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, 1998
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, 1999 was approximately $2,511,000 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, 1999:
1,604,163
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Report to Shareholders for the year ended
December 31, 1998 are incorporated by reference into Part II.
2. Portions of the Registrant's definitive Proxy Statement to be dated April 2,
1999 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. In October 1998 the
remaining sales and service facility was closed and moved to Minneapolis.
Effective January 1, 1998 the Registrant liquidated both subsidiaries and
transferred the assets to Photo Control Corporation, the parent company.
The Registrant designs, manufactures, and markets professional Camerz
cameras, long-roll film magazines, photographic accessories, Norman electronic
flash equipment, and Nord photographic package printers.
(b) Financial Information About Industry Segments.
During the years ended December 31, 1998, 1997, and 1996, 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 Camerz professional cameras, long-roll film
magazines, photographic accessories, Norman electronic flash equipment, and Nord
photographic package printers.
The principal market for the Registrant's Camerz 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 Camerz cameras, film magazines,
Norman electronic flash and lighting equipment, and photographic accessories
through its five employee salesmen and part-time use of a service employee. Such
equipment is marketed primarily under the tradename, "Camerz" and "Norman". The
Nord printers are marketed through Bremson, Inc., an unaffiliated professional
photographic supplier. It is expected that the sales force will remain at the
current level during 1999.
(c)(1)(ii) New Products and Services. A new product sold to
photographic processing labs called the AutoCard was introduced in 1998. The
AutoCard electronically scans bar code that is on the film aperture card and
order envelope which enables the lab to automatically process the film and
order.
(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.
2
<PAGE>
(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. Patents Nos. 5,294,950 on March 15, 1994
and 5,812,895 on September 22, 1998 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.
The Registrant 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 the registered trademarks "Smart
System," "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,
is somewhat seasonal, with 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 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.
(c)(1)(vii) Single Customer. During the years ended December 31, 1998,
1997 and 1996, the company derived 15.1%, 8.4% and 14.3%, respectively, of its
sales from one unaffiliated customer, Lifetouch Inc. and its affiliates. During
the year ended December 31, 1998, 1997 and 1996, 5.7%, 13.3% and 11.0%,
respectively, of its sales were from another unaffiliated customer, CPI Corp.
3
<PAGE>
(c)(1)(viii) Backlog. The dollar amount of backlog believed by the
Registrant to be firm at the years ended December 31, 1998, 1997 and 1996, is
$6,399,000, $1,078,000 and $633,000, respectively. The Registrant anticipates
that it will be able to fill all current backlog orders during the fiscal year
ending December 31, 1999 except for $4,704,000 which is scheduled for shipment
in 2000 at the customer's request.
(c)(1)(ix) Government Contracts. No material portion of the
Registrant's 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 the Norman professional studio electronic
flash equipment competes, 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,
1998, 1997 and 1996, the Registrant spent $957,000, $1,056,000 and $1,108,000,
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 capital expenditures, earnings, or respective competitive
positions.
(c)(1)(xiii) Employees. As of December 31, 1998, the Registrant had 92
full time employees and 3 part time employees. The Registrant utilizes
subcontract personnel on a temporary basis to supplement its regular work force
which totaled 9 people as of December 31, 1998.
(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, 1998, 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.
A 5,000 square foot building in Hinckley, Minnesota, on one acre of
land is leased to a retail organization which has an option to purchase at
various points during a five year lease. Prior to 1996, the building housed the
optical manufacturing which was moved to Minneapolis.
The Registrant leases a four thousand square foot building in Burbank
which housed a service and sales department. The facility was closed in October
1998 and the activities moved to Minnesota. The building is now sublet to a
third party for the remainder of the lease term.
4
<PAGE>
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, 1998.
5
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME, AGE AND
PRESENT POSITION OF OFFICER BUSINESS EXPERIENCE
- --------------------------- -------------------
<S> <C>
John R. Helmen, 58 Mr. Helmen has been President of the Registrant since April 1997. In August
1997, the Board of Directors appointed him CEO and a director of the Registrant.
Chief Executive Officer Mr. Helmen was employed by Supra Color Labs, Inc. as Vice President, Director of
and President 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, 52 Mr. Jackels has been Vice President-Treasurer of the Registrant since August
1985 and Treasurer since November 1980. Mr. Jackels was controller from June
Vice President - 1978 to November 1980. Prior to June, 1978, Mr. Jackels was employed by two
Finance public accounting firms. Mr. Jackels is a certified public accountant and has a
Master of Business Administration degree from the University of Wisconsin.
Mark J. Simonett, 42 Mr. Simonett has served as the Registrant's General Counsel and Personnel
Director since September 1992, as Secretary since May 1993, and as Vice
Vice President and President since May 1998.
Secretary
</TABLE>
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.
6
<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 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, 1998. 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, 1998, 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) Financial Statements.
Page
----
Independent Auditor's Report............................................. *
Statements of Opera-
tions for the years ended
December 31, 1998, 1997 and 1996......................................... *
Statements of Changes
in Stockholders' Equity for the
years ended December 31, 1998, 1997
and 1996, ............................................................... *
Balance Sheets at December
31, 1998 and 1997........................................................ *
Statements of Cash Flows
for the years ended December 31,
1998, 1997 and 1996...................................................... *
- -------------------------------
*Incorporated by reference to the Registrant's Annual Report to Shareholders for
the year ended December 31, 1998, a copy of which is included in this Form 10-K
as Exhibit 13.
7
<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, 1998, 1997
and 1996................................................. 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 1998 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, 1998, a copy of which is included in this Form 10-K
as Exhibit 13.
8
<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, 1998 of
our report, dated January 26, 1999, appearing in the Company's 1998 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 26, 1999, included in the Company's 1998 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 26, 1999
Minneapolis, Minnesota
9
<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, 1998
Allowance for Doubtful
Accounts $ 95,000 $ 12,810 $ 1,985(a) $ (69,795)(d) $ 40,000
========== ========== =========== ========= ==========
Allowance for Inventory
Obsolescence $1,150,000 $ 208,110 $ 138,000(e) $ (34,110)(c) $1,462,000
========== ========== =========== ========= ==========
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
========== ========== =========== ========= ==========
</TABLE>
(a) Recoveries of amounts written off in prior years.
(b) Uncollectible accounts written off.
(c) Inventory Disposed
(d) $14,795 is uncollectable accounts written off and $55,000 is a transfer to
the Allowance for Inventory Obsolescence reserve.
(e) Transfer of $55,000 from allowance for doubtful accounts and recovery of
$83,000 of inventory previously written off but not disposed.
10
<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 12, 1999 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 12, 1999 /s/John R. Helmen
John R. Helmen, Chief Executive Officer,
President and Director
(principal executive officer)
Date: March 12, 1999 /s/ Leslie A. Willig
Leslie A. Willig, Director
Date: March 12, 1999 /s/ Curtis R. Jackels
Curtis R. Jackels, Vice President
and Treasurer (principal financial and
principal accounting officer)
Date: March 12, 1999 /s/ George A. Kiproff
George A. Kiproff, Director
Date: March 12, 1999 /s/ James R. Loomis
James R. Loomis, Director
Date: March 12, 1999 /s/ Thomas J. Cassady
Thomas J. Cassady, Director
11
<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, 1999
<TABLE>
<CAPTION>
Page Number
in Sequential
Numbering
of all Form
10-K and
Exhibit Pages
EXHIBIT -------------
- -------
<S> <C> <C>
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 **
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Page Number
in Sequential
Numbering
of all Form
10-K and
Exhibit Pages
-------------
<S> <C> <C>
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, 1998 15 to 29
23 Consent of Independent Auditors 30
25 Power of Attorney from Messrs. Willig, Jackels, Kiproff, 31
Loomis, Helmen and Cassady
27 Financial Data Schedule 32
</TABLE>
* Incorporated by reference
** Indicates management contracts or compensation plans or arrangements required
to be filed as exhibits.
13
EXHIBIT 11
COMPUTATION OF NET INCOME PER COMMON SHARE
DECEMBER 31
------------------------------------------
1998 1997 1996
---- ---- ----
NET INCOME (LOSS) $(1,017,170) $(2,259,251) $ 68,279
WEIGHTED AVERAGE OF
COMMON SHARES
OUTSTANDING 1,604,163 1,604,163 1,608,163
----------- ----------- ----------
BASIC NET INCOME (LOSS)
PER COMMON $ (.63) $ (1.41) $ .04
=========== =========== ==========
For the years ended December 31, 1998, 1997 and 1996 there was no dilutive
effect for stock options.
14
EXHIBIT 13
PHOTO CONTROL
CORPORATION
1998
ANNUAL REPORT
15
<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
16
<PAGE>
Dear Shareholders:
The anticipated sales and planned improvements to make your Company profitable
in 1998 were not achieved. However, we did build the foundation for Photo
Control Corporation to have a better future. A consulting firm was retained to
assist in developing a strategic plan which will enable us to serve our
customers with the products and services they require. The disciplines, policies
and procedures which will enable us to make good decisions and give the Company
the proper direction have been implemented.
For 1999, we are planning to generate approximately $130,000 of sales for each
2,080 hours of payroll, which is a substantial improvement over the past several
years. However, our main focus must be on our core business and how to be
profitable on that core.
The Norman Service Center in Burbank, California was closed in October 1998. All
service, manufacturing, sales, accounting and engineering are now performed at
our Minneapolis facility. Considerable savings will be realized in future years
and, as important, it will give us the control to be more customer focused.
A six million dollar camera order was received from one of our largest customers
with delivery to begin in the late fall of 1999. Shipments will be made over
about seventeen months. A successful beta test of a new Norman lighting product,
the Monolite, was completed with manufacturing to begin in early 1999.
The strategic alliance that was formed with Bremson, Inc. of Kansas City for the
distribution of Nord printers in late 1997 is working well for both companies.
In February 1999, at the Photo Marketing Association Convention, two new printer
products will be introduced that will provide a good value to our customers.
We are now focused on profitability, improved product quality and giving the
customers what they want and need. Our commitment is to maximize shareholder
value and to provide maximum value to our customers.
Sincerely,
John R. Helmen
President and Chief Executive Officer
17
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales ............................ $ 10,014,685 $ 10,423,244 $ 14,211,920 $ 14,698,526 $ 17,590,481
Net Income (Loss) .................... (1,017,170) (2,259,251) 68,279 (581,864) 459,290
Net Income (Loss) Per Share .......... (.63) (1.41) .04 (.37) .28
Return on Sales ...................... (10.2)% (21.7)% .5% (4.0)% 2.6%
Return on Beginning Net Worth ........ (14.6)% (24.5)% .7% (6.1)% 4.9%
Return on Beginning Assets ........... (12.4)% (20.0)% .5% (4.8)% 3.6%
Working Capital ...................... $ 4,364,249 $ 5,166,898 $ 6,351,386 $ 6,133,435 $ 6,378,530
Plant and Equipment .................. 1,757,246 1,879,280 3,441,430 3,614,104 3,813,339
Total Assets ......................... 7,452,931 8,181,990 11,269,911 12,595,111 12,064,139
Long-Term Debt ....................... 0 0 530,000 600,000 670,000
Shareholders' Equity ................. 5,950,662 6,967,832 9,227,083 9,172,308 9,509,595
Book Value Per Share ................. 3.71 4.34 5.75 5.70 6.28
Shares Outstanding ................... 1,604,163 1,604,163 1,604,163 1,608,163 1,514,813
</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, 1998
numbered 411. 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 sales prices for the periods set
forth below. The source of the prices is the NASDAQ Historical Trade Tables.
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
March 31 2.80 2.44 4.38 3.12
June 30 2.94 1.00 3.75 3.00
September 30 3.75 1.25 3.50 2.50
December 31 1.88 1.00 3.00 2.25
</TABLE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Photo Control Corporation
We have audited the accompanying balance sheets of Photo Control
Corporation as of December 31, 1998 and 1997, and the related statements of
changes in stockholders' equity, operations and cash flows for each of the three
years in the period ended December 31,1998. 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 financial position of Photo Control
Corporation as of December 31, 1998 and 1997 and the results of operations and
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Minneapolis, Minnesota Virchow, Krause & Company, LLP
January 26, 1999
18
<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, 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 the exception of the package printer line products which are sold
by Bremson, Inc., an unaffiliated professional photographer supplier.
The Company had anticipated that, because of the above described restructuring
and related cost reductions, future profit margins would improve. Although
marketing, administrative and engineering cost decreased by $1,080,000 in 1998
as compared to 1997, the gross margin declined from 21.6% in 1997 to 18.0% in
1998. However, it is expected that future gross margins will exceed the 1997
level and approach the 1996 level.
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 Statements of
Operations expressed as percentages of sales for the year indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Gross Margin 18.0 21.6 28.6
Marketing & Administrative 18.4 27.1 19.7
Research, Development & Engineering 9.6 10.1 7.8
Interest .2 .5 .5
Provision for Inventory Losses 12.1
Moving Cost .9
Gain on Sale of Building (6.1)
Income (Loss) Before Taxes (10.2) (23.0) .6
Net Income (Loss) (10.2) (21.7) .5
</TABLE>
SALES
Sales in 1998 decreased $408,000 or 3.9% as compared to 1997. Sales of printer
products declined $444,000 while the sales of the camera products increased
$15,000 and the electronic flash equipment increased $21,000. The decline of the
printer product sales is attributed to the consolidation and technology changes
discussed above.
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 to three customers declined by $1,487,000.
These customers were in various phases of their replacement or expansion plans
which resulted 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 was related to dealer sales which in recent years have been very
competitive and price sensitive.
19
<PAGE>
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.
Sales of the package printer line decreased by $442,000 in 1997 as compared to
1996 due to a saturated market for package printers. In 1997, Bremson, Inc., an
unaffiliated professional photographer supplier, began to sell and market the
package printer line, on behalf of the Company.
GROSS MARGINS
The gross margins were 18.0%, 21.6% and 28.6% for the years ended December 31,
1998, 1997 and 1996, respectively. 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 in both 1998 and 1997. Also in 1998, production cost overruns were
incurred on the electronic flash equipment line due to training of production
personnel and lack of adequate product documentation. Due to the substantial
decline in sales volume during 1997, manufacturing overhead could not be
completely absorbed as compared to 1996. The Company anticipates that the gross
margin in future periods will exceed the 1997 level and approach the 1996 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 $1,836,609, $2,820,346 and $2,804,186
for the years ended December 31, 1998, 1997 and 1996, respectively. As a
percentage of sales, marketing and administrative expenses have changed to 18.4%
in 1998 from 27.1% in 1997 and from 19.7% in 1996. The restructuring previously
discussed resulted in the decrease in expense of $984,000 in 1998 as compared to
1997.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses were $956,916, $1,055,843 and
$1,107,985 for the years ended December 31, 1998, 1997 and 1996, respectively.
In the past, the Company had aggressively tried to develop innovative products
that the market would come to accept. The Company is now concentrating on
products which already have market penetration and can be effectively sold
through our existing distribution network.
INTEREST
Interest expense decreased to $18,369 for the year ended December 31, 1998 as
compared to $56,860 for the year ended December 31, 1997 and $67,818 for the
year ended December 31, 1996. During 1998 a relatively small amount was borrowed
against the open line of credit to satisfy the seasonality of the business. 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 used to pay off the line of credit in November 1997.
QUARTERLY RESULTS, GAIN ON SALE OF BUILDING, PROVISION FOR INVENTORY
OBSOLESCENCE, AND MOVING COSTS
The three years ended December 31, 1998 reflects the seasonal demand for the
Company's products of relatively high sales in the second and third quarters. In
the fourth quarter of 1997, the building in California was sold at a gain of
$645,671. All of the California operations were moved to Minnesota in October
and November of 1997, with the exception of space leased for a sales and service
facility which was closed in October 1998 and moved to Minneapolis. In 1997 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 related 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. In 1997 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 received a refund of $184,000 in 1998 for losses incurred in 1997
that were carried back to a previous open tax year. In addition there is
$1,200,000 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 $1,193,000 valuation allowance against its deferred tax
asset of $1,353,000. It is expected that the net tax asset of $160,000 will be
realized in future periods through profitable operations.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased to $731,426 at December 31, 1998 from $808,169 at December 31,
1997. Working capital decreased to $4,364,249 at December 31, 1998 from
$5,166,898 at December 31, 1997 as a result of a decrease in accounts
receivables and an increase in customer deposits.
Capital expenditures were $259,242 in 1998, $290,461 in 1997 and $207,009 in
1996. The Company estimates that additional capital investments for property and
equipment will be approximately $200,000 in 1999.
The Company has an unsecured line of credit for $1,500,000 at the prime rate of
interest. At December 31, 1998, there were no borrowings under the line.
The Board of Directors had authorized the purchase of common stock of up to a
total of $2,000,000. At December 31, 1998, $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
1999.
YEAR 2000 DISCLOSURE
The Company continues to evaluate and, as necessary, modify or replace portions
of its product software and internal business computer systems and software so
that they will function properly in the year 2000 and beyond. Generally, the
Company's products do not utilize date dependent functions. Testing is being
performed on those products which do incorporate date functions. The Company's
business software and systems will be made year 2000 compliant in the normal
course system upgrades planned in 1999. The Company's integrated manufacturing
and accounting software and the associated hardware and operating system
software have been upgraded to achieve year 2000 compliance. The Company's
networked computers, network server and associated business and technical
software are in the process of being upgraded. The Company expects the year 2000
evaluation and any identified remedial work will be completed by June 30, 1999.
Progress in the year 2000 effort is being monitored by senior management. At
this stage, the Company believes that it can address the year 2000 issues under
its control to prevent any material impact on its operations, and that the costs
associated with the year 2000 efforts will not materially impact financial
results. The Company can not guarantee that the Company's vendors and customers
can achieve timely year 2000 compliance, which could have an adverse impact on
the Company. Critical vendors of supplies and services are being contacted to
assess their state of compliance and the potential impacts, if any, on the
Company's operations. The Company will develop contingency plans where necessary
so that the Company's operations will not be materially affected by the year
2000.
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.
21
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Sales ........................................... $ 10,014,685 $ 10,423,244 $ 14,211,920
Cost of Sales ....................................... 8,217,961 8,175,528 10,140,652
------------ ------------ ------------
Gross Profit ........................................ 1,796,724 2,247,716 4,071,268
Expenses
Marketing and Administrative ................ 1,838,609 2,820,346 2,804,186
Research, Development and Engineering ....... 956,916 1,055,843 1,107,985
Interest .................................... 18,369 56,860 67,818
Provision for Inventory Losses .............. 1,260,000
Moving Cost ................................. 99,589
Gain on Sale of Building ............................ (645,671)
------------ ------------ ------------
2,813,894 4,646,967 3,979,989
Income (Loss) Before Income Taxes ................... (1,017,170) (2,399,251) 91,279
Income Tax Provision (Benefit) (Note 6) ............ (140,000) 23,000
------------ ------------ ------------
Net Income (Loss) ................................... $ (1,017,170) $( 2,259,251 ) $ 68,279
============ ============ ============
Net Income (Loss) Per Common Share (Note 2) ......... $ (.63) $ (1.41) $ .04
============ ============ ============
</TABLE>
See accompanying Notes to Financial Statements
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, 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
Net Income (Loss) ................................ (1,017,170)
----------- ----------- ----------- -----------
Balance at December 31, 1998 ........................ 1,604,163 $ 128,333 $ 1,393,484 $ 4,428,845
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements
22
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
ASSETS 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and Cash Equivalents .................................. $ 731,426 $ 808,169
Accounts Receivable, Less Allowance of $40,000 and $95,000 . 338,893 508,073
Inventories (Notes 2 and 3) ................................ 4,114,655 4,322,603
Prepaid Expenses ........................................... 65,645 201,899
----------- -----------
Total Current Assets ................................... 5,250,619 5,840,744
----------- -----------
Other Assets
Cash Value of Life Insurance ............................... 285,066 261,966
Deferred Income Taxes (Note 6) ............................. 160,000 200,000
----------- -----------
Total Other Assets ..................................... 445,066 461,966
----------- -----------
Plant and Equipment (Note 2)
Land and Building .......................................... 2,222,350 2,204,871
Machinery and Equipment .................................... 3,428,283 3,303,719
Accumulated Depreciation ................................... (3,893,387) (3,629,310)
----------- -----------
Total Plant and Equipment .............................. 1,757,246 1,879,280
----------- -----------
$ 7,452,931 $ 8,181,990
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------
Current Liabilities
Accounts Payable ........................................... $ 103,908 $ 288,724
Accrued Payroll and Employee Benefits ...................... 137,378 270,214
Accrued Expenses ........................................... 238,834 114,908
Customer Deposits .......................................... 406,250
----------- -----------
Total Current Liabilities .............................. 886,370 673,846
----------- -----------
Other Accrued Expense (Note 5) ................................. 615,899 540,312
----------- -----------
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 .......................................... 4,428,845 5,446,015
----------- -----------
Total Stockholders' Equity ............................. 5,950,662 6,967,832
----------- -----------
$ 7,452,931 $ 8,181,990
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements
23
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (Loss) from operations ................ $(1,017,170) $(2,259,251) $ 68,279
Items not affecting cash-
Depreciation ................................. 335,907 348,755 374,797
Deferred compensation ........................ 145,553 57,260 30,726
(Gain) Loss on sale of building and equipment. 29,235 (626,706) 3,886
Deferred income taxes ........................ 54,000 78,000
Provision for inventory obsolescence ......... 208,110 1,381,332 191,000
Payment of deferred compensation ................. (69,966) (45,548) (24,620)
Change in operating assets and liabilities:
Receivables .............................. 169,180 16,906 753,267
Inventories .............................. (162) 100,568 662,833
Prepaid expenses ......................... 136,254 68,202 81,162
Accounts payable ......................... (184,816) (164,848) (931,258)
Accrued expenses and customer deposits ... 437,340 (34,238) 84,497
----------- ----------- -----------
Net cash provided (used) by
operating activities ............... 189,465 (1,103,568) 1,372,569
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of building and equipment ..... 16,134 2,130,562 1,000
Additions to plant and equipment ................. (259,242) (290,461) (207,009)
Additions to cash value of life insurance ........ (23,100) (23,099) (23,604)
----------- ----------- -----------
Net cash provided (used)
in investing activities ............. (266,208) 1,817,002 (229,613)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of long-term debt ...................... (641,296) (89,320)
Repayment on line of credit-net .................. (450,000)
Repurchase of Company's common stock ............. (13,504)
----------- ----------- -----------
Net cash used by
financing activities .............. (641,296) (552,824)
----------- ----------- -----------
Change in cash and cash equivalents .................. (76,743) 72,138 590,132
Cash and cash equivalents at beginning of year ....... 808,169 736,031 145,899
----------- ----------- -----------
Cash and cash equivalents at end of year ............. $ 731,426 $ 808,169 $ 736,031
=========== =========== ===========
Supplemental disclosure information:
Income tax payments .............................. $ 3,330 $ 2,239 $ 176,000
=========== =========== ===========
Income tax refunds ............................... $ 183,866 $ 207,206 $ 360,233
=========== =========== ===========
Interest paid .................................... $ 18,369 $ 56,860 $ 67,818
=========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements
24
<PAGE>
NOTES TO
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 1998 and 1997, sales of camera equipment was the highest followed by flash
equipment and printer sales. 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 1998, two customers accounted for 15.1% and 5.7% of the
Company's sales and in 1997 for 8.4% and 13.3%, 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 - Effective January 1, 1998 the wholly-owned subsidiaries, Norman
Enterprises, Inc. and Nord Photo Engineering, Inc. were liquidated into the
parent company, Photo Control Corporation. Prior to 1998, the financial
statements include the accounts of the Company and its subsidiaries with all
material inter-company transactions and account balances 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 35 years for the building 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.
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.
25
<PAGE>
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, 1998 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, 1998, 1997 and 1996 there
was no dilutive effect for stock options.
NOTE 3. INVENTORIES
The following inventories were on hand at December 31:
1998 1997
---- ----
Raw Materials ....................... $ 4,261,234 $ 3,816,732
Work in Process ..................... 172,227 492,833
Finished Goods ...................... 1,143,194 1,163,038
Reserve for Obsolescence ............ (1,462,000) (1,150,000)
----------- -----------
$ 4,114,655 $ 4,322,603
=========== ===========
NOTE 4. SHORT-TERM LINE OF CREDIT
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:
1998 1997
---- ----
Outstanding balance at year end ............ $ -- $ --
Maximum balance at any month end ........... 600,000 600,000
Average month end balance .................. 216,667 253,846
Average interest rate ...................... 8.5% 8.5%
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 that expires in 2002 with annual minimum
rents of $37,000. In 1998 the Company vacated the facility and subleased the
property at the same rate of rent it is paying the lessor. The Company has an
employment agreement with the Norman products Director of Development through
the year 2000 in the amount of $100,000 annually plus commission on certain
sales.
26
<PAGE>
NOTE 6. INCOME TAXES
The income tax provision (benefit) shown in the statement of operations is
detailed below for each year ended December 31:
1998 1997 1996
---- ---- ----
Current
Federal ............................. $(197,000) $ (58,000)
State ............................... 3,000 3,000
Deferred ................................ 54,000 78,000
--------- --------- ---------
$(140,000) $ 23,000
========= ========= =========
The income tax provision for continuing operations varied from the federal
statutory tax rate as follows for each year ended December 31:
1998 1997 1996
---- ---- ----
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
Miscellaneous Items .................... 1.4
Valuation Allowance .................... 34.0 31.2
----- ---- ----
0% (5.8%) 25.2%
===== ==== ====
The company has Federal tax loss carry forwards of approximately $1,200,000,
which expire in varying amounts from 1999 through 2013.
The following summarizes the tax effects of the significant temporary
differences which comprise the deferred tax asset for each year ended December
31:
1998 1997
---- ----
Inventory Costs.......................... $588,000 $495,000
Deferred Compensation.................... 222,000 137,000
Bad Debt Reserves........................ 14,000 34,000
Accrued Benefits......................... 27,000 47,000
Accrued Costs............................ 53,000 41,000
Net Operating Loss Carry Forward......... 449,000 194,000
------- --------
Net Deferred Tax Asset................... 1,353,000 948,000
Valuation Allowance...................... (1,193,000) (748,000)
--------- --------
Net Deferred Income Tax.................. $160,000 $200,000
========= ========
NOTE 7. PROFIT SHARING PLAN
Effective April 1, 1998 the Company amended its profit sharing plan to a 401K
plan. The plan covers qualified full-time employees. The Company matches the
employees contributions to 8% of the employees salary at a rate of 25%. An
additional 10% match is contributed if certain profit goals are achieved. The
Company contributed $38,754 for the year ended December 31, 1998 and $12,000 for
the year ended December 31, 1996. A contribution was not made for the year ended
December 31, 1997.
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.
27
<PAGE>
The following summarizes the changes in the options for the years ended December
31:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------
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.................... 207,000 $4.29 239,375 $4.47 137,375 $5.08
Granted......................................... 32,000 $2.80 25,000 $3.50 115,000 $3.73
Expired......................................... (79,000) $4.84 (57,375) $4.70 (13,000) $4.47
------- ------- -------
Balance at End of Year.......................... 160,000 $3.72 207,000 $4.29 239,375 $4.47
======= ======= =======
</TABLE>
The following summarizes the outstanding and exercisable options as of December
31, 1998 and the potential realizable value assuming annual rates of stock price
appreciation for the option term:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OPTIONS OUTSTANDING EXERCISABLE OPTIONS OF STOCK PRICE APPRECIATION
- --------------------------------------------------------------------------------- FOR OPTION TERM
RANGE NUMBER OF REMAINING EXERCISE NUMBER EXERCISE ---------------------------
OF PRICE SHARES LIFE (YEARS) PRICE OF SHARES PRICE 5%($) 10%($)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$5.75 10,000 .4 $5.75 10,000 $5.75 15,900 35,100
$4.75 10,000 1.4 $4.75 6,667 $4.75 13,100 29,000
$3.12 to 3.75 86,000 2.6 $3.74 28,667 $3.74 89,100 196,900
$3.50 25,000 3.4 $3.50 24,200 53,400
$2.80 29,000 4.1 $2.80 22,400 54,200
------- ------
160,000 45,334
======= ======
</TABLE>
Had compensation cost for options granted during the three years ended December
31, 1998 been measured by the fair value based method, Company expense would
have increased by approximately $63,000, $99,000 and $53,000, respectively. The
option costs measured using the fair value based method reduce earnings per
share by $.04, $.06 and $.03, 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, 1998, 1997, and 1996, the Company derived
15.1%, 8.4%, and 14.3%, respectively, of its sales from one unaffiliated
customer. Also, a second unaffiliated customer accounted for 5.7%, 13.3% and
11.0% of sales for the years ended December 31, 1998, 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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL
-------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Sales ........................... $ 1,947,046 $ 3,151,947 $ 3,548,571 $ 1,367,121 $ 10,014,685
Gross Operating Earnings ........ 139,757 820,653 788,137 48,177 1,796,724
Net Income (Loss) ............... (622,808) 156,142 71,186 (621,690) (1,017,170)
Net Income (Loss) Per Share ..... (.39) .10 .04 (.38) (.63)
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL
-------- -------- -------- -------- -----
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)
<CAPTION>
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
</TABLE>
28
<PAGE>
CORPORATE DIRECTORY CORPORATE OFFICERS
DIRECTORS JOHN R. HELMEN
Chief Executive Officer
LESLIE A. WILLIG and President
Chairman
CURTIS R. JACKELS
THOMAS J. CASSADY Vice President - Finance
Retired President of
Merrill Lynch Pierce Fenner & Smith
MARK SIMONETT
JOHN R. HELMEN Vice President and Secretary
Chief Executive Officer and President
JOE M. KILGORE LEGAL COUNSEL
Partner in Law Firm of Gray, Plant, Mooty, Mooty &
McGinnis, Lochridge and Kilgore Bennett, P.A.
Minneapolis, Minnesota
GEORGE A. KIPROFF INDEPENDENT PUBLIC ACCOUNTANTS
Retired President of Virchow, Krause & Company, LLP
DEK Identification Systems Minneapolis, Minnesota
JAMES R. LOOMIS
Retired President of STOCK TRANSFER AGENT
Magnavox Electronic System Co. Norwest Bank Minnesota, N.A.
South St. Paul, Minnesota
STOCK LISTED
NASDAQ
Stock symbol: PHOC
29
EXHIBIT 23
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, 1998, of
our report, dated January 26, 1999, appearing in the Company's 1998 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 26, 1999, included in the Company's 1998 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 26, 1999 VIRCHOW KRAUSE, & COMPANY, LLP
Minneapolis, Minnesota
30
EXHIBIT 25
EXHIBIT 25
POWER OF ATTORNEY
CONCERNING
FORM 10-K FISCAL 1998
Each person whose signature appears below constitutes and appoints JOHN
R. HELMEN 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, 1998, 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 12, 1999
/s/Leslie A. Willig March 12, 1999
Leslie A. Willig, Chairman
/s/Curtis R. Jackels March 12, 1999
Curtis R. Jackels, Vice President - Finance
and Treasurer (principal financial and principal
accounting officer)
/s/George A. Kiproff March 12, 1999
George A. Kiproff, Director
/s/James R. Loomis March 12, 1999
James R. Loomis, Director
/s/Thomas J. Cassady March 12, 1999
Thomas J. Cassady, Director
31
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 731,426
<SECURITIES> 0
<RECEIVABLES> 338,893
<ALLOWANCES> 0
<INVENTORY> 4,114,655
<CURRENT-ASSETS> 5,250,619
<PP&E> 5,650,633
<DEPRECIATION> 3,893,387
<TOTAL-ASSETS> 7,452,931
<CURRENT-LIABILITIES> 886,370
<BONDS> 0
0
0
<COMMON> 128,333
<OTHER-SE> 5,822,329
<TOTAL-LIABILITY-AND-EQUITY> 7,452,931
<SALES> 10,014,685
<TOTAL-REVENUES> 10,014,685
<CGS> 8,217,961
<TOTAL-COSTS> 8,217,961
<OTHER-EXPENSES> 2,795,525
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,369
<INCOME-PRETAX> (1,017,170)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,017,170)
<EPS-PRIMARY> (.63)
<EPS-DILUTED> 0
</TABLE>
