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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For Quarter Ended June 30, 2003 Commission File Number 0-7475
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PHOTO CONTROL CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Minnesota 41-0831186
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4800 Quebec Avenue North, Minneapolis, Minnesota 55428
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number (763) 537-3601
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- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year if changes since last
report.)
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 twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at July 31, 2003
- ---------------------------- ----------------------------
Common Stock, par value $.08 1,604,163 Shares
1
PHOTO CONTROL CORPORATION
INDEX
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PART I Page Number
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ITEM 1: Financial Information
Balance Sheets -
June 30, 2003 and December 31, 2002 3
Statements of Operations -
Six Months and Three Months Ended
June 30, 2003 and 2002 4
Statements of Cash Flows -
Six Months Ended June 30, 2003 and 2002 5
Notes to Financial Statements 6
ITEM 2: Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7
ITEM 4: Controls and Procedures 8
PART II
- -------
ITEM 2: Changes in Securities 9
ITEM 4: Results of Vote of Security Holders 9
ITEM 6: Exhibits and Reports on Form 8-K 9
Signatures 9
2
PART I
------
ITEM 1: FINANCIAL INFORMATION
BALANCE SHEETS
(UNAUDITED) (AUDITED)
JUNE 30 DECEMBER 31
2003 2002
----------- -----------
ASSETS
------
Current Assets
- --------------
Cash $ 3,353,645 $ 3,520,622
Accounts Receivable 692,631 379,045
Inventories 2,759,275 3,144,766
Prepaid Expenses 66,161 110,805
Refundable Income Taxes 76,591 171,127
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Total Current Assets 6,948,303 7,326,365
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Other Assets
- ------------
Patent Right, Net of Amortization 1,182,136 1,270,798
Cash Value of Life Insurance 100,998 96,285
----------- -----------
Total Other Assets 1,283,134 1,367,083
----------- -----------
Plant and Equipment
- -------------------
Land and Building 2,181,120 2,181,120
Machinery and Equipment 2,508,595 2,485,818
Accumulated Depreciation (3,545,297) (3,425,297)
----------- -----------
Total Plant and Equipment 1,144,418 1,241,641
----------- -----------
$ 9,375,855 $ 9,935,089
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
- -------------------
Current Portion of Purchase Contract $ 55,120 $ 184,920
Accounts Payable 189,604 156,977
Accrued Payroll and Employee Benefits 152,099 141,751
Accrued Expenses 363,447 316,143
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Total Current Liabilities 760,270 799,791
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Accrued Retirement Benefit 860,898 873,548
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Stockholders' Equity
- --------------------
Common Stock 128,333 128,333
Additional Paid-In Capital 1,393,484 1,393,484
Retained Earnings 6,232,870 6,739,933
----------- -----------
Total Stockholders' Equity 7,754,687 8,261,750
----------- -----------
$ 9,375,855 $ 9,935,089
=========== ===========
See accompanying notes to financial statements.
3
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net Sales $ 1,700,519 $ 2,027,180 $ 3,171,719 $ 3,730,655
Cost of Sales 1,418,934 1,517,846 2,647,663 2,849,654
----------- ----------- ----------- -----------
Gross Profit 281,585 509,334 524,056 881,001
Expenses
Marketing & Administrative 310,609 309,992 777,535 741,523
Research, Development & Eng 161,466 155,366 367,584 287,744
----------- ----------- ----------- -----------
Total Expenses 472,075 465,358 1,145,119 1,029,267
----------- ----------- ----------- -----------
Income(Loss) Before Taxes (190,490) 43,976 (621,063) (148,266)
Income Tax(Benefit) 19,000 (114,000) (50,000)
----------- ----------- ----------- -----------
Net Income(Loss) $ (190,490) $ 24,976 $ (507,063) $ (98,266)
=========== =========== =========== ===========
Net Income(Loss) Per Common
Share - Basic $ (.12) $ .02 $ (.32) $ (.06)
=========== =========== =========== ===========
Net Income(Loss) Per Common
Share - Diluted $ (.12) $ .02 $ (.32) $ (.06)
=========== =========== =========== ===========
See accompanying notes to financial statements.
4
STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS
ENDED JUNE 30
---------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net from operations $ (507,063) $ (98,266)
Items not affecting cash-
Depreciation 120,000 150,000
Deferred Compensation 24,000 24,000
Amortization 88,662 88,662
Provision for Obsolete Inventory 66,332 19,870
Loss on Sale of Equipment 1,114
Change in:
Receivables (313,586) (506,852)
Inventories 319,159 (25,395)
Prepaid Expenses 44,644 61,448
Accounts Payable 32,627 (30,727)
Accrued Expenses 57,652 (191,215)
Accrued and Refundable Income Taxes 94,536 50,440
Deferred Compensation (36,651) (36,651)
----------- -----------
Net Cash provided by (used in)
operating activities (9,688) (493,572)
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Cash flows from investing activities:
Additions to plant and equipment (22,776)
Additions to cash value of life insurance (4,713) (4,389)
----------- -----------
Net cash provided by (used in)
investing activities (27,489) (4,389)
----------- -----------
Cash flow from financing activities:
Payment on purchase contract (129,800) (152,360)
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Change in cash and cash equivalent (166,977) (650,321)
Beginning cash and cash equivalent 3,520,622 3,019,781
----------- -----------
Ending cash and cash equivalent $ 3,353,645 $ 2,369,460
=========== ===========
See accompanying notes to financial statements
5
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1
Notes to financial statements presented herein do not include all the
footnotes normally presented in the Company's annual report to
stockholders.
The accompanying financial statements reflect, in the opinion of
management, all normal and recurring adjustments necessary to a fair
presentation of financial position, results of operations, and cash
flows for the interim periods. The results for interim periods are not
necessarily indicative of results to be expected for the year.
NOTE 2
Inventories are analyzed as follows:
JUNE 30 DECEMBER 31
2003 2002
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Raw Materials $1,798,847 $1,904,392
Work in Progress 98,125 103,993
Finished Goods 1,322,303 1,536,381
Reserve for Obsolescence (460,000) (400,000)
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$2,759,275 $3,144,766
========== ==========
NOTE 3
Net Income(Loss) per common share is computed 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 method when
computing the diluted earnings per share.
NOTE 4
The compensation cost based on the fair values of options at grant
dates consistent with the provisions of SFAS No. 123, would be $54,280
for the year ended December 31, 2003 and $.03 per share of common
stock. For each quarter of 2003 the compensation cost would be
approximately $13,500 and approximately $.01 per share of common stock.
6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the second quarter ended June 30, 2003 were $1,700,000, a decrease of
16.1% or $327,000 from the second quarter in 2002. Sales for the six months
ended June 30, 2003 were $3,171,000, a decrease of 15.0% or $559,000 from the
same period in the prior year. The photographic products sales decreased
$302,000 in the second quarter of 2003 compared to the second quarter in 2002
which consisted of a camera product line sales decrease of $394,000, a printer
product line sales decrease of $17,000, a flash equipment product line sales
increase of $108,000, and a Lindahl shades product line sales decrease of
$49,000. Photographic product sales for the six months ended June 30, 2003 were
$2,577,000, a decrease of 15.3% or $464,000 over the same period in the prior
year which consisted of a camera product line sales decrease of $466,000, a
printer product line sales decrease of $54,000, a flash equipment product line
sales increase of $116,000 and a Lindahl shade product line sales decrease of
$60,000. The decrease in the photographic product line sales reflects a general
overall weakness in demand due to the economic downturn. In addition, many
customers are not buying new film cameras in anticipation of switching to
digital cameras in the near future. The Bookendz dock product line sales
increased $25,000 in the second quarter of 2003 as compared to 2002. Bookendz
dock product line sales decreased $95,000 for the six months ended June 30, 2003
over the same period in the prior year. Apple introduced two new powerbooks, a
twelve inch model and a seventeen inch model in January, 2003, however the
Company did not ship the twelve inch dock until June and is in the process of
evaluating a dock for the seventeen inch model.
The gross profit margin for the second quarter of 2003 decreased to 16.6% from
25.1% in the second quarter of 2002. The gross profit margin for the six months
ended June 30, 2003 decreased to 16.5% from 23.6% in the prior year period.
Because of the low sales volume in 2003 there was an under absorption of
manufacturing overhead of $483,000 compared to an under absorption of $372,000
in 2002 which accounts for half of the gross profit margin decline. The balance
of the decline is attributable to changes in the product mix and increasing
costs on the Bookendz product line.
Marketing and administrative expenses increased as a percentage of sales to
18.3% for the second quarter of 2003 from 15.3% for the second quarter of 2002
and increased to 24.3% for the first six months of 2003 from 19.9% for the same
period in 2002. Marketing and administrative expenses increased $1,000 for the
second quarter of 2003 as compared to the second quarter of 2002 and increased
$36,000 for the first six months of 2003 compared to the same period in 2002.
Research, development and engineering expense increased by $6,000 for the second
quarter of 2003 compared to the second quarter of 2002 and increased by $80,000
for the first six months of 2003 compared to the same period of 2002. The
increase in marketing and administrative expense reflects increased sales
promotion activity for trade shows,
7
advertising, and a direct user sales promotion. The increase in research,
development and engineering expense reflects the cost to develop two new digital
cameras.
LIQUIDITY & CAPITAL RESOURCES
Cash decreased by $167,000 to $3,353,000 since December 31, 2002. This cash
decrease for the six months was due to $10,000 of negative cash flow from
operations, $27,000 of capital equipment expenditures and payment of $130,000 on
the Bookendz purchase contract. At June 30, 2003 there was no borrowing under
the line of credit.
The Company believes that its cash flow from future operations and available
borrowing capacity will be sufficient to finance operations and capital
requirements.
CAUTIONARY STATEMENT
Statements included or incorporated by reference in this Quarterly Report on
Form 10-Q 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 limitation, 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
other risks indicated in filings with the Securities and Exchange Commission.
ITEM 4: CONTROLS AND PROCEDURES
(a)Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing date of this Quarterly Report on Form
10-Q, the Company's principal officer and principal financial officer have
concluded that the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the
"Exchange Act")) are effective to ensure that the information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
(b)Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses, and therefore there were no
corrective actions taken.
8
PART II
ITEM 2: CHANGES IN SECURITIES
Common Stock
------------ Additional
Number of Paid In Retained
Shares Amount Capital Earnings
---------- ---------- ---------- ----------
Balance at
December 31,2002 1,604,163 $ 128,333 $1,393,484 $6,739,933
Net Loss (507,063)
---------- ---------- ---------- ----------
Balance at
June 30, 2003 1,604,163 $ 128,333 $1,393,484 $6,232,870
========== ========== ========== ==========
ITEM 4: RESULTS OF VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held on May 15, 2003 the following matters
were approved by the Company's stockholders:
1. Set the number of directors at six (6). The voting results were:
1,193,156 For, 3,476 Against and 31,014 Abstained.
2. Elected James R. Loomis and John R. Helmen to the Board of Directors
for a three-year term or until the election and qualification of a
respective successor. The voting results were: 1,149,556 For, and
78,090 To Withhold Authority.
Scott S. Meyers, John McMillan, Curtis R. Jackels and Richard P.
Kiphart are directors of the Company whose terms of office continued
after the annual meeting of stockholders.
ITEM 6: EXHIBIT AND REPORTS ON FORM 8-K
A. Exhibits:
31.1 and 31.2 - Certifications
32 - Certification Pursuant to 18 U.S.C. ss. 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
B. Reports on Form 8-K - On April 16, 2003 a Current Report on Form 8-K
reporting under Items 7c and 9, the issuance of a press release announcing
financial results for the three months ended March 31, 2003.
Date: July 31, 2003 PHOTO CONTROL CORPORATION
By /s/ Curtis R. Jackels
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Curtis R. Jackels
Chief Executive Officer, and
President
By /s/ Christopher S. Lausen
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Christopher S. Lausen
Treasurer
9