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Insiders Hope to Resurrect the Bankrupt Moto Photo

by Jerry Lansky

The announcement on November 25 by Moto Photo that it was filing a petition of bankruptcy under Chapter 11 was probably not a surprise to many in the industry. In fact, it could be asked: What took so long?

What was the surprise, however, was the fact that a new company, MOTO Franchise Corporation, has been set up for the express purpose of buying the assets of Moto Photo and continuing the operation. The bankruptcy court will make the final ruling on how Moto's assets should be disposed of: allow MFC to purchase; accept another bidder; or whatever. It is hoped to be resolved by the end of January.

President of the new operation is Harry Loyle, Moto's second largest stockholder (to founder and Chairman Michael Adler), a Moto director, an area developer in the Northeast responsible for 52 franchises and an owner or part owner of three Moto franchise stores. He and six others (five Moto area developers and Harry's partner in New Jersey) are the investors in MFC, a private company. All are veterans of Moto's history. Sounds like the inmates are taking over the institution.

Even the most casual industry observer knew it could not forever be business as usual for Moto considering the continuing stream of losses over the years. I was told that Moto showed a profit in only five of the past 19 years though positive cash flows helped keep the motor running in Dayton. The auditor's statement in Moto's most recent annual report pulled no punches: "...the company...is in default of several covenants in their borrowing arrangement with their primary bank and a major vendor that raises substantial doubt about its ability to continue as a going concern." The 'major vendor,' of course, is Fuji. (The auditor, incidentally, was Arthur Anderson. Had they only been so forthright with some of their other clients.)

Could Moto have continued on its losing ways? Yes, but for one reason, or I should say, about 15 million reasons. For that's the amount of dollars owed to Fuji by Moto ($10 million in preferred stock due for redemption; $1.9 million in a note; and about $3 million in accounts payable). The two parties couldn't agree on a repayment plan and Fuji filed suit in late October for the $3 million payables due Fuji Film and Fuji Hunt.

How did the Fuji-Moto relationship degenerate so? It's a long story with many facets and strong personalities on each side of the table. Obviously, at one time there was a strong relationship between the firms or else Fuji would never have gotten in so deep. As Moto was unable to meet financial commitments matters started to get a bit hairy. In the last episode Moto was complaining that Fuji's paper price was not competitive and that franchises were able to buy it through other sources at a price below what they had to pay to Moto. Fuji would not re-negotiate, they say. Fuji counters that they were selling to Moto at the lowest possible price but that Moto's own markup was driving the price up to the franchisee. Sounds like they both could have been right.

The big break came in September, 2001, when Moto signed a deal with Kodak to be "its primary supplier of photographic paper, chemistry, film and related products." And a healthy deal it was: Moto committed to buy 100 million square feet of paper and one million rolls of film and/or single use cameras in three years.

Fuji's supply arrangement with Moto was kaput and needless to say things became rather tense especially considering that Fuji owned $10 million in Moto stock. The stock was purchased by Fuji to help out what was at that time a good customer. You can just imagine the temperature in the corner office at Fuji HQ: they own all that stock in a company that signed a three year supply agreement with Kodak. Pass the Alka Seltzer, please.

Fuji was not used to getting beaten out by Kodak as proven by notches on its green belt with such jewels as Wal-Mart and Ritz and, more recently, gnawing away at a prize Qualex-OSP account, Walgreens.

Fuji's situation was unique. Yes, Moto had a contract with Kodak, but the Moto franchise agreement allows the individual franchises to buy supplies from whomever they choose. They were encouraged but not forced to buy Kodak. Of the Moto family of about 250 franchise outlets in the U.S. and another 35-40 in Canada, I understand about 180 buy Kodak paper via the Moto contract. Most of the rest stayed with Fuji, some because they owned Fuji Frontier digital labs on a deal that gave them interest-free equipment leasing so long as they used Fuji paper.

Fuji is a major player with minilab equipment and over the years has become the dominant lab in Moto stores. Unlike paper, which franchises may or may not buy from Moto headquarters, Moto plays only an advisory role when it comes to equipment though they negotiate a chain-wide price. The brand to buy and the money required fall to the franchise.

I'm told there may be as many as 70-80 Fuji Frontiers in Moto stores right now. It will be interesting to see what happens in the future as I understand that Kodak has brought its buddy Noritsu back into the Moto arena with some special deals on digital labs for franchise stores.

In any event, Fuji apparently decided enough was enough and filed its October suit. Moto's response was their Chapter 11 bankruptcy filing.

There may be lurking out there some operation that would see Moto as a natural mate for its own service and might like to have an instant network of 250 stores to insure a known retail channel.

Left holding the bag are relatively few trade names. Fuji is obviously the largest with about $15 million. Kodak is next with $931,000, followed by Trebla Chemical, $100,000 and Agfa $83,000. Those are the biggies. Of course there are banks, sales and other taxing entities, and landlords on the list.

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