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Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1999--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
incorporation or organization) Identification No.)
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 per share
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(Title of Class)
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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
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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. [X]
At March 31, 1999, there were 2,357,052 shares of the registrant's common
stock outstanding. The shares are not actively traded on any stock exchange
and; therefore, the registrant is unable to determine the aggregate market
value of shares held by non-affiliates.
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT
THE COMPANY. PCA International, Inc. ("PCA" or the "Company") is a
holding company engaged through its subsidiaries in the sale and processing of
professional color portraits of children, adults, and families. The Company
operates 2,055 portrait studios within Kmart and Wal-Mart stores and
supercenters 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.
Executive offices and film developing and portrait processing
facilities are located in Matthews, North Carolina. A second portrait
processing facility and distribution center are located in Charlotte, North
Carolina. The Company was organized as a North Carolina corporation in 1967 and
has been in business since 1967.
During the fiscal year ended January 31, 1999 ("Fiscal 1998"), the
Company had sales of $227.1 million. The Company's fiscal year ends on the
Sunday nearest the end of January. The fiscal years ended January 31, 1999 and
February 1, 1998 ("Fiscal 1997") were 52-week years. The fiscal year ended
February 2, 1997 ("Fiscal 1996") was a 53-week year. The 1999 fiscal year that
will end January 30, 2000 will be 52 weeks.
RECAPITALIZATION MERGER ("MERGER"). The Company's Merger with a
subsidiary of Jupiter Partners II L.P. ("Jupiter") was approved by shareholders
on August 17, 1998 and became effective on August 25, 1998. Financing sources
for the Merger (collectively, "Merger Financing") were (a) an equity
contribution of $51.9 million from Jupiter, or 83.1% of outstanding equity of
the Company, (b) $150 million in senior secured debt pursuant to a bank credit
facility led by NationsBank, N.A., and (c) $100 million in senior subordinated
debt through the issuance of bridge loans from Nations Bridge, L.L.C. and the
Chase Manhattan Bank ("Senior Subordinated Debt"). 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. For the
1998 fiscal year, the Company reported merger-related charges totaling $27.3
million, including an extraordinary loss on the extinguishment of debt of $1.4
million before income taxes.
On August 25, 1998, the effective date of the Merger, the Company's
stock was delisted from the Nasdaq National Market. The Company's shares are
listed for trading on the over-the-counter market (the OTC Bulletin Board)
under the symbol "PCAI." The Company's shares have not traded actively since
the Merger. On February 18, 1999 the Company filed a Form 15 to deregister its
common stock and suspend its duty to file periodic reports with the Securities
and Exchange Commission. This Form 10-K is the last report the Company is
required to file.
ACQUISITION OF WAL-MART PORTRAITURE BUSINESSES. The Company
strengthened its position in the discount retail market segment with the
January 27, 1997 acquisition of American Studios, Inc. ("American Studios" or
"ASI"), the portrait provider to Wal-Mart stores in the United States and
Mexico. This acquisition increased by 2,300 the number of Wal-Mart locations
serviced by the Company in the United States and Mexico through a combination
of permanent studios and traveling promotions.
DIGITAL STUDIO CONVERSION. During the first half of fiscal 1997, the
Company redeployed underutilized digital technology and studio assets from
closed locations to 856 portrait studios in Wal-Mart,
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previously operated by ASI. This conversion strengthened the Company's
diversified distribution channel and increased by 44% the Company's base of
digital studios operating in discount stores.
DISTRIBUTION CHANNEL CHANGES IN 1998. The Company closed 145 portrait
studios located within U.S. Kmart stores during the fiscal year ended January
31, 1999. Seventy-five of the studio closings were in compliance with a
termination notification dated April 1998. These studios accounted for
approximately $5.0 million and $12.4 million in revenues in fiscal years 1998
and 1997, respectively. In November 1998, the Company was notified by Kmart
that it would close 135 additional studios in which PCA is operating. Under the
terms of the licensing agreement between PCA and Kmart, PCA is required to exit
these 135 studios within six months of notification or around May 1999. In
February 1999, the Company was again notified by Kmart of plans to close 31
additional studios in which it is operating. PCA is required to exit these
studios on or around August 1999. Revenue from the studios expected to be
closed in fiscal 1999 was $14.9 million and $19.0 million in fiscal years 1998
and 1997, respectively.
During fiscal 1998, the Company added 127 new digital studios, 108
domestically and 19 internationally, all at Wal-Mart stores. At January 31,
1999, the Company operated a total of 2,055 studios, 1,914 domestically and 141
internationally.
CAPITAL EXPENDITURES. Capital expenditures in fiscal 1998 of $11.0
million were principally for materials and equipment for additional permanent
portrait studios, for upgrading certain equipment in the Company's two lab and
processing facilities, and for purchasing new computer equipment for the
corporate office. Capital for the expansion and upgrading of PCA's studio and
processing operations came from cash flow with supplemental funding from the
credit facilities.
INDUSTRY SEGMENT AND SIGNIFICANT CUSTOMERS
The Company operates within the professional portrait photography
industry, specializing in preschool children's portraits offered through
permanent studios and traveling promotions, and adult and family portraits
provided through traveling promotions in churches and other institutions. For
information regarding portrait sales through Kmart and Wal-Mart during the last
three fiscal years, see note 1 of Notes to Consolidated Financial Statements
that begin on page F-1 of this report.
U.S. PRESCHOOL PORTRAIT OPERATIONS
The Company operates portrait studios in discount stores in all 50
states, principally servicing the preschool portrait market. PCA's U.S.
portrait studio operations contributed 91.8% of the Company's sales in fiscal
year 1998, 92.0% in fiscal year 1997, and 87.2% in fiscal year 1996. At the end
of fiscal 1998, the Company operated 1,914 permanent portrait studios in the
United States, a net decrease of 39 studios compared with the prior fiscal
year. During the year, the Company added 108 new studios to its domestic studio
base and closed 147 studios. The Company also services approximately 1,400
Wal-Mart stores in the United States four to seven times a year with traveling
promotions.
PCA became the exclusive portrait studio operator for Wal-Mart in
fiscal 1997 with the acquisition of ASI. The Company continued its 30-year
relationship with Kmart as operator of portrait studios in Kmart stores and
supercenters, although the Company closed 145 Kmart locations in fiscal 1998
(See "General Development Distribution Channel Changes in 1998.") The Company
seeks to maintain an advertising presence throughout the year in all geographic
markets where the Company operates permanent studios by advertising under the
name of its retail partners. Customers are attracted to the studio through a
variety of advertising methods including in-store point-of-sale merchandising,
television and newspaper advertising, and direct mail to current and
prospective customers.
The typical permanent studio occupies 250 square feet on average,
consisting of a camera room, a portrait viewing and sales area, and a reception
area. Generally, the permanent studio is staffed by one to three employees who
perform both the photography and sales functions. Except for extended hours
during
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certain holiday seasons, the majority of PCA's portrait studios are open from
10:00 a.m. to 7:00 p.m. either five or seven days a week.
INTERNATIONAL
At the end of fiscal year 1998, the Company operated 141 portrait
studios internationally in Wal-Mart stores, with 113 permanent studios in
Canada, 26 in Mexico, and 2 in Argentina. The Company's International studios
contributed 5.0%, 4.3%, and 4.4% of sales for fiscal 1998, 1997, and 1996,
respectively. International expansion added 19 new studios in 1998. Since April
1996, the Company's Canadian subsidiary has operated studios under a long-term
licensing agreement with Wal-Mart's Canadian subsidiary.
INSTITUTIONAL OPERATIONS
The Company's Institutional operations accounted for 3.2%, 3.1%, and
4.7% of sales in fiscal years 1998, 1997, and 1996, respectively. The Company
contracts with institutions, primarily church congregations, to photograph and
sell individual and family group portraits of congregation members. The Company
does not pay commissions to the hosting institutions, but provides a free photo
directory to all members who agree to be photographed. Approximately three
weeks after the photography session, the finished portraits are sent to the
church or directly to the consumer. During fiscal 1998, the Company operated
approximately 25 portable camera units each week for Institutional promotions.
DISCONTINUED BUSINESSES
In fiscal 1998, the Company closed 145 Kmart studios. These studios
accounted for sales of approximately $5.0 million in fiscal 1998 and $12.4
million in fiscal year 1997.
In fiscal 1997, the Company discontinued ASI's fashion photography
business and PCA's pilot pet portrait program and closed 401 portrait studios
that were not meeting the Company's profit objectives. These closed and
discontinued operations accounted for aggregate sales of approximately $14.7
million in fiscal 1997 and approximately $44.0 million in fiscal 1996.
SEASONALITY
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 operating income, and
the Company's fourth fiscal quarter (late October through late January)
typically produces a large percentage of annual sales and operating income. The
fourth quarters of fiscal 1998, 1997, and 1996 accounted for approximately
31.3%, 31.2%, and 33.2%, respectively, of annual sales. For the fourth quarters
of fiscal 1998, 1997, and 1996, operating income as a percentage of annual
operating income was approximately 67.7%, 70.5%, and 33.7%, respectively. The
calculation of fiscal 1998 fourth quarter operating income as a percentage of
annual operating income excludes merger-related expenses. Operating income in
the 1996 fourth quarter would have accounted for 68.9% of annual operating
income before giving effect to a $6.0 million charge for studio closure costs.
The Company's operations can be adversely affected by inclement weather,
especially during the important fiscal fourth quarter.
COMPETITION
The professional portrait photography industry, including both
permanent and traveling studios, is highly competitive and fragmented. The
companies in the industry compete on the basis of price, service, package size
and technology. In addition, for larger national companies, such as PCA, which
operate studios within retail hosts, the relative convenience of the retail
host stores and consumer preferences for such retail hosts are important
competitive factors. The market comprises several large competitors, including
the Company, which operate in multiple locations, and numerous smaller
entities, which operate
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in only one or a few locations. The Company believes that it is one of the
larger portrait providers in the industry measured by annual sales and the
largest operator of portrait studios in the discount retail segment through
association with Kmart and Wal-Mart.
LICENSES, TRADEMARKS, AND PATENTS
The Company is party to a license agreement with Kmart Corporation
that allows the Company to operate its permanent studios in U.S. Kmart stores
under the Kmart name in exchange for a commission from the Company based on a
percentage of sales from the permanent studio in each store. The Company has
maintained a continuous business relationship with Kmart Corporation since
1967. The license agreement expires May 9, 2001, and may be terminated by
either party upon 180-days' notice. The Company assumed ASI's license agreement
with Wal-Mart Stores, Inc. when it acquired American Studios on January 27,
1997. Wal-Mart may terminate or amend the license agreement at any time. The
loss of the license to do business in U.S. Kmart stores or U.S. Wal-Mart
stores, or the closing of a significant number of U.S. Kmart or U.S. Wal-Mart
stores, could have a materially adverse effect on the Company. (See "General
Development - Distribution Channel Changes in 1998.")
On February 9, 1996, the Company's Canadian subsidiary entered into a
license agreement with Wal-Mart Canada, Inc. to operate portrait studios in
Wal-Mart's stores in Canada. The license agreement expires on a store-by-store
basis five years after a store opens and may be terminated by either party, on
a store-by-store basis, if certain minimum sales results are not achieved.
The Company owns certain other patents, trademarks, and licenses that
it does not believe are material to its business.
TECHNOLOGY: RESEARCH AND DEVELOPMENT
The Company has developed a proprietary digital imaging system that
allows the customer to view on a high-resolution monitor a digital proof of
each pose as the photographer photographs the subject. Immediately after the
photography session, customers then customize their portrait purchase using a
computerized sales system that enables customers to select specific poses,
portrait sizes, and quantities for purchase. The customer returns to the studio
approximately three weeks later to pick up the finished portraits. The Company
believes the increased flexibility and choice provided to customers by the
digital system have improved customer satisfaction and increased average
purchases. As a byproduct of its digital technology, the Company prints only
portraits purchased by the customer, eliminating waste associated with the
speculative production method. Furthermore, the Company's production efficiency
is enhanced through integration of its digital studio infrastructure with the
Company's computerized production system. The Company believes that its
integrated system is unique in the industry.
The Company operates two film-processing facilities in North Carolina.
The Company processes film from substantially all studios and Institutional
promotions at its finishing laboratory in Matthews, North Carolina. Film from
traveling promotions and approximately 250 digital studios is processed at a
second finishing laboratory located in Charlotte, North Carolina. The finishing
laboratories have adequate capacity to meet the Company's processing needs for
the foreseeable future.
The Company spent approximately $1.6 million, $1.3 million, and $1.3
million on research and development activities during the fiscal years 1998,
1997, and 1996, respectively. Research and development efforts have focused on
developing and refining its digital imaging system, enhancing the Company's
cameras and studio systems, and advancing the engineering and performance of
the Company's computerized lab and processing facilities.
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SOURCES AND AVAILABILITY OF SUPPLIES
The Agfa Division of Bayer Corporation is the Company's primary
supplier of photographic film, paper, and processing chemicals. PCA renewed its
supply contract with Agfa in August 1997 after receiving competitive bids from
other suppliers. PCA has not had significant difficulty obtaining its paper,
film and portrait processing chemical supplies, and management considers the
available alternative sources of such supplies to be adequate. Additionally,
PCA has not found it necessary to carry significant amounts of inventory to
ensure itself of a continuous allotment of raw materials.
PCA builds its own cameras and has an adequate supply of cameras and
camera components. The computer and video equipment used by PCA in its
integrated digital imaging system consists of standard components that are
readily available from multiple suppliers.
GOVERNMENTAL REGULATIONS
The Company is subject to various federal and state laws and
regulations, including the Occupational Safety and Health Act and federal and
state environmental laws. The Company is not aware of any material violation of
such laws and regulations. Continued compliance is not expected to have a
material effect upon capital expenditures, earnings, or the competitive
position of the Company.
EMPLOYEES
At January 31, 1999, the Company had approximately 5,600 full-time and
part-time employees. The Company believes employee relations are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Positions and Offices
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<S> <C> <C>
John Grosso(1) 52 President, Chief Executive Officer, and
Chairman of the Board
Eric H. Jeltrup(2) 54 Executive Vice President and Chief Technical
Officer
J. Robert Wren Jr.(3) 51 Executive Vice President and General Counsel
Bruce A. Fisher (4) 49 Executive Vice President and Chief Financial
Officer and Secretary
R. Michael Spencer(5) 51 Senior Vice President and Treasurer
</TABLE>
(1) Mr. Grosso has been President and Chief Executive Officer of the
Company since 1987, and Chairman of the board since 1998.
(2) Mr. Jeltrup has been with the Company in various positions in research
and development and production since 1976. He has served as Executive
Vice President since 1991 and was promoted to Chief Technical Officer
on August 25, 1994.
(3) Mr. Wren joined the Company in January 1997 as Executive Vice
President and General Counsel. Prior to that, Mr. Wren served as Chief
Executive Officer of American Studios, Inc. from July 1995 until its
acquisition in January 1997. He served in various other positions with
American Studios, Inc.
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including director and general counsel from January 1993 to July 1995.
From July 1986 to December 1992, Mr. Wren was a partner in the law
firm of Garland & Wren, P.A., Gastonia, NC.
(4) Mr. Fisher has been with the Company in various positions in
accounting and finance since 1977 and was promoted to Chief Financial
Officer and Secretary on August 25, 1994.
(5) Mr. Spencer has been with the Company since 1973 in various positions
in accounting. He was promoted to Senior Vice President and Treasurer
on January 6, 1992.
ITEM 2. PROPERTIES
The Company owns three facilities in the Charlotte, North Carolina,
area. One facility in Matthews, North Carolina, serves as its corporate
headquarters, production facility, and warehouse. The building is approximately
166,000 square feet. The Company also owns two facilities in Charlotte, North
Carolina, acquired through the ASI acquisition: a processing and administrative
facility which is approximately 60,000 square feet and a distribution center
which is approximately 31,400 square feet. All of these facilities are subject
to liens in favor of NationsBank, N.A., as Agent for the Company's credit
facilities. At January 31, 1999, the Company operated 818 permanent studios
within Kmart stores and 1,237 permanent studios within Wal-Mart stores, all
under license agreements. The Company owns the equipment, furniture, and
fixtures in all permanent studios.
ITEM 3. LEGAL PROCEEDINGS
On April 22, 1998, the Company and the then 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 defendant's move to dismiss
the Amended Complaint was denied. The Company and the Directors intend to
defend the lawsuit vigorously and believe it to be without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the
fourth quarter ended January 31, 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Following the August 25, 1998 Merger, the Company's Common Stock was
delisted from The Nasdaq Stock Market(SM). The Company's shares are listed for
trading on the OTC Bulletin Board under the symbol "PCAI." The Company's shares
have not traded actively since the Merger. On February 18, 1999, the Company
filed a Form 15 to deregister its common stock and suspend its duty to file
periodic reports with the Securities and Exchange Commission.
The Company's Common Stock traded on The Nasdaq Stock Market for the
first three fiscal 1998 quarters. The following is the range of high and low
trade prices for the shares of common stock during the Company's last two
fiscal years, as reported on The Nasdaq Stock Market.
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
January 31, 1999 February 1, 1998
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High Low High Low
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<S> <C> <C> <C> <C>
1st Quarter $26.00 $20.000 $17.25 $14.62
2nd Quarter $26.00 $24.500 $23.25 $15.50
3rd Quarter $27.75 $24.375 $25.50 $21.00
4th Quarter * * $25.50 $19.75
</TABLE>
* The Company's shares are not traded actively on a stock exchange and there
are no bid/ask quotes available.
At March 31, 1999, the Company had approximately 45 shareholders of
record.
The Company paid cash dividends of $0.07 per share in the first
quarter of fiscal 1998 and in each of the last three quarters in fiscal 1997.
The Company's credit agreement with NationsBank, N.A., as Agent, contains
covenants that restrict the Company's payment of dividends.
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ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except for percentages, ratios, statistics, and per share data)
<TABLE>
<CAPTION>
For the Fiscal Years Ended Approximately January 31,
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1999 1998 1997* 1996 1995
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<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Sales ......................................... $ 227,100 $ 242,899 $ 156,099 $ 144,715 $ 144,881
General and administrative expenses ........... $ 33,523 $ 36,160 $ 31,676(1) $ 23,782 $ 22,936
Total costs and expenses ...................... $ 236,228 $ 220,036 $ 150,783(1) $ 131,392 $ 137,028
Income (loss) before extraordinary items ...... $ (16,157) $ 8,735 $ 2,994 $ 7,617 $ 4,372
Extraordinary loss on extinguishment of debt .. $ (1,057) $ -- $ -- $ -- $ --
Income (loss) from continuing operations ...... $ (17,214) $ 8,735 $ 2,994(2) $ 7,617 $ 4,372
Net Income (loss) ............................. $ (17,214) $ 8,735 $ 2,994(2) $ 7,617 $ 4,785
Basic earnings (loss) per common share:
Income from operations ..................... $ (2.94) $ 1.12 $ 0.40 $ 1.00 $ 0.54
Extraordinary loss on extinguishment of debt $ (0.19) $ -- $ -- $ -- $ --
From continuing operations ................. $ (3.13) $ 1.12 $ 0.40(2) $ 1.00 $ 0.54
Net Income ................................. $ (3.13) $ 1.12 $ 0.40(2) $ 1.00 $ 0.59
Diluted earnings per common share:
Income from operations ..................... $ (2.94) $ 1.07 $ 0.38 $ 0.96 $ 0.52
Extraordinary loss on extinguishment of debt $ (0.19) $ -- $ -- $ -- $ --
From continuing operations ................. $ (3.13) $ 1.07 $ 0.38(2) $ 0.96 $ 0.52
Net Income ................................. $ (3.13) $ 1.07 $ 0.38(2) $ 0.96 $ 0.57
Number of common shares:
Basic ...................................... 5,502 7,779 7,522 7,632 8,149
Diluted .................................... 5,502 8,195 7,836 7,895 8,398
BALANCE SHEET DATA & FINANCIAL RATIOS:
Working capital ............................... $ (16,112) $ (20,334) $ (18,472) $ (3,878) $ (6,697)
Current ratio ................................. 0.65 0.64 0.55 0.82 0.67
Quick ratio ................................... 0.44 0.47 0.38 0.70 0.52
Total assets .................................. $ 150,591 $ 153,301 $ 146,661 $ 59,884 $ 59,557
Long-term debt (noncurrent portion) ........... $ 218,589 $ 42,064 $ 58,680 $ -- $ --
Ratio of long-term debt (noncurrent portion)
to total capitalization(3) ................. 2.20 0.48 0.64 -- --
Total shareholders' equity per share(4) ....... $ (21.69) $ 5.45 $ 4.29 $ 3.96 $ 3.93
Return on average equity ...................... NA 22.3% 9.2% 23.7% 15.1%
STATEMENT OF CASH FLOWS DATA:
Depreciation and amortization expense ......... $ 14,858 $ 15,453 $ 9,498 $ 8,490 $ 7,136
Capital expenditures .......................... $ 11,022 $ 12,086 $ 13,424 $ 6,309 $ 14,698
Cash dividends per share ...................... $ 0.07 $ 0.21 $ 0.21 $ 0.28 $ 0.28
</TABLE>
* PCA's operating results for the fiscal year ended February 2, 1997, do
not include operating results from American Studios, Inc. as the
acquisition was accounted for by the purchase method at year-end;
balance sheet information includes the assets and liabilities of the
combined companies.
(1) Includes $6 million charge for studio closure costs.
(2) Net income and earnings per share include tax effected studio closure
costs of $3.6 million or $0.46 per share. Excluding this amount, net
income was $6.6 million or $0.84 per diluted share.
(3) Total capitalization is long-term debt and total shareholders' equity.
(4) Total shareholders' equity per share has been calculated by dividing
total shareholders' equity by the number of diluted shares.
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ITEM 7. 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 January 31, 1999, the Company operated 2,055 portrait
studios within Kmart and Wal-Mart discount stores and supercenters. The
Company's studios are located 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. At January 31, 1999, the Company operated 1,914 permanent
studios in the United States and 141 internationally. Portrait studio sales in
discount stores accounted for 96.8% of consolidated sales.
The Company's Merger with a subsidiary of Jupiter Partners II L.P.
("Jupiter") was approved by shareholders on August 17, 1998 and became
effective on August 25, 1998. Financing sources for the Merger (collectively,
"Merger Financing") were (a) an equity contribution of $51.9 million from
Jupiter, or 83.1% of outstanding equity of the Company, (b) $150 million in
senior secured debt pursuant to a bank credit facility led by NationsBank,
N.A., and (c) $100 million in senior subordinated debt. 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.
For the 1998 fiscal year, the Company reported merger-related charges
totaled $27.3 million. These merger-related charges are comprised of
nonrecurring charges of $25.9 million and a noncash write-off of unamortized
financing expenses related to the Company's previous credit facilities of $1.4
million. The principal components of the nonrecurring charges were 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, and
a noncash charge for the rollover of options.
During fiscal 1998, the Company closed 145 portrait studios located
within Kmart stores. The Company was notified by Kmart in November 1998 that it
would close 135 additional studios in which PCA is currently operating. These
studios accounted for approximately $5.0 million and $12.4 million of revenue
in fiscal years 1998 and 1997, respectively. Under the terms of the license
agreement between Kmart and PCA, PCA is required to exit these 135 studios
within six months of notification or around May 1999. In February 1999, the
Company was again notified by Kmart of plans to close 31 additional studios in
which PCA is operating. PCA is required to exit these studios on or around
August 1999. Revenue from the studios expected to be closed in fiscal 1999 was
$14.9 million and $19.0 million in fiscal years 1998 and 1997, respectively.
HISTORICAL BUSINESS REVIEW
In fiscal 1997, following the acquisition of American Studios, Inc.
("ASI"), the Company completed several strategic initiatives intended to
strengthen the Company's competitive position and improve the profitability of
its portrait studio operations. These initiatives included: (1) the integration
of the ASI operations, (2) the discontinuation of ASI's fashion photography and
PCA's pet photography business and the closure of underperforming studios, (3)
the redeployment of digital studio assets from closed and discontinued
operations to certain Wal-Mart studios acquired from ASI, and (4) continued
expansion of PCA's customer base with both domestic and international studio
openings. At February 1, 1998, the Company operated 2,075 portrait studios.
Portrait sales at discount stores accounted for 96.2% of fiscal 1997
consolidated sales.
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In fiscal 1996, 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. On January 27, 1997,
the Company acquired 94.9% of the outstanding common stock of ASI, portrait
provider to Wal-Mart in the United States and Mexico. This acquisition expanded
the number of Wal-Mart stores PCA served to over 2,300, including 856 permanent
studios in U.S. Wal-Mart stores previously served by ASI. 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 in April 1996. At the end of fiscal 1996,
the Company operated 2,288 portrait studios in discount stores, which included
892 studios acquired through the acquisitions mentioned above. Portrait sales
at discount store studios accounted for 91.6% of fiscal 1996 consolidated
sales. 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
ASI.
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 operating income, and
the Company's fourth fiscal quarter (late October through late January)
typically produces a large percentage of annual sales and operating income. The
fourth quarters of fiscal 1998, 1997, and 1996 accounted for approximately
31.3%, 31.2%, and 33.2%, respectively, of annual sales. For the fourth quarters
of fiscal 1998, 1997, and 1996, operating income as a percentage of annual
operating income was approximately 67.7%, 70.5% and 33.7%, respectively. The
calculation of fiscal 1998 fourth quarter operating income as a percentage of
annual operating income excludes merger-related expenses. Operating income in
the 1996 fourth quarter would have accounted for 68.9% of annual operating
income before giving effect to the $6.0 million charge for studio closure
costs. The Company's operations can be adversely affected by inclement weather,
especially during the important fiscal fourth quarter.
OPERATIONS
1998 PCA FISCAL YEAR COMPARED WITH 1997 PCA FISCAL YEAR. Sales for the
fiscal year ended January 31, 1999 were $227.1 million, a decline of 6.5%
compared with sales of $242.9 million reported for the fiscal year ended
February 1, 1998. The $15.8 million sales decline was due to sales from
operations that were closed or discontinued in fiscal 1997 and the closing of
145 portrait studios in Kmart stores in fiscal 1998 (see "General Development -
Distribution Channel Changes in 1998.") Sales from fiscal 1998 Kmart studio
closings were $5.0 million in fiscal 1998 and $12.4 million in fiscal 1997. In
fiscal 1997, the Company discontinued its subsidiary's fashion photography
business and PCA's pilot pet portrait operations, closed 401 underperforming
discount store studios and restructured its studio operations. These
discontinued operations and restructuring activities accounted for aggregate
sales of approximately $14.7 million sales in the fiscal 1997 period. Excluding
sales from studios closed in fiscal 1998 and discontinued operations and
restructuring activities in fiscal 1997, PCA fiscal 1998 sales increased $6.4
million or 3.0%, primarily the result of an increase in the number of studios
in Wal-Mart stores and rising purchase averages in Wal-Mart studios.
Total operating costs and expenses as a percentage of sales increased
to 104.0% in fiscal 1998 from 90.6% in fiscal 1997. Excluding nonrecurring
charges of $25.9 million or 11.4% of sales related to the execution of the
Merger, total operating costs as a percentage of sales were 92.6% in fiscal
1998. The increase in operating costs and expenses over the prior fiscal year
was principally due to lower average sales per studio and rising labor costs.
Advertising and promotional expenses as a percentage of sales decreased to 6.6%
in fiscal 1998 compared with 6.9% in fiscal 1997. Cost of photographic sales as
a percentage of sales increased to 36.6% in fiscal 1998 compared with 35.3% in
fiscal 1997 due to increased product costs and increased labor expenses
required to staff a greater proportion of seven-day studios. Store commissions
and selling expense as a percentage of sales increased to 33.8% in fiscal 1998
compared with 32.8% in fiscal 1997, the result of rising wages in general and
increased labor expense to staff a greater proportion of seven-day studios.
General and administrative expenses as a
10
<PAGE> 12
percentage of sales, net of merger-related costs, were 14.8% in fiscal 1998
compared with 14.9% in the prior fiscal year.
The Company realized a loss from operations in fiscal 1998 of $9.1
million compared with income from operations of $22.9 million or 9.4% of sales
in fiscal 1997. Excluding nonrecurring charges related to the execution of the
Merger of $25.9 million in fiscal 1998, operating income was $16.8 million or
7.4% of sales.
Net interest expense for the 1998 fiscal year was $13.0 million or
5.7% of sales compared with $6.6 million or 2.7% of sales. The increase in net
interest expense reflects an increased level of borrowing due to the Merger.
(See note 4 of Notes to Consolidated Financial Statements for additional
information on interest and debt.)
Excluding the extraordinary items, the income tax benefit for the 1998
period was $6.0 million compared with a tax provision of $7.6 million in fiscal
1997. (See note 5 of Notes to Consolidated Financial Statements for additional
information on taxes.)
The Company reported a net loss of $17.2 million for the fiscal 1998
year compared with net income of $8.7 million for the fiscal 1997 year. In
fiscal 1998, loss per common share on a diluted basis was $3.13 including
extraordinary loss of $0.19 per share based on 5.5 million weighted average
shares outstanding. In fiscal year 1997, diluted earnings per common share were
$1.07 on a base of 8.2 million weighted average shares outstanding.
1997 PCA FISCAL YEAR COMPARED WITH 1996 PCA FISCAL YEAR. Sales for
fiscal year 1997 increased 55.6% to $242.9 million, compared with $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 ASI's 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 ASI 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 with 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 with 33.7% of sales in
1996, principally due to higher labor costs of ASI's 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 with 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 with 16.4% of sales
in fiscal 1996. This decline is 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 related to the acquisition of American
Studios.
Pretax income increased to $16.3 million or 6.7% of sales in fiscal
1997 compared with $5.1 million or 3.3% of sales in the prior year. Fiscal 1996
pretax income includes a $6.0 million charge for
11
<PAGE> 13
studio closure costs noted above. Fiscal 1997 net interest expense was $6.6
million compared with $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 with $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.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended January 31, 1999, the Company experienced
negative cash flow from operating activities of $12.4 million due principally
to the Company's Merger with Jupiter described in the Overview. Changes in
operating assets and liabilities consumed $9.6 million of cash. Merger and
financing related expenses were $27.3 million. Excluding the aforementioned
items, operating activities provided cash flow of $24.5 million for the period.
At January 31, 1999, the Company had $5.0 million in cash and cash
equivalents, $4.6 million of letters of credit, and $20.4 million available
under its revolving credit facility.
The Company had capital expenditures of $11.0 million for the fiscal
year ended January 31, 1999, principally for new studios, materials used to
improve the physical layout of existing portrait studios, and the purchase of
laboratory equipment. Capital expenditures for fiscal year 1999 are estimated
to be approximately $12.0 million, and will be financed from operations
augmented by borrowing under the Company's credit facilities.
On August 25, 1998, the Company consummated the Merger discussed in
the Overview in which the Company acquired 7,548,639 or 95% of its outstanding
common stock for approximately $200.0 million. In connection with the Merger,
the Company was recapitalized with $62.5 million in equity. Merger Financing
included: (a) an equity contribution of $51.9 million from Jupiter,
representing 83.1% of the outstanding equity of the Company, (b) $150 million
in senior secured debt pursuant to a bank credit facility led by NationsBank,
N.A., and (c) $100 million in Senior Subordinated Debt. These debt facilities
are secured by substantially all of the assets of the Company and its direct
and indirect domestic subsidiaries, subject to certain limitations with respect
to foreign subsidiaries, and contain customary covenants and events of default,
including substantial restrictions on the Company's ability to declare
dividends or distributions. Funds provided by the Merger Financing were 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.
As a result of the Merger, the Company's capital structure is highly
leveraged. Debt service requirements for 1999 are approximately $5.4 million.
The Company's principal sources of liquidity are cash flow from operations and
borrowings under its revolving credit facility. The Company's principal uses of
cash are debt service requirements, capital expenditures, research and
development, and working capital. The Company's ability to make scheduled
payments of principal of, or to pay the interest on, or to refinance its
indebtedness, or to fund planned capital expenditures and research and
development expenses will depend on its future performance, which to a certain
extent is subject to general economics, financial, competitive, legislative,
regulatory and other factors that are beyond its control. Based upon the
current level of operations, management believes that cash flow from operations
and available cash, together with available borrowings under its credit
facilities, will be adequate to meet the Company's future liquidity needs for
at least the next several years.
12
<PAGE> 14
YEAR 2000 ISSUES
The Company has been evaluating and adjusting all date-sensitive
systems and equipment for compliance with the Year 2000. The Company upgraded
its mainframe computer hardware in November 1997 to a version that will be
vendor supported into the new millennium. During the first quarter of fiscal
1998, the Company completed the assessment phase of the Year 2000 project,
including information technology such as point-of-sale computer systems, as
well as non-information technology equipment such as film processing, printers,
and portrait processing equipment. The Company initiated plans to correct
programming code in existing computer software applications. Over 90% of the
required coding conversions on information technology have occurred to date.
The Company anticipates completing all known remaining coding conversions by
the second quarter of 1999. Testing of individual program modifications began
in March 1998; testing of the integrated system is scheduled to begin during
the second quarter of 1999. Testing will continue for all existing systems and
enhancements to ensure readiness. In addition, communications are ongoing with
other companies with which our systems interface or our business relies on to
determine the extent to which those companies are addressing their Year 2000
compliance.
The Company is using both internal and external resources to reprogram
and/or modify Company-developed applications, install up-to-date releases of
purchased systems, and test all systems for Year 2000 compliance. The Company
has not deferred any information technology projects to address the Year 2000
issue.
The estimated total incremental cost of the conversion is between $1.0
million and $1.2 million, which is being expensed as incurred, or capitalized
if appropriate. The vast majority of the cost is related to reprogramming or
replacement software; the remainder is related to acquisition of hardware. The
Company expensed $0.5 million in fiscal 1998. All of these costs are being
funded through operating cash flows.
Although the Company anticipates minimal business disruption will
occur as a result of Year 2000 issues, possible consequences include, but are
not limited to, loss of communications links with certain studio locations,
inability to process transactions, inability to process portraits, or engage in
similar normal business activities. The Company will establish contingency
plans where needed based on the results of actual testing. We anticipate
contingency plans to be in place by July 1999.
The cost of the conversions and the completion dates are based on
management's best estimates and may be updated as additional information
becomes available.
PROSPECTIVE INFORMATION
The Private Securities Litigation Act of 1995 ("the Act") provides a
safe harbor for forward-looking statements made by or on behalf of the Company.
Certain statements contained in Management's Discussion and Analysis and in
other Company filings are "forward-looking statements" that involve a number of
risks and uncertainties. A number of factors could cause actual results,
performance, achievements of the Company, or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These factors include, but are not
limited to, the competitive environment in the portrait photography industry in
general and in the Company's specific market areas; changes in prevailing
interest rates and the availability of and terms of financing to fund the
anticipated growth of the Company's business; inflation; changes in costs of
goods and services; economic conditions in general and in the Company's
specific market areas; demographic changes; changes in or failure to comply
with federal, state and/or local governmental regulations; liability and other
claims asserted against the Company; changes in operating strategy or
development plans; the ability to attract and retain qualified personnel; the
significant indebtedness of the Company after the Merger and the impact of
increases in interest rates on such indebtedness; labor disturbances; changes
in the Company's capital expenditure and studio
13
<PAGE> 15
expansion plans; termination of the Company's right to do business in Kmart or
Wal-Mart stores on a permanent or traveling studio basis or reduction in the
number of stores in which the Company operates; decreases in the number of
customers or lower average sales amounts; and other factors referenced in the
Company's filings with the Securities and Exchange Commission. Actual results
may materially differ from anticipated results described in such statements.
INFLATION
Over the past few years, inflation has not had a significant impact on
the Company's financial condition or results of operations.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risks from changes in interest rates
relates primarily to the effects that changes in interest rates have on
floating rate debt. A 100 basis point movement in the interest rate on the
Company's floating rate debt would result in approximately $1.5 million
annualized increase or decrease in net interest expenses and cash flows.
The Company has operations in several foreign countries and conducts
business in foreign currencies in both Canada and Mexico. A 10% change in the
value of all foreign currencies would not have a material effect on the
Company's financial position, liquidity or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is submitted beginning on page
F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
None.
14
<PAGE> 16
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
The following table sets forth certain information relating to each
director of the Company as of March 4, 1999:
<TABLE>
<CAPTION>
Name, Principal
Occupation, Business Experience
During Last Five Years, Positions and Offices Director
Other Directorships Age With the Company Since
------------------------------- --- --------------------- --------
<S> <C> <C> <C>
John Grosso 52 Chairman of the 1987
President and Chief Executive Officer of the Company since 1987. board, President, and
Chairman of the Board since 1998. Chief Executive
Officer
Thomas A. Berglund 38 Director 1998
Principal of Jupiter Partners since 1994. Prior to that time he
served for three years with the Invus Group, a privately funded
buy-out group specializing in food-related companies.
Terry J. Blumer 40 Director 1998
Co-founder of Jupiter Partners in 1994. Prior to that time he was
associated with Goldman, Sachs & Co. for over eight years, most
recently as an Executive Director.
Donald P. Greenberg, Ph.D. 64 Director 1996
Faculty of Cornell University since 1968. Director, Program of
Computer Graphics, Cornell University, since 1973. Founding Director,
National Science and Technology Center for Computer Graphics and
Scientific Visualization. Director of Data Broadcasting Corporation
since 1995 and Chyron Corporation since 1996.
Bridgette P. Heller
General Manager GEVALIA Kaffe, a division of Kraft Foods, since 36 Director 1998
1996 and various positions with Kraft Foods since 1985.
John F. Klein 36 Director 1998
Principal of Jupiter Partners and has been associated with the firm
since 1995. Prior to that time he served for three years as a
consultant with Bain & Company, a management consulting firm.
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
Name, Principal
Occupation, Business Experience
During Last Five Years, Positions and Offices Director
Other Directorships Age With the Company Since
------------------------------- --- --------------------- --------
<S> <C> <C> <C>
Joseph H. Reich 64 Director 1987
Managing Partner of Centennial Associates, L.P. since April 1989.
Eric F. Scheuermann 33 Director 1998
Associate of Jupiter Partners and has been associated with the firm
since March 1998. Prior to that time, he served for three years with
McKinsey & Company, a management-consulting firm, and with
Latham & Watkins, a law firm.
John A. Sprague 46 Director 1998
Co-founder of Jupiter Partners in 1994. Prior to that time he was
associated with Forstmann Little & Co. for eleven years, most
recently as a partner. He is a director of Harmon Industries.
</TABLE>
16
<PAGE> 18
ITEM 11. EXECUTIVE COMPENSATION
The following sets forth certain compensation information with regard
to the Company's chief executive officer and each of the next four most highly
compensated executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
---------------------------------- ------------
Securities All Other
Fiscal Underlying Compensation
Name and Principal Position Year Salary ($) Bonus ($) Options(#) ($) (2)
- - ----------------------------- ------ ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
John Grosso 1998 $ 280,725 $ - - $945,000 (1)
President 1997 $ 254,100 $ 38,115 - $ 5,831
Chief Executive Officer 1996 $ 248,325 $120,000 50,000 $ 2,193
J. Robert Wren, Jr. 1998 $ 250,000 $ - - $ -
Executive Vice President 1997 $ 250,000 $ 31,250 - $ 5,831
General Counsel 1996 $ - $ - (4) - (4) $ - (3)
Eric H. Jeltrup 1998 $ 230,000 $ - - $ -
Executive Vice President 1997 $ 210,271 $ 26,284 - $ 5,831
Chief Technical Officer 1996 $ 194,987 $ 41,248 - $ 2,193
Bruce A. Fisher 1998 $ 170,167 $ - - $ -
Executive Vice President 1997 $ 155,250 $ 15,525 - $ 5,701
Chief Financial Officer 1996 $ 153,938 $ 43,090 - $ 2,193
R. Michael Spencer 1998 $ 156,625 $ - - $ -
Senior Vice President 1997 $ 144,900 $ 14,490 - $ 5,320
Treasurer 1996 $ 143,675 $ 31,551 - $ 2,110
</TABLE>
- - -----------------
(1) Changes in control payment made pursuant to Employment Agreement.
(2) Company's portion of Profit Sharing Plan contribution in 1997 and
1996.
(3) The Company paid Mr. Wren $539,000 to terminate employment and
noncompete agreement between Mr. Wren and American Studios, Inc. and
$168,750 to purchase Mr. Wren's American Studios stock options.
(4) $75,000 was paid to Mr. Wren for services rendered to American
Studios, Inc. and he received a grant of 150,000 options.
17
<PAGE> 19
II. OPTION GRANT TABLE
Options Granted in the Last Fiscal Year and Potential Realizable Values
<TABLE>
<CAPTION>
Number of
Securities Percent of Potential Realizable Value at
Underlying Total Options Exercise or Assumed Annual Rates of Stock
Options Granted Granted in Base Share Expiration Price Appreciation for Option
Name (#) Fiscal Year Price ($/Share) Date Term(4)
- - -------------------------- ------------------ --------------- ---------------- --------------- --------------------------------
5% ($) 10% ($)
---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John Grosso 13,897(1) 3.2% $ 8.00 8/25/06 $ 92,068 $184,135
24,000(2) 5.5% $26.50 8/25/06 $159,000 $318,000
24,000(3) 5.5% $26.50 8/25/06 $159,000 $318,000
J. Robert Wren Jr. 13,400(1) 3.1% $ 8.00 8/25/06 $ 88,775 $177,550
7,500(2) 1.7% $26.50 8/25/06 $ 49,687 $ 99,375
7,500(3) 1.7% $26.50 8/25/06 $ 49,687 $ 99,375
Eric H. Jeltrup 7,100(1) 1.6% $ 8.00 8/25/06 $ 47,037 $ 44,015
12,000(2) 2.7% $26.50 8/25/06 $ 79,500 $159,000
12,000(3) 2.7% $26.50 8/25/06 $ 79,500 $159,000
Bruce A. Fisher 20,200(1) 4.6% $ 8.00 8/25/06 $133,825 $267,650
7,500(2) 1.7% $26.50 8/25/06 $ 49,687 $ 49,687
7,500(3) 1.7% $26.50 8/25/06 $ 49,687 $ 49,687
R. Michael Spencer 9,700(1) 2.2% $ 8.00 8/25/06 $ 64,262 $128,525
5,000(2) 1.1% $26.50 8/25/06 $ 33,125 $ 66,250
5,000(3) 1.1% $26.50 8/25/06 $ 33,125 $ 66,250
</TABLE>
(1) The options vested on the date of grant, August 25, 1998.
(2) The options vest pro rata with over a five-year period from date of
grant, August 25, 1998.
(3) The options vest conditioned on achievement of a minimum cumulative
EBITDA target.
(4) These values are hypothetical; there is no assurance that the stock
will achieve these rates of appreciation.
18
<PAGE> 20
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 at Fiscal Year End
On Exercise Realized Year End - Exercisable/ Exercisable/
Name (#) ($)(1) Unexercisable (#) Unexercisable ($)(2)
- - ---- --------------- ---------- ----------------------- ------------------------
<S> <C> <C> <C> <C>
John Grosso............... 0 $2,973,655 13,897/48,000 *
J. Robert Wren Jr......... 0 $1,158,350 13,400/15,000 *
Eric H. Jeltrup........... 0 $1,958,650 7,100/24,000 *
Bruce A. Fisher........... 0 $ 103,800 20,200/15,000 *
R. Michael Spencer........ 0 $ 248,050 9,700/10,000 *
</TABLE>
(1) Amount represents cash payment for options canceled on completion of
the Merger with Jupiter Partners II L.P.
(2) The Company's common shares are not actively traded on any stock
exchange. Without a bid/ask quote from an exchange, the Company is
unable to determine the value of unexercised options.
19
<PAGE> 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table shows the beneficial ownership as of March 31,
1999, of each person known to the Company to be the beneficial owner of more
than 5% of the outstanding shares of the Company's Common Stock:
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address Beneficial Percent
Title of Class of Beneficial Owner Ownership of Class
- - -------------- ------------------- ---------- --------
<S> <C> <C> <C>
Common Stock, Jupiter Partners LP 1,957,812(1) 83.1%
$0.20 par value 30 Rockefeller Plaza, Suite 4525
New York, NY 10112
</TABLE>
(1) See note (1) to the table under "Security Ownership of Directors and
Management" below.
Security Ownership of Directors and Management
The following table shows the beneficial stock ownership as of March
31, 1999, of each of the current directors and executive officers of the
Company and of all directors and executive officers as a group of the
outstanding shares of the Company's Common Stock, $0.20 par value, which is the
only class of voting securities outstanding. Each of the individuals listed
below possesses sole voting and investment power with respect to the shares
listed opposite his or her name, unless noted otherwise:
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name Beneficial Ownership(1) of Class
- - ---- ----------------------- --------
<S> <C> <C>
Thomas A. Berglund................................... 0
Terry J. Blumer...................................... 1,957,812 (2) 83.1%
Donald P. Greenberg.................................. 0
John Grosso.......................................... 77,797 (3) 3.3%
Bridgette P. Heller.................................. 0
John F. Klein........................................ 0
Joseph H. Reich...................................... 115,405 4.9%
Eric H. Scheuermann.................................. 0
John A. Sprague...................................... 1,957,812 (2) 83.1%
Eric H. Jeltrup...................................... 36,400 (3) 1.5%
J. Robert Wren Jr.................................... 13,400 (3) *
Bruce A. Fisher...................................... 20,200 (3) *
R. Michael Spencer................................... 9,700 (3) *
All Executive Officers and Directors as a group...... 2,230,714 94.6%
</TABLE>
*Less than 1% of the outstanding shares of Common Stock of the Company.
20
<PAGE> 22
(1) Pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of
1934, beneficial ownership of a security consists of sole or shared voting
power (including power to vote or direct the vote) and/or sole or shared
investment power (including the power to dispose or direct the disposition)
with respect to the security through any contract, arrangement,
understanding, relationship or otherwise.
(2) Represents the shares owned by Jupiter. Messrs. Sprague and Blumer exercise
investment and voting power over the shares owned by Jupiter and accordingly
are deemed to "beneficially own" such shares in accordance with Rule 13d-3
promulgated under the Securities Exchange Act of 1934. Each of the Messrs.
Blumer and Sprague disclaim beneficial ownership of all shares of the
Company owned by Jupiter, except to the extent of their respective ownership
interests in such partnership.
(3) The numbers and percentages of shares shown in the table above include stock
options covering Common Stock exercisable within 60 days of March 31, 1999
as follows: Mr. Fisher--20,200; Mr. Grosso--13,897; Mr. Jeltrup--7,100; Mr.
Spencer--9,700; and Mr. Wren--13,400; and all executive officers and
directors as a group (including such individuals)--64,297. Such persons and
members of such group disclaim any beneficial ownership of the shares
subject to such options.
Section 16(a), Beneficial Ownership Reporting Compliance, of the
Securities Exchange Act of 1934 requires the Company's officers and directors
and persons who own more than 10% of the Company's Common Stock to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Based on Company records and other information, the Company
believes that all such SEC filing requirements with respect to the 1998 fiscal
year were met.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The spouse of Mr. Wren (an officer of PCA) is a partner in the law firm
of Kilpatrick Stockton LLP of Charlotte, North Carolina. The Company has
engaged Kilpatrick Stockton LLP on various legal matters during the year.
The Company has awarded a grant to the Cornell University Program of
Computer Graphics to support digital photographic research principally related
to retail portrait studio business. Mr. Greenberg (a Director of PCA) is the
director of the Computer Graphics Department at Cornell University.
The Company has employment, severance and stock option arrangements
with certain members of its senior management. In connection with the
Recapitalization Closing, management rolled over options to purchase shares of
Common Stock at $8.00 per share, the number of the options rolled-over was
based on the value of options held prior to the Recapitalization Closing.
Pursuant to the Merger Agreement between the Company and Jupiter, PCA
paid Jupiter a transaction fee of approximately $2.76 million in connection
with the consummation of the Merger. The fee equaled one percent of the
transaction size and is Jupiter's principal form of compensation for arranging
the Merger Financing.
21
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1 & 2. The financial statements and schedules required by this Item
can be found as indexed on Page F-1 following page 26.
3. Exhibits shown by index beginning on page 23.
(b) Reports on Form 8-K.
None
22
<PAGE> 24
EXHIBIT INDEX
PCA INTERNATIONAL, INC.
Index to Exhibits
Index Page
No. Description No.
- - ----- ----------- ----
3(a) Restated Charter, as amended to date, incorporated by
reference to Exhibit 4(b) to the Company's Registration
Statement on Form S-2, Commission File No. 33-50738, dated
August 12, 1992.
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, Commission File No. 0-8550,
for the quarter ended May 3, 1992.
10(a) License Agreement dated July 29, 1992, between Wal-Mart
Corporation and American Studios, Inc., incorporated by
reference to Exhibit 10.1 to American Studios, Inc. 1992 Form
S-1 (Registration No. 33-58958).
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(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) Credit Agreement dated as of August 25, 1998 by and among PCA
International, Inc., PCA Photo Corporation of Canada, Inc.,
PCA Specialty Retail Photo Corporation, Inc., Photo
Corporation of America, PCA National, Inc., American Studios,
Inc., the Borrowers, and NationsBank, as Agent, incorporated
by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended November 1, 1998.
10(g) Bridge Loan Agreement dated as of August 25, 1998 among PCA
International, Inc., PCA Photo Corporation of Canada, Inc.,
PCA Specialty Retail Photo Corporation, Inc., Photo
Corporation of America, PCA National, Inc., American Studios,
Inc., as Borrowers, and NationsBanc Montgomery Securities
LLC, as Arranger and NationsBridge, L.L.C., as Administrative
Agent, incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended November 1, 1998.
10(i) Merger Agreement dated December 17, 1996, between PCA
International, Inc., ASI Acquisition Corp., and American
Studios, Inc., incorporated by reference to the Company's
Form 8-K dated January 23, 1997.
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.
10(l)* Employment and Noncompete Agreement dated December 17, 1996,
between Randy J. Bates and PCA International, Inc.,
incorporated by reference to Exhibit 10(l) to the Company's
Annual Report on Form 10-K for the year ended February 2,
1997.
23
<PAGE> 25
EXHIBIT INDEX
PCA INTERNATIONAL, INC.
Index to Exhibits
Index Page
No. Description No.
- - ----- ----------- ----
10(m)* Employment and Noncompete Agreement dated December 17, 1996,
between Robert Kent Smith and PCA International, Inc.,
incorporated by reference to Exhibit 10(m) to the Company's
Annual Report on Form 10-K for the year ended February 2,
1997.
10(n)* Employment and Noncompete Agreement dated December 17, 1996,
between J. Robert Wren Jr., and PCA International, Inc.,
incorporated by reference to Exhibit 10(n) to the Company's
Annual Report on Form 10-K for the year ended February 2,
1997.
10(o)* Employment and Noncompete Agreement dated June 9, 1997,
between John Grosso and PCA International, Inc., incorporated
by reference to Exhibit 10(o) to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 3, 1997.
10(p)* Employment and Noncompete Agreement dated June 9, 1997,
between Eric Jeltrup and PCA International, Inc.,
incorporated by reference to Exhibit 10(p) to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 3,
1997.
10(q)* Employment and Noncompete Agreement dated June 9, 1997,
between Bruce Fisher and PCA International, Inc.,
incorporated by reference to Exhibit 10(q) to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 3,
1997.
10(r) Sales contract dated August 1, 1997, between PCA
International, Inc., and Agfa Division of Bayer Corporation,
incorporated by reference to Exhibit 10(r) to the Company's
Quarterly Report on Form 10-Q for the quarter ended November
2, 1997.
21 Subsidiaries of the Registrant.
23 Consent of KPMG LLP.
27 Financial Data Schedule.
*Management contract or compensatory plan or arrangement required to be filed
as an exhibit.
24
<PAGE> 26
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.
PCA INTERNATIONAL, INC.
Date: April 29, 1999 /s/John Grosso
-------------------------------------
John Grosso
Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
/s/John Grosso Chairman of the Board, President, and April 29, 1999
- - ------------------------------ Chief Executive Officer
John Grosso
/s/Eric H. Jeltrup Executive Vice President April 29, 1999
- - ------------------------------ Chief Technical Officer
Eric H. Jeltrup
/s/J. Robert Wren Jr. Executive Vice President April 29, 1999
- - ------------------------------ General Counsel
J. Robert Wren Jr.
/s/Bruce A. Fisher Executive Vice President April 29, 1999
- - ------------------------------ Chief Financial Officer
Bruce A. Fisher Secretary
/s/R. Michael Spencer Senior Vice President April 29, 1999
- - ------------------------------ Treasurer
R. Michael Spencer
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
/s/Thomas A. Berglund Director April 29, 1999
- - -----------------------------
Thomas A. Berglund
/s/Terry J. Blumer Director April 29, 1999
- - -----------------------------
Terry J. Blumer
/s/John F. Klein Director April 29, 1999
- - -----------------------------
John F. Klein
/s/Eric F. Scheuermann Director April 29, 1999
- - -----------------------------
Eric F. Scheuermann
/s/John A. Sprague Director April 29, 1999
- - -----------------------------
John A. Sprague
/s/Donald P. Greenberg Director April 29, 1999
- - -----------------------------
Donald P. Greenberg
/s/Bridgette P. Heller Director April 29, 1999
- - -----------------------------
Bridgette P. Heller
</TABLE>
26
<PAGE> 28
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
Index to Financial Statements and Schedules
<TABLE>
<CAPTION>
Financial Statements: Page No.
--------
<S> <C>
Independent Auditors' Report............................................................ F-2
Consolidated Balance Sheets at January 31, 1999 and February 1, 1998.................... F-3-F-4
Consolidated Statements of Operations for Fiscal Years Ended
January 31, 1999, February 1, 1998, and February 2, 1997................................ F-5
Consolidated Statements of Changes in Shareholders' (Deficit) Equity for Fiscal Years
Ended January 31, 1999, February 1, 1998, and February 2, 1997.......................... F-6
Consolidated Statements of Cash Flows for Fiscal Years Ended
January 31, 1999, February 1, 1998, and February 2, 1997................................ F-7
Notes to Consolidated Financial Statements.............................................. F-8-F-27
Schedules:
II Valuation and Qualifying Accounts for Fiscal Years Ended
January 31, 1999, February 1, 1998 and February 2, 1997................................. S-1
Exhibits:
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule 1/31/99
</TABLE>
Financial statements, historical information, and schedules other than those
listed above have been omitted for the reason that they are not required or
because the required information is given in the financial statements or notes
thereto.
F-1
<PAGE> 29
Independent Auditors' Report
The Board of Directors and Shareholders
PCA International, Inc.:
We have audited the consolidated financial statements of PCA International,
Inc. and subsidiaries as of January 31, 1999 and February 1, 1998 and for each
of the years in the three-year period ended January 31, 1999, as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PCA International,
Inc. and subsidiaries as of January 31, 1999 and February 1, 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 31, 1999, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/KPMG LLP
KPMG LLP
Charlotte, North Carolina
April 27, 1999
F-2
<PAGE> 30
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
January 31, February 1,
1999 1998
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 4,951,618 $ 12,289,761
Accounts receivable (net of allowance for doubtful
accounts of $1,028,232 and $1,315,666):
Due from licensor stores and customers ....... 5,723,096 6,740,560
Other, including employee advances ........... 3,920,457 763,925
Inventories ...................................... 9,333,102 10,078,719
Deferred income taxes ............................ 4,137,500 5,827,324
Prepaid expenses ................................. 1,416,970 1,043,708
------------ ------------
TOTAL CURRENT ASSETS ......................... 29,482,743 36,743,997
PROPERTY:
Land and improvements ............................ 2,305,293 2,305,293
Building and improvements ........................ 12,177,324 12,148,732
Photographic and sales equipment ................. 60,838,969 57,713,911
Photographic finishing equipment ................. 12,481,197 15,599,525
Furniture and equipment .......................... 15,163,671 13,872,058
Transportation equipment ......................... 294,920 292,593
Leasehold improvements ........................... 17,117,247 16,050,719
Construction in progress ......................... 2,990,097 1,429,621
------------ ------------
Total .......................................... 123,368,718 119,412,452
Less: Accumulated depreciation and amortization . 71,286,553 64,488,965
------------ ------------
PROPERTY, NET .................................. 52,082,165 54,923,487
------------ ------------
INTANGIBLE ASSETS ................................ 57,673,732 59,733,731
DEFERRED FINANCING COST .......................... 7,942,170 1,831,141
OTHER ASSETS ..................................... 3,410,092 68,470
------------ ------------
TOTAL ASSETS ................................... $150,590,902 $153,300,826
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 31
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
January 31, February 1,
1999 1998
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion long-term debt ......................... $ 5,423,243 $ 8,750,000
Accounts payable-trade ................................. 22,685,385 25,915,285
Accrued insurance ...................................... 5,707,519 4,085,191
Accrued income taxes ................................... 79,297 1,188,859
Accrued compensation ................................... 3,538,649 6,474,414
Other accrued liabilities .............................. 8,160,371 10,664,577
------------- -------------
TOTAL CURRENT LIABILITIES ............................ 45,594,464 57,078,326
LONG-TERM DEBT ......................................... 218,589,101 42,063,857
DEFERRED INCOME TAXES .................................. -- 1,738,255
OTHER LIABILITIES ...................................... 5,720,422 7,730,964
COMMITMENTS AND CONTINGENCIES:
SHAREHOLDERS' (DEFICIT) 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; outstanding--2,357,052 and 7,901,579 shares) 471,410 1,580,316
Additional paid-in capital ............................. -- 9,995,238
Retained (deficit) earnings ............................ (119,675,548) 33,423,465
Cumulative foreign currency translation adjustments .... (108,947) (309,595)
------------- -------------
TOTAL SHAREHOLDERS' (DEFICIT) EQUITY ................. (119,313,085) 44,689,424
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
(DEFICIT) EQUITY ................................... $ 150,590,902 $ 153,300,826
============= =============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 32
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
--------------------------------------------------
January 31, February 1, February 2,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
SALES .......................................... $ 227,100,223 $ 242,899,027 $ 156,099,050
COSTS AND EXPENSES:
Advertising and promotional costs .......... 14,929,310 16,661,542 16,163,273
Costs of photographic sales ................ 83,081,180 85,707,294 52,558,425
Store commissions and selling costs ........ 76,779,782 79,597,084 50,384,753
General and administrative expenses ........ 33,523,311 36,160,218 31,676,471
Merger expenses ............................ 25,889,431 -- --
Amortization of intangibles ................ 2,025,467 1,909,772 --
------------- ------------- -------------
Total Costs and Expenses ................. 236,228,481 220,035,910 150,782,922
(LOSS) INCOME FROM OPERATIONS BEFORE
INTEREST AND INCOME TAXES .................. (9,128,258) 22,863,117 5,316,128
Interest expense, net ...................... 13,036,065 6,570,945 179,221
------------- ------------- -------------
(LOSS) INCOME FROM OPERATIONS BEFORE
INCOME TAXES ............................... (22,164,323) 16,292,172 5,136,907
INCOME TAX (BENEFIT) PROVISION ................. (6,007,032) 7,557,320 2,143,053
------------- ------------- -------------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEMS ....... (16,157,291) 8,734,852 2,993,854
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF
DEBT, NET OF INCOME TAX BENEFIT OF $396,705 1,056,428 -- --
------------- ------------- -------------
NET (LOSS) INCOME .............................. $ (17,213,719) $ 8,734,852 $ 2,993,854
============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES:
Basic ...................................... 5,501,701 7,779,176 7,522,188
============= ============= =============
Diluted .................................... 5,501,701 8,195,108 7,835,613
============= ============= =============
(LOSS) EARNINGS PER COMMON SHARE:
Basic:
Income from operations ..................... $ (2.94) $ 1.12 $ 0.40
Extraordinary item on extinguishment of debt (0.19) 0.00 0.00
------------- ------------- -------------
Net (loss) income .......................... $ (3.13) $ 1.12 $ 0.40
============= ============= =============
Diluted:
Income from operations ..................... $ (2.94) $ 1.07 $ 0.38
Extraordinary item on extinguishment of debt (0.19) 0.00 0.00
------------- ------------- -------------
Net (loss) income .......................... $ (3.13) $ 1.07 $ 0.38
============= ============= =============
CASH DIVIDENDS PER COMMON SHARE ................ 0.07 $ 0.21 $ 0.21
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 33
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
For the Fiscal Years ended January 31, 1999,
February 1, 1998, and February 2, 1997
<TABLE>
<CAPTION>
Common Stock Additional Currency
------------------------- Paid-In Comprehensive Retained Translation
Shares Amount Capital Income Earnings Adjustment
---------- ----------- ----------- ---------------- ------------------ ---------------
<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)
Comprehensive Income:
Net income $ 2,993,854 2,993,854
Foreign currency translation
adjustment 103,370 172,284
----------------
Total comprehensive income $ 3,097,224
================
Exercise of stock options 434,300 86,860 4,372,329
Dividends (1,577,571)
Acquisition of Company stock (309,242) (61,849) (4,128,776)
Issuance of warrants to
purchase common stock 549,000
----------- ------------ ------------ ------------------ ---------------
BALANCE, FEBRUARY 2, 1997: 7,607,129 1,521,426 5,838,131 26,334,992 (53,809)
Comprehensive Income:
Net income $ 8,734,852 8,734,852
Foreign currency translation
adjustment (161,145) (255,786)
----------------
Total comprehensive income $ 8,573,707
================
Exercise of stock options 294,450 58,890 4,157,107
Dividends (1,646,379)
----------- ------------ ------------ ------------------ ---------------
BALANCE, FEBRUARY 1, 1998: 7,901,579 1,580,316 9,995,238 33,423,465 (309,595)
Comprehensive Income:
Net loss $(17,213,719) (17,213,719)
Foreign currency translation
adjustment 145,871 200,648
----------------
Total comprehensive loss $(17,067,848)
================
Exercise of stock options 46,300 9,260 712,377
Dividends (554,805)
Issuance of Company stock 1,957,812 391,562 51,490,456
Acquisition of Company stock (7,548,639) (1,509,728) (63,198,716) (135,330,489)
Compensatory stock options 2,538,145
Cancellation of Warrants (1,537,500)
----------- ------------ ------------ ------------------ ---------------
BALANCE, JANUARY 31, 1999: 2,357,052 $ 471,410 $ - $(119,675,548) $ (108,947)
=========== ============ ============ ================== ===============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 34
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
---------------------------------------------------
January 31, February 1, February 2,
1999 1998 1997
------------- ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ........................................ $ (17,213,719) $ 8,734,852 $ 2,993,854
Adjustments to reconcile net income (loss) to net cash
provided from operating activities:
Depreciation and amortization ........................ 14,857,793 15,453,159 9,498,315
(Decrease) increase in allowance for doubtful accounts (290,703) 449,734 (167,303)
Provision for deferred income taxes .................. (3,423,243) 2,764,916 (1,421,999)
Loss on disposal of property ......................... 317,533 1,539,689 3,287,772
Compensatory stock option expense .................... 2,538,145 -- --
Decrease in other liabilities ........................ (2,010,542) (1,147,285) (375,932)
Decrease (increase) in other noncurrent assets ....... 2,420,889 (760,306) (156)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ........... (1,853,712) (660,510) 1,254,260
Decrease (increase) in inventories ................... 742,937 (268,838) (4,489,573)
(Increase) decrease in prepaid expenses .............. (374,225) 454,106 (178,505)
(Decrease) increase in accounts payable .............. (3,227,206) 6,124,980 2,596,851
(Decrease) increase in accrued expenses .............. (4,888,679) (3,150,299) 4,679,050
------------- ------------- -------------
NET CASH (USED IN) PROVIDED FROM OPERATING
ACTIVITIES ........................................... (12,404,732) 29,534,198 17,676,634
INVESTING ACTIVITIES:
Purchase of property ..................................... (11,021,799) (12,086,194) (13,423,544)
Proceeds from sales of fixed assets ...................... 610,044 16,100 10,151
Purchase of Canadian assets .............................. -- -- (1,201,213)
Purchase of American Studios, Inc. ....................... -- (1,410,741) (52,689,671)
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES .................. (10,411,755) (13,480,835) (67,304,277)
FINANCING ACTIVITIES:
Increase in borrowings ................................... 225,000,000 -- 58,679,770
Repayment of borrowings .................................. (51,705,126) (7,865,913) (10,344,954)
Deferred financing cost .................................. (8,498,728) -- --
Exercise of stock options ................................ 721,637 4,215,997 4,459,189
Acquisition of Company stock ............................. (200,038,933) -- (4,190,625)
Cash dividends ........................................... (554,805) (1,646,379) (1,577,571)
Issuance of Company stock ................................ 51,882,018 -- --
Cancellation of warrants ................................. (1,537,500) -- --
------------- ------------- -------------
NET CASH PROVIDED FROM (USED IN) FINANCING
ACTIVITIES ........................................... 15,268,563 (5,296,295) 47,025,809
------------- ------------- -------------
Effect of exchange rate changes on cash ................ 209,781 (3,541) 223,555
------------- ------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............. (7,338,143) 10,753,527 (2,378,279)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............. 12,289,761 1,536,234 3,914,513
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................... $ 4,951,618 $ 12,289,761 $ 1,536,234
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Flow Data:
Interest paid .......................................... $ 18,021,696 $ 7,749,779 $ 173,644
============= ============= =============
Income taxes paid ...................................... $ 2,122,662 $ 2,751,652 $ 3,160,160
============= ============= =============
Schedule of Noncash Financing Activities:
Warrants issued to purchase common stock ............... $ -- $ -- $ 549,000
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 35
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
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
30.5%, 40.0%, and 87.2% of consolidated sales during the fiscal years
ended January 31, 1999; February 1, 1998; and February 2, 1997,
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.
During the fiscal year ended January 31, 1999, the Company closed 145
portrait studios within U.S. Kmart stores. Seventy-five of the studio
closings were in compliance with a termination notification dated
April 1998. Sales at these studios were approximately $5.0 million and
$12.4 million for the fiscal years 1998 and 1997, respectively. In
November 1998, the Company was notified by Kmart that it would close
135 additional studios in which PCA is operating. Under the terms of
the licensing agreement between PCA and Kmart, PCA is required to exit
these 135 studios within six months of notification, or around May
1999. In February 1999, the Company was again notified by Kmart of
plans to close 31 additional studios. PCA is required to exit these
studios on or around August 1999. The combined sales of the studios
pending closure in 1999 approximated $14.9 million and $19.0 million
in fiscal years 1998 and 1997, respectively.
The Company's operations in Wal-Mart stores accounted for
approximately 66.3% and 56.2% of consolidated sales in the fiscal
years ended January 31, 1999 and February 1, 1998, respectively, and
less than 5% of total sales in fiscal year 1997. 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 3).
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
could 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 31, 1999 and February 1, 1998 were
52-week years. The Company's fiscal year that will end January 30,
2000 will be 52 weeks.
F-8
<PAGE> 36
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
1. Significant Accounting Policies (continued):
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 ($585,815); ($78,748); and $10,940 for the fiscal years
ended January 31, 1999; February 1, 1998; and February 2, 1997,
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.
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:
Land improvements.......................... 10 to 30 years
Building and improvements.................. 10 to 55 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
Leasehold improvements..................... 3 to 10 years
Intangible Assets:
Intangible assets primarily consist of goodwill representing the
excess of purchase price over net tangible assets of businesses
acquired. Substantially all intangible assets are amortized over 35
years by the straight-line method. Accumulated amortization of
intangible assets totaled $4,007,599 and $1,988,722 at January 31,
1999 and February 1, 1998, respectively. 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.
F-9
<PAGE> 37
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
1. Significant Accounting Policies (continued):
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 an 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.
Deferred Financing Costs:
Deferred financing costs primarily consist of fees and expenses
incurred in obtaining long-term financing. The deferred costs are
amortized over the life of the associated debt, ranging from 5 to 8
years, by the interest method.
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
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.
F-10
<PAGE> 38
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
1. Significant Accounting Policies (continued):
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. Such costs are expensed as
incurred.
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 $1,600,000; $1,311,000; and $1,321,000 on research
and development activities during the fiscal years ended January 31,
1999; February 1, 1998; and February 2, 1997, respectively. Such costs
are charged to costs of photographic sales as incurred.
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
F-11
<PAGE> 39
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
1. Significant Accounting Policies (continued):
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 to 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 1997
amounts to conform to the fiscal 1998 presentation.
Comprehensive Income:
On February 2, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income consists of net
income plus all other changes in net assets from nonowner sources and
is presented in the Consolidated Statements of Change in Shareholders'
(Deficit) Equity. The Statement requires only additional disclosures
in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior year
financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
F-12
<PAGE> 40
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
2. Recapitalization:
On August 17, 1998, the Company's shareholders approved a
Recapitalization Merger ("Merger") with a subsidiary of Jupiter
Partners II L.P. ("Jupiter"). Pursuant to the Merger Agreement, on
August 25, 1998, the subsidiary was merged with and into the Company,
with the Company continuing as the surviving corporation. Subject to
certain provisions of the Merger Agreement, each issued and
outstanding share of common stock either (i) was converted, at the
election of the holder, into either the right to receive $26.50 in
cash or (ii) was retained by the holder thereof and remained
outstanding as one share of common stock. Upon completion of the
Merger, Jupiter owned 1,957,812 shares, or 83.1% of the Company's
common stock.
The Merger Financing included (a) the equity contribution from Jupiter
of $51.9 million, (b) $150 million senior term loan facility of which
$125 million was immediately drawn, and (c) $100 million in Senior
Subordinated Debt. The Merger Financing was used to redeem (a)
7,548,639 shares of company stock for $200.0 million, (b) refinance
indebtedness of approximately $45.8 million, and (c) pay fees and
expenses in connection with the Merger of $25.9 million of which a
$2.8 million transaction fee was paid to Jupiter. Additionally,
financing costs of approximately $7.9 million have been deferred and
will be amortized over the lives of the new debt facilities.
3. Acquisition:
On January 27, 1997, PCA acquired 94.9% of the outstanding common
stock of American Studios, Inc. ("ASI") for $2.50 a share, or
$50,833,770. In addition, the Company incurred transaction costs of
$1,855,901, resulting in an aggregate purchase price of $52,689,671.
ASI was based in Charlotte, North Carolina, and was engaged in the
sale of photographic color portraits of children, adults, and
families. The acquisition was accounted for by the purchase method at
February 2, 1997. Since the acquisition was accounted for at February
2, 1997, the results of operations of ASI were not included in PCA's
consolidated financial statements for the fiscal year ended February
2, 1997. The excess of the purchase price over the fair value of the
net identifiable assets acquired at February 2, 1997 of $59,134,104
has been recorded as an intangible asset and is being amortized on a
straight-line basis over 35 years. During the fiscal year ended
February 1, 1998, PCA acquired an additional 4.8% of the outstanding
common stock of ASI for $2.50 a share, or $2,601,968. Intangible asset
adjustments resulted in an addition to intangible assets of
$1,410,741.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and ASI as if the
acquisition had occurred as of the beginning of fiscal 1996, after
giving effect to certain adjustments, including amortization of
intangible assets, additional depreciation expense, increased interest
expense on debt related to the acquisition, acquisition-related costs,
and related income tax effects. The pro forma financial information
does not necessarily reflect the results of operations that would have
occurred had the Company and ASI constituted a single entity during
such periods.
F-13
<PAGE> 41
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
3. Acquisition (continued):
For the Fiscal Year Ended
February 2, 1997
(Unaudited)
----------------
Sales...................... $263,974,050
============
Net loss................... $ (855,898)
============
Basic loss per share....... $ (0.11)
============
During fiscal 1996, the Company also purchased certain assets of two
Canadian companies for $1.2 million. The effect of this acquisition is
not material to the results of operations of the Company.
Such acquisitions were accounted for by the purchase method.
4. Debt:
During fiscal 1998, the Company retired $45.8 million of senior debt
in connection with the Recapitalization Merger. As a result of the
debt retirement, the Company incurred a $1.1 million extraordinary
loss, net of taxes, relating to the write-off of deferred financing
costs.
Debt financing for the Merger was provided by (a) $150 million in
senior secured debt financing ("Credit Facility"), and (b) $100
million in Senior Subordinated Debt.
The Credit Facility includes a $35 million five-year term loan
("Tranche A"), a $90 million seven-year term loan ("Tranche B") and a
$25 million five-year revolving line of credit ("Revolving Credit
Facility"). The term loans shall be repaid in quarterly installments,
which increase on an annual basis from an aggregate of $5.0 million in
the first year to an aggregate of $31.9 million in the seventh year.
Interest rates under the Credit Facility are based on LIBOR (or a bank
base rate, as selected by the Company) with an applicable margin that
may adjust after the first year based upon the Company's ratio of debt
to earnings before interest, income taxes, depreciation and
amortization ("EBITDA"). The Revolving Credit Facility and the Tranche
A term loan bear interest at a rate equal to LIBOR plus 2.25% and the
Tranche B term loan bears interest at a rate equal to LIBOR plus
2.75%. The Credit Facility is secured by substantially all of the
assets of the Company, including 100% of the outstanding capital stock
of all domestic subsidiaries. The terms of the Credit Facility
prohibit the payment of dividends by the Company.
The Senior Subordinated Debt matures on August 25, 1999. The interest
rate accruing on the Senior Subordinated Debt is based on LIBOR plus
4.25% increasing in increments up to a specified maximum rate. If, at
such maturity date, any Senior Subordinated Debt has not been repaid
in full, subject to certain conditions, such loan will be
automatically converted into a term loan maturing seven years after
the date of such conversion. The interest rate accruing on the term
loan is based on LIBOR plus 6.25% increasing in increments up to a
specified maximum rate.
F-14
<PAGE> 42
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
4. Debt (continued):
Both credit and debt facilities described above contain restrictive
covenants which require the maintenance of defined ratios of debt,
fixed charges, and interest expense to EBITDA and limit, among other
items, capital expenditures.
Debt Summary
Short-term: At January 31, 1999, the Company had no short-term
borrowings, $4.6 million of letters of credit, and approximately $20.4
million available under its revolving credit facility.
Long-term: The Company's long-term debt at January 31, 1999 is
summarized as follows:
January 31,
1999
------------
Senior Term Loan
Tranche A due 2003............ $ 34,200,000
Senior Term Loan
Tranche B due 2005............ $ 89,666,667
Senior Subordinated Debt......... $100,000,000
Capital Leases................... $ 145,677
------------
Total Debt.................... $224,012,344
Less current portion of long-term
debt.......................... $ 5,423,243
------------
Long-term Debt................ $218,589,101
============
Aggregate debt maturities for the next five fiscal years are as
follows:
1999........................ $ 5,423,243
2000........................ $ 6,810,000
2001........................ $ 9,279,101
2002........................ $ 11,500,000
2003........................ $ 27,250,000
Thereafter.................. $163,750,000
------------
Total.................... $224,012,344
============
F-15
<PAGE> 43
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
4. Debt (continued):
The components of net interest expense (income) were:
<TABLE>
<CAPTION>
For the Fiscal Years Ended
------------------------------------------------
January 31, February 1, February 2,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Interest Income $ (524,112) $ (218,622) $ (225,748)
Interest Expense 13,560,177 6,789,567 404,969
------------ ------------ ------------
Net ............ $ 13,036,065 $ 6,570,945 $ 179,221
============ ============ ============
</TABLE>
5. Income Taxes:
PCA International, Inc. and its domestic subsidiaries file a
consolidated federal income tax return. The components of income tax
(benefit) expense attributable to income from operations are as
follows:
<TABLE>
<CAPTION>
For the Fiscal Years Ended
-----------------------------------------------
January 31, February 1, February 2,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal .. $(2,128,296) $ 2,491,486 $ 2,824,740
State .... 377,361 714,587 957,859
----------- ----------- -----------
(1,750,935) 3,206,073 3,782,599
----------- ----------- -----------
Deferred:
Federal .. (3,044,361) 3,690,903 (1,270,094)
State .... (1,211,736) 660,344 (369,452)
----------- ----------- -----------
(4,256,097) 4,351,247 (1,639,546)
----------- ----------- -----------
Total Provision $(6,007,032) $ 7,557,320 $ 2,143,053
=========== =========== ===========
</TABLE>
F-16
<PAGE> 44
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
5. Income Taxes (continued):
A reconciliation of the amount computed by applying the statutory
federal income tax rate to income from operations to the consolidated
income tax (benefit) provision follows:
<TABLE>
<CAPTION>
For the Fiscal Years Ended
----------------------------------------------
January 31, February 1, February 2,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Tax (benefit) expense at statutory federal rates $(7,535,870) $ 5,539,338 $ 1,746,548
Tax effect of expenses not deductible .......... 229,860 218,392 71,011
State income taxes, net of federal income
tax benefit ................................ (655,219) 907,454 388,349
Tax effect related to foreign subsidiary ....... 20,674 73,078 14,200
Amortization of goodwill ....................... 661,471 620,107 --
Merger Costs ................................... 1,072,027 -- --
Other .......................................... 200,025 198,951 (77,055)
----------- ----------- -----------
Total (Benefit) Provision ...................... $(6,007,032) $ 7,557,320 $ 2,143,053
=========== =========== ===========
</TABLE>
F-17
<PAGE> 45
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
5. Income Taxes (continued):
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
January 31, 1999 and February 1, 1998 are presented below:
<TABLE>
<CAPTION>
January 31, February 1,
1999 1998
------------ ------------
<S> <C> <C>
Deferred Tax Assets:
Current:
Accounts receivable, principally due to allowance for
doubtful accounts ......................................... $ 401,955 $ 517,963
Inventory, principally due to obsolescence reserve ........... 161,102 235,856
Life and health, principally due to adoption of SFAS No. 106 . 759,812 339,210
Stock options, principally due to compensation element ....... -- 118,379
Workers' compensation ........................................ 2,485,809 2,811,175
Reserves, principally due to accrual for financial reporting
purposes .................................................. 328,822 878,659
Studio closure costs, principally due to accrual for financial
reporting purposes ........................................ -- 93,426
------------ ------------
Gross current deferred tax assets ............................ 4,137,500 4,994,668
Noncurrent:
Alternative minimum tax and other tax credits ................ 1,176,192 832,654
Net operating loss carryforward .............................. 7,697,802 2,546,988
Life and health, principally due to adoption of SFAS No. 106 . 825,826 1,009,407
Intangibles .................................................. 1,180,051 1,888,075
Stock options, principally due to compensation element ....... 956,780 --
------------ ------------
Gross noncurrent deferred tax assets ......................... 11,836,651 6,277,124
------------ ------------
Gross deferred tax assets .................................... 15,974,151 11,271,792
------------ ------------
Deferred Tax Liabilities:
Noncurrent:
Plant and equipment, principally due to differences in
depreciation .............................................. (8,461,838) (7,182,724)
------------ ------------
Net Deferred Tax Assets ............................................. $ 7,512,313 $ 4,089,068
============ ============
</TABLE>
In assessing the ability to realize deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
F-18
<PAGE> 46
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
5. Income Taxes (continued):
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not the Company will
realize the benefits of these deductible differences that were
available at January 31, 1999.
At January 31, 1999, the Company has federal net operating loss
carryforwards of approximately $18,512,000 expiring in various amounts
beginning 2010; however, net operating loss carryforwards may be
subject to restriction under Section 382 and the separate return
limitation year rules of the Internal Revenue Code due to the
acquisition of ASI. Additionally, the Company has minimum tax credit
carryforwards with indefinite expiration of approximately $1,176,000.
6. Other Accrued Liabilities:
<TABLE>
<CAPTION>
January 31, February 1,
1999 1998
----------- ------------
<S> <C> <C>
Costs accrued to complete church directories $ 966,230 $ 1,043,437
Accrued taxes other than income ............ 1,287,552 1,175,602
Accrued interest ........................... 2,309,147 390,397
Accrued expenses ........................... 3,597,442 8,055,141
----------- -----------
Total ...................................... $ 8,160,371 $10,664,577
=========== ===========
</TABLE>
F-19
<PAGE> 47
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
7. Employee Benefits:
The Company has a profit sharing plan with annual contributions by the
Company as directed by the Board of Directors for all employees who
meet certain eligibility requirements. For fiscal 1998, the Company
did not make a contribution. Forfeitures in 1998 of $213,661 were
distributed to the remaining participants in the Plan. Company
contributions, net of forfeitures in fiscal 1997 and fiscal 1996, are
as follows:
<TABLE>
<CAPTION>
February 1, February 2,
1998 1997
----------- -----------
<S> <C> <C>
Contributions .. $ 1,653,000 $ 421,000
Forfeitures .... (146,000) (212,000)
----------- -----------
Net Contribution $ 1,507,000 $ 209,000
=========== ===========
</TABLE>
The Company provides health and life insurance benefits to those
persons already retired on February 1, 1992 and to those employees who
were 55 years of age with 5 years of service on February 1, 1992. The
plan provides for annual benefits of $2,000 (single) or $4,000
(married) toward the purchase of supplemental health care coverage. An
eligible employee who retires after February 1, 1992 can receive
benefits after attaining the age of 65.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 6% at January 31, 1999, and 7%
at February 1, 1998 and February 2, 1997. There were no assumptions
for trends since the Company's obligation was limited to the dollar
amounts previously stated.
F-20
<PAGE> 48
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
7. Employee Benefits (continued):
The following tables set forth the change in projected benefit
obligation and funded status of the plan as of January 31, 1999 and
February 2, 1998:
<TABLE>
<CAPTION>
January 31, February 1,
1999 1998
----------- -----------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year ............... $ 2,527,309 $ 2,889,663
Benefits paid ......................................... (301,453) (368,131)
Interest cost ......................................... 102,982 140,099
Actuarial gain ........................................ (261,171) (134,322)
----------- -----------
Benefit obligation at end of year ..................... 2,067,667 2,527,309
=========== ===========
Funded status ......................................... (1,822,837) (2,223,866)
Unrecognized net actuarial gain ....................... (244,830) (303,443)
----------- -----------
Accrued benefit cost .................................. $(2,067,667) $(2,527,309)
=========== ===========
The components of net periodic benefit costs are as follows:
Interest cost ......................................... $ 102,982 $ 140,099
Amortization .......................................... (34,645) (31,560)
----------- -----------
Net periodic benefit cost ............................. $ 68,337 $ 108,539
=========== ===========
</TABLE>
Of the above accrued pension cost, $1.9 million and $2.3 million at
January 31, 1999 and February 1, 1998, respectively, is included in
"Other liabilities" per the Consolidated Balance Sheets, while
$250,000 is classified as "Other accrued liabilities" in both years.
8. Commitments and Contingencies:
The Company is obligated under operating leases with initial or
remaining noncancelable terms in excess of one year which provide, in
some instances, for the payment of taxes, insurance, and maintenance.
The future minimum rental payments are not material.
Certain of the Company's operating lease agreements have renewal
options. Rental expense for all operating leases was $141,608;
$296,567; and $237,923 for the fiscal years ended January 31, 1999;
February 1, 1998; and February 2, 1997, respectively.
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a materially
adverse effect on the Company's consolidated financial position,
results of operations, or liquidity.
F-21
<PAGE> 49
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
9. Stock Options:
The 1996 Omnibus Long-Term Compensation Plan (the "1996 Plan")
provides for the issuance of up to 811,550 shares of the Company's
common stock (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"]). The 1996 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 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. Under the 1996 Plan, the
Compensation 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. In addition, the 1996 Plan
provides for the grant of stock options 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. With
the consummation of the Merger, 137,197 options held by certain
members of management were rolled over as options to purchase shares
of the surviving corporation company stock, with an option price of
$8.00 per share. All other options outstanding as of the
Recapitalization were canceled and the optionees received a cash
payment equal to $26.50 less the option price multiplied by the number
of shares represented by the options.
The Company intends to adopt the PCA International, Inc. Stock Option
Plan (the "New Option Plan"). The purpose of the New Option Plan is to
provide for certain officers, directors and key personnel of the
Company and certain of its affiliates an equity-based incentive to
maintain and to enhance the performance and profitability of the
Company.
The New Option Plan authorizes the grant to participants of options to
purchase shares of Common Stock equal to an aggregate of 12.5% of the
outstanding Common Stock calculated as of the date of the
Recapitalization Closing, subject to adjustment to avoid dilution or
enlargement of intended benefits in the event of changes in
capitalization of the Company.
Subject to the provisions of the New Option Plan, the option committee
(the "Committee") appointed by the Board of Directors, or any person
or persons designated by the Committee, will have sole and complete
authority to determine the participants to whom options will be
granted, the number of shares to be covered by each option, the
exercise price therefor and the conditions and limitations applicable
to the exercise thereof. As provided in each stock option agreement
and in the New Option Plan, options become exercisable either over
time ("Time Options") or after the Company achieves the Minimum EBITDA
Target (as defined in the New Option Plan) ("Performance Options").
Except to the extent otherwise provided in the applicable stock option
agreement, each Time Option will become exercisable with respect to
20% of the shares of Common Stock subject thereto on each of the
first, second, third and fourth anniversaries of the date of grant if
the grantee is still employed by the Company on each relevant date,
and each Time Option will become 100% exercisable on the fifth
anniversary of the date of grant if the grantee is still employed by
the Company at such date. The extent to which Performance Options
granted under this Plan will become
F-22
<PAGE> 50
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
9. Stock Options (continued):
exercisable will be conditioned upon the attainment of the Minimum
EBITDA Target in the relevant calculation period and will increase as
EBITDA exceeds such Minimum EBITDA Target (up to a predetermined
maximum). A Performance Option may be exercised only with respect to
the applicable portion of the number of shares covered by such
Performance Option and, upon exercise, will expire and be canceled
with respect to any shares in excess thereof.
The Company applies APB Opinion No. 25 in accounting for its stock
option plans and, accordingly, no compensation cost has been
recognized for its stock options in the financial statements with the
exception of the rollover of options as a result of the
Recapitalization. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
For the Fiscal Years Ended
---------------------------------------------------
January 31, February 1, February 2,
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Net income (loss) ................. As reported $(17,213,719) $ 8,734,852 $ 2,993,854
============ ============= =============
Pro forma $(17,213,719) $ 8,365,608 $ 2,374,079
============ ============= =============
Basic (loss) earnings per
share ........................ As reported $ (3.13) $ 1.12 $ 0.40
============ ============= =============
Pro forma $ (3.13) $ 1.08 $ 0.32
============ ============= =============
Diluted (loss) earnings per
share ........................ As reported $ (3.13) $ 1.07 $ 0.38
============ ============= =============
Pro forma $ (3.13) $ 1.02 $ 0.30
============ ============= =============
</TABLE>
F-23
<PAGE> 51
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
9. Stock Options (continued):
The following table sets forth information regarding the 1990, 1992,
and 1996 Plans and New Option Plan with respect to the exercise,
cancellation, expiration, and grant of options during the previous
three fiscal years:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Option Price
--------- ------------
<S> <C> <C>
Options outstanding January 28, 1996 1,904,450 $ 9.76
Exercised ..................... (434,300) $ 7.79
Canceled ...................... (15,800) $ 10.10
Expired ....................... (87,000) $ 16.22
Granted ....................... 468,700 $ 17.10
---------
Options outstanding February 2, 1997 1,836,050 $ 11.80
Exercised ..................... (294,450) $ 10.86
Canceled ...................... (72,200) $ 12.71
Granted ....................... 71,600 $ 16.87
---------
Options outstanding February 1, 1998 1,541,000 $ 12.17
Exercised ..................... (46,300) $ 10.85
Canceled ...................... (1,514,200) $ 12.36
Granted ....................... 438,697 $ 20.61
---------
Options outstanding January 31, 1999 419,197 $ 20.45
=========
</TABLE>
At January 31, 1999, the range of exercise prices, the weighted
average exercise price, and the weighted average contractual remaining
life of options outstanding are as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------------- ----------------------
Wgt. avg. Wgt. avg. Wgt. avg.
Range of Number remaining exercise Number exercise
exercise prices outstanding contractual life price exercisable price
--------------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$8.00 137,197 7.6 years $ 8.00 137,197 $8.00
$26.50 282,000 7.6 years $26.50 - N.A.
----------- -----------
$8.00 to $26.50 419,197 7.6 years $20.45 137,197 $8.00
=========== ===========
</TABLE>
The Company's stock is no longer listed on a national exchange. The
last shares traded on September 16, 1998. The Company is unable to
determine the market price of its Common Stock.
F-24
<PAGE> 52
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
10. 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
fiscal 1996, the Company purchased, in various transactions, 309,242
shares. The credit agreement dated August 25, 1998 restricts the
Company from repurchasing any shares of the Company's stock.
11. Earnings (Loss) Per Share:
The following table sets forth a reconciliation of the numerators and
denominators of the basic and diluted EPS computations for the
previous three fiscal years:
<TABLE>
<CAPTION>
For the Fiscal Years Ended
-----------------------------------------------
January 31, February 1, February 2,
1999 1998 1997
------------ ---------- ------------
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER COMMON
SHARE:
EARNINGS (LOSS) APPLICABLE TO
COMMON STOCK:
Net income (loss) ...................... $(17,213,719) $8,734,852 $2,993,854
============ ========== ==========
Weighted average number of common shares 5,501,701 7,779,176 7,522,188
============ ========== ==========
Basic (loss) earnings per common share . $ (3.13) $ 1.12 $ 0.40
============ ========== ==========
DILUTED EARNINGS PER COMMON SHARE:
EARNINGS (LOSS) APPLICABLE TO
COMMON STOCK:
Net Income (loss) ...................... $(17,213,719) $8,734,852 $2,993,854
============ ========== ==========
COMPUTATION OF DILUTED COMMON
SHARES:
Weighted average number of common shares
outstanding ........................ 5,501,701 7,779,176 7,522,188
Dilutive effect of stock options ....... -- 398,784 313,425
Dilutive effect of warrants ............ -- 17,148 --
------------ ---------- ----------
Weighted average number of common shares
outstanding as adjusted ............ 5,501,701 8,195,108 7,835,613
============ ========== ==========
DILUTED EARNINGS (LOSS) PER COMMON
SHARE:
Net income (loss) ...................... $ (3.13) $ 1.07 $ 0.38
============ ========== ==========
</TABLE>
F-25
<PAGE> 53
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999,
FEBRUARY 1, 1998, AND FEBRUARY 2, 1997
12. Unaudited Quarterly Financial Data:
<TABLE>
<CAPTION>
For the Fiscal Year Ended January 31, 1999
---------------------------------------------------------------
January 31, November 1, August 2, May 3,
1999 1998 1998 1998
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Sales ......................................... $71,068,356 $ 56,401,636 $44,968,306 $54,661,925
Gross Profit* ................................. $20,533,044 $ 11,787,383 $ 6,904,476 $13,085,048
Income (Loss) Before Extraordinary Items ...... $ 4,189,494 $(19,162,540) $(1,962,318) $ 778,073
Extraordinary Loss on the Extinguishment of
Debt, Net of Income Taxes of $396,705
for the Quarter Ended November 1, 1998 ... $ -- $ 1,056,428 $ -- $ --
Net Income (Loss) ............................. $ 4,189,494 $(20,218,968) $(1,962,318) $ 778,073
Weighted Average Number of Common Shares:
Basic .................................... 2,357,052 3,770,118 7,947,879 7,931,757
Diluted .................................. 2,401,151 3,770,118 7,947,879 8,373,084
(Loss) Earnings Per Common Share:
Basic:
Income From Operations ................... $ 1.78 $ (5.08) $ (0.25) $ 0.10
Extraordinary loss on Early Extinguishment
of Debt ............................... $ -- $ (0.28) $ -- $ --
Net (Loss) Income ........................ $ 1.78 $ (5.36) $ (0.25) $ 0.10
Diluted:
Income From Operations ................... $ 1.74 $ (5.08) $ (0.25) $ 0.09
Extraordinary loss on Early Extinguishment
of Debt ............................... $ -- $ (0.28) $ -- $ --
Net (Loss) Income ........................ $ 1.74 $ (5.36) $ (0.25) $ 0.09
</TABLE>
<TABLE>
<CAPTION>
For the Fiscal Year Ended February 1, 1998
------------------------------------------------------------
February 1, November 2, August 3, May 4,
1998 1997 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales ..................... $75,834,923 $61,235,465 $47,136,830 $58,691,809
Gross Profit* ............. $25,569,922 $14,295,372 $ 7,376,925 $13,690,889
Net Income (Loss) ......... $ 7,811,302 $ 1,919,844 $(1,639,620) $ 643,326
Basic Earnings (Loss) Per
Common Share ......... $ 0.99 $ 0.24 $ (0.21) $ 0.08
Diluted Earnings (Loss) Per
Common Share ......... $ 0.94 $ 0.23 $ (0.20) $ 0.08
</TABLE>
* Sales less advertising and promotional costs, costs of photographic sales,
and store commissions and selling costs.
F-26
<PAGE> 54
13. Subsequent Events (Unaudited):
The Company issued Series A convertible preferred stock to Jupiter on
April 30, 1999 with rights to convert into PCA International, Inc.
Common Stock. The proceeds from the preferred stock will be used to
prepay $10 million of the Company's Credit Facility with the remainder
to fund working capital requirements including the installation of new
permanent studios.
F-27
<PAGE> 55
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
Schedule II. Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- - ------------------------------------------------- --------------- ------------- ------------- -------------
Balance at Charged to Write-offs Balance at
Beginning of Costs and Net of End of
Classification Period Expenses Recoveries Period
- - ------------------------------------------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED JANUARY 31, 1999:
Allowance for doubtful accounts.............. $ 1,315,666 $ 220,819 $(508,253) $1,028,232
=============== ============= ============= =============
FISCAL YEAR ENDED FEBRUARY 1, 1998:
Allowance for doubtful accounts.............. $ 867,961 $ 472,805 $ (25,100) $1,315,666
=============== ============= ============= =============
FISCAL YEAR ENDED FEBRUARY 2, 1997:
Allowance for doubtful accounts.............. $ 1,011,350 $ 129,563 $(272,952) $ 867,961
=============== ============= ============= =============
</TABLE>
S-1
<PAGE> 1
Exhibit 21
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
The following is a list of the Company's subsidiaries and affiliates at
January 31, 1999 indicating the percentage of ownership and the state or country
of incorporation:
<TABLE>
<CAPTION>
Percentage
of Voting
State or Country Securities
of Owned by the
Name Incorporation Company
- - ------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
Photo Corporation of America North Carolina 100%
PCA National, Inc. North Carolina *
PCA Specialty Photo Retail Corporation North Carolina **
PCA Photo Corporation of Canada, Inc. North Carolina 100%
PCA of Mexico SA DE CV Mexico 99%
PCA of Argentina S.A. Argentina 100%
American Studios, Inc. North Carolina 100%
</TABLE>
* PCA National, Inc. is a subsidiary of Photo Corporation of America.
** PCA Specialty Photo Retail Corporation is a subsidiary of PCA National, Inc.
<PAGE> 1
Exhibit 23
The Board of Directors
PCA International, Inc.:
We consent to incorporation by reference in the registration statement on Form
S-8 for the PCA International, Inc. 1990 Non-Qualified Stock Option Plan,
registration statement on Form S-8 for the PCA International, Inc. 1992
Non-Qualified Stock Option Plan and registration statement on Form S-8 for the
PCA International, Inc. 1996 Omnibus Long-Term Compensation Plan of our report
dated April 27, 1999, relating to the consolidated balance sheets of PCA
International, Inc. and subsidiaries as of January 31, 1999 and February 1,
1998, the related consolidated statements of operations, changes in
shareholders' (deficit) equity and cash flows and related schedule for each of
the years in the three-year period ended January 31, 1999 which report appears
in the January 31, 1999 annual report on Form 10-K of PCA International, Inc.
/s/KPMG LLP
KPMG LLP
Charlotte, North Carolina
April 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-02-1998
<PERIOD-END> JAN-31-1999
<CASH> 4,951,618
<SECURITIES> 0
<RECEIVABLES> 9,613,463
<ALLOWANCES> 1,028,232
<INVENTORY> 9,333,102
<CURRENT-ASSETS> 29,482,743
<PP&E> 123,368,718
<DEPRECIATION> 71,286,553
<TOTAL-ASSETS> 150,590,902
<CURRENT-LIABILITIES> 45,594,464
<BONDS> 218,589,101
0
0
<COMMON> 471,410
<OTHER-SE> (119,313,085)
<TOTAL-LIABILITY-AND-EQUITY> 150,590,902
<SALES> 227,100,223
<TOTAL-REVENUES> 227,100,223
<CGS> 174,790,272
<TOTAL-COSTS> 174,790,272
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,036,065
<INCOME-PRETAX> (22,164,323)
<INCOME-TAX> (6,007,032)
<INCOME-CONTINUING> (16,157,291)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,056,428)
<CHANGES> 0
<NET-INCOME> (17,213,719)
<EPS-PRIMARY> (3.13)
<EPS-DILUTED> (3.13)
</TABLE>
