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, 2000
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  ______

 

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

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 registrantwas 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 definitiveproxy or information statements incorporated by reference in part of this Form 10-K or any amendment to this Form 10-K. [   ]

 

State the aggregate market value of the voting stock held by non-affiliates of the registrant:

 

$862,657 in Voting Common Stock 

as of May 11, 2001

(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 confirmedby a court.

Yes  _____  No _____

 

Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock

as of May 11, 2001:

7,809,338 shares of Voting Common

0 shares of Non-Voting Common

 

 

DOCUMENTS INCORPORATED BY REFERENCE

None
**MOTO PHOTO, INC.

FORM 10-K

For the year ended December 31, 2000
**TABLE OF CONTENTS
**PART I	*
ITEM  1.     BUSINESS	*

General	*

Operating Segments	*

Development	*

Competition	*

Trade Names, Service Marks and Logo Types	*

Regulation	*

Royalty and Advertising	*

Wholesale	*

Company Stores	*

The Business as a Whole	*

Seasonality	*

Employees	*

Supply Contract and Amended Series G Preferred Stock	*

Competition	*

Expansion Plans	*

Development of the System in 2000	*

Summary of Store Development	*

ITEM  2.      PROPERTIES	*

ITEM  3.      LEGAL PROCEEDINGS	*

ITEM  4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	*

PART II	*

ITEM  5.      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED

STOCKHOLDER MATTERS	*

ITEM  6.     SELECTED FINANCIAL DATA	*

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL  

                      CONDITION AND RESULTS OF OPERATIONS	*

General	*

Market Risk	*

Results of Operations 2000 vs. 1999	*

Results of Operations 1999 vs. 1998	*

Liquidity and Capital Resources	*

Forward Looking Statements	*

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES 

ABOUT MARKET RISK.	*

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	*

ITEM 9.	 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	*

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	*

PART IV.	*

ITEM 14.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND

  REPORTS ON  FORM 8-K	*
**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 tradenames 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 servicesto 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 storesowned by the Company.  See Note Rto the Consolidated Financial Statements of the Company included elsewhere herein for information concerning the revenue, profit contribution or loss, and assets of each operating segment.
 
**Development**
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 "ONEHOUR 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 theright 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, 2000, the Company had atotal of ten area developers covering twenty-three 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 for providing assistance inopening the store 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, 2000, area developers accounted for twelve new franchises and franchise brokers accounted for three new franchises.  In addition, areadevelopers assist in finding buyers for existing stores; in 2000, twenty-five franchises were transferred to new owners.

During 2000, the Company continued to use its new store design in all new stores opening in the system.  The new design, Project Aspire, is intended to appeal to the target customers of MOTOPHOTO stores and the Company believes it willcomplement the services the stores offer.  Project Aspire will be also be used to retrofit existing stores over time.

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.

During 2000, the Company offered a reduced fee program pursuant to which the Company lowered its initial franchise fee from $35,000 to $15,000 for first-time franchisees and to $7,500 for existing franchisees and agreed to contribute$4,000 to grand opening advertising expenses.  This limited time offer was contingent upon the franchisee's signing a franchise agreement by December 31, 2000, opening its store by December 31, 2001 and agreeing to purchase all of its store's requirementsfor photo processing paper and chemistry from the Company for the first three years of operation.  The Company is no longer offering this reduced fee program.
The Company offers financing for new franchises through the MotoPhoto QuickStart(SM) financing program.  Under this program, a third party lender offers financing which enables franchisees to open a MOTOPHOTO store for a much smallerinitial cash investment (currently approximately $60,000) than a franchisee who used traditional financing methods would have (currently approximately $120,000).  The MotoPhoto QuickStart(SM) program has two components:  (1) the Company will finance theinitial franchise fee for qualified new franchisees, payable at 9.4% over ten years; and (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 storebuild-out allowance of up to approximately $37,900.  Repayment is made over eight years in specified weekly payments.  These payments are lower in the earlier years to take into account the normal sales ramp-up of an average store.  The franchisee will bepersonally liable for the payments for the full eight-year term of the business lease agreement.  As a condition of the MotoPhoto QuickStart(SM) program, the franchisee must purchase all photo processing paper and chemicals from the Company, must purchaseand display certain other products made by Fuji Photo Film U.S.A., Inc. ("Fuji"), and must use certain Fuji equipment.  Fuji has agreed to guarantee the franchisees' payments to Provident Bank under the MotoPhoto QuickStart(SM) program and the Company hasagreed 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 that 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". 

The Company has a program to increase the number of conversion franchises.  The Company has lowered its initial franchise fee for conversion franchises to $10,000.  If the conversion franchisee's sales in the preceding twelve monthswere over $167,000, the Company will give the conversion franchisee a credit equal to 6% of the previous year's sales, with a maximum credit of $10,000.  A new system franchisee who acquires an independent store for the purpose of converting it pays aninitial franchise fee of $20,000 without any credit.  In addition, the Company will subsidize up to $5,000 of the cost of converting the store to the MOTOPHOTO store design ("the Store Design Allowance") by giving the franchisee credits against wholesalepurchases from the Company.  Lastly, the Company will, on a quarterly basis, credit six percent of the conversion franchisee's first year net retail sales against its purchases from the Company of film, photo processing paper, and chemistry, provided thefranchisee signs a three-year agreement to purchase such items from the Company. The credit will be applied only to the extent that purchases exceed the credits due the franchisee for the Store Design Allowance and it is available only to new conversionfranchisees and not to existing or new franchisees who acquire a store to convert it.

In addition to the MotoPhoto QuickStart(SM) program, 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 berequired to guarantee in whole or in part.

 
**Competition****
In marketing its franchise, the Company faces 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 marketMOTOPHOTO franchises. 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 changesome 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  "CLUBMOTO" are registered on the principal register of the United States Patentand 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, France, Germany, Italy, Kuwait, Luxembourg, the Netherlands, Norway, 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 theCompany's option regardless of usage but if the marks are not used, the registrations are subject to expungement upon challenge by a third party.  The Company'strade 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 & PORTRAITSTUDIO".  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 wherecircumstances 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 nocurrent materially infringing uses.

 
**Regulation**
The Company is subject to Federal Trade Commission ("FTC") regulation and certain state laws that regulate the offer and sale of franchises.  The Company is also subject to a number of state laws that regulate substantive aspects ofthe 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.  If such legislation were enacted, it could ultimately weaken the cohesiveness of franchise systems and could affect the way the Company does business in the future.  The Company believes thatits 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 itsfranchisees 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 ofthe 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 detailed operations and management guidelines and standards for stores.  These guidelines and standards deal with, among other things, technical operations, storedesign, marketing, portraiture, and merchandising.  These guidelines and standards are proprietary information belonging to the Company and are made available for use by a franchisee of the Company so long as the franchisee operates its store pursuant tothe terms of the franchise agreement.  The Company has developed these guidelines and standards, as well as other training and operational materials, and makes them available to its franchisees in written form, through computer-based training, and throughits newly-developed intranet for franchisees, which will be its primary method of communication and ongoing guidance for franchisees.

The Company enforces a 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 toconduct 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 toterminate.  However, fourteen stores are operated under older agreements that allow the franchisee to terminate the agreement on three months prior notice.  Franchises are transferable only with the prior approval of the Company.  For transfers offranchises sold before March 2001, the Company charges a transfer fee of $5,250 except in limited circumstances.  This transfer fee will be $7,500 for franchises sold after March 2001.

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 totheir local advertising cooperative for advertising an amount of at least 5.5% of net retail sales.  In addition, franchisees are required to pay to the Company 0.5% of 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, single-use cameras and certain start-up advertising materials from the Company.  The franchisee generally is not required to purchase other supplies or equipmentfrom 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 QuickStart(SM) program must useFuji paper and Fuji or Fuji/Hunt chemistry throughout the term of the business lease agreement and must purchase these supplies through the Company.  Franchisees who bought franchises under the reduced fee program offered during 2000 must purchase suchsupplies through the Company for the first three years of operation of their stores.

The Company has negotiated arrangements with a number of suppliers that provide favorable pricing to the Company's franchisees on supplies and equipment.  In return for providing services for certain suppliers, the Company may receiveas 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 and Amended Series G Preferred Stock" below.

 
**Company Stores**
At December 31, 2000, the Company had 42 company stores in operation compared to 44 at year-end 1999.  This decrease in the number of company stores partially resulted from a management decision to close four under-performing storesnear the end of 2000.  In early 2001, two more company stores were closed and one was sold as a franchise.  The Company has no plans to open additional company stores during 2001.  The Company will continue to offer some of its stores for sale.  TheCompany operates its company stores as a source of revenue, 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 springand fall is fairly equal.

 
**Employees**
As of May 7, 2001, the Company had 418 employees, 200of whom were employed part-time.  None of the Company's employees is represented by labor unions.  The Company believes itsrelationship with its employees is good.**Supply Contract and Amended 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, certainfilm, 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 1992 in connection with aseries of transactions also involving the issuance to Fuji of all shares of what is now the Company's Amended Series G Preferred Stock ("Amended Series G Stock").

In December 1999, the Company exchanged its Series G Preferred Stock, all one million shares of which were held by Fuji, for the Amended Series G Stock issue of one million shares.  The Amended Series G Stock extended the mandatoryredemption date from January 1, 2000 to January 1, 2003 and eliminated scheduled penalty payments for non-redemption of the Series G Preferred Stock of $800,000 in 2000, $900,000 in 2001 and $1,000,000 annually thereafter.  If the Company fails to redeemthe Amended Series G Stock on January 1, 2003, the Company must make penalty payments of $.90 per share, or $900,000, in 2003 and $1.00 per share, or $1,000,000, in 2004 and each year thereafter until the stock is redeemed.  The Amended Series G Stock isredeemable by the Company at any time in aggregate amounts of at least $1,000,000.  No dividends are payable in connection with the Amended Series G Stock.  The Amended Series G Stock is redeemable only out of the proceeds of an equity offering or inCompany 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 Amended Series G Stock without impairment of any right torequire redemption at a later time.  The redemption price for the Amended Series G Stock is $10.00 per share, or an aggregate of $10 million. 

In connection with the Amended Series G Stock transactions, the supply agreement was amended to reduce the associated revolving credit agreement by $2.7 million to $4 million.  The Company executed a note to pay Fuji the $2.7 millionover three years.  The principal balance of such note was $2.1 million as of December 31, 2000 and was $1.9 million as of March 31, 2001.

Fuji may terminate the supply contract upon, after appropriate cure periods, failure by the Company to make payments when due under the supply contract, failure by the parties to renegotiate prices for the Fuji products as required bythe supply contract, or bankruptcy or insolvency of the Company.  Fuji may require the Company to redeem the Amended Series G Stock under certain other circumstances ("Redemption Event") which include, after appropriate cure periods, termination of thesupply contract other than as a result of a material default by Fuji, default by the Company under certain other agreements between the Company and Fuji, failure by the Company to meet its obligations under other indebtedness in excess of $100,000, or ifeither Michael F. Adler or David A. Mason ceases to be involved in the day-to-day management of the Company and the Company does not replace him or them, within a specified period, with an executive reasonably acceptable to Fuji.  Change in control of theCompany, other than the acquisition of control by Fuji, would give Fuji the right to require redemption of the Amended Series G Stock but would not affect the validity of the supply contract.  If the Company redeems the Amended Series G Stock, the supplycontract will be extended to the third anniversary of the redemption without right of renewal.  The Company has the right to terminate the supply contract under certain circumstances including failure of Fuji to maintain appropriate pricing levels asrequired under the agreement or if Fuji defaults on its obligations.

On April 9, 2001, the Company gave Fuji notice of its intent to renegotiate the prices as permitted under the supply contract.  If the parties are unable to agree upon new prices within sixty days of the date of the notice, eitherparty may terminate the supply contract upon thirty days notice to the other.  In such case, the Company could change to a key supplier other than Fuji for system requirements of paper, chemistry and equipment.  The Company believes these products areavailable from alternative vendors at comparable prices, but there can be no assurances that the Company can obtain favorable pricing and terms without disruption to wholesale activities.

The Company has a revolving credit arrangement with Fuji under the supply contract pursuant to which the Company may have outstanding amounts due to Fuji for purchases under the supply contract for a period of approximately 120 dayswithout interest.  If the supply contract is terminated, the balance outstanding under the revolving credit arrangement, which currently is approximately $3.4 million (was $4 million at December 31, 2000), would become payable according to its terms overthe approximately 120 day period following termination of the supply contract.  In connection with a change to a new key supplier, the Company would seek similar credit terms, but there can be no assurances that similar credit terms would be obtained. 

Termination of the supply contract other than as a result of a material default by Fuji would also constitute a Redemption Event under the Amended Series G Stock and would give Fuji the right to require redemption of the Amended SeriesG Stock.  If Fuji requests redemption, the Company can cure the Redemption Event by offering the requisite cash or common stock to redeem all of the Amended Series G Stock. If redemption were to occur in shares of common stock, depending on the marketprice of the common stock and the number of shares of common stock outstanding at the time of redemption, Fuji could acquire control of the Company.  Based on current market prices of the common stock, full redemption of the Amended Series G Stock inshares of common stock would result in Fuji having the right to receive common shares representing approximately 90% of the Company's outstanding stock following such redemption.  If the Company fails to tender the requisite cash or common stock in orderto redeem all of the Amended Series G Stock upon request by Fuji following the occurrence of a Redemption Event, Fuji has the right, until all the shares of the Amended Series G Stock are redeemed or the Redemption Event is cured, to elect the majority ofthe Board of Directors.
**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 processingindustry in particular, is intense.  There is pervasive competition in the provision of photo processing services, particularly through the increasing number of one-hour labs in drug stores and other mass merchants, and also through other channels ofdistribution, such as specialty stores and photographic chains, large retail stores, the Internet, and mail order.  The Company's competitors are many individuals and companies, some of which are large and established and have substantially greaterresources than those of the Company.  The Company competes in the marketplace 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 inattracting 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 theCompany 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 than centralized photo processors.  In addition, personnel at MOTOPHOTO stores aretrained to offer a high level of customer service, including the ability to advise customers on picture-taking and on the array of imaging services offered at the stores.  The Company maintains quality control standards intended to assure that the qualityof 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, lower prices offered by already establishedcentralized photo processing outlets and other one-hour outlets and the high quality of product made possible by new automated photo processing equipmentmay adversely affect the business of the Company and its franchisees.  Factors allowing the Company and its franchisees to realize premium prices are the variety of imaging services offered by theCompany and its franchisees and the personalized service and photographic expertise of store employees, 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 services andproducts.  The Company hasintroduced, 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 theirequipment or are anticipated to offer such rights in the future.

 
**Expansion Plans**
The Company is planning to expand its offerings of services and products as quickly as commercially practicable in order to reinforce its market position in the rapidly changing retail photo processing industry.  The Company has formeda concept development team that is dedicating itself to rethinking every aspect of the MOTOPHOTO concept and to exploring and testing new services and products with potential to significantly drive sales and profits.  The concept development team alsolooks for new ways of serving customers and motivating and rewarding franchisees and employees that may also enhance sales and profits.

The Company continues to add digital imaging to the services which may be offered by MOTOPHOTO stores. The Company is working to develop marketing strategies and services to meet customers' digital imaging needs.The Company is expanding its CLUBMOTO program and broadening its portrait offerings and capabilities.  The Company intends to expand its offerings of services and products as market tests indicate their potential profitability.

During 2001, the Company will continue to offer new franchises and to convert profitable existing independent stores to MOTOPHOTO stores.  The Company is also devoting increased efforts to developing andimplementing operations and training programs to improve the profitability of existing company stores and franchised stores and to assisting in the transfer to new owners of under-performing stores in good locations.  In addition, the Company will seek topromote growth of the system through alliance opportunities with other firms.  In September 2000, the Company and PhotoChannel Networks, Inc., a digital imaging network company, signed a letter of intent to merge that was later allowed to expire.  

 
**Development of the System in 2000**
During 2000, the Company granted fifteen new franchises, while sixteen franchises were canceled or terminated, for a net decrease of one franchise in the United States.
The number of stores in foreign countries declined overall during 2000.  The Company's master franchisor for Canada, Canadian Industrial Systems, Inc., granted two new franchises, while four franchises were canceledor terminated, for a net decrease of two international franchises.  In addition, the Company and G.L. Gruppen, A/S, allowed an affiliate program relating to 47 stores in Norway to expire.  In 2000, all foreign source revenue represented less than 1% oftotal revenue. 

During 2000, the Company opened four new company stores and closed six under-performing stores.  The Company does not plan to open or acquire additional company stores during 2001 and will continue during 2001 toemphasize development of the system through franchised stores.  The Company will continue to offer for sale as franchises some of its company stores.**Summary of Store Development**
Set forth below is a summary of the store development of the Company in the United States and abroad during 1999 and 2000:

**2000**1999**U.S.**Int'l.**Total**U.S.**Int'l.**Total
Stores Open at Beginning of Year
332
87
419
333
94
427
New Stores Opened
17
2
19
17
9
26
Conversions
3
-
3
5
-
5
Terminations or Non-Renewals
20
4
24
23
16
39
Expiration of Norway affiliate program
-
47
47
-
-
-
Stores Open at End of Year
332
38
370
332
87
419
Company Stores Open at End of Year
42
-
42
44
-
44
Franchised Stores Open at End of Year (a)
290
38
328
288
40
328
Affiliate Stores Open at End of Year
-
-
-
-
47
47
Stores Under Development at End of Year (b)
13
1
14
23
1
24

																										

(a)	As of December 31, 2000, a total of 227 franchisees owned the 290 franchised stores in the United States.****************************