FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No: 0-7475
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PHOTO CONTROL CORPORATION
(Exact name of Registrant as specified in its charter)
Minnesota
(State or other jurisdiction of 41-0831186
incorporation or organization) (I.R.S. Employer
Identification No.)
4800 Quebec Avenue North
Minneapolis, Minnesota 55428
(Address of principal executive offices)
Registrant's telephone number, including area code:
(612) 537-3601
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.08
----------------------------------------------------------------------
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 ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.(X)
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 3, 1998 was approximately $2,980,000 based on the closing
sale price of the Registrant's Common Stock on such date.
- --------------------------------------------------------------------------------
Number of shares of $0.08 par value Common Stock outstanding at March 3, 1998:
1,604,163
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Report to Shareholders for the year ended
December 31, 1997 are incorporated by reference into Part II.
2. Portions of the Registrant's definitive Proxy Statement to be dated April 1,
1998 for its Annual Meeting of Shareholders are incorporated by reference into
Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
(a) General Development of Business.
Photo Control Corporation (the "Registrant" or the "Company") was
organized as a Minnesota corporation in 1959. The Registrant acquired all of the
outstanding stock of Norman Enterprises, Inc. ("Norman"), a California
corporation, in 1973. In June 1983, the Registrant acquired all of the
outstanding stock of Nord Photo Engineering, Inc. ("Nord"), a Minnesota
corporation. In October 1997, Norman's manufacturing operations were moved to
Minnesota and the land and building in California was sold. A four thousand
squared foot building is rented in California to house a sales and service
office. The Registrant is in the process of liquidating both subsidiaries and
transferring the assets to Photo Control Corporation, the parent company.
The Registrant designs, manufactures, and markets professional cameras,
long-roll film magazines, photographic accessories, Norman electronic flash
equipment, and Nord photographic package printers. All references to the
"Registrant" or the "Company" also include "Norman" and "Nord" unless indicated
otherwise.
(b) Financial Information About Industry Segments.
During the years ended December 31, 1997, 1996, and 1995, the
Registrant was engaged in one industry which consisted of designing,
manufacturing, and marketing professional photographic equipment.
(c) Narrative Description of Business.
(c) (l)(i) Principal Products, Services and Markets. The Registrant
designs, manufactures and markets professional cameras, long-roll film
magazines, photographic accessories, Norman electronic flash equipment, and Nord
photographic package printers.
The principal market for the Registrant's long-roll camera equipment is
the sub-segment of the professional photography market requiring high-volume
equipment, such as elementary and secondary school photographers. The market
with respect to the Norman electronic flash equipment is broader, extending to
all professional photographers and to experienced amateur photographers. The
market for Nord photographic package printers is photographic processing labs
which specialize in producing photographic color print packages such as those
often produced for weddings and school photography. The geographic market in
which the Registrant competes with respect to long-roll camera equipment, flash
equipment, and printers consists of the entire United States and, to a lesser
extent, some foreign countries.
The Registrant markets most of its cameras, film magazines, Norman
electronic flash and lighting equipment, and photographic accessories through
its five employee salesmen, one independent sales representative and part-time
use of a service employee. Such equipment is marketed primarily under the
tradename, "Camerz" and "Norman". Nord markets its printers through Bremson,
Inc., an unaffiliated professional photographic supplier. It is expected that
the sales force will remain at the current level during 1998.
(c)(1)(ii) New Products and Services. The Camerz Division introduced
the new ZIII camera long-roll film portrait zoom camera. The ZIII is
micro-processor controlled and has all new electronics which allows
compatibility with the electronic frame identification system without the
external control box that was needed for the prior ZII model. The ZIII also
offers options for automatic focusing and a film cassette system, versus the
exclusive prior use of a film magazine. Split view digital previewing is
available with the ZIII which allows for digital image capture and printing for
many service items such as class composites and identification cards.
Norman introduced a new 40/40 power supply which features a module
design with plug-in boards which provides for high power output along with easy
servicing.
<PAGE>
Nord modified the existing MI1100 printer to accommodate a back printer
which will print two lines of forty characters on the back side of the
photograph.
(c)(1)(iii) Sources and Availability of Raw Materials. Materials
required for the Registrant's photographic equipment consist primarily of
fabricated parts, lenses, electronic components, and lights, most of which are
readily available from numerous sources.
(c)(1)(iv) Patents, Trademarks, Licenses, Franchises and Concessions.
The Registrant, on March 16, 1982, obtained United States patent number
4,319,819 for a reflex shutter, which is used in conjunction with a zoom lens.
The Registrant has incorporated the shutter into a zoom lens camera which was
first introduced in fiscal 1980.
The Registrant on June 7, 1988, obtained a United States Patent number
4,750,012 for a reflex shutter for SLR cameras. The shutter is incorporated into
the "Z35" camera which was first introduced in 1987.
In 1991, the Registrant was granted United States Patent number
5,055,863 for a multiple image transfer camera system for the simultaneous
transfer of light rays from an object to a pair of separate, discrete mediums to
provide for substantially exact image reproduction and capture thereof at either
or both of two media.
The Registrant received U.S. Patent No. 5,294,950 on March 15, 1994 for
an identification system for automated film and order processing including
machine and human readable code.
On July 12, 1994, the U.S. Patent and Trademark Office granted the
Registrant patent number 5,329,325 for the Registrant's synchronized zoom
electronic camera system.
Nord holds two patents. Patent number 4,213,689 granted July 22, 1980
relates to a camera shutter which is electromagnetically activated and is not
currently in production. The Additive Color Lamphouse patent, granted in 1991,
United States Patent number 5,032,866, covers a closed loop light intensity
feedback control system for regulating the light sources within the lamphouse.
The Registrant is the owner of the registered trademark, "Camerz," and
the logo-type used in connection with the sale of photographic equipment under
the name Camerz. Also, the Registrant owns one registered trademark called
"Smart System."
Nord is the owner of four registered trademarks; "Portrait Express,"
"Nord", "ESP", and a logo-type design referred to as the "Micrometer."
Although the Registrant's patents and trademarks are valuable, they are
not considered to be essential to the Company's success. Innovative application
of existing technology along with providing efficient and quality products are
of primary importance.
The Registrant has entered into agreements with employees which
agreements grant the Registrant a exclusive right to use, make and sell
inventions conceived by employees during their employment with the Registrant.
The Registrant believes that the right to use, make and sell such inventions
adequately protects the Registrant against any employee who might claim an
exclusive proprietary right in an invention developed while the employee was
employed by the Registrant.
(c)(1)(v) Seasonal Fluctuations. The photographic equipment business,
including that of Norman and Nord, is somewhat seasonal. There is a larger
volume of sales from March through October.
(c)(1)(vi) Working Capital Practices. The Registrant believes that its
working capital needs are typical to the industry. The nature of the
Registrant's business does not require that it maintain a high volume of
finished goods inventory or provide extended payment terms to customers. The
Registrant maintains an inventory of raw material and finished products and
permits customers to return only defective merchandise.
<PAGE>
(c)(1)(vii) Single Customer. During the years ended December 31, 1997,
1996 and 1995, the company derived 8.4%, 14.3% and 20.2%, respectively, of its
sales from one unaffiliated customer, Lifetouch Inc. and its affiliates. During
year ended December 31, 1997 and 1996, 13.3% and 11.0%, respectively, of its
sales were from another unaffiliated customer, CPI Corp.
(c)(1)(viii) Backlog. The dollar amount of backlog believed by the
Registrant to be firm at the years ended December 31, 1997, 1996 and 1995, is
$1,078,000, $633,000 and $2,858,000, respectively. The Registrant anticipates
that it and its subsidiaries will be able to fill all current backlog orders
during the fiscal year ending December 31, 1998.
(c)(1)(ix) Government Contracts. No material portion of the
Registrant's or its subsidiaries' business is subject to renegotiation of
profits or termination of any contract or subcontract at the election of the
Government.
(c)(1)(x) Competition. Primary methods of competition for the Company's
products are product performance, reliability, service, and delivery. The
Registrant's two primary competitors with respect to such equipment are Lucht,
Inc., which sells photographic printers, and Beattie Systems, Inc., which sells
long-roll cameras. Because of varying product lines, the Registrant is unable to
state accurately its competitive position in relation to such competitors. In
the somewhat broader market in which Norman competes in the sale of professional
studio electronic flash equipment, there are approximately fourteen significant
competitors, several of which are well established. The Registrant is unable to
state accurately Norman's overall competitive position in relation to such
competitors. Norman's dominant competitors are Broncolor, Dynalite, White
Lighting, Photogenic, and Speed-O-Tron.
(c)(1)(xi) Research and Development. For the years ended December 31,
1997, 1996 and 1995, the Registrant spent $1,056,000, $1,108,000 and $1,310,000,
respectively, on research activities relating to the development of new
products, services, and production engineering. The Company intends to maintain
its level of spending on research and development.
(c)(1)(xii) Environmental Regulation. Federal, state and local laws and
regulations with respect to the environment have had no material effect on the
Registrant's or its subsidiaries' capital expenditures, earnings, or respective
competitive positions.
(c)(1)(xiii) Employees. As of December 31, 1997, the Registrant had 95
full time employees and 2 part time employees. The Registrant utilizes
subcontract personnel on a temporary basis to supplement its regular work force
which totaled 27 people as of December 31, 1997.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales. The Registrant has no operations based outside of the United
States. During each of the last three years ended December 31, 1997, slightly
more than 5% of the Registrant's consolidated sales were derived from export
sales.
ITEM 2. PROPERTIES
The Registrant's principal property is located at 4800 Quebec Avenue
North, Minneapolis, Minnesota. The building at that location consists of 60,000
square feet and is located on 3 1/2 acres of land. The building was constructed
in 1971 and was purchased in 1980. Extensive remodeling has been done to meet
the specific needs of the Company. The Registrant first occupied the building
during the fall of 1980, and uses the building for camera production, Nord
printer manufacturing, Norman electronic flash equipment manufacturing, and as
corporate offices.
Nord owns a 5,000 square foot building in Hinckley, Minnesota, on one
acre of land, which houses optical production and was built in 1981. In February
1996, the production was moved to Minneapolis. The building is leased to a
retail organization which has an option to purchase at various points during the
five year lease.
<PAGE>
Norman occupied a 32,000 square foot building in Burbank, California
which was constructed in 1977 and expanded in 1984. The facility was located on
50,000 square feet of land and housed all of Norman's operations, until October
1997 when the manufacturing operations were moved to Minnesota and the land and
building sold. The Registrant leases a four thousand square foot building in
Burbank to house a service and sales department.
The Registrant believes its present facilities are adequate for its
current level of operation and provide for a reasonable increase in production
activities.
ITEM 3. LEGAL PROCEEDINGS
Neither the Registrant nor any of its subsidiaries is a party to, and
none of their property is the subject of, any material pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Registrant's shareholders
during the Registrant's quarter ending December 31, 1997.
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME, AGE AND
PRESENT POSITION OF OFFICER BUSINESS EXPERIENCE
- --------------------------- -------------------
Leslie A. Willig, 72 Mr. Willig, who received a Ph.D. in Industrial
Management from the School of Business of the
Chairman of the Board University of Iowa in 1956, has been a member
of Directors and Chairman of the Board of Directors of
Registrant since June, 1974. He served as its
Chief Executive Officer from August, 1974, to
August,1997, and President from May, 1975 to
April, 1997. Mr. Willig has been a director and
Secretary of North Snow Bay Inc., Fremont,
Indiana, a real estate development company,
since 1965. Mr. Willig has acted as a
self-employed business and real estate broker in
Indiana, since March, 1970.
John R. Helmen, 57 Mr. Helmen has been President of the Registrant
since April, 1997. In August 1997, the Board of
Chief Executive Officer Directors appointed him CEO and a director of
and President the Registrant. Mr. Helmen was employed by Supra
Color Labs, Inc. as Vice President, Director of
Sales and Marketing from 1977 through 1979,
President from 1979 through 1993, and General
Manager after the sale of Supra Color to Burrel
Professional Labs in 1993.
Curtis R. Jackels, 51 Mr. Jackels has been Vice President-Treasurer of
the Registrant since August, 1985 and Treasurer
Vice President - since November, 1980. Mr. Jackels was controller
Treasurer of the from June, 1978 to November, 1980. Prior to
Registrant June, 1978, Mr. Jackels was employed by two
public accounting firms. Mr. Jackels is a
certified public accountant and has a Master of
Business Administra- tion degree from the
University of Wisconsin.
Mark J. Simonett, 41 Mr. Simonett has served as the Registrant's
General Counsel and Personnel Director since
Secretary of the September, 1992 and as Secretary since May,
Registrant 1993. He served part-time from April 1995 to
February 1997 and full-time since. He was
associated with the Minneapolis law firm of
Gray, Plant, Mooty, Mooty and Bennet P.A. from
1991 to 1992, and with the consulting firm Delta
Environmental Consultants, Inc. From 1990 to
1992.
Patrick J. Gilligan, 57 Mr. Gilligan has been President of the
Registrant's wholly-owned subsidiary, Nord Photo
Executive Vice President Engineering, Inc., since November, 1990. Since
of the Registrant May, 1993, he has been Executive Vice President
President of Nord of the Registrant. From August 1988 to October,
1990, he was employed by Pakor, Inc. of
Minneapolis, Minnesota, a manufacturer of Pako
service parts, and a distributor of photographic
processing equipment. The last position held at
Pakor was President. From 1986 to 1988 he was
employed by PhotoTek, a Division of Pako, the
predecessor to Pakor, Inc. and a subsidiary of
Pako. His position with PhotoTek was Vice
President and General Manager. From 1968 to 1985
he was employed by Pako with his last position
being Director of Photo Engineering.
The term of office for each executive officer is from one annual meeting of
directors until the next annual meeting or until a successor is elected. There
are no arrangements or understandings between any of the executive officers and
any other person (other than arrangements or understandings with directors or
officers acting as such) pursuant to which any of the executive officers were
selected as an officer of the Registrant. There are no family relationships
between any of the Registrant's directors or executive officers.
<PAGE>
PART II
The information required by Items 5, 6, 7 and 8 of Part II is incorporated
herein by reference to the sections labeled "Stock Market Information,"
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Consolidated Financial Statements and
Notes and the Independent Auditor's Report which appear in the Registrant's
Annual Report to Shareholders for the year ended December 31, 1997. With respect
to Item 9, no change of accountants or disagreements on any matter of accounting
principles or practices or financial statement disclosure has occurred.
PART III
Items 10, 11, 12 and 13 of Part III, except for certain information relating to
Executive Officers included in Part I, are omitted inasmuch as the Company
intends to file with the Securities and Exchange Commission within 120 days of
the close of the year ended December 31, 1997, a definitive proxy statement
containing information pursuant to Regulation l4A of the Securities Exchange Act
of 1934 and such information shall be deemed to be incorporated herein by
reference from the date of filing such document.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as Part of this Report.
(a)(l) Consolidated Financial Statements.
Page
Independent Auditor's Report........................................... *
Consolidated Statements of Opera-
tions for the years ended
December 31, 1997, 1996 and 1995....................................... *
Consolidated Statements of Changes
in Stockholders' Equity for the
years ended December 31, 1997, 1996
and 1995, ............................................................. *
Consolidated Balance Sheets at December
31, 1997 and 1996...................................................... *
Consolidated Statements of Cash Flows
for the years ended December 31,
1997, 1996 and 1995.................................................... *
- -------------------------------
*Incorporated by reference to the Registrant's Annual Report to Shareholders for
the year ended December 31, 1997, a copy of which is included in this Form 10-K
as Exhibit 13.
<PAGE>
Page
Notes to Consolidated Financial
Statements ............................................................ *
(a)(2) Consolidated Financial Statement Schedules.
Auditor's Consent and Report on Schedules.............................. 9
Schedule VIII - Valuation and Qualifying Accounts
for the years ended December 31, 1997, 1996
and 1995............................................. 10
All other schedules have been omitted because they are not applicable or are not
required, or because the required information has been given in the Consolidated
Financial Statements or notes thereto.
(a)(3) Exhibits. See "Exhibit Index" on page following signatures.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the last fiscal quarter of the Registrant's 1997 fiscal year.
(c) Exhibits. Reference made to item 14 (A)(3)
(d) Schedules. Reference made to item 14 (A)(2)
- -------------------------------
*Incorporated by reference to the Registrant's Annual Report to Shareholders for
the year ended December 31, 1997, a copy of which is included in this Form 10-K
as Exhibit 13.
<PAGE>
AUDITOR'S CONSENT AND REPORT ON SCHEDULES
Board of Directors and
Stockholders
Photo Control Corporation
We hereby consent to the incorporation by reference in this Annual Report on
Form 10-K of Photo Control Corporation for the year ended December 31, 1997 of
our report, dated January 30, 1998, appearing in the Company's 1996 Annual
Report to Shareholders. We also consent to the incorporation by reference of
such report in the registration statements on Form S-8 for the Photo Control
Stock Option Plan.
In the course of our audit of the financial statements referred to in our
report, dated January 30, 1998, included in the Company's 1997 Annual Report to
Shareholders, we also audited the supporting schedule listed in Item 14(a)(2) of
this Annual Report on Form 10-K. In our opinion, the 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.
VIRCHOW, KRAUSE & COMPANY, LLP
January 30, 1998
Minneapolis, Minnesota
<PAGE>
PHOTO CONTROL CORPORATION
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- --------- -------- --------
ADDITIONS
CHARGED ADDITIONS
BALANCE (CREDITED) CHARGED
AT TO COSTS TO OTHER BALANCE
BEGINNING AND ACCOUNTS DEDUCTIONS AT END
DESCRIPTION OF YEAR EXPENSES DESCRIBE DESCRIBE OF YEAR
- ----------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Allowance for Doubtful
Accounts $ 92,000 $ 46,948 $ 52(a) $ 44,000(b) $ 95,000
---------- ---------- ---------- ----------- ----------
Allowance for Inventory
Obsolescence 536,774 1,381,332 (768,106)(c) 1,150,000
---------- ---------- ---------- ----------- ----------
YEAR ENDED DECEMBER 31, 1996
Allowance for Doubtful
Accounts $ 153,000 $ 18,434 $ 1,710(a) $ (81,144)(b) $ 92,000
---------- ---------- ---------- ----------- ----------
Allowance for Inventory
Obsolescence 621,000 191,000 (275,226)(c) 536,774
---------- ---------- ---------- ----------- ----------
YEAR ENDED DECEMBER 31, 1995
Allowance for Doubtful
Accounts $ 142,000 $ 61,325 $ 710(a) $ (51,035)(b) $ 153,000
---------- ---------- ---------- ----------- ----------
Allowance for Inventory
Obsolescence 435,000 186,000 621,000
---------- ---------- ---------- ----------- ----------
</TABLE>
(a) Recoveries of amounts written off in prior years
(b) Uncollectible accounts written off.
(c) Inventory Disposed
<PAGE>
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.
PHOTO CONTROL CORPORATION
Date: March 14, 1998 By/s/John R. Helmen
John R. Helmen
Chief Executive Officer,
President and Director
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.
Date: March 13, 1998 /s/John R. Helmen
John R. Helmen, Chief Executive Officer,
President and Director
(principal executive officer)
Date: March 13, 1998 /s/ Leslie A. Willig
Leslie A. Willig, Director
Date: March 13, 1998 /s/ Curtis R. Jackels
Curtis R. Jackels, Vice President
and Treasurer (principal financial and principal
accounting officer)
Date: March 13, 1998 /s/ George A. Kiproff
George A. Kiproff, Director
Date: March 13, 1998 /s/ James R. Loomis
James R. Loomis, Director
Date: March 13, 1998 /s/ Thomas J. Cassady
Thomas J. Cassady, Director
Date: March 13, 1998 /s/ Joe M. Kilgore
Joe M. Kilgore, director
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PHOTO CONTROL CORPORATION
COMMISSION FILE NO.: 0-7475
- ------------------------------------------------------------------------
E X H I B I T I N D E X
FOR
FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997
Page Number
in Sequential
Numbering
of all Form
10-K and
Exhibit Pages
-------------
EXHIBIT
- -------
3.1 Registrant's Restated Articles of Incorporation, as
amended-incorporated by reference to Exhibit 3.1 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1988 *
3.2 Registrant's bylaws as amended-incorporated by
reference to Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended June 30, 1989 *
10.1 Executive Salary Continuation Plan adopted August 9, 1985
together with Exhibits - incorporated by reference to
Exhibit 10.4 to the Registrant's Annual Report on Form 10-K *
for the year ended June 30, 1986 **
10.2 The Registrant's 1983 Stock Option Plan - incorporated by
reference to Exhibit 10.4 to the Registrant's
Annual Report on Form 10-K for the fiscal year *
ended June 30, 1989 **
10.3 Form of Stock Option Agreement under the Registrant's 1983
Stock Option Plan - incorporated by reference to
Exhibit 5 to the Registrant's Registration Statement on *
Form S-8, Reg. No. 2-85849 **
10.4 Cash bonus plan for officers - incorporated by reference to
the description of such plan contained in the Registrant's
definitive Proxy Statement for its 1996 Annual Meeting of *
Shareholders **
<PAGE>
Page Number
in Sequential
Numbering
of all Form
10-K and
Exhibit Pages
-------------
10.5 Amendment to Stock Option Plan August 29, 1994 - incorporated *
by reference to Exhibit 10.5 to the Registrant's Annual Report on **
Form 10-K for the fiscal year ended December 31, 1994
10.6 Amendment to Stock Option Plan, February 23, 1996-incorporated
by reference to Exhibit 10.6 to the Registrant's annual report on *
form 10-K for the fiscal year ended December 31, 1995. **
10.7 Amendment to Stock Option Plan, November 7, 1997. **
11 Statement re computation of per share earnings 14
13 Report to Shareholders for the year
ended December 31, 1997 15 to 30
21 Subsidiaries of the Registrant 31
23 Consent of Independent Auditors 32
25 Power of Attorney from Messrs. Willig, Jackels, Kiproff, Kilgore, 33
Loomis, Helmen and Cassady
27 Financial Data Schedule 34
*Incorporated by reference
** Indicates management contracts or compensation plans or arrangements required
to be filed as exhibits.
EXHIBIT 10.7
PHOTO CONTROL CORPORATION
1983 STOCK OPTION PLAN
AMENDMENT
NOVEMBER 7, 1997
The Photo Control Corporation 1983 Stock Option Plan (the "Plan") is amended by
replacement of the prior section entitled "Forfeiture" with the following
forfeiture provision:
Forfeiture
The purpose of the Company's Stock Option Plan is to attract, retain,
and reward employees, to increase stock ownership and identification with the
Company's interests, and to provide incentive for remaining with the Company
over the long term. To further these objectives, options granted under the Plan
shall be subject to the following forfeiture provisions unless otherwise
indicated in an optionee's Stock Option Agreement.
1. Forfeiture of option gain if optionee leaves the Company within one
year of exercise. If an optionee exercises any portion of an option and leaves
the employment of the Company within one year after such exercise for any reason
except death, disability or normal retirement, then the optionee shall pay the
Company the Option Gain defined as both (a) the cash bonus received from the
Company, if any, and (b) the gain represented by the market price on the date of
exercise less the exercise price, multiplied by the number of shares purchased
without regard to any subsequent market price decrease or increase.
2. Forfeiture of option gain and unexercised options if optionee
engages in certain activities. If at any time within
(a) the original term of an option, or
(b) three years after exercise of any portion of an option,
whichever is latest, the optionee engages in any activity in competition with
any activity of the Company, or any of the following activities:
(i) conduct related to the optionee's employment for which either
criminal or civil penalties against the optionee may be sought,
(ii) violation of the Company's insider trading policy,
(iii) accepting employment with or serving as a consultant, advisor or
in any other capacity to an employer that is in competition with or
acting against the interests
<PAGE>
of the Company, including employing or recruiting any present, former or
future employee of the Company,
(iv) disclosing or misusing any confidential information or material
concerning the Company, or
(v) participating in a hostile takeover attempt,
then all unexpired options held by the optionee shall terminate effective upon
the date on which the optionee engages in such activity, unless terminated
earlier by operation of another term or condition of the Plan or the Stock
Option Agreement, and the optionee shall pay the Company any Option Gain as
defined in paragraph 1 of this section.
3. Right of Setoff. The Company shall have a right of setoff against
any amounts the Company may owe the optionee from time to time (including wages,
vacation pay, other compensation, fringe benefits or any other amounts owed), to
the extent of the amounts owed by the optionee to the Company under paragraphs 1
and 2 of this section.
4. Board Discretion. The optionee may be released from the obligations
under this forfeiture section only if the Board of Directors, or its duly
appointed agent, determines in its sole discretion that such action is in the
best interests of the Company.
EXHIBIT 11
COMPUTATION OF NET INCOME PER COMMON SHARE
DECEMBER 31
-----------
1997 1996 1995
---- ---- ----
NET INCOME (LOSS) (2,259,251) $ 68,279 $ (581,864)
WEIGHTED AVERAGE OF
COMMON SHARES
OUTSTANDING 1,604,163 1,608,163 1,550,685
---------- ---------- ----------
BASIC NET INCOME (LOSS)
PER COMMON $ (1.41) $ .04 $ (.37)
========== ========== ==========
For the years ended December 31, 1997, 1996 and 1995 there was no dilutive
effect for stock options.
CRJ\EXHIB11
PHOTO CONTROL
CORPORATION
1997
ANNUAL REPORT
<PAGE>
BUSINESS DESCRIPTION
Photo Control Corporation designs, manufactures, and markets
professional cameras, package printers, electronic flash equipment and
photographic accessories. The principal market for the camera equipment is the
sub-segment of the professional photography market which requires high-volume
equipment, such as school photographers. The market for photographic package
printers is photographic processing labs which specialize in producing
photographic color print packages such as wedding and school photography. The
market for the electronic flash equipment extends to all professional and to
more experienced amateur photographers. The geographic area in which the
equipment is marketed consists of the entire United States and to some foreign
countries. Marketing personnel are full-time employees of the Company.
CORPORATE COMMUNICATIONS
Requests for annual, and Form 10-K
reports or other Company financial communications
should be directed to:
Investor Relations
Photo Control Corporation
4800 Quebec Ave. N.
Minneapolis, MN 55428
The above reports will be mailed without charge.
CORPORATE OFFICES
Photo Control Corporation
4800 Quebec Ave. N.
Minneapolis, MN 55428
(612) 537-3601
<PAGE>
Dear Shareholders:
I became the President and CEO of your company on July 1, 1997. I am very
pleased to be on board.
Photo Control experienced a significant loss in 1997 due primarily to decreased
sales and major changes undertaken within the Company to position it for future
success and growth. The decrease in sales occurred in all three of the Company's
product lines. Regarding major business changes in 1997, the Norman Enterprises
flash equipment manufacturing operations in Burbank, California, were
consolidated with the camera and printer product line operations in the
Minneapolis facility. In addition to the moving expense of $99,000, the Company
incurred substantial cost to shut down the manufacturing in Burbank and to start
up again in Minneapolis. The Company also performed a complete review of all
product lines and wrote off $1,260,000 in inventory that was obsolete or slow
moving.
Even though the industry is not in an exciting growth cycle at the present time,
we at Photo Control are excited about making your company a success for the
following reasons:
* The consolidation of all product lines will reduced
administrative and engineering costs and should significantly
decrease our manufacturing expenses.
* Our new ZIII camera is the long-roll camera of the future. And
we are now manufacturing the ZIII cameras with less waste and
greater efficiencies.
* We are now selling directly to camera and lighting dealers. We
believe that direct selling will bring us closer to our
customers and, therefore, make us better and faster at
responding to their needs. Also, our sales effort is more
efficient in that we have one sales force selling these product
lines.
* We are excited about new product possibilities in our Norman
line-up of products. And we plan to make existing products
better and improve the margins.
* We have no debt.
A highlight of the year was the forming of a strategic alliance with Bremson,
Inc. of Kansas City. Bremson is a manufacturer of professional photographic lab
equipment and develops and markets related software. Bremson will be marketing,
selling and servicing our Nord printer product line. This alliance opens the
door to the professional photographic lab market, a market which Photo Control
has not successfully penetrated. We are also working very closely with Bremson
and other companies on a complete system for the professional photographer, the
professional lab and the customer of the professional photographer. We have
named this the "Shoot to Ship" system. This system was just unveiled at the
Photo Marketing Association convention on February 12-15, 1998, in New Orleans.
We are committed to do our best to increase your company's value, to give our
customers the quality products and service they need, and to increase the
productivity of each of us as employees of Photo Control Corporation.
Sincerely,
John R. Helmen
President & CEO
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 10,423,244 $ 14,211,920 $ 14,698,526 $ 17,590,481 $ 17,809,220
Net Income (Loss) (2,259,251) 68,279 (581,864) 459,290 843,479
Net Income (Loss) Per Share (1.41) .04 (.37) .28 .49
Return on Sales (21.7)% .5% (4.0)% 2.6% 4.7%
Return on Beginning Net Worth (24.5)% .7% (6.1)% 4.9% 9.6%
Return on Beginning Assets (20.0)% .5% (4.8)% 3.6% 6.7%
Working Capital 5,166,898 $ 6,351,386 $ 6,133,435 $ 6,378,530 $ 6,994,937
Plant and Equipment 1,879,280 3,441,430 3,614,104 3,813,339 3,692,698
Total Assets 8,181,990 11,269,911 12,595,111 12,064,139 12,661,072
Long-Term Debt 0 530,000 600,000 670,000 1,551,590
Shareholders' Equity 6,967,832 9,227,083 9,172,308 9,509,595 9,318,098
Book Value Per Share 4.34 5.75 5.70 6.28 5.99
Shares Outstanding 1,604,163 1,604,163 1,608,163 1,514,813 1,556,155
</TABLE>
STOCK MARKET INFORMATION
The Company's Common Stock was listed on the National Association of Securities
Dealers Automated Quotation System (NASDAQ) on the National Market System under
the symbol PHOC until 1998 when it was moved to the NASDAQ Small-Cap Issues
because it did not meet the aggregate market value requirement. The Company has
never paid any cash dividends. It intends to retain earnings to finance the
development of its business. Shareholders of record on December 31, 1997
numbered 427. The Company estimates that an additional 900 shareholders own
stock held for their account at brokerage firms and financial institutions. The
following table sets forth the high and low transactions for the eight fiscal
quarters ending during the years set forth below. The source of the quotations
is the National Association of Securities Dealers Inc. Monthly Statistical
Report.
1997 1996
----------------------------------------------
QUARTER HIGH LOW HIGH LOW
- ------- ---- --- ---- ---
March 31 4 3/8 3 1/8 4 1/8 3 3/8
June 30 3 3/4 3 3 7/8 3 1/4
September 30 3 1/2 2 1/2 5 1/2 3 1/4
December 31 3 2 1/4 3 15/16 3 1/8
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Photo Control Corporation
We have audited the accompanying consolidated balance sheets of Photo
Control Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of changes in stockholders' equity, operations
and cash flows for each of the three years in the period ended December 31,1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Photo
Control Corporation and subsidiaries as of December 31, 1997 and 1996 and the
consolidated results of operations and cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Minneapolis, Minnesota Virchow, Krause & Company, LLP
January 30, 1998
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Photo Control Corporation is a manufacturer of professional photographic
equipment with three major product lines; long-roll cameras, photographic
package printers and electronic flash equipment. The cameras and electronic
flash equipment are used primarily for portrait, commercial and school
photography. The package printers are used by photographic processing labs which
specialize in producing color print packages such as wedding and school
photography.
In recent years there has been a consolidation in the markets served by our
equipment, resulting in excess capacity and sales to fewer customers. In
addition, the technology related to many areas of image processing is rapidly
changing and as a result, customers are reluctant to purchase new equipment.
Because of declining sales and profits since 1993, the Norman Enterprises, Inc.
flash equipment facility in California was sold and its manufacturing operations
consolidated into the camera and package printer operations in Minneapolis
during 1997. All sales and marketing functions were combined and the use of
independent sales representatives discontinued. All products are sold by
employees with exception of package printer line products which are sold by
Bremson, Inc., an unaffiliated professional photographer supplier.
The Company anticipates that, because of the above described restructuring and
related cost reductions future profit margins will improve. In addition, over
the past several years, the company has manufactured OEM products for the
professional photographic market in all three product lines. It is expected that
sales of these products will continue over the next several years but the sales
amount is uncertain.
RESULTS OF OPERATIONS
The following table presents selected items from the Company's Consolidated
Statements of Operations expressed as percentages of sales for the year
indicated.
YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
---- ---- ----
Sales 100.0% 100.0% 100.0%
Gross Margin 21.6 28.6 26.6
Marketing & Administrative 27.1 19.7 23.0
Research, Development & Engineering 10.1 7.8 8.9
Interest .5 .5 .7
Provision for Inventory Losses 12.1
Moving Cost .9
Gain on Sale of Building (6.1)
Income (Loss) Before Taxes (23.0) .6 (6.0)
Net Income (Loss) (21.7) .5 (4.0)
SALES
Sales in 1997 decreased by $3,788,000 or 26.7% as compared to 1996. Of this
decrease, $2,510,000 is attributable to the electronic flash equipment product
line. Sales of OEM flash equipment equipment to three customers declined by
$1,487,000. These customers are in various phases of their replacement or
expansion plans which results in the variable nature of these sales. Sales of
flash equipment declined $501,000 in the fourth quarter of 1997 compared to
1996. In October 1997, the production of the electronic flash equipment was
moved from California to Minnesota and because of the required shut down and
unexpected delays, products were not available for shipment. The balance of the
$522,000 sales decline is related to dealer sales which in recent years have
been very competitive and price sensitive.
Sales of the camera product line declined $836,000 in 1997 as compared to 1996.
Sales to one major customer declined $706,000 because of the completion of a
multi-year contract to this customer in 1996. In 1997, a new zoom camera was
introduced; however, due to engineering and production delays, sales lagged
behind expectations. It is anticipated that future annual sales of this new unit
will increase over 1997.
<PAGE>
Sales of the package printer line decreased by $442,000 as compared to 1996. The
market for package printers is very saturated and unless new innovative products
are introduced it is expected that the market will continue to decline. In 1997,
Bremson, Inc., an unaffiliated professional photographer supplier, began to sell
and market the package printers. A joint effort is underway with Bremson to
upgrade the product line to make it more attractive for multiple application.
Consolidated sales in 1996 decreased by $486,606 or 3.3% from 1995. Sales to a
major customer decreased by $927,000 in 1996 from 1995. A substantial portion of
the sales to this customer consisted of a dual-ported zoom lens camera that were
made under a multi-year contract. Sales of professional cameras declined by
$936,000 in 1996 from 1995, of which $644,000 is attributable to the customer
discussed above. The standard zoom lens camera comprised the majority of the
sales for the professional camera line. Because this unit had been sold for over
twelve years, the market had in 1996 become somewhat saturated and a new camera
was introduced in 1997. Sales of the printer line decreased by $494,000 in 1996
as compared to 1995, of which $326,000 is attributed to the major customer
previously discussed. Sales of flash equipment increased $943,000 in 1996 from
1995 which is attributed to higher OEM equipment sales. Two customers accounted
for substantially all the OEM sales. Prices of the regular dealer flash
equipment were raised five percent in 1996 and the camera products prices were
raised four percent.
GROSS MARGINS
The gross margins were 21.6%, 28.6% and 26.6% for the years ended December 31,
1997, 1996 and 1995, respectively. Due to the substantial decline in sales
volume during 1997, manufacturing overhead could not be completely absorbed as
compared to 1996 resulting in a 3% drop of the 7% decline in gross margins. The
move of the electronic flash equipment product line from California to Minnesota
caused numerous inefficiencies in closing down and restarting production of the
product line. The inefficiencies impacted all three product lines due to the
integration of manufacturing functions. The gross margin increase in 1996 from
1995 primarily reflects the price increases implemented during 1996. The Company
anticipates that the gross margin in future periods will approximate the 1995
level. However, gross margins are expected to fluctuate on a quarterly basis
because of product mix changes and the seasonality of sales.
MARKETING AND ADMINISTRATIVE
Marketing and administrative expenses were $2,820,346, $2,804,186 and $3,377,883
for the years ended December 31, 1997, 1996 and 1995, respectively. As a
percentage of sales, marketing and administrative expenses have changed to 27.1%
in 1997 from 19.7% in 1996 and from 23.0% in 1995. The restructuring previously
discussed was completed at the end of the fourth quarter. It is anticipated that
these expenses will decrease by approximately $700,000 in 1998 due to the
reorganization. The decrease in 1996 from 1995 reflects lower marketing expenses
due to a revision in the commission programs and reduced compensation cost.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company believes that timely development of new products and features is
required to maintain and enhance its competitive position. Accordingly, the
Company is committed to an aggressive level of research, development and
engineering spending. Research, development and engineering expenses were
$1,055,843 $1,107,985 and $1,309,738 for the years ended December 31, 1997, 1996
and 1995, respectively. Because of the rapidly changing technology in the image
processing market, spending is expected to continue at the same level in 1998 as
1997. The 1996 expense decrease of $201,753 is primarily attributable to the
printer product line. A number of projects were completed and the related use of
outside engineers declined.
INTEREST
Interest expense decreased to $56,860 for the year ended December 31, 1997 as
compared to $67,818 for the year ended December 31, 1996 and $108,387 for the
year ended December 31, 1995. Upon the sale in 1997 of the building in
California, the Industrial Development Revenue Bond secured by the building was
paid off. Also, excess cash from the sale was to used to pay off the line of
credit in November 1997. The decrease in 1996 from 1995 reflects lower usage of
the Company's line of credit during 1996.
<PAGE>
QUARTERLY RESULTS, GAIN ON SALE OF BUILDING, PROVISION FOR INVENTORY
OBSOLESCENCE, AND MOVING COSTS
Historically, second and third quarter sales are relatively high which reflects
the seasonal demand for the Company's products. 1997, 1996 and 1995 reflected
the typical seasonality. In the fourth quarter of 1997 the building in
California was sold at a gain of $645,671. With the exception of space leased
for a sales and service facility, all of the California operations were moved to
Minnesota in October and November of 1997. A complete review was made of the
inventory for all three product lines. It was determined that the electronic
flash equipment line had obsolete inventory of $828,000 and the printer product
line $432,000. Approximately $200,000 of the electronic flash equipment obsolete
inventory relates to inventory loaned to schools over the past several years and
although useable by the schools, cannot be resold. Because of the changing
technology it was determined that certain electronic flash equipment and package
printer products should be discontinued and replaced with new or updated
products. Moving costs of $99,589 were incurred for transfer of inventory and
equipment from California to Minnesota and for severance pay to those employees
who worked through the date of the move.
INCOME TAXES
The company will receive a refund $197,000 in 1998 for losses incurred in 1997
that can be carried back to previous open tax years. In addition there is
$400,000 of Federal tax loss carry forward to offset against future taxable
income. Because of uncertainty related to the realization of the tax benefit,
the company has placed a $748,000 valuation allowance against its deferred tax
asset of $948,000. It is expected that the net tax asset of $200,000 will be
realized in future periods through profitable operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased to $808,169 at December 31, 1997 from $736,031 at December 31,
1996. Working capital decreased to $5,166,898 at December 31, 1997 from
$6,351,386 at December 31, 1996. Proceeds from the sale of the building was
$2,105,191 which was used to pay off the Industrial Development Revenue Bond
balance of $565,000 and to pay off the open line of credit which had a balance
of $600,000 in November 1997, the date of sale. The net investment in plant and
equipment decreased to $1,879,280 at December 31, 1997 from $3,441,430 at
December 31, 1996 because of the building sale. Inventories have declined to
$4,322,603 at December 31, 1997 from $5,804,503 at December 31, 1996,
attributable to both the increase in the reserve for inventory obsolescence and
the reduction in inventory due to decreased sales volume.
Capital expenditures were $290,461 in 1997, $207,009 in 1996 and $231,817 in
1995. The Company estimates that additional capital investments for property and
equipment will be approximately $300,000 in 1998.
The Company has an unsecured line of credit for $1,500,000 at the prime rate of
interest. At December 31, 1997, there were no borrowings under the line.
The Company has repurchased its common stock in the amounts of $13,504 and
$285,320 for the years ended December 31, 1996, and 1995, respectively. The
Board of Directors had authorized the purchase of common stock of up to a total
of $2,000,000. At December 31, 1997, $388,000 of this authorized amount remained
available to repurchase common stock. The Company has not paid any cash
dividends on its common stock and currently expects that any future earnings
will be retained for use in its business.
The Company believes that its current cash position, its cash flow from
operations and amounts available from bank borrowing should be adequate to meet
its anticipated cash needs for working capital and capital expenditures during
1998.
CAUTIONARY STATEMENT
Statements included in this management's discussion and analysis of financial
condition and results of operations, in the letter to shareholders, elsewhere in
this annual report, in the Company's Form 10-K and in future filings by the
company with the Securities and Exchange Commission which are not historical in
nature are identified as "forward looking statements" for the purposes of the
safe harbor provided by Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. The Company
cautions readers that forward looking statements, including without limitations,
those relating to the Company's future business prospects, revenues, working
capital, liquidity, capital needs, interest costs, and income, are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward looking statements. The risks and
uncertainties include, but are not limited to, economic conditions, product
demand and industry capacity, competitive products and pricing, manufacturing
efficiencies, new product development and market acceptance, the regulatory and
trade environment, and any other risks indicated.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales ................................... $ 10,423,244 $ 14,211,920 $ 14,698,526
Cost of Sales ............................... 8,175,528 10,140,652 10,783,382
------------ ------------ ------------
Gross Profit ................................ 2,247,716 4,071,268 3,915,144
Expenses
Marketing and Administrative .......... 2,820,346 2,804,186 3,377,883
Research, Development and Engineering . 1,055,843 1,107,985 1,309,738
Interest .............................. 56,860 67,818 103,387
Provision for Inventory Losses (Note 3) 1,260,000
Moving Cost ........................... 99,589
Gain on Sale of Building .................... (645,671)
------------ ------------ ------------
4,646,967 3,979,989 4,791,008
Income (Loss) Before Income Taxes ........... (2,399,251) 91,279 (875,864)
Income Tax Provision (Benefit) (Note 6) .... (140,000) 23,000 (294,000)
------------ ------------ ------------
Net Income (Loss) ........................... $ (2,259,251) 68,279 $ (581,864)
============ ============ ============
Net Income (Loss) Per Common Share (Note 2) . $ (1.41) $ 04 $ (.37)
============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------
NUMBER ADDITIONAL
OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ........ 1,514,813 $ 121,185 $ 927,645 $ 8,460,765
Repurchase of Stock ............... (63,750) (5,100) (48,450) (231,770)
Stock Options Exercised (Note 8) .. 148,752 11,900 484,605 --
Contribution to Profit Sharing Plan 8,348 668 32,724 --
Net Income (Loss) ................. -- -- -- (581,864)
----------- ----------- ----------- -----------
Balance at December 31, 1995 ........ 1,608,163 128,653 1,396,524 7,647,131
Repurchase of Stock ............... (4,000) (320) (3,040) (10,144)
Net Income ........................ -- -- -- 68,279
----------- ----------- ----------- -----------
Balance at December 31, 1996 ........ 1,604,163 $ 128,333 $ 1,393,484 $ 7,705,266
Net Income (Loss) ................ -- -- -- (2,259,251)
----------- ----------- ----------- -----------
Balance at December 31, 1997 ........ 1,604,163 $ 128,333 $ 1,393,484 $ 5,446,015
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------
ASSETS 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and Cash Equivalents ................................ $ 808,169 $ 736,031
Accounts Receivable, Less Allowance of $95,000 and $92,000 505,373 522,279
Other Receivables ........................................ 2,700 2,700
Inventories (Notes 2 and 3) .............................. 4,322,603 5,804,503
Prepaid Expenses ......................................... 201,899 270,101
------------ ------------
Total Current Assets .................................. 5,840,744 7,335,614
------------ ------------
Investments and Other Assets
Cash Value of Life Insurance ............................. 261,966 238,867
Deferred Income Taxes (Note 6) ........................... 200,000 254,000
------------ ------------
Total Investments and Other Assets .................... 461,966 492,867
------------ ------------
Plant and Equipment (Note 2)
Land and Building ........................................ 2,204,871 4,240,777
Machinery and Equipment .................................. 3,303,719 3,363,630
Accumulated Depreciation ................................. (3,629,310) (4,162,977)
------------ ------------
Total Plant and Equipment ............................. 1,879,280 3,441,430
------------ ------------
$ 8,181,990 $ 11,269,911
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------
Current Liabilities
Current Maturities of Long-Term Debt (Note 4) ............ $ $ 111,296
Accounts Payable ......................................... 288,724 453,572
Accrued Payroll and Employee Benefits .................... 270,214 303,320
Accrued Expenses ......................................... 114,908 116,040
------------ ------------
Total Current Liabilities ............................. 673,846 984,228
------------ ------------
Long-Term Debt (Note 4) ..................................... 530,000
------------ ------------
Other Accrued Expense (Note 5) .............................. 540,312 528,600
------------ ------------
Stockholders' Equity (Note 8)
Common Stock
Par Value $.08 Authorized 5,000,000
Shares Issued 1,604,163 ............................... 128,333 128,333
Additional Paid-In Capital ............................... 1,393,484 1,393,484
Retained Earnings ........................................ 5,446,015 7,705,266
------------ ------------
Total Stockholders' Equity ............................ 6,967,832 9,227,083
------------ ------------
$ 8,181,990 $ 11,269,911
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (Loss) from operations .............. $(2,259,251) $ 68,279 $ (581,864)
Items not affecting cash-
Depreciation ................................ 348,755 374,797 401,444
Amortization ................................ -- -- 19,352
Deferred compensation ....................... 57,260 30,726 26,453
(Gain) Loss on sale of building and equipment (626,706) 3,886 8,774
Deferred income taxes ....................... 54,000 78,000 (37,000)
Provision for inventory obsolescence ........ 1,381,332 191,000 186,000
Payment of deferred compensation ............... (45,548) (24,620) (24,620)
Change in operating assets and liabilities:
Receivables .............................. 16,906 753,267 249,056
Inventories .............................. 100,568 662,833 (1,116,976)
Prepaid expenses ......................... 68,202 81,162 (170,739)
Accounts payable ......................... (164,848) (931,258) 602,380
Accrued expenses ......................... (34,238) 84,497 (95,566)
----------- ----------- -----------
Net cash provided (used) by
operating activities ................ (1,103,568) 1,372,569 (533,306)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of building and equipment ... 2,130,562 1,000 20,834
Additions to plant and equipment ............... (290,461) (207,009) (231,817)
Additions to cash value of life insurance ...... (23,099) (23,604) (21,228)
----------- ----------- -----------
Net cash provided (used)
in investing activities .............. 1,817,002 (229,613) (232,211)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of long-term debt .................... (641,296) (89,320) (56,996)
Borrowing (repayment) on line of credit-net .... -- (450,000) 450,000
Proceeds from stock options exercised .......... -- -- 496,505
Repurchase of Company's common stock ........... -- (13,504) (285,320)
----------- ----------- -----------
Net cash provided (used) by
financing activities ............... (641,296) (552,824) 604,189
----------- ----------- -----------
Change in cash and cash equivalents ............... 72,138 590,132 (161,328)
Cash and cash equivalents at beginning of year .... 736,031 145,899 307,227
----------- ----------- -----------
Cash and cash equivalents at end of year .......... $ 808,169 $ 736,031 $ 145,899
=========== =========== ===========
Supplemental disclosure information:
Income tax payments ............................ $ 2,239 $ 176,000 $ 20,900
=========== =========== ===========
Income tax refunds ............................. $ 207,206 $ 360,233 $ 170,562
=========== =========== ===========
Interest paid .................................. $ 56,860 $ 67,818 $ 103,387
=========== =========== ===========
</TABLE>
Non-Cash Transaction:
The Company contributed 8,343 shares of common stock to its profit sharing
plan at a value of $33,392 during the year ended December 31, 1995.
See accompanying Notes to Consolidated Financial Statements
<PAGE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS DESCRIPTION
Photo Control Corporation (the Company) designs, manufactures and markets
professional cameras, photographic package printers, electronic flash equipment,
and related photographic accessories.
The principal market for the Company's long-roll camera equipment is the
sub-segment of the professional photography market requiring high-volume
equipment, such as elementary and secondary school photographers. The market
with respect to electronic flash equipment is broader, extending to all
professional and commercial photographers and to experienced amateur
photographers. The market for photographic package printers is photographic
processing labs which specialize in producing photographic color print packages
such as those often produced for weddings and school photography. The geographic
market in which the Company competes with respect to long-roll camera equipment,
flash equipment, and printers consists of the entire United States and, to a
lesser extent, some foreign countries.
In 1997, sales of camera equipment was the highest followed by flash equipment
and printer sales; however, sales in all three product lines declined from 1996.
As a result of the sales decrease and operating losses the flash equipment
operation was moved from California to Minnesota and both the flash equipment
and printer operation consolidated into the camera operation. The land and
building in California was sold at a gain of $645,671 and the related debt of
$565,000 paid off.
There has been a consolidation of school photography and studio portrait
photography in recent years which has concentrated the Company's sales to fewer
customers. It is expected that this trend will continue. In 1997, two customers
accounted for 13.3% and 8.4% of the Company's sales and in 1996 for 11.0% and
14.3%, respectively. Due to the rapidly changing technology related to many
areas of image processing, the company has discontinued manufacturing of many
products and is replacing them with newer, updated equipment.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Norman Enterprises,
Inc. and Nord Photo Engineering, Inc. All material inter-company transactions
and account balances have been eliminated.
USE OF ESTIMATES - Management uses estimates and assumptions in preparing
financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Actual results could vary from the estimates
that were assumed in preparing the financial statements.
REVENUE RECOGNITION - Sales are recorded when the product is shipped.
INVENTORIES - Inventories of raw materials, work in process and finished goods
are valued at the lower of cost (first-in, first-out) or market. Market
represents estimated realizable value in the case of finished goods and
replacement or reproduction cost in the case of other inventories. Because of
changing technology and market demand, inventory is subject to obsolescence. An
annual review is made of all inventory to determine if any obsolete,
discontinued or slow moving items are in inventory. Based on this review,
inventory is disposed of or an allowance for obsolescence established to cover
any future disposals.
PLANT AND EQUIPMENT - Plant and equipment are stated at cost. Depreciation is
computed primarily on the straight-line method over the estimated useful lives
of 15 to 35 years for the buildings and 3 to 7 years for machinery and
equipment. Ordinary maintenance and repairs are charged to operations, and
expenditures which extend the physical or economic life of property and
equipment are capitalized. Gains and losses on disposition of property and
equipment are recognized in operations and the related asset and accumulated
depreciation accounts are adjusted accordingly.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts for cash,
receivables, accounts payable and accrued liabilities approximate fair value
because of the short maturity of these instruments. The fair value of long-term
debt is estimated based on current rates for tax-exempt debt of similar
maturities and is not materially different than its carrying value.
<PAGE>
RESEARCH AND DEVELOPMENT - Expenditures for research and development are charged
against operations as incurred.
INCOME TAXES - Deferred income taxes are provided for expenses recognized in
different time periods for financial reporting and income tax purposes. These
differences consist primarily of deferred compensation that is not deductible
for taxes and inventory which has a higher tax basis than for financial
reporting purposes.
CASH EQUIVALENTS - The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be a cash equivalent. Cash
and cash equivalents consist of money market mutual funds, short-term securities
and bank balances. The Company at December 31, 1997 and periodically throughout
the year has maintained balances in various operating and money market accounts
in excess of federally insured limits.
NET INCOME PER SHARE - Net income per common share was based on the weighted
average number of common shares outstanding during the period when computing the
basic earnings per share. When dilutive, stock options are included as
equivalents using the treasury stock market method when computing the diluted
earnings per share. For the years ended December 31, 1997, 1996 and 1995 there
was no dilutive effect for stock options..
NOTE 3. INVENTORIES
The following inventories were on hand at December 31:
1997 1996 1995
---- ---- ----
Raw Materials............. $2,666,732 $3,851,706 $4,272,903
Work in Process........... 492,833 559,321 819,686
Finished Goods............ 1,163,038 1,393,476 1,565,747
--------- --------- ---------
$4,322,603 $5,804,503 $6,658,336
========= ========== ==========
Due to the changing market conditions discussed in Note 1, a thorough review was
made of the inventory in all three product lines. As a result, a provision for
inventory losses of $1,260,000 pertaining to the electronic flash and printer
product lines was charged against operations in 1997. At year end December 31,
1997 the reserve for inventory obsolescence is $1,150,000.
NOTE 4. LONG-TERM DEBT AND SHORT-TERM LINE OF CREDIT
Long-term debt at each year ended December 31, consisted of the following:
1997 1996
---- ----
65% of Prime Rate Industrial Development Revenue Bond $ -- $600,000
Other Notes Payable ................................. -- 41,296
-------- --------
-- 641,296
Less Amount Due Within One Year ..................... -- 111,296
-------- --------
Amount Due After One Year ........................... -- $530,000
======== ========
The Company has a $1,500,000 unsecured line of credit agreement at the prime
rate of interest. The following summarizes the borrowings under the line of
credit during each year ended December 31:
1997 1996
---- ----
Outstanding balance at year end ........ $ -- $ --
Maximum balance at any month end ....... 600,000 750,000
Average month end balance .............. 253,846 338,462
Average interest rate .................. 8.5% 8.3%
NOTE 5. COMMITMENTS
The Company has deferred compensation agreements with key management personnel
which is funded by life insurance. Under the agreements, covered individuals
become vested immediately upon death or if employed at age 65. Compensation
costs are recognized over the period of service and recorded as other accrued
expense.
The company has a non-cancelable operating lease commitment for a sales and
service facility in Burbank, California. The lease expires in 2002 with annual
minimum rents of $36,000. The company has an employment agreement with the
president of Norman Enterprises, Inc. through the year 2000 in the amount of
$100,000 annually plus commission on certain sales.
<PAGE>
NOTE 6. INCOME TAXES
The income tax provision shown in the statement of operations is detailed below
for each year ended December 31:
Current 1997 1996 1995
---- ---- ----
Federal....................... (197,000) $ (58,000) $ (260,000)
State......................... 3,000 3,000 3,000
Deferred .......................... 54,000 78,000 (37,000)
------ ------ --------
(140,000) $ 23,000 $ (294,000)
========= ========= ===========
The income tax provision for continuing operations varied from the federal
statutory tax rate as follows for each year ended December 31:
1997 1996 1995
---- ---- ----
U.S. Statutory Rate....................................(34.0)% 34.0% (34.0)%
Surtax Exemption....................................... (12.9)
State Income Taxes, Net of Federal Income Tax Benefit.. (3.0) 2.7 (.2)
Amortization of Goodwill............................... .7
Miscellaneous Items.................................... 1.4 (.3)
Valuation Allowance.................................... 31.2 (.6)
------ ----- -------
(5.8%) 25.2% (33.6)%
====== ===== =======
The Company does not file on a unitary tax basis in all states. As a result
certain losses which are offset against income on a federal tax basis cannot be
used in computing taxes in some states, which caused a lower than expected tax
benefit for the year ended December 31, 1997 and 1995. The company has Federal
and state tax loss carry forwards of approximately $400,000 and 1,400,000,
respectively, which expire in varying amounts from 1998 through 2012.
The following summarizes the tax effects of the significant temporary
differences which comprise the deferred tax asset for each year ended December
31:
1997 1996
---- ----
Inventory Costs 495,000 $ 269,000
Deferred Compensation 137,000 111,000
Bad Debt Reserves 34,000 28,000
Accrued Benefits 47,000 29,000
Accrued Costs 41,000
Net Operating Loss Carry forward 194,000
Less Accelerated Depreciation (183,000)
--------- ---------
Net Deferred Tax Asset 948,000 254,000
Valuation Allowance (748,000)
--------- ---------
Net Deferred Income Tax $200,000 $ 254,000
========= =========
NOTE 7. PROFIT SHARING PLAN
The contribution to the Company's profit sharing plan, which covers qualified
full-time employees was $12,000 for the year ended December 31, 1996. No
contributions were made for the years ended December 31, 1997 and 1995.
NOTE 8. STOCK OPTIONS
Non-qualified stock options to purchase shares of the Company's common stock
have been granted to certain officers, directors, and key employees. Option
prices of all the grants were not less than the fair market value of the
Company's common stock at dates of grants.
The Company has elected to account for non-qualified stock options under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no compensation expense
has been recognized for stock options.
<PAGE>
The following summarizes the changes in the options for the years ended December
31: (Exercise prices are computed on a weighted-average basis).
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- ----------------------
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at Beginning of Year........ 239,375 4.47 137,375 $5.08 260,127 $3.92
Granted............................. 25,000 3.50 115,000 $3.73 29,000 $4.75
Exercised........................... - - (148,752) 2.80
Expired............................. (57,375) 4.70 (13,000) $4.47 (3,000) $6.00
-------- -------- ------
Balance at End of Year.............. 207,000 4.29 239,375 $4.47 137,375 $5.08
======= ======= =======
</TABLE>
The following summarizes the outstanding and exercisable options as of December
31, 1997 and the potential realizable value assuming annual rates of stock price
appreciation for the option term:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OPTIONS OUTSTANDING EXERCISABLE OPTIONS OF STOCK PRICE APPRECIATION
- --------------------------------------------------------------------- FOR OPTION TERM
RANGE NUMBER OF REMAINING EXERCISE NUMBER EXERCISE ---------------------------
OF PRICE SHARES LIFE (YEARS) PRICE OF SHARES PRICE 5%($) 10%($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$5.00 71,000 .7 $5.00 71,000 $5.00 98,100 216,700
$5.75 10,000 1.6 $5.75 6,667 $5.75 15,900 35,100
$4.75 10,000 2.5 $4.75 3333 $4.75 13,100 29,000
$3.12 to $3.75 91,000 3.4 $3.74 93,900 207,600
$3.50 25,000 4.4 $3.50 24,200 53,400
------ ------
207,000 81,000
======= ======
</TABLE>
Had compensation cost for options granted during the three years ended December
31, 1997 been measured by the fair value based method, Company expense would
have increased by approximately $99,000, $53,000 and $16,000, respectively. The
option costs measured using the fair value based method reduce earnings per
share by $.06, $.03 and $.01, respectively. The weighted average fair value of
options granted was estimated using the Black-Scholes option pricing model and
assuming a 6.5% risk-free interest rate, 50% expected volatility, five year
option term and no anticipated dividends.
NOTE 9. MAJOR CUSTOMER
During the years ended December 31, 1997, 1996, and 1995, the Company derived
8.4%, 14.3%, and 20.2%, respectively, of its sales from one unaffiliated
customer. Also, a second unaffiliated customer accounted for 13.3% and 11.0% of
sales for the years ended December 31, 1997 and 1996, respectively.
NOTE 10. QUARTERLY INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial information for
the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1ST QTR. 2ND QTR 3RD QTR. 4TH QTR. TOTAL
-------- ------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Sales ..................... $ 2,246,642 $ 2,440,797 $ 3,876,768 $ 1,859,037 $10,423,244
Gross Operating Earnings .. 407,323 585,609 789,278 465,506 2,247,716
Net Income (Loss) ......... (524,464) (424,045) (195,263) (1,115,479) (2,259,251)
Net Income (Loss) Per Share (.33) (.26) (.12) (.70) (1.41)
YEAR ENDED DECEMBER 31, 1996 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL
-------- -------- -------- -------- -----
Sales ..................... $ 3,260,981 $ 4,466,143 $ 4,618,348 $ 1,866,448 $14,211,920
Gross Operating Earnings .. 839,392 1,574,513 1,435,081 222,282 4,071,268
Net Income (Loss) ......... (196,041) 330,320 224,252 (290,252) 68,279
Net Income (Loss) Per Share (.12) .20 .14 (.18) .04
YEAR ENDED DECEMBER 31, 1995 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL
-------- -------- -------- -------- -----
Sales ..................... $ 3,044,080 $ 3,496,583 $ 4,858,565 $ 3,299,298 $14,698,526
Gross Operating Earnings .. 770,677 1,014,055 1,417,375 713,037 3,915,144
Net Income (Loss) ......... (396,237) (45,355) 167,427 (307,699) (581,864)
Net Income (Loss) Per Share (.25) (.03) .11 (.20) (.37)
</TABLE>
<PAGE>
CORPORATE DIRECTORY CORPORATE OFFICERS
DIRECTORS JOHN R. HELMEN
Chief Executive Officer
LESLIE A. WILLIG and President
Chairman
PATRICK J. GILLIGAN
THOMAS J. CASSADY Executive Vice President
Retired President of
Merrill Lynch Pierce Fenner & Smith CURTIS R. JACKELS
Vice President - Treasurer
GEORGE A. KIPROFF
Retired President of MARK SIMONETT
DEK Identification Systems Secretary
JAMES R. LOOMIS
Retired President of
Magnavox Electronic System Co.
LEGAL COUNSEL
JOHN R. HELMEN Gray, Plant, Mooty, Mooty &
Chief Executive Officer and President Bennett, P.A.
Minneapolis, Minnesota
JOE M. KILGORE
Partner in Law Firm of INDEPENDENT PUBLIC ACCOUNTANTS
McGinnis, Lochridge and Kilgore Virchow, Krause & Company, LLP
Minneapolis, Minnesota
STOCK TRANSFER AGENT
Norwest Bank Minnesota, N.A.
South St. Paul, Minnesota
STOCK LISTED
NASDAQ
Stock symbol: PHOC
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
NAME OF SUBSIDIARY STATE OF INCORPORATION PERCENT OWNED
- ------------------ ---------------------- -------------
Norman Enterprises, Inc. California 100%
Nord Photo Engineering, Inc. Minnesota 100%
EXHIBIT 23
AUDITOR'S CONSENT AND REPORT ON SCHEDULES
Board of Directors and
Stockholders
Photo Control Corporation
We hereby consent to the incorporation by reference in this Annual Report on
Form 10-K of Photo Control Corporation for the year ended December 31, 1997, of
our report, dated January 30, 1998, appearing in the Company's 1996 Annual
Report to Shareholders. We also consent to the incorporation by reference of
such report in the registration statements on Form S-8 for the Photo Control
Stock Option Plan.
In the course of our audit of the financial statements referred to in our
report, dated January 30, 1998, included in the Company's 1997 Annual Report to
Shareholders, we also audited the supporting schedule listed in Item 14(a)(2) of
this Annual Report on Form 10-K. In our opinion, the 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.
January 30, 1998 VIRCHOW KRAUSE, & COMPANY, LLP
Minneapolis, Minnesota
EXHIBIT 25
POWER OF ATTORNEY
CONCERNING
FORM 10-K FISCAL 1997
Each person whose signature appears below constitutes and appoints
LESLIE A. WILLIG his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in his name, place, and stead,
in any and all capacities to sign the Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, and any or all amendments to such Annual Report on
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue thereof.
Signature Date
- --------- ----
/s/John R. Helmen, Chief Executive Officer,
President and Director (Principal executive officer) March 13, 1998
/s/Leslie A. Willig March 13, 1998
Leslie A. Willig, Chairman
/s/Curtis R. Jackels March 13, 1998
Curtis R. Jackels, Vice President
and Treasurer (principal financial and principal
accounting officer)
/s/George A. Kiproff March 13, 1998
George A. Kiproff, Director
/s/James R. Loomis March 13, 1998
James R. Loomis, Director
/s/Thomas J. Cassady March 13, 1998
Thomas J. Cassady, Director
/s/Joe M. Kilgore March 13, 1998
Joe M. Kilgore, Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 808,169
<SECURITIES> 0
<RECEIVABLES> 508,073
<ALLOWANCES> 0
<INVENTORY> 4,322,603
<CURRENT-ASSETS> 5,840,744
<PP&E> 5,508,590
<DEPRECIATION> 3,629,310
<TOTAL-ASSETS> 8,181,990
<CURRENT-LIABILITIES> 673,846
<BONDS> 0
0
0
<COMMON> 128,333
<OTHER-SE> 6,839,499
<TOTAL-LIABILITY-AND-EQUITY> 8,181,990
<SALES> 10,423,244
<TOTAL-REVENUES> 10,423,244
<CGS> 8,175,528
<TOTAL-COSTS> 8,175,528
<OTHER-EXPENSES> 4,590,107
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,860
<INCOME-PRETAX> (2,399,251)
<INCOME-TAX> (140,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,259,251)
<EPS-PRIMARY> (1.41)
<EPS-DILUTED> 0
</TABLE>
