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, 2001
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)

 

Delaware31-1080650
 (State of Incorporation)    (Employer Identification No.)

 

4444 Lake Center Dr. Dayton, OH45426
(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 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. [   ]

 

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

 

$520,228 in Voting Common Stock 

as of March 15, 2002

(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 _____

 

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

as of March 15, 2002:

8,227,389 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, 2001
**TABLE OF CONTENTS

 

PART I	***ITEM  1.  BUSINESS	*
**General	*
**Developments in 2001	*
**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	*

Amended Series G Preferred Stock and Fuji Relationship	*

Supply Contract	*

Competition	*

Expansion Plans	*
**Development of the System in 2001	*
**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 2001 vs. 2000	*

Results of Operations 2000 vs. 1999	*

Liquidity and Capital Resources	*

Forward Looking Statements	*
**Risk Factors	*
**The Company's ability to continue as a going concern is uncertain.	*
**Fuji  could assume control of the Company.	*
**The Company encounters significant competition in the photo processing market.	*
**The Company's business may be adversely affected by new technology.	*
**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 trade name and service mark "MOTOPHOTO".

The Company was incorporated as an Oklahoma corporation on July 29, 1981 and was reincorporated under Delaware law in 1983.  

 
**Developments in 2001**
The Company had key changes in senior management during 2001.  Effective July 1, 2001, Lawrence P. Destro became the Chief Executive Officer of the Company, and on November 1, 2001, also became President.  Mr. Destro came to the Company from an almost 20-year career in the quick service restaurant industry, most recently, as President of an international business where he was responsible for 4,000 stores in 50 countries.  On September 17, 2001, Alfred E. Lefeld was promoted to Chief Financial Officer and Treasurer.  He has been with the Company approximately eight years, most recently as Vice President and Controller.  Certain other senior management positions were eliminated or consolidated.  Michael F. Adler, formerly Chief Executive Officer, and David A. Mason, formerly Executive Vice President--Finance, both retired as officers, but will continue as directors and consultants to the Company.  Mr. Adler also continues as Chairman of the Board of Directors.

During 2001, the Company changed its primary supplier of photo processing paper and chemicals.  On September 17, 2001, the Company terminated its supply contract with Fuji Photo Film U.S.A., Inc. ("Fuji") following Fuji's refusal to renegotiate contract prices as permitted under the supply contract.  Also on September 17, 2001, the Company signed a supply contract with Eastman Kodak Company ("Kodak") for photo processing paper, chemicals, film, and batteries.  See "Item 1 - Business - Supply Contract" elsewhere in this report.

During fall of 2001, the Company developed a strategic plan for 2002 and 2003 to increase brand awareness, to improve the system's core competencies, and to develop new services and products with potential to significantly drive sales and profits.  As part of this strategy, the Company also announced its intention to franchise, sell or close most of its company stores.  See "Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations".
** 

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 S to the Consolidated Financial Statements of the Company included elsewhere in this Report 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 name and service mark  "MOTOPHOTO".  See "Business - Trade Names, Service Marks and Logo Types."  The Company, as franchisor, licenses to the franchisee such trade name and service mark 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, and the Internet.  At December 31, 2001, the Company had a total 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 in opening the store.  The area developer 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, 2001, Company personnel accounted for seven new franchises and area developers accounted for one.  Area developers also assist in finding buyers for existing stores; during 2001, twelve franchises were transferred to new owners.

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.  Beginning in 2002, the Company also offers a discounted franchise fee if the franchisee agrees to purchase photo processing paper and chemicals from the Company during the initial ten-year term of the franchise agreement.

During 2001, the Company continued to offer financing for new franchises through the MotoPhoto QuickStart(SM) financing program which began in 1998.  Nine franchised stores and eleven company stores previously opened using QuickStart financing; however, no stores opened using this financing during 2001 and four of these stores have closed.  Under this program, a third party lender offered financing which enabled franchisees to open a MOTOPHOTO store for a much smaller initial cash investment than a franchisee who used traditional financing methods would have.  Financing was provided by The Provident Bank, Fuji guaranteed the franchisees' obligations under the financing arrangements, and the Company agreed to reimburse Fuji for half of any payments made under the guarantee.  The program was terminated in December 2001.

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 is continuing its program of financing incentives intended to increase the number of conversion franchises.  The Company's initial franchise fee for conversion franchises is $10,000. 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 wholesale purchases from the Company.  In addition, 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 the franchisee 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. 

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 be required to guarantee in whole or in part.

The Company believes that the "going concern" comment of the auditor's report on the Company's audited financial statements for 2001 and 2000 (see Note C to the Consolidated Financial Statements of the Company included elsewhere in this report) and the significant initial investment cost for opening a MOTOPHOTO store have adversely affected the Company's ability to sell franchises.  The Company is working on ways to lower the initial investment cost and to increase the profitability of MOTOPHOTO stores to make MOTOPHOTO franchises more attractive as business opportunities.  In 2002, the initial investment cost for a franchise has been lowered by approximately $74,000 to approximately $255,000 as a result of the franchise fee discount for paper and chemistry and of the lower cost for new photo processing equipment.  However, until the Company has improved its financial condition, its ability to sell franchises may continue to be adversely affected.  

 
**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 market MOTOPHOTO 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 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  "CLUBMOTO" are registered on the principal register of the United States Patent and Trademark Office.  New stores operate under the mark "MOTOPHOTO"; older stores operate under the marks "ONE HOUR MOTOPHOTO", and "ONE HOUR MOTOPHOTO & PORTRAIT STUDIO".  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", "MOTO-PHOTO", "MOTOPHOTO", and/or "moto-photo" plus design also are registered in Australia, Belgium, Canada, France, Germany, Italy, Luxembourg, the Netherlands, Norway, and the United Kingdom.  In addition, the Company has registered the mark "ONE HOUR MOTOPHOTO" in Canada and Mexico and the mark "ONE HOUR MOTOPHOTO & PORTRAIT STUDIO" in Mexico.  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.  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 & 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 that regulate the offer and sale of franchises.  The Company is also subject to a number of state laws that 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.  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 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" trade name and service mark 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 recruiting 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, store design, 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 to the 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 through its intranet for franchisees, which has become 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 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, sixteen 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.  Except in limited circumstances, the Company charges a transfer fee of $5,250 for transfers of franchises sold through March 2001 and $7,500 for transfers of 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 for advertising or contribute to their local advertising cooperative 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, private label one-time-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.   Beginning in 2002, the Company is offering a discounted initial franchise fee to franchisees who agree to purchase photo processing paper and chemistry from the Company during the initial ten-year term of the franchise agreement.  In addition, it offers certain credits to conversion franchisees against their purchases from the Company of film, photo processing paper, and chemistry, provided the franchisees sign a three-year agreement to purchase such items from the Company.

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 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, 2001, the Company had 32 company stores in operation compared to 42 at year-end 2000.  In November 2001, the Company announced its intention to franchise, sell, or close all company stores except those in the Dayton, Ohio market, which it will retain as testing and research sites.  In accordance with this decision, the Company franchised six stores in December 2001 and closed two stores in late 2001.  The Company closed a total of four stores in 2001.  In early 2002, the Company closed three stores and sold two stores as independents in a market the Company is exiting.  The Company will continue to offer the remaining Company stores for sale or evaluate for closure.
**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 March 19, 2002, the Company had 315 employees, 139 of whom were employed part-time.  None of the Company's employees is represented by labor unions.  The Company believes its relationship with its employees is good.

 
**Amended Series G Preferred Stock and Fuji Relationship**
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 mandatory redemption 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 redeem the 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 is redeemable 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 in Company 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 to require 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. 

Fuji may also require the Company to redeem the Amended Series G Stock under certain other circumstances ("Redemption Event"), including the termination of a supply contract between Fuji and the Company for any reason other than default by Fuji.  In April 2001, the Company requested that Fuji renegotiate prices with the Company, as permitted under the supply contract.  Fuji failed to do so and, on September 17, 2001, the Company terminated the supply contract with Fuji, although Fuji remains a vendor to the Company.  This termination, after a six-month cure period, is a Redemption Event which permits Fuji, to require the Company to redeem the Amended Series G Stock.  

If Fuji requests redemption of the Amended Series G Stock, the Company may redeem by offering at its option the requisite cash or common stock.  If redemption were to occur in shares of common stock, depending on the market price 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 in shares of common stock would result in Fuji's having the right to receive common shares representing approximately 95% of the Company's outstanding stock following such redemption.  If the Company fails to give notice of redemption of all of the Amended Series G Stock upon request by Fuji, Fuji would have the right, until all the shares of the Amended Series G Stock are redeemed or the Redemption Event is cured, to elect the majority of the Board of Directors.

The Company currently has 21,772,611 authorized but unissued shares of voting common stock, which would be insufficient at current share prices to redeem all shares of the Amended Series G Stock should Fuji request redemption.  In such case, the Company would have to seek shareholder authorization of additional shares of common stock.

The Company has a $1.9 million note with Fuji, as well as accounts payable as of December 31, 2001 of approximately $3.2 million, subject to reduction for certain claims.  In May 2001, the Company's primary bank declared the Company to be in default of certain financial covenants under an agreement with the bank, although the Company remains current with its bank payment obligations.  The bank therefore has the right to accelerate repayments of the bank debt and lease obligations; however, the bank has not given notice of any intent to accelerate these payments.  The bank agreement prohibits principal payments on the note payable to Fuji until covenant compliance is achieved.  The Company has been in negotiations with Fuji to change the Company's payment schedule on the $1.9 million note, of which approximately $0.7 million was past due at December 31, 2001, on its accounts payable, of which approximately $2.0 million was past due at December 31, 2001, and on the terms of the Amended Series G Stock.  The Company has been unable to obtain agreement at this point.  On March 21, 2002 the Company advised Fuji that it was substantially reducing its monthly payments on its past due trade payables while negotiations are pending.  There can be no assurance negotiations will be successful (see Note H to the Consolidated Financial Statements).  The Company continues to explore various possibilities to negotiate a resolution of the Fuji relationship that would enhance shareholder value.

 
**Supply Contract**
On September 17, 2001, as noted above, the Company terminated its supply contract with Fuji and signed athree-year contract with Eastman Kodak Company ("Kodak") for the purchase of photo processing paper, film, and batteries.  The Company has agreed to purchase 100 million square feet of photo processing paper from Kodak over three years; if the Company does not meet its purchase requirement, the contract will be extended for another year.  The Company believes that, at current purchasing levels, it will be able to meet the purchase commitment within the four-year period.  In addition, the Company has agreed to purchase at least one million rolls of film and/or one-time-use cameras from Kodak each year during the term of the supply contract; if the Company fails to do so, Kodak has the right to increase film prices.  Purchases from Kodak will be made primarily for resale to franchisees.
In addition, the Company purchases photo processing supplies from several other vendors.

 
**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.  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 of distribution, 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 greater resources 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 selling 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.

Principal competitive factors in the industry are convenience, price, quality of service, quality of product, 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 than centralized photo processors.  In addition, personnel at MOTOPHOTO stores are trained 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 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, lower prices offered by already established centralized 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 the Company 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 both through retail stores and through the internet.  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 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 developed a strategic plan for 2002 and 2003 to increase brand awareness, to improve the system's core competencies, and to develop new services and products with potential to significantly drive 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 2002, the Company will continue to offer new franchises and to seek to convert profitable existing independent stores to MOTOPHOTO stores.  The Company is also devoting increased efforts to developing and implementing operations and training programs to improve the profitability of  franchised stores and to assisting in the transfer to new owners of under-performing stores in good locations.  In addition, the Company will seek to promote growth of the system through alliance opportunities with other firms. 

 
**Development of the System in 2001**
During 2001, the Company granted eight new franchises, while twenty-seven franchises were canceled or terminated, for a net decrease of nineteen franchises in the United States.
The number of stores in Canada declined overall during 2001.  The Company's master franchisor for Canada, CIS Franchising, Limited, granted one new franchise, while four franchises were canceled or terminated, for a net decrease of three international franchises.  In 2001, all foreign source revenue represented less than 1% of total revenue. 

During 2001, the Company opened no new company stores, franchised seven company stores, acquired one franchised store, and closed four under-performing stores.  The Company has announced its intention to franchise, sell, or close all of its company stores except those in the Dayton, Ohio market, which it will retain as testing and research sites.  It will continue during 2002 to emphasize development of the system through franchised 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 2000 and 2001:

**2001**2000**U.S.**Int'l.**Total**U.S.**Int'l.**Total
Stores Open at Beginning of Year
331
38
369
332
87
419
New Stores Opened
-
1
1
17
2
19
Conversions
1
-
1
3
-
3
Terminations or Non-Renewals
30
4
34
21
4
25
Expiration of Norway affiliate program
-
-
-
-
47
47
Stores Open at End of Year
302
35
337
331
38
369
Company Stores Open at End of Year
32
-
32
42
-
42
Franchised Stores Open at End of Year (a)
270
35
305
289
38
327
Stores Under Development at End of Year (b)
10
-
10
13
1
14

												

(a)	As of December 31, 2001, a total of 209 franchisees owned the 270 franchised stores in the United States.**************************************************************************************