-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SIlUWz1m1Q9zyUEXNxJ0NY8fkcYe3Qmwo5mME76xUXWzE5iWzBZCLP7hs+iVDaL/ q7rMhm6tXhcx24R11mmYMQ== 0000897101-00-000220.txt : 20000313 0000897101-00-000220.hdr.sgml : 20000313 ACCESSION NUMBER: 0000897101-00-000220 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHOTO CONTROL CORP CENTRAL INDEX KEY: 0000078311 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861] IRS NUMBER: 410831186 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-07475 FILM NUMBER: 565434 BUSINESS ADDRESS: STREET 1: 4800 QUEBEC AVE N CITY: MINNEAPOLIS STATE: MN ZIP: 55428 BUSINESS PHONE: 6125373601 MAIL ADDRESS: STREET 1: 4800 QUEBEC AVENUE NORTH STREET 2: 4800 QUEBEC AVENUE NORTH CITY: MINNEAPOLIS STATE: MN ZIP: 55428 10-K405 1 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, 1999 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 ---------------------------------------------------------- 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 1, 2000 was approximately $3,394,000 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 1, 2000: 1,604,163 DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Registrant's Report to Shareholders for the year ended December 31, 1999 are incorporated by reference into Part II. 2. Portions of the Registrant's definitive Proxy Statement to be dated April 3, 2000 for its Annual Meeting of Shareholders are incorporated by reference into Part III. 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, 1999, 1998, and 1997, 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 2000. (c)(1)(ii) New Products and Services. The Company entered into an agreement with Kodak whereby it would manufacture and sell a product called the Dual Capture Imaging System (DCIS). The DCIS allows a photographer to capture a film and a video image when using a medium format film camera such as a Mamiya or Hasselblad. At the time the photograph is taken the customer is shown the images on a CRT and they can then select which images they wish to order. The film is processed in the conventional manner and the prints are delivered to the customer. 2 (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. 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's 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, 1999, 1998 and 1997, the company derived 16.5%, 15.1% and 8.4%, respectively, of its sales from an unaffiliated customer, Lifetouch Inc. and its affiliates. During the year ended December 31, 1999, 1998 and 1997, 10.8%, 5.7% and 13.3%, respectively, of its sales were from another unaffiliated customer, CPI Corp. 3 During the year ended December 31, 1999, 1998, and 1997 10.0%, 6.8% and .6%, respectively of it sales were from a third unaffiliated customer, PCA National, Inc. (c)(1)(viii) Backlog. The dollar amount of backlog believed by the Registrant to be firm at the years ended December 31, 1999, 1998 and 1997, is $6,217,000, $6,399,000 and $1,078,000, respectively. The Registrant anticipates that it will be able to fill all current backlog orders during the fiscal year ending December 31, 2000 except for $1,362,000 which is scheduled for shipment in 2001 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 Sienna Imaging, Incorporated., 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, 1999, 1998 and 1997, the Registrant spent $588,000, $957,000 and $1,056,000, 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, 1999, the Registrant had 79 full time employees and 5 part time employees. The Registrant utilizes subcontract personnel on a temporary basis to supplement its regular work force which totaled 3 people as of December 31, 1999. (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, 1999, 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. 4 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. 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, 1999. 5 EXECUTIVE OFFICERS OF THE REGISTRANT NAME, AGE AND PRESENT POSITION OF OFFICER BUSINESS EXPERIENCE - --------------------------- ------------------- John R. Helmen, 59 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 the and President 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, 53 Mr. Jackels has been Vice President-Treasurer of the Registrant since August 1985 and Treasurer Vice President - since November 1980. Mr. Jackels was controller Finance from June 1978 to November 1980. Prior to June, 1978, Mr. Jackels was employed by two 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, 43 Mr. Simonett has served as the Registrant's General Counsel and Personnel Director since Vice President and September 1992, as Secretary since May 1993, and Secretary as Vice President since May 1998. 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 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, 1999. 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, 1999, 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, 1999, 1998 and 1997........................................ * Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997................................................................ * Balance Sheets at December 31, 1999 and 1998....................................................... * Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997..................................................... * - ------------------------------- *Incorporated by reference to the Registrant's Annual Report to Shareholders for the year ended December 31, 1999, a copy of which is included in this Form 10-K as Exhibit 13. 7 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, 1999, 1998 and 1997......................................... 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, 1999, a copy of which is included in this Form 10-K as Exhibit 13. 8 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, 1999 of our report, dated January 20, 2000, appearing in the Company's 1999 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 20, 2000, included in the Company's 1999 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 20, 2000 Minneapolis, Minnesota 9 PHOTO CONTROL CORPORATION SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
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 - ----------- ----------- ----------- ----------- ----------- ----------- YEAR ENDED DECEMBER 31, 1999 Allowance for Doubtful Accounts $ 40,000 $ (9,343) $ 4,492(a) $ 4,851(b) $ 40,000 =========== =========== =========== =========== =========== Allowance for Inventory Obsolescence $ 1,462,000 $ 235,750 $ (55,750)(c) $ 1,642,000 =========== =========== =========== =========== =========== 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 =========== =========== =========== =========== ===========
(a) Recoveries of amounts written off in prior years. (b) Uncollectible accounts written off. In 1999 write off of credits exceeded write off of uncollectible accounts. (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 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 10, 2000 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 10, 2000 /s/John R. Helmen John R. Helmen, Chief Executive Officer, President and Director (principal executive officer) Date: March 10, 2000 /s/ Leslie A. Willig Leslie A. Willig, Director Date: March 10, 2000 /s/ Curtis R. Jackels Curtis R. Jackels, Vice President and Treasurer (principal financial and principal accounting officer) Date: March 10, 2000 /s/ James R. Loomis James R. Loomis, Director Date: March 10, 2000 /s/ Thomas J. Cassady Thomas J. Cassady, Director 11 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------------------------------------------ PHOTO CONTROL CORPORATION COMMISSION FILE NO.: 0-7475 ------------------------------------------------------------------------ EXHIBIT INDEX FOR FORM 10-K FOR YEAR ENDED DECEMBER 31, 1999 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 and key employees** 14 12 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 15 13 Report to Shareholders for the year ended December 31, 1999 16 to 31 23 Consent of Independent Auditors 32 25 Power of Attorney from Messrs. Willig, Jackels, 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. 13 EX-10.4 2 CASH BONUS PLAN EXHIBIT 10.4 CASH BONUS PLAN In February 1999 the Compensation Committee of the Board of Directors approved a cash bonus plan which covers officers and certain key employees. The President receives five percent of the pre-tax, pre-bonus annual income as a cash bonus payable by March 15 of the following year. The other officers along with certain key employees are pooled and receive an aggregate bonus of fifteen percent of the pre-tax, pre-bonus annual income as a cash bonus payable by March 15 of the following year. Each individual participant in the bonus pool is awarded a bonus based on individual performance criteria. If pre-tax pre-bonus annual income is under $200,000 the bonus pool for officers and key employees is twenty-five percent. EX-11 3 COMPUTATION OF NET INCOME PER COMMON SHARE EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE DECEMBER 31 --------------------------------------------- 1999 1998 1997 ---- ---- ---- NET INCOME (LOSS) $ 300,553 $ (1,017,170) $ (2,259,251) ============ ============ ============ WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING 1,604,163 1,604,163 1,604,163 DILUTIVE EFFECT OF STOCK OPTION 63,021 ------------ ------------ ------------ 1,667,184 1,604,163 1,604,163 ============ ============ ============ BASIC NET INCOME (LOSS) PER COMMON SHARE $ .19 $ (.63) $ (1.41) ============ ============ ============ DILUTIVE NET INCOME (LOSS) PER COMMON SHARE $ .18 $ (.63) $ (1.41) ============ ============ ============ EX-13 4 1999 ANNUAL REPORT EXHIBIT 13 PHOTO CONTROL CORPORATION 1999 ANNUAL REPORT 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 Dear Fellow Shareholders: We had solid financial performance in 1999. Our earnings for 1999 were $300,533 compared to a loss of $1,017,170 in 1998. In the last two years our headcount has been reduced by 40%. Currently, we ship about 95% of our orders on the same day the order is received. Our products are very high in quality and robust. We are extremely proud of the good attitudes and the excellent performance levels of all our employees. Our Norman lighting product line finished the year with better than expected sales. The gross margin improved significantly over the past year at just under 30% in 1999. Our Nord product sales, as expected, decreased by 20%. As the professional photo industry goes through more consolidation each year and digital printing replaces some of the traditional printing methods, we can expect this trend to continue. We are not investing further dollars or human resources in this product line. Our Camerz product sales were down for two reasons. The recently introduced ZIII camera has not been as widely accepted as expected and, secondly, the Company began shipping under a large camera contract three months later than expected. Shipments started on this contract in December 1999, and will be shipped monthly for a total of seventeen months. In January 2000 we implemented a two year, no hassle warranty program, to gain the customer acceptance of the ZIII camera. Early indications are that the market is reacting more favorably to this camera. To bring further interest to the Camerz product line, we will be offering a version of the very popular ZII camera. We are excited about camera sales for 2000. We strongly feel that we now have the business in a position to produce good financial results. Our customers now receive a high quality product on time. We will continue to fine tune the existing business and focus on growth opportunities, whether it be new products, new markets or acquisitions. We will not rule out any options for profitable growth. Sincerely, John Helmen President and Chief Executive Officer 1 SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31 ------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Net Sales ....................... $ 9,335,077 $ 10,014,685 $ 10,423,244 $ 14,211,920 $ 14,698,526 Net Income (Loss) ............... 300,533 (1,017,170) (2,259,251) 68,279 (581,864) Net Income (Loss) Per Share ..... .18 (.63) (1.41) .04 (.37) Return on Sales ................. 3.2% (10.2)% (21.7)% .5% (4.0)% Return on Beginning Net Worth ... 5.1% (14.6)% (24.5)% .7% (6.1)% Return on Beginning Assets ...... 4.0% (12.4)% (20.0)% .5% (4.8)% Working Capital ................. $ 4,846,502 $ 4,364,249 $ 5,166,898 $ 6,351,386 $ 6,133,435 Plant and Equipment ............. 1,621,675 1,757,246 1,879,280 3,441,430 3,614,104 Total Assets .................... 8,109,810 7,452,931 8,181,990 11,269,911 12,595,111 Long-Term Debt .................. 0 0 0 530,000 600,000 Shareholders' Equity ............ 6,251,195 5,950,662 6,967,832 9,227,083 9,172,308 Book Value Per Share ............ 3.90 3.71 4.34 5.75 5.70 Shares Outstanding .............. 1,604,163 1,604,163 1,604,163 1,604,163 1,608,163
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, 1999 numbered 348. 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. 1999 1998 ---------------------------------------------- QUARTER ENDED HIGH LOW HIGH LOW - ------------- ---- --- ---- --- March 31 2.63 1.19 2.80 2.44 June 30 2.50 1.25 2.94 1.00 September 30 4.63 2.25 3.75 1.25 December 31 3.63 1.75 1.88 1.00 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, 1999 and 1998, and the related statements of changes in stockholders' equity, operations and cash flows for each of the three years in the period ended December 31,1999. 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, 1999 and 1998 and the results of operations and cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Minneapolis, Minnesota Virchow, Krause & Company, LLP January 20, 2000 2 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, in 1999 the restructuring resulted in a gross margin of 28.7% and it is expected that gross margins in 2000 will remain as high or slightly exceed the 1999 gross margin. 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. YEAR ENDED DECEMBER 31 -------------------------------- 1999 1998 1997 ---- ---- ---- Sales 100.0% 100.0% 100.0% Gross Margin 28.7 18.0 21.6 Marketing & Administrative 19.2 18.4 27.1 Research, Development & Engineering 6.3 9.6 10.1 Interest .2 .5 Provision for Inventory Losses 12.1 Moving Cost .9 Gain on Sale of Building (6.1) Income (Loss) Before Taxes 3.2 (10.2) (23.0) Net Income (Loss) 3.2 (10.2) (21.7) SALES Sales in 1999 decreased $680,000 or 6.8% as compared to 1998. Sales of printer products declined $297,000, sales of camera products declined $487,000 and sales of electronic flash equipment increased $104,000. The decline of the printer product sales is attributed to the consolidation and technology changes discussed above. In 1997, a new zoom camera was introduced and had modest sales in both 1997 and 1998. However, in 1999 sales of this unit declined due to competition in the used equipment market. In 2000, a modified zoom camera will be introduced in an attempt to regain sales. The Company has a $6,200,000 camera contract for which shipments began in December 1999. Shipments under the contract will continue over the next sixteen months. The increase in flash equipment sales was primarily a result of a three percent price increase. 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. 3 GROSS MARGINS The gross margins were 28.7%, 18.0% and 21.6% for the years ended December 31, 1999, 1998 and 1997, 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. In 1999, gross margins increased as anticipated, due to this restructuring and it is expected that gross margins in 2000 will remain as high as or slightly exceed the 1999 gross margin. 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 $1,796,139, $1,838,609 and $2,820,346 for the years ended December 31, 1999, 1998 and 1997, respectively. As a percentage of sales, marketing and administrative expenses have changed to 19.2% in 1999 from 18.4% in 1998 and from 27.1% in 1997. Market and administrative expense increase as a percentage of sales from 1998 to 1999 because the expenses did not decrease proportionally with the sales decrease. The restructuring previously discussed resulted in the decrease in expense of $981,737 in 1998 as compared to 1997. RESEARCH, DEVELOPMENT AND ENGINEERING Research, development and engineering expenses were $588,194, $956,916 and $1,055,843 for the years ended December 31, 1999, 1998 and 1997, 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. In 1999, the engineering department was reorganized resulting in lower cost and increased efficiencies. INTEREST No amounts were borrowed in 1999 because of the positive cash flow from operations. 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. During 1998 a relatively small amount was borrowed against the open line of credit to satisfy the seasonality of the business. QUARTERLY RESULTS, GAIN ON SALE OF BUILDING, PROVISION FOR INVENTORY OBSOLESCENCE, AND MOVING COSTS The three years ended December 31, 1999 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 had obsolete inventory of $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 In 1999 the Company used its tax loss carry forwards to offset its income resulting a zero provision for 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. There is $800,000 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 $1,110,000 valuation allowance against its deferred tax asset of $1,270,000. It is expected that the net tax asset of $160,000 will be realized in future periods through profitable operations. LIQUIDITY AND CAPITAL RESOURCES Cash increased to $819,302 at December 31, 1999 from $731,426 at December 31, 1998. Working capital increased to $4,864,502 at December 31, 1999 from $4,364,249 at December 31, 1998 as a result of an increase in inventory. Capital expenditures were $181,606 in 1999, $259,242 in 1998 and $290,461 in 1997. The Company estimates that additional capital investments for property and equipment will be approximately $240,000 in 2000. The Company has an unsecured line of credit for $1,000,000 at the prime rate of interest. At December 31, 1999, there were no borrowings under the line. 4 The Board of Directors had authorized the purchase of common stock of up to a total of $2,000,000. At December 31, 1999, $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 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. 5 STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 ---------------------------------------------- 1999 1998 1997 ---- ---- ---- Net Sales .................................................. $ 9,335,077 $ 10,014,685 $ 10,423,244 Cost of Sales .............................................. 6,650,211 8,217,961 8,175,528 ------------ ------------ ------------ Gross Profit ............................................... 2,684,866 1,796,724 2,247,716 Expenses Marketing and Administrative ......................... 1,796,139 1,838,609 2,820,346 Research, Development and Engineering ................ 588,194 956,916 1,055,843 Interest ............................................. 18,369 56,860 Provision for Inventory Losses ....................... 1,260,000 Moving Cost .......................................... 99,589 Gain on Sale of Building ................................... (645,671) ------------ ------------ ------------ 2,384,333 2,813,894 4,646,967 Income (Loss) Before Income Taxes .......................... 300,533 (1,017,170) (2,399,251) Income Tax (Benefit) (Note 6) .............................. (140,000) ------------ ------------ ------------ Net Income (Loss) .......................................... $ 300,533 $ (1,017,170) $ (2,259,251) ============ ============ ============ Net Income (Loss) Per Common Share-Basic (Note 2) .......... $ .19 $ (.63) $ (1.41) ============ ============ ============ Net Income (Loss) Per Common Share-Diluted (Note 2) ........ $ .18 $ (.63) $ (1.41) ============ ============ ============
See accompanying Notes to Financial Statements STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ----------------------- NUMBER ADDITIONAL OF PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS ----------------------------------------------- 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 Net Income .............................................. 300,533 ---------- ---------- ---------- ---------- Balance at December 31, 1999 ............................... 1,604,163 $ 128,333 $1,393,484 $4,729,378 ========== ========== ========== ==========
See accompanying Notes to Financial Statements 6 BALANCE SHEETS
DECEMBER 31 ----------------------------- ASSETS 1999 1998 - ------------------------------------------------------------------------------------------------------ Current Assets Cash and Cash Equivalents ...................................... $ 819,302 $ 731,426 Accounts Receivable, Less Allowance of $40,000 ................. 647,597 338,893 Inventories (Notes 2 and 3) .................................... 4,478,640 4,114,655 Prepaid Expenses ............................................... 74,430 65,645 ----------- ----------- Total Current Assets ...................................... 6,019,969 5,250,619 ----------- ----------- Other Assets Cash Value of Life Insurance ................................... 308,166 285,066 Deferred Income Taxes (Note 6) ................................. 160,000 160,000 ----------- ----------- Total Other Assets ........................................ 468,166 445,066 ----------- ----------- Plant and Equipment (Note 2) Land and Building .............................................. 2,293,818 2,222,350 Machinery and Equipment ........................................ 3,173,990 3,428,283 Accumulated Depreciation ....................................... (3,846,133) (3,893,387) ----------- ----------- Total Plant and Equipment ................................. 1,621,675 1,757,246 ----------- ----------- $ 8,109,810 $ 7,452,931 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------ Current Liabilities Accounts Payable ............................................... $ 281,417 $ 103,908 Accrued Payroll and Employee Benefits .......................... 220,848 137,378 Accrued Expenses ............................................... 264,952 238,834 Customer Deposits .............................................. 406,250 406,250 ----------- ----------- Total Current Liabilities ................................. 1,173,467 886,370 ----------- ----------- Other Accrued Expense (Note 5) .................................... 685,148 615,899 ----------- ----------- 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 .............................................. 4,729,378 4,428,845 ----------- ----------- Total Stockholders' Equity ................................ 6,251,195 5,950,662 ----------- ----------- $ 8,109,810 $ 7,452,931 =========== ===========
See accompanying Notes to Financial Statements 7 STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 -------------------------------------------- 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income (Loss) from operations ....................... $ 300,533 $(1,017,170) $(2,259,251) Items not affecting cash- Depreciation ...................................... 270,323 335,907 348,755 Deferred compensation ............................. 139,214 145,553 57,260 (Gain) Loss on sale of building and equipment ..... 36,354 29,235 (626,706) Deferred income taxes ............................. 54,000 Provision for inventory obsolescence .............. 235,750 208,110 1,381,332 Payment of deferred compensation ........................ (69,965) (69,966) (45,548) Change in operating assets and liabilities: Receivables ....................................... (308,704) 169,180 16,906 Inventories ....................................... (599,735) (162) 100,568 Prepaid expenses .................................. (8,785) 136,254 68,202 Accounts payable .................................. 177,509 (184,816) (164,848) Accrued expenses and customer deposits ............ 109,588 437,340 (34,238) ----------- ----------- ----------- Net cash provided (used) by operating activities ......................... 282,082 189,465 (1,103,568) ----------- ----------- ----------- Cash flows from investing activities: Proceeds from sale of building and equipment ............ 10,500 16,134 2,130,562 Additions to plant and equipment ........................ (181,606) (259,242) (290,461) Additions to cash value of life insurance ............... (23,100) (23,100) (23,099) ----------- ----------- ----------- Net cash provided (used) in investing activities ...................... (194,206) (266,208) 1,817,002 ----------- ----------- ----------- Cash flows from financing activities: Repayment of long-term debt ............................. (641,296) ----------- ----------- ----------- Change in cash and cash equivalents ........................ 87,876 (76,743) 72,138 Cash and cash equivalents at beginning of year ............. 731,426 808,169 736,031 ----------- ----------- ----------- Cash and cash equivalents at end of year ................... $ 819,302 $ 731,426 $ 808,169 =========== =========== =========== Supplemental disclosure information: Income tax payments ..................................... $ 4,464 $ 3,330 $ 2,239 =========== =========== =========== Income tax refunds ...................................... $ $ 183,866 $ 207,206 =========== =========== =========== Interest paid ........................................... $ $ 18,369 $ 56,860 =========== =========== ===========
See accompanying Notes to Financial Statements 8 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 1999, sales of flash equipment was highest followed by camera equipment and printer sales. In 1998, 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 1999, three customers accounted for 37.3% of the Company's sales, in 1998 27.6% and in 1997 22.3%. 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. The Company assesses long-lived assets for impairment under FASB Statement 121 using estimates of undiscounted future cash flows. Under those rules, long-lived assets are included in impairment evaluations when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. 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. 9 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. ADVERTISING - Advertising costs are included in Marketing and Administrative Expenses and are expensed as incurred. Advertising expense was $114,000, $39,000 and $57,000 for the years ended December 31, 1999, 1998 and 1997 respectively. 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, 1999 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. The weighted average number of common shares outstanding for the three years ended December 1999, was 1,604,163. The basic earnings per share was $.19, $(.63) and $(1.41) for the years ended December 31, 1999, 1998 and 1997 respectively. The dilutive earnings per share was $.18 for the year ended December 31, 1999 which was computed using an additional 63,000 shares for the dilutive effect of stock options. For the years ended December 31, 1998 and 1997 there was no dilutive effect for stock options. NOTE 3. INVENTORIES The following inventories were on hand at December 31: 1999 1998 1997 ---- ---- ---- Raw Materials....................... $4,237,561 $4,261,234 $3,816,732 Work in Process..................... 257,031 172,227 492,833 Finished Goods...................... 1,626,048 1,143,194 1,163,038 Reserve for Obsolescence............ (1,642,000) (1,462,000) (1,150,000) ---------- ---------- ---------- $4,478,640 $4,114,655 $4,322,603 ========== ========== ========== NOTE 4. SHORT-TERM LINE OF CREDIT The Company has a $1,000,000 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: 1999 1998 ---- ---- Outstanding balance at year end........................ $ -- $ -- Maximum balance at any month end....................... -- 600,000 Average month end balance.............................. -- 216,667 Average interest rate.................................. -- 8.5% NOTE 5. COMMITMENTS The Company has deferred compensation agreements with key management personnel which are 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 $38,000. 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 December, 2000 in the amount of $100,000 annually plus commission on certain sales. 10 NOTE 6. INCOME TAXES The income tax provision (benefit) shown in the statement of operations is detailed below for each year ended December 31: 1999 1998 1997 ---- ---- ---- Current Federal......................................... $(197,000) State........................................... 3,000 Deferred ............................................ 54,000 ----- ------ --------- $(140,000) ===== ====== ========= The income tax provision for continuing operations varied from the federal statutory tax rate as follows for each year ended December 31: 1999 1998 1997 ---- ---- ---- U.S. Statutory Rate.................................... 34.0% (34.0)% (34.0)% State Income Taxes, Net of Federal Income Tax Benefit.. (3.0) Utilization of Loss Carry Forward ..................... (34.0) Valuation Allowance.................................... 34.0 31.2 ---- ---- ---- 0% 0% (5.8)% ==== ==== ==== The company has Federal tax loss carry forwards of approximately $800,000, which expire in varying amounts from 2000 through 2014. The following summarizes the tax effects of the significant temporary differences which comprise the deferred tax asset for each year ended December 31: 1999 1998 ---- ---- Inventory Costs........................... $621,000 $588,000 Deferred Compensation..................... 247,000 222,000 Bad Debt Reserves......................... 14,000 14,000 Accrued Benefits.......................... 47,000 27,000 Accrued Costs............................. 46,000 53,000 Net Operating Loss Carry Forward.......... 295,000 449,000 --------- --------- Net Deferred Tax Asset.................... 1,270,000 1,353,000 Valuation Allowance....................... (1,110,000) (1,193,000) --------- --------- Net Deferred Income Tax................... $160,000 $160,000 ========= ========= 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 $49,578 and $38,754 for the years ended December 31, 1999 and 1998, respectively. 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. 11 The following summarizes the changes in the options for the years ended December 31:
1999 1998 1997 ----------------------------------------------------------------- NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE --------- ----- --------- ----- --------- ----- Balance at Beginning of Year..... 160,000 $3.72 207,000 $4.29 239,375 $4.47 Granted.......................... 134,000 $1.19 32,000 $2.80 25,000 $3.50 Expired.......................... (17,000) $4.82 (79,000) $4.84 (57,375) $4.70 -------- -------- -------- Balance at End of Year........... 277,000 $2.43 160,000 $3.72 207,000 $4.29 ======== ======= ========
The following summarizes the outstanding and exercisable options as of December 31, 1999 and the potential realizable value assuming annual rates of stock price appreciation for the option term:
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OPTIONS OUTSTANDING EXERCISABLE OPTIONS OF STOCK PRICE APPRECIATION - --------------------------------------------------------------------------- FOR OPTION TERM RANGE NUMBER OF REMAINING EXERCISE NUMBER EXERCISE ---------------- OF PRICE SHARES LIFE (YEARS) PRICE OF SHARES PRICE 5%($) 10%($) - ---------------------------------------------------------------------------------------------------- $4.75 10,000 .4 $4.75 10,000 $4.75 13,100 29,000 $3.12 to 3.75 81,000 1.6 $3.74 53,995 $3.74 83,700 185,000 $3.50 25,000 2.4 $3.50 8,333 $3.50 24,200 53,400 $2.80 27,000 3.1 $2.80 21,000 46,200 $1.19 134,000 4.1 $1.19 44,000 97,400 ------- ------- 277,000 72,328 ======= =======
Had compensation cost for options granted during the three years ended December 31, 1999 been measured by the fair value based method, Company expense would have increased by approximately $66,000, $63,000 and $99,000, respectively. The option costs measured using the fair value based method reduce earnings per share by $.04, $.04 and $.06, 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 CUSTOMERS During the years ended December 31, 1999, 1998, and 1997, the Company derived 16.5%, 15.1%, and 8.4%, respectively, of its sales from one unaffiliated customer. A second unaffiliated customer accounted for 10.8%, 5.7% and 13.3% of sales for the years ended December 31, 1999, 1998 and 1997, respectively. Also a third unaffiliated customer accounted for 10.0%, 6.8% and .6% of sales for the year ended December 31, 1999, 1998 and 1997, respectively. NOTE 10. QUARTERLY INFORMATION (UNAUDITED) The following is a summary of the unaudited quarterly financial information for the years ended December 31, 1999, 1998 and 1997:
YEAR ENDED DECEMBER 31, 1999 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL -------- -------- -------- -------- ----- Sales ............................. $ 1,829,552 $ 2,744,327 $ 2,963,156 $ 1,798,042 $ 9,335,077 Gross Profit ...................... 475,835 863,214 835,795 510,022 2,684,866 Net Income (Loss) ................. (200,026) 283,224 264,118 (46,783) 300,533 Net Income (Loss) Per Share ....... (.12) .18 .16 (.04) .18 YEAR ENDED DECEMBER 31, 1998 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL -------- -------- -------- -------- ----- Sales ............................. $ 1,947,046 $ 3,151,947 $ 3,548,571 $ 1,367,121 $10,014,685 Gross Profit ...................... 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) 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 Profit ...................... 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)
12 CORPORATE DIRECTORY CORPORATE OFFICERS DIRECTORS JOHN R. HELMEN LESLIE A. WILLIG Chief Executive Officer Chairman and President THOMAS J. CASSADY CURTIS R. JACKELS Retired President of Vice President - Finance Merrill Lynch Pierce Fenner & Smith MARK SIMONETT JOHN R. HELMEN Vice President and Secretary Chief Executive Officer and President JAMES R. LOOMIS LEGAL COUNSEL Retired President of Gray, Plant, Mooty, Mooty & Magnavox Electronic Systems Co. Bennett, P.A. Minneapolis, Minnesota INDEPENDENT PUBLIC ACCOUNTANTS Virchow, Krause & Company, LLP Minneapolis, Minnesota STOCK TRANSFER AGENT Signature Stock Transfer, Inc. Dallas, Texas STOCK LISTED NASDAQ Stock symbol: PHOC EX-23 5 AUDITOR'S CONSENT AND REPORT ON SCHEDULES 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, 1999, of our report, dated January 20, 2000, appearing in the Company's 1999 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 20, 2000, included in the Company's 1999 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 20, 2000 VIRCHOW KRAUSE, & COMPANY, LLP Minneapolis, Minnesota EX-25 6 POWER OF ATTORNEY CONCERNING FORM 10-K FISCAL 1999 EXHIBIT 25 POWER OF ATTORNEY CONCERNING FORM 10-K FISCAL 1999 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, 1999, 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 10, 2000 /s/Leslie A. Willig March 10, 2000 Leslie A. Willig, Chairman /s/Curtis R. Jackels March 10, 2000 Curtis R. Jackels, Vice President - Finance (principal financial and principal accounting officer) /s/James R. Loomis March 10, 2000 James R. Loomis, Director /s/Thomas J. Cassady March 10, 2000 Thomas J. Cassady, Director EX-27 7 ARTICLE 5 - FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 DEC-31-1999 819,302 0 647,597 0 4,478,640 6,019,969 5,467,808 3,846,133 8,109,810 1,173,467 0 0 0 128,333 6,122,862 8,109,810 9,335,077 9,335,077 6,650,211 6,650,211 2,384,333 0 0 300,533 0 0 0 0 0 300,533 .19 .18
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