FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 1999
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________ to ________________
Commission file number: 0-11927
Moto Photo Inc.
(Exact name of registrant as specified in its charter)
Delaware 31-1080650
(State or other jurisdiction of (IRS Employer Identification
Incorporation or organization) Number)
4444 Lake Center Dr. Dayton, OH 45426
(Address of principal executive offices with Zip Code)
(937) 854-6686
(Registrant's telephone number, including area code)
No Change
(Former name, former address, and former fiscal year, if changed since last
report)
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
APPLICABLE ONLY TO ISSUERS 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 Sections 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______
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
As of May 12, 1999:
7,843,173 - Voting Common, 0 - Non - Voting Common
INDEX
MOTO PHOTO, INC. AND SUBSIDIARIES
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets . March 31, 1999 and December 31, 1998
Consolidated statements of operations - Three months ended March 31,
1999 and 1998
Consolidated statements of cash flows - Three months ended March 31,
1999 and 1998
Notes to consolidated financial statements - March 31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOTO PHOTO, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
MARCH DECEMBER
1999 1998
<S> <C> <C>
Assets
Current assets:
Cash $ 1,648,448 $ 2,918,396
Accounts receivable, less
allowances of $1,103,000 in
1999 and $1,092,000 in 1998 3,146,212 4,188,807
Notes receivable, less allowances
of $172,000 in 1999 and
in 1998 437,669 437,669
Inventory 2,544,965 2,457,950
Deferred tax assets 1,213,000 1,213,000
Prepaid expenses 143,871 116,081
Total current assets 9,134,165 11,331,903
Property and equipment 3,863,269 3,712,064
Other assets:
Notes receivable, less allowances
of $1,300,000 in 1999 and
$1,228,000 in 1998 1,880,424 1,897,755
Cost of franchises and contracts
acquired 146,435 155,688
Goodwill 3,695,910 3,728,816
Deferred tax assets 57,000 57,000
Other assets 1,041,917 1,050,567
Total assets $19,819,120 $21,933,793
<FN>
See accompanying notes.
</TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,185,351 $ 4,251,043
Accrued payroll and benefits 489,050 560,901
Accrued expenses 890,422 1,192,968
Current portion of long-term obligations 1,562,000 1,534,000
Other 244,559 310,540
Total current liabilities 6,371,382 7,849,452
Long-term obligations 8,781,041 9,064,001
Deferred revenue 99,434 99,434
Total liabilities 15,251,857 17,012,887
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 _ 7,843,173 in
1999 and 7,833,573 in 1998 78,432 78,336
Paid in capital 6,311,525 6,404,734
(Deficit) retained earnings subsequent to
June 30, 1991 (1,832,694) (1,572,164)
Total stockholders' equity 4,567,263 4,920,906
Total liabilities and stockholders' equity $ 19,819,120 $ 21,933,793
<FN>
See accompanying notes.
</TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
<S> <C> <C>
Revenue
Sales and other revenue $ 6,974,933 $ 6,884,974
Interest income 79,534 94,467
Other income 4,325 112,000
7,058,792 7,091,441
Expenses
Company store cost of sales and operating
expenses 5,294,733 5,442,633
Selling, general, and administrative 1,354,493 1,349,866
costs
Advertising 279,042 257,684
Depreciation and amortization 281,207 210,760
Interest expense 107,524 97,740
7,316,999 7,358,683
(Loss) before income taxes (258,207) (267,242)
Income tax benefit 65,000 67,000
Net (loss) (193,207) (200,242)
Preferred stock dividend requirements (67,324) (69,344)
Net (loss) applicable to common stock $ (260,531) $ (269,586)
Net (loss) per common share $ (0.03) $ (0.03)
Weighted average shares outstanding -
Basic 7,838,298 7,804,540
Weighted average shares outstanding -
Diluted 7,838,298 7,804,540
<FN>
See accompanying notes.
</TABLE>
MOTO PHOTO INC AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
<S> <C> <C>
Operating Activities
Net (loss) $ (193,207) $ (200,242)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 281,207 210,760
Provision for losses on inventory and
receivables 105,693 154,145
Loss on disposition of assets - 65,672
Write off of assets due to store closings - 32,258
Issuance of stock for directors fees 14,563 7,470
Increase (decrease) resulting from changes in:
Accounts receivable 889,817 767,943
Inventory and prepaid expenses (121,948) (587,058)
Other assets 2,400 (10,563)
Accounts payable and accrued expenses (1,440,089) (1,524,493)
Deferred revenues and other liabilities (65,981) (6,278)
Net cash used in operating activities (527,545) (1,090,386)
Investing Activities
Purchases of equipment and leaseholds (384,002) (66,753)
Payments received on notes receivable 71,559 173,306
Net cash (used in) provided by investing
activities (312,443) 106,553
Financing Activities
Principal payments on revolving line of
credit, long-term debt and capital
lease obligations (254,960) (270,665)
Payments of preferred dividends (175,000) (150,000)
Net cash used in financing activities (429,960) (420,665)
Decrease in cash (1,269,948) (1,404,498)
Cash at beginning of period 2,918,396 3,139,252
Cash at end of period $ 1,648,448 $ 1,734,754
<FN>
See accompanying notes.
</TABLE>
MOTO PHOTO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
"UNAUDITED"
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31,
1999, are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999.
The internal accounting for the Company is on a fiscal calendar quarter basis.
The fiscal quarter dates may vary from the calendar quarter dates, (i.e. April 3
vs. March 31 for the first quarter 1999), except for the fourth quarter which
ends on December 31. The differences in ending dates are immaterial.
The balance sheet at March 31, 1999, has been derived from the unaudited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates that affect amounts
reported in the financial statements. Actual results could differ from those
estimates.
For further information, refer to the consolidated financial statements and
footnotes thereto included in Moto Photo, Inc. and Subsidiaries' annual report
on Form 10-K for the year ended December 31, 1998.
B. RECLASSIFICATION
Certain amounts from the prior period have been reclassified to conform to the
current period presentation.
C. SEGMENT INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
ROYALTIES
COMPANY AND
DEVELOPMENT STORES ADVERTISING WHOLESALE TOTAL
<S> <C> <C> <C> <C> <C>
Sales and other revenue $ 88,420 $2,670,298 $1,034,039 $3,182,176 $6,974,933
Depreciation and
amortization 979 203,742 3,226 2,306 210,253
Operating segment
contribution
prior to interest
expense, income taxes
and unallocated
corporate expenses (118,685) (530,048) 679,539 (264,471) (233,665)
Identifiable segment
assets 92,105 8,696,618 1,238,612 3,725,830 13,753,165
Capital expenditures for
long lived assets - 340,111 - 878 340,989
THREE MONTHS ENDED MARCH 31, 1998
ROYALTIES
COMPANY AND
DEVELOPMENT STORES ADVERTISING WHOLESALE TOTAL
Sales and other revenue $ 22,250 $2,735,581 $1,033,257 $3,093,886 $6,884,974
Depreciation and
amortization 883 132,342 3,122 19,339 155,686
Operating segment
contribution
prior to interest
expense, income taxes
and unallocated
corporate expenses (141,762) (536,303) 682,741 (296,167) (291,491)
Identifiable segment
assets 27,511 8,127,227 1,231,124 3,378,484 12,764,346
Capital expenditures for
long lived assets - 46,624 2,635 - 49,259
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
<S> <C> <C>
REVENUE 1999 1998
Total sales and other revenue
for reportable segments $6,974,933 $6,884,974
Interest income 79,534 94,467
Other>income 4,325 112,000
Total consolidated revenues $7,058,792 $7,091,441
</TABLE>
C. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
SEGMENT CONSOLIDATED
OTHER SIGNIFICANT ITEMS TOTAL CORPORATE TOTAL
<S> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999
Depreciation and amortization $ 210,253 $ 70,954 $ 281,207
Operating segment contribution prior
to interest expense, income taxes
and unallocated corporate expenses
for segment totals reconciled
to loss before taxes (233,665) (24,542) (258,207)
Identifiable segment assets 13,753,165 6,065,955 19,819,120
Capital expenditures for long lived
assets 340,989 43,013 384,002
THREE MONTHS ENDED MARCH 31, 1998
Depreciation and amortization $ 155,686 $ 55,074 $ 210,760
Operating segment contribution prior to
interest expense, income taxes and
unallocated corporate expenses for
segment totals reconciled to loss
before taxes (291,491) 24,249 (267,242)
Identifiable segment assets 12,764,346 9,169,447 21,933,793
Capital expenditures for long lived
assets 49,259 17,494 66,753
</TABLE>
D. EARNINGS PER SHARE DATA
The following table sets forth the calculation of basic and diluted earnings per
share for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
<S> <C> <C>
Net loss applicable to common shares $ (260,531) $ (269,586)
Reconciliation of shares:
Weighted average common share outstanding 7,838,298 7,804,540
Effect of dilutive stock options and
other common stock equivalent - -
Weighted average common shares assuming
dilution 7,838,298 7,804,540
Basic earnings per share $ (0.03) $ (0.03)
Diluted earnings per share $ (0.03) $ (0.03)
</TABLE>
In the first quarter 1999, $175,000 of dividends were paid on the Series G
preferred shares. Of this amount $107,676 was for previously reported and
accreted dividends.
ITEM 2.
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FIRST QUARTER 1999 VS FIRST QUARTER 1998
The Company reported a net loss of $260,531 or a loss per common share, basic
and diluted, of $.03 for the first quarter 1999 compared to a net loss of
$269,586, or a loss per common share, basic and diluted, of $.03 for the first
quarter 1998. Per share calculations are made after provision for Series G
preferred dividend requirements. Due to the Company's common share price of
approximately $1.24, certain securities could become dilutive and have a
significant impact on diluted earnings per share in subsequent periods.
Development segment revenue increased $66,000, or 297%, in 1999 compared to 1998
due primarily to two store openings in 1999 compared to zero in 1998.
Depreciation and amortization expenses increased by $70,000, or 33%, in 1999
compared to 1998 primarily as a result of depreciation on additions to property
and equipment in Company stores.
Interest expense increased $10,000, or 10%, in 1999 compared to 1998 due to
increased borrowings to support Company store asset additions expansion
discussed above. Interest income, which is primarily interest income from notes
receivable and temporary investments of cash, decreased in 1999 due to a
decrease in notes receivable and cash balances.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities decreased by $563,000 in 1999 compared to 1998
largely due to $465,000 decrease in inventory and prepaids.
In 1999 net cash utilized by investing activities was $312,000 as compared to
net cash provided by investing activities of $107,000 in 1998. Increased
purchases of property and equipment in 1999 accounted for about approximately
$300,000 of the change.
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 June 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 May 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.
MARKET RISK
There have been no significant changes in market risk since December 31, 1998.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company has pending against it a small number of claims which it believes
are routine and incidental to the 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 6. Exhibits and Reports on Form 8-K.
(a)Exhibits: See Exhibit Index immediately preceding exhibits.
(b)Reports on Form 8-K. The Company filed no reports on Form 8-K during the
quarter ended March 31, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has 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,
Treasurer, and Chief
Financial Officer
Date: May 12, 1999
EXHIBITS TO
FORM 10-Q
for the quarter ended
March 31, 1999
Copies of the following documents are filed as exhibits to this report:
No. Description
*10.1 Employment Agreement, dated as of January 1, 1999, with Lloyd F.
Noland
*10.2 Bonus Plan for Executive Officers
27.0 Financial Data Schedule
* Indicates compensatory plan
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
EXHIBIT A
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 January 1, 1999 ("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
BONUS ARRANGEMENTS
The following bonus arrangements have been made for the officers named with
respect to profits of the Company for fiscal year 1999:
<TABLE>
PART I PART II (1)
<S> <C> <C>
Mr. Adler 10% of base 7%
salary
Mr. Montano 10% of base 5%
salary
Mr. Mason 10% of base 4%
salary
Mr. Noland (2) 10% of base 2%
salary
</TABLE>
(1) The bonus for each of the officers named has two components. Part I
requires that the pre-tax profit of the Company equal or exceed 95% of budgeted
levels. If corporate profits reach the target level, the named officer will get
the Part I bonus indicated. Part II requires that pre-tax profits meet or
exceed 25% of the Company's net worth as of January 1, 1999 ("Base Net Worth").
If the profits exceed 25% of the Base Net Worth, the named officer will get the
percentage specified of the excess of profits over the Base Net Worth.
(2) Pursuant to his employment agreement, Mr. Noland's minimum bonus for fiscal
year 1999 will be $20,000.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from Moto Photo
Inc.'s 1999 First Quarter 10Q and is qualified in its entirety by
refernce to such 10-Q filings.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,648,488
<SECURITIES> 0
<RECEIVABLES> 5,464,305
<ALLOWANCES> 2,576,139
<INVENTORY> 2,544,965
<CURRENT-ASSETS> 9,134,165
<PP&E> 3,863,269
<DEPRECIATION> 7,952,255
<TOTAL-ASSETS> 19,819,120
<CURRENT-LIABILITIES> 6,371,383
<BONDS> 0
0
10,000
<COMMON> 78,432
<OTHER-SE> 4,478,831
<TOTAL-LIABILITY-AND-EQUITY> 19,819,120
<SALES> 6,974,933
<TOTAL-REVENUES> 7,058,792
<CGS> 5,294,733
<TOTAL-COSTS> 1,354,493
<OTHER-EXPENSES> 560,249
<LOSS-PROVISION> 281,207
<INTEREST-EXPENSE> 107,524
<INCOME-PRETAX> (258,207)
<INCOME-TAX> (65,000)
<INCOME-CONTINUING> (193,207)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (193,207)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
