2 Sides of Photo Firm’s Status : Positive and Negative

When Terence Ragan started looking for a franchise business in 1980, he was a 53-year-old nearing the end of his business career who just wanted to have a little fun. He turned down several investments, including a muffler shop, because, Ragan said, “Everyone that would come in your door was an adversary.” No fun.

Then he came across a company that processed film in just an hour. “It dealt with people’s happy moments,” Ragan said. In 1980, Los Angeles-based Fromex One Hour Photo Systems hired Ragan to market its franchises.

Fromex wasn’t fun for very long. The company was undercapitalized, so it borrowed money for advertising and promotion that Ragan needed to attract franchisees. It all proved too much of a financial strain. In 1982, Fromex went bankrupt.

Ragan, now 60, is still trying his luck in the smile business. He is chairman and founder of Finest Hour, based in Westlake Village, which owns or operates 28 one-hour photo stores in central California.

Personal Service Featured

The stores cater to serious photography buffs and charge about a third more than drugstores or discount stores because of their fast work and personal attention.

On the surface, Finest Hour appears to be doing fairly well. For the fiscal year ended Jan. 31, net income was $220,000 on $3.1 million in sales, marking three years of improved results. And, in January, Ragan took Finest Hour public, which netted the company $3.6 million.

But just how much fun the business will be for Finest Hour’s stockholders remains open to question.

Eighteen of the 28 Finest Hour stores are owned by individuals or limited partnerships but are managed by the company. As a result, last year two-thirds of the company’s revenue came from so-called development fees, which average $202,000 a store and are to be paid over five years, Ragan said.

The fees cover the cost of setting up a store and managing it day to day. Finest Hour also receives 10% of each store’s sales a year.

No Guarantees

But Finest Hour records that $202,000-per-store fee in a lump sum, even though it will not get full payment for another four years. If the stores start slowing down, Finest Hour has no guarantee that those development fees will keep coming.

Already some of Finest Hour’s stores are suffering. Just 12 of its stores have been open for the two years needed for a year-to-year comparison, but five of those suffered declining revenues in the past year. Ragan acknowledged that he plans to close or move one of those stores.

To date most of Finest Hour’s stores have been in smaller markets, such as Bakersfield and Stockton. “We didn’t have a lot of competition, and when you don’t have a lot of competition, it’s real easy,” Ragan said.

But one-hour photo-developing stores are catching on, even in smaller cities. When Finest Hour opened its first Bakersfield store in 1982, there was just one other store developing film in an hour. Today there are at least 10.

Finest Hour has $1.4 million in lease obligations that run through 1998 on company-owned and third-party stores. If the stores falter, Finest Hour would have to keep paying for the leases until it finds another tenant.

Long-Term Debt Jumps

Meanwhile, Finest Hour’s long-term debt has jumped to $2.6 million, contrasted with $51,000 a year ago. The main cause is the $2.3 million that Finest Hour paid to buy seven stores owned by limited partnerships in which Ragan or other company officers had interests. The average purchase price was $335,714. By contrast, Moto Photo paid an average of just $158,609 for each of its 27 stores in 1986.

Ragan said that, if the new stores’ revenues come in under estimates, some of the money will be returned to the company.

Another troubling sign is that last year Finest Hour lent $473,000 to its company-owned stores or stores owned by a third party. This was nearly double the amount loaned a year earlier.

Not surprisingly, thus far Finest Hour’s stock hasn’t been very dynamic. It closed yesterday at $4.38 a share, below the $5 a share it sold for when the company went public in January.

The company can only hope its performance is better than the track record of its underwriter, First Affiliated Securities of San Diego. When Going Public, a newsletter based in New York, ranked 54 underwriters on stock performance in 1986, First Affiliated came in dead last. Not one of First Affiliated’s stocks traded above its initial offering price at year’s end.

Limited Choices

Ragan, who owns 11% of Finest Hour’s stock, said that, because Finest Hour is a small firm, it didn’t have much choice in selecting underwriters.

Would Ragan still sell Finest Hour’s stock to his mother? “I already did,” he said, laughing. “And my children. If things don’t work out, I’ll probably have to leave town.”

Indeed, many of Ragan’s friends are investors, including members of the Westlake Village Rotary Club, to which Ragan belongs, and parishioners in Ragan’s church, Emmanuel Presbyterian in Thousand Oaks.

Ragan said he hopes to build the company’s momentum by starting a franchise program in September: “The opportunity exists now. If we don’t do it, who’s to say someone else won’t?”

In a franchise, Finest Hour will not own or operate individual stores, as it does now. Instead, in exchange for a franchise fee, Finest Hour will allow independent operators to use the Finest Hour name.

Only Experience

Finest Hour hasn’t settled on its fees yet, but Moto Photo charges a $35,000 franchise fee per store in urban areas and receives 9% of the store’s sales per year. It also requires franchisees to contribute 6% of their sales toward local advertising.

But Ragan’s only franchise experience is with Fromex, and Dr. Bruce Frome, Fromex’s founder, said his company’s problems began when it decided to open franchises across the country.

Ragan said things are different this time: “There’s no comparison between Finest Hour and Fromex. Their plan for selling franchises was a shotgun approach.”

Ragan said Fromex sold franchises “to anyone anywhere that wanted a store. That’s not our plan.”

Instead, Ragan is targeting Los Angeles as his first franchise area. But there are already 400 stores in the city that can develop film in an hour, contrasted with 150 five years ago, said David Allen, vice president of Noritsu America Corp., a Buena Park company that supplies film-processing equipment.

Among the Competitors

Moto Photo and Fox Photo (owned by Kodak) are among the chains doing business here, as well as some old Fromex stores that former franchisees still run, having bought the right to keep using the Fromex name.

To squeeze into this market, Ragan must convince store owners that investing in a Finest Hour franchise will pay off. It won’t be easy. Moto Photo, which has 19 franchise stores in Los Angeles, has persuaded just one independent to join its system here in the past three years.

And the ad revenue that it will take for Finest Hour to become a household word in Los Angeles is considerably more than it took to accomplish the same thing in Bakersfield.