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:
1997 1998
U.S. Int'l Total U.S. Int'l Total
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
(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]
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
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.
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]
DECEMBER 31
1998 1997
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.
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[CAPTION]
DECEMBER 31
1998 1997
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.
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
[CAPTION]
YEAR ENDED DECEMBER 31
1998 1997 1996
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.
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[CAPTION]
SERIES G PREFERRED COMMON STOCK
STOCK
SHARES AMOUNT SHARES AMOUNT
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.
[CAPTION]
(DEFICIT)
PAID IN RETAINED
CAPITAL EARNINGS TOTAL
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.
MOTO PHOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
[CAPTION]
YEAR ENDED DECEMBER 31
1998 1997 1996
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.
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)
1998 1997 1996
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
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:
1998 1997
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
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:
1998 1997
Non-compete agreements $ 737,500 $ 762,500
Other 313,067 269,619
$1,050,567 $1,032,119
E. LONG-TERM DEBT
The detail of long-term debt as of December 31 is:
1998 1997
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
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:
1998 1997
Processing equipment $ 832,187 $1,737,753
Less accumulated amortization 261,714 554,918
$ 570,473 $1,182,835
Future minimum lease payments for capitalized leases at December 31, 1998 are as
follows:
YEAR ENDING DECEMBER 31
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
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:
LEASE SUBLEASE NET LEASE
OBLIGATION RENTALS OBLIGATION
S S
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
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:
1998 1997
COMMON AVERAGE COMMON AVERAGE
SHARES PRICE SHARES PRICE
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
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:
PRO FORMA EARNINGS 1998 1997 1996
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
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:
FAIR VALUE ASSUMPTIONS 1998 1997 1996
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
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:
1998 1997
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
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:
1998 1997 1996
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
1998 1997 1996
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)
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]
1998
ROYALTIES
COMPANY AND
DEVELOPMENT STORES ADVERTISING
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
MOTO PHOTO, INC. AND SUBSIDIARIES
[CAPTION]
1998
WHOLESALE TOTAL
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
MOTO PHOTO, INC. AND SUBSIDIARIES
[CAPTION]
REVENUE 1998 1997 1996
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
SEGMENT CONSOLIDATED
OTHER SIGNIFICANT ITEMS TOTAL CORPORATE TOTAL
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
MOTO PHOTO, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
[CAPTION]
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
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
MOTO PHOTO, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
[CAPTION]
BALANCE AT CHARGED TO BALANCE AT
YEAR ENDED BEGINNING COSTS AND CHARGEDRTO END OF
DECEMBER 31, 1997 OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
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
MOTO PHOTO, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
[CAPTION]
BALANCE AT CHARGED TO BALANCE
YEAR ENDED BEGINNING COSTS AND CHARGED TO AT END OF
DECEMBER 31, 1996 OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
Reserves and
Allowances
deducted from
Accounts and
Notes Receivable $1,354,000 $1,244,000 $ 359,000 $746,000(1) $2,211,000
Allowance for Cash
Discounts 73,000 (12,000) 61,000
Allowance for
Inventory
Obsolescence 70,000 93,000 37,000(2) 126,000
Total $1,497,000 $1,325,000 $ 359,000 $783,000 $2,398,000
<FN>
(1) Uncollectible accounts written-off
(2) Disposal of Inventory
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