Finest Hour Seeks Protection : Photo Developing Firm Files Under Chapter 11 as Losses Soar

Finest Hour, a chain of 1-hour photo developing stores, has filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.

According to its March 4 filing, Finest Hour had total liabilities of $5.7 million compared to total assets of $8.2 million. Under Chapter 11, the company will continue to operate while it tries to reorganize and figure out how to pay back its creditors.

Finest Hour was headquartered in Westlake Village until Nov. 1, when it moved to a wholesale processing lab in Goleta to cut expenses. The company has been suffering from intense competition and mounting losses. In the nine months ended Oct. 31, Finest Hour lost $2.1 million on sales of $2.2 million.

The bankruptcy filing came only 14 months after the company went public and collected $3.6 million from investors. The stock opened at $5 a share in January, 1987, but traded last week at 37 1/2 cents per share.

Negative Cash Flow

“The company had gone public and raised a lot of money, but they were in a negative cash flow position,” said former board member David Kunkler.

In early February, without notice, Finest Hour closed two stores that were located inside Safeway markets in Arkansas. Facing declining revenues at some of its other photo-developing stores, Finest Hour had been hoping that its pilot program with a national grocery store chain would catch on and ensure the company steady sales.

Scott McPherson, variety merchandising manager for Safeway, said Finest Hour did not give a reason why it was pulling out. But former Finest Hour board members say the two stores were unprofitable.

Then, in late February, Finest Hour’s entire board of directors resigned with the exception of company founder Terence Ragan. Board member Edwin Jaeger also resigned as president, chief executive and chief financial officer.

Ragan, who had been replaced by Jaeger as president in mid-September, reassumed that position and named his wife, Marylyn, to the board. Marylyn Ragan “previously has been involved in education and property management,” according to the bankruptcy papers.

Neither Jaeger nor Terence Ragan would comment.

The company also is involved in several lawsuits, including one brought by Jaeger against Robert Bretz, who was terminated as Finest Hour’s legal counsel in mid-September. Jaeger sued Bretz in late last year in Los Angeles Superior Court for breach of fiduciary duty, fraud and deceit, alleging that the attorney grossly overcharged Finest Hour and then used some of the money to pay his bills.

According to court documents, Jaeger said when he first started reviewing the company’s books, “it appeared that the company had exhausted nearly $3 million in cash in a very brief period of time.” He blamed much of that on high legal expenses.

Bretz has countersued, alleging that Jaeger was using “company funds to pay personal debts.”

Children Invested

Ragan, who founded Finest Hour in 1982, oversaw the company’s development from an idea into a chain of 31 stores, most of them in central California. For three years, the company posted higher revenue and increasing profits. For the fiscal year ended Jan. 31, 1987, Finest Hour reported net income of $220,000 on $3.1 million in sales.

Among the initial investors in the company’s stock, Ragan said, were his children, his friends at the Westlake Village Rotary Club and fellow parishioners of Emmanuel Presbyterian Church in Thousand Oaks.

But the company’s stock prospectus contained several hints that Finest Hour was not the picture of perfect health. Five of the 12 Finest Hour stores open for at least two years had suffered declining revenue in the second year due to increased competition. But the company’s overall revenue continued to go up because it kept opening new stores or acquiring others from third-party owners.

As part of that expansion, however, Finest Hour lent $473,000 to those stores in an effort to keep them in business or to help them get started.

Later, Finest Hour’s board created a $325,000 reserve for bad debts because the company’s accountants suggested some of the loans never would be repaid. The company also wrote off a couple hundred thousand dollars in expenses from an ill-fated franchise program Ragan had started.