-----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, UuABcjJPWRW11sCLYHWenk1GDr7/4y8BXTIbKQBjDJS/gjh3rJICP2SLAu99+TJ3 cbkdA7pHu0qIDQ5/7JCCYw== 0000897101-98-000299.txt : 19980323 0000897101-98-000299.hdr.sgml : 19980323 ACCESSION NUMBER: 0000897101-98-000299 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: NASD 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: 98570156 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, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File No: 0-7475 ----------------------------------------------------------------------- PHOTO CONTROL CORPORATION (Exact name of Registrant as specified in its charter) Minnesota (State or other jurisdiction of 41-0831186 incorporation or organization) (I.R.S. Employer Identification No.) 4800 Quebec Avenue North Minneapolis, Minnesota 55428 (Address of principal executive offices) Registrant's telephone number, including area code: (612) 537-3601 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.08 ---------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_. No ___ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.(X) The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 3, 1998 was approximately $2,980,000 based on the closing sale price of the Registrant's Common Stock on such date. - -------------------------------------------------------------------------------- Number of shares of $0.08 par value Common Stock outstanding at March 3, 1998: 1,604,163 DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Registrant's Report to Shareholders for the year ended December 31, 1997 are incorporated by reference into Part II. 2. Portions of the Registrant's definitive Proxy Statement to be dated April 1, 1998 for its Annual Meeting of Shareholders are incorporated by reference into Part III. PART I ITEM 1. BUSINESS (a) General Development of Business. Photo Control Corporation (the "Registrant" or the "Company") was organized as a Minnesota corporation in 1959. The Registrant acquired all of the outstanding stock of Norman Enterprises, Inc. ("Norman"), a California corporation, in 1973. In June 1983, the Registrant acquired all of the outstanding stock of Nord Photo Engineering, Inc. ("Nord"), a Minnesota corporation. In October 1997, Norman's manufacturing operations were moved to Minnesota and the land and building in California was sold. A four thousand squared foot building is rented in California to house a sales and service office. The Registrant is in the process of liquidating both subsidiaries and transferring the assets to Photo Control Corporation, the parent company. The Registrant designs, manufactures, and markets professional cameras, long-roll film magazines, photographic accessories, Norman electronic flash equipment, and Nord photographic package printers. All references to the "Registrant" or the "Company" also include "Norman" and "Nord" unless indicated otherwise. (b) Financial Information About Industry Segments. During the years ended December 31, 1997, 1996, and 1995, the Registrant was engaged in one industry which consisted of designing, manufacturing, and marketing professional photographic equipment. (c) Narrative Description of Business. (c) (l)(i) Principal Products, Services and Markets. The Registrant designs, manufactures and markets professional cameras, long-roll film magazines, photographic accessories, Norman electronic flash equipment, and Nord photographic package printers. The principal market for the Registrant's long-roll camera equipment is the sub-segment of the professional photography market requiring high-volume equipment, such as elementary and secondary school photographers. The market with respect to the Norman electronic flash equipment is broader, extending to all professional photographers and to experienced amateur photographers. The market for Nord photographic package printers is photographic processing labs which specialize in producing photographic color print packages such as those often produced for weddings and school photography. The geographic market in which the Registrant competes with respect to long-roll camera equipment, flash equipment, and printers consists of the entire United States and, to a lesser extent, some foreign countries. The Registrant markets most of its cameras, film magazines, Norman electronic flash and lighting equipment, and photographic accessories through its five employee salesmen, one independent sales representative and part-time use of a service employee. Such equipment is marketed primarily under the tradename, "Camerz" and "Norman". Nord markets its printers through Bremson, Inc., an unaffiliated professional photographic supplier. It is expected that the sales force will remain at the current level during 1998. (c)(1)(ii) New Products and Services. The Camerz Division introduced the new ZIII camera long-roll film portrait zoom camera. The ZIII is micro-processor controlled and has all new electronics which allows compatibility with the electronic frame identification system without the external control box that was needed for the prior ZII model. The ZIII also offers options for automatic focusing and a film cassette system, versus the exclusive prior use of a film magazine. Split view digital previewing is available with the ZIII which allows for digital image capture and printing for many service items such as class composites and identification cards. Norman introduced a new 40/40 power supply which features a module design with plug-in boards which provides for high power output along with easy servicing. Nord modified the existing MI1100 printer to accommodate a back printer which will print two lines of forty characters on the back side of the photograph. (c)(1)(iii) Sources and Availability of Raw Materials. Materials required for the Registrant's photographic equipment consist primarily of fabricated parts, lenses, electronic components, and lights, most of which are readily available from numerous sources. (c)(1)(iv) Patents, Trademarks, Licenses, Franchises and Concessions. The Registrant, on March 16, 1982, obtained United States patent number 4,319,819 for a reflex shutter, which is used in conjunction with a zoom lens. The Registrant has incorporated the shutter into a zoom lens camera which was first introduced in fiscal 1980. The Registrant on June 7, 1988, obtained a United States Patent number 4,750,012 for a reflex shutter for SLR cameras. The shutter is incorporated into the "Z35" camera which was first introduced in 1987. In 1991, the Registrant was granted United States Patent number 5,055,863 for a multiple image transfer camera system for the simultaneous transfer of light rays from an object to a pair of separate, discrete mediums to provide for substantially exact image reproduction and capture thereof at either or both of two media. The Registrant received U.S. Patent No. 5,294,950 on March 15, 1994 for an identification system for automated film and order processing including machine and human readable code. On July 12, 1994, the U.S. Patent and Trademark Office granted the Registrant patent number 5,329,325 for the Registrant's synchronized zoom electronic camera system. Nord holds two patents. Patent number 4,213,689 granted July 22, 1980 relates to a camera shutter which is electromagnetically activated and is not currently in production. The Additive Color Lamphouse patent, granted in 1991, United States Patent number 5,032,866, covers a closed loop light intensity feedback control system for regulating the light sources within the lamphouse. The Registrant is the owner of the registered trademark, "Camerz," and the logo-type used in connection with the sale of photographic equipment under the name Camerz. Also, the Registrant owns one registered trademark called "Smart System." Nord is the owner of four registered trademarks; "Portrait Express," "Nord", "ESP", and a logo-type design referred to as the "Micrometer." Although the Registrant's patents and trademarks are valuable, they are not considered to be essential to the Company's success. Innovative application of existing technology along with providing efficient and quality products are of primary importance. The Registrant has entered into agreements with employees which agreements grant the Registrant a exclusive right to use, make and sell inventions conceived by employees during their employment with the Registrant. The Registrant believes that the right to use, make and sell such inventions adequately protects the Registrant against any employee who might claim an exclusive proprietary right in an invention developed while the employee was employed by the Registrant. (c)(1)(v) Seasonal Fluctuations. The photographic equipment business, including that of Norman and Nord, is somewhat seasonal. There is a larger volume of sales from March through October. (c)(1)(vi) Working Capital Practices. The Registrant believes that its working capital needs are typical to the industry. The nature of the Registrant's business does not require that it maintain a high volume of finished goods inventory or provide extended payment terms to customers. The Registrant maintains an inventory of raw material and finished products and permits customers to return only defective merchandise. (c)(1)(vii) Single Customer. During the years ended December 31, 1997, 1996 and 1995, the company derived 8.4%, 14.3% and 20.2%, respectively, of its sales from one unaffiliated customer, Lifetouch Inc. and its affiliates. During year ended December 31, 1997 and 1996, 13.3% and 11.0%, respectively, of its sales were from another unaffiliated customer, CPI Corp. (c)(1)(viii) Backlog. The dollar amount of backlog believed by the Registrant to be firm at the years ended December 31, 1997, 1996 and 1995, is $1,078,000, $633,000 and $2,858,000, respectively. The Registrant anticipates that it and its subsidiaries will be able to fill all current backlog orders during the fiscal year ending December 31, 1998. (c)(1)(ix) Government Contracts. No material portion of the Registrant's or its subsidiaries' business is subject to renegotiation of profits or termination of any contract or subcontract at the election of the Government. (c)(1)(x) Competition. Primary methods of competition for the Company's products are product performance, reliability, service, and delivery. The Registrant's two primary competitors with respect to such equipment are Lucht, Inc., which sells photographic printers, and Beattie Systems, Inc., which sells long-roll cameras. Because of varying product lines, the Registrant is unable to state accurately its competitive position in relation to such competitors. In the somewhat broader market in which Norman competes in the sale of professional studio electronic flash equipment, there are approximately fourteen significant competitors, several of which are well established. The Registrant is unable to state accurately Norman's overall competitive position in relation to such competitors. Norman's dominant competitors are Broncolor, Dynalite, White Lighting, Photogenic, and Speed-O-Tron. (c)(1)(xi) Research and Development. For the years ended December 31, 1997, 1996 and 1995, the Registrant spent $1,056,000, $1,108,000 and $1,310,000, respectively, on research activities relating to the development of new products, services, and production engineering. The Company intends to maintain its level of spending on research and development. (c)(1)(xii) Environmental Regulation. Federal, state and local laws and regulations with respect to the environment have had no material effect on the Registrant's or its subsidiaries' capital expenditures, earnings, or respective competitive positions. (c)(1)(xiii) Employees. As of December 31, 1997, the Registrant had 95 full time employees and 2 part time employees. The Registrant utilizes subcontract personnel on a temporary basis to supplement its regular work force which totaled 27 people as of December 31, 1997. (d) Financial Information About Foreign and Domestic Operations and Export Sales. The Registrant has no operations based outside of the United States. During each of the last three years ended December 31, 1997, slightly more than 5% of the Registrant's consolidated sales were derived from export sales. ITEM 2. PROPERTIES The Registrant's principal property is located at 4800 Quebec Avenue North, Minneapolis, Minnesota. The building at that location consists of 60,000 square feet and is located on 3 1/2 acres of land. The building was constructed in 1971 and was purchased in 1980. Extensive remodeling has been done to meet the specific needs of the Company. The Registrant first occupied the building during the fall of 1980, and uses the building for camera production, Nord printer manufacturing, Norman electronic flash equipment manufacturing, and as corporate offices. Nord owns a 5,000 square foot building in Hinckley, Minnesota, on one acre of land, which houses optical production and was built in 1981. In February 1996, the production was moved to Minneapolis. The building is leased to a retail organization which has an option to purchase at various points during the five year lease. Norman occupied a 32,000 square foot building in Burbank, California which was constructed in 1977 and expanded in 1984. The facility was located on 50,000 square feet of land and housed all of Norman's operations, until October 1997 when the manufacturing operations were moved to Minnesota and the land and building sold. The Registrant leases a four thousand square foot building in Burbank to house a service and sales department. The Registrant believes its present facilities are adequate for its current level of operation and provide for a reasonable increase in production activities. ITEM 3. LEGAL PROCEEDINGS Neither the Registrant nor any of its subsidiaries is a party to, and none of their property is the subject of, any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Registrant's shareholders during the Registrant's quarter ending December 31, 1997. EXECUTIVE OFFICERS OF THE REGISTRANT NAME, AGE AND PRESENT POSITION OF OFFICER BUSINESS EXPERIENCE - --------------------------- ------------------- Leslie A. Willig, 72 Mr. Willig, who received a Ph.D. in Industrial Management from the School of Business of the Chairman of the Board University of Iowa in 1956, has been a member of Directors and Chairman of the Board of Directors of Registrant since June, 1974. He served as its Chief Executive Officer from August, 1974, to August,1997, and President from May, 1975 to April, 1997. Mr. Willig has been a director and Secretary of North Snow Bay Inc., Fremont, Indiana, a real estate development company, since 1965. Mr. Willig has acted as a self-employed business and real estate broker in Indiana, since March, 1970. John R. Helmen, 57 Mr. Helmen has been President of the Registrant since April, 1997. In August 1997, the Board of Chief Executive Officer Directors appointed him CEO and a director of and President the Registrant. Mr. Helmen was employed by Supra Color Labs, Inc. as Vice President, Director of Sales and Marketing from 1977 through 1979, President from 1979 through 1993, and General Manager after the sale of Supra Color to Burrel Professional Labs in 1993. Curtis R. Jackels, 51 Mr. Jackels has been Vice President-Treasurer of the Registrant since August, 1985 and Treasurer Vice President - since November, 1980. Mr. Jackels was controller Treasurer of the from June, 1978 to November, 1980. Prior to Registrant June, 1978, Mr. Jackels was employed by two public accounting firms. Mr. Jackels is a certified public accountant and has a Master of Business Administra- tion degree from the University of Wisconsin. Mark J. Simonett, 41 Mr. Simonett has served as the Registrant's General Counsel and Personnel Director since Secretary of the September, 1992 and as Secretary since May, Registrant 1993. He served part-time from April 1995 to February 1997 and full-time since. He was associated with the Minneapolis law firm of Gray, Plant, Mooty, Mooty and Bennet P.A. from 1991 to 1992, and with the consulting firm Delta Environmental Consultants, Inc. From 1990 to 1992. Patrick J. Gilligan, 57 Mr. Gilligan has been President of the Registrant's wholly-owned subsidiary, Nord Photo Executive Vice President Engineering, Inc., since November, 1990. Since of the Registrant May, 1993, he has been Executive Vice President President of Nord of the Registrant. From August 1988 to October, 1990, he was employed by Pakor, Inc. of Minneapolis, Minnesota, a manufacturer of Pako service parts, and a distributor of photographic processing equipment. The last position held at Pakor was President. From 1986 to 1988 he was employed by PhotoTek, a Division of Pako, the predecessor to Pakor, Inc. and a subsidiary of Pako. His position with PhotoTek was Vice President and General Manager. From 1968 to 1985 he was employed by Pako with his last position being Director of Photo Engineering. The term of office for each executive officer is from one annual meeting of directors until the next annual meeting or until a successor is elected. There are no arrangements or understandings between any of the executive officers and any other person (other than arrangements or understandings with directors or officers acting as such) pursuant to which any of the executive officers were selected as an officer of the Registrant. There are no family relationships between any of the Registrant's directors or executive officers. PART II The information required by Items 5, 6, 7 and 8 of Part II is incorporated herein by reference to the sections labeled "Stock Market Information," "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements and Notes and the Independent Auditor's Report which appear in the Registrant's Annual Report to Shareholders for the year ended December 31, 1997. With respect to Item 9, no change of accountants or disagreements on any matter of accounting principles or practices or financial statement disclosure has occurred. PART III Items 10, 11, 12 and 13 of Part III, except for certain information relating to Executive Officers included in Part I, are omitted inasmuch as the Company intends to file with the Securities and Exchange Commission within 120 days of the close of the year ended December 31, 1997, a definitive proxy statement containing information pursuant to Regulation l4A of the Securities Exchange Act of 1934 and such information shall be deemed to be incorporated herein by reference from the date of filing such document. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as Part of this Report. (a)(l) Consolidated Financial Statements. Page Independent Auditor's Report........................................... * Consolidated Statements of Opera- tions for the years ended December 31, 1997, 1996 and 1995....................................... * Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995, ............................................................. * Consolidated Balance Sheets at December 31, 1997 and 1996...................................................... * Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.................................................... * - ------------------------------- *Incorporated by reference to the Registrant's Annual Report to Shareholders for the year ended December 31, 1997, a copy of which is included in this Form 10-K as Exhibit 13. Page Notes to Consolidated Financial Statements ............................................................ * (a)(2) Consolidated Financial Statement Schedules. Auditor's Consent and Report on Schedules.............................. 9 Schedule VIII - Valuation and Qualifying Accounts for the years ended December 31, 1997, 1996 and 1995............................................. 10 All other schedules have been omitted because they are not applicable or are not required, or because the required information has been given in the Consolidated Financial Statements or notes thereto. (a)(3) Exhibits. See "Exhibit Index" on page following signatures. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last fiscal quarter of the Registrant's 1997 fiscal year. (c) Exhibits. Reference made to item 14 (A)(3) (d) Schedules. Reference made to item 14 (A)(2) - ------------------------------- *Incorporated by reference to the Registrant's Annual Report to Shareholders for the year ended December 31, 1997, a copy of which is included in this Form 10-K as Exhibit 13. AUDITOR'S CONSENT AND REPORT ON SCHEDULES Board of Directors and Stockholders Photo Control Corporation We hereby consent to the incorporation by reference in this Annual Report on Form 10-K of Photo Control Corporation for the year ended December 31, 1997 of our report, dated January 30, 1998, appearing in the Company's 1996 Annual Report to Shareholders. We also consent to the incorporation by reference of such report in the registration statements on Form S-8 for the Photo Control Stock Option Plan. In the course of our audit of the financial statements referred to in our report, dated January 30, 1998, included in the Company's 1997 Annual Report to Shareholders, we also audited the supporting schedule listed in Item 14(a)(2) of this Annual Report on Form 10-K. In our opinion, the schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. VIRCHOW, KRAUSE & COMPANY, LLP January 30, 1998 Minneapolis, Minnesota 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, 1997 Allowance for Doubtful Accounts $ 92,000 $ 46,948 $ 52(a) $ 44,000(b) $ 95,000 ---------- ---------- ---------- ----------- ---------- Allowance for Inventory Obsolescence 536,774 1,381,332 (768,106)(c) 1,150,000 ---------- ---------- ---------- ----------- ---------- YEAR ENDED DECEMBER 31, 1996 Allowance for Doubtful Accounts $ 153,000 $ 18,434 $ 1,710(a) $ (81,144)(b) $ 92,000 ---------- ---------- ---------- ----------- ---------- Allowance for Inventory Obsolescence 621,000 191,000 (275,226)(c) 536,774 ---------- ---------- ---------- ----------- ---------- YEAR ENDED DECEMBER 31, 1995 Allowance for Doubtful Accounts $ 142,000 $ 61,325 $ 710(a) $ (51,035)(b) $ 153,000 ---------- ---------- ---------- ----------- ---------- Allowance for Inventory Obsolescence 435,000 186,000 621,000 ---------- ---------- ---------- ----------- ----------
(a) Recoveries of amounts written off in prior years (b) Uncollectible accounts written off. (c) Inventory Disposed SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PHOTO CONTROL CORPORATION Date: March 14, 1998 By/s/John R. Helmen John R. Helmen Chief Executive Officer, President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 13, 1998 /s/John R. Helmen John R. Helmen, Chief Executive Officer, President and Director (principal executive officer) Date: March 13, 1998 /s/ Leslie A. Willig Leslie A. Willig, Director Date: March 13, 1998 /s/ Curtis R. Jackels Curtis R. Jackels, Vice President and Treasurer (principal financial and principal accounting officer) Date: March 13, 1998 /s/ George A. Kiproff George A. Kiproff, Director Date: March 13, 1998 /s/ James R. Loomis James R. Loomis, Director Date: March 13, 1998 /s/ Thomas J. Cassady Thomas J. Cassady, Director Date: March 13, 1998 /s/ Joe M. Kilgore Joe M. Kilgore, director SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - ------------------------------------------------------------------------ PHOTO CONTROL CORPORATION COMMISSION FILE NO.: 0-7475 - ------------------------------------------------------------------------ E X H I B I T I N D E X FOR FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 Page Number in Sequential Numbering of all Form 10-K and Exhibit Pages ------------- EXHIBIT - ------- 3.1 Registrant's Restated Articles of Incorporation, as amended-incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1988 * 3.2 Registrant's bylaws as amended-incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1989 * 10.1 Executive Salary Continuation Plan adopted August 9, 1985 together with Exhibits - incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K * for the year ended June 30, 1986 ** 10.2 The Registrant's 1983 Stock Option Plan - incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year * ended June 30, 1989 ** 10.3 Form of Stock Option Agreement under the Registrant's 1983 Stock Option Plan - incorporated by reference to Exhibit 5 to the Registrant's Registration Statement on * Form S-8, Reg. No. 2-85849 ** 10.4 Cash bonus plan for officers - incorporated by reference to the description of such plan contained in the Registrant's definitive Proxy Statement for its 1996 Annual Meeting of * Shareholders ** Page Number in Sequential Numbering of all Form 10-K and Exhibit Pages ------------- 10.5 Amendment to Stock Option Plan August 29, 1994 - incorporated * by reference to Exhibit 10.5 to the Registrant's Annual Report on ** Form 10-K for the fiscal year ended December 31, 1994 10.6 Amendment to Stock Option Plan, February 23, 1996-incorporated by reference to Exhibit 10.6 to the Registrant's annual report on * form 10-K for the fiscal year ended December 31, 1995. ** 10.7 Amendment to Stock Option Plan, November 7, 1997. ** 11 Statement re computation of per share earnings 14 13 Report to Shareholders for the year ended December 31, 1997 15 to 30 21 Subsidiaries of the Registrant 31 23 Consent of Independent Auditors 32 25 Power of Attorney from Messrs. Willig, Jackels, Kiproff, Kilgore, 33 Loomis, Helmen and Cassady 27 Financial Data Schedule 34 *Incorporated by reference ** Indicates management contracts or compensation plans or arrangements required to be filed as exhibits. EX-10.7 2 AMENDMENT TO STOCK OPTION PLAN EXHIBIT 10.7 PHOTO CONTROL CORPORATION 1983 STOCK OPTION PLAN AMENDMENT NOVEMBER 7, 1997 The Photo Control Corporation 1983 Stock Option Plan (the "Plan") is amended by replacement of the prior section entitled "Forfeiture" with the following forfeiture provision: Forfeiture The purpose of the Company's Stock Option Plan is to attract, retain, and reward employees, to increase stock ownership and identification with the Company's interests, and to provide incentive for remaining with the Company over the long term. To further these objectives, options granted under the Plan shall be subject to the following forfeiture provisions unless otherwise indicated in an optionee's Stock Option Agreement. 1. Forfeiture of option gain if optionee leaves the Company within one year of exercise. If an optionee exercises any portion of an option and leaves the employment of the Company within one year after such exercise for any reason except death, disability or normal retirement, then the optionee shall pay the Company the Option Gain defined as both (a) the cash bonus received from the Company, if any, and (b) the gain represented by the market price on the date of exercise less the exercise price, multiplied by the number of shares purchased without regard to any subsequent market price decrease or increase. 2. Forfeiture of option gain and unexercised options if optionee engages in certain activities. If at any time within (a) the original term of an option, or (b) three years after exercise of any portion of an option, whichever is latest, the optionee engages in any activity in competition with any activity of the Company, or any of the following activities: (i) conduct related to the optionee's employment for which either criminal or civil penalties against the optionee may be sought, (ii) violation of the Company's insider trading policy, (iii) accepting employment with or serving as a consultant, advisor or in any other capacity to an employer that is in competition with or acting against the interests of the Company, including employing or recruiting any present, former or future employee of the Company, (iv) disclosing or misusing any confidential information or material concerning the Company, or (v) participating in a hostile takeover attempt, then all unexpired options held by the optionee shall terminate effective upon the date on which the optionee engages in such activity, unless terminated earlier by operation of another term or condition of the Plan or the Stock Option Agreement, and the optionee shall pay the Company any Option Gain as defined in paragraph 1 of this section. 3. Right of Setoff. The Company shall have a right of setoff against any amounts the Company may owe the optionee from time to time (including wages, vacation pay, other compensation, fringe benefits or any other amounts owed), to the extent of the amounts owed by the optionee to the Company under paragraphs 1 and 2 of this section. 4. Board Discretion. The optionee may be released from the obligations under this forfeiture section only if the Board of Directors, or its duly appointed agent, determines in its sole discretion that such action is in the best interests of the Company. EX-11 3 COMPUTATION OF NET INCOME PER COMMON SHARE EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE DECEMBER 31 ----------- 1997 1996 1995 ---- ---- ---- NET INCOME (LOSS) (2,259,251) $ 68,279 $ (581,864) WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING 1,604,163 1,608,163 1,550,685 ---------- ---------- ---------- BASIC NET INCOME (LOSS) PER COMMON $ (1.41) $ .04 $ (.37) ========== ========== ========== For the years ended December 31, 1997, 1996 and 1995 there was no dilutive effect for stock options. CRJ\EXHIB11 EX-13 4 ANNUAL REPORT PHOTO CONTROL CORPORATION 1997 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 Shareholders: I became the President and CEO of your company on July 1, 1997. I am very pleased to be on board. Photo Control experienced a significant loss in 1997 due primarily to decreased sales and major changes undertaken within the Company to position it for future success and growth. The decrease in sales occurred in all three of the Company's product lines. Regarding major business changes in 1997, the Norman Enterprises flash equipment manufacturing operations in Burbank, California, were consolidated with the camera and printer product line operations in the Minneapolis facility. In addition to the moving expense of $99,000, the Company incurred substantial cost to shut down the manufacturing in Burbank and to start up again in Minneapolis. The Company also performed a complete review of all product lines and wrote off $1,260,000 in inventory that was obsolete or slow moving. Even though the industry is not in an exciting growth cycle at the present time, we at Photo Control are excited about making your company a success for the following reasons: * The consolidation of all product lines will reduced administrative and engineering costs and should significantly decrease our manufacturing expenses. * Our new ZIII camera is the long-roll camera of the future. And we are now manufacturing the ZIII cameras with less waste and greater efficiencies. * We are now selling directly to camera and lighting dealers. We believe that direct selling will bring us closer to our customers and, therefore, make us better and faster at responding to their needs. Also, our sales effort is more efficient in that we have one sales force selling these product lines. * We are excited about new product possibilities in our Norman line-up of products. And we plan to make existing products better and improve the margins. * We have no debt. A highlight of the year was the forming of a strategic alliance with Bremson, Inc. of Kansas City. Bremson is a manufacturer of professional photographic lab equipment and develops and markets related software. Bremson will be marketing, selling and servicing our Nord printer product line. This alliance opens the door to the professional photographic lab market, a market which Photo Control has not successfully penetrated. We are also working very closely with Bremson and other companies on a complete system for the professional photographer, the professional lab and the customer of the professional photographer. We have named this the "Shoot to Ship" system. This system was just unveiled at the Photo Marketing Association convention on February 12-15, 1998, in New Orleans. We are committed to do our best to increase your company's value, to give our customers the quality products and service they need, and to increase the productivity of each of us as employees of Photo Control Corporation. Sincerely, John R. Helmen President & CEO SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31 ---------------------- 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ Net Sales $ 10,423,244 $ 14,211,920 $ 14,698,526 $ 17,590,481 $ 17,809,220 Net Income (Loss) (2,259,251) 68,279 (581,864) 459,290 843,479 Net Income (Loss) Per Share (1.41) .04 (.37) .28 .49 Return on Sales (21.7)% .5% (4.0)% 2.6% 4.7% Return on Beginning Net Worth (24.5)% .7% (6.1)% 4.9% 9.6% Return on Beginning Assets (20.0)% .5% (4.8)% 3.6% 6.7% Working Capital 5,166,898 $ 6,351,386 $ 6,133,435 $ 6,378,530 $ 6,994,937 Plant and Equipment 1,879,280 3,441,430 3,614,104 3,813,339 3,692,698 Total Assets 8,181,990 11,269,911 12,595,111 12,064,139 12,661,072 Long-Term Debt 0 530,000 600,000 670,000 1,551,590 Shareholders' Equity 6,967,832 9,227,083 9,172,308 9,509,595 9,318,098 Book Value Per Share 4.34 5.75 5.70 6.28 5.99 Shares Outstanding 1,604,163 1,604,163 1,608,163 1,514,813 1,556,155
STOCK MARKET INFORMATION The Company's Common Stock was listed on the National Association of Securities Dealers Automated Quotation System (NASDAQ) on the National Market System under the symbol PHOC until 1998 when it was moved to the NASDAQ Small-Cap Issues because it did not meet the aggregate market value requirement. The Company has never paid any cash dividends. It intends to retain earnings to finance the development of its business. Shareholders of record on December 31, 1997 numbered 427. The Company estimates that an additional 900 shareholders own stock held for their account at brokerage firms and financial institutions. The following table sets forth the high and low transactions for the eight fiscal quarters ending during the years set forth below. The source of the quotations is the National Association of Securities Dealers Inc. Monthly Statistical Report. 1997 1996 ---------------------------------------------- QUARTER HIGH LOW HIGH LOW - ------- ---- --- ---- --- March 31 4 3/8 3 1/8 4 1/8 3 3/8 June 30 3 3/4 3 3 7/8 3 1/4 September 30 3 1/2 2 1/2 5 1/2 3 1/4 December 31 3 2 1/4 3 15/16 3 1/8 INDEPENDENT AUDITOR'S REPORT Board of Directors and Stockholders Photo Control Corporation We have audited the accompanying consolidated balance sheets of Photo Control Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of changes in stockholders' equity, operations and cash flows for each of the three years in the period ended December 31,1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Photo Control Corporation and subsidiaries as of December 31, 1997 and 1996 and the consolidated results of operations and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Minneapolis, Minnesota Virchow, Krause & Company, LLP January 30, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Photo Control Corporation is a manufacturer of professional photographic equipment with three major product lines; long-roll cameras, photographic package printers and electronic flash equipment. The cameras and electronic flash equipment are used primarily for portrait, commercial and school photography. The package printers are used by photographic processing labs which specialize in producing color print packages such as wedding and school photography. In recent years there has been a consolidation in the markets served by our equipment, resulting in excess capacity and sales to fewer customers. In addition, the technology related to many areas of image processing is rapidly changing and as a result, customers are reluctant to purchase new equipment. Because of declining sales and profits since 1993, the Norman Enterprises, Inc. flash equipment facility in California was sold and its manufacturing operations consolidated into the camera and package printer operations in Minneapolis during 1997. All sales and marketing functions were combined and the use of independent sales representatives discontinued. All products are sold by employees with exception of package printer line products which are sold by Bremson, Inc., an unaffiliated professional photographer supplier. The Company anticipates that, because of the above described restructuring and related cost reductions future profit margins will improve. In addition, over the past several years, the company has manufactured OEM products for the professional photographic market in all three product lines. It is expected that sales of these products will continue over the next several years but the sales amount is uncertain. RESULTS OF OPERATIONS The following table presents selected items from the Company's Consolidated Statements of Operations expressed as percentages of sales for the year indicated. YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 ---- ---- ---- Sales 100.0% 100.0% 100.0% Gross Margin 21.6 28.6 26.6 Marketing & Administrative 27.1 19.7 23.0 Research, Development & Engineering 10.1 7.8 8.9 Interest .5 .5 .7 Provision for Inventory Losses 12.1 Moving Cost .9 Gain on Sale of Building (6.1) Income (Loss) Before Taxes (23.0) .6 (6.0) Net Income (Loss) (21.7) .5 (4.0) SALES Sales in 1997 decreased by $3,788,000 or 26.7% as compared to 1996. Of this decrease, $2,510,000 is attributable to the electronic flash equipment product line. Sales of OEM flash equipment equipment to three customers declined by $1,487,000. These customers are in various phases of their replacement or expansion plans which results in the variable nature of these sales. Sales of flash equipment declined $501,000 in the fourth quarter of 1997 compared to 1996. In October 1997, the production of the electronic flash equipment was moved from California to Minnesota and because of the required shut down and unexpected delays, products were not available for shipment. The balance of the $522,000 sales decline is related to dealer sales which in recent years have been very competitive and price sensitive. Sales of the camera product line declined $836,000 in 1997 as compared to 1996. Sales to one major customer declined $706,000 because of the completion of a multi-year contract to this customer in 1996. In 1997, a new zoom camera was introduced; however, due to engineering and production delays, sales lagged behind expectations. It is anticipated that future annual sales of this new unit will increase over 1997. Sales of the package printer line decreased by $442,000 as compared to 1996. The market for package printers is very saturated and unless new innovative products are introduced it is expected that the market will continue to decline. In 1997, Bremson, Inc., an unaffiliated professional photographer supplier, began to sell and market the package printers. A joint effort is underway with Bremson to upgrade the product line to make it more attractive for multiple application. Consolidated sales in 1996 decreased by $486,606 or 3.3% from 1995. Sales to a major customer decreased by $927,000 in 1996 from 1995. A substantial portion of the sales to this customer consisted of a dual-ported zoom lens camera that were made under a multi-year contract. Sales of professional cameras declined by $936,000 in 1996 from 1995, of which $644,000 is attributable to the customer discussed above. The standard zoom lens camera comprised the majority of the sales for the professional camera line. Because this unit had been sold for over twelve years, the market had in 1996 become somewhat saturated and a new camera was introduced in 1997. Sales of the printer line decreased by $494,000 in 1996 as compared to 1995, of which $326,000 is attributed to the major customer previously discussed. Sales of flash equipment increased $943,000 in 1996 from 1995 which is attributed to higher OEM equipment sales. Two customers accounted for substantially all the OEM sales. Prices of the regular dealer flash equipment were raised five percent in 1996 and the camera products prices were raised four percent. GROSS MARGINS The gross margins were 21.6%, 28.6% and 26.6% for the years ended December 31, 1997, 1996 and 1995, respectively. Due to the substantial decline in sales volume during 1997, manufacturing overhead could not be completely absorbed as compared to 1996 resulting in a 3% drop of the 7% decline in gross margins. The move of the electronic flash equipment product line from California to Minnesota caused numerous inefficiencies in closing down and restarting production of the product line. The inefficiencies impacted all three product lines due to the integration of manufacturing functions. The gross margin increase in 1996 from 1995 primarily reflects the price increases implemented during 1996. The Company anticipates that the gross margin in future periods will approximate the 1995 level. However, gross margins are expected to fluctuate on a quarterly basis because of product mix changes and the seasonality of sales. MARKETING AND ADMINISTRATIVE Marketing and administrative expenses were $2,820,346, $2,804,186 and $3,377,883 for the years ended December 31, 1997, 1996 and 1995, respectively. As a percentage of sales, marketing and administrative expenses have changed to 27.1% in 1997 from 19.7% in 1996 and from 23.0% in 1995. The restructuring previously discussed was completed at the end of the fourth quarter. It is anticipated that these expenses will decrease by approximately $700,000 in 1998 due to the reorganization. The decrease in 1996 from 1995 reflects lower marketing expenses due to a revision in the commission programs and reduced compensation cost. RESEARCH, DEVELOPMENT AND ENGINEERING The Company believes that timely development of new products and features is required to maintain and enhance its competitive position. Accordingly, the Company is committed to an aggressive level of research, development and engineering spending. Research, development and engineering expenses were $1,055,843 $1,107,985 and $1,309,738 for the years ended December 31, 1997, 1996 and 1995, respectively. Because of the rapidly changing technology in the image processing market, spending is expected to continue at the same level in 1998 as 1997. The 1996 expense decrease of $201,753 is primarily attributable to the printer product line. A number of projects were completed and the related use of outside engineers declined. INTEREST Interest expense decreased to $56,860 for the year ended December 31, 1997 as compared to $67,818 for the year ended December 31, 1996 and $108,387 for the year ended December 31, 1995. Upon the sale in 1997 of the building in California, the Industrial Development Revenue Bond secured by the building was paid off. Also, excess cash from the sale was to used to pay off the line of credit in November 1997. The decrease in 1996 from 1995 reflects lower usage of the Company's line of credit during 1996. QUARTERLY RESULTS, GAIN ON SALE OF BUILDING, PROVISION FOR INVENTORY OBSOLESCENCE, AND MOVING COSTS Historically, second and third quarter sales are relatively high which reflects the seasonal demand for the Company's products. 1997, 1996 and 1995 reflected the typical seasonality. In the fourth quarter of 1997 the building in California was sold at a gain of $645,671. With the exception of space leased for a sales and service facility, all of the California operations were moved to Minnesota in October and November of 1997. A complete review was made of the inventory for all three product lines. It was determined that the electronic flash equipment line had obsolete inventory of $828,000 and the printer product line $432,000. Approximately $200,000 of the electronic flash equipment obsolete inventory relates to inventory loaned to schools over the past several years and although useable by the schools, cannot be resold. Because of the changing technology it was determined that certain electronic flash equipment and package printer products should be discontinued and replaced with new or updated products. Moving costs of $99,589 were incurred for transfer of inventory and equipment from California to Minnesota and for severance pay to those employees who worked through the date of the move. INCOME TAXES The company will receive a refund $197,000 in 1998 for losses incurred in 1997 that can be carried back to previous open tax years. In addition there is $400,000 of Federal tax loss carry forward to offset against future taxable income. Because of uncertainty related to the realization of the tax benefit, the company has placed a $748,000 valuation allowance against its deferred tax asset of $948,000. It is expected that the net tax asset of $200,000 will be realized in future periods through profitable operations. LIQUIDITY AND CAPITAL RESOURCES Cash increased to $808,169 at December 31, 1997 from $736,031 at December 31, 1996. Working capital decreased to $5,166,898 at December 31, 1997 from $6,351,386 at December 31, 1996. Proceeds from the sale of the building was $2,105,191 which was used to pay off the Industrial Development Revenue Bond balance of $565,000 and to pay off the open line of credit which had a balance of $600,000 in November 1997, the date of sale. The net investment in plant and equipment decreased to $1,879,280 at December 31, 1997 from $3,441,430 at December 31, 1996 because of the building sale. Inventories have declined to $4,322,603 at December 31, 1997 from $5,804,503 at December 31, 1996, attributable to both the increase in the reserve for inventory obsolescence and the reduction in inventory due to decreased sales volume. Capital expenditures were $290,461 in 1997, $207,009 in 1996 and $231,817 in 1995. The Company estimates that additional capital investments for property and equipment will be approximately $300,000 in 1998. The Company has an unsecured line of credit for $1,500,000 at the prime rate of interest. At December 31, 1997, there were no borrowings under the line. The Company has repurchased its common stock in the amounts of $13,504 and $285,320 for the years ended December 31, 1996, and 1995, respectively. The Board of Directors had authorized the purchase of common stock of up to a total of $2,000,000. At December 31, 1997, $388,000 of this authorized amount remained available to repurchase common stock. The Company has not paid any cash dividends on its common stock and currently expects that any future earnings will be retained for use in its business. The Company believes that its current cash position, its cash flow from operations and amounts available from bank borrowing should be adequate to meet its anticipated cash needs for working capital and capital expenditures during 1998. CAUTIONARY STATEMENT Statements included in this management's discussion and analysis of financial condition and results of operations, in the letter to shareholders, elsewhere in this annual report, in the Company's Form 10-K and in future filings by the company with the Securities and Exchange Commission which are not historical in nature are identified as "forward looking statements" for the purposes of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company cautions readers that forward looking statements, including without limitations, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements. The risks and uncertainties include, but are not limited to, economic conditions, product demand and industry capacity, competitive products and pricing, manufacturing efficiencies, new product development and market acceptance, the regulatory and trade environment, and any other risks indicated. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 ---------------------- 1997 1996 1995 ------------ ------------ ------------ Net Sales ................................... $ 10,423,244 $ 14,211,920 $ 14,698,526 Cost of Sales ............................... 8,175,528 10,140,652 10,783,382 ------------ ------------ ------------ Gross Profit ................................ 2,247,716 4,071,268 3,915,144 Expenses Marketing and Administrative .......... 2,820,346 2,804,186 3,377,883 Research, Development and Engineering . 1,055,843 1,107,985 1,309,738 Interest .............................. 56,860 67,818 103,387 Provision for Inventory Losses (Note 3) 1,260,000 Moving Cost ........................... 99,589 Gain on Sale of Building .................... (645,671) ------------ ------------ ------------ 4,646,967 3,979,989 4,791,008 Income (Loss) Before Income Taxes ........... (2,399,251) 91,279 (875,864) Income Tax Provision (Benefit) (Note 6) .... (140,000) 23,000 (294,000) ------------ ------------ ------------ Net Income (Loss) ........................... $ (2,259,251) 68,279 $ (581,864) ============ ============ ============ Net Income (Loss) Per Common Share (Note 2) . $ (1.41) $ 04 $ (.37) ============ ============ ============
See accompanying Notes to Consolidated Financial Statements CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ------------ NUMBER ADDITIONAL OF PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS ----------- ----------- ----------- ----------- Balance at December 31, 1994 ........ 1,514,813 $ 121,185 $ 927,645 $ 8,460,765 Repurchase of Stock ............... (63,750) (5,100) (48,450) (231,770) Stock Options Exercised (Note 8) .. 148,752 11,900 484,605 -- Contribution to Profit Sharing Plan 8,348 668 32,724 -- Net Income (Loss) ................. -- -- -- (581,864) ----------- ----------- ----------- ----------- Balance at December 31, 1995 ........ 1,608,163 128,653 1,396,524 7,647,131 Repurchase of Stock ............... (4,000) (320) (3,040) (10,144) Net Income ........................ -- -- -- 68,279 ----------- ----------- ----------- ----------- Balance at December 31, 1996 ........ 1,604,163 $ 128,333 $ 1,393,484 $ 7,705,266 Net Income (Loss) ................ -- -- -- (2,259,251) ----------- ----------- ----------- ----------- Balance at December 31, 1997 ........ 1,604,163 $ 128,333 $ 1,393,484 $ 5,446,015 =========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ----------- ASSETS 1997 1996 - ---------------------------------------------------------------------------------------------- Current Assets Cash and Cash Equivalents ................................ $ 808,169 $ 736,031 Accounts Receivable, Less Allowance of $95,000 and $92,000 505,373 522,279 Other Receivables ........................................ 2,700 2,700 Inventories (Notes 2 and 3) .............................. 4,322,603 5,804,503 Prepaid Expenses ......................................... 201,899 270,101 ------------ ------------ Total Current Assets .................................. 5,840,744 7,335,614 ------------ ------------ Investments and Other Assets Cash Value of Life Insurance ............................. 261,966 238,867 Deferred Income Taxes (Note 6) ........................... 200,000 254,000 ------------ ------------ Total Investments and Other Assets .................... 461,966 492,867 ------------ ------------ Plant and Equipment (Note 2) Land and Building ........................................ 2,204,871 4,240,777 Machinery and Equipment .................................. 3,303,719 3,363,630 Accumulated Depreciation ................................. (3,629,310) (4,162,977) ------------ ------------ Total Plant and Equipment ............................. 1,879,280 3,441,430 ------------ ------------ $ 8,181,990 $ 11,269,911 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------- Current Liabilities Current Maturities of Long-Term Debt (Note 4) ............ $ $ 111,296 Accounts Payable ......................................... 288,724 453,572 Accrued Payroll and Employee Benefits .................... 270,214 303,320 Accrued Expenses ......................................... 114,908 116,040 ------------ ------------ Total Current Liabilities ............................. 673,846 984,228 ------------ ------------ Long-Term Debt (Note 4) ..................................... 530,000 ------------ ------------ Other Accrued Expense (Note 5) .............................. 540,312 528,600 ------------ ------------ Stockholders' Equity (Note 8) Common Stock Par Value $.08 Authorized 5,000,000 Shares Issued 1,604,163 ............................... 128,333 128,333 Additional Paid-In Capital ............................... 1,393,484 1,393,484 Retained Earnings ........................................ 5,446,015 7,705,266 ------------ ------------ Total Stockholders' Equity ............................ 6,967,832 9,227,083 ------------ ------------ $ 8,181,990 $ 11,269,911 ============ ============
See accompanying Notes to Consolidated Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ---------------------- 1997 1996 1995 ----------- ----------- ----------- Cash flows from operating activities: Net income (Loss) from operations .............. $(2,259,251) $ 68,279 $ (581,864) Items not affecting cash- Depreciation ................................ 348,755 374,797 401,444 Amortization ................................ -- -- 19,352 Deferred compensation ....................... 57,260 30,726 26,453 (Gain) Loss on sale of building and equipment (626,706) 3,886 8,774 Deferred income taxes ....................... 54,000 78,000 (37,000) Provision for inventory obsolescence ........ 1,381,332 191,000 186,000 Payment of deferred compensation ............... (45,548) (24,620) (24,620) Change in operating assets and liabilities: Receivables .............................. 16,906 753,267 249,056 Inventories .............................. 100,568 662,833 (1,116,976) Prepaid expenses ......................... 68,202 81,162 (170,739) Accounts payable ......................... (164,848) (931,258) 602,380 Accrued expenses ......................... (34,238) 84,497 (95,566) ----------- ----------- ----------- Net cash provided (used) by operating activities ................ (1,103,568) 1,372,569 (533,306) ----------- ----------- ----------- Cash flows from investing activities: Proceeds from sale of building and equipment ... 2,130,562 1,000 20,834 Additions to plant and equipment ............... (290,461) (207,009) (231,817) Additions to cash value of life insurance ...... (23,099) (23,604) (21,228) ----------- ----------- ----------- Net cash provided (used) in investing activities .............. 1,817,002 (229,613) (232,211) ----------- ----------- ----------- Cash flows from financing activities: Repayment of long-term debt .................... (641,296) (89,320) (56,996) Borrowing (repayment) on line of credit-net .... -- (450,000) 450,000 Proceeds from stock options exercised .......... -- -- 496,505 Repurchase of Company's common stock ........... -- (13,504) (285,320) ----------- ----------- ----------- Net cash provided (used) by financing activities ............... (641,296) (552,824) 604,189 ----------- ----------- ----------- Change in cash and cash equivalents ............... 72,138 590,132 (161,328) Cash and cash equivalents at beginning of year .... 736,031 145,899 307,227 ----------- ----------- ----------- Cash and cash equivalents at end of year .......... $ 808,169 $ 736,031 $ 145,899 =========== =========== =========== Supplemental disclosure information: Income tax payments ............................ $ 2,239 $ 176,000 $ 20,900 =========== =========== =========== Income tax refunds ............................. $ 207,206 $ 360,233 $ 170,562 =========== =========== =========== Interest paid .................................. $ 56,860 $ 67,818 $ 103,387 =========== =========== ===========
Non-Cash Transaction: The Company contributed 8,343 shares of common stock to its profit sharing plan at a value of $33,392 during the year ended December 31, 1995. See accompanying Notes to Consolidated Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BUSINESS DESCRIPTION Photo Control Corporation (the Company) designs, manufactures and markets professional cameras, photographic package printers, electronic flash equipment, and related photographic accessories. The principal market for the Company's long-roll camera equipment is the sub-segment of the professional photography market requiring high-volume equipment, such as elementary and secondary school photographers. The market with respect to electronic flash equipment is broader, extending to all professional and commercial photographers and to experienced amateur photographers. The market for photographic package printers is photographic processing labs which specialize in producing photographic color print packages such as those often produced for weddings and school photography. The geographic market in which the Company competes with respect to long-roll camera equipment, flash equipment, and printers consists of the entire United States and, to a lesser extent, some foreign countries. In 1997, sales of camera equipment was the highest followed by flash equipment and printer sales; however, sales in all three product lines declined from 1996. As a result of the sales decrease and operating losses the flash equipment operation was moved from California to Minnesota and both the flash equipment and printer operation consolidated into the camera operation. The land and building in California was sold at a gain of $645,671 and the related debt of $565,000 paid off. There has been a consolidation of school photography and studio portrait photography in recent years which has concentrated the Company's sales to fewer customers. It is expected that this trend will continue. In 1997, two customers accounted for 13.3% and 8.4% of the Company's sales and in 1996 for 11.0% and 14.3%, respectively. Due to the rapidly changing technology related to many areas of image processing, the company has discontinued manufacturing of many products and is replacing them with newer, updated equipment. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION - The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Norman Enterprises, Inc. and Nord Photo Engineering, Inc. All material inter-company transactions and account balances have been eliminated. USE OF ESTIMATES - Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements. REVENUE RECOGNITION - Sales are recorded when the product is shipped. INVENTORIES - Inventories of raw materials, work in process and finished goods are valued at the lower of cost (first-in, first-out) or market. Market represents estimated realizable value in the case of finished goods and replacement or reproduction cost in the case of other inventories. Because of changing technology and market demand, inventory is subject to obsolescence. An annual review is made of all inventory to determine if any obsolete, discontinued or slow moving items are in inventory. Based on this review, inventory is disposed of or an allowance for obsolescence established to cover any future disposals. PLANT AND EQUIPMENT - Plant and equipment are stated at cost. Depreciation is computed primarily on the straight-line method over the estimated useful lives of 15 to 35 years for the buildings and 3 to 7 years for machinery and equipment. Ordinary maintenance and repairs are charged to operations, and expenditures which extend the physical or economic life of property and equipment are capitalized. Gains and losses on disposition of property and equipment are recognized in operations and the related asset and accumulated depreciation accounts are adjusted accordingly. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts for cash, receivables, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The fair value of long-term debt is estimated based on current rates for tax-exempt debt of similar maturities and is not materially different than its carrying value. RESEARCH AND DEVELOPMENT - Expenditures for research and development are charged against operations as incurred. INCOME TAXES - Deferred income taxes are provided for expenses recognized in different time periods for financial reporting and income tax purposes. These differences consist primarily of deferred compensation that is not deductible for taxes and inventory which has a higher tax basis than for financial reporting purposes. CASH EQUIVALENTS - The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be a cash equivalent. Cash and cash equivalents consist of money market mutual funds, short-term securities and bank balances. The Company at December 31, 1997 and periodically throughout the year has maintained balances in various operating and money market accounts in excess of federally insured limits. NET INCOME PER SHARE - Net income per common share was based on the weighted average number of common shares outstanding during the period when computing the basic earnings per share. When dilutive, stock options are included as equivalents using the treasury stock market method when computing the diluted earnings per share. For the years ended December 31, 1997, 1996 and 1995 there was no dilutive effect for stock options.. NOTE 3. INVENTORIES The following inventories were on hand at December 31: 1997 1996 1995 ---- ---- ---- Raw Materials............. $2,666,732 $3,851,706 $4,272,903 Work in Process........... 492,833 559,321 819,686 Finished Goods............ 1,163,038 1,393,476 1,565,747 --------- --------- --------- $4,322,603 $5,804,503 $6,658,336 ========= ========== ========== Due to the changing market conditions discussed in Note 1, a thorough review was made of the inventory in all three product lines. As a result, a provision for inventory losses of $1,260,000 pertaining to the electronic flash and printer product lines was charged against operations in 1997. At year end December 31, 1997 the reserve for inventory obsolescence is $1,150,000. NOTE 4. LONG-TERM DEBT AND SHORT-TERM LINE OF CREDIT Long-term debt at each year ended December 31, consisted of the following: 1997 1996 ---- ---- 65% of Prime Rate Industrial Development Revenue Bond $ -- $600,000 Other Notes Payable ................................. -- 41,296 -------- -------- -- 641,296 Less Amount Due Within One Year ..................... -- 111,296 -------- -------- Amount Due After One Year ........................... -- $530,000 ======== ======== The Company has a $1,500,000 unsecured line of credit agreement at the prime rate of interest. The following summarizes the borrowings under the line of credit during each year ended December 31: 1997 1996 ---- ---- Outstanding balance at year end ........ $ -- $ -- Maximum balance at any month end ....... 600,000 750,000 Average month end balance .............. 253,846 338,462 Average interest rate .................. 8.5% 8.3% NOTE 5. COMMITMENTS The Company has deferred compensation agreements with key management personnel which is funded by life insurance. Under the agreements, covered individuals become vested immediately upon death or if employed at age 65. Compensation costs are recognized over the period of service and recorded as other accrued expense. The company has a non-cancelable operating lease commitment for a sales and service facility in Burbank, California. The lease expires in 2002 with annual minimum rents of $36,000. The company has an employment agreement with the president of Norman Enterprises, Inc. through the year 2000 in the amount of $100,000 annually plus commission on certain sales. NOTE 6. INCOME TAXES The income tax provision shown in the statement of operations is detailed below for each year ended December 31: Current 1997 1996 1995 ---- ---- ---- Federal....................... (197,000) $ (58,000) $ (260,000) State......................... 3,000 3,000 3,000 Deferred .......................... 54,000 78,000 (37,000) ------ ------ -------- (140,000) $ 23,000 $ (294,000) ========= ========= =========== The income tax provision for continuing operations varied from the federal statutory tax rate as follows for each year ended December 31: 1997 1996 1995 ---- ---- ---- U.S. Statutory Rate....................................(34.0)% 34.0% (34.0)% Surtax Exemption....................................... (12.9) State Income Taxes, Net of Federal Income Tax Benefit.. (3.0) 2.7 (.2) Amortization of Goodwill............................... .7 Miscellaneous Items.................................... 1.4 (.3) Valuation Allowance.................................... 31.2 (.6) ------ ----- ------- (5.8%) 25.2% (33.6)% ====== ===== ======= The Company does not file on a unitary tax basis in all states. As a result certain losses which are offset against income on a federal tax basis cannot be used in computing taxes in some states, which caused a lower than expected tax benefit for the year ended December 31, 1997 and 1995. The company has Federal and state tax loss carry forwards of approximately $400,000 and 1,400,000, respectively, which expire in varying amounts from 1998 through 2012. The following summarizes the tax effects of the significant temporary differences which comprise the deferred tax asset for each year ended December 31: 1997 1996 ---- ---- Inventory Costs 495,000 $ 269,000 Deferred Compensation 137,000 111,000 Bad Debt Reserves 34,000 28,000 Accrued Benefits 47,000 29,000 Accrued Costs 41,000 Net Operating Loss Carry forward 194,000 Less Accelerated Depreciation (183,000) --------- --------- Net Deferred Tax Asset 948,000 254,000 Valuation Allowance (748,000) --------- --------- Net Deferred Income Tax $200,000 $ 254,000 ========= ========= NOTE 7. PROFIT SHARING PLAN The contribution to the Company's profit sharing plan, which covers qualified full-time employees was $12,000 for the year ended December 31, 1996. No contributions were made for the years ended December 31, 1997 and 1995. NOTE 8. STOCK OPTIONS Non-qualified stock options to purchase shares of the Company's common stock have been granted to certain officers, directors, and key employees. Option prices of all the grants were not less than the fair market value of the Company's common stock at dates of grants. The Company has elected to account for non-qualified stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, no compensation expense has been recognized for stock options. The following summarizes the changes in the options for the years ended December 31: (Exercise prices are computed on a weighted-average basis).
1997 1996 1995 -------------------- -------------------- ---------------------- NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE --------- ----- --------- ----- --------- ----- Balance at Beginning of Year........ 239,375 4.47 137,375 $5.08 260,127 $3.92 Granted............................. 25,000 3.50 115,000 $3.73 29,000 $4.75 Exercised........................... - - (148,752) 2.80 Expired............................. (57,375) 4.70 (13,000) $4.47 (3,000) $6.00 -------- -------- ------ Balance at End of Year.............. 207,000 4.29 239,375 $4.47 137,375 $5.08 ======= ======= =======
The following summarizes the outstanding and exercisable options as of December 31, 1997 and the potential realizable value assuming annual rates of stock price appreciation for the option term:
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OPTIONS OUTSTANDING EXERCISABLE OPTIONS OF STOCK PRICE APPRECIATION - --------------------------------------------------------------------- FOR OPTION TERM RANGE NUMBER OF REMAINING EXERCISE NUMBER EXERCISE --------------------------- OF PRICE SHARES LIFE (YEARS) PRICE OF SHARES PRICE 5%($) 10%($) - -------------------------------------------------------------------------------------------------- $5.00 71,000 .7 $5.00 71,000 $5.00 98,100 216,700 $5.75 10,000 1.6 $5.75 6,667 $5.75 15,900 35,100 $4.75 10,000 2.5 $4.75 3333 $4.75 13,100 29,000 $3.12 to $3.75 91,000 3.4 $3.74 93,900 207,600 $3.50 25,000 4.4 $3.50 24,200 53,400 ------ ------ 207,000 81,000 ======= ======
Had compensation cost for options granted during the three years ended December 31, 1997 been measured by the fair value based method, Company expense would have increased by approximately $99,000, $53,000 and $16,000, respectively. The option costs measured using the fair value based method reduce earnings per share by $.06, $.03 and $.01, respectively. The weighted average fair value of options granted was estimated using the Black-Scholes option pricing model and assuming a 6.5% risk-free interest rate, 50% expected volatility, five year option term and no anticipated dividends. NOTE 9. MAJOR CUSTOMER During the years ended December 31, 1997, 1996, and 1995, the Company derived 8.4%, 14.3%, and 20.2%, respectively, of its sales from one unaffiliated customer. Also, a second unaffiliated customer accounted for 13.3% and 11.0% of sales for the years ended December 31, 1997 and 1996, respectively. NOTE 10. QUARTERLY INFORMATION (UNAUDITED) The following is a summary of the unaudited quarterly financial information for the years ended December 31, 1997, 1996 and 1995.
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) YEAR ENDED DECEMBER 31, 1996 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL -------- -------- -------- -------- ----- Sales ..................... $ 3,260,981 $ 4,466,143 $ 4,618,348 $ 1,866,448 $14,211,920 Gross Operating Earnings .. 839,392 1,574,513 1,435,081 222,282 4,071,268 Net Income (Loss) ......... (196,041) 330,320 224,252 (290,252) 68,279 Net Income (Loss) Per Share (.12) .20 .14 (.18) .04 YEAR ENDED DECEMBER 31, 1995 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL -------- -------- -------- -------- ----- Sales ..................... $ 3,044,080 $ 3,496,583 $ 4,858,565 $ 3,299,298 $14,698,526 Gross Operating Earnings .. 770,677 1,014,055 1,417,375 713,037 3,915,144 Net Income (Loss) ......... (396,237) (45,355) 167,427 (307,699) (581,864) Net Income (Loss) Per Share (.25) (.03) .11 (.20) (.37)
CORPORATE DIRECTORY CORPORATE OFFICERS DIRECTORS JOHN R. HELMEN Chief Executive Officer LESLIE A. WILLIG and President Chairman PATRICK J. GILLIGAN THOMAS J. CASSADY Executive Vice President Retired President of Merrill Lynch Pierce Fenner & Smith CURTIS R. JACKELS Vice President - Treasurer GEORGE A. KIPROFF Retired President of MARK SIMONETT DEK Identification Systems Secretary JAMES R. LOOMIS Retired President of Magnavox Electronic System Co. LEGAL COUNSEL JOHN R. HELMEN Gray, Plant, Mooty, Mooty & Chief Executive Officer and President Bennett, P.A. Minneapolis, Minnesota JOE M. KILGORE Partner in Law Firm of INDEPENDENT PUBLIC ACCOUNTANTS McGinnis, Lochridge and Kilgore Virchow, Krause & Company, LLP Minneapolis, Minnesota STOCK TRANSFER AGENT Norwest Bank Minnesota, N.A. South St. Paul, Minnesota STOCK LISTED NASDAQ Stock symbol: PHOC EX-21 5 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT NAME OF SUBSIDIARY STATE OF INCORPORATION PERCENT OWNED - ------------------ ---------------------- ------------- Norman Enterprises, Inc. California 100% Nord Photo Engineering, Inc. Minnesota 100% EX-23 6 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, 1997, of our report, dated January 30, 1998, appearing in the Company's 1996 Annual Report to Shareholders. We also consent to the incorporation by reference of such report in the registration statements on Form S-8 for the Photo Control Stock Option Plan. In the course of our audit of the financial statements referred to in our report, dated January 30, 1998, included in the Company's 1997 Annual Report to Shareholders, we also audited the supporting schedule listed in Item 14(a)(2) of this Annual Report on Form 10-K. In our opinion, the schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. January 30, 1998 VIRCHOW KRAUSE, & COMPANY, LLP Minneapolis, Minnesota EX-25 7 POWER OF ATTORNEY CONCERNING FORM 10-K FISCAL 1997 EXHIBIT 25 POWER OF ATTORNEY CONCERNING FORM 10-K FISCAL 1997 Each person whose signature appears below constitutes and appoints LESLIE A. WILLIG his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and any or all amendments to such Annual Report on other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Signature Date - --------- ---- /s/John R. Helmen, Chief Executive Officer, President and Director (Principal executive officer) March 13, 1998 /s/Leslie A. Willig March 13, 1998 Leslie A. Willig, Chairman /s/Curtis R. Jackels March 13, 1998 Curtis R. Jackels, Vice President and Treasurer (principal financial and principal accounting officer) /s/George A. Kiproff March 13, 1998 George A. Kiproff, Director /s/James R. Loomis March 13, 1998 James R. Loomis, Director /s/Thomas J. Cassady March 13, 1998 Thomas J. Cassady, Director /s/Joe M. Kilgore March 13, 1998 Joe M. Kilgore, Director EX-27 8 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1997 DEC-31-1997 808,169 0 508,073 0 4,322,603 5,840,744 5,508,590 3,629,310 8,181,990 673,846 0 0 0 128,333 6,839,499 8,181,990 10,423,244 10,423,244 8,175,528 8,175,528 4,590,107 0 56,860 (2,399,251) (140,000) 0 0 0 0 (2,259,251) (1.41) 0
-----END PRIVACY-ENHANCED MESSAGE-----