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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 28, 1996--Commission File Number 0-8550
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PCA INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-0888429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
815 Matthews-Mint Hill Road
Matthews, North Carolina 28105
(Address of principal executive offices)(Zip Code)
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
(Title of Class)
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 29, 1996, there were 7,448,771 shares of the registrant's common
stock outstanding; the aggregate market value of such common stock (based on the
closing price on the over-the-counter National Association of Securities Dealers
National Market System) held by non-affiliates was approximately $93,575,186.
Documents Incorporated by Reference
The information required by Part III is incorporated by reference to the
Registrant's Definitive Proxy Statement to be filed not later than 120 days
after the end of the registrant's fiscal year 1995.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT
THE COMPANY. PCA International, Inc. (the "Company") is a holding
company engaged through its subsidiaries in the sale of photographic color
portraits of children, adults, families, and pets. The Company operates in the
United States, Canada, Puerto Rico, and the Virgin Islands. Executive offices
and film developing and portrait processing facilities are located in Matthews,
North Carolina. The Company was organized as a North Carolina corporation in
1967 and has been in business since 1967.
The Company's 1995, 1994, and 1993 fiscal years constitute the 52-week
periods ending January 28, 1996; January 29, 1995; and January 30, 1994,
respectively. The Company's 1996 fiscal year is the 53-week period that will end
February 2, 1997.
CAPITAL EXPENDITURES. Capital expenditures in fiscal 1995 were $6.3
million, primarily for the addition of 91 Kmart studios, upgrading certain
processing equipment in the Matthews, North Carolina, laboratory, and portrait
studios and equipment in PETsMART pet photography studios. During fiscal year
1994, the Company spent approximately $14.7 million in capital expenditures
principally to convert the remaining 672 of its existing permanent Kmart studios
not converted in 1993 to the Company's new digital imaging system and to open
136 new permanent studios in Kmart stores. The capital expenditures to convert
all permanent studios to the new digital imaging system totaled approximately
$16 million over a two-year period.
DIVERSIFICATION STRATEGY. As part of its objective to diversify, the
Company began, in the second quarter of fiscal 1995, testing pet photography in
a single retail location operated by the PETsMART chain. The test was expanded,
in the third and fourth quarter of fiscal 1995, to 14 portrait studios in 2
retail markets. Portrait studios operating in PETsMART locations photograph pets
and pets with their owners. The Company expects to open up to 115 additional
portrait studios in PETsMART stores during 1996 through a separate subsidiary.
The Company expects to fund the 1996 capital expansion of approximately $3.0
million from operations augmented by borrowings under its line of credit.
ACQUISITION OF CANADIAN PHOTOGRAPHY BUSINESSES. In April 1996, the
Company's Canadian subsidiary purchased certain assets of two related Canadian
portrait businesses, Portrait Works, Inc., and Portrait Experience of Canada,
Ltd. The Company funded the purchase from cash on hand. In connection with the
purchase, the Company's Canadian subsidiary has entered into a long-term license
agreement with Wal-Mart's Canadian subsidiary to operate permanent studios in
Wal-Mart's Canadian stores. The Company expects to operate initially in
approximately 50 Wal-Mart stores in Canada.
PHASE-OUT OF TRAVELING STUDIOS. During fiscal year 1994, the Company
completed the planned phase-out of traveling photography in temporary studios in
Kmart stores. Most of the equipment and employees used in the traveling business
were transferred to permanent Kmart studios. There was no material cost
associated with the phase-out of the traveling business. Sales from the
traveling business accounted for 2% and 16%, respectively, of the Company's
sales during fiscal years 1994 and 1993.
INDUSTRY SEGMENT
The Company operates in the portrait photography industry and
photographs, processes, and sells photographic portraits. Within the industry,
the Company services the children's preschool market and the pet market through
permanent studio operations and services the adult and family markets through
traveling promotions in churches and other institutions.
PERMANENT STUDIO OPERATIONS
The Company operates permanent portrait studios in Kmart stores in the
United States, primarily servicing the children's preschool portrait market,
under a license agreement with Kmart Corporation that expires January 31, 1997.
The Company's Kmart studio operations, including Canadian Kmart studios,
contributed 94.8% of the Company's revenue in fiscal year 1995, 95.1% in 1994,
and 95.6% in 1993. As noted above, the Company's Canadian subsidiary has entered
into a license agreement to operate portrait studios in Wal-Mart stores in
Canada, and the Company has recently begun operation of permanent studios for
pet photography in the PETsMART chain.
The typical permanent studio occupies approximately 200 square feet,
consisting of a reception area, a camera room, and a portrait viewing and sales
area. Generally, the permanent studio is staffed by one employee who performs
both the photography and sales functions. At the end of fiscal year 1995, the
Company operated 1,508 permanent Kmart store studios, a net increase of 91 from
1994. During 1995, 164 Kmart studios were opened and 73 Kmart studios were
closed, for a net addition of 91 portrait studios. For fiscal year 1996, the
Company expects no significant change in the number of studios in Kmart stores
operating in the United States. At the end of fiscal 1995, the Company operated
107 Canadian Kmart studios and 4 Mexican Kmart studios. The Company ceased its
Canadian and Mexican Kmart operations in April 1996. Sales in Canadian and
Mexican portrait studios provided less than 5% of the Company's 1995 sales.
The Company operates its permanent studios and advertises for them
under the Kmart name. Customers are attracted to the studios through a variety
of advertising methods including in-store, point-of-sale merchandising,
television and newspaper advertising, and direct mail to prior and prospective
customers. The Company seeks to maintain an advertising presence throughout the
year in all geographic markets where the Company operates permanent studios. As
a Kmart licensee, the Company is able to place its media advertising under the
Kmart name at rates that are lower than those the Company could independently
obtain.
INSTITUTIONAL OPERATIONS
The Company contracts with institutions, primarily church
congregations, to photograph and sell individual and family group portraits of
the congregation members. The Company does not pay commissions to the hosting
institution, 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 1995, the Company operated approximately 27 portable camera units each
week for Institutional promotions. The Company does not expect the number of
portable units in service to change significantly during 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 earnings, and the
Company's fourth fiscal quarter (late October through late January) typically
produces a large percentage of annual revenues and more than 60% of the
Company's annual earnings. The fourth fiscal quarters of 1995, 1994, and 1993
accounted for
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approximately 32.2%, 31.2%, and 35.0%, respectively, of sales, and 64.2%, 79.3%,
and 92.5%, respectively, of earnings for those years.
COMPETITION
The children's preschool portrait market is highly competitive and no
one firm dominates the United States market. The market comprises several large
competitors, including the Company, operating in multiple locations, and
numerous smaller entities operating in only one or a few locations. The Company
believes that it is one of the largest retailers, measured by annual sales, in
the children's preschool portrait market.
Competition for the Company's products, especially in the children's
preschool portrait market, centers on the quantity and quality of the portrait
packages relative to the price charged. Other competitive factors include the
quality of service, convenience of the studio to the customer, and the
availability and benefits of the digital imaging technology. The major
competitors in the market seek to attract new customers through advertised
low-price portrait packages and the benefits of the new digital technology, or
low-price session fees coupled with custom portrait ordering of individual
portrait sheets. The Company believes that the quality of its portraits and
service, which is enhanced by the digital imaging system, is an important factor
in obtaining repeat business from customers.
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 the United States 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 continuously maintained its business relationship with Kmart Corporation for
more than 28 years. The license agreement, which was renewed on July 1, 1994,
expires January 31, 1997, and may be terminated by either party upon 60-days'
notice. The loss of the license to do business in Kmart stores or the closing of
a significant number of Kmart stores would have a materially adverse effect on
the Company.
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 is for a five-year period on
a store-by-store basis.
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 a digital proof of each pose on a high-resolution
video monitor as the photographer takes the portraits. Immediately after the
photography session, customers are able to customize their portrait purchase,
choosing the poses, sizes, and number of portraits they wish to purchase. The
customer then 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 imaging system have improved
customer satisfaction and increased average purchases. In addition, the digital
imaging system allows the Company to print only portraits that have been
purchased by the customer, as opposed to "speculative" portrait packages, and
further to improve production efficiency through integration of the system with
the Company's computerized production system. The Company believes that its
integrated system is unique in the portrait photography industry.
3
The Company processes film from permanent studios and portable units at
its finishing laboratory in Matthews, North Carolina. The finishing laboratory
has adequate capacity to meet the Company's processing needs for the foreseeable
future.
The Company spent $1,033,000; $748,000; and $444,000 on research and
development activities during the 1995, 1994, and 1993 fiscal years. Research
and development have focused on developing and refining the digital imaging
system and integrating the system with the Company's computerized processing
facility and development of a portrait studio for pet photography in PETsMART
retail stores.
SOURCES AND AVAILABILITY OF SUPPLIES
The Agfa Division of Bayer Corporation is the Company's primary
supplier of photographic film, paper, and processing chemicals. The Company
renewed its supply contract with Agfa in 1994 after receiving competitive bids
from other suppliers. The Company has not had significant difficulty obtaining
photographic supplies. The Company builds its own cameras and has an adequate
supply of cameras and camera components.
The Company has not found it necessary to carry significant amounts of
inventory to ensure itself of a continuous allotment of raw materials. The
Company's receivables from licensors and customers are due within the cycle of
payments to suppliers.
The computer and video equipment used by the Company in the 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 28, 1996, the Company had approximately 2,800 full-time and
500 part-time employees. The Company believes employee relations are good.
INTERNATIONAL
At the end of fiscal year 1995, the Company operated 107 permanent
studios in Kmart stores in Canada and had 4 such studios in Mexico. The
Company's Canadian studios provided 4.5%, 4.3%, and 3.9% of revenues for fiscal
1995, 1994, and 1993, respectively. The Company ceased operations of its
Canadian and Mexican Kmart studios in April 1996, at which time the licenses to
operate such studios were terminated. The Company's Canadian subsidiary has
entered into a long-term licensing agreement with Wal-Mart's Canadian subsidiary
for the operation of portrait studios in Canadian Wal-Mart stores, and expects
to operate more than 50 studios during fiscal 1996.
4
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Positions and Offices
John Grosso(1) 49 President, Chief Executive Officer, and
Director (Since 1987)
Jan M. Rivenbark(2) 46 Executive Vice President and
Chief Operating Officer (Since 1992)
Eric H. Jeltrup(3) 51 Executive Vice President and Chief Technical
Officer (Since 1987)
Bruce A. Fisher(4) 46 Senior Vice President and Chief Financial
Officer and Secretary (Since 1992)
R. Michael Spencer(5) 48 Senior Vice President, Treasurer (Since 1992)
(1)Mr. Grosso has been President and Chief Executive Officer of the Company
since 1987.
(2)Mr. Rivenbark has been Executive Vice President of the Company since August
1992. He was promoted from Chief Financial Officer to Chief Operating Officer
on August 25, 1994. Prior to joining the Company, he was President and Chief
Operating Officer of JP Foodservice, Inc., a privately held national food
service distribution company, based in Baltimore, Maryland.
(3)Mr. Jeltrup has been with the Company in various positions in research and
development and production since 1976. He was promoted to Chief Technical
Officer on August 25, 1994.
(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, Treasurer on January 6,
1992.
ITEM 2. PROPERTIES
The Company owns a facility in Matthews, North Carolina, that serves as
its corporate headquarters, production facility, and warehouse. The building is
approximately 166,000 square feet. The Company leases its 1,508 permanent
studios under a license agreement with Kmart. The Company owns the equipment,
furniture, and fixtures in the Kmart store permanent studios.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company, or its
subsidiaries, is a party or of which any of their property is the subject that
are required to be disclosed under this item.
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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 28, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the over-the-counter market and
is quoted on the NASDAQ National Market System under the symbol "PCAI." The
following is the range of high and low bid prices for the shares of common stock
during the Company's last two fiscal years, as reported on the NASDAQ National
Market System:
Fiscal Year Ended Fiscal Year Ended
January 28, 1996 January 29, 1995
----------------------- ------------------------
High Low High Low
1st Quarter $11.00 $ 8.75 $11.75 $8.50
2nd Quarter $14.25 $10.12 $ 9.25 $8.25
3rd Quarter $14.25 $10.25 $12.50 $8.75
4th Quarter $12.00 $ 8.37 $12.00 $9.25
At March 29, 1996, the Company had approximately 1,024 shareholders of
record and the closing bid price for a share of common stock was $12.12.
The Company paid cash dividends of $0.07 per share in each quarter
of fiscal years 1995 and 1994. There can be no assurance that the Company
will continue or increase its dividend. Future dividends will be dependent
upon the Company's performance, capital and liquidity needs, and strategic
plans, as well as the performance of the retail portrait photography industry
and the economy in general.
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ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except for percentages, ratios, statistics, and per share data)
For the Fiscal Years Ended Approximately January 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ------------ -----------
SUMMARY OF OPERATIONS:
Sales........................................ $ 144,715 $ 144,881 $ 149,150 $ 142,865 $ 129,644
General and administrative expense........... $ 23,782 $ 22,936 $ 20,594 $ 16,374 $ 18,845
Total cost and expense....................... $ 131,392 $ 137,028 $ 140,947 $ 130,182 $ 120,925
Income from continuing operations before
cumulative effect of changes in
accounting principles..................... $ 7,617 $ 4,372 $ 4,912 $ 7,778 $ 5,438
Net Income................................... $ 7,617 $ 4,785 $ 2,712 $ 7,410 $ 7,014
*Primary and fully diluted earnings per
common share:
From continuing operations before
cumulative effect of changes in
accounting principles................. $ 0.94 $ 0.51 $ 0.56 $ 0.94 $ 0.68
Net Income............................... $ 0.94 $ 0.56 $ 0.31 $ 0.89 $ 0.88
*Weighted average number of fully
diluted common shares................. 8,110 8,582 8,823 8,306 7,934
*Cash dividends per share................ $ 0.28 $ 0.28 $ 0.28 $ 0.28 $ 0.21
Return on average equity................. 23.7% 15.1% 9.3% 36.3% 75.0%
BALANCE SHEET DATA:
Working capital............................... $ (3,878) $ (6,697) $ (4,321) $ 7,423 $ (1,889)
Current ratio................................. 0.82 0.67 0.81 1.35 0.91
Quick ratio................................... 0.70 0.52 0.59 1.10 0.72
Total assets.................................. $ 59,884 $ 59,557 $ 56,751 $ 51,975 $ 34,335
Long-term debt (noncurrent portion)........... $ -- $ -- $ -- $ -- $ --
Ratio of long-term debt (noncurrent portion)
to total capitalization................... -- -- -- -- --
*Total shareholders' equity per share(1)...... $ 3.85 $ 3.85 $ 3.43 $ 3.41 $ 1.58
OTHER FINANCIAL DATA:
Depreciation expense.......................... $ 8,490 $ 7,136 $ 5,159 $ 3,455 $ 2,539
Capital expenditures.......................... $ 6,309 $ 14,698 $ 21,875 $ 12,233 $ 6,027
*All share information for fiscal years prior to fiscal 1992 has been
adjusted for the three-for-two stock split paid April 8, 1992.
(1)Total shareholders' equity per share has been calculated dividing total
shareholders' equity by the weighted average number of fully diluted
shares.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides portrait services, primarily in permanent studios
operated in Kmart stores, throughout the United States and in many locations in
Canada in fiscal 1995 and 1994. In its Institutional operations, the Company
also provides portrait services primarily to church congregations through
traveling promotions. The Company's Kmart studios, including Canadian and
Mexican operations, accounted for approximately 95% of sales during fiscal 1995.
At year-end, the Company operated 1,397 U.S. Kmart studios, 107 Canadian Kmart
studios, and 4 Mexican Kmart studios. In April 1996, the Company closed the 107
Canadian Kmart studios and the 4 Mexican Kmart studios and discontinued future
operations in these locations.
In the first quarter of fiscal 1996, the Company's Canadian subsidiary
purchased certain assets of two related Canadian portrait businesses, Portrait
Works, Inc., and Portrait Experience of Canada, Ltd. In connection with the
purchase, PCA's Canadian subsidiary entered into a long-term license agreement
with Wal-Mart's Canadian subsidiary to operate permanent studios photographing
children in Wal-Mart's Canadian stores. The Company expects to begin photography
in approximately 52 Wal-Mart stores in April and May of 1996.
Prior to August 1994, the Company also operated traveling, or portable,
studio promotions in Kmart stores that did not have a permanent studio.
Traveling promotion sales in Kmart stores were $23.3 million, or approximately
16% of total sales, in fiscal 1993; and $3.3 million, or approximately 2% of
total sales, in fiscal 1994. Because portrait services from traveling promotions
were available only seven weeks per year in any given Kmart location and because
permanent studios were more profitable than traveling promotions, the Company
converted its traveling promotion business in Kmart stores to permanent studios.
The Company opened 258 permanent studios in fiscal 1993, 136 in fiscal 1994, and
opened 164, while closing 73 studios resulting in a net addition of 91, in
fiscal 1995; it operated 1,508 permanent studios at the end of fiscal 1995.
In July 1994, the Company completed the conversion, begun in November
1992, of all of its Kmart studio locations to its new digital imaging system
technology. The new digital imaging system allows customers to approve each
portrait during the photography session as each pose is displayed on a video
monitor. With this technology, the Company no longer relies on the production of
portraits on a speculative basis, but produces only those portraits which the
customer purchases. The conversion to digital technology has resulted in very
significant changes in the Company's operations, increasing the emphasis on
better quality portraits and service and allowing the Company to improve its
per-customer sales average. The Company also has benefited from lower production
costs primarily through the elimination of waste from speculative portrait
production.
Beginning with the fourth quarter of fiscal 1993 and continuing in 1994
and 1995, the portrait services industry experienced extremely competitive
pricing conditions. The Company responded to these pricing pressures by reducing
the price of its advertised special promotions during the 1993 holiday season,
which contributed to lower average sales per customer for 1993. The Company
expects competitive pricing conditions to continue and has implemented various
marketing and product strategies in response, with particular emphasis on the
quality of its services and the enhanced portrait experience made possible
through its digital imaging system.
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The Company operated a test in 14 PETsMART stores in 1995, photographing
pets and pets with their owners, as part of its diversification program. The
Company utilizes its digital imaging technology in PETsMART stores. The Company
and PETsMART have agreed to expand this program to over 125 locations in fiscal
1996. PETsMART currently operates more than 260 retail stores.
Prior to December 1993, the Company also operated permanent studios under
license agreements with several department store chains. The Company
discontinued its department store operations in the third quarter of fiscal
1993, and recorded a $2.2 million after-tax charge in connection with the
shutdown of these operations.
Because of the retail nature of its services, the Company's business is
very seasonal. The Christmas season accounts for a significant percentage of the
Company's sales and earnings, and the Company's fourth fiscal quarter (beginning
in late October of each calendar year and ending approximately January 31 of the
succeeding calendar year) typically produces a large percentage of annual
revenues and more than 60% of the Company's annual earnings. The fourth fiscal
quarters of fiscal 1993, 1994, and 1995 accounted for 35.0%, 31.2%, and 32.2%,
respectively, of sales and 92.5%, 79.3%, and 64.2%, respectively, of earnings
for such years. The Company's operations can also be adversely affected by
inclement weather.
RESULTS OF OPERATIONS
The table below presents the percentage of sales represented by the
following line items from the Company's statements of income for the periods
indicated:
For the Fiscal Years Ended
January 28, January 29, January 30,
1996 1995 1994
Sales 100.0% 100.0% 100.0%
Costs and Expenses 90.8 94.6 94.5
Income from Operations 9.2 5.4 5.5
Interest Expense (Income) 0.3 0.3 --
Income from Continuing Operations before
Income Taxes 8.9 5.1 5.5
Income Tax Provision 3.6 2.1 2.2
Income from Continuing Operations 5.3 3.0 3.3
Income (Loss) from Discontinued Operations
(net of income taxes) -- 0.3 (1.5)
Net Income 5.3% 3.3% 1.8%
CONTINUING OPERATIONS
1995 FISCAL YEAR COMPARED WITH 1994 FISCAL YEAR. Sales for the
Company's 1995 fiscal year were $144.7 million, flat as compared with sales of
$144.9 million for fiscal 1994. Consolidated sales in Kmart stores, of $137.2
million, were down slightly, from $137.7 million in 1994. The decline was
attributable to the phase-out of traveling photography
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promotions in 1994. Sales in Kmart permanent locations were up over 2% in fiscal
1995. The increase in sales in Kmart permanent studios was attributable to a 7%
increase in the average purchase, partially offset by a 5% decline in customers
photographed. The Company opened 91, net, new Kmart studios in 1995 and ended
the year with 1,508 studios. In April 1996, the Company closed 107 Canadian
Kmart studios and 4 Mexican Kmart studios, at which time the licenses to operate
such studios were terminated. The Institutional operations had sales of $6.6
million in 1995, a decline of $0.5 million from fiscal 1994. In the fourth
quarter, Kmart sales increased by 2%, with customers increasing by 3.7%. The
PETsMART pilot program contributed sales of $0.9 million in fiscal 1995.
Income from operations, as a percentage of sales, increased to 9.2%
from 5.4% in fiscal 1994. The improvement in margin reflects the elimination of
introductory advertising expenses incurred in 1994 to introduce the Company's
new digital imaging system. Additionally, the Company's production costs, as a
percentage of sales, decreased by 1% in fiscal 1995. Store commissions and
selling costs increased by 2.6%, principally from a full year's digital
equipment depreciation expense. General and administrative expenses increased by
3.7%. Benefit plans designated to reward employees for achieving higher
performance and profits and write-offs from approximately 180 Kmart store
closings contributed to the increase in general and administrative expenses. In
the fourth quarter, the Company accrued $0.6 million for the write-off of
property and other costs associated with the closing of its Canadian and Mexican
Kmart studios.
Income from continuing operations for 1995 increased to $7.6 million
from $4.4 million, or 74% in 1994. Net income, of $7.6 million, increased 59%
from the prior year. Earnings per share were $0.94 in 1995 as compared to $0.56
in fiscal 1994, an increase of 68%. Expenses related to the PETsMART pilot
program reduced net income by approximately $0.4 million in fiscal 1995.
The income tax provision for fiscal 1995 was $5.2 million versus a
provision of $3.1 million in fiscal 1994. This resulted in an effective tax rate
of 40.8% for fiscal 1995 versus 41.3% for fiscal 1994.
1994 FISCAL YEAR COMPARED WITH 1993 FISCAL YEAR. Consolidated sales in
fiscal 1994 declined by 2.9% to $144.9 million from $149.2 million in fiscal
1993. Sales in Kmart stores declined by 3.4% in fiscal 1994 to $137.7 million.
During the year, the Company eliminated all traveling promotions resulting in a
sales decrease of $19.9 million, a decline of 85.6% as compared to the prior
fiscal year. Most of this sales shortfall was offset by a 12.7% sales increase
in Kmart permanent studio sales to $134.4 million which accounted for 93% of the
Company's total consolidated sales. The Company opened 136 new studios in 1994
and ended the year with 1,417 studios. Sales in Institutional operations
increased by 8.3% to $7.1 million in fiscal 1994 as compared to fiscal 1993.
During the fourth quarter of fiscal 1994, the Company adopted a
strategy designed to emphasize the enhanced quality of the overall portrait
experience in its digital studios by offering more choice and service. Large
numbers of temporary seasonal help were not hired and the Company was able to
service customers with experienced, full-time PCA employees. As a result, and as
planned, permanent studio customers photographed during the fourth quarter
declined by 32%, but the average sales per customer increased by 42%, to $50.78
from $35.70, in the fourth quarter of fiscal 1993.
Consolidated profit contribution (sales less advertising and
promotional costs, costs of photographic sales, store commissions and selling
costs, and field operating overhead) increased by 32.3% in the fourth quarter to
$9.3 million compared to the fourth quarter of fiscal 1993. The profit
contribution margin in the fourth quarter was 20.7% as compared to 13.5% in the
same
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period of fiscal 1993. The significant improvement in margins resulted from
higher average sales per customer and lower production costs, which the Company
was able to achieve from its proprietary digital imaging system. For the fiscal
year, profit contribution was down $1.2 million, or 7.6%. This decline was the
result of the phase-out of Kmart traveling promotions. In fiscal 1994, the
Company incurred start-up costs of approximately $2.0 million to develop, train,
and market the new digital technology. Partially offsetting these factors was an
increase in profitability in permanent studios, which reflects higher sales
averages, cost savings from digital technology, and competitive pricing
conditions in fiscal year 1993.
Corporate general and administrative expenses declined by $0.8 million,
or 11.4%, from $7.2 million in fiscal 1993. The decline was primarily
attributable to lower legal costs. Interest expenses increased $0.4 million in
fiscal 1994 as compared to fiscal 1993. The increase was related to increased
borrowing levels in fiscal 1994 for procurement of digital imaging system
equipment.
The income tax provision for fiscal year 1994 of $3.1 million resulted
in an effective tax rate of 41.3%, as compared with 40.2% in fiscal 1993. The
increase in the tax rate was generally attributable to the 1993 tax act.
DISCONTINUED OPERATIONS
In the third quarter of fiscal 1993, the Company discontinued its
Department Store Division, which included 13 fashion photography studios and 67
adult/family studios operating in five chains. The Company recorded a $1.9
million after-tax charge for the shutdown of these operations in fiscal 1993.
The $1.9 million represents the write-down of fixed assets, severance expenses
for the approximately 650 people either employed in that division or displaced
in other operations, obsolete inventory, an accrual for professional fees,
insurance and other administrative costs, and operating losses in the fourth
quarter of 1993 and the first quarter of 1994.
During the second quarter of fiscal 1994, the Company adjusted
downward, by $0.4 million after-taxes, the reserve for discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of working capital are cash from
operations and its $16.0 million unsecured revolving line of credit from a bank.
The credit facility bears interest, at the Company's choice, at either (a) the
90-day Certificate of Deposit Rate ("CD Rate") plus 100 basis points, adjusted
daily; or (b) the 30-, 60-, 90-, or 180-day London Interbank Offered Rate
("LIBOR") plus 100 basis points, adjusted monthly, bimonthly, quarterly, or
semiannually, respectively, or (c) the Prime Rate. On January 28, 1996, the
Company had $3.9 million in cash and cash equivalents and no short-term debt
outstanding.
During fiscal 1995, the Company had property additions of approximately
$6.3 million, principally for materials and equipment for the Company's
permanent Kmart studios, upgrading certain processing equipment in our Matthews,
North Carolina, laboratory, and portrait studios and equipment in PETsMART
stores. Cash from operating activities provided $20.3 million. The Company was
able to fund its capital expenditures from operations, cash on hand, and its
revolving line of credit.
Shareholders' equity decreased by $1.8 million to $31.2 million. Net
income was $7.6 million and dividends paid totaled $2.1 million. The Company
repurchased 744,300 shares in fiscal 1995, reducing shareholders' equity by $7.7
million.
11
The Company anticipates capital expenditures of $6.9 million for fiscal
1996. The dividend rate of $0.07 per share per quarter, if maintained throughout
the year, would result in a payout of approximately $2.1 million in fiscal 1996.
The Company believes, based on its short- and long-term business plans, that it
has the ability to adequately fund its operating and capital expenditure needs
for fiscal 1996, as well as dividends and authorized share repurchases, from
operations, augmented by borrowings under its line of credit for seasonal credit
needs. Due to the seasonality of the Company's operations, cash is generally
consumed during the first fiscal quarter. During the remaining fiscal quarters,
operating activities usually generate cash.
INFLATION
Over the past few years, inflation has not had a significant impact on
the Company's financial condition or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is submitted beginning on page
F-2 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE MATTERS
None.
PART III
ITEMS 10, 11, 12, and 13.
The portion of Item 10 with respect to Directors of the Company and
Items 11, 12, and 13, Management Remuneration, Security Ownership of Certain
Beneficial Owners and Management, and Certain Relationships and Related
Transactions, respectively, have been omitted from this report since the Company
will file with the Securities and Exchange Commission a definitive proxy
statement pursuant to Rule 14a-3(b) of the Commission, not later than 120 days
after the close of the fiscal year ended January 28, 1996. That portion of Item
10 with respect to executive officers of the Company appears in Item 1 of Part I
hereof.
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 16.
3. Exhibits shown by index beginning on page 13.
(b) Reports on Form 8-K.
None
12
PCA INTERNATIONAL, INC.
Index to Exhibits - [Item 14(a)(3)]
Index No. Page
No.
Description
3(a) Restated Charter, as amended to date.
3(b) Bylaws of PCA International, Inc., as amended to date,
incorporated by reference to Exhibit 3.4 to the Company's
Quarterly Report on Form 10-Q, Commission File No. 0-8550, for
the quarter ended May 3, 1992.
4 Instruments defining the rights of security holders, incorporated by
reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended May 3, 1992.
10(a) Amendment dated as of June 1, 1994, to Loan Agreement between
PCA International, Inc., Photo Corporation of America, PCA
National, Inc., and PCA Photo Corporation of Canada, Inc., PCA
Mexico, S.A. de C.V. and NationsBank of North Carolina, N.A.,
incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 31,
1994.
10(b) Revised Exclusive License Agreement dated July 1, 1994, between
Kmart Corporation and PCA International, Inc., incorporated by
reference to Exhibit 10(b) to the Company's Amendment No. 1 on
Form 10-Q/A to its Quarterly Report on Form 10-Q for the
quarter ended July 31, 1994.
10(c) New Sales Contract dated August 11, 1994, between PCA
International, Inc., and Agfa Division of Miles, Inc.,
incorporated by reference to Exhibit 10(c) to the Company's
Amendment No. 1 on Form 10-Q/A to its Quarterly Report on Form
10-Q for the quarter ended July 31, 1994.
10(d)* The 1990 Non-Qualified Stock Option Plan, incorporated by reference to
Exhibit 4 to the Company's Registration Statement on Form S-8
(Registration No. 33-36793).
10(e)* The 1992 Non-Qualified Stock Option Plan, as amended, incorporated by
reference to Exhibit 4 to the Company's Registration Statement on
Form S-8 (Registration No. 33-51458).
10(f) Loan Agreement dated September 8, 1992, between PCA
International, Inc., Photo Corporation of America, PCA
National, Inc., and PCA Photo Corporation of Canada, Inc., and
NationsBank of North Carolina, N.A., incorporated by reference
to Exhibit 10(o) to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 2, 1992 (Commission File No.
0-8550).
10(g) Amendment dated as of September 14, 1993, to Loan Agreement
between PCA International, Inc., Photo Corporation of America,
PCA National, Inc., PCA Photo Corporation of Canada, Inc., and
NationsBank of North Carolina, N.A., incorporated by reference
to Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 31, 1994.
10(h) Amendment dated as of March 31, 1995, to Loan Agreement between
PCA International, Inc., Photo Corporation of America, PCA
National, Inc., PCA Photo Corporation of Canada, Inc., and PCA
Mexico, S.A. de C.V. and NationsBank of North Carolina, N.A.,
incorporated by reference to Exhibit 10(h) to the Company's
Annual Report on Form 10-K for the year ended January 29, 1995.
11 Computation of Primary and Fully Diluted Earnings per Common Share.
13
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
*Management contract or compensatory plan or arrangement required to be filed
as an exhibit.
14
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 19, 1996 By:/s/Joseph H. Reich
---------------------------
Joseph H. Reich
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.
Signature Title Date
/s/Joseph H. Reich Chairman of the Board April 19, 1996
- ------------------------------------------
Joseph H. Reich
/s/John Grosso President, Chief Executive April 19, 1996
- ------------------------------------------ Officer and Director
John Grosso
/s/Jan M. Rivenbark Executive Vice President April 19, 1996
- ------------------------------------------ Chief Operating Officer
Jan M. Rivenbark
/s/Eric H. Jeltrup Executive Vice President April 19, 1996
- ------------------------------------------ Chief Technical Officer
Eric H. Jeltrup
15
Signature Title Date
/s/Bruce A. Fisher Senior Vice President April 19, 1996
- ------------------------------------------ Chief Financial Officer
Bruce A. Fisher Secretary
/s/R. Michael Spencer Senior Vice President April 19, 1996
- ------------------------------------------ Treasurer
R. Michael Spencer
/s/R. Stuart Dickson Director April 19, 1996
- ------------------------------------------
R. Stuart Dickson
/s/Peter B. Foreman Director April 19, 1996
- ------------------------------------------
Peter B. Foreman
/s/George Friedman Director April 19, 1996
- ------------------------------------------
George Friedman
/s/Charlotte H. Mason Director April 19, 1996
- ------------------------------------------
Charlotte H. Mason
/s/Albert F. Sloan Director April 19, 1996
- ------------------------------------------
Albert F. Sloan
/s/Stanley Tulchin Director April 19, 1996
- ------------------------------------------
Stanley Tulchin
16
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
Index to Financial Statements and Schedules
Page No.
Financial Statements:
Independent Auditors' Report............................................................ F-2
Consolidated Balance Sheets at January 28, 1996 and January 29, 1995.................... F-3-F-4
Consolidated Statements of Income for Fiscal Years Ended
January 28, 1996; January 29, 1995; and January 30, 1994................................ F-5
Consolidated Statements of Changes in Shareholders' Equity for Fiscal
Years Ended January 28, 1996; January 29, 1995; and January 30, 1994.................... F-6
Consolidated Statements of Cash Flows for Fiscal Years Ended
January 28, 1996; January 29, 1995; and January 30, 1994................................ F-7
Notes to Consolidated Financial Statements.............................................. F-8-F-19
Schedules:
II Valuation and Qualifying Accounts for Fiscal Years Ended
January 28, 1996; January 29, 1995; and January 30, 1994................................ S-1
Exhibits:
11 Computation of Primary and Fully Diluted Earnings per Common Share
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
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
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 28, 1996 and January 29, 1995 and for each of the
years in the three-year period ended January 28, 1996, 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 schedules 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 28, 1996, and January 29, 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 28, 1996, 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 Peat Marwick LLP
KPMG PEAT MARWICK LLP
Charlotte, North Carolina
March 6, 1996
F-2
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
JANUARY 28, JANUARY 29,
1996 1995
------------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 3,914,513 $ 311,759
Accounts receivable (net of allowance for doubtful accounts of
$1,011,350 and $845,843):
Due from licensor stores and customers............................. 7,342,232 6,408,629
Other, including employee advances................................. 677,334 1,263,681
Inventories............................................................ 2,488,964 3,243,571
Deferred income taxes.................................................. 2,167,152 1,952,293
Prepaid expenses....................................................... 513,685 636,907
------------------- ------------------
TOTAL CURRENT ASSETS............................................... 17,103,880 13,816,840
------------------- ------------------
PROPERTY:
Land and improvements.................................................. 1,177,805 1,169,495
Building and improvements.............................................. 7,730,952 7,630,427
Photographic and sales equipment....................................... 44,183,975 40,884,594
Photographic finishing equipment....................................... 12,501,537 12,076,064
Furniture and equipment................................................ 10,010,818 9,475,787
Transportation equipment............................................... 208,795 205,664
Leasehold improvements................................................. 11,508,810 10,408,620
Construction in progress............................................... 946,478 1,629,026
------------------- ------------------
Total.............................................................. 88,269,170 83,479,677
Less: Accumulated depreciation and amortization....................... 45,516,802 37,752,137
------------------- ------------------
PROPERTY, NET...................................................... 42,752,368 45,727,540
------------------- ------------------
OTHER ASSETS............................................................. 28,228 12,569
------------------- ------------------
TOTAL ASSETS....................................................... $ 59,884,476 $ 59,556,949
=================== ==================
See notes to consolidated financial statements.
F-3
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
JANUARY 28, JANUARY 29,
1996 1995
------------------- ------------------
CURRENT LIABILITIES:
Short-term borrowings....................................................... $ -- $ 974,215
Accounts payable-trade...................................................... 9,178,213 11,418,568
Accrued insurance........................................................... 2,247,693 727,125
Accrued income taxes........................................................ 2,317,974 1,492,427
Accrued compensation........................................................ 3,779,849 3,015,943
Other accrued liabilities................................................... 3,457,973 2,885,131
------------------- ------------------
TOTAL CURRENT LIABILITIES................................................ 20,981,702 20,513,409
------------------- ------------------
DEFERRED INCOME TAXES......................................................... 4,562,570 3,083,062
------------------- ------------------
OTHER LIABILITIES............................................................. 3,105,595 2,928,023
------------------- ------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $10.00 par value (authorized 2,000,000 shares;
outstanding - none)....................................................... -- --
Common stock, $0.20 par value (authorized 20,000,000 shares;
outstanding - 7,482,071 and 8,160,171 shares)............................. 1,496,415 1,632,035
Additional paid-in capital.................................................. 5,045,578 12,204,069
Retained earnings........................................................... 24,918,709 19,444,035
Cumulative foreign currency translation adjustments......................... (226,093) (215,087)
------------------- ------------------
Total.................................................................... 31,234,609 33,065,052
Less: Unearned compensation.............................................. -- 32,597
------------------- ------------------
TOTAL SHAREHOLDERS' EQUITY............................................... 31,234,609 33,032,455
------------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... $ 59,884,476 $ 59,556,949
=================== ==================
See notes to consolidated financial statements.
F-4
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED
-------------------------------------------------------
January 28, January 29, January 30,
1996 1995 1994
--------------- ---------------- ----------------
SALES.................................................................. $ 144,714,535 $ 144,880,737 $ 149,150,445
--------------- ---------------- ----------------
COSTS AND EXPENSES:
Advertising and promotional costs.................................. 14,784,803 20,083,522 21,595,161
Costs of photographic sales........................................ 47,635,178 49,981,831 58,599,010
Store commissions and selling costs................................ 45,190,783 44,026,391 40,159,117
General and administrative expenses................................ 23,781,509 22,936,035 20,593,676
--------------- ---------------- ----------------
Total Costs and Expenses....................................... 131,392,273 137,027,779 140,946,964
--------------- ---------------- ----------------
INCOME FROM OPERATIONS BEFORE INTEREST AND INCOME TAXES................
13,322,262 7,852,958 8,203,481
Interest expense (income) net...................................... 458,923 406,147 (5,108)
--------------- ---------------- ----------------
INCOME FROM OPERATIONS BEFORE INCOME TAXES............................. 12,863,339 7,446,811 8,208,589
INCOME TAX PROVISION................................................... 5,246,170 3,074,350 3,296,515
--------------- ---------------- ----------------
INCOME FROM CONTINUING OPERATIONS...................................... 7,617,169 4,372,461 4,912,074
DISCONTINUED OPERATIONS................................................ -- 412,406 (2,199,826)
--------------- ---------------- ----------------
NET INCOME............................................................. $ 7,617,169 $ 4,784,867 $ 2,712,248
=============== ================ ================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Primary............................................................ 8,069,538 8,564,295 8,793,876
=============== ================ ================
Fully Diluted...................................................... 8,110,453 8,582,267 8,822,690
=============== ================ ================
PRIMARY AND FULLY DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations.................................. $ 0.94 $ 0.51 $ 0.56
--------------- ---------------- ----------------
Discontinued operations:
Loss from operations............................................ -- -- (0.04)
Income (loss) on disposal....................................... -- 0.05 (0.21)
--------------- ---------------- ----------------
Total discontinued operations...................................... -- 0.05 (0.25)
--------------- ---------------- ----------------
Net income......................................................... $ 0.94 $ 0.56 $ 0.31
=============== ================ ================
CASH DIVIDENDS PER COMMON SHARE........................................ $ 0.28 $ 0.28 $ 0.28
=============== ================ ================
See notes to consolidated financial statements.
F-5
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Fiscal Years ended January 28, 1996; January 29, 1995; and
January 30, 1994
Cumulative
Foreign Loans to
Additional Currency Exercise
Common Stock Paid-In Retained Translation Unearned Stock
Shares Amount Capital Earnings Adjustments Compensation Options
---------- ----------- ------------- ------------ ------------- ------------- ----------
BALANCE, JANUARY 31, 1993: 8,016,371 $1,603,275 $10,819,794 $16,494,408 $(74,119) $ (429,250) $(89,963)
Net income................ 2,712,248
Exercise of stock options. 121,700 24,340 1,199,974
Dividends................. (2,266,084)
Compensatory stock options 3,342,062 (3,080,621)
Canceled compensatory
stock options........... (3,175,850) 3,175,850
Payment of loans to
exercise 89,963
stock options...........
Foreign currency
translation (49,674)
adjustment..............
---------- ----------- ------------- ------------ ------------- ------------- ----------
BALANCE, JANUARY 30, 1994: 8,138,071 1,627,615 12,185,980 16,940,572 (123,793) (334,021) --
Net income................ 4,784,867
Exercise of stock options. 22,100 4,420 87,754
Dividends................. (2,281,404)
Compensatory stock options 231,759
Canceled compensatory
stock options........... (69,665) 69,665
Foreign currency
translation (91,294)
adjustment..............
---------- ----------- ------------- ------------ ------------- ------------- ---------
BALANCE, JANUARY 29, 1995: 8,160,171 1,632,035 12,204,069 19,444,035 (215,087) (32,597) --
Net income................ 7,617,169
Exercise of stock options. 66,200 13,240 415,533
Dividends................. (2,142,495)
Acquisition of Company
stock................... (744,300) (148,860) (7,565,092)
Compensatory stock options 23,665
Canceled compensatory
stock options........... (8,932) 8,932
Foreign currency
translation (11,006)
adjustment..............
---------- ----------- ------------- ------------ ------------- ------------- ---------
BALANCE, JANUARY 28, 1996: 7,482,071 $1,496,415 $5,045,578 $24,918,709 $(226,093) $ -- $ --
---------- ----------- ------------- ------------ ------------- ------------- ---------
See notes to consolidated financial statements.
F-6
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
-----------------------------------------------------
January 28, January 29, January 30,
1996 1995 1994
-------------- ---------------- ----------------
OPERATING ACTIVITIES:
Net income............................................................ $ 7,617,169 $ 4,784,867 $ 2,712,248
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation...................................................... 8,489,754 7,135,629 5,159,325
Increase in allowance for doubtful accounts....................... 165,140 189,479 529,744
Provision for deferred income taxes............................... 1,264,649 1,576,386 (866,897)
Loss on disposal of property...................................... 776,592 222,526 1,610,777
Compensatory stock option expense................................. 23,665 231,758 261,441
Increase in other liabilities..................................... 177,572 105,915 141,553
(Increase) decrease in other noncurrent assets.................... (15,659) (5,000) 65,070
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable....................... (530,433) (3,362,361) 1,049,334
Decrease in inventories.......................................... 755,065 1,654,774 469,781
Decrease in deferred costs applicable to unsold portraits........ -- 1,410,953 1,271,511
Decrease (increase) in prepaid expenses.......................... 122,987 (78,195) 351,877
(Decrease) increase in accounts payable.......................... (2,246,715) (2,797,599) 2,922,774
Increase (decrease) in accrued expenses.......................... 3,686,168 (73,317) (953,487)
-------------- ---------------- ----------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES........................... 20,285,954 10,995,815 14,725,051
-------------- ---------------- ----------------
INVESTING ACTIVITIES:
Purchases of property................................................. (6,309,168) (14,697,706) (21,875,095)
Proceeds from sales of fixed assets................................... 47,311 72,554 22,523
Loans to corporate officers and employees to exercise stock
options, net of repayments.......................................... -- -- 133,074
-------------- ---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES................................. (6,261,857) (14,625,152) (21,719,498)
-------------- ---------------- ----------------
FINANCING ACTIVITIES:
(Decrease) increase in short-term borrowing........................... (974,215) 974,215 --
Exercise of stock options............................................. 428,773 92,174 1,224,314
Acquisition of company stock.......................................... (7,713,952) -- --
Cash dividends........................................................ (2,142,495) (2,281,404) (2,266,084)
-------------- ---------------- ----------------
NET CASH USED IN FINANCING ACTIVITIES............................... (10,401,889) (1,215,015) (1,041,770)
-------------- ---------------- ----------------
Effect of exchange rate changes on cash............................... (19,454) 37,215 (56,356)
-------------- ---------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... 3,602,754 (4,807,137) (8,092,573)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................... 311,759 5,118,896 13,211,469
-------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 3,914,513 $ 311,759 $ 5,118,896
============== ================ ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Flow Data:
Interest paid........................................................ $ 364,041 $ 431,766 $ 73,684
============== ================ ================
Income taxes paid..................................................... $ 3,059,180 $ 800,410 $ 4,198,236
============== ================ ================
Schedule of Noncash Financing Activities:
Stock options canceled and unearned compensation credited............. $ 8,932 $ 69,665 $ 3,175,850
============== ================ ================
See notes to consolidated financial statements.
F-7
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 28, 1996;
JANUARY 29, 1995; AND JANUARY 30, 1994
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 94.8%, 95.1%, and 95.6% of
consolidated sales during the fiscal years ended January 28, 1996;
January 29, 1995; and January 30, 1994, respectively. The license
agreement with Kmart Corporation was revised and renewed on July 1,
1994. The license is for the period through January 31, 1997 and may be
terminated by either party upon 60-days' notice. The loss of the
license to do business in Kmart stores would have a materially adverse
effect on the Company. Kmart'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 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 years ended January 28, 1996; January 29, 1995; and
January 30, 1994 were 52-week years. The Company's fiscal year that
will end February 2, 1997, will be 53 weeks.
Foreign Currency Transactions:
Gains and losses on foreign currency transactions are included in the
determination of net income for the period. The amount of such gain and
(loss) was $19,474; $(100,452); and $9,338 for the fiscal years ended
January 28, 1996; January 29, 1995; and January 30, 1994, respectively.
Supplemental Cash Flow Information:
The Company considers all highly liquid investments with a 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:
F-8
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 28, 1996;
JANUARY 29, 1995; AND JANUARY 30, 1994
1. Significant Accounting Policies (continued):
Land improvements........................ 10 to 30 years
Building and improvements................ 10 to 55 years
Leasehold improvements................... 3 to 10 years
Photographic and sales equipment......... 3 to 13 years
Photographic finishing equipment......... 3 to 15 years
Furniture and equipment.................. 3 to 10 years
Transportation equipment................. 3 years
Photographic Sales and Deferred Costs:
Digital photographic sales are recorded when portraits are purchased.
All sales in the fourth quarter of fiscal 1994 and fiscal 1995 were
digital photographic sales. In fiscal 1993 and the first three quarters
of 1994, digital sales were recorded when the portraits were produced.
The change, beginning in the fourth quarter of fiscal 1994, did not
significantly affect the Company's results of operations.
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.
Fair Value of Financial Instruments:
The Company is required under SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," 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 set forth
below.
F-9
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 28, 1996;
JANUARY 29, 1995; AND JANUARY 30, 1994
1. Significant Accounting Policies (continued):
The Company's fair value methods and assumptions are as follows:
(BULLET) 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.
(BULLET) Other non-current liabilities--the carrying amount approximates
fair value because such liabilities consist of actuarially
determined postretirement liabilities using current market rate
assumptions.
Costs and Expenses:
Advertising and promotional costs consist of the direct mail,
television broadcasting, and print media costs for the children's
market and the payroll and related taxes, benefits and other costs for
employees in the adult/family market who directly promote and acquire
customers, as well as the cost of church directories.
Costs of photographic sales are all the direct and indirect portrait
production costs: salaries, commissions, payroll taxes, related
benefits and traveling costs for all photography personnel, as well as
the recruiting and training costs of these employees. The costs of
film, accessories, photography equipment depreciation and maintenance,
supplies, and distribution are also included in this category.
Store commissions and selling costs include the commissions paid to
each chain based on a percentage of net sales, salaries, commissions,
payroll taxes, related benefits and travel costs for all sales
personnel, and recruiting and training, sales supplies, sales equipment
depreciation, and related distribution costs.
Research and Development:
The Company spent $1,033,000; $748,000; and $444,000 on research and
development activities during the years ended January 28, 1996; January
29, 1995; and January 30, 1994, respectively. Such costs are charged to
operations as incurred.
Earnings per Share:
Earnings per share are determined by dividing income from continuing
operations and net income by the weighted average number of common
shares and common equivalent shares outstanding during the period.
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
F-10
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 28, 1996;
JANUARY 29, 1995; AND JANUARY 30, 1994
1. Significant Accounting Policies (continued):
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 1994
amounts to conform to the fiscal 1995 presentation.
2. Debt:
The Company signed a new loan agreement on September 8, 1992, amended
March 31, 1995, with NationsBank of North Carolina, N.A.
("NationsBank") for a $16,000,000 revolving credit facility. The
revolving line of credit matures on May 31, 1998 with interest computed
at the Company's option, either (a) the 90-day Certificate of Deposit
Rate ("CD Rate") plus 100 basis points, adjusted daily; (b) the 30-,
60-, 90-, or 180-day London Interbank Offered Rate ("LIBOR") plus 100
basis points, adjusted monthly, bimonthly, quarterly, or semiannually,
respectively, or (c) the Prime Rate.
Borrowings under the agreement are unsecured, and debt-to-net worth
ratios, minimum levels of tangible net worth, maximum levels of
cumulative common stock repurchase, and a fixed charge ratio must be
maintained in addition to other financial covenants. The amount
available under the Company's line of credit is reduced by outstanding
letters of credit. As of January 28, 1996, the Company had letters of
credit of $350,000 for its workers' compensation insurance. As of
January 29, 1995, there were no outstanding letters of credit.
The components of net interest expense (income) were:
For the Fiscal Years Ended
---------------------------------------------------
January 28, January 29, January 30,
1996 1995 1994
-------------- -------------- --------------
Interest Income........ $ (123,865) $ (156,424) $ (220,451)
Interest Expense....... 582,788 562,571 215,343
-------------- -------------- --------------
Net.................... $ 458,923 $ 406,147 $ (5,108)
============== ============== ==============
F-11
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 28, 1996;
JANUARY 29, 1995; AND JANUARY 30, 1994
3. Income Taxes:
PCA International, Inc., and its domestic subsidiaries file a
consolidated federal income tax return. The components of income tax
expense, attributable to income from continuing operations, are as
follows:
For the Fiscal Years Ended
---------------------------------------------------------
January 28, January 29, January 30,
1996 1995 1994
-------------- -------------- --------------
Current:
Federal........................... $2,888,851 $1,457,788 $2,633,531
State............................. 1,082,736 361,835 590,145
International..................... -- -- (40,860)
-------------- -------------- --------------
3,971,587 1,819,623 3,182,816
-------------- -------------- --------------
Deferred:
Federal........................... 1,178,154 919,088 92,574
State............................. 96,429 335,639 21,125
-------------- -------------- --------------
1,274,583 1,254,727 113,699
-------------- -------------- --------------
Total Provision........................ $5,246,170 $3,074,350 $3,296,515
============== ============== ==============
A reconciliation of the amount computed by applying the statutory
federal income tax rate to income from continuing operations to the
consolidated income tax provision follows:
For the Fiscal Years Ended
---------------------------------------------------------
January 28, January 29, January 30,
1996 1995 1994
--------------- ------------- ---------------
Tax expense at statutory
federal rates..................... $4,402,166 $2,531,916 $2,790,920
Tax effect of expenses
not deductible pursuant to
Tax Reform Act of 1986............ 65,338 88,885 64,346
State income taxes, net
of federal income tax
benefit........................... 766,458 460,333 403,439
Tax effects related to
foreign subsidiary................ 13,203 6,297 (27,553)
Other.................................. (995) (13,081) 65,363
--------------- ------------- ---------------
Total Provision........................ $5,246,170 $3,074,350 $3,296,515
=============== ============= ===============
F-12
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 28, 1996;
JANUARY 29, 1995; AND JANUARY 30, 1994
3. Income Taxes (continued):
Deferred income taxes are provided to reflect differences between
income and expenses recognized in one accounting period for financial
reporting purposes and a different period for income tax purposes. Such
differences attributable to continuing operations and their tax effects
are as follows:
For the Fiscal Years Ended
---------------------------------------------------
January 28, January 29, January 30,
1996 1995 1994
--------------- -------------- --------------
Depreciation..................... $ 1,503,342 $ 1,831,023 $ 1,334,327
Alternative minimum tax.......... 846,652 (231,199) --
Profit sharing................... (51,748) -- --
Deferred costs................... -- (540,160) (339,112)
Self-insurance and various
other reserves.............. (1,014,211) 251,285 (800,053)
Restructuring costs.............. -- 39,906 16,428
Amortization of unearned
compensation................ (9,452) (92,562) (101,314)
Other............................ -- (3,566) 3,423
--------------- -------------- --------------
Total............................ $ 1,274,583 $1,254,727 $ 113,699
=============== ============== ==============
F-13
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 28, 1996;
JANUARY 29, 1995; AND JANUARY 30, 1994
3. 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 28, 1996 and January 29, 1995 are presented below:
January 28, January 29,
1996 1995
---------------- --------------
Deferred Tax Assets:
Current:
Accounts receivable, principally due to allowance for
doubtful accounts........................................... $ 403,553 $ 337,397
Inventory, principally due to obsolescence reserve............ 147,136 142,039
Life and health, principally due to adoption of SFAS No. 106.. 152,753 99,850
Alternative minimum tax....................................... -- 732,326
Stock options, principally due to compensation element........ 259,978 285,671
Workers' compensation......................................... 743,792 159,233
Reserves, principally due to accrual for financial
reporting purposes.......................................... 459,940 198,157
-------------- --------------
Gross current deferred tax assets............................. 2,167,152 1,954,673
Noncurrent:
Life and health, principally due to adoption of SFAS No. 106.. 1,240,375 1,199,335
---------------- --------------
Gross deferred tax assets..................................... 3,407,527 3,154,008
---------------- --------------
Deferred Tax Liabilities:
Current:
Portrait cost, principally due to expenses not accrued
for financial reporting purposes............................ -- (2,380)
Noncurrent:
Plant and equipment, principally due to differences in
depreciation................................................ (5,802,945) (4,282,397)
---------------- --------------
Gross deferred tax liabilities................................ (5,802,945) (4,284,777)
---------------- --------------
Net Deferred Tax Liabilities....................................... $ (2,395,418) $ (1,130,769)
================ ==============
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. 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 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 28, 1996.
F-14
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 28, 1996;
JANUARY 29, 1995; AND JANUARY 30, 1994
4. Other Accrued Liabilities:
January 28, January 29,
1996 1995
---------------- ---------------
Costs accrued to complete church
directories................................... $ 948,671 $ 1,081,271
Accrued and withheld sales and payroll taxes...... 402,253 332,432
Accrued expenses.................................. 1,163,715 893,897
Other............................................. 943,334 577,531
---------------- ---------------
Total............................................. $3,457,973 $2,885,131
================ ===============
5. Employee Benefits:
The Company has a profit sharing plan for all employees who meet
certain eligibility requirements with annual contributions by the
Company as directed by the Board of Directors. For fiscal 1995, the
contribution was equal to 10% of consolidated income before income
taxes and profit sharing less expenses associated with the plan.
Company contributions, net of forfeitures, are as follows:
For the Fiscal Years Ended
-------------------------------------------------------
January 28, January 29, January 30,
1996 1995 1994
---------------- --------------- ----------------
Contributions.................... $1,429,000 $904,000 $557,000
Forfeitures...................... (172,000) (253,000) (195,000)
---------------- --------------- ----------------
Net Contribution................. $1,257,000 $651,000 $362,000
================ =============== ================
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 7% at January 28, 1996; January
29, 1995; and January 30, 1994. There were no assumptions for trends
since the Company's obligation was limited to the dollar amounts
previously stated.
F-15
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 28, 1996;
JANUARY 29, 1995; AND JANUARY 30, 1994
5. Employee Benefits (continued):
The Company's net periodic cost of this program, not included in the
accumulated obligation, including service cost and interest related
cost for the most recent three years is:
For the Fiscal Years Ended
-----------------------------------------------------------
January 28, January 29, January 30,
1996 1995 1994
--------------- ------------- -------------
Service Cost............................ $ 58,000 $ 83,000 $ 83,000
Interest Related Cost................... 192,000 192,000 192,000
--------------- ------------- -------------
Net Periodic Cost....................... $250,000 $275,000 $275,000
=============== ============= =============
On January 28, 1996, the accrued cost was $3.4 million, of which
$250,000 was classified as current liabilities.
6. 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 $249,444;
$254,494; and $412,056 for the fiscal years ended January 28, 1996;
January 29, 1995; and January 30, 1994, 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.
7. Stock Options:
The Company's 1990 Non-Qualified Stock Option Plan (the "1990 Plan")
provides for the grant of up to 1,425,000 non-qualified stock options
to key employees and non-employee directors. The plan is administered
by the Stock Option Plan Administration Committee, which is appointed
by the Board of Directors, subject to the terms of the 1990 Plan.
Subject to certain provisions, no option granted will be exercisable at
any time during the first year following the date of its grant.
Following the end of the first year, each option will become
exercisable to the extent of 20%, and thereafter, at the end of each of
the succeeding four years on a cumulative basis as to an additional 20%
of the shares of common stock covered thereby. As of January 28, 1996;
January 29, 1995; and January 30, 1994, options for 17,850; 57,150; and
133,550 shares, respectively, were available for future grant, and
694,550; 514,950; and 319,950 options,
F-16
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 28, 1996;
JANUARY 29, 1995; AND JANUARY 30, 1994
7. Stock Options (continued):
respectively, were exercisable. As of January 28, 1996, 403,350 of
the exercisable options were in-the-money.
The Company's 1992 Non-Qualified Stock Option Plan (the "1992 Plan")
provides for the grant of up to 1,725,000 non-qualified stock options
to key employees and non-employee directors of the Company. Subject to
certain provisions set forth in the 1992 Plan, no options granted
pursuant to the 1992 Plan will be exercisable at any time during the
first six months following the date of grant. Thereafter, each option
will become exercisable on the date determined by the Stock Option Plan
Administration Committee at the time of grant. No options may be
granted under the 1992 Plan after February 27, 2002. As of January 28,
1996; January 29, 1995; and January 30, 1994, options for 425,800;
256,200; and 221,000 shares were exercisable. As of January 28, 1996;
January 29, 1995; and January 30, 1994, options for 793,700; 844,500;
and 881,500 shares, respectively, were available for future grant under
the 1992 Plan. As of January 28, 1996, no exercisable options were
in-the-money.
When options are exercised, authorized shares are issued. The 1990 and
1992 Plans are deemed to be compensatory plans (compensation for
services) to the extent the difference in the market price of the stock
on the date of grant exceeds the exercise price of the option, and such
difference is recorded as unearned compensation and charged to
shareholders' equity. The unearned compensation is subsequently
amortized against income over the five-year vesting period.
The following table sets forth information regarding the 1990 Plan and
1992 Plan with respect to the exercise, cancellation, expiration, and
grant of options during the previous three fiscal years:
Number of Option
Shares Price
----------------- -------------------
Options outstanding January 31, 1993........... 1,379,350 $ 1.67--$20.25
Exercised.................................. (121,700) $ 1.67--$16.33
Canceled................................... (782,900) $ 1.67--$16.33
Granted.................................... 1,313,000 $ 9.50--$17.00
-----------------
Options outstanding January 30, 1994........... 1,787,750 $ 1.67--$20.25
Exercised.................................. (22,100) $ 1.67--$ 4.13
Canceled................................... (101,600) $ 1.67--$20.25
Granted.................................... 216,500 $ 9.50--$10.25
-----------------
Options outstanding January 29, 1995........... 1,880,550 $ 1.67--$17.00
Exercised.................................. (66,200) $ 1.67--$10.00
Canceled................................... (109,700) $ 1.67--$16.33
Granted.................................... 199,800 $ 9.25--$12.88
-----------------
Options outstanding January 28, 1996........... 1,904,450 $ 1.67--$17.00
=================
F-17
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 28, 1996;
JANUARY 29, 1995; AND JANUARY 30, 1994
8. Common Stock:
On September 6, 1990, the Company's Board of Directors authorized the
purchase by the Company of up to 450,000 shares of its outstanding
common stock from time to time in the open market or in privately
negotiated transactions. On March 8, 1995 and March 20, 1996, the
Company's Board of Directors increased the number of shares authorized
for repurchase by 754,490 and 744,300, respectively. Prior to January
29, 1995, the Company had purchased 204,490 shares pursuant to this
program. In fiscal 1995, the Company purchased, in various
transactions, 744,300 shares. As of March 21, 1996, the share
repurchase authorization, net of repurchased shares, was 1,000,000
shares.
9. Discontinued Operations:
During the third quarter of fiscal 1993, the Company discontinued its
Department Store Division, consisting of 67 family portrait studios and
13 fashion photography studios operating in five department store
chains. As of January 30, 1994, the Company had accrued for the costs
associated with discontinuing this division, which included severance
expenses, insurance costs, reserves for refunds, operating losses
during the shutdown period, and other costs associated with the
closings. Except for the camera equipment, property and leasehold
improvements have been written off as of January 30, 1994. As of
January 30, 1994, seven portrait studios were still in operation. These
studios were closed in March of 1994. During the second quarter of
fiscal 1994, the Company adjusted downward, by $0.4 million
after-taxes, the reserve for discontinued operations.
The components of the discontinued operations are as follows:
For the Fiscal Years Ended
----------------------------------------------------------
January 28, January 29, January 30,
1996 1995 1994
--------------- ------------- ---------------
Loss from operations of Department
Store Division (net of income tax
benefit of $201,303).................... $ -- $ -- $ (307,038)
Income (loss) on disposal of Department
Store Division (net of income taxes
[benefits] of $280,189 and [$1,272,212]) -- 412,406 (1,892,788)
--------------- ------------- ---------------
Total Discontinued Operations........... $ -- $412,406 $(2,199,826)
=============== ============= ===============
F-18
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 28, 1996;
JANUARY 29, 1995; AND JANUARY 30, 1994
10. Unaudited Quarterly Financial Data:
For the Fiscal Year Ended January 28, 1996
----------------------------------------------------------------------
January 28, October 29, July 30, April 30,
1996 1995 1995 1995
-------------- --------------- -------------- ---------------
Sales......................... $ 46,585,446 $ 36,890,845 $ 28,629,613 $ 32,608,631
Gross Profit*................. $ 14,780,167 $ 8,707,306 $ 5,780,190 $ 7,836,108
Income from Continuing
Operations.................. $ 4,890,197 $ 1,677,469 $ 198,502 $ 851,001
Net Income.................... $ 4,890,197 $ 1,677,469 $ 198,502 $ 851,001
Primary and Fully Diluted
Earnings Per Common Share:
Income from Continuing
Operations.................. $ 0.62 $ 0.21 $ 0.02 $ 0.10
Net Income.................... $ 0.62 $ 0.21 $ 0.02 $ 0.10
For the Fiscal Year Ended January 29, 1995
----------------------------------------------------------------------
January 29, October 30, July 31, May 1,
1995 1994 1994 1994
-------------- --------------- -------------- ---------------
Sales......................... $ 45,143,637 $ 38,695,847 $ 31,104,809 $ 29,936,444
Gross Profit*................. $ 13,307,437 $ 7,964,182 $ 4,340,315 $ 5,177,059
Income (loss) from Continuing
Operations.................. $ 3,793,745 $ 1,094,603 $ (579,538) $ 63,651
Net Income (Loss)............. $ 3,793,745 $ 1,094,603 $ (167,132) $ 63,651
Primary and Fully Diluted
Earnings Per Common Share:
Income (loss) from Continuing
Operations.................. $ 0.44 $ 0.13 $ (0.07) $ 0.01
Net Income (Loss)............. $ 0.44 $ 0.13 $ (0.02) $ 0.01
*Sales less advertising and promotional costs, cost of photographic
sales, and store commissions and selling costs.
F-19
PCA INTERNATIONAL, INC., AND SUBSIDIARIES
Schedule II. Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
- ----------------------------------------------- ---------------- -------------- -------------- -------------
Balance at Charged to Balance at
Beginning of Costs and End of
CLASSIFICATION Period Expenses Write-offs Period
- ----------------------------------------------- ---------------- -------------- -------------- -------------
FISCAL YEAR ENDED JANUARY 28, 1996:
Allowance for doubtful accounts........... $845,843 $193,715 $ 28,208 $1,011,350
================ ============== ============== =============
FISCAL YEAR ENDED JANUARY 29, 1995:
Allowance for doubtful accounts........... $658,349 $82,427 $(105,067) $ 845,843
================ ============== ============== =============
FISCAL YEAR ENDED JANUARY 30, 1994:
Allowance for doubtful accounts........... $128,736 $665,215 $ 135,602 $ 658,349
================ ============== ============== =============
S-1