SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED OCTOBER 27, 1996
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM _______________ TO ________________
Commission File Number: 0-8550
PCA INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0888429
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(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
815 MATTHEWS-MINT HILL ROAD
MATTHEWS, NORTH CAROLINA 28105
(Address of principal executive offices)
(Zip Code)
(704) 847-8011
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(Registrant's telephone number, including area code)
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 report), 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 latest practicable date.
COMMON STOCK, $0.20 PAR VALUE 7,587,629
- - ----------------------------------- ----------------------------------
CLASS OUTSTANDING AT DECEMBER 2, 1996
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<PAGE>
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
I N D E X
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION: PAGE NO.
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets - October 27, 1996 and
January 28, 1996 1
Consolidated Statements of Income - Three Months and Nine Months
Ended October 27, 1996 and October 29, 1995 2
Consolidated Statement of Changes in Shareholders' Equity - Nine
Months Ended October 27, 1996 3
Consolidated Statements of Cash Flows - Nine Months Ended
October 27, 1996 and October 29, 1995 4
Condensed Notes to Consolidated Financial Statements 5-6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-10
PART II. OTHER INFORMATION:
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 11
EXHIBIT INDEX 12
</TABLE>
<PAGE>
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 27, January 28,
ASSETS 1996 1996
Current Assets:
Cash and cash equivalents................. $ 234,293 $ 3,914,513
Accounts receivable (net of allowance for
doubtful accounts of $1,579,440 and
$1,011,350):
Due from licensor stores and customers. 12,533,339 7,342,232
Other, including employee advances..... 379,497 677,334
Inventories............................... 5,069,442 2,488,964
Deferred income taxes..................... 2,784,065 2,167,152
Prepaid expenses.......................... 767,177 513,685
Total Current Assets................... 21,767,813 17,103,880
Property:
Land and improvements..................... 1,177,805 1,177,805
Building and improvements................. 7,783,269 7,730,952
Photographic and sales equipment.......... 48,054,168 44,183,975
Photographic finishing equipment.......... 12,500,275 12,501,537
Furniture and equipment................... 11,607,429 10,010,818
Transportation equipment.................. 216,443 208,795
Leasehold improvements.................... 13,456,279 11,508,810
Construction in progress.................. 3,822,079 946,478
Total.................................. 98,617,747 88,269,170
Less: Accumulated depreciation and
amortization............................. 51,442,061 45,516,802
Property net.......................... 47,175,686 42,752,368
Other Assets............................... 1,524,959 28,228
Total Assets................... $70,468,458 $59,884,476
October 27, January 28,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1996
Current Liabilities:
Short-term borrowings.......................... $ 7,470,964 $ -
Accounts payable-trade......................... 12,515,112 9,178,213
Accrued insurance.............................. 4,174,407 2,247,693
Accrued income taxes........................... 83,846 2,317,974
Accrued compensation........................... 3,156,925 3,779,849
Other accrued liabilities...................... 3,417,859 3,457,973
Total Current Liabilities.................... 30,819,113 20,981,702
Deferred Income Taxes........................... 5,178,245 4,562,570
Other Liabilities................................ 2,773,508 3,105,595
Shareholders' Equity:
Preferred stock, $10.00 par value (authorized--
2,000,000 shares; outstanding--none)........... - -
Common Stock, $0.20 par value (authorized--
20,000,000 shares; issued--7,575,229 shares and
7,482,071 shares).............................. 1,515,046 1,496,415
Additional paid-in capital...................... 4,882,585 5,045,578
Retained earnings............................... 25,353,325 24,918,709
Cumulative foreign currency translation
adjustments................................... (53,364) (226,093)
Total Shareholders' Equity................... 31,697,592 31,234,609
Total Liabilities and Shareholders' Equity.......$ 70,468,458 $ 59,884,476
See Condensed Notes to Consolidated Financial Statements.
1
<PAGE>
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 27, October 29, October 27, October 29,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
SALES..................................$ 37,093,025 $ 36,890,845 $ 104,297,847 $ 98,129,089
COSTS AND EXPENSES:
Advertising and promotional costs..... 4,799,759 4,194,123 11,864,291 11,127,541
Costs of photographic sales........... 13,005,884 12,536,703 36,256,693 33,463,609
Store commissions and selling costs... 12,121,559 11,452,713 34,434,883 31,214,335
General and administrative expenses... 6,054,604 5,690,289 18,219,525 17,235,289
Total costs and expenses............. 35,981,806 33,873,828 100,775,392 93,040,774
INCOME FROM OPERATIONS.................. 1,111,219 3,017,017 3,522,455 5,088,315
Interest expense, net................. 48,178 178,188 83,485 443,733
INCOME BEFORE INCOME TAXES............. 1,063,041 2,838,829 3,438,970 4,644,582
INCOME TAX PROVISION................... 421,929 1,161,360 1,426,783 1,917,610
NET INCOME............................. $ 641,112 $ 1,677,469 $ 2,012,187 $ 2,726,972
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Primary............................... 8,131,921 8,030,550 8,019,678 8,149,227
Fully Diluted......................... 8,132,376 8,030,710 8,147,005 8,236,618
PRIMARY AND FULLY DILUTED EARNINGS PER
COMMON SHARE:
Net Income........................... $ 0.08 $ 0.21 $ 0.25 $ 0.33
CASH DIVIDENDS PER COMMON SHARE........ $ 0.07 $ 0.07 $ 0.21 $ 0.21
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
2
<PAGE>
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED OCTOBER 27,1996
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
Foreign
Additional Currency
Common Stock Paid-In Retained Translation
Shares Amount Capital Earnings Adjustments
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 28,1996:.....7,482,071 $ 1,496,415 $ 5,045,578 $ 24,918,709 $ (226,093)
Net income.................... 2,012,187
Exercise of stock options..... 402,400 80,480 3,965,783
Dividends..................... (1,577,571)
Acquisition of Company stock..(309,242) (61,849) (4,128,776)
Foreign currency translation
adjustment.................. 172,729
BALANCE, OCTOBER 27,1996:.....7,575,229 $ 1,515,046 $ 4,882,585 $ 25,353,325 $ (53,364)
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
3
<PAGE>
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
October 27, October 29,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................... $ 2,012,187 $ 2,726,972
Adjustments to reconcile net income to net cash provided from
operating activities:
Depreciation and amortization................................ 6,743,401 6,259,425
Increase in allowance for doubtful accounts.................. 557,366 917,930
Provision for deferred income taxes.......................... (354,608) 275,889
Loss on disposal of property................................. 406,726 112,089
Compensatory stock option expense............................ - 23,665
(Decrease) increase in other liabilities..................... (332,087) 132,451
Decrease (increase) in other noncurrent assets............... 1,140 (13,700)
Changes in operating assets and liabilities:
Increase in accounts receivable............................. (5,446,911) (6,982,071)
(Increase) decrease in inventories.......................... (2,576,605) 81,571
(Increase) decrease in prepaid expenses..................... (253,023) 45,533
Increase in accounts payable................................ 3,330,202 70,276
(Decrease) increase in accrued expenses..................... (982,121) 2,452,206
NET CASH PROVIDED FROM OPERATING ACTIVITIES:................. 3,105,667 6,102,236
INVESTING ACTIVITIES:
Purchase of property.......................................... (11,537,593) (5,066,579)
Purchase of certain assets from two Canadian companies........ (1,194,795) -
Proceeds from sale of fixed assets............................ 10,151 47,311
NET CASH USED IN INVESTING ACTIVITIES (12,722,237) (5,019,268)
FINANCING ACTIVITIES:
Increase in short-term borrowings............................. 7,470,964 7,984,960
Exercise of stock options..................................... 4,046,263 427,784
Acquisition of Company stock.................................. (4,190,625) (7,713,952)
Cash dividends................................................ (1,577,571) (1,618,764)
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES......... 5,749,031 (919,972)
Effect of exchange rate changes on cash....................... 187,319 21,520
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.............. (3,680,220) 184,516
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............... 3,914,513 311,759
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................... $ 234,293 $ 496,275
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Flow Data:
Interest paid................................................ $ 108,458 $ 269,060
Income taxes paid............................................ $ 3,004,904 $ 2,375,920
Schedule of Non-Cash Financial Activities:
Stock options canceled and unearned compensation credited.... $ - $ 8,932
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
4
<PAGE>
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
With respect to the significant accounting policies of PCA
International, Inc., and its subsidiaries (the "Company"), which are
wholly-owned, reference is made to note 1 of the financial statements in the
Company's Form 10-K filed for the fiscal year ended January 28, 1996. The
interim financial statements reflect all adjustments (consisting of normal
recurring accruals) which are, in the opinion of management, necessary for a
fair statement of the results for the interim periods presented.
2. ACQUISITION:
On April 15, 1996, the Company's Canadian subsidiary purchased certain
assets of two related Canadian portrait businesses, Portrait Works, Inc., and
Portrait Experience of Canada, Ltd., for $1.2 million. The Company is amortizing
over fifteen years the excess of the purchase price over the value assigned to
the purchased assets.
3. STOCK OPTIONS:
On March 6, 1996, the Board of Directors adopted the 1996 Omnibus
Long-Term Compensation Plan (the "1996 Plan") providing for the issuance of up
to 811,550 shares (the same number that had been available for issuance under
the Company's 1990 Non-Qualified Stock Option Plan (the "1990 Plan") and the
1992 Non-Qualified Stock Option Plan (the "1992 Plan") of the Company's common
stock. The 1996 Plan is designed to give the Board of Directors flexibility to
adapt the long-term incentive compensation of key employees to changing business
conditions through a variety of long-term incentive awards and was approved by
the Company's shareholders at the 1996 Annual Meeting on May 22, 1996. Under the
1996 Plan, the Stock Option Plan Administration Committee may approve the grant
of employee Stock Options, Stock Appreciation Rights (SARs), Performance
Restricted Stock Awards, Performance Awards, and Performance Units ("Awards") to
senior level employees of the Company and to nonemployee directors upon their
election to the Board and allows nonemployee directors to elect to take their
compensation as directors in the form of options. The exercise price for stock
options and stock Awards may not be less than the fair market value of the
common stock on the date of grant. As of October 27, 1996, options for 792,850
shares were available for future grant. The Plan replaced and superseded the
1990 Plan and the 1992 Plan, except with respect to options and shares of common
stock issued and outstanding under those plans which will continue to be
governed by the terms of such plans.
The 1990 Plan provides for the grant of up to 1,425,000 non-qualified
stock options to key employees and nonemployee directors. As of October 27,
1996, options for approximately 598,850 shares were exercisable and
in-the-money; options for 900 shares were exercisable and out-of-the-money. As
of October 29, 1995, options for 462,850 shares were exercisable and
in-the-money, and options for 225,600 shares were exercisable and
out-of-the-money.
The 1992 Plan provides for the grant of non-qualified stock options to
key employees and nonemployee directors of the Company. As of October 27, 1996,
options for 207,900 shares were exercisable and in-the-money; no options were
exercisable and out-of-the-money. As of October 29, 1995, options for 128,300
shares were exercisable and in-the-money, and options for 201,500 shares were
exercisable and out-of-the-money.
5
<PAGE>
The following table summarizes all stock option activity for the nine
months ended October 27, 1996:
<TABLE>
<CAPTION>
NUMBER OF OPTION
SHARES PRICE
----------------- -----------------
<S> <C> <C>
OPTIONS OUTSTANDING
JANUARY 28, 1996.................................. 1,904,450 $ 1.67-$17.00
Exercised...................................... (402,400) $ 1.67-$16.33
Canceled....................................... (14,000) $10.12-$10.25
Expired........................................ (87,000) $15.25-$16.33
Granted........................................ 18,700 $16.25-$16.50
-----------------
OPTIONS OUTSTANDING
OCTOBER 27, 1996.................................. 1,419,750 $ 1.67-$17.00
=================
</TABLE>
The following table summarizes all stock option activity for the nine
months ended October 29, 1995:
<TABLE>
<CAPTION>
NUMBER OF OPTION
SHARES PRICE
<S> <C> <C>
OPTIONS OUTSTANDING
JANUARY 29, 1995.................................. 1,880,550 $ 1.67-$17.00
Exercised...................................... (66,000) $ 1.67-$10.00
Canceled....................................... (99,700) $ 1.67-$16.33
Granted........................................ 196,800 $10.13-$12.88
-----------------
OPTIONS OUTSTANDING
OCTOBER 29, 1995.................................. 1,911,650 $ 1.67-$17.00
=================
</TABLE>
4. COMMON STOCK:
On March 20, 1996, the Company's Board of Directors increased the
number of shares authorized for repurchase by 744,300, bringing the total number
of shares authorized for repurchase to 1,000,000. During the first nine months,
the Company purchased, in various transactions, 309,242 shares. The average
purchase price per share was $13.55.
5. SUBSEQUENT EVENTS:
On November 25, 1996, the Company and American Studios, Inc., announced
that they have entered into a nonbinding letter of intent providing for the
acquisition by PCA of American Studios for $2.50 per share in cash, subject to
the approval by the Boards of Directors of both companies. The total purchase
price offered by PCA for the approximately 21.4 million shares of American
Studios outstanding, plus assumption of debt and capital lease obligations, is
approximately $66 million.
American Studios had assets of $35.6 million and $43.8 million at
September 29, 1996 and December 31, 1995, respectively. Revenues for American
Studios were $68.7 million and $101.9 million for the thirty-nine weeks ended
September 29, 1996, and year ended December 31, 1995, respectively.
Consummation of the transaction is subject to approval by the Boards of
Directors of both companies and execution of a definitive agreement.
Consummation of such agreement will be subject, among other things, to obtaining
required regulatory clearance, as well as other customary conditions.
6
<PAGE>
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company, through its subsidiaries, provides portrait photography
services, primarily in permanent studios operated in Kmart stores throughout the
United States, Puerto Rico, and the Virgin Islands, and in Wal-Mart and PETsMART
stores in the United States and Canada. The Company operates portrait studios in
1,379 Kmart stores, 76 Wal-Mart stores, and 107 PETsMART stores as of October
27, 1996. In its Institutional Division, the Company also provides portrait
services to church congregations through traveling promotions. Sales in Kmart
stores accounted for approximately 85% of sales during the third quarter of
fiscal 1996. On May 10, 1996, the Company and Kmart Corporation entered into a
five-year, non-exclusive license agreement pursuant to which the Company will
operate permanent studios in Kmart stores in the United States.
On November 25, 1996, the Company and American Studios, Inc., ("ASI")
announced that they have entered into a nonbinding letter of intent providing
for the acquisition by the Company of ASI for $2.50 per share in cash, subject
to the approval by the Boards of Directors of both companies. The total purchase
price offered by the Company for the approximately 21.4 million shares of
American Studios outstanding, plus assumption of debt and capital lease
obligations, is approximately $66 million.
Consummation of the transaction is subject to approval by the Boards of
Directors of both companies and execution of definitive agreements. Consummation
of such agreement will be subject, among other things, to obtaining required
regulatory clearance, as well as other customary conditions.
In April 1996, the Company closed 107 Canadian Kmart portrait studios
and 4 Mexican Kmart studios and ceased operations in those locations. In the
United States, the Company opened 11 new Kmart portrait studios and closed 21
studios for a net decrease of 9 studios in the third fiscal quarter. The Company
currently operates portrait studios in 1,379 of Kmart's approximately 2,150
discount stores operating in the United States. The Company is not aware of any
plans by Kmart to close a significant number of additional stores in the United
States. The closing of a significant number of additional stores by Kmart could
have a material impact on the Company's revenues and could result in a write-off
of leasehold improvements and furniture and equipment in the affected locations.
No estimate can be made of the impact to earnings if Kmart should close a
significant number of locations.
During the first quarter of fiscal 1996, the Company's Canadian
subsidiary purchased certain assets of two related Canadian portrait businesses,
Portrait Works, Inc., and Portrait Experience of Canada, Ltd. In connection with
the purchase, PCA's Canadian subsidiary entered into a long-term license
agreement with Wal-Mart's Canadian subsidiary to operate permanent studios in
Wal-Mart's Canadian stores. The Company opened 44 portrait studios in Wal-Mart
stores in Canada in April 1996. The Company opened 11 portrait studios in
Canadian Wal-Mart stores in the third quarter and operates portrait studios in
61 of the approximately 130 Canadian Wal-Mart stores.
The Company entered into an agreement, in the third quarter of 1996,
with Wal-Mart stores to operate portrait studios in Wal-Mart stores in the
United States. During the third quarter, the Company opened portrait studios in
15 Wal-Mart stores in three markets: Denver, Phoenix, and Salt Lake City.
The Company began photography in these locations in late October 1996.
The Company operated a test in 14 PETsMART stores in 1995,
photographing pets and pets with their owners. During the third quarter of
fiscal 1996, the Company added 32 portrait studios in PETsMART, with 107 studios
operational at the end of the third quarter. Current plans are to open portrait
7
<PAGE>
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
studios in 7 additional PETsMART stores by the end of fiscal 1996. PETsMART
currently operates approximately 300 superstores specializing in products and
services for pets.
The Company utilizes a proprietary digital imaging system in all of its
portrait studios. The system was designed and engineered in-house by the
Company's technology and manufacturing staff, ensuring complete control of all
aspects of the system. The system allows customers to instantly view digital
proofs of each pose on a color monitor as they are photographed and select only
the highest quality and most pleasing poses for further consideration. Following
photography, the customer chooses the exact poses to be produced in the specific
portrait sizes and quantities desired. The digital imaging system is integrated
with the Company's automated production facility. With the digital imaging
system, the Company has benefited from higher average sales and lower production
costs, primarily through the elimination of waste from speculative portrait
production.
The foregoing discussion contains certain forward-looking statements
regarding expected store openings. These statements are based on the Company's
belief and assumptions, as well as information currently available to the
Company's management. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to be correct. In particular,
expected store openings will depend on the economy generally, the operations of
Kmart, Wal-Mart, and PETsMART in which the Company operates studios, the
performance of the portrait studio industry generally and of the Company, and
other factors.
SEASONALITY
The Company's portrait photography business is seasonal, with the
greatest sales volume occurring in the fourth fiscal quarter during the
Thanksgiving and Christmas holiday seasons. The fourth quarters of fiscal 1995
and 1994 contributed approximately 32% and 31%, respectively, of annual sales
and 64% and 79%, respectively, of earnings for such years. The Company's
operations can also be adversely affected by inclement weather.
RESULTS OF OPERATIONS
The following table presents the percentage of sales represented by the
following line items from the Company's statements of income for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- --------------------------------
OCTOBER 27, October 29, OCTOBER 27, October 29,
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales.......................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses............. 97.0 91.8 96.6 94.8
-------------- -------------- -------------- --------------
Income from operations......... 3.0 8.2 3.4 5.2
Interest expense............... 0.1 0.5 0.1 0.5
-------------- -------------- -------------- --------------
Income before income taxes..... 2.9 7.7 3.3 4.7
Income tax provision........... 1.2 3.2 1.4 1.9
============== ============== ============== ==============
Net income..................... 1.7% 4.5% 1.9% 2.8%
============== ============== ============== ==============
</TABLE>
8
<PAGE>
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
The Company's sales for the third quarter were $37.1 million, an
increase of 0.5% as compared with sales of $36.9 million in the third quarter of
1995. The increase in sales was attributable to increases in numbers of
promotions in PETsMART stores partially offset by a decline in Kmart sales. The
Company operated portrait studios in 1,379 Kmarts in the U.S. at the end of the
third quarter, a decrease of 6 from October 29, 1995, and a net decline of 22
locations from January 28, 1996. The Company operated 76 portrait studios in
Wal-Mart stores as of October 27, 1996. There were 107 PETsMART stores with
portrait studios, up from 14 locations on January 28, 1996.
Consolidated sales for the first nine months of fiscal 1996 were $104.3
million, an increase of 6% from $98.1 million. Increased customer traffic in
U.S. Kmart studios and the addition of PETsMART studios contributed to the sales
increase.
Income from operations, as a percentage of sales, decreased to 3.0%
from 8.2% in the third quarter. The decline in operating margins resulted from
the lower sales in Kmart stores as the number of customers photographed
declined. The Company attributes the decline in net income during the third
quarter to three factors: the start-up expenses and operating losses incurred to
support the Company's aggressive diversification programs in PETsMART and
Wal-Mart, the Company's Super Kmart studio enlargement and relocation program,
and to a decline in customers photographed in the quarter in the Company's U.S.
Kmart studios. Additionally, operating margins are down from start-up costs and
operating losses in PETsMART stores. The Company opened portrait studios in 32
PETsMART stores in the third quarter. Operating margins for the nine months
decreased to 3.4% from 5.2%. The decrease in operating margins for the nine
months was attributable to start-up costs and operating losses incurred in
PETsMART and expenses incurred for the transition to and start-up of the
Canadian Wal-Mart stores and renovation of Super Kmarts.
The income tax provision for the first nine months of fiscal 1996 was
$1.4 million. This resulted in an effective tax rate of 41.5% versus 41.3% in
fiscal 1995.
Net income decreased to $0.6 million for the third quarter. Earnings
per share were $0.08 in the third quarter of fiscal 1996 and $0.21 in 1995. Net
income for the first nine months decreased by 26%, to $2.0 million, or $0.25 per
share, as compared to $0.33 per share in the previous year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of working capital are cash from
operations and the Company's revolving line of credit. On October 27, 1996, the
Company had $0.2 million in cash and cash equivalents and short-term debt of
$7.5 million. The Company has a $16.0 million revolving line of credit with
NationsBank of North Carolina, N.A., ("NationsBank") to meet seasonal capital
requirements.
During August, September, and October of 1996 (the third quarter of
fiscal 1996), the Company had property additions of $6.1 million, principally
for materials and equipment for the new PETsMART and Wal-Mart permanent studios
and the expansion and relocation of portrait studios in 45 Super Kmarts.
Currently, the Company estimates capital expenditures for fiscal 1996 will
exceed $12 million. Operating activities provided $2.6 million in cash
for the quarter.
Shareholders' equity increased by $0.9 million to $31.7 million in the
third quarter. Net income for the quarter of $0.6 million and stock options
exercised added $0.8 million to shareholders' equity. Dividends paid in the
quarter totaled $0.5 million.
9
<PAGE>
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
The Company believes, based on its short- and long-term business plans,
that it has the ability to adequately fund its operating and capital expenditure
needs for fiscal 1996 from operations, augmented by borrowings under its line of
credit for seasonal credit needs.
10
<PAGE>
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Primary and Fully Diluted Earnings Per
Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements 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.
PCA INTERNATIONAL, INC.
-------------------------------------------
(Registrant)
Date: December 10, 1996 /s/ John Grosso
-------------------------------------------
John Grosso
President
(Principal Executive Officer)
Date: December 10, 1996 /s/ Bruce A. Fisher
-------------------------------------------
Bruce A. Fisher
Senior Vice President
(Principal Accounting Officer)
11
<PAGE>
EXHIBIT INDEX
INDEX PAGE
NO. DESCRIPTION NO.
3(a) Restated Charter, as amended to date.
3(b) Bylaws of PCA International, Inc., as amended to date,
incorporated by reference to Exhibit 3.4 to the Company's
Quarterly Report on Form 10-Q, Commission File No. 0-8550, for
the quarter ended May 3, 1992.
4 Instruments defining the rights of security holders, incorporated
by reference to Exhibit 4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 3, 1992.
10(a) Amendment dated as of June 1, 1994, to Loan Agreement between PCA
International, Inc., Photo Corporation of America, PCA National,
Inc., and PCA Photo Corporation of Canada, Inc., PCA Mexico, S.A.
de C.V. and NationsBank of North Carolina, N.A., incorporated by
reference to Exhibit 10(a) to the Company's Quarterly Report on
Form 10-Q for the quarter ended July 31, 1994.
10(b) License Agreement dated May 10, 1996, between Kmart Corporation
and PCA International, Inc. Incorporated by reference to Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 28, 1996.
10(c) New Sales Contract dated August 11, 1994, between PCA
International, Inc., and Agfa Division of Miles, Inc.,
incorporated by reference to Exhibit 10(c) to the Company's
Amendment No. 1 on Form 10-Q/A to its Quarterly Report on Form
10-Q for the quarter ended July 31, 1994.
10(d)* The 1990 Non-Qualified Stock Option Plan, incorporated by reference
to Exhibit 4 to the Company's Registration Statement on Form S-8
(Registration No. 33-36793).
10(e)* The 1992 Non-Qualified Stock Option Plan, as amended, incorporated
by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 (Registration No. 33-51458).
10(f) Loan Agreement dated September 8, 1992, between PCA
International, Inc., Photo Corporation of America, PCA National,
Inc., and PCA Photo Corporation of Canada, Inc., and NationsBank
of North Carolina, N.A., incorporated by reference to Exhibit
10(o) to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 2, 1992 (Commission File No. 0-8550).
10(g) Amendment dated as of September 14, 1993, to Loan Agreement
between PCA International, Inc., Photo Corporation of America,
PCA National, Inc., PCA Photo Corporation of Canada, Inc., and
NationsBank of North Carolina, N.A., incorporated by reference to
Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q for
the quarter ended July 31, 1994.
10(h) Amendment dated as of March 31, 1995, to Loan Agreement between
PCA International, Inc., Photo Corporation of America, PCA
National, Inc., PCA Photo Corporation of Canada, Inc., and PCA
Mexico, S.A. de C.V. and NationsBank of North Carolina, N.A.,
incorporated by reference to Exhibit 10(h) to the Company's
Annual Report on Form 10-K for the year ended January 29, 1995.
10(i) Amendment dated June 3, 1996 to Loan Agreement between PCA
International, Inc., Photo Corporation of America, PCA National,
Inc., PCA Corporation of Canada, Inc., and PCA Specialty Photo
Retail Corporation, and NationsBank of North Carolina, N.A.
Incorporated by reference to Exhibit 10(I) to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 28,
1996.
10(j)* 1996 Omnibus Long-Term Compensation Plan. Incorporated by
reference to Exhibit 10(j) to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 28, 1996.
11 Computation of Primary and Fully Diluted Earnings per Common 13
Share.
27 Financial Data Schedule.
*Management contract or compensatory plan or arrangement required
to be filed as an exhibit.
12
<PAGE>
EXHIBIT 11
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
COMPUTATION OF PRlMARY AND FULLY DILUTED
EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 27, October 29, October 27, October 29,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE:
EARNINGS APPLICABLE TO COMMON STOCK:
Net income............................................ $ 641,112 $ 1,677,469 $2,012,187 $2,726,972
COMPUTATlON OF COMMON SHARES AND
COMMON EQUIVALENT SHARES:
Weighted average number of common shares............. 7,556,349 7,476,683 7,498,032 7,680,476
Dilutive effect of stock options..................... 575,572 553,867 521,646 468,751
Weighted average number of common shares after
dilutive effect..................................... 8,131,921 8,030,550 8,019,678 8,149,227
EARNINGS PER COMMON SHARE AND COMMON
EQUIVALENT SHARE:
Net income........................................... $ 0.08 $ 0.21 $ 0.25 $ 0.33
FULLY DILUTED EARNINGS PER COMMON SHARE:
EARNINGS APPLICABLE TO COMMON STOCK:
Net income............................................ $ 641,112 $ 1,677,469 $2,012,187 $2,726,972
COMPUTATION OF COMMON SHARES AND
COMMON EQUIVALENT SHARES:
Weighted average number of common shares outstanding. 7,556,349 7,476,683 7,498,032 7,680,476
Dilutive effect of stock options..................... 576,027 554,027 648,973 556,142
Weighted average number of common shares after
dilutive effect.................................... 8,132,376 8,030,710 8,147,005 8,236,618
EARNINGS PER COMMON SHARE AND COMMON
EQUIVALENT SHARE ASSUMING FULL DILUTION:
Net income........................................... $ 0.08 $ 0.21 $ 0.25 $ 0.33
</TABLE>
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-2-1997
<PERIOD-START> JAN-28-1996
<PERIOD-END> OCT-27-1996
<CASH> 234,293
<SECURITIES> 0
<RECEIVABLES> 14,492,276
<ALLOWANCES> 1,579,440
<INVENTORY> 5,069,442
<CURRENT-ASSETS> 21,767,813
<PP&E> 98,617,747
<DEPRECIATION> 51,442,061
<TOTAL-ASSETS> 70,468,458
<CURRENT-LIABILITIES> 30,819,113
<BONDS> 0
0
0
<COMMON> 1,515,046
<OTHER-SE> 30,182,546
<TOTAL-LIABILITY-AND-EQUITY> 70,468,458
<SALES> 104,297,847
<TOTAL-REVENUES> 104,297,847
<CGS> 82,555,867
<TOTAL-COSTS> 82,555,867
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,485
<INCOME-PRETAX> 3,438,970
<INCOME-TAX> 1,426,783
<INCOME-CONTINUING> 2,012,187
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,012,187
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
