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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1998
COMMISSION FILE NUMBER 0-8550
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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 jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
815 MATTHEWS-MINT HILL ROAD
MATTHEWS, NORTH CAROLINA 28105
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(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (704) 847-8011
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Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.20 PAR VALUE THE NASDAQ STOCK MARKET
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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 reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 31, 1998, there were 7,940,779 shares of the registrant's common
stock outstanding; the aggregate market value of such common stock (based on the
closing price on the over-the-counter National Association of Securities Dealers
National Market System) held by non-affiliates was approximately $178,667,528.
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EXPLANATORY NOTE
This Annual Report on Form 10-K/A is being filed as Amendment No. 2 to the
Registrant's Annual Report on Form 10-K for the year ended February 1, 1998
filed with the Securities and Exchange Commission on April 9, 1998 and Amendment
No. 1 filed on June 9, 1998. Amendment No. 2 is filed solely for the purpose of
revising and restating the following items: Item 7 as amended is stated in its
entirety; Item 11 is amended by adding Table II and Table III; and Note 1 to
Consolidated Financial Statements is amended by adding "Impairment of
Long-lived Assets" and is shown in its entirety.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
PCA International, Inc. is engaged, through its subsidiaries, in the sale
and processing of professional color portraits of children, adults, and
families. The Company operates 2,075 retail portrait studios in the United
States, Canada, Mexico, Puerto Rico, and South America. The Company also
operates an extensive traveling business providing portrait photography services
in approximately 1,400 additional retail locations and to church congregations
and other institutions. Portrait sales at discount stores accounted for 96.2% of
sales in fiscal 1997. At February 1, 1998, the Company operated 1,953 permanent
portrait studios in the United States and 122 internationally.
Following the January 1997 acquisition of American Studios, the Company
completed several strategic initiatives intended to strengthen the Company's
competitive position and improve the profitability of its portrait studio
operations, as follows:
- - Integration and consolidation of corporate administrative functions and
field operations yielding cost savings in excess of $6 million.
- - Discontinuation of American Studios' fashion photography and PCA's pilot
pet portraiture businesses and the closure of 401 portrait studios which
were not meeting the Company's profit objectives. Closed and discontinued
businesses represented $9 million of 1997 sales and $44 million of pro
forma Company sales in fiscal 1996.
- - Conversion and upgrade of approximately 850 acquired studios to digital
imaging technology. The Company leveraged its digital studio infrastructure
over the Wal-Mart distribution channel which strengthened and diversified
the Company's distribution channels and increased by 44% the number of
digital studios the Company operates in discount stores.
- - Expansion of the Company's customer base by opening 188 new studios
domestically and internationally.
HISTORICAL BUSINESS REVIEW
In fiscal 1996, portrait studio sales in discount stores were 91.6% of
total sales. During the year, the Company diversified its retail partnerships
and expanded its distribution principally through the acquisition of Wal-Mart
portraiture businesses in Canada and the United States. In April 1996, the
Company acquired two Canadian Wal-Mart portraiture businesses, Portrait Works,
Inc. and Portrait Experience of Canada, Ltd. 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.
On January 27, 1997, the Company acquired 94.9% of the outstanding common
stock of American Studios, portrait provider to Wal-Mart in the United States
and Mexico. This
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acquisition expanded the number of Wal-Mart stores PCA serves to over 2,300,
including 856 permanent studios in U.S. Wal-Mart stores previously served by
American Studios. At the end of fiscal 1996, the Company operated 2,288 portrait
studios in discount stores, which includes 892 studios acquired through the
acquisitions mentioned above. PCA's studio counts at the end of fiscal 1996
reflect the combined companies for fiscal 1996 while financial results do not
include the results of American Studios.
In fiscal 1995, PCA operated 1,508 portrait studios principally in Kmart
stores in the United States, Canada and Mexico. Portrait studio sales in
discount stores accounted for 94.8% of 1995 total sales. The Company opened 164
permanent Kmart studios in 1995 and closed 73 studios, resulting in a net
addition of 91 studios.
Beginning with the fourth quarter of fiscal 1993 and continuing through
fiscal 1996, the portrait services industry experienced extremely competitive
pricing and promotional conditions. The Company expects competitive pricing
conditions will be less aggressive than in the past and continues to place
emphasis on the quality and value-pricing of its portrait products and services,
and the enhanced portrait experience made possible through its digital imaging
system.
Because of the retail nature of its services and its locations in discount
stores, the Company's business is very seasonal. The Christmas season accounts
for a high percentage of the Company's sales and earnings, and the Company's
fourth fiscal quarter (late October through late January) typically produces a
large percentage of annual sales and annual earnings. The fourth fiscal quarters
of 1997, 1996, and 1995, accounted for approximately 31.2%, 33.2%, and 32.2%,
respectively, of sales, and 89.4%, 32.8%, and 64.2%, respectively, of earnings
for those years. Fiscal 1997 fourth quarter earnings as a percentage of total
earnings were out of proportion compared to prior years 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 earnings
would have accounted for 69.5% of annual earnings before giving effect to the
$3.6 million after-tax charge for studio closure costs. The Company's operations
can be adversely affected by inclement weather, especially during the important
fiscal fourth quarter.
OPERATIONS
1997 PCA FISCAL YEAR COMPARED WITH 1996 PCA FISCAL YEAR. Sales for fiscal
year 1997 increased 55.6% to $242.9 million, compared to $156.1 million in
fiscal year 1996. Fiscal 1997 was a 52-week year versus 53 weeks in fiscal 1996.
The sales increase of $86.8 million in fiscal 1997 was attributable to the
Company's acquisition of American Studios' Wal-Mart distribution channel, net of
discontinued businesses, and to a lesser degree, studio expansion and increased
customer purchase averages realized in each of the Company's retail channels.
PCA's financial results for fiscal 1996 do not include the operating results of
American Studios while studio counts reflect the combined companies at the end
of fiscal 1996.
Total operating costs and expenses as a percentage of sales declined 2.2
percentage points to 90.6% in fiscal 1997 compared to 92.8% in fiscal 1996,
before the 1996 fourth quarter pretax charge of $6.0 million to close 401
underperforming portrait studios. Advertising and promotional costs as a
percentage of sales were 6.9% in 1997, versus 10.4% in 1996, reflecting a less
promotional environment in the discount retail segment. Costs of photographic
sales increased to 35.3% of sales in 1997, compared to 33.7% of sales in 1996,
principally due to higher labor costs to operate American Studios' non-digital
studios for half the year and traveling operations for the full year. Store
commission and selling costs increased to 32.8% of sales in 1997, compared to
32.3% the prior year. Increased labor expenses related to staffing requirements
to operate more seven-day studios in discount stores was a primary factor for
the rise in direct selling cost. General and administrative expenses declined
1.5 percentage points to 14.9% of sales in fiscal 1997 compared to 16.4% of
sales in fiscal 1996. This decline is
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principally the result of cost savings from the consolidation of field and
corporate general and administrative functions.
Income from operations increased to $22.9 million or 9.4% of sales in
fiscal 1997 versus $11.3 million or 7.2% of sales in fiscal 1996 (stated before
the 1996 studio closure charge). This 102.0% increase in 1997 reflects one full
year of operations of American Studios, as well as the elimination of
underperforming operations and improved performance of the Company's portrait
studio operations. Fiscal 1997 operating costs include $1.9 million for
amortization of intangible assets relating to the acquisition of American
Studios.
Pretax income increased to $16.3 million or 6.7% of sales in fiscal 1997
compared to $5.1 million or 3.3% of sales in the prior year. Fiscal 1996 pretax
income includes a $6.0 million charge for studio closure costs noted above.
Fiscal 1997 net interest expense was $6.6 million compared to $0.2 million in
1996, reflecting an increase in indebtedness related to the acquisition of
American Studios.
Income tax provision for 1997 was $7.6 million as compared to $2.1 million
in 1996. The fiscal 1997 tax provision as a percentage of pretax income was
46.4% versus 41.7% in 1996. The increase in the effective tax rate in 1997 was
due to amortization of intangibles related to the American Studios acquisition,
which are not deductible for tax purposes. Net income in 1997 was $8.7 million
or 3.6% of sales compared to $3.0 million or 1.9% of sales in 1996. Fiscal 1997
earnings per share on a diluted basis were $1.07 compared to $0.38 in fiscal
1996. Fiscal 1996 results include the previously mentioned studio closure
charge, which reduced net income by $3.6 million after tax or $0.46 per diluted
share.
1996 PCA FISCAL YEAR COMPARED WITH 1995 PCA FISCAL YEAR. Sales for fiscal
year 1996 increased 7.9% to $156.1 million, compared to $144.7 million in fiscal
year 1995. The sales increase of $11.4 million in fiscal 1996 was attributable
to the Company's diversification strategy, which led to an increase in the
number of customers served. Fiscal 1996 was a 53-week year versus 52 weeks in
fiscal 1995. On a comparable 52-week basis, sales increased 6.5%.
In 1996, PCA diversified its retail partnerships, and sales through the
retail distribution channel reflect this strategy. Sales through U.S. Kmart
portrait studios were $135.1 million, or 86.5% of total sales; and Wal-Mart
portrait studio sales, both international and domestic, were $6.6 million, or
4.2% of sales. PCA's Institutional Division and pet portrait pilot program
provided an aggregate of $13.3 million, or 8.5% of sales. In 1995, U.S. Kmart
studios provided sales of $130.6 million, or 90.2% of sales; and PCA's pet
portrait pilot and Institutional sales provided sales of $7.5 million, or 5.2%
of sales.
Total operating costs and expenses increased 10.2%, before the fourth
quarter charge of $6.0 million to close underperforming portrait studios, and
accounted for 92.8% of sales compared to 90.8% of sales in 1995. Advertising and
promotional costs as a percentage of sales were 10.4%, versus 10.2% in 1995.
Cost of photographic sales increased $4.9 million, or 10.3%, to 33.7% of sales
in 1996, compared to 32.9% of sales in 1995, due principally to the increase in
customers photographed. Store commission and selling costs increased to 32.3% of
sales, compared to 31.2% the prior year. Labor costs associated with the pilot
pet portrait program and staffing requirements to operate more seven-day studios
in discount store permanent studios caused the increase in direct selling cost.
General and administrative expense levels before the fourth quarter charge
were 16.4% of sales for 1996, similar to prior year's level. The Company
recorded a pretax charge of $6.0 million for the closing of 401 portrait studios
which were not meeting the Company's profitability objectives. This charge
includes the write-off of leasehold improvements and other
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fixed assets in these stores, separation pay, cost to restore the studios to the
same condition they were in prior to the Company installing the portrait studio,
and customer refunds.
Income from operations, before the charge to close 401 portrait studios,
declined to 7.2% of sales from 9.2% of sales in 1995, a direct result of the
investment spending initiatives to pursue the Company's diversification
objectives. The costs associated with the pilot pet portrait expansion, the
Wal-Mart expansion, and overall costs to support the diversification activities
were the principal reasons for the operating margin decline.
Pretax income declined 60.1% to $5.1 million, compared to $12.9 million in
1995. This pretax figure includes the $6.0 million charge for studio closure
costs noted above. Net interest expense declined 60.9% due to repayment of
borrowings to fund the Company's repurchase of over $7.7 million of stock in
1995. Income tax provision for 1996 was $2.1 million as compared to $5.2 million
in 1995. The tax provision as a percentage of income was 41.7% versus 40.8% in
1995. The increase in effective tax rate was generally attributable to losses in
the pet portraiture pilot operation which did not generate state tax benefits.
Net income in 1996 was $3.0 million, or $0.38 per diluted share, including the
previously mentioned charge, which reduced per share earnings by $0.46, compared
to $7.6 million, or $0.96 per diluted share in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $29.5 million in fiscal 1997, up
$11.9 million from fiscal 1996, principally the result of net income increasing
$5.7 million and an increase of $6.0 million in depreciation and amortization in
the first year following the merger with American Studios.
Cash flow, defined as earnings before interest, taxes, depreciation and
amortization ("EBITDA"), was $38.3 million in fiscal 1997, up from $14.8 million
in fiscal 1996. The increase was primarily due to the realization of significant
cost savings and positive operating leverage resulting from the integration of
American Studios, elimination of underperforming operations, and improved
profitability of the Company's portrait studio operations.
Cash flow enabled the Company to reduce long-term borrowings and pay
dividends. At February 1, 1998, the Company had $12.3 million in cash and cash
equivalents, $4.3 million in letters of credit, and $20.7 million available
under its revolving credit facility. The Company had $51.0 million debt
outstanding from its senior term loan which compares to $58.7 million debt
outstanding one year earlier. The terms of the senior term loan and the
revolving credit facility were amended on September 15, 1997 to reduce the
applicable margin up to 0.75% from the range of 0.75% to 2.5% in the original
loan agreement.
During fiscal 1997, the Company had property additions of $12.1 million,
principally for materials and equipment for the addition of new permanent
studios in Wal-Mart and Kmart, the upgrading of certain processing equipment in
the Company's two lab and processing facilities, and new computing equipment in
the corporate office.
Shareholders' equity increased by $11.0 million to $44.7 million. Net
income was $8.7 million and dividends paid totaled $1.6 million. Exercised stock
options contributed $4.2 million to shareholders' equity.
Capital expenditures for 1998 are estimated to be approximately $13.0
million, and will be financed from operations augmented by borrowing under the
Company's credit facility. The Company believes, based on its short- and
long-term business plans, that it has the ability to fund adequately from
operations, augmented by borrowings under its line of credit for seasonal credit
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needs, its operating and capital expenditure needs for fiscal 1998 and the
foreseeable future. The Company currently expects that cash flow from operations
will exceed future capital expenditures in 1998. Any excess cash flows generated
may be used to make prudent repayment of debt, purchase Company stock, pay
dividends or for other investing or financing needs, provided that conditions
are met in the restrictive covenants set forth in the credit agreement with
NationsBank, N.A., as Agent.
YEAR 2000 ISSUES
During 1997, the Company upgraded its mainframe computer hardware to a
version that will be vendor supported into the new millennium. The Company has
initiated plans to correct programming code in existing computer software
applications as the year 2000 approaches. The Company will utilize both internal
and external resources to reprogram Company-developed applications, install
up-to-date releases of purchased systems, and test all systems for year 2000
compliance. The Company continues to evaluate its various systems to determine
the most cost-effective corrective action which could include replacement of
certain systems. The Company currently believes that reprogramming will be
completed by the first quarter of 1999. The cost to correct year 2000 program
code is expected to be $0.8 to $1.2 million and will be expensed over the next
two years.
PROSPECTIVE INFORMATION
Note regarding Private Securities Litigation Reform Act: Statements made by
the Company which are not historical facts are forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from
those expressed or implied in forward-looking statements. All such
forward-looking statements are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. Important factors that could cause
financial performance to differ materially from past results and from those
expressed or implied in this document include, without limitation, the risks of
acquisition of businesses (including limited knowledge of the businesses
acquired and misrepresentations by sellers), new store openings, availability of
financing, competition, management's ability to manage growth, loss of
customers, and a variety of other factors.
INFLATION
Over the past few years, inflation has not had a significant impact on the
Company's financial condition or results of operations.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 requires the reporting of
comprehensive income in financial statements by all entities that provide a full
set of financial statements. The Statement is effective for fiscal years
beginning after December 15, 1997. Management of the Company does not expect
that the adoption of SFAS No. 130 will have a material impact on the Company's
financial position or results of operation.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 requires disclosures of and provides accounting guidance for reporting
information about operating segments in annual financial statements. The
Statement is effective for fiscal years beginning after December 15, 1997.
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ITEM 11. EXECUTIVE COMPENSATION
II. OPTION GRANT TABLE
OPTIONS GRANTED IN THE LAST FISCAL YEAR AND POTENTIAL REALIZABLE VALUES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT
SECURITIES TOTAL OPTIONS EXERCISE OR ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS GRANTED IN BASE SHARE EXPIRATION STOCK PRICE APPRECIATION FOR
NAME GRANTED (#) FISCAL YEAR(1) PRICE ($/SHARE) DATE OPTION TERM(2)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5% ($) 10% ($)
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John Grosso 50,000 72.5% $16.25 3/5/02 $203,125 $406,250
J. Robert Wren, Jr. 0 -- -- -- -- --
Eric H. Jeltrup 0 -- -- -- -- --
Bruce A. Fisher 0 -- -- -- -- --
R. Michael Spencer 0 -- -- -- -- --
</TABLE>
(1) The options vest after one year from the date of grant, April 9, 1997.
(2) These values are hypothetical; there is no assurance that the stock will
achieve these rates of appreciation.
The following table sets forth certain information with respect to options
exercised in the most recent fiscal year by the officers named in the Summary
Compensation Table and remaining options held at the end of the most recent
fiscal year.
III. OPTIONS EXERCISED AND YEAR-END VALUE TABLE
AGGREGATED OPTIONS EXERCISED IN THE
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options Held
Shares Acquired Value Options Held at Fiscal Year at Fiscal Year End
On Exercise Realized End - Exercisable/ Exercisable/
Name (#) ($) Unexercisable (#) Unexercisable ($)(1)
- ---- ------ -------- ----------------- --------------------
<S> <C> <C> <C> <C>
John Grosso ................ 0 $ 0 144,500/ $1,851,625/
65,000 $ 488,750
J. Robert Wren, Jr.......... 0 $ 0 50,000/ $ 256,500/
100,000 $ 513,000
Eric H. Jeltrup ............ 0 $ 0 80,000/ $1,349,500/
25,000 $ 294,250
Bruce A. Fisher ............ 10,000 $ 88,750 23,000/ $ 262,250/
7,000 $ 87,750
R. Michael Spencer ......... 15,000 $310,925 27,000/ $ 263,250/
3,000 $ 36,750
</TABLE>
(1) Based on closing price of $22.25 per Common Share on February 1, 1998.
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PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
FEBRUARY 2, 1997; AND JANUARY 28, 1996
1. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND CONCENTRATIONS OF CREDIT RISK:
The consolidated financial statements include the accounts of PCA
International, Inc. and its subsidiaries (the "Company"), all of which are
wholly owned. All material intercompany balances and transactions have been
eliminated in consolidation. The Company's operations in Kmart stores
accounted for approximately 40.0%, 87.2%, and 94.8% of consolidated sales
during the fiscal years ended February 1, 1998; February 2, 1997; and
January 28, 1996, respectively. The license agreement with Kmart
Corporation was revised and renewed on May 10, 1996. The license is for the
period through May 9, 2001 and may be terminated by either party upon
180-days' notice. Operations in Wal-Mart stores accounted for approximately
56.2% of consolidated sales in the fiscal year ended February 1, 1998, and
less than 5% of total sales in fiscal years ending in 1997 and 1996. The
Company operates its U.S. studios in Wal-Mart stores under the terms of the
license agreement between Wal-Mart and American Studios, Inc. (see note 2).
Wal-Mart may amend or terminate this agreement at any time at its sole
discretion. The loss of the license to do business in Kmart or Wal-Mart
stores would have a materially adverse effect on the Company. Kmart's or
Wal-Mart's closing of a significant number of discount stores 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 or
Wal-Mart should close a significant number of locations.
FISCAL YEAR:
The Company's fiscal year ends on the Sunday nearest the end of January.
The fiscal year ended February 2, 1997 was a 53-week year. The fiscal years
ended January 28, 1996 and February 1, 1998 were 52-week years. The
Company's fiscal year that will end January 31, 1999 will be 52 weeks.
FOREIGN CURRENCY TRANSACTIONS:
Gains and losses on foreign currency transactions are included in the
determination of net income for the period. The amount of such gain and
(loss) was ($78,748); $10,940; and $19,474 for the fiscal years ended
February 1, 1998; February 2, 1997; and January 28, 1996, respectively.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
INVENTORIES:
Inventories are valued at the lower of cost or market, cost being
determined on the first-in, first-out basis.
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PROPERTY AND DEPRECIATION:
Property is recorded at cost. Maintenance and repairs are charged to
expense as incurred; property additions, renewals, and improvements are
capitalized. When property is retired or
otherwise disposed of, the related costs and accumulated depreciation are
removed from the respective accounts and any gain or loss is credited or
charged to income. A summary of the estimated useful lives used in
computing depreciation and amortization, principally on the straight-line
method, is as follows:
<TABLE>
<S> <C>
Land improvements .............................. 10 to 30 years
Building and improvements ...................... 10 to 55 years
Leasehold improvements ......................... 3 to 10 years
Photographic and sales equipment ............... 3 to 13 years
Photographic finishing equipment ............... 3 to 15 years
Furniture and equipment ........................ 3 to 10 years
Transportation equipment ....................... 3 years
</TABLE>
INTANGIBLE ASSETS:
Substantially all intangible assets are amortized over 35 years by the
straight-line method. The recoverability of intangible assets is evaluated
by the Company on the basis of undiscounted expected future cash flows from
the acquired operations before interest for the remaining amortization
period. If impairment exists, the carrying amount of the intangible assets
is reduced based on the greater of fair value or estimated shortfall of
cash flows.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company periodically evaluates its long-lived assets for financial
impairment to determine if the carrying amount of such assets may not be
fully recoverable. The Company evaluates the recoverability of long-lived
assets not held for sale by measuring the carrying amount of the assets
against the estimated undiscounted future cash flows associated with them.
If such evaluation indicates that the future undiscounted cash flows of
certain long-lived assets are not sufficient to recover the carrying value
of such assets, the assets are then adjusted to their fair values.
PHOTOGRAPHIC SALES AND DEFERRED COSTS:
Digital photographic sales are recorded when portraits are purchased at the
time of photography. Substantially all of the Company's sales are digital.
Traditional photographic sales are recorded when portraits are delivered to
studios and sold to customers. Costs relating to portraits processed, or in
process, but not recorded as sales prior to the fiscal year-end, are
deferred. Substantially all portraits are subsequently delivered and
offered for sale to the customer within three weeks.
INCOME TAXES:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and
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their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
POSTRETIREMENT BENEFITS:
The Company sponsors a postretirement health care plan for retirees and
certain current employees. The Company measures the cost of its obligations
based on actuarial assumptions. The cost of this program is not funded.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company is required to disclose in its consolidated financial
statements the fair value of all financial instruments, including assets
and liabilities both on- and off-balance sheet, for which it is practicable
to estimate such fair value. Fair value methods, assumptions, and estimates
for the Company are as follows:
- Cash and cash equivalents, accounts receivable, prepaid expenses,
short-term borrowings, accounts payable-trade, and accrued
expenses--the carrying amount approximates fair value because of the
short maturity of these instruments.
- Non-current liabilities--the carrying amount approximates fair value
because such liabilities consist primarily of actuarially determined
postretirement liabilities using current market rate assumptions and
long-term debt at market rates currently offered.
COSTS AND EXPENSES:
Advertising and promotional costs consist of the direct mail, television
broadcasting, and print media costs, and the payroll and related taxes,
benefits and other costs for employees in the adult/family market who
directly promote and acquire customers, as well as the cost of church
directories.
Costs of photographic sales are all the direct and indirect portrait
production costs: salaries, commissions, payroll taxes, related benefits
and traveling costs for all photography personnel, as well as the
recruiting and training costs of these employees. The costs of film,
accessories, photography equipment depreciation and maintenance, supplies,
and distribution are also included in this category.
Store commissions and selling costs include the commissions paid to each
chain based on a percentage of net sales, salaries, commissions, payroll
taxes, related benefits and travel costs for all sales personnel, and
recruiting and training, sales supplies, sales equipment depreciation, and
related distribution costs.
RESEARCH AND DEVELOPMENT:
The Company spent $1,311,000; $1,321,000; and $1,033,000 on research and
development activities during the fiscal years ended February 1, 1998;
February 2, 1997; and January 28, 1996, respectively. Such costs are
charged to costs of photographic sales as incurred.
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STOCK OPTION PLAN:
Prior to January 28, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 29, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply provisions for APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123.
EARNINGS PER SHARE:
During fiscal 1997, the Company adopted the provisions of SFAS No. 128,
Earnings per Share. SFAS No. 128 specifies the computation, presentation,
and disclosure requirements for earnings per share (EPS). Basic EPS is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding during the period.
Diluted EPS reflects the dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company. All prior period EPS data presented have been
restated to conform with the Statement's provisions.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
RECLASSIFICATIONS:
Certain reclassifications have been made to the fiscal year 1996 amounts to
conform to the fiscal 1997 presentation.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of
Charlotte and State of North Carolina, on the 7th day of July 1998.
PCA INTERNATIONAL, INC.
/s/John Grosso
----------------------------------------
John Grosso
President and
Chief Executive Officer
/s/Bruce A. Fisher
----------------------------------------
Bruce A. Fisher
Senior Vice President
Chief Financial Officer
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