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, 1998
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, 1999
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:
$8,085,570 in Voting Common Stock
as of March 25, 1999
(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 a 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 25, 1999:
7,840,173 shares of Voting Common
0 shares of Non-Voting Common
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 1999 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, 1998
TABLE OF CONTENTS
PART I...................................................................7
ITEM 1.BUSINESS ........................................................7
General .........................................................7
Operating Segments ..............................................7
Competition..................................................11
Trade Names, Service Marks and Logo Types....................11
Regulation...................................................12
Royalty and Advertising......................................13
Wholesale....................................................14
Company Stores...............................................15
The Business as a Whole ........................................15
Seasonality..................................................15
Employees....................................................16
Supply Contract and Series G Preferred Stock.................16
Competition..................................................18
Expansion Plans..............................................19
Development of the System in 1998 ..............................20
Summary of Store Development ...................................21
ITEM 2.PROPERTIES .....................................................23
ITEM 3.LEGAL PROCEEDINGS ..............................................24
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............24
PART II.................................................................25
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS ........................................................25
ITEM 6.SELECTED FINANCIAL DATA ........................................26
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ..........................................27
General ........................................................27
Year 2000 ......................................................29
Results of Operation 1998 vs. 1997 .............................32
Results of Operation 1997 vs 1996 ..............................35
Liquidity and Capital Resources ................................37
Forward Looking Statements .....................................39
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ....40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................40
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ...........40
PART III................................................................40
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .............40
ITEM 11.EXECUTIVE COMPENSATION .........................................40
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .40
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................41
Items 10-13 are incorporated by reference from the definitive
proxy statement for the Company's 1999 annual meeting of
shareholders to be filed pursuant to Regulation 14A. ...........41
PART IV.................................................................41
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K41
SIGNATURES .....................................................41
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.
OPERATING SEGMENTS
The operating segments of the Company's business are Development, Royalty and
Advertising, Wholesale, and Company Stores. Development markets the Company's
franchise and recruits franchisees. Royalty and Advertising provides services
to current franchisees. Wholesale sells to franchisees products and related
services not covered under the franchise agreement which the franchisees need to
operate their businesses. Company Stores operates retail photo processing and
portrait stores owned by the Company. See Note M to the Audited Financial
Statements of the Company included elsewhere herein for information concerning
the revenue, profit contribution or loss, and assets of each operating segment.
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.
The Company offers franchises in the United States through area developers and
Company personnel, who generate leads through advertising, brokers, referrals,
franchise shows, and the internet. At December 31, 1998, the Company had a
total of eleven area developers covering twenty-four 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 a portion 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, 1998, area developers accounted for fifteen new franchises
and Company personnel accounted for seven new franchises.
During 1998, the Company worked with an award-winning design firm to develop a
new store design for Company and franchised stores. The new design, Project
Aspire, is intended to appeal to the target customers of MOTOPHOTO stores and
the Company believes it will complement the services the stores offer. Project
Aspire will be used by all new stores opening in the system and will be retrofit
into existing stores over time.
In addition, the Company worked with a national real estate modeling and
consulting firm to develop a new real estate model for selecting store sites and
evaluating their potential for both sales and risk of failure. The Company
believes that this real estate model, the MotoWizardO program, will help its
franchisees to choose better store sites and will also be useful as a sales tool
in attracting new franchisees.
During first quarter 1998, the Company began to offer a new financing program
(`the MotoPhoto QuickStartSM financing program'') which enables franchisees to
open a MOTOPHOTO store for a much smaller initial cash investment (during 1998,
approximately $90,600) than a franchisee who used traditional financing methods
would have (during 1998, approximately $152,000), as well as reduced personal
financial risks. The MotoPhoto QuickStartSM financing 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 weekly 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 financing program, the
franchisee must purchase all photo processing paper and chemicals from the
Company, must purchase and display certain other products made by Fuji Photo
Film U.S.A., Inc. (``Fuji''), and must use certain Fuji equipment because Fuji
is a guarantor of the franchisee's obligation to Provident Bank.
In 1999 the Company will begin to offer an additional financing program called
the MotoPhoto QuickStart IISM financing program. The MotoPhoto QuickStart IISM
financing program differs from the original QuickStartSM financing program in
the following two respects: (1) Under the business lease agreement, the
franchisee will make specified weekly payments which are not based on the
franchisee's sales; and (2) the franchisee will be personally liable for the
payments for the full eight-year term of the business lease agreement.
Fuji has agreed to guarantee the franchisees' payments to Provident Bank under
the MotoPhoto QuickStartSM financing programs and the Company has agreed to
indemnify Fuji for one-half of any guarantee payments it makes to the Bank.
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.
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.
In addition to the MotoPhoto QuickStartSM financing programs, 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.
COMPETITION
In marketing its franchise, 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. Furthermore, with the strong economy, fewer
individuals are leaving the corporate workplace to seek to operate their own
businesses; the number of franchise sales leads is down throughout the
franchising industry. In addition, the Company's franchisees face competition
from other providers of photo processing services. See ``The Business as a
Whole - Competition'' below. Accordingly, as market conditions change, it may
be necessary to change some or all of the strategies discussed above.
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 MOTO'' 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
`MOTOPHOTO,'' "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.
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.
ROYALTY AND ADVERTISING
The Company provides to franchisees operation, management, and marketing
programs and systems and other services designed to promote the business of the
franchisee. 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 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. The Company has developed these manuals and other training
and operational materials and makes them available to its franchisees in written
form, on computer disk, through its fax-on-demand program, and through computer-
based training.
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-two 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.
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. 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.
Management of the Company believes that relations with franchisees are generally
satisfactory.
WHOLESALE
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. Franchisees obtaining financing under
the MotoPhoto QuickStartSM financing program and the MotoPhoto QuickStart IISM
financing program must use Fuji paper and Fuji-Hunt chemistry and purchase these
supplies through the Company.
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 as
compensation, a rebate or commission on certain products and equipment sold
directly to its franchisees by those suppliers. See also "The Business as a
Whole - Supply Contract" below.
COMPANY STORES
At December 31, 1998, the Company had 37 Company stores in operation compared to
43 at year-end 1997. Although the Company plans to continue the majority of its
growth of the system through franchises, the Company plans to open 20 stores
during 1999. The Company plans to open these stores to fill out existing
markets or in concentration in new markets. With the new MotoWizardTM real
estate program and new financing programs available to it, including the
MotoPhoto QuickStartSM financing programs, the Company believes that it can open
and operate new stores cost-effectively and with reduced risk. The Company will
continue to offer for sale some of its older stores which are in outlying areas.
The Company operates its Company stores both as a source of revenues, as
training sites and as testing and research sites for products, services, and
systems.
THE BUSINESS AS A WHOLE
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.
EMPLOYEES
As of February 26, 1999, the Company had 403 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.
SUPPLY CONTRACT AND SERIES G PREFERRED STOCK
The Company has a supply contract with Fuji in which the Company has agreed to
use best efforts to have all system stores purchase Fuji products to meet the
stores' requirements for photographic paper, equipment, chemistry, certain film,
and other items. The supply contract has a term ending on December 31, 2001, and
automatically renews every three years, absent notice from either party that it
does not wish to renew. The supply contract was executed in connection with a
series of transactions also involving the issuance of all shares of the
Company's Series G. Preferred Stock ("Series G Stock") to Fuji in 1995.
The Series G Stock is redeemable by the Company at any time in aggregate amounts
of at least $1 million. The shares were subject to mandatory redemption on
January 1, 1999; however, because the market price of the Company's Common Stock
on January 1, 1999, was less than $3.00 per share, the redemption of the Series
G Stock has been extended until the earlier of (i) the first date on which the
market price of the Common Stock equals or exceeds $3.00 per share or (ii)
January 1, 2000. Any redemption of the Series G Stock must be either in cash
from the proceeds of an equity offering or in Common Stock valued at 90% of the
market price at the time of redemption. Fuji may refuse any proposed redemption
by the Company in shares of Common Stock and elect to continue to hold the
Series G Stock without impairment of any right to require redemption at a later
time. The redemption price for the Series G Stock is $10.00 per share, or an
aggregate of $10 million. If the Series G Stock is redeemed in shares of Common
Stock, depending upon the market price of the Common Stock and the number of
shares of Common Stock outstanding, such redemption could result in Fuji's
acquiring control of the Company.
Fuji may terminate the supply contract and may require the Company to redeem the
Series G Stock under certain other circumstances ("Redemption Event") which
include, after appropriate cure periods, failure by the Company to make payments
when due under the supply contract, failure by the Company to renegotiate prices
for the Fuji products as required by the supply contract, bankruptcy or
insolvency of the Company, failure by the Company to meet its obligation under
other indebtedness in excess of $100,000, or if either Michael F. Adler or David
A. Mason ceases to be involved in the day-to-day management of the Company.
Change in control of the Company, other than the acquisition of control by Fuji,
would require redemption of the Series G Stock but would not affect the validity
of the supply contract. If the Company, in the absence of a Redemption Event,
redeems the Series G Stock, the supply contract will be extended to the third
anniversary of the redemption without right of renewal.
The terms of the Series G Stock permit the holder to require redemption in cash
from the proceeds of an equity offering rather in Common Stock of the Company.
If the Company defaulted under the supply contract so that Fuji could require
redemption of the Series G Stock, the Company would have to make a public
offering of equity securities to obtain the funds to redeem the Series G Stock
if the Company chose not to redeem it in Common Stock or if the holder chose not
to accept redemption in Common Stock. There is no certainty that the Company
would be able to have a successful public offering. If the Company fails to
redeem all of the Series G Stock upon the occurrence of a Redemption Event, Fuji
has the right, until all of the share of the Series G Stock are redeemed or the
Redemption Event is cured, to elect the majority of the Board of Directors. The
Company would also have to find another supplier for system requirements of
paper, chemistry and equipment; however, the Company believes 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.
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. There is pervasive competition from one-hour outlets, particularly
through the increasing number of one-hour labs in drug stores. 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 continuing to
introduce new products and services, such as digital imaging products and the 24
mm Advanced Photo System, introduced in 1997. 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.
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 is adding digital imaging to the services which may be offered by
MOTOPHOTO stores. In addition, it is testing an upscale portrait experience,
repositioning its portrait offerings toward the premium market in the children's
and family portrait segment. The Company is also expanding its relationship
marketing of customers through an expanded ClubMoto(R) program, school
portraiture, database marketing, and other forms of creative marketing.
During 1999, the Company plans system expansion through the establishment of new
franchises and conversion of profitable existing stores to MOTOPHOTO stores, and
through the opening of 20 Company stores, which may include acquisition of
existing independent stores. The Company is also devoting increased efforts to
developing and implementing operations and training programs to improve the
profitability of existing Company stores and franchised stores.
DEVELOPMENT OF THE SYSTEM IN 1998
During 1998, the Company granted nineteen new franchises, sold one Company store
as a franchise, and converted two independent stores to franchises, while
thirty-four franchises were canceled or terminated, for a net decrease of twelve
franchises in the United States.
During 1998, the Company reorganized its international franchise relationships.
On December 31, 1998, the Company's master licensor for the province of Ontario,
Canada, Canadian Industrial Services, Inc. (`CIS''), signed a new master
license agreement for the development of franchises throughout Canada. This
agreement supplements the existing agreement for the development of stores in
Ontario.
The Company also initiated a new program called the World Alliance Partnership
of Moto Photo, Inc. Pursuant to this program, independent minilabs outside of
the United States and Canada, signing a World Alliance Partnership agreement
will have the right to call themselves World Alliance Partners (``WAPs') of the
Company, display limited signage to that effect, participate in the Company's
ClubMoto(R) program for customers, attend the Company's franchisee convention,
and offer for sale the Company's private label products, including film and
single-use cameras. The WAP will pay an annual fee, currently set at $500. In
August 1998, the Company agreed with its master licensor for Norway, Scan-
Franchise, A/S, Ltd. (``Scan-Franchise'), to terminate the master license
agreement between the Company and Scan-Franchise. In its place, Scan-
Franchise's parent company, G.L. Gruppen, A/S, Ltd., has agreed to act as master
licensor for the WAP program in Norway, pending execution of final documents.
The 26 Norway franchises converted to WAPs in August 1998.
During 1998, CIS granted four new franchises in Ontario and converted one
independent store to a franchise, while six franchises were canceled or
terminated. As noted, 26 franchises in Norway converted to WAPs and an
additional 18 stores became WAPs. This resulted in a net decrease of 27
international franchises and a net increase of 44 WAPs in 1998. In 1998, all
foreign source revenues represented less than 1% of total revenues.
During 1998, the Company opened no new Company stores. Although the Company
will continue during 1999 to emphasize development of the system through
franchised stores, the Company plans to open approximately 20 new stores in
1999, which may include the acquisition of existing independent stores. The
Company will continue to offer for sale some of its older stores which are in
outlying areas.
SUMMARY OF STORE DEVELOPMENT
Set forth below is a summary of the store development of the Company in the
United States and abroad during 1997 and 1998:
<TABLE>
1997 1998
U.S. Int'l Total U.S. Int'l Total
<S> <C> <C> <C> <C> <C> <C>
Store Open at Beginning of Year 363 81 444 356 77 433
New Stores Opened 13 1 14 9 22(a) 31
Conversion 3 0 3 2 1 3
Terminations or Non-renewals 23 5 28 34 6 40
Store Open at End of Year 356 77 433 333 94 427
Company Stores Open At End of Year 43 0 43 37 0 37
Franchised Stores Open at End of Year (b) 313 77 390 296 50 346
WAP Stores Open at End of Year 0 0 0 0 44 44
Stores Under Development at End of Year (c) 13 0 13 18 0 18
WAP Stores Under Development at End of Year 0 0 0 0 4 4
</TABLE>
(a) Includes eighteen WAP stores added in Norway.
(b) As of December 31, 1998, a total of 229 franchisees owned the 295
franchised stores in the United States.
(c) Stores under development include one store closed pending relocation and
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 1997 and 1998. Reasons for terminated franchises relate to
franchise management, failure to follow system requirements, market conditions,
location, sales of stores, and other factors typically affecting franchisee
operations. In addition, 26 Norway franchises converted to WAP stores.
Set forth below is the geographical location of the stores in operation at
ecember 31, 1998:
Arizona 13 Kentucky 6 Oklahoma 19
California 27 Maryland 20 Pennsylvania 9
Colorado 14 Maine 1 Rhode Island 4
Connecticut 14 Massachusetts 7 Tennessee 8
Florida 3 Michigan 5 Texas 6
Georgia 8 North Carolina 1 Utah 5
Illinois 27 New Jersey 48 Virginia 22
Indiana 5 New York 20 Wisconsin 4
Kansas 3 Ohio 24
District of Columbia 10
Canada 50
WAP Stores: Norway 44
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. The Company
has agreed in principle to sign a new lease for these offices on the following
terms: the lease will have an initial term of ten years commencing July 1,
1999, with two five-year renewal options. The rent will be $20,327 per month
through June 2004 and $22,374 from July 2004 through June 2009. These offices
are leased from a partnership which is controlled by certain officers and/or
directors of the Company. At the direction of the Audit Committee of the Board
of Directors, an independent appraisal was made of rental value for comparable
business properties in the Dayton, Ohio area. Based on this appraisal,
management believes that the terms of the lease and proposed 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 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 ten MOTOPHOTO stores, which have in
turn been assigned to franchisees. In addition, at December 31, 1998, the
Company was the lessee or assignee of the leases for 37 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, 1998.
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, 1999, there were approximately 685 record holders and approximately
1,600 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 for the periods indicated the range of high and
low last actual transaction prices 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
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
1998:
First Quarter $2.81 $2.25
Second Quarter 2.63 1.50
Third Quarter 2.00 1.31
Fourth Quarter 1.88 1.00
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 repay debt.
Dividends on the Series G Stock in the aggregate amount of $700,000 are payable
in 1999. 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 therefore, 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
[CAPTION]
<TABLE>
Year Ended Year Ended Year Ended Year Ended Year Ended
December December December December December
31, 31, 31, 31, 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Revenue $37,199,707 $41,897,343 $43,287,566 $42,217,722 $40,144,886
Net Income (Loss) $ 1,690,253 $ 1,703,535 $ 1,073,873 $(5,673,647) $ 725,230
Net Income (Loss)
Applicable
to Common Shares $ 1,415,691 $ 1,420,707 $ 784,583 $(5,307,782) $ (395,495)
Net Income (Loss)
Per Common Share
- - basic and
diluted $ .18 $ .18 $ .10 $ (.69) $ (.07)
Working Capital $ 3,482,451 $ 3,231,884 $ (250,611) $(1,551,817) $ (251,921)
(Deficit)
Stockholders'
Equity $ 4,920,906 $ 3,771,156 $ 2,538,198 $ 1,908,325 $ 8,909,595
Long-Term
Obligations $ 9,064,001 $ 9,783,805 $ 8,207,762 $ 7,895,652 $ 7,288,842
Total Assets $21,933,793 $21,038,115 $20,485,212 $21,324,474 $26,568,526
Common Shares
Outstanding (1) 7,816,165 7,793,905 7,785,973 7,687,249 5,664,446
Number of Stores
Open 427 433 444 447 433
<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 427 operational stores at December 31, 1998 compared to
433 at December 31, 1997.
Systemwide sales increased to approximately $143,000,000 in 1998 from
$140,000,000 in 1997. The Company plans to grow through granting new
franchises, conversion of independent stores to franchise stores, opening
Company stores and selective acquisitions, as well as increasing the average
annual sales per store older than one year from approximately $400,000 to
$550,000 or more over the next several years.
The Company operates primarily in the specialty retail channel of the photo
processing industry (see `Item 1. Business-Competition'' on page 3). There is
a consolidation of photographic specialty retail outlets occurring and the
Company estimates that the three largest chains, of which the Company is one,
have approximately 35-40% of the U.S. specialty retail photo processing market.
The Company estimates its share at approximately 8% of the U.S. 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. 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 and
opening new markets with multiple stores are important strategies 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.
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.
The Company has market risk exposure to interest rates. At December 31, 1998,
the Company has interest bearing debt obligations that are subject to market
risk exposure relating to changes in interest rates. At December 31, 1998,
$2,124,360 of outstanding debt is at fixed rates with a weighted average
interest rate of 9.29% and $2,375,000 is at variable rates with a weighted
average rate of 8.5%. The estimated fair value of the Company's debt at
December 31, 1998 is equal to its carrying amount.
The aggregate annual maturities of the Company's variable interest debt
obligations for the five years subsequent to December 31, 1998 are as follows:
$583,333, $625,000, $625,000, $250,000 and $291,667.
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.
YEAR 2000
The year 2000 issue, or Y2K, refers to computer programs or computer embedded
chips which use two digits rather than four digits to define the applicable
year. Any of the Company's computer software, hardware or other equipment
having date sensitive software or embedded chips could recognize a ``00' date
as year 1900 rather than year 2000. If this happened, it could result in
miscalculations or system failures which could be disruptive to normal business
activities. The Company has a plan to prepare its systems for the Y2K issue.
This plan includes obtaining reasonable assurance that its critical business
partners are also prepared.
The Company's plan for resolving Y2K issues has the following phases:
assessment, remediation, testing, and implementation. The Company has completed
assessment of its internal software and computer hardware that could be
significantly affected by the year 2000 issue. The Company believes that it is
currently Y2K compliant on all critical internal systems with the exception of
certain computer hardware used in some Company store point of sale systems, as
discussed below.
The Company is still in the process of gathering information about the Y2K
compliance status of key third party suppliers. The Company has received
written notification from most of its key suppliers that they plan to be Y2K
compliant by October 1, 1999. The Company has been informed by its primary bank
that it believes it is Y2K compliant. The Company will be requesting
certification by May 1, 1999 from depository banks. If the review and
evaluation of responses indicate lack of Y2K compliance by September 30, 1999,
the Company will change its depository banking relationships as required.
The Company is in the implementation phase on certain of the older computer
hardware used in its approved point of sale systems in both franchise and
Company stores. A software modification is currently available, at no cost, to
achieve Y2K compliance for this hardware. It will be implemented in Company
stores by June 30, 1999, and will be installed in all franchise stores as they
request it.
There are several versions of the Company sponsored point of sale software in
use in franchise stores, all of which are believed to be Y2K compliant except
for certain operating systems which are no longer supported by their provider.
Accordingly, the provider will not certify as to its Y2K compliance. However,
the Company has tested the software and believes that it will operate without
any critical failures after December 31, 1999. The Company will continue its
testing and will attempt to develop solutions if any disruptions occur during
test. The worst case solution would be for the franchisee to upgrade software
and hardware at a cost of $2,000 to $7,000 per store. Currently 53 franchise
stores use the subject operating system. Seven other stores are using a POS
system that has not been supported by the Company since 1997. These franchisees
are being notified of where to obtain assistance on Y2K compliance for these
systems.
The Company believes that all significant non-information systems are either Y2K
compliant or has received notification that the vendors will make them Y2K
compliant by no later than September 30, 1999. The Company plans to continue
testing its operating equipment and other equipment to ensure that it is
operable in 2000 and beyond.
By April 30, 1999, the Company intends to further notify its franchisees of the
steps they should take to ensure that there are no disruptions to their
operations as a result of the Y2K issue. The Company cannot guarantee that each
franchisee will follow through on the necessary steps, and accordingly, some
short-term interruptions could occur in certain franchise stores. The Company
does not believe that this disruption will have a material impact on the
Company's results of operations, financial condition or cash flows. The Company
will develop contingency plans to assist franchisees if any significant
disruption risks are identified.
The Company has spent no significant incremental funds to date to achieve Y2K
compliance and does not anticipate doing so in the future. All expenses paid to
date as well as in the future will be funded through existing cash resources and
future operating cash flows.
While the Company believes it has an effective plan to resolve the Y2K issue in
a timely manner, lack of historical experience and the forward-looking nature of
the issues involved make it difficult to predict with certainty what will happen
on January 1, 2000 and thereafter. It is possible that there will be disruption
and unexpected business problems during the early months of 2000. The Company
intends to make contingency plans if any critical systems or suppliers are
identified as representing a significant risk of Y2K failure. Unfortunately,
despite the Company's efforts, unanticipated third party failures may occur,
particularly in general public infrastructures. If this were to occur, it could
have a material adverse impact on the Company's results of operations, financial
condition or cash flows. The amount of potential loss cannot be reasonably
estimated at this time.
RESULTS OF OPERATION 1998 VS. 1997
In 1998 the Company recorded net income of $1,690,253, or $.18 per common share
(basic and diluted), compared to net income of $1,703,535 or $.18 per common
share (basic and diluted), in 1997. Due to the Company's common share price of
approximately $1.25, certain securities could become dilutive and have a
significant impact on diluted earnings per common share in 1999 and subsequent
periods (See Note G).
Development segment revenue increased $78,000, or 16%, in 1998 compared to 1997
due primarily to the sale of development rights to Canada which was partially
offset by 11 U.S. franchise openings in 1998 versus 14 in 1997. Costs
associated with the introduction of the MotoPhoto QuickStartSM financing program
more than offset the increased revenue. The Company anticipates increased
operating segment contributions in 1999 because in 1998, the Company began
offering the MotoPhoto QuickStartSM financing program which requires a lower
initial investment and allows the franchisee to lease a significant portion of
the store investment and pay a lease payment as a percentage of sales rather
than a fixed monthly loan payment. In 1999, the Company anticipates offering
variations of this program, each of which is targeted toward a specific
franchisee prospect profile which the Company believes is a good fit for its
concept. The Company believes that these new programs will increase the number
of franchises sold. (See `Item 1 -- Business)
Company store revenue declined by $3.4 million, or 20%, in 1998 compared to
1997. One Company store was sold to a franchisee in 1998 and five others were
closed. The decrease in Company store sales and related expenses were a result
of the decrease in the number of Company stores operated and, along with a 3% or
$437,000 decrease in Company comparable store sales, lead to a decreased
contribution from the Company store segment, and Company comparable stores sales
decrease of $437,000, or 3%. The Company plans to open approximately twenty
Company stores in 1999 which would lead to increased revenues and associated
costs and expenses. A new store is budgeted to lose approximately $16,000
during its first year open.
Royalty and advertising revenues increased $157,000 or 3% in 1998 compared to
1997 primarily due to a 4% increase in comparable franchise store sales offset
by fewer stores. This increase in revenue was approximately equal to the
increase in costs and expenses in this segment. The Company anticipates
continued growth in royalty and advertising revenue as a result of continued
increases in comparable franchise stores sales, addition of new franchise
stores, continuing improvement in the quality of the average franchisee, and
better site selection.
Wholesale revenue decreased $1.7 million, or 9%, in 1998 compared to 1997.
During the first half of 1998 the Company suffered sales declines due to
uncompetitive pricing on certain products, primarily photographic paper and
film. In the third and fourth quarter of 1998, the Company lowered certain
prices to remain competitive and also obtained cost concessions from its vendors
late in the year. The Company estimates that approximately 6% of its 1997
revenue was lost in 1998 due to franchisees purchasing merchandise from
alternative suppliers. The Company believes that its new pricing and cost
programs have corrected this weakness and does not expect the trend to continue.
The Company anticipates a 6% increase in wholesale revenue in 1999.
Additionally, operating segment contribution was adversely impacted by $161,000
more losses in 1998 than 1997 in the Company's telemarketing operations which
were closed in December 1998.
Selling, general and administrative expenses decreased $288,000, or 4%, in 1998
compared to 1997, primarily due to reduced bonuses paid on lower pretax profits.
Advertising expenses increased by $83,000, or 6%, in 1998 compared to 1997 due
to increases associated with the initiation of the MotoPhoto QuickStartSM
financing program.
Depreciation and amortization expenses increased by $168,000, or 20%, in 1998
compared to 1997 primarily as a result of depreciation on additions to property
and equipment in Company stores. In 1999 depreciation and amortization expenses
are planned to increase by approximately $450,000 because of full year of
depreciation for 1998 additions as well as the Company continuing to add new
services, such as 24 mm Advanced Photo System processing, digital and kiosks,
upgrading the design of certain Company stores, and opening new Company stores.
Interest expense decreased $34,000, or 8%, in 1998 compared to 1997 due to lower
levels of interest bearing debt. Interest expense is planned to increase
approximately 10% in 1999 as a result of borrowings to support Company store
expansion discussed above. Interest and investment income, which is primarily
interest income from notes receivable and temporary investments of cash,
increased in 1998 due to improved liquidity and collection of interest on
certain notes classified as impaired at December 31, 1997. The Company
anticipates interest income in 1999 to approximate the 1998 amount.
Income tax benefit in 1998 was $360,000, with an effective tax benefit rate of
27% compared to $800,000 of tax expense with an effective rate of 32% in 1997.
The reduction is due primarily to the closing of certain Company stores which
created a deductible tax expense for assets previously written off for book
purposes, generating a realization of tax deductions for which no net deferred
tax asset recognition was available to the Company as of December 31, 1997. The
Company does not believe it will generate a tax benefit in 1999 but is not yet
certain as to what its expected tax expense will be due to various options the
Company is currently investigating.
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% in 1997 compared to 1996.
In 1997 development revenue was 42% lower than in 1996, reflecting the opening
of 14 stores in the US in 1997 compared to 22 stores in 1996. Of the stores
opened in 1997, 11 were either conversions or stores added by existing
franchisees, both of which carry lower initial franchise fees. This mix
accounted for the further reduction of 1997 development revenue as compared to
1996 and largely accounted for the decrease in operating segment contribution.
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.
Company store revenue declined by $1.6 million, or 9%, in 1997 compared to 1996.
Six Company stores were sold to franchisees in 1997 and two others were closed.
Company store revenue and related costs and operating expenses and operating
segment contributions declined as a result of the decrease in the number of
Company stores operated. Company comparable stores sales increased $230,000 or
2% in 1997.
Royalty and advertising 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.
Furthermore, segment expenses were approximately $100,000 less in 1997 than
1996.
Wholesale revenue increased by $590,000 or 3%, 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. Wholesale segment contribution was
favorably impacted because of a 2% of revenue decrease in bad debt expense and a
.5% of revenue decrease in paper costs as a result of the systems using Fuji
paper for the full year in 1997 as opposed to only a partial year in 1996.
Selling, general and administrative expenses were about the same in 1997
compared to 1996. 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.
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.
Depreciation and amortization expenses increased by $90,000, or 12%, in 1997
compared to 1996 as a result of depreciation on additions to fixed assets in
1997.
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.
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 to realization of other tax
deductions for which no net deferred tax asset recognition was available to the
Company.
LIQUIDITY AND CAPITAL RESOURCES
In 1998 the Company's operating activities provided $1.4 million more cash than
in 1997. The primary reason for the increase is due to a decrease of payments
on accounts payable in 1998 versus unusually high payments on payables otherwise
due in 1996 as noted below. This decrease was offset by an increase in
inventory generated by stockpiling certain products at year end.
In 1997 the Company's operating activities provided $2 million less cash than
in 1996. The primary reasons for the decrease were $2 million in increased
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
to more stringent credit practices with franchisees and a generally overall
improved franchise store performance.
In 1998 net cash utilized by investing activities was $664,000 as compared to
net cash provided by investing activities of $485,000 in 1997. Increased
purchases of property and equipment in 1998 accounted for about $900,000 of the
change with about $400,000 more accounted for by lower proceeds on sales of
assets. In 1999 the Company anticipates investing about $3 million in opening
Company stores, service expansion, and equipment replacement. The Company plans
to enter into operating leases for a substantial amount of the assets needed to
open new Company stores.
In 1997 net cash provided by investing activities decreased $358,000 as compared
to 1996. Increased purchases of property and equipment in 1997 accounted for
most of the change because of a 1996 reduction of the Company's capital spending
program due to stores sold and closed. The other major factor was $142,000 more
in proceeds from sales of assets in 1996 compared to 1997.
In 1998 the Company borrowed $1.25 million for capital expenditures and made
principal payments of $1.9 million which, along with dividend payments,
generated a $1.2 million use of cash from financing activities. In 1999 the
Company anticipates increasing its net borrowing by approximately $1.5 million
to help fund its investing activities.
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.
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 $700,000 in 1999. Funds for repaying these
commitments are anticipated to be generated primarily from operations in 1999
and beyond.
The Company has available a $2 million line of credit, none of which was
borrowed as of December 31, 1998. This line expires April 30, 2000. The
Company believes this is adequate to finance its seasonal working capital needs.
At December 31, 1998, the Company had working capital of $3.5 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.
On December 31, 1998, the Company had income tax loss carryforwards, tax credits
and deductible temporary differences with a tax benefit of approximately $3.4
million. The tax benefit of these carryforwards has a $2 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 2000
or earlier under certain circumstances. (See Note G and Item 1 - Business -
Supply Contract and Series G Preferred Stock) 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.
FORWARD LOOKING STATEMENTS
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.
Quantitative and qualitative disclosures about market risk are included in
management's discussion and analysis of financial conditions and result of
operations.
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 1999 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, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MOTO PHOTO, INC.
By /s/ David A. Mason
David A. Mason
Executive Vice President
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Michael F. Adler March 26, 1999
Michael F. Adler Chairman of the Board,
Chief Executive
Officer, and Director
(Principal Executive
Officer)
/s/ David A. Mason March 26, 1999
David A. Mason Executive Vice President,
Treasurer, Assistant
Secretary, and Director
(Principal Financial
Officer)
/s/ Frank M. Montano March 26, 1999
Frank M. Montano President, and Chief
Operating Officer
/s/ Frank W. Benson March 26, 1999
Frank W. Benson Director
/s/ D. Lee Carpenter March 26, 1999
D. Lee Carpenter Director
/s/ Leslie Charm March 26, 1999
Leslie Charm Director
/s/ Dexter B. Dawes March 26, 1999
Dexter B. Dawes Director
/s/ Harry D. Loyle March 26, 1999
Harry D. Loyle Director
/s/ James F. Robeson March 26, 1999
James F. Robeson Director
/s/ Alfred E. Lefeld March 26, 1999
Alfred E. Lefeld Vice President, and
Controller(Principal
Accounting Officer)
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Moto Photo, Inc.
We have audited the accompanying consolidated balance sheets of Moto Photo, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. 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. and subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, 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 12, 1999
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[CAPTION]
<TABLE>
DECEMBER 31
1998 1997
<S> <C> <C>
Assets
Current assets:
Cash $ 2,918,396 $ 3,139,252
Accounts receivable, less allowances of $1,092,000 4,188,807 4,416,899
in 1998 and $1,590,000 in 1997
Notes receivable, less allowances of $172,000 in 437,669 403,669
1998 and $125,000 in 1997
Inventory 2,457,950 1,388,010
Deferred tax assets 1,213,000 1,025,000
Prepaid expenses 116,081 223,176
Total current assets 11,331,903 10,596,006
Property and equipment 3,712,064 3,095,006
Other assets:
Notes receivable, less allowances of $1,228,000 in 1,897,755 2,157,360
1998 and $893,000 in 1997
Cost of franchises and contracts acquired 155,688 167,741
Goodwill 3,728,816 3,932,883
Deferred tax assets 57,000 57,000
Other assets 1,050,567 1,032,119
Total assets $21,933,793 $21,038,115
<FN>
See accompanying notes.
</TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[CAPTION]
<TABLE>
DECEMBER 31
1998 1997
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 4,251,043 $ 3,206,342
Accrued payroll and benefits 560,901 1,060,188
Accrued expenses 1,192,968 1,472,306
Current portion of long-term obligations 1,534,000 1,444,000
Other 310,540 181,286
Total current liabilities 7,849,452 7,364,122
Long-term debt 8,775,360 9,220,469
Capitalized leases 288,641 563,336
Deferred revenue 99,434 119,032
Total liabilities 17,012,887 17,266,959
Stockholders' equity
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 - 7,833,573 in
1998 and 7,802,973 in 1997 78,336 78,030
Paid in capital 6,404,734 6,670,981
(Deficit) retained earnings subsequent to June 30,
1991 (1,572,164) (2,987,855)
Total stockholders' equity 4,920,906 3,771,156
Total liabilities and stockholders' equity $21,933,793 $21,038,115
<FN>
See accompanying notes.
</TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
[CAPTION]
<TABLE>
YEAR ENDED DECEMBER 31
1998 1997 1996
<S> <C> <C> <C>
Revenue
Sales and other revenue $36,674,620 $41,532,923 $42,599,365
Interest income 413,087 364,420 214,614
Gain on sale of stores - - 78,051
Other income 112,000 - 395,536
37,199,707 41,897,343 43,287,566
Expenses
Cost of sales and operating 26,329,572 29,820,906 31,246,267
expenses
Selling, general, and
administrative expenses 6,553,425 6,841,931 6,924,163
Advertising 1,416,855 1,333,934 1,469,531
Depreciation and amortization 1,015,611 847,509 757,673
Interest expense 411,610 445,141 455,404
Impairment charge 142,381 104,387 510,655
35,869,454 39,393,808 41,363,693
Income before income taxes 1,330,253 2,503,535 1,923,873
Income tax benefit (expense):
Current 172,000 (731,000) (794,000)
Deferred 188,000 - -
Charge in lieu of income taxes - (69,000) (56,000)
360,000 (800,000) (850,000)
Net income 1,690,253 1,703,535 1,073,873
Dividend requirements:
Series E and F preferred shares 325,438 317,172 210,710
Series G preferred shares (600,000) (600,000) (500,000)
Net income applicable to common $ 1,415,691 $ 1,420,707 $ 784,583
shares
Net income per common share - basic
and diluted $ 0.18 $ 0.18 $ 0.10
<FN>
See accompanying notes.
</TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[CAPTION]
<TABLE>
SERIES G PREFERRED COMMON STOCK
STOCK
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Balance at December 31, 1995 1,000,000 $10,000 7,785,973 $ 77,860
Reversal of Series E and F
previously accreted preferred
dividend
Series G preferred dividend
paid
Use of net operating loss
carryforward
Net income
Balance at December 31, 1996 1,000,000 10,000 7,785,973 77,860
Common stock issued 17,000 170
Reversal of Series E and F
previously accreted preferred
dividend
Series G preferred dividend
paid
Warrants issued
Use of net operating loss
carryforward
Net income
Balance at December 31, 1997 1,000,000 10,000 7,802,973 78,030
Common Stock Issued 30,600 306
Reversal of Series E and F
previously accreted
preferred dividend
Series G preferred dividend
paid
Net Income
Balance at December 31, 1998 1,000,000 $10,000 7,833,573 $ 78,336
<FN>
See accompanying notes.
</TABLE>
[CAPTION]
<TABLE>
(DEFICIT)
PAID IN RETAINED
CAPITAL EARNINGS TOTAL
<S> <C> <C> <C>
Balance at December 31, 1995 $ 7,013,610 $ (5,193,145) $ 1,908,325
Reversal of Series E and F
previously accreted preferred
dividend (210,710) 210,710 -
Series G preferred dividend
paid (500,000) (500,000)
Use of net operating loss
carryforward 56,000 56,000
Net income 1,073,873 1,073,873
Balance at December 31, 1996 6,858,900 (4,408,562) 2,538,198
Common stock issued 35,253 35,423
Reversal of Series E and F
previously accreted preferred
dividend (317,172) 317,172 -
Series G preferred dividend
paid (600,000) (600,000)
Warrants issued 25,000 25,000
Use of net operating loss
carryforward 69,000 69,000
Net income 1,703,535 1,703,535
Balance at December 31, 1997 6,670,981 (2,987,855) 3,771,156
Common Stock Issued 59,191 59,497
Reversal of Series E and F
previously accreted
preferred dividend (325,438) 325,438 -
Series G preferred dividend
paid (600,000) (600,000)
Net Income 1,690,253 1,690,253
Balance at December 31, 1998 $ 6,404,734 $ (1,572,164) $ 4,920,906
<FN>
See accompanying notes.
</TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
[CAPTION]
<TABLE>
YEAR ENDED DECEMBER 31
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,690,253 $1,703,535 $ 1,073,873
Adjustments to reconcile net income to
net cash provided by operating
activities:
Impairment charge - goodwill 88,618 30,887 372,409
Impairment charge - property and equipment 53,763 73,500 138,246
Depreciation and amortization 1,015,611 847,509 757,673
Charge in lieu of income tax - 69,000 56,000
Provision for losses on inventory and
receivables 543,031 908,377 1,325,101
Notes receivable increase as a result of
franchise activities (17,422) (19,000) (185,500)
Loss (gain) on sale of stores 646 48,280 (344,023)
Lss on fixed asset disposals and close
of telemarketing 212,301 - -
Issuance of stock for directors fees 37,622 35,253 -
Increase (decrease) resulting from
changes in:
Accounts receivable (678,631) (374,471) (2,164,947)
Inventory and prepaid expenses (1,241,275) 54,795 296,281
Other assets (241,113) (45,616) (42,218)
Deferred taxes (188,000) - -
Accounts payable, accrued payroll,
benefits, and accrued expenses 266,076 (3,167,576) 999,482
Deferred revenue and other liabilities 109,656 78,009 (19,205)
Net cash provided by operating activities 1,651,136 242,482 2,263,172
INVESTING ACTIVITIES
Purchases of property and equipment (1,368,316) (477,513) (290,788)
Payments received on notes receivable 643,253 509,848 499,806
Proceeds from sale of property and
equipment 61,000 452,606 595,102
Loss from investments - - 39,124
Net cash (utilized) provided by investing
activities (664,063) 484,941 843,244
FINANCING ACTIVITIES
Proceeds from revolving line of credit
and long-term borrowings 1,250,000 9,324,274 7,100,000
Principal payments on revolving line of
credit, long-term debt and capital lease
obligations (1,879,804) (7,711,389) (9,847,160)
Payments of preferred dividends (600,000) (600,000) (500,000)
Proceeds from issuance of common stock 21,875 - -
Net cash (utilized) provided in financing
activities (1,207,929) 1,012,885 (3,247,160)
(Decrease) increase in cash (220,856) 1,740,308 (140,744)
Cash at beginning of year 3,139,252 1,398,944 1,539,688
Cash at end of year $ 2,918,396 $3,139,252 $ 1,398,944
<FN>
See accompanying notes.
</TABLE>
A. THE COMPANY
Moto Photo, Inc. and its subsidiaries (`the Company'') is engaged in the
franchising and ownership of stores offering one-hour processing services,
portrait and related imaging services and merchandise under the trade names and
service marks of `ONE HOUR MOTOPHOTO'', ``MOTOPHOTO'' and `ONE HOUR MOTOPHOTO &
PORTRAIT STUDIO' and related marks.
During 1998, the Company initiated the World Alliance Partnership program (WAP).
Independent minilabs outside of the United States and Canada who sign a WAP
agreement will have the right to display limited signage, attend the Company's
franchise convention and offer for sale the Company's private label products.
The participants in the WAP will pay an annual fee.
At December 31, 1998 the 427 stores of the Moto Photo system included 296
Franchise stores in the United States, 37 Company stores in the United States,
50 stores in Canada and 44 WAP stores in Norway. During 1998, the Company
awarded 19 franchises, refranchised 1 Company store, converted two independent
stores to franchises and closed 34 stores.
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.
ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable are composed of accounts and notes due from
various franchisees. The notes receivable carry interest rates which
approximate the prevailing interest rate at the time of the notes receivable
inception. The carrying value of each account and note receivable is evaluated
to determine if facts and circumstances suggest the receivable has become
impaired. If the review indicates that a note has become impaired as determined
by an analysis of creditworthiness and payment history, interest income on that
note is not recognized unless collected. During 1998 and 1997, approximately
$400,000 and $612,000, respectively were transferred to notes receivable from
accounts receivable. The carrying value of all accounts and notes receivable
approximates fair value.
INVENTORY
Inventory is valued at the lower of cost or market. Cost is determined using
the first in, first out cost method. Inventory is shown net of allowances of
$150,000 in 1998 and $115,000 in 1997.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 up to three years for software and hardware and
over the lesser of the remaining term of the lease or the lives of the leasehold
improvements.
COST OF FRANCHISES AND CONTRACTS ACQUIRED
Franchises and contracts acquired are 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 $688,513 in 1998 and $646,813 in 1997.
GOODWILL
The excess of the cost over the fair value of the net 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 $2,255,130 in 1998
and $2,707,055 in 1997.
LONG LIVED ASSETS
The carrying value of long lived assets, including goodwill and property, plant
and equipment 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.
NON-COMPETE AGREEMENTS
The Company amortizes non-compete agreements by the straight line method over
the life of the contract.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 revenue are recognized as sales are made. Merchandise revenue are
recognized when the goods are shipped. Telemarketing revenue are recognized
when the services are rendered. In 1998, the Company's master licensor for the
province of Ontario, Canada signed a new master license agreement for the
development of franchises throughout Canada. The Company recognized $100,000 in
1998 for the sale of these rights.
PROFIT SHARING PLAN
The Company sponsors a profit sharing plan covering all employees who meet
certain eligibility requirements. The Company makes matching contributions to
the Plan. Additionally, the Company may make discretionary contributions, which
are subject to the approval of the Board of Directors. Profit sharing expense
was $94,793 in 1998, $127,899 in 1997, and $125,000 in 1996.
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.
NET INCOME PER COMMON SHARE - BASIC AND DILUTED
Basic income per common share is based on the weighted-average number of common
shares outstanding during the respective periods. Diluted income per common
share is 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>
1998 1997 1996
<S> <C> <C> <C>
Net income applicable to common shares $ 1,415,691 $ 1,420,707 $ 784,583
Reconciliation of Shares:
Weighted average common shares
outstanding 7,816,165 7,793,905 7,785,973
Effect of dilutive stock options and
other common stock equivalents 115,245 101,034 46,644
Weighted average common shares assuming
dilution 7,931,410 7,894,939 7,832,617
</TABLE>
STORES FOR RESALE
Certain Company 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 stores in
the respective line item in the respective financial statement. The Company sold
one store in 1998, six stores in 1997, and five stores in 1996.
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 1998.
C. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment as of December 31:
<TABLE>
1998 1997
<S> <C> <C>
Equipment and other property $ 7,801,086 $ 7,379,716
Leasehold improvements 2,601,003 2,869,816
Furniture and fixtures 1,029,420 1,136,240
11,431,509 11,385,772
Less accumulated depreciation and amortization 7,719,445 8,290,766
Net book value $ 3,712,064 $ 3,095,006
</TABLE>
Depreciation expense on property and equipment including amortization of assets
recorded under capital leases for the year ended December 31, 1998 was $813,462
($653,822 in 1997 and $567,131 in 1996).
D. OTHER ASSETS
Other assets as of December 31 include the following items, net of accumulated
amortization of $262,500 in 1998 and $237,500 in 1997:
<TABLE>
1998 1997
<S> <C> <C>
Non-compete agreements $ 737,500 $ 762,500
Other 313,067 269,619
$1,050,567 $1,032,119
</TABLE>
E. LONG-TERM DEBT
The detail of long-term debt as of December 31 is:
<TABLE>
1998 1997
<S> <C> <C>
Note payable to bank due January 2002
with interest at 9.29% per annum $ 2,124,360 $ 2,748,469
Note payable to bank due January 2002
with interest at 8.75% (prime rate
plus 1%) 1,125,000 1,500,000
Note payable to bank due January 2004
with interest at 8.25% (prime rate
plus 1/2%) 1,250,000 -
Revolving credit agreements with
supplier, non-interest-bearing, due
June 2002 5,515,000 5,971,000
10,014,360 10,219,469
Portion classified as current 1,239,000 999,000
$ 8,775,360 $ 9,220,469
</TABLE>
At December 31, 1998, the Company had an unused line of credit for $2,000,000 at
prime plus .50%. The Company pays a commitment fee of .25% per annum on the
unused portion of the line of credit. 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, 1998 are $1,239,000, $1,312,092, $1,344,631, $5,827,239 and
$291,398. Interest paid in 1998, 1997, and 1996 was $399,400, $436,808, and
$476,695, 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;
the Company was in compliance with them at December 31, 1998.
F. LEASES
At December 31, 1998 and 1997, property and equipment included the following
capitalized lease obligations:
<TABLE>
1998 1997
<S> <C> <C>
Processing equipment $ 832,187 $1,737,753
Less accumulated amortization 261,714 554,918
$ 570,473 $1,182,835
</TABLE>
Future minimum lease payments for capitalized leases at December 31, 1998 are as
follows:
<TABLE>
YEAR ENDING DECEMBER 31
<S> <C>
1999 $ 346,338
2000 219,739
2001 86,709
2002 19,290
Total minimum lease
payments 672,076
Less: amount
representing interest
ranging from 5.7% to
11.5% 88,435
Present value of minimum
lease payments 583,641
Current portion 295,000
Capitalized leases $ 288,641
</TABLE>
During 1998, 1997, and 1996, the Company incurred or assumed capital lease
obligations aggregating $0, $679,300, and $283,106, 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 and warehouse facilities, and
equipment under operating lease agreements. Certain leases have renewal options
which the Company may exercise. Rental expense for operating leases was
$1,841,830 in 1998, $2,275,443 in 1997, and $2,554,979 in 1996, net of sublease
rentals of $447,372, $444,734, and $409,088, respectively.
F. LEASES (CONTINUED)
In 1998 and 1996 the Company sold the lease rights for a Company store which
increased net income by approximately $112,000 and $300,000 respectively.
At December 31, 1998, noncancelable operating leases provide for the following
minimum annual obligations and sublease rentals:
<TABLE>
LEASE SUBLEASE NET LEASE
OBLIGATION RENTALS OBLIGATION
S S
<S> <C> <C> <C>
1999 $1,623,816 $ 328,078 $1,295,738
2000 1,311,989 246,445 1,065,544
2001 984,830 222,398 762,432
2002 647,657 87,283 560,374
2003 298,063 56,945 241,118
2004 and
thereafter 206,786 - 206,786
Totals $5,073,141 $ 941,149 $4,131,992
</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 shares are outstanding and,
unless otherwise stated, any reference herein to common shares refers to voting
common shares.
In conjunction with the 1995 redemption of outstanding $1.20 Preferred Stock,
the cumulative non-voting Series E and F Preferred Shares outstanding 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 $.50 in 1996, and $.60 in 1997 and 1998. In 1998, 1997, 1996 $600,000,
$600,000, and $500,000, respectively, of dividends were paid on Series G Stock.
The Series G Stock has a dividend rate lower than the previously accreted rate
of the Series E and F Preferred Shares. Accordingly, the 1998 dividend
requirement on income or applicable to common shares was reduced by $325,438
($317,172 in 1997 and $210,710 in 1996).
The Series G Stock is redeemable at any time by the Company. The holder can
redeem the Series G Stock in 2000, or earlier if the Company's common share
price is $3.00 or more. 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. The
1999 dividend rate is $.70 per share. 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.
G. STOCKHOLDERS' EQUITY (CONTINUED)
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, 1999. 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. The warrants are anti--
dilutive for diluted earnings per share calculations for all years.
As of December 31, 1998, 12,201,934 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 directors, 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, 1998 additional awards aggregating up to 782,405 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.
The following summarizes the shares option activity for the years ended December
31:
<TABLE>
1998 1997
COMMON AVERAGE COMMON AVERAGE
SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 1,015,966 $1.99 985,286 $1.87
Granted 406,219 $2.32 163,460 $2.57
Expired (88,104) $2.47 (132,780) $1.82
Outstanding at end of
year 1,334,081 $2.06 1,015,966 $1.99
Exercisable at end of
year 755,956 608,002
</TABLE>
The exercise price of all options granted has been at least equal to the market
value at the date of grant. The options generally expire five years after the
grant date except for 352,041 options which expire ten years after the grant
date.
H. STOCK-BASED COMPENSATION (CONTINUED)
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''),
which 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.
Pro forma earnings amounts prepared under the assumption that the stock options
granted in 1998, 1997 and 1996 were accounted for based on their fair value as
determined under FAS 123 are as follows:
<TABLE>
PRO FORMA EARNINGS 1998 1997 1996
<S> <C> <C> <C>
Net income applicable to common
shares $ 1,157,652 $1,234,223 $ 629,096
Net income per common share-basic
and diluted $ 0.15 $ 0.16 $ 0.08
</TABLE>
The weighted average value of an option granted during 1998, 1997 and 1996
approximated 50% of the grant price of the respective option. using the Black-
Scholes option pricing model and the following assumptions:
<TABLE>
FAIR VALUE ASSUMPTIONS 1998 1997 1996
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 45% 39% 39%
Risk-free interest rate 5.8% 5.5% 5.5%
Expected life in years 5-10 5-10 5
</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
Deferred taxes at December 31 are:
<TABLE>
1998 1997
<S> <C> <C>
Deferred tax assets
Capital loss carryforwards $ 712,000 $ 586,000
AMT credit carryforwards 85,000 37,000
Asset impairment 1,370,000 1,983,000
Receivable allowances 977,000 945,000
Employee benefit accruals 117,000 138,000
Inventory valuation allowances 82,000 65,000
Depreciation - 28,000
All other items, net 125,000 109,000
Total deferred tax assets 3,468,000 3,891,000
Deferred tax liability
Depreciation (116,000) -
Total deferred tax liability (116,000) -
Gross deferred tax assets 3,352,000 3,891,000
Less: valuation allowance (2,082,000) (2,809,000)
Net deferred tax assets $ 1,270,000 $ 1,082,000
</TABLE>
For financial reporting purposes, a valuation allowance of $2,082,000 for 1998
and $2,809,000 for 1997 has been recognized to offset certain deferred tax
assets including the capital loss carryforwards and asset impairment.
Realization of the net deferred tax assets depends on generating sufficient
taxable income to utilize the tax benefit of the assets. Although realization is
not assured, management believes it is more likely than not that the net
deferred tax assets will be realized.
I. INCOME TAXES (CONTINUED)
The effective income tax rates differed from the federal statutory income tax
rates as follows for the years ended December 31:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Expense (benefit):
Statutory federal income tax $ 452,000 $ 850,000 $ 654,000
Increase (decrease) resulting
from effect of:
Nondeductible amortization 168,000 169,000 162,000
Change in deferred tax
valuation allowance (727,000) (353,000) (225,000)
Other, net (233,900) 39,000 92,000
State income tax expense, net
of federal tax benefit (19,100) 95,000 167,000
$ (360,000)$ 800,000 $ 850,000
</TABLE>
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Income tax benefit (expense)
Current $ 172,000 $(731,000) $(794,000)
Deferred 188,000 - -
Change in lieu of income
taxes - (69,000) (56,000)
$ 360,000 $(800,000) $(850,000)
</TABLE>
As a result of quasi-reorganization accounting treatment, $69,000 and $56,000 in
1997 and 1996, respectively, 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, 1998, the Company has capital loss carryforwards of $1,874,000
which begin to expire in 1999 and approximately $85,000 of alternative minimum
tax (AMT) credit carryfowards which have no expiration date.
The Company paid $82,000, $174,000, and $134,000 of income taxes in 1998, 1997,
and 1996, respectively.
J. RELATED PARTY TRANSACTIONS
The Company manages a franchise store controlled by certain officers and
directors of the Company. The Company derived revenue from this store, including
management incentive fees, of approximately $308,000 in 1998, $269,000 in 1997,
and $244,000 in 1996.
Another franchise store is owned and managed by a corporation owned and
controlled by an officer/director and his family, from which the Company derived
revenue of approximately $97,000 in 1998, $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. Rent expense for each of 1998, 1997, and
1996, 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. IMPAIRMENT CHARGE
During 1996, a charge of $510,655 was recorded, which brought the net book value
of certain stores planned to be disposed of 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 related to goodwill and $120,246 to property and equipment and $18,000
for lease terminations. Additional charges of $104,387 in 1997 and $142,381 in
1998 were recorded. The 1997 charge consisted of $30,887 related to goodwill
and $73,500 to property and equipment. The 1998 charges consisted of $88,618
related to goodwill and $53,763 to property and equipment.
The 20 stores planned to be disposed of at December 31, 1997 had a fair value of
$898,000.
At December 31, 1998, nine stores remained to be disposed of, three of which
were closed in January 1999. The six stores remaining to be disposed of had
revenues of $1.3 million and a loss of $34,000 in 1998. The six stores have a
carrying value of $164,000. Management is actively attempting to dispose of
these six stores in the shortest time practicable.
M. SEGMENTS
In 1998, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS 131). SFAS 131 establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the decision making group in deciding how to allocate
resources. The Company has eight
M. SEGMENTS (CONTINUED)
business units. The business units have been aggregated into four operating
segments with each segment representing a strategic segment that offers
different products and services. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
The Company's four reportable operating segments are Development, Company
Stores, Royalty and Advertising, and Wholesale. Development markets the
Company's franchise and recruits franchisees. Company Stores operate retail
photo processing and portrait stores owned by the Company. Royalty and
Advertising provide services to current franchisees. Wholesale sells to
franchisees products and related services not covered under the franchise
agreement which the franchisees need to operate their businesses.
Summarized financial information concerning the Company's reportable segments is
shown in the following table.
MOTO PHOTO, INC. AND SUBSIDIARIES
[CAPTION]
<TABLE>
1998
ROYALTIES
COMPANY AND
DEVELOPMENT STORES ADVERTISING
<S> <C> <C> <C>
Sales and other revenue $ 559,256 $ 13,710,748 $ 5,315,708
Depreciation and amortization 3,787 674,217 18,269
Operating segment contribution prior to
interest expense, income taxes and
unallocated corporate expenses (344,535) (911,889) 3,706,813
Identifiable segment assets 133,159 8,803,804 1,238,143
Capital expenditures for long lived
assets 1,812 1,115,136 4,207
1997
ROYALTIES
COMPANY AND
DEVELOPMENT STORES ADVERTISING
Sales and other revenue $ 80,991 $ 17,102,706 $ 5,158,577
Depreciation and amortization 3,524 530,657 7,363
Operating segment contribution
prior to interest expense, income
taxes and unallocated corporate
expenses (166,375) (545,667) 3,681,550
Identifiable segment assets 42,393 8,396,862 1,278,020
Capital expenditures for long lived
assets 114 277,023 6,531
1996
COMPANY ROYALTIES
DEVELOPMENT STORES AND
ADVERTISING
Sales and other revenue $ 829,714 $ 18,704,617 $ 4,864,783
Depreciation and amortization 4,722 472,614 5,482
Operating segment contribution
prior to interest expense, income
taxes and unallocated corporate
expenses (25,251) (387,112) 3,265,354
Identifiable segment assets 86,286 9,013,692 884,732
Capital expenditures for long lived
assets 1,710 169,054 2,977
</TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
[CAPTION]
<TABLE>
1998
WHOLESALE TOTAL
<S> <C> <C>
Sales and other revenue $ 17,088,908 $ 36,674,620
Depreciation and amortization 84,511 780,784
Operating segment contribution prior to
interest expense, income taxes and
unallocated corporate expenses (1,038,767) 1,411,622
Identifiable segment assets 4,451,862 14,626,968
Capital expenditures for long lived
assets 24,392 1,145,547
1997
WHOLESALE TOTAL
Sales and other revenue $ 18,790,649 $ 41,532,923
Depreciation and amortization 94,850 636,394
Operating segment contribution
prior to interest expense, income
taxes and unallocated corporate
expenses (259,016) 2,710,492
Identifiable segment assets 3,661,687 13,378,962
Capital expenditures for long lived
assets 11,779 295,447
1996
WHOLESALE TOTAL
Sales and other revenue $ 18,200,251 $ 42,599,365
Depreciation and amortization 92,969 575,787
Operating segment contribution
prior to interest expense, income
taxes and unallocated corporate
expenses (588,877) 2,264,114
Identifiable segment assets 5,092,950 15,077,660
Capital expenditures for long lived
assets 62,396 236,137
</TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
[CAPTION]
<TABLE>
REVENUE 1998 1997 1996
<S> <C> <C> <C>
Total sales and other
revenue for
reportable segments $36,674,620 $41,532,923 $42,599,365
Interest income 413,087 364,420 214,614
Gain on sale of stores - - 78,051
Other income 112,000 - 395,536
Total consolidated
revenues $37,199,707 $41,897,343 $43,287,566
</TABLE>
<TABLE>
SEGMENT CONSOLIDATED
OTHER SIGNIFICANT ITEMS TOTAL CORPORATE TOTAL
<S> <C> <C> <C>
1998
Depreciation and
amortization $780,784 $ 234,827 $ 1,015,611
Operating segment
contribution prior to
interest expense,
income taxes and
unallocated corporate
expenses for segment
totals reconciled to
income before taxes 1,411,622 (81,369) 1,330,253
Identifiable segment
assets 14,626,968 7,306,825 21,933,793
Capital expenditures
for long lived assets 1,145,547 222,769 1,368,316
1997
Depreciation and
amortization $ 636,394 $ 211,115 $ 847,509
Operating segment
contribution prior to
interest expense,
income taxes and
unallocated corporate
expenses for segment
totals reconciled to
income before taxes 2,710,492 (206,957) 2,503,535
Identifiable segment 13,378,962 7,659,153 21,038,115
assets
Capital expenditures
for long lived assets 295,447 182,066 477,513
1996
Depreciation and
amortization $ 575,787 $ 181,886 $ 757,673
Operating segment
contribution prior to
interest expense,
income taxes and
unallocated corporate
expenses for segment
totals reconciled to
income before taxes 2,264,114 (340,241) 1,923,873
Identifiable segment 15,077,660 5,407,552 20,485,212
assets
Capital expenditures
for long lived assets 236,137 54,651 290,788
</TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
[CAPTION]
<TABLE>
BALANCE AT CHARGED TO CHARGED TO BALANCE
YEAR ENDED BEGINNING COSTS AND OTHER AT END OF
DECEMBER 31, 1998 OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
<S> <C> <C> <C> <C> <C>
Reserves and
Allowances
deducted from
Accounts and
Notes Receivable $ 2,608,000 $ 449,000 $ 205,000 $770,000(1) $2,492,000
Allowance for Cash
Discounts 45,000 1,000 46,000
Allowance for
Inventory
Obsolescence 115,000 94,000 59,000(2) 150,000
Total $ 2,768,000 $ 543,000 $ 206,000 $829,000 $2,688,000
<FN>
(1) Uncollectible accounts written-off
(2) Disposal of Inventory
</TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
[CAPTION]
<TABLE>
BALANCE AT CHARGED TO BALANCE AT
YEAR ENDED BEGINNING COSTS AND CHARGEDRTO END OF
DECEMBER 31, 1997 OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
<S> <C> <C> <C> <C> <C>
Reserves and
Allowances
deducted from
Accounts and
Notes Receivable $ 2,211,000 $ 809,000 $ 226,000 $638,000(1) $ 2,608,000
Allowance for Cash
Discounts 61,000 -0- 16,000 45,000
Allowance for
Inventory
Obsolescence 126,000 99,000 110,000(2) 115,000
Total $ 2,398,000 $ 908,000 $ 226,000 $764,000 $ 2,768,000
<FN>
(1) Uncollectible accounts written-off
(2) Disposal of Inventory
</TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
[CAPTION]
<TABLE>
BALANCE AT CHARGED TO BALANCE
YEAR ENDED BEGINNING COSTS AND CHARGED TO AT END OF
DECEMBER 31, 1996 OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
<S> <C> <C> <C> <C> <C>
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
Total $1,497,000 $1,325,000 $ 359,000 $783,000 $2,398,000
<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 by and between Moto Photo, Inc.
and Fuji Photo film U.S.A., Inc., with Exhibits
(Incorporated by Reference to Exhibit 28.1 to Form 8-K
dated September 9, 1992)
*10.1 1992 Moto Photo Performance and Equity Incentive Plan
and Amendment No. 1 to the Plan, as amended through
April 11, 1995 (Incorporated by Reference to Exhibit 4.1
to Registration Statement Number 033-59673 on Form S-8
dated May 30, 1995)
*10.2 Amendment No. 2 to the 1992 Moto Photo Performance
and Equity Incentive Plan (Incorporated by Reference to
Exhibit 10.2 to Form 10-Q dated May 14, 1998)
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)
NUMBER DESCRIPTION
10.5 First Amendment to Loan and Security Agreement,
dated as of May 1, 1998, by and between Moto Photo, Inc.
and The Provident Bank (Incorporated by Reference to
Exhibit 10.3 to Form 10-Q dated May 14, 1998)
10.6 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 29, 1995)
10.7 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)
10.8 Project Agreement dated as of February 6, 1998 between
Fuji Photo Film U.S.A., Inc., and Moto Photo, Inc.
(Incorporated by Reference to Exhibit 10.7 to Form 10-K dated
March 30, 1998)
10.9 Master Lease Agreement dated as of February 6, 1998 between
Fuji Photo Film U.S.A., Inc., Moto Photo, Inc., and The
Provident Bank (Incorporated by Reference to Exhibit 10.8 to
Form 10-K dated March 30, 1998)
10.10 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)
10.11 Master License Agreement dated as of December 31, 1998
between Moto Photo, Inc. and Canadian Industrial Services, Ltd.
*10.12 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)
*10.13 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)
*10.14 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)
*10.15 Amendment to Employment Agreement, dated as of
December 23, 1997, with David A. Mason (Incorporated by
Reference to Exhibit 10.13 to Form 10-K dated March 30, 1998)
*10.16 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)
*10.17 Amendment to Employment Agreement, dated as of December 23, 1997,
with Frank M. Montano (Incorporated by Reference to Exhibit 10.15
to Form 10-K dated March 30, 1998)
*10.18 Employment Agreement dated as of January 1, 1999 with
Lloyd F. Noland
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
TABLE OF CONTENTS
1. GRANT 3
2. TERM AND RENEWAL 6
3. SUBLICENSE AGREEMENTS 7
4. FEES 8
5. RIGHTS AND OBLIGATIONS OF FRANCHISOR 12
6. RIGHTS AND OBLIGATIONS OF MASTER LICENSOR 15
7. PROPRIETARY MARKS 21
8. CONFIDENTIAL MANUALS 26
9. CONFIDENTIAL INFORMATION 27
10. ACCOUNTING AND RECORDS 28
11. INSURANCE 30
12. TRANSFER OF INTEREST 32
13. DEFAULT AND TERMINATION 42
14. OBLIGATIONS UPON TERMINATION OR EXPIRATION 47
15. COVENANTS 51
16. TAXES 55
17. INDEPENDENT CONTRACTOR AND INDEMNIFICATION 57
18. APPROVALS AND WAIVERS 58
19. NOTICES 59
20. ENTIRE AGREEMENT 60
21. SEVERABILITY AND CONSTRUCTION 61
22. APPLICABLE LAW 62
23. ARBITRATION 64
24. ACKNOWLEDGMENTS 64
MOTO PHOTO, INC.
MASTER LICENSE AGREEMENT
This Master License Agreement (the "Agreement") is made and entered into as
of December 31, 1998, by and between MOTO PHOTO, INC., a Delaware corporation
("Franchisor"), and CANADIAN INDUSTRIAL SERVICES, LTD., an Ontario corporation
("Master Licensor").
The Agreement is based on the following understandings:
1. Franchisor, as the result of the expenditure of time, skill, effort,
and money, has developed and owns a unique and distinctive system (the "System")
relating to the establishment and operation of photo processing stores which
feature quality fast photo processing and related imaging services and which
offer for sale photo-related products.
2. The distinguishing characteristics of the System include, without
limitation, uniform and distinctive methods for selling and advertising photo
processing and related imaging services; interior and exterior color and design
schemes, furnishings, and other identifying characteristics; specifications and
procedures for installation of equipment and fixtures; standards and
specifications for inventory, chemicals, photographic paper, and supplies;
customized accounting and other recordkeeping procedures; and training
procedures relating to the use of photo processing equipment, customer service,
and business management; all of which may be changed, improved, and further
developed by Franchisor from time to time.
3. Franchisor identifies the System by means of certain trade names,
service marks, trademarks, logos, emblems and indicia of origin, including but
not limited to the marks "MOTOPHOTO" and "ONE HOUR MOTOPHOTO" and design, and
such other trade names, service marks, and trademarks as are now designated (and
<PAGE>
may hereafter be designated or substituted by Franchisor) for use in connection
with the System (the "Proprietary Marks").
4. Franchisor continues to develop, use, and control the use of such
Proprietary Marks in order to identify for the public the source of services and
products marketed the Proprietary Marks and the System, and to represent the
System's high standards of quality, appearance, and service.
5. Master Licensor has been acting as Master Licensor for Franchisor in
Ontario, Canada pursuant to a Master License Agreement and Sub-License
Development Agreement dated as of February 20, 1987 ("the MLA"). Master
Licensor wishes to obtain the right to license others ("Sublicensees") to
operate MotoPhotoSM stores (the "Stores" or "sublicensed businesses") under the
System in other areas of Canada and to license additional stores in Ontario.
6. Master Licensor understands and acknowledges the importance of
Franchisor's high and uniform standards of quality, service, and appearance, and
the necessity of ensuring the maintenance of those high standards by all
Sublicensees of Master Licensor.
NOW, THEREFORE, the parties mutually agree as follows:
1. GRANT
1.01 Franchisor grants to Master Licensor, upon the terms and conditions
set forth in this Agreement, the right to grant an unlimited number of
sublicenses for the use in Canada ("the Designated Area") of Franchisor's
Proprietary Marks and the System, as such may be changed, improved, and amended
from time to time, and a license to use the Proprietary Marks and the System in
connection with such sublicensing. Franchisor represents that the marks
"MOTOPHOTO" and "ONE HOUR MOTOPHOTO" and design have been registered in Canada.
Franchisor will take all steps necessary to extend the registration of such
marks in Canada so long as Master Licensor is still actively working with the
System pursuant to this Agreement.
1.02 Except as otherwise provided in this Agreement, Franchisor shall not
establish, nor license anyone other than Master Licensor to sublicense or
establish, any Store under the System in the Designated Area during the term of
this Agreement or any renewal hereof. Prior to the expiration of the term of
this Agreement, Franchisor retains the right to acquire or otherwise affiliate
entities which own stores, which franchise stores, or which both own and
franchise stores at any location, within or outside of the Designated Area, and
which operate under proprietary marks other than those used in connection with
the System for the sale of the same, similar, or different services and products
("Non-System Stores") on any terms and conditions Franchisor may deem advisable
and, except as provided in Section 1.03 hereof, without granting Master Licensor
any rights in such entities or such Non-System Stores. Notwithstanding the
foregoing, Franchisor agrees that it shall not acquire nor solicit such entities
to sell their Non-System Stores to Franchisor or to otherwise affiliate with
Franchisor unless Master Licensor is in default under this Agreement.
1.03 It is Franchisor's intent to assist Master Licensor in expanding the
System in the Designated Area and to that end Franchisor may elect to purchase
and to convert more Non-System Stores to Stores under the System; provided,
however, that Franchisor may purchase and convert only chains of Non-System
Stores with eleven (11) or more stores. If Franchisor desires to effect such a
conversion prior to the expiration of the term of this Agreement, Master
Licensor shall have the right and option to purchase and convert all of the Non-
System Stores being acquired by Franchisor in the Designated Area and/or in the
United States. Master Licensor may exercise this right only if Master Licensor
is in good standing under this Agreement at the time of exercise and only during
the first three (3) years following the date Franchisor acquires the Non-System
Stores.
Master Licensor shall exercise such right by closing on such purchase and
executing Franchisor's then-current form of franchise agreement (which shall not
require payment of any initial franchise fee) for each such store in the United
States which Master Licensor is purchasing and/or by establishing a sublicense
arrangement as provided in Section 3.03 of this Agreement for any Non-System
Store acquired in the Designated Area.
The purchase price to be paid by Master Licensor for the Non-System Stores
shall be the greater of (a) 3.5 times the pre-debt cash flow for the Non-System
Stores which Master Licensor is purchasing and (b) the cash equivalent of the
acquisition costs, the consideration paid by Franchisor for the Non-System
Stores (or, if Master Licensor is purchasing fewer than all of the Non-System
Stores purchased by Franchisor, the cash equivalent of Franchisor's
proportionate per store cost), and any new investment Franchisor has made in the
Non-System Store(s) Master Licensor is purchasing. In the event that the
parties cannot agree on the cash equivalent for the Non-System Stores within a
reasonable time, an independent appraiser shall be designated by each party, and
the two (2) independent appraisers so designated shall select a third
independent appraiser. The determination of the cash equivalent by the majority
of appraisers so chosen shall be binding. Franchisor and Master Licensor shall
bear the costs of the appraisal on an equal basis.
Franchisor shall have no right to add stores to the chain(s) of stores
acquired and converted by Franchisor as provided in this Agreement.
1.04 Master Licensor may establish a Store or Stores only as provided in
Section 3.03 of this Agreement.
2. TERM AND RENEWAL
2.01 Except as otherwise provided, the term of this Agreement shall be for
ten (10) years from the date of its execution.
2.02 Master Licensor may, at its option, renew this Agreement for
additional terms of ten years each, provided that at the end of the applicable
term:
2.02.1 Master Licensor has given Franchisor written notice of such
election to renew not less than nine (9) months nor more than twelve (12) months
prior to the end of the initial term.
2.02.2 Master Licensor is not in material breach of any material
provision of this Agreement, any amendment hereof or successor to this
Agreement, or any other agreement between Master Licensor and Franchisor, or
Franchisor's subsidiaries or affiliates, and has substantially complied with all
of the terms and conditions of such agreements during their terms.
2.02.3 Master Licensor has satisfied all monetary obligations owed by
Master Licensor to Franchisor and its subsidiaries and affiliates and has timely
met these obligations throughout the term of this Agreement.
2.02.4 Master Licensor shall execute upon renewal a new Master
License Agreement for the renewal term as set out in Section 2.02 and such other
ancillary agreements as Franchisor may require, which agreements shall supersede
this Agreement in all respects, and the terms of which may differ from the terms
of this Agreement; provided, however, that the Designated Area shall remain the
same, the percentage of royalty, transfer, renewal, and sublicense fees payable
by Master Licensor to Franchisor shall remain the same, and that Master Licensor
shall pay a renewal fee of Five Thousand United States Dollars (US $5,000).
2.02.5 Master Licensor shall execute a general release, in a form
prescribed by Franchisor, of any and all claims against Franchisor and its
subsidiaries and affiliates, and their respective officers, directors, agents,
and employees.
2.02.6 Master Licensor shall comply with Franchisor's then-current
qualification and training requirements.
2.02.7 Franchisor is still seeking to sell franchises in the United
States.
3. SUBLICENSE AGREEMENTS
3.01 Master Licensor shall grant the right to operate a Store only
pursuant to a sublicense agreement in a form approved by Franchisor (the
"Sublicense Agreement" or "Sublicense Agreements"), to which the Sublicensee,
Master Licensor, and Franchisor shall be parties.
3.02 Master Licensor shall make no material modification to any Sublicense
Agreement without Franchisor's prior consent, except that Master Licensor shall,
in its sole discretion, determine the initial sublicense fee and the continuing
royalty fee to be paid pursuant to the Sublicense Agreements, as well as the
transfer and renewal fees, if any, to be paid. No Sublicense Agreement shall be
for more than one Store.
3.03 This Agreement does not grant Master Licensor the right to operate a
Store or Stores in the Designated Area; however, nothing in this Agreement shall
be deemed to prohibit Master Licensor from executing a Sublicense Agreement with
an entity in which Master Licensor has an interest, for a Store to be located in
the Designated Area. In any such case, the Sublicense Agreement shall provide
that Franchisor shall have a right of first refusal in the event that any person
or entity owning a controlling interest in such entity, in the assets of such
entity, or in such Sublicense Agreement wishes to sell such interest.
4. FEES
4.01 Master Licensor shall pay Franchisor, subject to prevailing
withholding taxes or other taxes, the following:
4.01.1 A master license fee of One Hundred Fifty Thousand Canadian
Dollars ($150,000.00). The master license fee shall be paid by execution of a
promissory note substantially in the form attached to this Agreement as Exhibit
A. Upon payment of any portion of the master license fee under the promissory
note, such portion shall be deemed fully-earned and non-refundable in
consideration for the administrative and other expenses incurred by Franchisor
in granting this license and for the development opportunities lost or deferred
by Franchisor as a result of the right granted Master Licensor in this
Agreement.
4.01.2 For each Sublicense Agreement executed pursuant to this
Agreement, a sublicense fee equal to sixteen and one-half percent (16.5%) of the
sublicense or franchise fee paid to Master Licensor pursuant to executed
Sublicense Agreements.
4.01.3 A continuing royalty fee during the term of this Agreement in
an amount equal to twenty-five percent (25%) of the royalty fee paid to Master
Licensor by Sublicensees.
4.01.4 A fee in the amount of sixteen and one-half percent (16.5%) of
each renewal fee and/or transfer fee, if any, paid by any Sublicensee.
4.01.5 In the event that any payment(s) which Master Licensor must
make to Franchisor pursuant to this Agreement cannot be delivered in Dayton,
Ohio, Master Licensor shall deposit such payment(s) in Canada as Franchisor
shall direct.
4.02 Master Licensor shall collect renewal fees, transfer fees, sublicense
fees, and continuing royalty fees owed pursuant to the Sublicense Agreements
between Master Licensor and Sublicensees within the Designated Area and shall
provide Franchisor with a monthly report by the last day of each month on the
amounts collected during the preceding month, along with the payments due
Franchisor from such amounts. Master Licensor shall have sole discretion as to
the terms and conditions of collections from Sublicensees, including the right
to defer or refund sublicense, renewal, transfer, and royalty fees. In no event
shall any such deferred payments become payable to Franchisor by Master Licensor
until, and unless, such fees are paid to Master Licensor by Sublicensees. If
Master Licensor finances any portion or all of the sublicense, renewal, or
transfer fee for a Sublicensee, Master Licensor shall pay to Franchisor when
received, in accordance with this Section 4.02, Franchisor's proportionate share
of the principal and interest paid by the Sublicensee. If Master Licensor
refunds amounts collected, Master Licensor shall have the right to deduct from
any payments due Franchisor Franchisor's portion of any amount so refunded.
Master Licensor shall have no liability to Franchisor for payments under this
Section 4.02 with respect to any payment which a Sublicensee, for any reason,
fails to pay to Master Licensor.
Notwithstanding the foregoing, Master Licensor shall have no right to defer
or refund sublicense, renewal, transfer, and/or royalty fees payable pursuant to
a Sublicense Agreement executed by an entity in which Master Licensor has an
interest. Payment of such fees shall be made to Franchisor at the time
specified in this Agreement for payment of royalties, regardless of collection
from the Sublicensee.
4.03 All payments shall be made together with any reports or statements
required under Section 10.02 of this Agreement. Any payment or report not
actually received by Franchisor on or before such date shall be deemed overdue
if not postmarked at least five (5) days before the due date. If any payment is
overdue, Master Licensor shall pay Franchisor, in addition to the overdue
amount, interest on such amount from the date it was due until paid at the
equivalent of two percent (2%) per month calculated on a daily basis, or the
maximum rate permitted by law, whichever is less. Entitlement to such interest
shall be in addition to any other remedies Franchisor may have.
4.04 As used in this Agreement, "gross sales" shall include all revenue
received by Sublicensees from the sale (including retail and wholesale sales) of
all services and products, and all other income of every kind related to the
sublicensed businesses, whether for cash or credit, less any discounts given or
sales tax or Value Added Tax or equivalent tax collected from customers by
Sublicensees for transmittal to the appropriate taxing authority.
4.05 As further consideration for the license granted by Franchisor, upon
execution of this Agreement Master Licensor shall grant to Franchisor an option,
exercisable the first time Master Licensor makes a public offering of equity
securities and/or securities convertible into equity securities, to purchase up
to twenty percent (20%) of such securities at a price equal to the selling price
for each issue less a twenty percent (20%) discount ("the Exercise Price");
provided, however, that the Exercise Price shall not be less than the net book
value calculated immediately prior to the offering/placement. The foregoing is
subject to compliance with prevailing Canadian and provincial securities laws.
5. RIGHTS AND OBLIGATIONS OF FRANCHISOR
In addition to any other rights and obligations specified in this
Agreement, Franchisor shall have the following rights and obligations:
5.01 Franchisor shall provide initial training at its corporate
headquarters for managers of Stores operated by Sublicensees in the Designated
Area, subject to the terms set forth in Section 6.07 of this Agreement.
Franchisor shall not be obligated to provide initial training to more than two
persons per Store.
5.02 Franchisor has made available at no charge to Master Licensor plans
and specifications for the construction of the first Store opened pursuant to a
Sublicense Agreement and for the exterior and interior design and layout,
fixtures, furnishings and signs. At its own expense, Master Licensor may
reproduce and distribute such plans and specifications, all of which are
Franchisor's property, to its Sublicensees in connection with its performance
under the Sublicense Agreements. If Franchisor shall change such plans and
specifications, Franchisor shall make the new plans and specifications available
at no charge to Master Licensor.
5.03 Franchisor has provided on loan to Master Licensor one (1) copy of
its Confidential Operations Manual and associated manuals (collectively, the
"Manuals"), other operating systems, information systems, training programs, and
other materials which Franchisor may develop for use in connection with the
System and which it deems relevant. Franchisor shall provide revisions of such
materials as it deems appropriate. Franchisor shall charge Master Licensor only
for such materials as Franchisor normally charges its franchisees.
5.04 Franchisor shall provide to Master Licensor copies of all relevant
materials provided to Franchisor's franchisees, area developers, franchise
consultants, and shareholders. Master Licensor shall have the right to
reproduce such materials at Master Licensor's expense and distribute them to its
Sublicensees, as Master Licensor deems advisable; provided, however, that all
such materials shall be marked as the property of Franchisor, shall be made
available to Sublicensees on loan only, and shall be distributed to Sublicensees
only subject to the confidentiality provisions of the Sublicense Agreements.
5.05 Franchisor shall make available from time to time, at Master
Licensor's expense, promotional materials for advertising by Master Licensor
and/or its Sublicensees and shall have the right to review all advertising and
promotional material which Master Licensor proposes to use or to furnish to its
Sublicensees for their use. Franchisor shall charge Master Licensor only for
such materials as Franchisor normally charges its franchisees.
5.06 Franchisor's executives and/or operational managers shall be
available to visit and consult with Master Licensor's executives at their
reasonable request. At its own expense, Franchisor shall send one
executive/operational manager to Master Licensor's business premises in Canada
once each year to assist in planning. Master Licensor shall pay any reasonable
travel expenses associated with such visits. There shall be no charge for the
time of Franchisor's corporate executives. Franchisor's corporate executives/
managers shall also be available for consultation by telephone.
5.07 Franchisor shall invite Master Licensor's officers and directors to
participate in Franchisor's national advisory group, to attend Franchisor's
franchisee convention, and to attend the appropriate regional meetings of
Franchisor's area developers and/or franchise consultants. Master Licensor, its
directors, and/or its employees shall be responsible for any and all expenses
incurred by them in connection with attending any such events, including,
without limitation, the cost of transportation, lodging, meals, and wages.
5.08 Franchisor shall provide such additional training and programs as
Franchisor shall deem advisable. Master Licensor or its employees shall be
responsible for any and all expenses incurred by them in connection with
attending any such events, including, without limitation, the cost of
transportation, lodging, meals, and wages.
5.09 Franchisor shall, where possible, assist Master Licensor in
negotiating with suppliers for equipment, paper, chemicals, and merchandise.
5.10 Franchisor shall continue its efforts to maintain the standards of
quality, professionalism, and service of the System and, to that end, may
conduct inspections of any business premises operated under this Agreement by
Master Licensor and monitor Master Licensor's performance under the Sublicense
Agreements with Sublicensees. Such monitoring may include, without limitation,
contacting Sublicensees, visiting Store premises, and monitoring training
programs conducted by Master Licensor's personnel.
5.11 All of the obligations of Franchisor arising under this Agreement are
to Master Licensor. No other party is entitled to rely on, enforce, or obtain
relief from any breach of such obligations either directly or by subrogation.
6. RIGHTS AND OBLIGATIONS OF MASTER LICENSOR
Master Licensor understands and acknowledges that strict conformity to
System standards of the business contemplated under this Agreement and of the
sublicensed businesses is important to Master Licensor, Franchisor, System
franchisees and Sublicensees in order to develop and maintain high and uniform
operating standards, to increase the demand for System franchisees and
Sublicensees, and the demand for services sold by System franchisees and
Sublicensees, and to protect Franchisor's reputation and the goodwill associated
with the Proprietary Marks and the System. In addition to any other rights and
obligations specified in this Agreement, Master Licensor shall have the
following rights and obligations:
6.01 Master Licensor shall comply with all terms and conditions set forth
in this Agreement and in any and all Sublicense Agreements executed pursuant to
this Agreement and shall fully enforce all material provisions of such
Sublicense Agreements.
6.02 During the term of this Agreement, Master Licensor shall promote
diligently the sublicensing of Stores throughout the Designated Area,
recognizing that rapid market penetration by Stores is crucial to the success of
the System in the Designated Area.
6.03 Master Licensor understands and acknowledges the importance of
selecting only highly-qualified Sublicensees and the importance of ensuring that
all of Master Licensor's Sublicensees produce quality photo processing and
related imaging services, achieve maximum sales levels, make maximum efforts to
control costs, and fully conform to Franchisor's policies and procedures as set
forth in Franchisor's Manuals.
6.04 Before executing a Sublicense Agreement, Master Licensor shall obtain
Franchisor's written approval of any material changes to such agreement. Upon
execution of any Sublicense Agreement by Master Licensor and a prospective
Sublicensee, Master Licensor shall send to Franchisor two executed copies of the
Sublicense Agreement, together with a check for Franchisor's portion of the
initial sublicense fee. Franchisor shall promptly execute the Sublicense
Agreements and return one executed copy to Master Licensor.
6.05 Master Licensor shall cooperate with Franchisor in preparing and
filing with the appropriate authorities any filings required by law and in
obtaining any necessary governmental approvals.
6.06 Within thirty (30) days after execution of this Agreement, at least
two (2), and up to four (4), as Franchisor shall direct, of Master Licensor's
managers and\or corporate executives shall attend and complete to Franchisor's
satisfaction initial training at Franchisor's corporate headquarters.
Franchisor shall provide instructors and training materials for all required
training programs, and Master Licensor or its employees shall be responsible for
any and all other expenses incurred by them in connection with any training
programs, including, without limitation, the cost of transportation, lodging,
meals, and wages.
6.07 Master Licensor shall pay to Franchisor a training fee of Three
Hundred Canadian Dollars ($300.00) per Store for Franchisor's providing initial
training at Franchisor's corporate headquarters pursuant to Section 5.01 of this
Agreement, provided, however, that Franchisor shall not be obligated to provide
initial training to more than two (2) persons per Store. Franchisor shall
provide instructors and training materials for all required training programs,
and the Sublicensee or its employees shall be responsible for any and all other
expenses incurred by them in connection with any training programs, including,
without limitation, the cost of transportation, lodging, meals, and wages.
6.08 In dealing with prospective and actual Sublicensees, Master Licensor
shall:
6.08.1 Comply at all times with all applicable laws, rules, and
regulations affecting or governing commercial transactions and/or the
advertising, promotion, and sale of franchises or business opportunities,
including, without limitation, those relating to registration, disclosure, and
unfair practices.
6.08.2 Comply at all times with Franchisor's standards and procedures
as prescribed in this Agreement, the Manuals, or otherwise in writing.
6.08.3 Use only materials provided by, or previously approved in
writing by, Franchisor in sales presentations to prospective Sublicensees and
make no misrepresentations about Franchisor, Master Licensor, the Sublicensed
Businesses, or representations in conflict with the terms and conditions of the
Sublicense Agreement, the Confidential Operating Manual for Sublicensees, and/or
other related documents.
6.09 Master Licensor shall approve as suppliers of equipment, paper,
chemicals and merchandise to Sublicensees only those suppliers who demonstrate
to the continuing reasonable satisfaction of Franchisor the ability to meet
Franchisor's reasonable standards and specifications for such items, who possess
adequate quality controls and capacity to supply the Sublicensees' needs
promptly and reliably, and who have been approved in writing by Franchisor and
not thereafter disapproved. If Master Licensor desires to recommend to its
Sublicensees any supplier which has not been approved by Franchisor, it shall
submit to Franchisor a written request for such approval or request the supplier
itself to do so. Franchisor shall have the right to require that its
representatives be permitted to inspect the supplier's facilities and that
samples from the supplier be delivered, at Franchisor's option, either to
Franchisor or to an independent testing laboratory designated by Franchisor for
testing. A charge not to exceed the reasonable costs of inspection and actual
costs of the test shall be paid by Master Licensor or the supplier. Franchisor
reserves the right, at its option, to reinspect the facilities and products of
such approved supplier and to revoke its approval upon the supplier's failure to
continue to meet any of Franchisor's criteria. In taking action pursuant to
this Section 6.09, Franchisor shall act in a reasonable manner, taking into
consideration Master Licensor's competitive circumstances; provided, however,
that Franchisor may exclude any type or category of merchandise which
Franchisor, in its sole discretion, determines is unsuitable for System
franchisees to offer.
6.10 On a quarterly basis, or more frequently as it deems advisable,
Master Licensor shall perform reviews of the Stores in accordance with System
requirements and shall promptly send a copy of each store review report to
Franchisor.
6.11 Master Licensor shall have the right to send a reasonable number of
potential Sublicensees to visit Franchisor. Master Licensor shall pay all travel
expenses associated with such visits; Franchisor shall pay certain hospitality
expenses of such visitors and shall make its employees available to meet with
such visitors at no cost to Master Licensor.
6.12 Master Licensor shall employ sufficient numbers and categories of
employees necessary to fulfill its obligations under this Agreement and under
the Sublicense Agreements to be executed pursuant to this Agreement and shall
assure that all of its employees maintain the highest quality standards of
professionalism and integrity. Master Licensor shall screen carefully all
employees prior to employment and shall employ only those who have sufficient
education and previous work experience to perform competently and who have a
good moral character and reputation.
6.13 If Master Licensor is a corporation, the following requirements shall
also apply to Master Licensor:
6.13.1 Master Licensor shall promptly furnish to Franchisor copies of
Master Licensor's Articles of Incorporation, Bylaws, and other governing
documents, and any amendments to such documents, including the resolution of the
Board of Directors authorizing entry into this Agreement.
6.13.2 Master Licensor shall maintain instructions against the
transfer on its records of any equity securities; and each stock certificate of
Master Licensor shall have conspicuously endorsed upon its face a statement in a
form satisfactory to Franchisor that it is held subject to, and that further
assignment or transfer of it is subject to, all restrictions imposed upon
assignments by this Agreement; provided, however, that the requirements of this
Section 6.13.2 shall not apply to a publicly-held corporation, as such term is
defined in Section 12.02.3 of this Agreement.
6.13.3 Master Licensor shall maintain a current list of all owners of
record and all beneficial owners of any class of voting securities of Master
Licensor and shall furnish the list to Franchisor upon request.
6.13.4 All shareholders of Master Licensor shall jointly and
severally guarantee Master Licensor's performance under this Agreement and shall
bind themselves to the terms of this Agreement; provided, however, that the
requirements of this Section 6.13.4 shall not apply to a publicly-held
corporation as defined in Section 12.02.3 of this Agreement and provided further
that Franchisor may exempt certain individuals or classes of individuals from
such requirement. So long as Canadian Industrial Services Ltd. guarantees the
obligations of Master Licensor under this Agreement, Franchisor specifically
exempts all shareholders of Master Licensor from the requirements of this
Section 6.13.4.
6.14 If Master Licensor is a partnership, the following requirements shall
also apply to Master Licensor:
6.14.1 Master Licensor shall furnish Franchisor with its partnership
agreement as well as such other documents as Franchisor may reasonably request,
and any amendments to such documents.
6.14.2 Master Licensor shall prepare and furnish to Franchisor, upon
request, a list of all general and limited partners in Master Licensor.
7. PROPRIETARY MARKS
7.01 Franchisor represents with respect to the Proprietary Marks that:
7.01.1 Franchisor is the owner of all right, title, and interest in
and to the Proprietary Marks.
7.01.2 Franchisor has taken and will take all steps reasonably
necessary to preserve and protect the ownership and validity in and to the
Proprietary Marks.
7.01.3 Franchisor will use and permit Master Licensor and
Franchisor's franchisees to use the Proprietary Marks only in accordance with
the System and the standards and specifications attendant to the System which
underlie the goodwill associated with and symbolized by the Proprietary Marks.
7.02 With respect to Master Licensor's licensed use of the Proprietary Marks
pursuant to this Agreement, Master Licensor agrees that:
7.02.1 Master Licensor shall use only the Proprietary Marks
designated by Franchisor.
7.02.2 Master Licensor shall use the Proprietary Marks without prefix
or suffix and only in the manner authorized and permitted by Franchisor.
Franchisor recognizes that Canadian law may require translation of the
Proprietary Marks into French in connection with certain uses of the Proprietary
Marks. Franchisor expressly permits Master Licensor to make and use such
translations, provided, however, that Master Licensor first provides to
Franchisor the usage in French and a translation of such usage into idiomatic
English.
7.02.3 Master Licensor shall use the Proprietary Marks only for the
operation of the business licensed under this Agreement and shall sublicense the
use of the Proprietary Marks only pursuant to Sublicense Agreements as provided
in this Agreement and only in relation to services in accordance with the
standards set by Franchisor from time to time.
7.02.4 During the term of this Agreement and any renewal of this
Agreement, Master Licensor shall identify itself as a Registered User of the
Proprietary Marks and as the owner of the business operated under this Agreement
in conjunction with any use of the Proprietary Marks, including, but not limited
to, on advertisements and promotional pieces, as well as at such conspicuous
locations at the offices used for the operation of Master Licensor's business as
Franchisor shall designate in writing. The identification shall be in the form
which specifies Master Licensor's name, followed by the term "Master Licensor of
MotoPhotoSM," or such other identification Franchisor shall approve.
7.02.5 Master Licensor's right to use the Proprietary Marks is
limited to such uses as are authorized under this Agreement, and any
unauthorized use thereof shall constitute an infringement of Franchisor's
rights.
7.02.6 Master Licensor shall not use the Proprietary Marks to incur
any obligation or indebtedness on behalf of Franchisor.
7.02.7 Master Licensor shall not use the Proprietary Marks as part of
its corporate or other legal name.
7.02.8 Master Licensor shall comply with Franchisor's instructions in
filing and maintaining trade name or fictitious name registrations, if any, and
shall execute any documents deemed necessary by Franchisor or its counsel to
obtain protection for the Proprietary Marks or to maintain their continued
validity and enforceability.
7.02.9 If litigation involving the Proprietary Marks is instituted or
threatened against Master Licensor or, to Master Licensor's knowledge, any of
its Sublicensees, Master Licensor shall promptly notify Franchisor and shall
cooperate fully in defending or settling such litigation. If such litigation
arises from Master Licensor's use of the Proprietary Marks in strict accordance
with Franchisor's instructions, Franchisor shall indemnify Master Licensor from
all damages, costs and expenses arising from such litigation.
7.03 Master Licensor expressly understands and acknowledges that:
7.03.1 As between the parties to this Agreement, Franchisor has the
exclusive right and interest in and to the Proprietary Marks and the goodwill
associated with and symbolized by them.
7.03.2 The Proprietary Marks serve to identify the System and those
who are franchised or sublicensed under the System.
7.03.3 Master Licensor shall not directly or indirectly contest the
validity or Franchisor's ownership of the Proprietary Marks.
7.03.4 Master Licensor's use of the Proprietary Marks pursuant to
this Agreement does not give Master Licensor any ownership interest or other
interest in or to the Proprietary Marks, except the license granted in this
Agreement.
7.03.5 Any and all goodwill arising from Master Licensor's use of the
Proprietary Marks in its licensed operation under this Agreement shall inure
solely and exclusively to Franchisor's benefit, and upon expiration or
termination of this Agreement and the license in this Agreement granted, no
monetary amount shall be assigned as attributable to any goodwill associated
with Master Licensor's use of the Proprietary Marks.
7.03.6 The right and license of the Proprietary Marks granted under
this Agreement to Master Licensor is nonexclusive except as provided in Section
1 of this Agreement, and Franchisor thus has and retains the rights among
others:
7.03.6.1 Except in the Designated Area unless otherwise
permitted by this Agreement, to grant other licenses for the Proprietary Marks,
in addition to those licenses already granted to existing area developers,
master licensors, and franchisees;
7.03.6.2 To use the Proprietary Marks in connection with selling
products and services;
7.03.6.3 To develop and establish other systems and programs for
the same or similar Proprietary Marks, or any other Proprietary Marks, and grant
licenses or franchises to such Proprietary Marks without providing any rights in
such licenses or franchises to Master Licensor.
7.03.6.4 Franchisor agrees that, should it develop and establish
franchise systems for different products and services under the Proprietary
Marks or for similar products and services under other trademarks, Franchisor
will give Master Licensor the opportunity to act as master licensor for such
system in the Designated Area if Master Licensor is then in compliance with, and
throughout the term of this Agreement has been in substantial compliance with,
the material terms of this Agreement.
7.04 Franchisor shall have the right to substitute other Proprietary Marks
for use by its franchisees and/or by Master Licensor and its Sublicensees if
Franchisor, in its sole discretion, believes it to be in the best interest of
the System.
8. CONFIDENTIAL MANUALS
8.01 In order to protect the reputation and goodwill of Franchisor and to
maintain uniform standards of operation under the Proprietary Marks, Master
Licensor shall conduct its business in accordance with the Manuals, one (1) copy
of each of which Master Licensor acknowledges having received on loan from
Franchisor for the term of this Agreement.
8.02 Master Licensor shall at all times treat the Manuals, any other
manuals created for or approved for use in the operation of Master Licensor's
business or the sublicensed businesses, and the information contained in any
such manuals as confidential and shall use all reasonable efforts to maintain
such information as secret and confidential. Master Licensor shall not at any
time copy, duplicate, record, or otherwise reproduce the foregoing materials, in
whole or in part, nor otherwise make the same available to any unauthorized
person. Notwithstanding the foregoing, Master Licensor is authorized to
reproduce at Master Licensor's costs the Manuals and any manuals created or
approved for use in the operation of the sublicensed businesses and distribute
one copy, on loan, to each Sublicensee upon execution of a Sublicense Agreement.
8.03 The Manuals, any other manuals created for or approved for use in the
operation of Master Licensor's business and/or the sublicensed businesses, and
all copies of such manuals, shall at all times remain the sole property of
Franchisor.
8.04 Franchisor may from time to time revise the contents of the Manuals
and Master Licensor expressly agrees to comply with and furnish to each
Sublicensee each new or changed standard. The cost of printing any single
change to any outstanding version of any manual shall not exceed Five Hundred
Canadian Dollars ($500.00), provided, however, that Franchisor may from time to
time, but not more often than every three (3) years, issue a new version of the
Manuals which incorporates all previous changes and that there shall be no limit
on the cost of reproducing such new version.
8.05 Master Licensor shall at all times maintain the Manuals at its
business premises and insure that the Manuals are kept current and up-to-date.
In the event of any dispute as to the contents of the Manuals, the terms of the
master copy of the Manuals maintained by Franchisor at Franchisor's home office
shall be controlling.
9. CONFIDENTIAL INFORMATION
9.01 Master Licensor shall not, during the term of this Agreement or
thereafter, communicate, divulge, or use for the benefit of any other person,
persons, partnership, association, or corporation (other than, pursuant to this
Agreement and to any Sublicense Agreement, to Sublicensees) any confidential
information, knowledge, or know-how concerning the methods of operation of the
System which may be communicated to Master Licensor, or of which Master Licensor
may be apprised, by virtue of Master Licensor's operation under the terms of
this Agreement. Master Licensor shall divulge such confidential information only
to its Sublicensees and to such of its employees as must have access to it in
order to operate the business licensed under this
Agreement and who have signed a confidentiality agreement in a form approved by
Franchisor. Disclosure of such confidential information to Sublicensees shall
be made solely pursuant to and strictly in accordance with the provisions of the
Sublicense Agreements. Any and all information, knowledge, know-how, and
techniques which Franchisor designates as confidential shall be deemed
confidential for purposes of this Agreement, except information which Master
Licensor can demonstrate came to its attention prior to its disclosure by
Franchisor or which, at or after the time of disclosure by Franchisor to Master
Licensor, had become or becomes publicly known by way of publication or
communication by others.
10. ACCOUNTING AND RECORDS
10.01 Master Licensor shall maintain during the term of this Agreement and
shall preserve for at least five (5) years from the dates of their preparation,
full, complete, and accurate books, records, and accounts in accordance with
generally accepted accounting principles and in the form and manner prescribed
by Franchisor from time to time in the Manuals or otherwise in writing.
10.02 Master Licensor shall submit to Franchisor, with each royalty
payment to Franchisor during the term of this Agreement, a report in the form
prescribed by Franchisor, accurately reflecting all gross sales by Sublicensees
during the period since the last report and such other data or information as
Franchisor may require.
10.03 Master Licensor shall, at its expense, prepare a balance sheet and a
profit and loss statement, in accordance with generally accepted accounting
principles, each quarter of Master Licensor's fiscal year. Such statement shall
be provided to Franchisor, in a form prescribed by Franchisor, within thirty
(30) days from the end of each quarter and shall be signed by Master Licensor
attesting that it is true and correct.
10.04 Master Licensor shall, at its expense, provide to Franchisor a
profit and loss statement, a balance sheet, and statement of changes in
financial position prepared in accordance with generally accepted accounting
principles, within sixty (60) days after the end of each fiscal year of the
licensed business during the term hereof, showing the results of operations of
the licensed business during such fiscal year. Such statement shall be signed
by Master Licensor attesting that it is true and correct.
10.05 Master Licensor shall provide to Franchisor on a monthly basis,
together with its royalty report, a report listing the following information for
the preceding month: new Sublicense Agreements which have been signed,
including the name of the Sublicensee and the date of the Sublicense Agreement;
stores opened, including the Store address and the date the Store opened; Store
relocations; and all transferred, renewed and terminated Sublicense Agreements,
showing the date of the action taken, the new Sublicensee, if any, and, in the
case of termination of the Sublicense Agreement, the reason for termination.
10.06 Master Licensor shall also submit to Franchisor, for review or
auditing, such other forms, reports, records, information, and data as
Franchisor may reasonably designate, in the form and at the times and places
reasonably required by Franchisor, upon request and as specified from time to
time in the Manuals or otherwise in writing.
10.07 Franchisor or its designated agents shall have the right at all
reasonable times to examine and copy, at Franchisor's expense, the books,
records, and tax returns of Master Licensor. Franchisor shall also have the
right, at any time, to have an independent audit made of the books of Master
Licensor. If an inspection should reveal that any payments have been
understated in any report to Franchisor, then Master Licensor shall immediately
upon demand pay Franchisor the amount understated, in addition to interest from
the date such amount was due until paid, at two percent (2%) per month
calculated on a daily basis, or the maximum rate permitted by law, whichever is
less. If an inspection discloses an understatement in any report of two percent
(2%) or more, Master Licensor shall, in addition, reimburse Franchisor for any
and all costs and expenses connected with the inspection (including, without
limitation, reasonable accounting and attorneys' fees). The foregoing remedies
shall be in addition to any other remedies Franchisor may have.
11. INSURANCE
11.01 Before commencing any operations under this Agreement, Master
Licensor shall procure, at Master Licensor's expense, and maintain in full force
and effect during the term of this Agreement an insurance policy or policies
protecting Master Licensor and Franchisor, and their officers, directors,
partners, and employees, against any loss, liability, personal injury, death,
property damage, or expense whatsoever arising or occurring upon or in
connection with Master Licensor's business, as well as such other insurance
applicable to such other special risks, if any, as Franchisor may reasonably
require for its own and Master Licensor's protection.
11.02 Such policy or policies shall be written by an insurance company
satisfactory to Franchisor in accordance with standards and specifications set
forth in writing by Franchisor and shall include, at a minimum, the following:
11.02.1 Comprehensive general liability insurance, including errors
and omissions, personal liability and property damage coverage with limits
equivalent to not less than One Million United State Dollars (US $1,000,000)
combined single limit, and automobile liability coverage for both owned and non-
owned vehicles in an amount equivalent to Five Hundred Thousand United States
Dollars (US $500,000) combined single limit, and naming Franchisor as an
additional insured in each such policy or policies.
11.02.2 Worker's compensation and employer's liability insurance, as
well as such other insurance as may be required by statute or rule of the
province or nation in which the business licensed under this Agreement is
located and operated.
11.02.3 Fire, vandalism, and extended coverage insurance with primary
and excess limited of not less than the full replacement value of the business
premises operated by Master Licensor and any equipment, furniture, and fixtures
within such premises.
11.03 Master Licensor's obligation to obtain and maintain the foregoing
policy or policies in the amounts specified shall not be limited in any way by
reason of any insurance which may be maintained by Franchisor, nor shall Master
Licensor's performance of that obligation relieve it of liability under the
indemnity provisions set forth in Section 17.03 of this Agreement.
11.04 Upon obtaining the insurance required for this Agreement, and on
each policy date thereafter, Master Licensor shall promptly submit evidence of
satisfactory insurance and proof of payment for such insurance to Franchisor,
together with, upon request, copies of all policies and policy amendments. The
evidence of insurance shall include a statement by the insurer that the policy
or policies will not be cancelled or materially altered without at least thirty
(30) days' prior written notice to Franchisor.
11.05 Should Master Licensor for any reason, fail to procure or maintain
the insurance required by this Agreement, as revised from time to time by the
Manuals or otherwise in writing, Franchisor shall have the right and authority
(without, however, any obligation to do so) immediately to procure such
insurance and to charge the same to Master Licensor. Such charges, together
with a reasonable fee for Franchisor's expenses in so acting, shall be payable
by Master Licensor immediately upon notice.
12. TRANSFER OF INTEREST
12.01 Transfer by Franchisor:
Franchisor shall have the right to transfer or assign all or any part of
its rights or obligations in this Agreement to any person of legal entity.
12.02 Transfer by Master Licensor:
12.02.1 Master Licensor understands and acknowledges that the rights
and duties set forth in this Agreement are personal to Master Licensor and that
Franchisor has entered into this Agreement in reliance on the business skill,
financial capacity, and personal character of Master Licensor's principals.
12.02.2 As used in this Section 12.02, "transfer" shall be deemed to
include the voluntary or involuntary sale, assignment, conveyance, pledge,
mortgage or other encumbrance of (1) all or a significant portion of the assets
of the business licensed under this Agreement or (2) any interest in Master
Licensor or in this Agreement, by Master Licensor or any successor to any part
of Master Licensor's interest in this Agreement (including any rights or
obligations of Master Licensor under this Agreement) or in any individual,
partnership, corporation, or other legal entity which directly or indirectly
owns any interest in this Agreement or controls Master Licensor.
12.02.3 All transfers shall require Franchisor's prior written
consent except the transfer of less than a two percent (2%) interest in a
publicly-held corporation if the effect of the transfer would not be a transfer
of control or of a controlling interest in Master Licensor or in the licensed
business or of all or a significant portion of the assets of the licensed
business. A publicly-held corporation is a corporation which has total assets
exceeding $1,000,000 and a class of equity securities held of record by five
hundred or more persons. A "transfer of control" shall be deemed to have
occurred when the ownership of a majority interest in Master Licensor, in the
licensed business, or in any entity with a majority ownership interest in Master
Licensor shall reside in a different party than before the transfer or when a
different party, which may own less than a majority interest in Master Licensor
and/or in the licensed business and/or its assets, exercises control over the
licensed business and/or over Master Licensor including, but not limited to, by
actively managing the licensed business. A "transfer of control" shall not be
deemed to have occurred if Master Licensor makes a public offering of its equity
securities, provided Sam Hamam and/or Bill Hamam retain at least thirty-one
percent (31%) of the voting power of such securities as well as active
management of the licensed business. Any purported assignment or transfer, by
operation of law or otherwise, not having the written consent of Franchisor
required by this Section 12.02.3 shall be null and void and shall constitute a
material breach of this Agreement, for which Franchisor may then terminate
without opportunity to cure, pursuant to Section 13.02 of this Agreement. Such
termination shall be in addition to any other remedies Franchisor may have under
this Agreement, at law or in equity, including, without limitation, the
obtaining of injunctive relief.
12.02.4 Franchisor shall not unreasonably withhold its consent to a
transfer; provided, however, that it shall be reasonable for Franchisor to
withhold consent to a transfer of all or substantially all of the assets of
Master Licensor, any interest in Master Licensor, any interest in the license
granted by this Agreement, and/or any or all rights under this Agreement if:
12.02.4.1 Such transfer is not made in conjunction with a
simultaneous transfer of all comparable rights held by the transferor in all
Sublicense Agreements executed pursuant to this Agreement; or
12.02.4.2 Master Licensor would retain less than fifty-one
percent (51%) of the voting power in any entity to which such interest would be
transferred if such entity is not a public corporation; or
12.02.4.3 Master Licensor would retain less than fifty-one
percent (51%) of the voting power in any entity to which such interest would be
transferred if such entity is a public corporation, unless Master Licensor
retains at least thirty-one percent (31%) of the voting power in such entity as
well as active management of the licensed business.
If a transfer, alone or together with other previous, simultaneous, or
proposed transfers, would have the effect of transferring all or a significant
portion of the assets of Master Licensor, of the business licensed under this
Agreement, or of a controlling interest in Master Licensor or in this Agreement,
Franchisor may, in its sole discretion, require as a condition of its approval
that:
12.02.4.1 All of Master Licensor's accrued monetary obligations
to Franchisor and all other outstanding obligations related to Master Licensor's
business shall have been satisfied.
12.02.4.2 Master Licensor shall not be not in material default
of any material provision of this Agreement, any amendment hereof or successor
to this Agreement, or any other agreement between Master Licensor and
Franchisor, or its subsidiaries and affiliates.
12.02.4.3 The transferor shall have executed a general release,
in a form satisfactory to Franchisor, of any and all claims against Franchisor
and its officers, directors, shareholders, and employees, in their corporate and
individual capacities, including, without limitation, claims arising under
United States, Canadian, and/or provincial laws, rules, and ordinances.
12.02.4.4 The transferee shall enter into a written assignment,
in a form satisfactory to Franchisor, acting reasonably, assuming and agreeing
to discharge all of Master Licensor's obligations under this Agreement.
Franchisor may require that the transferee and/or its principals and/or
shareholders guarantee the performance of all such obligations in writing in a
form satisfactory to Franchisor.
12.02.4.5 The transferee shall demonstrate to Franchisor's
satisfaction, acting reasonably, that it meets Franchisor's education,
managerial, and business standards; possesses a good moral character, business
reputation, and credit rating; has the aptitude and ability to conduct the
business contemplated in this Agreement (as may be evidenced by prior related
business experience or otherwise); and has adequate financial resources and
capital to meet its obligations under this Agreement.
12.02.4.6 At Franchisor's option, the transferee shall execute
(and/or, upon Franchisor's request, shall cause all interested parties to
execute) a new master license agreement and such other ancillary agreements as
Franchisor may require for the licensed business, which agreements shall
supersede this Agreement in all respects and the terms of which agreements may
differ from the terms of this Agreement; provided, however, that the percentage
of royalty, transfer, renewal and sublicense fees payable to Franchisor under
this Agreement and the term of the agreement shall remain the same.
12.02.4.7 Master Licensor shall remain liable for all
obligations of the business before the effective date of transfer and shall
execute any and all instruments reasonably requested by Franchisor to evidence
such liability.
12.02.4.8 At the transferee's expense, the transferee or the
transferee's manager shall complete any training programs then in effect for
franchisees or sublicensees, upon such terms and conditions as Franchisor may
reasonably require.
12.02.4.9 Master Licensor shall pay a transfer fee as follows:
(a) In the case of a transfer to a corporation formed for the convenience
of ownership, there shall be no transfer fee.
(b) In the case of a transfer of a limited partner's interest in Master
Licensor or a transfer of this entire Agreement or any rights under this
Agreement to a System franchisee/sublicensee, the transfer fee shall be Five
Hundred Canadian Dollars ($500.00).
(c) In the case of a transfer of all or substantially all of the assets of
the licensed business or of this entire Agreement or any rights under this
Agreement to an individual or entity not then a System franchisee/sublicensee,
the transfer fee shall be Fifty Thousand Canadian Dollars ($50,000.00).
12.02.5 Master Licensor shall grant no security interest in the
licensed business or in any of its assets unless the secured party agrees that
in the event of any default by Master Licensor under any documents related to
the security interest, Franchisor shall have the right and option to purchase
the rights of the secured party upon payment of all sums then due to such
secured party.
12.02.6 Master Licensor acknowledges and agrees that each condition
which must be met by the transferee is necessary to assure such transferee's
full performance of the obligations under this Agreement.
12.02.7 If the transferee is a publicly-held corporation, then the
controlling shareholder and/or controlling manager of such corporation must be
approved by Franchisor as provided in Section 12 of this Agreement.
12.03 Right of First Refusal:
12.03.1 Any party holding an interest in Master Licensor or in this
Agreement and who desires to accept any bona fide offer to purchase such
interest shall notify Franchisor in writing of each such offer and provide
Franchisor with the information set forth in Section 12.03.3. Franchisor shall
have the right and option, exercisable within thirty (30) days after receipt of
such information, to send written notice to the seller that Franchisor intends
to purchase the seller's interest on the same terms and conditions contained in
the bona fide offer. If Franchisor elects to purchase the seller's interest,
closing on such purchase must occur within thirty (30) days from the date of
notice to the seller of the election to purchase by Franchisor. Any material
change in the terms of any offer before closing shall constitute a new offer
subject to the same rights of first refusal by Franchisor as in the case of an
initial offer.
12.03.2 If the consideration, terms, and/or conditions contained in
the bona fide offer are such that Franchisor may not reasonably be required to
furnish the same consideration, terms, and/or conditions, then Franchisor may
purchase the interest in Master Licensor or in this Agreement proposed to be
sold for the reasonable equivalent in cash. If the parties cannot agree within
a reasonable time on the reasonable equivalent in cash of the consideration,
terms and/or conditions contained in the bona fide offer, an independent
appraiser shall be designated by Franchisor and that appraiser's determination
shall be binding.
12.03.3 No offer shall be deemed to be bona fide unless there is a
writing, signed by the intended purchaser, setting forth the basic terms and
conditions of the offer. The seller shall provide Franchisor with the following
information: a copy of the offer signed by the intended purchaser; current
financial statements of the licensed business; business and personal financial
statements of the intended purchaser; a list and terms of all liabilities
relating to the licensed business, including, but not limited to, outstanding
debt, equipment leases and premises leases. If Franchisor declines or fails to
exercise the option afforded by this Section 12.03, the seller may sell its
interest, provided that such sale and the transferee meet all of the conditions
for transfer set forth in Section 12.02 of this Agreement.
12.04 Transfer Upon Death or Mental Incompetency:
Upon the death or mental incompetency of any person with a controlling
interest in this Agreement or in Master Licensor, the executor, administrator,
or personal representative of such person shall transfer his interest to a third
party approved by Franchisor (which approval shall not be unreasonably withheld)
within six (6) months after such death or mental incompetency. Such transfers,
including, without limitation, transfers by devise or inheritance, shall be
subject to the same conditions as any inter vivos transfer, as set forth in
Section 12.02 of this Agreement. However, in the case of transfer by devise or
inheritance, if the heirs or beneficiaries of any such person are unable to meet
the conditions in this Section 12, the personal representative of the deceased
person shall have a reasonable time to dispose of the deceased's interest in
Master Licensor or in this Agreement, which disposition shall be subject to all
the terms and conditions for transfers contained in this Agreement. If the
interest is not disposed of within a reasonable time, Franchisor may terminate
this Agreement. Any transfer from the estate of Sam Hamam to Bill Hamam, or the
estate of Bill Hamam to Sam Hamam, shall be deemed approved.
12.05 Offerings by Master Licensor
Securities or partnership interests in Master Licensor may be offered to
the public by Master Licensor only with the prior written consent of Franchisor
(regardless of whether Franchisor's consent is required under Section 12.02 of
this Agreement), which consent shall not be unreasonably withheld. All
materials required for such offering by United States, Canadian, or provincial
law shall be submitted to Franchisor for review prior to their being filed with
any government agency; and any materials to be used in any exempt offering shall
be submitted to Franchisor for review prior to their use. No Master Licensor
offering shall imply (by use of the Proprietary Marks or otherwise) that
Franchisor is participating in an underwriting, issuance, or offering of Master
Licensor or Franchisor securities; and Franchisor's review of any offering shall
be limited solely to the subject of the relationship between Master Licensor and
Franchisor. Master Licensor and the other participants in the offering must
fully indemnify Franchisor in connection with the offering. For each proposed
offering, Master Licensor shall pay Franchisor such amount as is necessary to
reimburse Franchisor for its reasonable costs and expenses associated with
reviewing the proposed offering, including, without limitation, legal and
accounting fees. Master Licensor shall give Franchisor written notice at least
fifteen (15) days prior to the date of commencement of any offering or other
transaction covered by this Section 12.05.
12.06 Non-Waiver of Claims:
Franchisor's consent to a transfer of any interest in this Agreement, of
the assets of the licensed business, or of any interest in Master Licensor shall
not constitute a waiver of any claims it may have against the transferring
party, nor shall it be deemed a waiver of Franchisor's right to demand exact
compliance with any of the terms of this Agreement by the transferee.
12.07 Irreparable Injury:
Master Licensor acknowledges that Master Licensor's violation of the terms
of this Section 12 would result in irreparable injury to Franchisor for which no
adequate remedy at law may be available, and Master Licensor accordingly
consents to the issuance of an injunction prohibiting any conduct by Master
Licensor in violation of the terms of this Section 12.
13. DEFAULT AND TERMINATION
13.01 Master Licensor shall be deemed to be in default under this
Agreement, and all rights granted in this Agreement shall automatically
terminate without notice to Master Licensor upon the occurrence of any of the
following events: if Master Licensor shall become insolvent (within the meaning
of the Bankruptcy and Insolvency Act of Canada) or make a general assignment for
the benefit of creditors; if an assignment in bankruptcy is filed by Master
Licensor or a petition in bankruptcy is filed against, and not opposed by Master
Licensor; if Master Licensor is adjudicated a bankrupt, or insolvent; if a bill
in equity or other proceeding for the appointment of a receiver of Master
Licensor or other custodian (permanent or temporary) of Master Licensor's assets
or property, or any part thereof, is appointed by any court of competent
jurisdiction; if proceedings for a composition with creditors under any law
should be instituted by or against Master Licensor; if a final judgment remains
unsatisfied or of record for thirty (30) days or longer (unless supersedeas bond
is filed) or if execution is levied against Master Licensor's business or
property; if suit to foreclose any lien or mortgage against the premises or
equipment is instituted against Master Licensor and not dismissed within thirty
(30) days; if the real or personal property of Master Licensor's business shall
be sold after levy thereupon by any sheriff, marshal, or constable; or if the
equivalent of any of the foregoing under Canadian or provincial law occurs.
13.02 Master Licensor shall be deemed to be in default and Franchisor may,
at its option, terminate this Agreement and all rights granted under this
Agreement without affording Master Licensor any opportunity to cure the default,
effective immediately upon notice to Master Licensor, upon the occurrence of any
of the following events:
13.02.1 If Master Licensor at any time ceases to operate or otherwise
abandons the business contemplated by this Agreement.
13.02.2 If Master Licensor, or any partner or principal shareholder
in Master Licensor who is active in the licensed business, is convicted of a
felony, a crime involving moral turpitude, or any other crime or offense that is
reasonably likely, in the sole opinion of Franchisor, to adversely affect the
System, the Proprietary Marks, the goodwill associated with the System and the
Proprietary Marks, or Franchisor's interest in the System and the Proprietary
Marks.
13.02.3 If Master Licensor or any partner or shareholder in Master
Licensor purports to make a transfer without Franchisor's prior written consent,
contrary to the terms of Section 12 of this Agreement.
13.02.4 If Master Licensor fails to comply with the in-term covenants
in Section 15.02 of this Agreement or fails to obtain, or, as applicable, use
best efforts to obtain, execution of such covenants as are required by Section
15.09 of this Agreement.
13.02.5 If Master Licensor discloses or divulges, contrary to
Sections 8 or 9 of this Agreement, the contents of the Manuals or other trade
secret or confidential information provided to Master Licensor by Franchisor, or
if Master Licensor fails to obtain confidentiality agreements with respect to
such information from Master Licensor's senior employees.
13.02.6 If an approved transfer is not effected within a reasonable
time following the death or mental incompetency of person holding an interest in
Master Licensor, as required by Section 12.04 of this Agreement.
13.02.7 If Master Licensor knowingly maintains false books or
records, or submits any false reports to Franchisor.
13.02.8 If Master Licensor, after curing a default under Section
13.03, engages in the same default whether or not such default is cured after
notice; or
13.02.9 If Master Licensor is repeatedly in default under Section
13.03 of this Agreement for failure to comply substantially with any of the
requirements imposed by this Agreement, whether or not cured after notice.
13.03 Except as provided in Sections 13.01, 13.02, and 13.05 of this
Agreement, Master Franchisor shall have thirty (30) days after its receipt from
Franchisor of a written Notice of Default within which to remedy any default
under this Agreement and provide evidence of such remedy to Franchisor. Master
Franchisor shall be in default under this Agreement for any failure to comply
substantially with any of the material requirements imposed by this Agreement,
as it may from time to time reasonably be supplemented by the Manuals, or to
carry out in good faith the terms of this Agreement or of any Sublicense
Agreement executed pursuant to this Agreement. Such defaults shall include, for
example, without limitation, the occurrence of any of the following events:
13.03.1 If Master Licensor fails, refuses, or neglects promptly to
pay any moneys owing Franchisor or its subsidiaries or affiliates when due, or
to submit the financial information required by Franchisor under this Agreement.
13.03.2 If Master Licensor fails to maintain any of the material
standards or procedures reasonably prescribed by Franchisor in this Agreement,
the Manuals, or otherwise in writing.
13.03.3 Except as otherwise provided in Section 13.02 of this
Agreement, if Master Licensor fails, refuses, or neglects to obtain Franchisor's
prior written approval or consent as required by this Agreement.
13.03.4 If Master Licensor misuses or makes any unauthorized use of
the Proprietary Marks or otherwise materially impairs Franchisor's rights in the
Proprietary Marks or the goodwill associated therewith.
13.03.5 If Master Licensor engages in any business or markets any
service or product under a name or mark which, in Franchisor's sole opinion, is
confusingly similar to the Proprietary Marks.
13.04 If any default under Section 13.03 is not cured within thirty (30)
days, Franchisor, in its discretion, may do any one of more of the following:
13.04.1 Terminate this Agreement and all rights granted under this
Agreement, effective immediately upon the mailing of written notice by
Franchisor to Master Licensor.
13.04.2 Perform any or all of Master Licensor's obligations under the
Sublicense Agreements executed pursuant to this Agreement and charge Master
Licensor for its costs in doing so.
13.05 If Master Licensor fails to spend at least $40,000 each year,
exclusive of salaries for salespersons and production costs, on advertising to
solicit sublicensees. The annual dollar amount to be spent by Master Licensor
shall be adjusted upward each year by three percent (3%) to account for
inflation. Master Licensor shall, upon request from Franchisor, provide
Franchisor with confirmation of such expenditures. Failure by Master Licensor
to expend the funds required shall be a default under this Agreement and, upon
written notice to Master Licensor, Franchisor may terminate the grant of
exclusivity set forth in Section 1.03 of this Agreement. Master Licensor's
obligations under this Section 13.05 shall cease when Franchisor deems that the
System has been fully developed in the Designated Area.
13.06 No default under this Agreement shall constitute a default under any
Sublicense Agreement executed as Sublicensee by an entity in which Master
Licensor has an interest.
13.07 No right or remedy in this Agreement conferred upon or reserved to
Franchisor is exclusive of any other right or remedy provided or permitted by
law or in equity.
14. OBLIGATIONS UPON TERMINATION OR EXPIRATION
14.01 Upon termination or expiration, this Agreement and all rights
granted under this Agreement to Master Licensor forthwith terminate, and:
14.01.1 Master Licensor shall immediately cease to operate under this
Agreement and shall not thereafter, directly or indirectly, advertise or
represent to the public or otherwise hold itself out to the public as a present
or former Master Licensor of Franchisor.
14.01.2 At Franchisor's request, Master Licensor shall cooperate with
Franchisor in advising the Sublicensees that the Master License Agreement has
been terminated and that Franchisor will assume the obligations of Master
Licensor under the Sublicense Agreements.
14.01.3 Master Licensor shall immediately turn over to Franchisor all
materials, including without limitation, all software licensed by Franchisor or
by another party on behalf of Franchisor and containing Franchisor-specific
coding and/or instructions, all manuals (including the Manuals), and all
records, files, instructions, correspondence, brochures, agreements, disclosure
statements, and any and all other materials and all copies of all such materials
in Master Licensor's possession related to Master Licensor's operation under
this Agreement and/or the Sublicense Agreements (all of which materials are
acknowledged to be Franchisor's property). Without Franchisor's written
consent, Master Licensor shall retain no copy or record of any of the foregoing,
except Master Licensor's copy of this Agreement and of any correspondence
between the parties and any other documents which Master Licensor reasonably
needs for compliance with any provision of law.
14.01.4 Master Licensor shall immediately and permanently cease to
use, by advertising or in any other manner whatsoever, any confidential methods,
procedures and techniques associated with the System; the Proprietary Mark
"MOTOPHOTOSM"; and all other Proprietary Marks and distinctive forms, slogans,
signs, symbols, or devices associated with the System. In particular, Master
Licensor shall cease to use, without limitation, all signs, equipment,
advertising material, stationery, forms, and any other articles which display
the Proprietary Marks associated with the System. Master Licensor acknowledges
that Master Licensor's violation of the terms of this Section 14.01.4 would
result in irreparable injury to Franchisor for which no adequate remedy at law
may be available, and Master Licensor accordingly consents to the issuance of an
injunction prohibiting any conduct by Master Licensor in violation of the terms
of this Section 14.01.4.
14.01.5 Master Licensor shall take such action as may be necessary to
cancel any Registered User, assumed name, or equivalent registration which
contains the "MOTOPHOTOSM" or any other service mark or trademark of Franchisor,
and Master Licensor shall furnish Franchisor with evidence satisfactory to
Franchisor of compliance with this obligation within ten (10) days after
termination or expiration of this Agreement.
14.01.6 At Franchisor's option, Master Licensor shall assign to
Franchisor any interest which Master Licensor has in any lease or sublease for
Master Licensor's business premises.
14.01.7 Master Licensor agrees, in the event it continues to operate
or subsequently begins to operate any other business, not to use any
reproduction, counterfeit, copy, or colorable imitation of the Proprietary Marks
either in connection with such other business or the promotion thereof, which is
likely to cause confusion, mistake, or deception, or which is likely to dilute
Franchisor's rights in and to the Proprietary Marks and further agrees not to
utilize any designation of origin or description or representation which falsely
suggests or represents an association or connection with Franchisor so as to
constitute unfair competition. In the event Franchisor does not elect to
exercise its option to acquire the lease or sublease for the premises of the
licensed business pursuant to Section 14.01.6 of this Agreement, Licensor shall
make immediately upon termination or expiration of this Agreement such
modifications or alterations to the premises operated under this Agreement
(including, without limitation, the changing of the telephone number) as may be
necessary to prevent the operation of any business thereon by itself or others
in derogation of this Section 14 and shall make such specific additional changes
the premises as Franchisor may reasonably request for that purpose. In the
event Master Licensor fails or refuses to comply with the requirements of this
Section 14, Franchisor shall have the right to enter upon the Master Licensor's
business premises, without being guilty of trespass or any other tort, for the
purpose of making or causing to be made such changes as may be required at the
expense of Master Licensor, which expense Master Licensor agrees to pay on
demand.
14.01.8 Master Licensor shall promptly pay all sums owing to
Franchisor and its subsidiaries and affiliates. In the event of termination for
any default of Master Licensor, such sums shall include all damages, costs, and
expenses, including reasonable attorney's fees, incurred by Franchisor as a
result of the default, which obligation shall give rise to and remain, until
paid in full, a lien in favor of Franchisor against any and all of the personal
property, equipment, inventory, and fixtures owned by Master Licensor and on all
premises operated under this Agreement at the time of default.
14.01.9 Master Licensor shall pay Franchisor all damages, costs, and
expenses, including reasonable attorney's fees, incurred by Franchisor
subsequent to the termination or expiration of the license in this Agreement
granted in obtaining injunctive or other relief for the enforcement of any
provisions of this Section 14.
14.01.10 At Franchisor's option, within thirty (30) days after the
date of termination or expiration, Master Licensor and Franchisor shall arrange
for an inventory to be made, at Franchisor's cost, of all the personal property,
fixtures, equipment, inventory, and other tangible assets of Master Licensor's
business. Franchisor shall have the option to purchase from Master Licensor any
or all tangible assets at fair market value. In no case will any amounts be
assigned for goodwill associated with the Proprietary Marks or with the System;
however, in the case of the expiration of this Agreement, going concern value,
if any, will be included. If the parties cannot agree on fair market value
within a reasonable time, the parties shall select an appraiser whose
determination of fair market value shall be binding. If the parties cannot
agree on an appraiser within a reasonable time, an independent appraiser shall
be designated by each party, and the two (2) independent appraisers so
designated shall select a third independent appraiser. The determination of
fair market value of the majority of appraisers so chosen shall be binding.
Master Licensor and Franchisor shall bear the costs of the appraisal on an equal
basis. If Franchisor elects to exercise the option to purchase provided in this
Agreement, it shall have sixty (60) days after determination of fair market
value to notify Master Licensor of its exercise of the option to purchase and
shall have the right to set off all amounts due from Master Licensor under this
Agreement against any payment therefor.
14.01.11 Master Licensor shall comply with the covenants contained in
Section 15.03 of this Agreement.
15. COVENANTS
15.01 Master Licensor covenants that, during the term of this Agreement,
except as otherwise approved in writing by Franchisor, Master Licensor or Master
Licensor's manager shall devote full time, energy, and best efforts to the
management and operation of the business contemplated under this Agreement.
15.02 Master Licensor covenants that during the term of this Agreement
except as otherwise approved in writing by Franchisor, Master Licensor shall
not, either directly or indirectly, for itself, or through, on behalf of, or in
conjunction with any person, persons, partnership, corporation, or other entity:
15.02.1 Divert or attempt to divert any business or customer of any
franchised or sublicensed business operated under the System to any competitor,
by direct or indirect inducement or otherwise, or do or perform, directly or
indirectly, any other act injurious or prejudicial to the goodwill associated
with Franchisor's Proprietary Marks and the System.
15.02.2 Employ or seek to employ any person who is at that time
employed by Franchisor or any Sublicensee or by any other master licensor, area
developer or franchisee of Franchisor, or otherwise directly or indirectly
induce such person to leave his or her employment.
15.02.3 Own, maintain, engage in, or have any interest in any
business which sells or offers to sell rapid photo-processing services or any
other service approved by Franchisor for use by System franchisees and/or
Sublicensees.
15.03 Master Licensor covenants that, except as otherwise approved in
writing by Franchisor, Master Licensor shall not, for a continuous uninterrupted
two-year period commencing upon the expiration or termination of this Agreement
or, in the case of a dispute relating to such termination or expiration or to
the covenants contained in this Section 15.03 (which both Master Licensor and
Franchisor shall diligently prosecute), commencing upon the resolution of such
dispute, regardless of the cause for termination, either directly or indirectly,
for itself, or through, on behalf of, or in conjunction with any person,
persons, partnership, corporation, or other entity, or through the receipt of
proceeds from the transfer of all or a significant portion of the assets of the
business licensed under this Agreement, own, maintain, engage in, or have any
interest in any business which as its principal business sells or offers to sell
rapid photo-processing services, portrait services, or any other service
approved by Franchisor for use by System franchisees and/or Sublicensees and
which service constitutes, on average, twenty-five percent (25)% or more of the
gross sales of System franchisees, provided such business is located:
15.03.1 Within the Designated Area; or
15.03.2 Within a radius of five (5) miles from the location of any
System store which is in existence on the date of expiration or termination of
this Agreement.
15.04 Sections 15.02.3 and 15.03 shall not apply to ownership by Master
Licensor of any interest in a System store or of less than five percent (5%)
beneficial interest in the outstanding equity securities of any publicly-held
corporation.
15.05 The parties agree that each of the foregoing covenants shall be
construed as independent of any other covenant or provision of this Agreement.
If all or any portion of a covenant in this Section 15 is held unreasonable or
unenforceable by a court having valid jurisdiction in an unappealed final
decision to which Franchisor is a party, Master Licensor expressly agrees to be
bound by any lesser covenant subsumed within the terms of such covenant that
imposes the maximum duty permitted by law, as if the resulting covenant were
separately stated in and made a part of this Section 15.
15.06 Master Franchisor understands and acknowledges that Franchisor shall
have the right, in its sole discretion, to reduce the scope of any covenant set
forth in Sections 15.02 and 15.03 of this Agreement or any portion of any such
covenant, without Master Licensor's consent, effective immediately upon receipt
by Master Licensor of written notice of such reduction. Master Licensor agrees
that it shall comply forthwith with any covenant as so modified, which shall be
fully enforceable notwithstanding the provisions of Section 20 of this
Agreement.
15.07 Master Licensor expressly agrees that the existence of any claims it
may have against Franchisor, whether or not arising from this Agreement, shall
not constitute a defense to the enforcement by Franchisor of the covenants in
this Section 15. Master Licensor agrees to pay all costs and expenses
(including reasonable attorney's fees) incurred by Franchisor in connection with
the enforcement of this Section 15.
15.08 Master Licensor acknowledges that Master Licensor's violation of the
terms of this Section 15 would result in irreparable injury to Franchisor for
which no adequate remedy at law may be available. Master Licensor accordingly
consents to the issuance of an injunction prohibiting any conduct by Master
Licensor in violation of the terms of this Section 15.
15.09 At the request of Franchisor, Master Licensor shall provide
Franchisor with covenants similar in substance to those set forth in this
Section 15 (including covenants applicable upon the termination of a person's
relationship with Master Licensor) from all officers, directors, and holders of
beneficial interest of five percent (5%) or more in Master Licensor. In
addition, upon Franchisor's request, Master Licensor shall use best efforts to
obtain such covenants from all managers of Master Licensor and any other persons
employed by Master Licensor who have received or will receive training from
Franchisor. If Franchisor has requested that any such person execute such a
covenant, Master Licensor shall not, without Franchisor's written approval,
grant access to any confidential aspect of the System or Master Licensor's
business prior to execution of the covenant. All covenants required by this
Section 15.09 shall be in forms satisfactory to Franchisor, including, without
limitation, specific identification of Franchisor as a third party beneficiary
of such covenants with the independent right to enforce them. Failure by Master
Licensor to obtain execution of a covenant required by this Section 15.09, or,
as applicable, to use best efforts to obtain execution of such a covenant, shall
constitute a material breach of this Agreement.
16. TAXES
16.01 Master Licensor shall promptly pay when due all taxes levied or
assessed, including, without limitation, unemployment and sales taxes, and all
accounts and other indebtedness of every kind incurred by Master Licensor in the
conduct of Master Licensor's business under this Agreement. Master Licensor
shall pay to Franchisor an amount equal to any sales tax, gross receipts tax, or
similar tax imposed on Franchisor with respect to any payments to Franchisor
required under this Agreement, unless the tax is credited against income tax
otherwise payable by Franchisor.
16.02 In the event of any bona fide dispute as to liability for taxes
assessed or other indebtedness, Master Licensor may contest the validity or the
amount of the tax or indebtedness in accordance with procedures of the taxing
authority or applicable law; however, in no event shall Master Licensor permit
a tax sale or seizure by levy of execution or similar writ or warrant, or
attachment by a creditor, to occur against the premises of the licensed business
or any improvements thereon.
16.03 Master Licensor shall comply with all applicable U.S., Canadian and
provincial laws, rules, and regulations, and shall timely obtain any and all
permits, certificates, or licenses necessary for the full and proper conduct of
Master Licensor's business under this Agreement, including, without limitation,
licenses to do business, fictitious name registration, sales tax permits, and
fire clearances.
16.04 Master Licensor shall notify Franchisor in writing within ten (10)
days of the commencement of any action, suit, or proceeding, and of the issuance
of any order, writ, injunction, award, or decree of any court, agency, or other
governmental instrumentality, which may adversely affect the operation or
financial condition of Master Licensor or Master Licensor's business.
17. INDEPENDENT CONTRACTOR AND INDEMNIFICATION
17.01 The parties to this Agreement understand and agree that this
Agreement does not create a fiduciary relationship between them, that Master
Licensor shall be an independent contractor, and that nothing in this Agreement
is intended to constitute either party an agent, legal representative,
subsidiary, joint venturer, partner, employee, or servant of the other for any
purpose whatsoever.
17.02 During the term of this Agreement and any extensions of it, Master
Licensor shall hold itself out to the public as an independent contractor
operating the business pursuant to this Agreement. Master Licensor agrees to
take such affirmative action as may be necessary to do so, including, without
limitation, exhibiting a notice of that fact in a conspicuous place in Master
Licensor's business premises, the content of which notice Franchisor reserves
the right to specify.
17.03 The parties to this Agreement understand and agree that nothing in
this Agreement authorizes Master Licensor to make any contract, agreement,
warranty, or representation on Franchisor's behalf, or to incur any debt or
other obligation in Franchisor's name, and that Franchisor shall in no event
assume liability for, or be deemed liable under this Agreement as a result of,
any such action, or by reason of any act or omission of Master Licensor in its
conduct of the business contemplated under this Agreement or any claim or
judgment arising therefrom against Franchisor.
17.04 Master Licensor shall indemnify and hold Franchisor harmless from
and against any and all claims arising directly or indirectly from, as a result
of, or in connection with from, as a result of, or in connection with Master
Licensor's activities under this Agreement and/or its performance under the
Sublicense Agreements, including the costs, expenses, and attorneys' fees, of
defending against them. In addition, Master Licensor shall pay Franchisor all
damages, costs, and expenses, including attorneys' fees, incurred by Franchisor
in defending successfully against claims of any kind brought by Master Licensor
or in enforcing its claims against Master Licensor arising from Master
Licensor's breach or non-performance of any of its obligations under this
Agreement, and/or Master Licensor's failure to pay Franchisor amounts due under
this Agreement or for merchandise and/or services purchased from Franchisor, or
otherwise. Notwithstanding the foregoing, Master Licensor shall have no
obligation to indemnify Franchisor for claims arising from Master Licensor's
use, in strict accordance with Franchisor's instructions, of the Proprietary
Marks or advertising material prepared by Franchisor, as to which Franchisor
shall indemnify Master Licensor.
18. APPROVALS AND WAIVERS
18.01 Whenever this Agreement requires the prior approval or consent of
Franchisor, Master Licensor shall make a timely written request to Franchisor
for such approval or consent, such approval or consent shall be obtained in
writing, and Franchisor shall not unreasonably withhold or delay its approval or
consent.
18.02 Franchisor makes no warranties or guarantees upon which Master
Licensor may rely and assumes no liability or obligation to Master Licensor by
providing any waiver, approval, consent, or suggestion to Master Licensor in
connection with this Agreement, or by reason of any neglect, delay, or denial of
any request for such waiver, approval, consent, or suggestion.
18.03 No delay, waiver, omission, or forbearance on the part of Franchisor
to exercise any right, option, duty, or power arising out of any breach or
default by Master Licensor or by any other master licensor of any of the terms,
provisions, covenants, or conditions hereof, shall constitute a waiver by
Franchisor to enforce any such right, option, duty, or power as against Master
Licensor or as to subsequent breach or default by Master Licensor. Subsequent
acceptance by Franchisor of any payments due to it under this Agreement shall
not be deemed to be a waiver by Franchisor of any preceding breach by Master
Licensor of any terms, provisions, covenants, or conditions of this Agreement.
19. NOTICES
Any and all notices required or permitted under this Agreement shall be in
writing and shall be personally delivered, delivered by courier service, or
mailed by certified or registered mail, return receipt requested, to the
respective parties at the following addresses unless and until a different
address has been designated by written notice to the other party:
Notices to Franchisor: Michael F. Adler
Chairman and C.E.O.
Moto Photo, Inc.
4444 Lake Center Drive
Dayton, Ohio 45426
U.S.A.
Notices to Master Licensor: Sam Hamam, P.Eng.
President and C.E.O.
Canadian Industrial Services, Ltd.
1315 Lawrence Avenue East
Unit #509
Don Mills, Ontario M3A 3R3
Canada
Notices shall be deemed to have been received as follows: by certified or
registered mail - five days following the date of mailing; by personal
delivery - at the time of delivery; if sent by overnight delivery service - on
the day after the date of delivery to the overnight delivery service.
20. ENTIRE AGREEMENT
This Agreement, the documents referred to in it, and the Attachments to it,
if any, constitute the entire, full, and complete Agreement between Franchisor
and Master Licensor concerning the subject matter of this Agreement and
supersede all prior agreements, no other representations having induced Master
Licensor to execute this Agreement. Except for those permitted to be made
unilaterally by Franchisor under this Agreement, no amendment, change, or
variance from this Agreement shall be binding on either party unless mutually
agreed to by the parties and executed by their authorized officers or agents in
writing. Franchisor authorizes only its Corporate Counsel and any officer at
the level of Senior Vice President or above to execute any such amendment,
change, or variance.
21. SEVERABILITY AND CONSTRUCTION
21.01 Except as expressly provided to the contrary in this Agreement, each
portion, section, part, term, and/or provision of this Agreement shall be
considered severable. If, for any reason, any section, part, term, and/or
provision in this Agreement is determined to be invalid and contrary to, or in
conflict with, any existing or future law or regulation by a court or agency
having valid jurisdiction, such shall not impair the operation of, or have any
other effect upon, such other portions, sections, parts, terms, and/or
provisions of this Agreement as may remain otherwise intelligible, and the
latter shall continue to be given full force and effect and bind the parties to
this Agreement; and the invalid portions, sections, parts, terms, and/or
provisions shall be deemed not to be a part of this Agreement.
21.02 Anything to the contrary in this Agreement notwithstanding, nothing
in this Agreement is intended, nor shall be deemed, to confer upon any person or
legal entity other than Franchisor or Master Licensor and such of their
respective successors and assigns as may be contemplated by Section 12 of this
Agreement, any rights or remedies under or by reason of this Agreement.
21.03 Master Licensor expressly agrees to be bound by any promise or
covenant imposing the maximum duty permitted by law which is subsumed within the
terms of any provision of this Agreement, as though it were separately
articulated in and made a part of this Agreement, that may result from striking
from any of the provisions of this Agreement any portion or portions which a
court may hold to unreasonable and unenforceable in a final decision to which
Franchisor is a party, or from reducing the scope of any promise or covenant to
the extent required to comply with such court order.
21.04 All captions in this Agreement are intended solely for the
convenience of the parties, and none shall be deemed to affect the meaning or
construction of any provision of this Agreement.
21.05 All references in this Agreement to the masculine, neuter, or
singular shall be construed to include the masculine, feminine, neuter, or
plural, where applicable, and all acknowledgments, promises, covenants,
agreements, and obligations in this Agreement made or undertaken by Master
Licensor shall be deemed jointly and severally undertaken by all the parties to
this Agreement on behalf of Master Licensor.
21.06 This Agreement may be executed in multiple copies, each of which
shall be deemed an original and all of which, taken together , shall constitute
on instrument.
22. APPLICABLE LAW
22.01 This Agreement takes effect upon its acceptance and execution by
Franchisor in Ohio. This Agreement, the rights and obligations of the parties
to it, and the relationship between the parties shall be construed in accordance
with and governed by the internal laws of the State of Ohio without reference to
its choice of law and conflict of laws rules.
22.02 No right or remedy conferred upon or reserved to Franchisor or
Master Licensor by this Agreement is intended to be, nor shall be deemed to be,
exclusive of any other right or remedy in this Agreement or provided or
permitted by law or equity, but shall be cumulative of every other right or
remedy.
22.03 Nothing in this Agreement contained shall bar Franchisor's right to
obtain injunctive relief against threatened conduct that will cause it loss or
damages, under the usual equity rules, including the applicable rules for
obtaining restraining orders and preliminary injunctions.
22.04 If Master Licensor commences any action against Franchisor arising
out of or related to this Agreement, the dealings or relationship of the parties
under this Agreement, or the rights and obligations of the parties, such action
shall be brought solely in the federal or state judicial district in which
Franchisor's principal place of business is located.
22.05 If Franchisor commences any action in court against Master Licensor
arising out of or related to this Agreement, the dealing or relationship of the
parties under this Agreement, or the rights and obligations of the parties,
Franchisor may, at its option, bring the action in the federal or state judicial
district in which Franchisor's principal place of business is located.
23. ARBITRATION
Except as specifically otherwise provided in this Agreement, the parties
agree that any and all disputes between them (including disputes concerning the
applicability and enforceability of this Section 23) shall be determined solely
and exclusively by arbitration in Dayton, Ohio under the Federal Arbitration Act
as amended and in accordance with the rules then obtaining of the American
Arbitration Association or any successor, unless the parties otherwise agree in
writing. Each party shall select one arbitrator and the two so designated shall
select a third. Judgment upon any award of the majority of the arbitrators
shall be binding and shall be entered in a court of competent jurisdiction. It
is the intent of the parties that any arbitration between Franchisor and Master
Licensor shall be of Master Licensor's individual claim and that the claims
subject to arbitration shall not be arbitrated on a classwide basis.
Notwithstanding the foregoing, Master Licensor agrees that Franchisor may,
at its option, (a) bring a legal action in a court of law as provided in Section
22.05 to collect moneys owed to Franchisor by Master Licensor, and/or (b) submit
to arbitration matters which would otherwise be the subject of a petition for
injunctive relief in court, including, but not limited to, enforcement of the
covenants against competition and enforcement of Franchisor's rights with
respect to the Proprietary Marks.
24. ACKNOWLEDGMENTS
24.01 Master Licensor acknowledges that it has conducted an independent
investigation of the business contemplated under this Agreement and recognizes
that the business venture contemplated by this Agreement involves business risks
and that its success will be largely dependent upon the ability of Master
Licensor as an independent business entity and upon the abilities of the
Sublicensees chosen by Master Licensor. Franchisor expressly disclaims the
making of, and Master Licensor acknowledges that it has not received, any
warranty or guarantee, express or implied, as to the potential volume, profits,
or success of the business venture contemplated by this Agreement.
24.02 Master Licensor acknowledges that it has read and understood the
Agreement, the attachments to this Agreement, if any, and agreements relating
the attachments, if any, and that Franchisor has accorded Master Licensor ample
time and opportunity to consult with advisors of its own choosing about the
potential benefits and risks of entered into this Agreement.
The parties to this Agreement have duly executed and delivered it on the
day and year first written above.
ATTEST: FRANCHISOR:
MOTO PHOTO, INC.
______________________________ By: c/s
Secretary or Assistant Secretary Printed Name:
Title:
ATTEST: MASTER LICENSOR:
CANADIAN INDUSTRIAL SERVICES, LTD.
_____________________________ By: c/s
Secretary or Assistant Secretary Printed Name:
Title:
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made as of the first day of
January, 1999, by and between MOTO PHOTO, INC., a Delaware corporation
("Employer"), and Lloyd F. Noland ("Employee"). This Agreement is based on the
following understandings:
a. The parties desire to enter into an employment relationship on the
terms and conditions set forth in this Agreement.
b. During the term of his employment, Employee will receive access to
proprietary information and/or trade secrets relating to Employer's
business, its franchisees, and its business contacts which are of a
highly confidential, unique, and valuable nature. In addition,
Employee may be adding to confidential information of Employer.
c. The parties acknowledge that Employer would suffer great loss and
damage if any Confidential Information (as defined in Section 4 of
this Agreement) is divulged at any time other than for the benefit of
Employer.
d. The parties further acknowledge that Employee may establish close
working relationships with valued employees of Employer and its
franchisees and that Employer's business may suffer substantial harm
if, upon the termination of Employee's employment with Employer,
Employee should thereafter employ or attempt to employ, directly or
indirectly, certain personnel of Employer, its franchisees, or their
employees.
Accordingly, the parties agree as follows:
1. DUTIES. Employer hereby employs Employee, for the term of this
Agreement, as Senior Vice President of Marketing, and Employee hereby accepts
such employment upon the terms and conditions specified in this Agreement.
During the term of his employment with Employer, Employee shall report to the
President and Chief Operating Officer and shall have the following duties:
1.1 Employee shall serve as head of Employer's Marketing Department,
directing other Marketing staff;
1.2 Employee shall be responsible for developing marketing strategies
for Employer-owned stores and franchised stores; and
1.3 Employee will perform such other duties as directed from time to
time by the President of Employer and/or the Board of Directors of
Employer.
2. ANNUAL COMPENSATION
2.1 Base Compensation. As base compensation for Employee's services to
Employer during the period August 3, 1998 through March 31, 1999, Employer shall
pay Employee a regular salary, which shall be prorated, at the rate of One
Hundred Thirty-Five Thousand Dollars ($135,000) per employment year (April 1 to
March 31), payable in such manner as Employer pays its other executives.
Thereafter, Employer shall pay Employee a salary determined as provided in
Section 2.3 of this Agreement.
2.2 Bonus. Employee shall not be entitled to a bonus for fiscal year
1998. Employee shall be entitled to a bonus of not less than $20,000 for the
fiscal year January 1, 1999 to December 31, 1999, calculated as provided in this
Section 2.2. Thereafter, Employee's bonus, if any, shall be determined as
provided in Section 2.3 of this Agreement. Employee's bonus for fiscal year
1999 shall be calculated as follows: Employer's Board of Directors shall, in
December 1998, set a profit goal for Employer for calendar year 1999, based on
Employer's pre-tax income for 1999. If Employer's pre-tax income exceeds the
profit goal set by the Board of Directors for calendar year 1999, Employee's
bonus shall be $20,000 plus three percent (3%) of any income in excess of the
profit goal set by the Board of Directors. No later than March 30 of each year,
Employer's independent CPA firm shall calculate pre-tax income and its
determination shall be binding. In calculating pre-tax income, the CPA firm
shall include gains or losses from the sale of company stores and shall add back
to the pre-tax income of Employer any bonuses of Employer's executives
(including Employee) who have a bonus based on pre-tax income of Employer. Any
bonus, to the extent due according to the calculation in this Section, will be
paid by March 30 of the following year.
2.3 Annual Review. By April 1 of each year of this Agreement, Employer
will review the compensation of Employee for the subsequent employment year.
The base salary may be increased and the bonus, if any, may be adjusted either
higher or lower.
2.4 Sign-on Bonus. Employer shall pay Employee a sign-on bonus of
$15,000. Employee acknowledges that he has received this sign-on bonus.
2.5 Relocation Expenses. Employer shall reimburse Employee for his
relocation expenses as set forth in Employer's relocation policy, provided,
however, that instead of the allocation for temporary living expenses as
provided in the policy, Employer shall pay Employee $1,200 per month for the
period August through December 1998. As an inducement to Employer to employ
Employee and to pay such additional living expenses, Employee shall sign a
promissory note substantially in the form set forth as Exhibit A to this
Agreement and in the principal amount equivalent to all relocation expenses paid
to Employee pursuant to this Agreement. Employee shall sign the promissory note
upon execution of this Agreement.
3. TERM. The term of this Agreement shall commence January 1, 1999, and
shall continue thereafter until December 31, 2001. Commencing January 1, 2001,
the term of this Agreement shall be extended so that it shall always be for a
period of one year until and unless either party gives the other party a one
year notice to terminate Employee's employment under this Agreement or
Employee's employment is sooner terminated in accordance with Section 10 of this
Agreement.
4. RESTRICTIVE COVENANTS.
4.1 Duties. During the term of this Agreement, Employee shall devote his
best efforts and full time, subject to Section 5 of this Agreement, to advance
the business and welfare of Employer. Employee shall take no action against the
best interest of Employer, and he shall pursue no business interests during the
term of this Agreement which conflict with his employment with Employer.
4.2 Covenant Not to Compete. Employee acknowledges that Employer's
activities are international in scope. During the term of this Agreement and
for a period of two years after the termination of Employee's employment with
Employer, its successors or assigns, Employee shall not, directly or indirectly,
engage or be interested (as principal, agent, manager, employee, consultant,
owner, partner, officer, director, stockholder, trustee or otherwise) in any
entity engaged in a business which competes in a material manner with Employer
within a three mile radius of any business location of Employer or of any of its
subsidiaries, affiliates, or franchisees. Notwithstanding the foregoing,
Employee may work for a mass merchant or other large retailer which provides
photoprocessing services provided Employee's services to such mass
merchant/large retailer do not in any way involve, concern, or have an impact on
(including through marketing or advertising advice) the mass merchant's/large
retailer's photoprocessing services. Employee's ownership of less than two
percent (2%) of the outstanding voting stock of any publicly-held corporation,
or any other entity specifically authorized by the Board of Directors of
Employer, shall not constitute a violation of this Section 4.
4.3 Confidentiality. During the term of this Agreement and thereafter,
Employee shall not at any time, other than for the benefit of Employer: (i)
divulge, furnish, disclose, or make accessible to any person, firm, or
corporation, or use for his own purposes, any Confidential Information; (ii)
make or cause to be made any copies, facsimiles, or other reproductions of any
Confidential Information without Employer's express written consent; or (iii)
remove any Confidential Information from Employer's premises or fail or refuse
to surrender (notwithstanding the failure of Employer to make demands for such
materials) the same to Employer immediately upon termination of Employee's
employment with Employer or at any time before such termination upon Employer's
request.
For purposes of this Agreement, the term "Confidential Information" shall
mean and include (a) any information with respect to Employer's accounts, plans,
strategies, business policies, software, know-how, trade secrets, customers,
franchisees, prospects, mailing lists, suppliers, pricing policies or rates,
marketing techniques, or any other information which may now or in the future be
considered confidential or proprietary information of Employer; and (b) manuals,
files, records, software, memoranda, correspondence, drawings, designs, or other
writings belonging to or in the possession of Employer or which may be produced
by or come into Employer's possession in the course of Employee's employment
with Employer.
4.4 Solicitation of Employer's Employees. For a period of three years
after the termination of Employee's employment with Employer, its successors or
affiliates, Employee shall not (i) employ or attempt to employ, directly or
indirectly, personally or through any entity in which Employee may be associated
(as principal, agent, manager, employee, consultant, owner, partner, officer,
director, stockholder, trustee, or otherwise), any employee of Employer, its
subsidiaries or affiliates, or (ii) induce any employee of Employer, its
subsidiaries or affiliates, to leave the employment of Employer, its
subsidiaries or affiliates, or (iii) induce any employee of any franchisee of
Employer to leave the employment of any franchisee.
4.5 Equitable Relief. The parties acknowledge and agree that a breach of
this Section 4 cannot be compensated for by monetary damages and that any remedy
at law is inadequate. Accordingly, Employee agrees that, in the event of a
breach of any restrictive covenant set forth in this Agreement, Employer may
seek and obtain, in addition to any other legal relief available to Employer, a
temporary restraining order, preliminary injunction, and permanent injunction
restraining Employee from violating Section 4 of this Agreement. For the
purposes of this provision, the parties confer jurisdiction upon the courts
located in Montgomery County, Ohio, and agree on venue in Montgomery County,
Ohio.
4.6 Reformation. In the event that any provision of this Section 4 should
be determined by a court of competent jurisdiction to be unenforceable by reason
of its being extended for too great a period of time, for too large a geographic
area, or for too great a range of activities, it shall be reformed to extend
only over the maximum period of time, geographic area, or range of activities as
to which it may be enforceable.
5. VACATION. Employee shall be entitled to vacation in accordance with
Company policy, to be taken at such times as determined by Employee, subject to
Employer's prior approval and to Employee's giving sufficient notice so that
Employer's business may operate effectively in Employee's absence.
Notwithstanding the foregoing, for any year during Employee's term of employment
that Company policy would provide for Employee to have two week's vacation,
Employee shall be entitled to three weeks' vacation.
6. HEALTH AND INSURANCE PLANS; FRINGE BENEFITS. Employee shall be
entitled to participate in all plans or agreements maintained by Employer
relating to health insurance for Employee, his wife and children, subject to the
terms and conditions of such plans in effect from time to time. Employee shall
also be entitled to all other fringe benefits provided senior officers of
Employer.
7. REIMBURSEMENT FOR EXPENSES. Employer shall reimburse Employee for all
reasonable expenses incurred on behalf of Employer in line with Employer's
policies.
8. AUTOMOBILE. During the term of this Agreement, Employer shall furnish
Employee with the use of an automobile or with an automobile allowance for use
on Employer's business, subject to Company policy.
9. NOTICE. Any notice required to be given pursuant to the provisions of
the Agreement shall be in writing and shall be delivered by certified mail or in
person to the parties at the following addresses:
Employer:
Moto Photo, Inc.
4444 Lake Center Drive
Dayton, Ohio 45426
Attn.: Frank M. Montano, President and Chief Operating Officer
Employee:
Lloyd F. Noland
10731 Weatherstone Court
Loveland, Ohio 45140
or at such other place as either party may designate in writing to the other.
10. TERMINATION.
10.1 Termination for Cause. Employer may terminate Employee's
employment under this Agreement for cause upon written notice to Employee.
For purposes of this Agreement, the term "cause" means the following
situations or occurrences:
(a) Dishonesty, embezzlement, fraud, breach of fiduciary duty,
actions involving moral turpitude, or conviction of a felony by
Employee;or
(b) Gross neglect of duty or gross insubordination by Employee,
including the failure to abide by any reasonable and material
instructions of Employer; provided, however, that it will not be
reasonable if such instructions request or demand actions which would
be inconsistent with the duties of a senior corporate executive; or
(c) Material breach of the provisions of Section 4 of this
Agreement and/or failure of Employee to sign a promissory note as
provided in Section 2.5 of this Agreement.
10.2 Challenge to Termination. Should Employee dispute that his discharge
was for cause, Employee must submit his claim to arbitration in accordance with
Section 13 of this Agreement within sixty (60) days after the termination of his
employment. If a discharge of Employee is eventually determined under
arbitration to have been for cause, or if no arbitration is requested by
Employee within sixty (60) days after the termination of Employee's employment,
Employer shall have no liability whatsoever under this Agreement from and after
the date of termination.
10.3 Termination Without Cause. If the termination of Employee is without
cause, Employer shall be responsible for payment of compensation as outlined in
Section 2 (Compensation) of this Agreement and subject to Section 12
(Mitigation) of this Agreement. In addition, Employer and Employee agree that
they shall work together for an orderly transition for the benefit of Employer.
To that end, for a period of ninety (90) days following termination of his
employment, Employee shall be available to participate, at Employer's
discretion, in meetings, conferences, and the like for up to fifty percent (50%)
of the normal and customary work week. In return, to assist Employee in
obtaining new employment, during that ninety-day period Employer shall provide
Employee with an office at Employer's headquarters and secretarial and office
support, including the use of the telephone, facsimile machine, and copier.
Should Employer ask Employee to relocate, to regularly commute more than 75
miles from Loveland, Ohio, or to accept a substitute office or position to that
specified in Section 1.1, and should Employee decline to do so and Employer
therefore terminate Employee's employment, such termination shall be treated as
without cause.
10.4 Voluntary Termination. Should Employee voluntarily terminate his
employment with Employer for any reason, all obligations of Employer, except for
the prorated bonus described in Section 10.5 of this Agreement, shall be
extinguished as of the date of termination of employment, but Employee shall
remain subject to all of his covenants in Section 4 of this Agreement.
10.5 Bonus. Should termination be voluntary or involuntary without cause,
Employee shall be entitled to a bonus as described in Section 2, prorated to the
end of the month prior to the termination of Employee's employment.
11. DEATH OR DISABILITY. In the event of the death of Employee,
employment will terminate but Employee's spouse or estate shall receive
Employee's then- current salary and the benefits contemplated by paragraphs 2,
6, 7 and 8 for ninety (90) days after Employee's death.
If Employee is disabled and cannot perform the duties of his assignment, he
will continue to receive full compensation at the time the disability began for
the first six months of continuous disability. After six months of continuous
disability, Employee will receive 70% of full compensation, reduced by any
benefits paid under Employer's long-term disability insurance program, until the
earlier of Employee's death, Employee's being able to return to work, or the
expiration of this Agreement. If Employee remains continuously disabled after
the expiration of this Agreement, Employee will continue to be entitled to
benefits due under Employer's long-term disability insurance program.
Termination or expiration of this Agreement for any reason shall not affect
any obligations of Employee under Section 4 of this agreement.
12. MITIGATION. In the event of the termination of this Agreement,
Employee shall use his best efforts to mitigate his damages, if any, by seeking
suitable employment for which he is qualified. This obligation to mitigate
damages shall not affect any right Employee may have to a bonus as provided in
Section 10.5 of this Agreement.
13. ARBITRATION. Except as provided for in Section 4.5 of this Agreement,
any controversy or claim arising out of or relating to this Agreement shall be
settled by arbitration in Dayton, Ohio in accordance with the Commercial Rules
of Arbitration of the American Arbitration Association. The decision of the
arbitrator(s) shall be final and binding upon all parties to this Agreement.
Judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof. The expenses of arbitration shall be borne
by the non-prevailing party.
14. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the internal laws of the State of Ohio without reference to
Ohio's choice of law or conflict of laws provisions.
15. ASSIGNABILITY. This Agreement is personal to Employee, and Employee
shall have no right to assign it. The terms of this Agreement shall be binding
upon, shall inure to the benefit of, and shall be enforceable by Employer, its
successor and assigns.
16. WAIVER. No delay, waiver, omission or forbearance by either party to
enforce any right arising out of the breach of any provision of this Agreement
by the other party shall be construed as or constitute a continuing waiver or a
waiver of any other breach of any provision of this Agreement.
17. PARTIAL INVALIDITY. In the event that any word, phrase, clause,
sentence, or other provision in this Agreement violates any applicable statute,
ordinance, or rule of law in any jurisdiction in which it is used, such
provision shall be ineffective to the extent of such violation, without
violating any other provision in this Agreement.
18. COMPLETE AGREEMENT; MODIFICATION. This Agreement supersedes all prior
agreements, written or oral, between the parties, is intended as a complete and
exclusive statement of the terms of the Agreement between parties, and may be
amended, modified, or rescinded only by a written instrument executed by both
parties.
19. CAPTIONS. All captions in this Agreement are intended solely for the
convenience of the parties, and none shall be deemed to affect the meaning or
construction of any provision of this Agreement.
20. MULTIPLE COPIES. This Agreement may be executed in multiple copies,
each of which shall be deemed an original.
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first written above.
WITNESSES: EMPLOYER:
MOTO PHOTO, INC.
________________________________ By_____________________________
Frank M. Montano
President and Chief Operating Officer
________________________________
EMPLOYEE:
_________________________________ ________________________________
Lloyd F. Noland
______________________________
PROMISSORY NOTE
This Promissory Note (the "Note") is made as of the third day of August,
1998, by Lloyd F. Noland ("Employee") in favor of Moto Photo, Inc., a Delaware
corporation ("Employer"), 4444 Lake Center Drive, Dayton, Ohio 45426. This
Note is based on the following understanding:
Employee has been employed by Employer as Senior Vice President of
Marketing pursuant to an employment agreement dated as of August 3, 1998 ("the
Employment Agreement)". As an inducement to Employer to enter into the
Employment Agreement, Employee agreed to repay certain relocation expenses paid
Employee by Employer if Employee does not continue his employment with Employer
for a specified period.
Accordingly, Employee hereby promises to pay to Employer the sum of Forty
Thousand Three Hundred Fifty-Two Dollars and Thirty-Six Cents ($40,352.36) on
the following terms:
1. Any unpaid principal shall bear interest at nine percent (9%) per year
until it is paid or forgiven as provided in Paragraph 2 of this Note.
2. So long as Employee remains employed by Employer, Employer will
forgive one-fifth of the principal amount of this Note, together with accrued
interest, on August 3 of each year until the note is forgiven in full.
3. If Employee voluntarily terminates his employment with Employer, the
remaining principal under this Note, together with accrued interest, shall
become due and payable immediately. If Employer terminates Employee's
employment, or if Employee dies or becomes permanently disabled such that he
must terminate his employment with Employer, Employer shall forgive the
remaining principal and accrued interest under this Note.
4. No delay, waiver, omission or forbearance by Employer to declare a
default or exercise any right arising under this Note shall constitute a waiver
by Employer of any such default or of such right or as to subsequent breach or
default by Employee. Subsequent acceptance by Employer of any payments due it
under this Note shall not be deemed a waiver by Employer of any preceding
default in payment by Employee.
5. In the event of litigation relating to this Note, each party shall
bear its own litigation expenses, court costs, and attorneys' fees.
6. This Note shall be governed by and construed in accordance with the
internal laws of the State of Ohio without reference to Ohio's choice of law or
conflict of laws provisions.
_____________________________
Lloyd F. Noland
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from Moto Photo
Inc.'s 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,918,396
<SECURITIES> 0
<RECEIVABLES> 9,016,231
<ALLOWANCES> 2,492,000
<INVENTORY> 2,457,950
<CURRENT-ASSETS> 11,331,903
<PP&E> 11,431,509
<DEPRECIATION> 7,719,445
<TOTAL-ASSETS> 21,933,793
<CURRENT-LIABILITIES> 7,849,542
<BONDS> 0
0
10,000
<COMMON> 78,336
<OTHER-SE> 4,832,570
<TOTAL-LIABILITY-AND-EQUITY> 21,933,793
<SALES> 36,674,620
<TOTAL-REVENUES> 37,199,707
<CGS> 26,329,572
<TOTAL-COSTS> 32,882,997
<OTHER-EXPENSES> 2,432,466
<LOSS-PROVISION> 543,031
<INTEREST-EXPENSE> 411,610
<INCOME-PRETAX> 1,330,253
<INCOME-TAX> 360,000
<INCOME-CONTINUING> 1,690,253
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,690,253
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
