Finest Hour Photo Stores Having Trouble Developing Profits

In June, Terence Ragan told a visitor that stock in his company, Finest Hour, had been sold to his children, his friends at the Westlake Village Rotary Club and fellow parishioners of Emmanuel Presbyterian Church in Thousand Oaks.

“If things don’t work out,” he joked at the time, “I’ll probably have to leave town.”

Maybe Ragan should start packing.

Finest Hour, a chain of 31 one-hour photo developing stores, recently issued its second-quarter earnings report, and the results weren’t pretty.

Losses Exceed Revenue

Finest Hour’s losses exceeded revenue for the three months that ended July 31. It lost $954,000, or 52 cents a share, on revenue of $778,000. For the six months that ended July 31, the company lost $1,064,000, or 58 cents a share, on revenue of $1,378,000.

In mid-September, Ragan was replaced as president by Edwin C. Jaeger, who owns about 11% of the company’s stock and had become chief operating officer at Ragan’s invitation in July.

“In view of the loss the company posted, the board felt a management change was in order,” Jaeger said. Ragan was named vice president, but will remain chairman of the company.

Not long ago, Finest Hour’s financials looked picture perfect. The company developed from just an idea in 1982 to 31 stores in operation this year, most of them in Central California. Finest Hour charges about one-third more for film developing than drugstores or discount stores and caters to photography buffs by offering fast work and personal attention.

Things weren’t as good as they seemed.

In June, Ragan said five of the 12 Finest Hour stores open for at least two years had suffered declining revenue in the second year, largely because of increased competition. Overall revenue for Finest Hour kept growing because the company continued to open stores or acquire others from third-party owners.

As part of that push, Finest Hour lent $473,000 to its company-owned stores or stores owned by a third party to help them get started or keep them afloat. Finest Hour’s accountants, Arthur Young & Co. in Woodland Hills, recently raised the question of whether the company would ever get any of that money back.

“The accountants felt if there were troubled stores, it was questionable whether or not they would be able to repay,” Jaeger said.

Finest Hour’s board apparently agreed. In the second quarter, the company set up a reserve of $325,000 for bad debts stemming from the advances it had made to the various stores. The company also wrote off $62,000 in improvements that were rendered useless when the company moved three stores to other sites in hopes of increasing business.

Ragan’s blueprint for growth included starting a franchise program in September. “The opportunity exists now,” he said in June. “If we don’t do it, who’s to say someone else won’t?”

But in Los Angeles--which was Ragan’s first choice for a franchise area--there are at least 400 mini-lab photo stores, and competition is tough. Finest Hour decided to write off $232,000 more in expenses from its franchise program, which the board suspended indefinitely.

All these second-quarter write-offs and reserves totaled $619,000. “The company probably went in too many directions at one time,” Jaeger said. “We aren’t in a cash position to expand on any program, whether it’s franchising or anything else.”

Jaeger said he plans to resuscitate Ragan’s franchise program eventually, but not before nursing the company’s existing stores back to healthy profits.

In the meantime, Finest Hour’s long-term debt is $3.9 million. Most of the loans were used to acquire stores. According to Finest Hour’s most recent Securities and Exchange Commission filing, “a continued improvement in the company’s operating results will be required in order to repay such obligations.”

Lease Obligations

Another problem is Finest Hour’s $1.3 million in lease obligations that run through 1998 on third-party-owned stores. If the stores falter, Finest Hour would have to keep paying for the leases until it finds other tenants. The company has $2.2 million more in lease obligations on its own stores, which run through 1997.

In the SEC filing, Finest Hour said these leases are “significant contingent liabilities.”

Is Finest Hour facing bankruptcy?

“I certainly hope not,” Jaeger said. “It’s certainly not anticipated and hasn’t been discussed.”

Jaeger has brought in consultants to evaluate Finest Hour’s problems and increased the number of outside directors on the company’s board, including David Kunkler, a former deputy to the chairman of the Federal Deposit Insurance Corp.

Within 60 days, Jaeger plans to trim the corporate staff and move the headquarters from Westlake Village into a wholesale photo processing lab in Goleta.

“We’re cutting any overhead that is unnecessary,” he said.

Ragan may be feeling some deja vu. In 1980, Los Angeles-based Fromex One Hour Photo Systems hired Ragan to market its franchises. Fromex was undercapitalized --like Finest Hour--and expanded its company-owned and franchise network too quickly. In 1982, Fromex went bankrupt. Former franchisees still run the stores, having bought the right to keep using the Fromex name.

No Comparison

In June, Ragan insisted that Finest Hour was not another Fromex. “There’s no comparison between Finest Hour and Fromex,” he said.

Another early Finest Hour enthusiast was stockbroker Robert MacKenzie, who works for Conejo Securities in Thousand Oaks. In a June interview, MacKenzie said his firm sold 30% of Finest Hour’s stock. MacKenzie also said Ragan was “outgoing, competent, honest, considerate. I don’t mean to make him sound like the 10 parts of the Boy Scout code.”

But when reached recently by telephone, MacKenzie wasn’t talking. “I don’t have anything to say,” he told a caller, then hung up and declined to return subsequent calls.

In recent weeks, investor interest in Finest Hour’s stock has been so thin that there has been a 50-cent to $1 spread per share between the bid and the asked price. “It’s hard to get clients interested when they could lose 30% of their investment on the next trade,” said Gary Shaw, a broker with E. F. Hutton in St. Charles, Mo.

Finest Hour could still take off if mass merchandisers like K mart set aside some of their space for one-hour booths. Finest Hour has begun pilot programs in grocery stores, one with Safeway in Arkansas, another with Lucky Stores in San Francisco. Extended agreements with either chain would help Finest Hour considerably.

In the meantime, Jaeger has plenty to do. When he originally agreed to run the Goleta lab for Ragan, it was with the understanding that he’d only stay for four months. “I didn’t want to get tied up for the summer because I have a boat,” Jaeger said.