<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED AUGUST 2, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM _______________ TO ________________
Commission File Number: 0-8550
PCA INTERNATIONAL, INC.
--------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0888429
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 2,357,052
- - --------------------------------- ----------------------------------
CLASS OUTSTANDING AT SEPTEMBER 1, 1998
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PCA INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION: PAGE NO.
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<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets - August 2, 1998 and
February 1, 1998..................................................... 1
Consolidated Statements of Income - Three Months and Six
Months Ended August 2, 1998 and August 3, 1997....................... 2
Consolidated Statement of Changes in Shareholders' Equity - Six
Months Ended August 2, 1998.......................................... 3
Consolidated Statements of Cash Flows - Six Months Ended
August 2, 1998 and August 3, 1997.................................... 4
Condensed Notes to Consolidated Financial Statements................... 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 5-9
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings...................................................... 9
ITEM 4. Submission of Matters to Vote of Security Holders...................... 9
ITEM 5. Other Information...................................................... 9
ITEM 6. Exhibits and Reports on Form 8-K....................................... 10
SIGNATURES ....................................................................... 10
</TABLE>
<PAGE> 3
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED
- - -----------------------------------------------------------------------------------------------------
AUGUST 2, February 1,
ASSETS 1998 1998
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 1,290,835 $ 12,289,761
Accounts receivable (net of allowance for
doubtful accounts of $1,453,764 and $1,315,666)
Due from licensor stores and customers ................ 6,641,387 6,740,560
Other, including employee advances .................... 1,360,780 763,925
Inventories ............................................... 7,879,871 10,078,719
Deferred income taxes ..................................... 4,964,732 5,827,324
Prepaid expenses .......................................... 1,032,596 1,043,708
------------- -------------
TOTAL CURRENT ASSETS .................................. 23,170,201 36,743,997
------------- -------------
PROPERTY:
Land and improvements ..................................... 2,305,293 2,305,293
Building and improvements ................................. 12,157,400 12,148,732
Photographic and sales equipment .......................... 59,210,285 57,713,911
Photographic finishing equipment .......................... 15,607,775 15,599,525
Furniture and equipment ................................... 14,211,074 13,872,058
Transportation equipment .................................. 294,920 292,593
Leasehold improvements .................................... 16,293,108 16,050,719
Construction in progress .................................. 2,861,315 1,429,621
------------- -------------
Total Property ........................................ 122,941,170 119,412,452
Less: Accumulated depreciation and
amortization ............................................ 69,793,681 64,488,965
------------- -------------
PROPERTY, NET ......................................... 53,147,489 54,923,487
------------- -------------
INTANGIBLE ASSETS ............................................ 58,685,551 59,733,731
OTHER ASSETS ................................................. 1,371,905 1,899,611
------------- -------------
TOTAL ASSETS ................................................. $ 136,375,146 $ 153,300,826
============= =============
<CAPTION>
UNAUDITED
- - -----------------------------------------------------------------------------------------------------
AUGUST 2, February 1,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1998
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings ..................................... $ 4,000,000 $ --
Current portion of long-term debt ......................... 7,411,765 8,750,000
Accounts payable-trade .................................... 21,698,689 25,915,285
Accrued insurance ......................................... 4,571,244 4,085,191
Accrued income taxes ...................................... 160,435 1,188,859
Accrued compensation ...................................... 4,031,590 6,474,414
Other accrued liabilities ................................. 9,808,354 10,664,577
------------- -------------
TOTAL CURRENT LIABILITIES ............................. 51,682,077 57,078,326
------------- -------------
LONG-TERM DEBT ............................................... 33,483,847 42,063,857
------------- -------------
DEFERRED INCOME TAXES ........................................ 107,019 1,738,255
------------- -------------
OTHER LIABILITIES ............................................ 7,517,957 7,730,964
------------- -------------
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--7,947,879 shares and
7,901,579 shares) ....................................... 1,589,576 1,580,316
Additional paid-in capital ................................ 10,707,615 9,995,238
Retained earnings ......................................... 31,684,415 33,423,465
Cumulative foreign currency translation
adjustments ............................................ (397,360) (309,595)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY ............................ 43,584,246 44,689,424
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................... $ 136,375,146 $ 153,300,826
============= =============
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
<PAGE> 4
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
AUGUST 2, August 3, AUGUST 2, August 3,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SALES ........................................ $ 44,968,305 $ 47,136,830 $ 99,630,230 $ 105,828,639
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Advertising and promotional costs ......... 2,910,972 3,662,180 6,303,721 7,976,080
Costs of photographic sales ............... 18,191,608 18,700,959 37,552,961 40,495,617
Store commissions and selling costs ....... 16,961,249 17,396,766 35,784,024 36,289,128
General and administrative expenses ....... 8,437,626 8,590,881 18,358,663 18,767,293
Amortization of intangibles ............... 506,802 508,837 1,014,220 964,575
------------- ------------- ------------- -------------
Total costs and expenses ................ 47,008,257 48,859,623 99,013,589 104,492,693
------------- ------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS ................ (2,039,952) (1,722,793) 616,641 1,335,946
Interest expense, net ..................... 1,144,638 1,651,113 2,364,347 3,270,496
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAXES ..................... (3,184,590) (3,373,906) (1,747,706) (1,934,550)
INCOME TAX BENEFIT ........................... (1,222,272) (1,734,286) (563,461) (938,256)
------------- ------------- ------------- -------------
NET LOSS ..................................... $ (1,962,318) $ (1,639,620) $ (1,184,245) $ (996,294)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic ..................................... 7,947,879 7,761,749 7,939,818 7,696,476
============= ============= ============= =============
Diluted ................................... 8,444,629 8,172,381 8,408,857 8,052,619
============= ============= ============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Net Loss .................................. $ (0.25) $ (0.21) $ (0.15) $ (0.13)
============= ============= ============= =============
CASH DIVIDENDS PER COMMON SHARE .............. $ -- $ 0.07 $ 0.07 $ 0.07
============= ============= ============= =============
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
2
<PAGE> 5
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED AUGUST 2, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
----------------------- PAID-IN COMPREHENSIVE RETAINED TRANSLATION
SHARES AMOUNT CAPITAL INCOME EARNINGS ADJUSTMENT
--------- ---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1998: 7,901,579 $1,580,316 $ 9,995,238 $33,423,465 $(309,595)
Comprehensive Income
Net loss $(1,184,245) (1,184,245)
Foreign currency translation
adjustment (51,781) (87,765)
-----------
Total comprehensive loss $(1,236,026)
Exercise of stock options 46,300 9,260 712,377
Dividends (554,805)
------------------------------------- ---------------------------
BALANCE, AUGUST 2, 1998: 7,947,879 $1,589,576 $10,707,615 $31,684,415 $(397,360)
===================================== ===========================
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
3
<PAGE> 6
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 2, August 3,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ................................................. $ (1,184,245) $ (996,294)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .......................... 7,544,571 7,501,651
Increase in allowance for doubtful accounts ............ 139,522 92,864
Provision for deferred income taxes .................... (768,644) (2,196,916)
Loss on disposal of property ........................... 177,518 4,283
Decrease in other liabilities .......................... (222,596) (431,740)
Decrease (increase) in other noncurrent assets ......... 527,706 (1,571,798)
Changes in operating assets and liabilities:
Increase in accounts receivable ...................... (641,690) (2,362,055)
Decrease in inventories .............................. 2,196,680 2,480,660
Decrease in prepaid expenses ......................... 19,941 633,615
Decrease in accounts payable ......................... (4,212,926) (2,021,688)
Decrease in accrued expenses ......................... (3,822,385) (3,163,990)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES .................. (246,548) (2,031,408)
------------ ------------
INVESTING ACTIVITIES:
Purchase of property ..................................... (5,123,685) (6,132,155)
Purchase of American Studios ............................. 0 (2,531,562)
Proceeds from sale of fixed assets ....................... 82,909 1,200
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES .................... (5,040,776) (8,662,517)
------------ ------------
FINANCING ACTIVITIES:
(Decrease) increase in borrowings ........................ (5,918,245) 9,355,180
Exercise of stock options ................................ 721,637 2,821,265
Cash dividends ........................................... (554,805) (545,323)
------------ ------------
NET CASH (USED IN) PROVIDED FROM FINANCING ACTIVITIES .... (5,751,413) 11,631,122
------------ ------------
Effect of exchange rate changes on cash .................. 39,811 (18,500)
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........ (10,998,926) 918,697
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............ 12,289,761 1,536,234
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 1,290,835 $ 2,454,931
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid .......................................... $ 2,109,108 $ 5,421,900
============ ============
Income taxes paid ...................................... $ 1,992,997 $ 2,190,462
============ ============
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
4
<PAGE> 7
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
With respect to the significant accounting policies of PCA
International, Inc., and its subsidiaries (the "Company" or "PCA"), 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 February 1, 1998. The
interim financial statements reflect all adjustments (consisting of normal
recurring accruals) that are, in the opinion of management, necessary for a
fair statement of the results for the interim periods presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a holding company engaged through its subsidiaries in
the sale and processing of professional color portraits of children, adults, and
families. As of August 2, 1998, the Company operated 2,048 portrait studios
within Kmart and Wal-Mart discount stores and supercenters in the United States,
Canada, Mexico, Puerto Rico, and South America. The Company also operates an
extensive traveling studio business providing portrait photography services in
approximately 1,400 additional domestic retail locations as well as to church
congregations and other institutions.
The Company's merger with a subsidiary of Jupiter Partners II L.P.
("Jupiter"), which was approved by shareholders on August 17, 1998, became
effective on August 25, 1998 with the filing of the articles of merger with the
Secretary of State of the State of North Carolina. The merger provides that the
Company will continue as the surviving corporation. Under the terms of the
merger agreement, the holder of each share of the common stock of PCA had the
option to elect to receive $26.50 in cash ("cash merger consideration") or to
make an unconditional election to retain a share of stock in the Company as the
surviving corporation. Public shareholders, excluding senior management, elected
to retain a continuing equity interest in the Company, consisting of 306,340
shares or 3.9% of the outstanding shares of the Company, immediately prior to
the effective time of the merger. Management shareholders elected to retain
92,900 shares immediately prior to the effective time of the merger. At the
effective time of the merger, 7,548,639 outstanding shares of PCA common stock
were converted into a right to receive $26.50 per share in cash; the aggregate
amount of cash merger consideration was approximately $200 million.
Financing sources for the merger (collectively, "Merger Financing")
were (a) an equity contribution of $51.9 million from Jupiter, (b) $150 million
in senior secured debt facilities pursuant to a bank credit facility led by
NationsBank, N.A., and (c) $100 million in senior subordinated debt initially
through the issuance of bridge loans from NationsBridge, L.L.C. and The Chase
Manhattan Bank. The Merger Financing was used to (i) pay the cash merger
consideration and to purchase other outstanding equity interests, (ii) refinance
indebtedness of approximately $45.8 million, and (iii) pay fees and expenses
incurred in connection with the merger.
It is estimated that the Company will incur nonrecurring charges in
excess of $26.0 million in its fiscal 1998 third quarter, the quarter in which
the merger was consummated. These nonrecurring charges consist of a cash payment
upon the cancellation of stock options of approximately $18.9 million, cash
payments for fees and expenses incurred in connection with the merger, a noncash
charge for the rollover of options, and a noncash write-off of unamortized
financing expenses related to the Company's previous credit facilities.
5
<PAGE> 8
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
On August 25, 1998, the effective date of the merger, the Company's
common stock was delisted from the Nasdaq National Market. The Company's shares
were listed for trading on the over-the-counter market (the OTC Bulletin Board)
under the symbol "PCAI."
On April 22, 1998, the Company and the members of its Board of
Directors were sued by Harbor Finance Partners, a shareholder of the Company, to
enjoin the merger between the Company and Jupiter, or in the alternative, for
damages. The lawsuit was filed in the Superior Court of Mecklenburg County,
North Carolina. Harbor Finance Partners has alleged that the Company and its
Directors breached their fiduciary duty to the shareholders in connection with
the merger. On May 26, 1998, the Company and the Directors moved to dismiss the
lawsuit on the basis that Harbor Finance Partners had failed to state a claim
for which relief can be granted. On August 18, 1998, Harbor Finance Partners
filed an Amended Complaint that added a claim that the Proxy Statement provided
to shareholders contained misleading information on their rights to dissent and
appraisal under North Carolina corporation law. The defendants will move to
dismiss the Amended Complaint. The Company and the Directors intend to defend
the lawsuit vigorously and believe it to be without merit.
In April 1998, the Company was notified by Kmart that the Company's
license agreements for 75 Kmart studios, which generated approximately $8.0
million in revenue and approximately $1.7 million in income from operations for
the fiscal year ended February 1, 1998, would be terminated in 180 days or
around November 1, 1998.
SEASONALITY
Because of the retail nature of its services and its locations in
discount stores, the Company's portrait photography business is seasonal. Sales
volume during the Company's second fiscal quarter is typically lower as a
percent of annual sales and net income compared to other fiscal quarters. The
Christmas season accounts for a high percentage of the Company's annual sales
and net income, and the Company's fourth fiscal quarter (late October through
late January) typically produces the largest percentage of annual sales and net
income. The fourth fiscal quarters of 1997, 1996, and 1995, accounted for
approximately 31.2%, 33.2%, and 32.2% of sales, respectively; and 89.4%, 32.8%,
and 64.2% of net income, respectively, for those years. Fiscal 1997 fourth
quarter net income as a percent of annual net income was higher than comparable
historical quarters due to significant costs incurred for restructuring the
Company's digital studio operations which led to operating losses in the first
half of the year. The 1996 fourth quarter net income would have accounted for
69.5% of annual net income before giving effect to a $3.6 million after-tax
charge for studio closure costs.
RESULTS OF OPERATIONS
Consolidated sales for the quarter ended August 2, 1998 were $45.0
million, a decrease of 4.6% compared with $47.1 million reported in the second
quarter of fiscal 1997. The $2.2 million sales decrease for the 1998 second
quarter was attributable to higher sales in the 1997 second quarter from closed
or discontinued operations and reorganization activities related to the
integration of American Studios offset partially by increased same studio sales
of 0.1% and expansion activities. The fiscal 1997 period includes approximately
$5.0 million sales in aggregate from (i) PCA's discontinued pet portrait pilot
operations, (ii) closed studios that were not meeting the Company's performance
objectives, and (iii) an adjustment in sales recognition that impacted
approximately 800 Wal-Mart studios converted to PCA's digital studio format in
the fiscal 1997 second quarter. Excluding the aforementioned sales from the
fiscal 1997 quarter,
6
<PAGE> 9
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
PCA's ongoing permanent and traveling studio operations ("core sales") increased
approximately $2.8 million or 6.7% for the fiscal 1998 second quarter.
Consolidated sales for the six months ended August 2, 1998 were $99.6
million, a decrease of 5.9% compared with $105.8 million for the six months
ended August 3, 1997. The $6.2 million sales decrease for the 1998 six months
was attributable to higher sales in the 1997 six months from closed or
discontinued operations and reorganization activities related to the integration
of American Studios offset partially by increased same studio sales of 2.4% and
expansion activities. The fiscal 1997 period includes approximately $14.7
million sales in aggregate from (i) PCA's discontinued pet portrait pilot
operations and fashion promotion business, (ii) closed studios that were not
meeting the Company's performance objectives, and (iii) an adjustment in sales
recognition that impacted approximately 800 Wal-Mart studios converted to PCA's
digital studio format in the fiscal 1997 second quarter. Excluding the
aforementioned sales in the first half of fiscal 1997, PCA's core sales
increased approximately $8.5 million or 9.3% for the first half of fiscal 1998.
Portrait sales through discount retailers represented $43.7 million or
97.1% of consolidated sales for the fiscal 1998 second quarter. As a percent of
total sales for the fiscal 1998 second quarter, U.S. portrait sales in Wal-Mart
discount stores represented 61.7%, U.S. Kmart portrait sales represented 30.2%,
and International sales through Wal-Mart stores represented 5.2%. For the six
months ended August 2, 1998, portrait sales through discount retailers
represented 96.9% of consolidated sales, or $96.5 million. As a percent of total
sales for the six months of fiscal 1998, U.S. portrait sales in Wal-Mart
discount stores represented 60.2%, U.S. Kmart portrait sales represented 32.1%,
and International sales through Wal-Mart stores represented 4.6%.
At August 2, 1998, the Company operated 2,048 portrait studios, 901
studios in U.S. Kmart stores, 1,017 studios in U.S. Wal-Mart stores and 130
studios internationally. This compares to 1,980 studio locations at August 3,
1997, 975 in U.S. Kmart stores, 905 in U.S. Wal-Mart stores, and 100
internationally. During the fiscal 1998 second quarter, the Company opened 23
portrait studios and closed 9 portrait studios.
The following table presents the percent of sales represented by the
following line items from the Company's statements of income for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- -------------------------
AUGUST 2, August 3, AUGUST 2, August 3,
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales............................. 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses...... 102.5 102.6 97.4 97.8
Merger costs...................... 0.9 -- 1.0 --
Amortization of intangible assets. 1.1 1.1 1.0 0.9
----- ----- ----- -----
Income (loss) from operations..... (4.5) (3.7) 0.6 1.3
Interest expense.................. 2.6 3.5 2.4 3.1
----- ----- ----- -----
Loss before income taxes.......... (7.1) (7.2) (1.8) (1.8)
Income tax benefit................ (2.7) (3.7) (0.6) (0.9)
===== ===== ===== =====
Net loss.......................... (4.4)% (3.5)% (1.2)% (0.9)%
===== ===== ===== =====
</TABLE>
For the quarter ended August 2, 1998, operating costs and expenses as a
percent of sales were 102.5%, consistent with the level of costs and expenses
reported in the year-ago quarter. Merger costs
7
<PAGE> 10
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
related to the execution of the recapitalization merger with Jupiter were $0.4
million representing 0.9% of sales. For the 1998 second quarter, advertising and
promotional expenses as a percent of sales decreased to 6.5% compared with 7.8%
in the fiscal 1997 second quarter reflecting a less promotional environment in
the discount retail segment. Costs of photographic sales as a percent of sales
for the 1998 second quarter increased to 40.5% compared with 39.7% in the
year-ago quarter principally due to increased labor expenses as a percent of
sales. Store commissions and selling expenses as a percent of sales increased to
37.7% in the 1998 second quarter versus 36.9% in the 1997 second quarter
principally due to increased labor requirements to staff more seven-day studios
and rising labor costs for hourly workers. For the second quarter of fiscal
1998, general and administrative expenses rose to 18.8% of sales compared with
18.2% of sales in the year-ago period principally due to merger-related costs
and expenses.
Inclusive of the $0.4 million merger-related costs, the Company
reported a loss from operations before interest expense and income tax of $2.0
million for the 1998 second quarter compared with a loss of $1.7 million in the
1997 second quarter. Net interest expense for the quarter ended August 2, 1998
was $1.1 million, down from $1.7 million reported in the year-ago quarter. The
reduction in net interest expense was attributable to a lower level of
borrowings during the 1998 period. See "Liquidity and Capital Resources." The
income tax benefit for the second quarter of 1998 was $1.2 million compared with
a benefit of $1.7 million in the fiscal 1997 second quarter. For the 1998 second
quarter, the Company reported a net loss of $2.0 million compared with a net
loss of $1.6 million reported in the comparable quarter one year ago.
For the six months ended August 2, 1998, operating costs and expenses
as a percent of sales were 97.4%, an improvement compared with 97.8% of sales
reported in the year-ago period. Merger-related costs for the six months of 1998
were $1.0 million representing 1.0% of sales. For the first half of 1998,
advertising and promotional expenses as a percent of sales decreased to 6.3%
compared with 7.5% in the comparable 1997 six months reflecting a less
promotional environment in the discount retail segment. Costs of photographic
sales as a percent of sales for the 1998 six months decreased to 37.7% compared
with 38.3% in the year-ago period principally due to increased labor expenses as
a percent of sales. Store commissions and selling expenses as a percent of sales
increased to 35.9% in the first half of fiscal 1998 versus 34.3% in the first
half of fiscal 1997 principally due to increased labor requirements to staff
more seven-day studios and rising labor costs for hourly workers. For the six
months of fiscal 1998, general and administrative expenses rose to 18.4% of
sales compared with 17.7% of sales in the 1997 six-month period principally due
to merger-related costs and expenses.
Inclusive of merger-related costs of $1.0 million, the Company reported
income from operations before interest expense and income tax of $0.6 million
for the six months ended August 2, 1998 compared with income of $1.3 million for
six months ended August 3, 1997. Net interest expense for the 1998 six months
was $1.7 million, down slightly from $1.9 million reported in the 1997 six-month
period. The reduction in net interest expense was attributable to a lower level
of borrowings during the 1998 period. The income tax benefit for the 1998 six
months was $0.6 million compared with a tax benefit of $0.9 million for the
fiscal 1997 six months. The Company reported a net loss of $1.2 million for the
six months ended August 2, 1998, compared with a net loss of $1.0 million for
the six months ended August 3, 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal 1998 second quarter, the Company's principal source
of working capital was cash on hand. For the quarter ended August 2, 1998, $1.6
million was consumed in operating activities compared with $1.4 million consumed
in the same period one year ago. At August 2, 1998, the Company
8
<PAGE> 11
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
had $1.3 million in cash and cash equivalents and $4.0 million in borrowings
under its revolving credit facility. During the quarter, the Company decreased
its borrowings by $5.0 million.
The Company had property additions of $3.3 million in the 1998 second
quarter, principally for materials used to improve the physical layout of
portrait studios.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 22, 1998, the Company and the members of its Board of
Directors were sued by Harbor Finance Partners, a shareholder of the Company, to
enjoin the merger between the Company and Jupiter, or in the alternative, for
damages. The lawsuit was filed in the Superior Court of Mecklenburg County,
North Carolina. Harbor Finance Partners has alleged that the Company and its
Directors breached their fiduciary duty to the shareholders in connection with
the merger. On May 26, 1998, the Company and the Directors moved to dismiss the
lawsuit on the basis that Harbor Finance Partners had failed to state a claim
for which relief can be granted. On August 18, 1998, Harbor Finance Partners
filed an Amended Complaint that added a claim that the Proxy Statement provided
to shareholders contained misleading information on their rights to dissent and
appraisal under North Carolina corporation law. The defendants will move to
dismiss the Amended Complaint. The Company and the Directors intend to defend
the lawsuit vigorously and believe it to be without merit.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) A Special Meeting of Shareholders was held on August 17, 1998.
(b) Pursuant to Instruction 3 to Item 4, this paragraph need not
be answered.
(c) At the Special Meeting of Shareholders held on August 17,
1998, the following matter was voted upon and passed. The
tabulation of votes was:
To approve and adopt the Agreement and Plan of Merger, dated as of
April 20, 1998 by and between the Company and Jupiter Acquisition
Corp., a subsidiary of Jupiter Partners II L.P.
<TABLE>
<CAPTION>
VOTES IN FAVOR VOTES AGAINST ABSTENTIONS
-------------------- ------------------- -------------------
IN PERSON AS PROXY IN PERSON AS PROXY IN PERSON AS PROXY
--------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
0 5,556,026 0 151,759 0 2,872
--------- --------- --------- -------- --------- --------
</TABLE>
ITEM 5. OTHER INFORMATION
The foregoing discussion may contain or imply certain forward-looking
statements regarding expected studio openings, future revenues, future cash
flows and future performance. 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, new studio openings
will depend on the economy generally, the operations of Kmart and Wal-Mart, the
performance of the portrait studio industry generally, and of the Company, and
other factors. Reference is made to the section "Cautionary Statement Concerning
Forward-Looking Statements" in the Company's Current Report on Form 8-K dated
July 30, 1998, which is incorporated herein by reference.
9
<PAGE> 12
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K was filed on September 9, 1998, to report changes
in control pursuant to the completion on August 25, 1998 of
the merger between PCA International, Inc. and Jupiter
Acquisition Corp. ("Mergerco"), a wholly-owned subsidiary of
Jupiter Partners II L.P. whereby Mergerco merged with and into
the Company, with the Company as the surviving corporation.
A Form 8-K was filed on July 30, 1998, to file selected
portions of the disclosure materials prepared in connection
with the recapitalization merger between PCA International,
Inc. and Jupiter Acquisition Corp., a wholly-owned subsidiary
of Jupiter Partners II L.P. previously reported on April 20,
1998.
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: September 16, 1998 /s/ John Grosso
------------------------------------
John Grosso
President
(Principal Executive Officer)
Date: September 16, 1998 /s/ Bruce A. Fisher
------------------------------------
Bruce A. Fisher
Senior Vice President
(Principal Accounting Officer)
10
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-02-1998
<PERIOD-END> AUG-02-1998
<CASH> 1,290,835
<SECURITIES> 0
<RECEIVABLES> 9,455,931
<ALLOWANCES> 1,453,764
<INVENTORY> 7,879,871
<CURRENT-ASSETS> 23,170,201
<PP&E> 122,941,170
<DEPRECIATION> 69,793,681
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<CURRENT-LIABILITIES> 51,682,077
<BONDS> 0
0
0
<COMMON> 1,589,576
<OTHER-SE> 41,994,670
<TOTAL-LIABILITY-AND-EQUITY> 136,375,146
<SALES> 99,630,230
<TOTAL-REVENUES> 99,630,230
<CGS> 79,640,706
<TOTAL-COSTS> 79,640,706
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,364,347
<INCOME-PRETAX> (1,747,706)
<INCOME-TAX> (563,461)
<INCOME-CONTINUING> (1,184,245)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,184,245)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
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