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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 FEBRUARY 2, 1997--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
(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)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 31, 1997, there were 7,631,829 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 $127,833,135.
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 1996.
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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, Mexico, and Argentina. 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.
The Company's fiscal year ends on the Sunday nearest the end of
January. The fiscal year ended February 2, 1997 was a 53-week year. The fiscal
years ended January 28, 1996 and January 29, 1995 were 52-week years. The
Company's 1997 fiscal year that will end February 1, 1998, will be 52 weeks.
CAPITAL EXPENDITURES. Capital expenditures in fiscal 1996 were $13.4
million, primarily for the addition of portrait studios in 90 Wal-Mart stores in
the U.S. and Canada, the addition of 100 new PETsMART portrait studios, the
addition of 38 new Kmart portrait studios, the relocation and expansion of
portrait studios in 66 Supercenter Kmarts, and for upgrading equipment in the
Matthews, North Carolina, processing facility. During fiscal year 1995, the
Company spent $6.3 million, primarily for the net addition of 91 Kmart studios
and upgrading certain processing equipment in the laboratory in its Matthews'
facility.
ACQUISITION OF WAL-MART PORTRAITURE BUSINESS. As part of its strategy
to diversify its retail partnerships and expand its distribution channels, the
Company made two acquisitions of Wal-Mart portraiture businesses. These
acquisitions significantly expanded the Company's retail studio operations in
Canada, the United States, and Mexico. 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. for $1.2 million.
The Company funded the purchase from cash on hand and operates these studios
under a long-term license agreement with Wal-Mart's Canadian subsidiary. The
Company operated portrait studios in 65 Canadian Wal-Mart stores on February 2,
1997.
On December 17, 1996, the Company, through its wholly owned subsidiary
ASI Acquisition Corp. entered into a definitive agreement to acquire all the
outstanding shares of American Studios, Inc. for $2.50 cash per share. On
January 23, 1997, the Company completed the tender offer for American Studios
shares with approximately 95% of the shares tendered. The Company funded the
acquisition of approximately 95% of the outstanding shares of American Studios,
amounting to $50.8 million, with a $75.8 million Tender Loan Facility agreement
with NationsBank of North Carolina, N.A. After completing the tender offer and
merger of American Studios into a subsidiary of the Company, the Company
refinanced the Tender Loan Facility on February 28, 1997, with a $65 million
5-year term loan and a $25 million revolving line of credit to pay for the
acquisition and provide for the Company's working capital and future expansion
needs. NationsBank of North Carolina, N.A. acted as agent for the loan
syndication. American Studios provided portrait services in over 2,300 Wal-Mart
stores in the United States and Mexico. Approximately 832 Wal-Mart stores in the
United States and 18 in Mexico serviced by American Studios had permanent
studios on February 2, 1997, and the remainder are serviced by traveling
promotions.
STUDIO CLOSINGS. The Company announced on February 3, 1997, the closing
of approximately 415 underperforming permanent portrait studios located
throughout the United States. This will be completed by May 1997. The Company
recorded a $6.0 million pretax ($3.6 million after-tax) fourth quarter charge
relating to the write-off of the unamortized studio leasehold improvements and
accruals for the expected expenses associated with closing these studios. In
April 1996, the Company ceased its Canadian and Mexican Kmart portrait
operations, closing 111 permanent studios.
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.
U.S. PRESCHOOL PORTRAIT OPERATIONS
The Company operates portrait studios, primarily servicing the
children's preschool portrait market, in Kmart and Wal-Mart stores in the United
States. As described more fully in the Management's Discussion and Analysis,
PCA's fiscal 1996 operating results do not reflect the operating results of
American Studios, while studio counts reflect the combined companies. The U.S.
Kmart studio operations contributed 86.5% of the Company's revenue in fiscal
year 1996, 90.2% in 1995, and 90.7% in 1994. At the end of fiscal year 1996, the
Company operated 1,348 permanent U.S. Kmart studios, a net decrease of 49 from
1995. During 1996, 38 U.S. Kmart studios were opened and 87 U.S. Kmart studios
were closed. The Company operates permanent portrait studios in approximately
856 U.S. Wal-Mart stores, including approximately 832 studios acquired in the
January 27, 1997, acquisition of American Studios, and services more than 1,350
Wal-Mart stores in the United States four to seven times a year with traveling
promotions. In 1997, the Company expects to open approximately 100 new permanent
studios domestically and close approximately 415 underperforming permanent
studios as previously mentioned.
The Company operates and advertises its permanent studios under the
name of its retail partners, Kmart and Wal-Mart. The Company is able to place
its media advertising under the name of its retail partners at rates that are
lower than those the Company could independently obtain. 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 Company seeks to maintain an
advertising presence throughout the year in all geographic markets where the
Company operates permanent studios. The Company has initiated several marketing
programs to increase in-store awareness with customers.
The typical permanent studio occupies approximately 200 to 300 square
feet, consisting of a camera room, a portrait viewing and sales area, and a
reception area with point-of-sale computer. Generally, the permanent studio is
staffed by one or more employees who perform both the photography and sales
functions.
INTERNATIONAL
At the end of fiscal year 1996, the Company operated 65 permanent
studios in Wal-Mart stores in Canada, 18 in Mexico from the acquisition of
American Studios, and 1 in Argentina. Additionally, the Company operated 8
portrait studios in PETsMART stores in Canada. The Company's Canadian studios
provided 4.4%, 4.5%, and 4.3% of revenues for fiscal 1996, 1995, and 1994,
respectively. The Company operated 107 studios in Canada and 4 studios in Mexico
under license agreements with Kmart until March 1996, at which time the licenses
to operate such studios were terminated. The Company began operating studios in
Canadian Wal-Mart stores in
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April 1996. 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 open between 30 and
40 studios during fiscal 1997. Additionally, the Company plans to open
approximately 15 Wal-Mart studios in Mexico and South America in fiscal 1997.
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
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 1996, the Company operated approximately 31 portable camera units each
week for Institutional promotions. The Company does not expect the number of
portable units in service to change significantly during 1997.
PET PHOTOGRAPHY OPERATIONS
The Company operates a pilot program with permanent portrait studios in
114 PETsMART retail stores in the United States and Canada. These studios
operate five or seven days a week and are staffed by one or two employees.
During 1996, the Company opened portrait studios in 100 PETsMART stores. The
Company advertises using various methods including, in-store point-of-sale
merchandising, newspaper advertising, and direct mail. The portrait package
offered in PETsMART is generally smaller than the package offered in the
preschool portrait operations. The Company does not expect the number of
PETsMART portrait studios to change significantly during 1997.
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 annual earnings. The fourth
fiscal quarters of 1996, 1995, and 1994 accounted for approximately 33.2%,
32.2%, and 31.2%, respectively, of sales, and 32.8%, 64.2%, and 79.3%,
respectively, of earnings for those years. The 1996 fourth quarter earnings
would have accounted for 69.5% of annual earnings before giving effect to the
$3.6 million charge after tax for studio closure costs.
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 portrait providers measured by annual
sales and the largest operator of retail professional portrait studios in the
children's preschool portrait market through its association with Kmart and
Wal-Mart.
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
benefits of the Company's digital imaging technology available at over 2,000
permanent portrait studios, the convenience of these studios located in retail
discount stores, customer service, and the extensive industry experience of the
Company's management. The Company believes that the quality of its portraits and
customer service, which is
3
enhanced by the digital imaging system, is an important factor in obtaining
repeat business from customers. The major competitors in the market seek to
attract new customers through advertised low-priced portrait packages and the
benefits of the new digital technology, or low-priced session fees coupled with
custom portrait ordering of individual portrait sheets.
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 29 years. The license agreement, which was renewed on May 10, 1996,
expires May 9, 2001, and may be terminated by either party upon 180-days'
notice. The Company assumed American Studios' license agreement with U.S.
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, U.S. Wal-Mart stores, or the
closing of a significant number of U.S. Kmart or U.S. Wal-Mart 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. 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 the digital imaging system with the Company's computerized production system.
The Company believes that its integrated system is unique in the portrait
photography industry.
The Company operates two film processing facilities in the Charlotte,
North Carolina, area. The Company processes film from its permanent studios and
Institutional promotions at its finishing laboratory in Matthews, North
Carolina, and from permanent and traveling studios previously operated by
American Studios 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 $1,321,000; $1,033,000; and $748,000 on research and
development activities during the 1996, 1995, and 1994 fiscal years. Research
and development efforts have focused on developing and refining the digital
imaging system, integrating the system with the Company's computerized
processing facility, and developing a portrait studio for pet photography in
PETsMART retail stores.
4
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 printing equipment
and has an adequate supply of cameras, camera components, and production
equipment.
The Company has not found it necessary to carry significant amounts of
inventory to ensure 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 February 2, 1997, the Company had approximately 5,325 full-time and
775 part-time employees. The Company believes employee relations are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITIONS AND OFFICES
John Grosso(1) 50 President, Chief Executive Officer, and
Director (Since 1987)
Jan M. Rivenbark(2) 47 Executive Vice President and
Chief Operating Officer (Since 1992) Mr.
Rivenbark resigned from the Company on March
13, 1997.
Eric H. Jeltrup(3) 52 Executive Vice President and Chief Technical
Officer (Since 1991)
J. Robert Wren Jr. (4) 49 Executive Vice President and General Counsel
(Since 1997)
Bruce A. Fisher(5) 47 Senior Vice President and Chief Financial
Officer and Secretary (Since 1992)
R. Michael Spencer(6) 49 Senior Vice President and Treasurer
(Since 1992)
5
(1)Mr. Grosso has been President and Chief Executive Officer of the Company
since 1987.
(2)Mr. Rivenbark resigned from the Company on March 13, 1997. Mr. Rivenbark had
been Executive Vice President of the Company since August 1992 and was Chief
Operating Officer since August 25, 1994. Prior to joining the Company, he was
President and Chief Operating Officer of JP Foodservice, Inc.
(3)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.
(4)Mr. Wren joined the Company in January 1997 as Executive Vice President and
General Counsel. Prior to that, Mr. Wren served as CEO of American Studios,
Inc. from July 1995 until its acquisition January 1997. He served in various
other positions with American Studios, Inc. including director and general
counsel. From July 1986 to December 1992, Mr. Wren was a partner in the law
firm of Garland & Wren, P.A., Gastonia, NC.
(5)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.
(6)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 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 American Studios' 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 of North Carolina, N.A.,
as agent for the Company's $90 million loan facility. The Company operates 1,348
permanent studios with Kmart and 940 permanent studios with Wal-Mart, all under
license agreements. The Company owns the equipment, furniture, and fixtures in
all 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.
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 February 2, 1997.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market 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:
FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 2, 1997 JANUARY 28, 1996
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HIGH LOW HIGH LOW
1ST QUARTER $14.13 $ 9.00 $11.00 $ 8.75
2ND QUARTER $17.75 $13.00 $14.25 $10.12
3RD QUARTER $19.00 $15.50 $14.25 $10.25
4TH QUARTER $18.25 $15.00 $12.00 $ 8.37
At March 31, 1997, the Company had approximately 977 shareholders of
record and the closing bid price for a share of common stock was $16.12.
The Company paid cash dividends of $0.07 per share in the first three
quarters of fiscal 1996 and in each quarter of fiscal 1995. On December 4, 1996,
the Company's Board of Directors voted to suspend payment of its quarterly
dividend in anticipation of the financial requirements for the acquisition of
American Studios, Inc.
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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,
------------------------------------------------------------------------
1997* 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
SUMMARY OF OPERATIONS:
SALES........................................ $ 156,099 $ 144,715 $ 144,881 $ 149,150 $ 142,865
GENERAL AND ADMINISTRATIVE EXPENSE........... $ 31,676 (1) $ 23,782 $ 22,936 $ 20,594 $ 16,374
TOTAL COSTS AND EXPENSES..................... $ 150,783 (1) $ 131,392 $ 137,028 $ 140,947 $ 130,182
INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES..................... $ 2,994 (2) $ 7,617 $ 4,372 $ 4,912 $ 7,778
NET INCOME $ 2,994 (2) $ 7,617 $ 4,785 $ 2,712 $ 7,410
PRIMARY AND FULLY DILUTED EARNINGS PER COMMON
SHARE:
FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES................. $ 0.37 (2) $ 0.94 $ 0.51 $ 0.56 $ 0.94
NET INCOME............................... $ 0.37 (2) $ 0.94 $ 0.56 $ 0.31 $ 0.89
WEIGHTED AVERAGE NUMBER OF FULLY DILUTED
COMMON SHARES......................... 8,154 8,110 8,582 8,823 8,306
CASH DIVIDENDS PER SHARE................. $ 0.21 $ 0.28 $ 0.28 $ 0.28 $ 0.28
RETURN ON AVERAGE EQUITY................. 9.2% 23.7% 15.1% 9.3% 36.3%
BALANCE SHEET DATA:
WORKING CAPITAL............................... $ (22,472) (3) $ (3,878) $ (6,697) $ (4,321) $ 7,423
CURRENT RATIO................................. 0.55 0.82 0.67 0.81 1.35
QUICK RATIO................................... 0.35 0.70 0.52 0.59 1.10
TOTAL ASSETS.................................. $ 146,661 $ 59,884 $ 59,557 $ 56,751 $ 51,975
LONG-TERM DEBT (NONCURRENT PORTION)........... $ 58,680 (3) $ -- $ -- $ -- $ --
RATIO OF LONG-TERM DEBT (NONCURRENT PORTION)
TO TOTAL CAPITALIZATION(4)................ 0.64 -- -- -- --
TOTAL SHAREHOLDERS' EQUITY PER SHARE(5)....... $ 4.13 $ 3.85 $ 3.85 $ 3.43 $ 3.41
OTHER FINANCIAL DATA:
DEPRECIATION EXPENSE.......................... $ 9,498 $ 8,490 $ 7,136 $ 5,159 $ 3,455
CAPITAL EXPENDITURES.......................... $ 13,424 $ 6,309 $ 14,698 $ 21,875 $ 12,233
*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 $0.44 PER SHARE. EXCLUDING THIS AMOUNT, NET INCOME WAS
$6.6 MILLION OR $0.81 PER SHARE.
(3)THE COMPANY REPLACED ITS EXISTING CREDIT FACILITY ON JANUARY 27, 1997 WITH A
TENDER LOAN FACILITY USED TO FINANCE THE TENDER OFFER FOR AMERICAN STUDIOS,
INC. AFTER COMPLETING THE TENDER OFFER AND MERGER OF AMERICAN STUDIOS, INC.
THE COMPANY REFINANCED THE TENDER LOAN FACILITY ON FEBRUARY 28, 1997 WITH A
$65 MILLION FIVE-YEAR TERM LOAN AND A $25 MILLION REVOLVING LINE OF CREDIT TO
PAY FOR THE ACQUISITION AND PROVIDE FOR WORKING CAPITAL NEEDS.
(4)TOTAL CAPITALIZATION IS LONG-TERM DEBT AND TOTAL SHAREHOLDERS' EQUITY.
(5)TOTAL SHAREHOLDERS' EQUITY PER SHARE HAS BEEN CALCULATED DIVIDING TOTAL
SHAREHOLDERS' EQUITY BY THE WEIGHTED AVERAGE NUMBER OF FULLY DILUTED SHARES.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides professional portrait photography services by
operating permanent studios in Kmart stores in the United States and Puerto Rico
and in Wal-Mart stores through permanent studios and traveling promotions in the
United States, Canada, Puerto Rico, Mexico, and South America. The Company
operates a pilot program for pet portrait photography in PETsMART stores in the
United States and Canada. PCA's Institutional Division provides portrait
services to church congregations and day care centers through traveling
promotions. The Company's Kmart studios accounted for approximately 87.2% of
sales in fiscal 1996. At the end of fiscal 1996, the Company operated permanent
studios in 1,348 U.S. Kmart stores, 856 U.S. Wal-Mart stores, 84 International
Wal-Mart stores, and 114 PETsMART stores. The Company also serves approximately
1,350 Wal-Mart stores with traveling promotions. PCA's fiscal 1996 operating
results do not include the operating results of American Studios, Inc. while
studio counts give effect to the combined companies.
In 1996, the Company diversified its retail partnerships and expanded
its distribution channels. In support of this strategy, the Company engaged in
the following activities:
o In April 1996, the Company acquired certain assets of two related Canadian
portrait businesses, Portrait Works, Inc. and Portrait Experience of
Canada, Ltd., Wal-Mart Canada's previous provider. PCA's Canadian
subsidiary then entered into a long-term license agreement with Wal-Mart's
Canadian subsidiary to operate permanent studios in Wal-Mart's Canadian
stores. PCA converted the 42 existing studios to full-service studios with
its digital imaging technology and opened 23 additional new Canadian
Wal-Mart studios during the year. The Company operated a total of 65
Canadian Wal-Mart portrait studios at year-end.
o In April 1996, the Company closed 107 Canadian Kmart studios and 4 Mexican
Kmart studios and discontinued Kmart operations in these markets.
o In August 1996, the Company entered into an agreement with Wal-Mart
Stores, Inc. to operate a total of 17 permanent portrait studios in Denver,
Salt Lake City, and Phoenix. The Company also began operating 7 Wal-Mart
studios in Puerto Rico.
o In November 1996, the Company began the process to acquire American
Studios by executing a letter of intent for PCA to acquire American Studios
at $2.50 cash per share. In December, the Companies executed a definitive
agreement for PCA to acquire American Studios. On January 27, 1997, the
Company successfully completed the cash tender offer for shares of American
Studios. On February 28, 1997, PCA completed the acquisition of American
Studios. This acquisition expanded the number of Wal-Mart stores PCA serves
to over 2,300, including 850 Wal-Mart stores previously served by American
Studios through permanent studio operations with the remainder served
through traveling promotions.
o The Company opened one Wal-Mart studio in Argentina in December 1996.
o PCA renovated and relocated 66 Super Kmart Center studios to store-front
locations, each with two camera rooms and expanded reception and children's
play area. Additionally, the Company opened 38 and closed 87 portrait
studios in Kmart.
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o PCA expanded its pilot program for pet portraiture with the opening of 100
PETsMART studios in the United States and Canada. The Company operated a
total of 114 studios at year-end.
o PCA expanded its Institutional promotions with the addition of day care
center portrait promotions.
Overall, PCA opened 252 permanent studios (including 66 upgraded Super
Kmart studios) while closing 198 studios in fiscal 1996, in addition to the 892
Wal-Mart studios acquired through the two acquisitions.
HISTORICAL BUSINESS REVIEW
In 1995 and 1994, PCA provided portrait services primarily through
permanent Kmart studios in the United States and Canada. Kmart studios accounted
for 95% of total sales both in 1995 and 1994. The Company opened 164 permanent
Kmart studios in 1995 and closed 73 studios, resulting in a net addition of 91
studios. At the end of fiscal 1995, the Company operated 1,508 permanent Kmart
studios in the U.S., Canada, and Mexico. The Company opened 136 permanent
studios in 1994 and operated 1,417 at the end of fiscal 1994. Prior to August
1994, the Company also operated traveling, or portable, studio promotions in
Kmart stores that did not have a permanent studio. Because 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.
In July 1994, the Company completed the conversion, begun in November
1992, of all Kmart studio locations to its digital imaging technology. The
digital imaging technology 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 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's system has reduced product costs primarily through the
elimination of waste from speculative portrait production.
Beginning with the fourth quarter of fiscal 1993 and continuing through
fiscal 1996, the portrait services industry has experienced extremely
competitive pricing and promotional conditions. The Company expects competitive
pricing conditions will be less aggressive than they have been in the past and
continues to place emphasis on the quality and value of its portrait products
and services, and the enhanced portrait experience made possible through its
digital imaging system.
Because of the retail nature of its services, 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 annual earnings. The fourth fiscal quarters of fiscal 1996, 1995,
and 1994 accounted for 33.2%, 32.2%, and 31.2%, respectively, of sales and
32.8%, 64.2%, and 79.3%, respectively, of earnings for such years. Earnings for
the fourth quarter of fiscal 1996 were impacted by a charge for studio closure
costs of $3.6 million after-tax, discussed below. Without this charge, earnings
in the fourth quarter of fiscal 1996 were approximately 69.5% of fiscal year
earnings. The Company's operations can also be adversely affected by inclement
weather, especially during the important fiscal fourth quarter.
10
CONTINUING OPERATIONS
1996 PCA FISCAL YEAR COMPARED WITH 1995 PCA FISCAL YEAR. Sales for
fiscal year 1996 increased 7.9% to $156.1 million, compared to $144.7 million in
fiscal year 1995. On a consolidated basis, the number of customers photographed
increased 8.9% to 2.9 million and the average customer purchase was $53.20 per
customer. Fiscal 1996 was a 53-week year versus 52 weeks in fiscal 1995. On a
comparable 52-week basis, sales increased 6.5%.
In 1996, PCA diversified its retail partnerships and expanded its
distribution channels. Sales by distribution channel reflect these new sources.
In 1996, sales through its U.S. Kmart portrait studios were $135.1 million and
accounted for 86.5% of total sales; Wal-Mart portrait studio sales, both
international and domestic, were $6.6 million, or 4.2% of sales; PCA's
Institutional Division and PETsMART pilot program provided $13.3 million, or
8.5% of sales. In 1995, U.S. Kmart studio sales were $130.6 million, or 90.2% of
sales; and PCA's PETsMART pilot program and Institutional sales were $7.5
million, or 5.2% of sales.
Total operating costs and expenses increased 10.2%, before the fourth
quarter charge of $6.0 million to close 415 underperforming portrait studios,
and accounted for 92.8% of sales compared to 90.8% of sales in 1995. Advertising
and promotional costs as a percentage of sales were 10.4%, versus 10.2% in 1995.
The increase in advertising and promotional costs is attributable to promotional
costs to introduce the Company's digital imaging system in the new Canadian and
U.S. studios. Principally due to the increase in customers photographed, cost of
photographic sales increased $4.9 million, or 10.3%, to 33.7% of sales in 1996,
compared to 32.9% of sales in 1995. Store commission and selling costs increased
to 32.3% of sales, compared to 31.2% the prior year. Labor costs, associated
with the PETsMART pilot program and staffing requirements to operate more
seven-day studios in discount store permanent studios, caused the increase in
direct selling cost.
General and administrative expense levels before the fourth quarter
charge were 16.4% of sales for 1996, similar to prior year's level. The Company
experienced a slight reduction in corporate administrative expenses as benefit
costs were lower, offset by an increase in field administrative expenses to
support our Wal-Mart and PETsMART expansion, and the write-off of leasehold
improvements associated with the relocation and studio expansion in 66 Super
Kmart Centers. The Company recorded a pretax charge of $6.0 million for the
closing of 415 portrait studios which were not meeting the Company's
profitability objectives. This charge includes the write-off of leasehold
improvements and other fixed assets in these stores, separation pay, cost to
restore the studios to the same condition they were in prior to the Company
installing the portrait studio, and customer refunds. The Company will
operate these portrait studios until June 1997.
Income from operations, before the charge to close 415 portrait
studios, declined 15.1% to 7.2% of sales from 9.2% of sales in 1995, a direct
result of the investment spending initiatives enumerated above to pursue the
Company's diversification objectives in Wal-Mart and PETsMART. The costs
associated with the PETsMART expansion, the Wal-Mart expansion, and overall
costs to support the diversification activities were the principal reasons for
the operating margin decline.
Pretax income declined 60.1% to $5.1 million, compared to $12.9 million
in 1995. This pretax figure includes the $6.0 million charge for studio closure
costs noted above. Interest expense, on a net basis, declined 60.9% due to
repayment of borrowings to fund the Company's repurchase of over $7.7 million of
stock in 1995. Income tax provision for 1996 was $2.1 million as compared to
$5.2 million in 1995. The tax provision as a percentage of income was 41.7%
versus 40.8% in 1995. The increase in effective tax rate was generally
attributable to
11
losses in the PETsMART operation which did not generate state tax benefits. Net
income in 1996 was $3.0 million, or $0.37 per share, including the previously
mentioned charge, which reduced per share earnings by $0.44, compared to $7.6
million, or $0.94 per share in 1995. Excluding the charge, net income was $6.6
million or $0.81 per share.
1995 PCA FISCAL YEAR COMPARED WITH 1994 PCA 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 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 Institutional division 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.
PROSPECTIVE INFORMATION
With the acquisition of American Studios, Inc., PCA operates the
largest number of professional retail portrait studios in North America. Pro
forma combined 1996 sales were approximately $264 million. On a combined basis,
U.S. Kmart studios were approximately 52% of pro forma combined sales,
international and domestic Wal-Mart sales were approximately 43%, and sales from
PCA's Institutional Division and the PETsMART pilot program were 5% of sales.
During 1997, the Company expects to serve over 5 million customers through more
than 2,000 permanent retail portrait studios and also traveling promotions. The
Company is geographically positioned to serve a dynamic and diverse, domestic
and international marketplace with studio locations throughout the United
States, Canada, Mexico, Puerto Rico, and South America.
As a result of the merger, the Company will execute five strategic
initiatives with the goal to improve its operating performance and marketing
presence in 1997:
12
o Integrate and consolidate corporate administrative functions and field
operations of the merged companies.
o Leverage PCA's digital imaging system over an expanded Wal-Mart customer
base. To accomplish this, the Company plans to convert 600 Wal-Mart
non-digital permanent studios, previously operated by American Studios, to
PCA's digital imaging studio system, upgrade and adapt 250 American
Studios' digital studios to PCA's software and systems approach, and train
approximately 1,000 studio associates.
o Improve operating performance at the studio level with the closing of 415
underperforming studios which were not meeting the Company's profitability
objectives, and use certain studio assets from those studios in opening new
portrait studios.
o Maintain a diversified distribution channel by opening approximately 150
new Wal-Mart portrait studios, both domestically and internationally.
Future domestic growth in the Kmart channel will come from opening studios
in new Super Kmart Center stores. The Company will continue to evaluate its
pilot program with PETsMART, and does not plan significant studio expansion
in 1997.
o Support studio expansion plans with several marketing initiatives to
improve in-store awareness and to build longer-term customer relationships.
Due to the impact and cost of this integration and conversion, the
related employee training expenses, and the seasonal nature of our business, the
Company expects operating losses in the first half of 1997. The Company
anticipates profit margins, cash flows, and earnings will improve in the second
half as it realizes the benefits from the digitally enhanced Wal-Mart studios
(increased average customer purchase, greater customer traffic, and lower
product costs) and its marketing initiatives, along with higher sales volumes
historically experienced in the second half of the year.
Capital expenditures for 1997, primarily to finance these strategic
initiatives, are estimated to be approximately $12.0 million, and will be
financed from operations augmented by borrowing under the Company's credit
facility.
Note regarding Private Securities Litigation Reform Act: Statements
made by the Company which are not historical facts are forward looking
statements that involve risks and uncertainties. Actual results could differ
materially from those expressed or implied in forward looking statements. All
such forward looking statements are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. Important factors that could
cause financial performance to differ materially from past results and from
those expressed or implied in this document include, without limitation, the
risks of acquisition of businesses (including limited knowledge of the
businesses acquired and misrepresentations by sellers), new store openings,
availability of financing, competition, management's ability to manage growth,
loss of customers, and a variety of other factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company replaced its existing credit facility on January 27, 1997,
with a credit facility (the "Tender Loan Facility") used to finance the tender
offer for American Studios, Inc. After completing the tender offer and merger of
American Studios into a subsidiary of the Company, the Company refinanced the
Tender Loan Facility on February 28, 1997, with a $65 million 5-year term loan
and a $25 million revolving line of credit with NationsBank acting as agent for
the loan syndication. On February 2, 1997, the Company had $1.5 million in cash
and
13
cash equivalents and $58.7 million debt outstanding from its $75.8 million
Tender Loan Facility used to finance the purchase of 95% of American Studios'
common stock. The Company's principal sources of working capital are cash from
operations and its $25 million secured revolving line of credit from a bank. The
credit facility bears interest, at the Company's choice, at either (a) Prime
Rate plus 150 basis points, adjusted daily; or (b) the 30-, 60-, 90-, or 180-day
London Interbank Offered Rate ("LIBOR") plus 250 basis points, adjusted monthly,
bimonthly, quarterly, or semiannually, respectively.
During fiscal 1996, the Company had property additions of $13.4
million, principally for materials and equipment for the addition of new
permanent studios in Wal-Mart and PETsMART, the expansion and relocation of
portrait studios in Super Kmart Centers, and upgrading certain processing
equipment in our Matthews, North Carolina, laboratory. The purchase of American
Studios and certain assets of the two Canadian companies consumed over $60
million and was financed by the Tender Loan Facility and cash on hand. The
Company was able to fund its capital expenditures from operations, cash on hand,
and its revolving line of credit.
Shareholders' equity increased by $2.4 million to $33.6 million. Net
income was $3.0 million, after the $3.6 million after-tax charge for studio
closings, and dividends paid totaled $1.6 million. Exercised stock options and
the issuance of warrants to purchase common stock added $5.0 million to
shareholders' equity. The Company repurchased 309,242 shares of its common stock
in fiscal 1996 reducing shareholders' equity by $4.2 million.
The Company anticipates capital expenditures of $12.0 million for
fiscal 1997 to convert 600 Wal-Mart studios to the Company's digital imaging
system, to add approximately 150 studios servicing the preschool children's
market, and for general capital needs. The Company believes, based on its short-
and long-term business plans, that it has the ability to fund adequately from
operations, augmented by borrowings under its line of credit for seasonal credit
needs, its operating and capital expenditure needs for fiscal 1997, as well as
approximately $3.0 million for the acquisition of the remaining 5% of American
Studios' shares, and $6.0 million for the closing of approximately 415 portrait
studios. The Company generated cash flows from operations of $17.7 million,
$20.3 million, and $10.9 million in fiscal 1996, 1995, and 1994, respectively.
At March 31, 1997, there was $20.5 million available under the Company's
revolving credit facility. There are no scheduled repayments to the Company's
term note in fiscal 1997. 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-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE MATTERS
None.
14
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 February 2, 1997. 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 19.
3. Exhibits shown by index beginning on page 16.
(b) Reports on Form 8-K.
None
15
PCA INTERNATIONAL, INC.
INDEX TO EXHIBITS - [ITEM 14(A)(3)]
INDEX NO. DESCRIPTION PAGE NO.
3(a) Restated Charter, as amended to date.
3(b) Bylaws of PCA International, Inc. as amended to date,
incorporated by reference to Exhibit 3.4 to the Company's
Quarterly Report on Form 10-Q, Commission File No. 0-8550, for
the quarter ended May 3, 1992.
4 Instruments defining the rights of security holders,
incorporated by reference to Exhibit 4 to the Company's
Quarterly Report on Form 10-Q, 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(c) 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 January 27, 1997, between PCA
International, Inc., PCA Photo Corporation of Canada, Inc., PCA
Specialty Retail Photo Corporation, Inc., Photo Corporation of
America, PCA National, Inc., ASI Acquisition Corp., and
NationsBank, N.A., as Agent, incorporated by reference to the
Company's Schedule 14D-1 and Schedule 13-D, Amendment No. 3,
dated January 27, 1997.
10(g) Loan Agreement dated February 28, 1997, between PCA
International, Inc., PCA Photo Corporation of Canada, Inc., PCA
Specialty Retail Photo Corporation, Inc., Photo Corporation of
America, PCA National, Inc., ASI Acquisition Corp., and
NationsBank, N.A., as Agent.
10(h) Sales Contract dated September 1, 1993, between Agfa Division
of Miles, Inc., and American Studios, Inc., incorporated by
reference to Exhibit 10.93 to American Studios, Inc. Form 10-K
for fiscal 1993, Commission File No. 0-20510.
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.
16
10(l)* Employment and Non-Compete Agreement dated December 17, 1996,
between Randy J. Bates and PCA International, Inc.
10(m)* Employment and Non-Compete Agreement dated December 17, 1996,
between Robert Kent Smith and PCA International, Inc.
10(n)* Employment and Non-Compete Agreement dated December 17, 1996,
between J. Robert Wren, Jr., and PCA International, Inc.
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.
*Management contract or compensatory plan or arrangement
required to be filed as an exhibit.
17
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 18, 1997 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 18, 1997
- - ----------------------------
Joseph H. Reich
/s/John Grosso President, Chief Executive April 18, 1997
- - ---------------------------- Officer and Director
John Grosso
/s/Eric H. Jeltrup Executive Vice President April 18, 1997
- - ---------------------------- Chief Technical Officer
Eric H. Jeltrup
/s/J. Robert Wren Jr. Executive Vice President April 18, 1997
- - ---------------------------- General Counsel
J. Robert Wren Jr.
18
SIGNATURE TITLE DATE
/s/Bruce A. Fisher Senior Vice President April 18, 1997
- - ---------------------------- Chief Financial Officer
Bruce A. Fisher Secretary
/s/R. Michael Spencer Senior Vice President April 18, 1997
- - ---------------------------- Treasurer
R. Michael Spencer
/s/R. Stuart Dickson Director April 18, 1997
- - ----------------------------
R. Stuart Dickson
/s/Peter B. Foreman Director April 18, 1997
- - ----------------------------
Peter B. Foreman
/s/George Friedman Director April 18, 1997
- - ----------------------------
George Friedman
/s/Donald P. Greenberg Director April 18, 1997
- - ----------------------------
Donald P. Greenberg
/s/Charlotte H. Mason Director April 18, 1997
- - ----------------------------
Charlotte H. Mason
/s/Albert F. Sloan Director April 18, 1997
- - ----------------------------
Albert F. Sloan
/s/Stanley Tulchin Director April 18, 1997
- - ----------------------------
Stanley Tulchin
19
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE NO.
FINANCIAL STATEMENTS:
INDEPENDENT AUDITORS' REPORT............................................................ F-2
CONSOLIDATED BALANCE SHEETS AT FEBRUARY 2, 1997 AND JANUARY 28, 1996.................... F-3-F-4
CONSOLIDATED STATEMENTS OF INCOME FOR FISCAL YEARS ENDED
FEBRUARY 2, 1997; JANUARY 28, 1996; AND JANUARY 29, 1995................................ F-5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR FISCAL
YEARS ENDED FEBRUARY 2, 1997; JANUARY 28, 1996; AND JANUARY 29, 1995.................... F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR FISCAL YEARS ENDED
FEBRUARY 2, 1997; JANUARY 28, 1996; AND JANUARY 29, 1995............................... F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................................. F-8-F-21
SCHEDULES:
II VALUATION AND QUALIFYING ACCOUNTS FOR FISCAL YEARS ENDED
FEBRUARY 2, 1997; JANUARY 28, 1996; AND JANUARY 29, 1995................................ 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 February 2, 1997 and January 28, 1996 and for each of the
years in the three-year period ended February 2, 1997, 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 February 2, 1997 and January 28, 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended February 2, 1997, 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 19, 1997
F-2
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
FEBRUARY 2, JANUARY 28,
1997 1996
------------------- ------------------
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS.............................................. $ 1,536,234 $ 3,914,513
ACCOUNTS RECEIVABLE (NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $867,961 AND
$1,011,350):
DUE FROM LICENSOR STORES AND CUSTOMERS............................. 6,702,335 7,342,232
OTHER, INCLUDING EMPLOYEE ADVANCES................................. 602,349 677,334
INVENTORIES............................................................ 9,814,682 2,488,964
DEFERRED INCOME TAXES.................................................. 6,853,985 2,167,152
PREPAID EXPENSES....................................................... 1,490,918 513,685
------------------- ------------------
TOTAL CURRENT ASSETS............................................... 27,000,503 17,103,880
------------------- ------------------
PROPERTY:
LAND AND IMPROVEMENTS.................................................. 2,443,939 1,177,805
BUILDING AND IMPROVEMENTS.............................................. 12,883,962 7,730,952
PHOTOGRAPHIC AND SALES EQUIPMENT....................................... 61,902,588 44,183,975
PHOTOGRAPHIC FINISHING EQUIPMENT....................................... 18,660,080 12,501,537
FURNITURE AND EQUIPMENT................................................ 14,188,792 10,010,818
TRANSPORTATION EQUIPMENT............................................... 477,073 208,795
LEASEHOLD IMPROVEMENTS................................................. 17,935,712 11,508,810
CONSTRUCTION IN PROGRESS............................................... 1,120,788 946,478
------------------- ------------------
TOTAL.............................................................. 129,612,934 88,269,170
LESS: ACCUMULATED DEPRECIATION AND AMORTIZATION....................... 71,348,374 45,516,802
------------------- ------------------
PROPERTY, NET...................................................... 58,264,560 42,752,368
------------------- ------------------
INTANGIBLE ASSETS........................................................ 60,256,854 --
OTHER ASSETS............................................................. 1,139,305 28,228
------------------- ------------------
TOTAL ASSETS....................................................... $ 146,661,222 $ 59,884,476
=================== ==================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
FEBRUARY 2, JANUARY 28,
1997 1996
------------------- ------------------
CURRENT LIABILITIES:
ACCOUNTS PAYABLE-TRADE...................................................... $ 19,799,067 $ 9,178,213
ACCRUED INSURANCE........................................................... 6,705,199 2,247,693
ACCRUED INCOME TAXES........................................................ 1,643,816 2,317,974
ACCRUED COMPENSATION........................................................ 5,924,407 3,779,849
OTHER ACCRUED LIABILITIES................................................... 15,399,563 3,457,973
------------------- ------------------
TOTAL CURRENT LIABILITIES................................................ 49,472,052 20,981,702
------------------- ------------------
LONG-TERM DEBT................................................................ 58,679,770 --
------------------- ------------------
DEFERRED INCOME TAXES......................................................... -- 4,562,570
------------------- ------------------
OTHER LIABILITIES............................................................. 4,609,510 3,105,595
------------------- ------------------
MINORITY INTERESTS............................................................ 259,150 --
------------------- ------------------
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 - 7,607,129 AND 7,482,071 SHARES)............................. 1,521,426 1,496,415
ADDITIONAL PAID-IN CAPITAL.................................................. 5,838,131 5,045,578
RETAINED EARNINGS........................................................... 26,334,992 24,918,709
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS......................... (53,809) (226,093)
------------------- ------------------
TOTAL SHAREHOLDERS' EQUITY............................................... 33,640,740 31,234,609
------------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... $ 146,661,222 $ 59,884,476
=================== ==================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED
-------------------------------------------------------
FEBRUARY 2, January 28, January 29,
1997 1996 1995
--------------- ---------------- ----------------
SALES.................................................................. $ 156,099,050 $ 144,714,535 $ 144,880,737
--------------- ---------------- ----------------
COSTS AND EXPENSES:
ADVERTISING AND PROMOTIONAL COSTS.................................. 16,163,273 14,784,803 20,083,522
COSTS OF PHOTOGRAPHIC SALES........................................ 52,558,425 47,635,178 49,981,831
STORE COMMISSIONS AND SELLING COSTS................................ 50,384,753 45,190,783 44,026,391
GENERAL AND ADMINISTRATIVE EXPENSES................................ 31,676,471 23,781,509 22,936,035
--------------- ---------------- ----------------
TOTAL COSTS AND EXPENSES....................................... 150,782,922 131,392,273 137,027,779
--------------- ---------------- ----------------
INCOME FROM OPERATIONS BEFORE INTEREST AND INCOME TAXES................
5,316,128 13,322,262 7,852,958
INTEREST EXPENSE NET............................................... 179,221 458,923 406,147
--------------- ---------------- ----------------
INCOME FROM OPERATIONS BEFORE INCOME TAXES............................. 5,136,907 12,863,339 7,446,811
INCOME TAX PROVISION................................................... 2,143,053 5,246,170 3,074,350
--------------- ---------------- ----------------
INCOME FROM CONTINUING OPERATIONS...................................... 2,993,854 7,617,169 4,372,461
DISCONTINUED OPERATIONS................................................ -- -- 412,406
--------------- ---------------- ----------------
NET INCOME............................................................. $ 2,993,854 $ 7,617,169 $ 4,784,867
=============== ================ ================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
PRIMARY............................................................ 8,044,563 8,069,538 8,564,295
=============== ================ ================
FULLY DILUTED...................................................... 8,154,129 8,110,453 8,582,267
=============== ================ ================
PRIMARY AND FULLY DILUTED EARNINGS PER COMMON SHARE:
INCOME FROM CONTINUING OPERATIONS.................................. $ 0.37 $ 0.94 $ 0.51
INCOME ON DISPOSAL OF DISCONTINUED OPERATIONS...................... -- -- 0.05
--------------- ---------------- ----------------
=============== ================ ================
NET INCOME......................................................... $ 0.37 $ 0.94 $ 0.56
=============== ================ ================
CASH DIVIDENDS PER COMMON SHARE........................................ $ 0.21 $ 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 FEBRUARY 2, 1997; JANUARY 28, 1996; AND
JANUARY 29, 1995
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY
COMMON STOCK PAID-IN RETAINED TRANSLATION UNEARNED
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS COMPENSATION
---------- ----------- ------------- ------------ ------------- -------------
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) 0
NET INCOME................ 2,993,854
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
FOREIGN CURRENCY
TRANSLATION 172,284
ADJUSTMENT..............
---------- ----------- ------------- ------------ ------------- -------------
BALANCE, FEBRUARY 2, 1997: 7,607,129 $1,521,426 $5,838,131 $26,334,992 $(53,809) $ 0
---------- ----------- ------------- ------------ ------------- -------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
-----------------------------------------------------
FEBRUARY 2, January 28, January 29,
1997 1996 1995
-------------- ---------------- ----------------
OPERATING ACTIVITIES:
NET INCOME............................................................. $ 2,993,854 $ 7,617,169 $ 4,784,867
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED FROM OPERATING ACTIVITIES:
DEPRECIATION....................................................... 9,498,315 8,489,754 7,135,629
(DECREASE) INCREASE IN ALLOWANCE FOR DOUBTFUL ACCOUNTS............. (167,303) 165,140 189,479
PROVISION FOR DEFERRED INCOME TAXES................................ (1,421,999) 1,264,649 1,576,386
LOSS ON DISPOSAL OF PROPERTY....................................... 3,287,772 776,592 222,526
COMPENSATORY STOCK OPTION EXPENSE.................................. -- 23,665 231,758
(DECREASE) INCREASE IN OTHER LIABILITIES........................... (375,932) 177,572 105,915
INCREASE IN OTHER NONCURRENT ASSETS................................ (156) (15,659) (5,000)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
DECREASE(INCREASE) IN ACCOUNTS RECEIVABLE......................... 1,254,260 (530,433) (3,362,361)
(INCREASE) DECREASE IN INVENTORIES................................ (4,489,573) 755,065 1,654,774
DECREASE IN DEFERRED COSTS APPLICABLE TO UNSOLD PORTRAITS......... -- -- 1,410,953
(INCREASE) DECREASE IN PREPAID EXPENSES........................... (178,505) 122,987 (78,195)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE........................... 2,596,851 (2,246,715) (2,797,599)
INCREASE (DECREASE) IN ACCRUED EXPENSES........................... 4,679,050 3,686,168 (73,317)
-------------- ---------------- ----------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES............................ 17,676,634 20,285,954 10,995,815
-------------- ---------------- ----------------
INVESTING ACTIVITIES:
PURCHASES OF PROPERTY.................................................. (13,423,544) (6,309,168) (14,697,706)
PROCEEDS FROM SALES OF FIXED ASSETS.................................... 10,151 47,311 72,554
PURCHASE OF CANADIAN ASSETS............................................ (1,201,213) -- --
PURCHASE OF AMERICAN STUDIOS, INC...................................... (52,689,671) -- --
-------------- ---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES.................................. (67,304,277) (6,261,857) (14,625,152)
-------------- ---------------- ----------------
FINANCING ACTIVITIES:
INCREASE(DECREASE) IN BORROWINGS....................................... 48,334,816 (974,215) 974,215
EXERCISE OF STOCK OPTIONS.............................................. 4,459,189 428,773 92,174
ACQUISITION OF COMPANY STOCK........................................... (4,190,625) (7,713,952) --
CASH DIVIDENDS......................................................... (1,577,571) (2,142,495) (2,281,404)
-------------- ---------------- ----------------
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES................
47,025,809 (10,401,889) (1,215,015)
-------------- ---------------- ----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................................ 223,555 (19,454) 37,215
-------------- ---------------- ----------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................... (2,378,279) 3,602,754 (4,807,137)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................... 3,914,513 311,759 5,118,896
-------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 1,536,234 $ 3,914,513 $ 311,759
============== ================ ================
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH FLOW DATA:
INTEREST PAID......................................................... $ 173,644 $ 364,041 $ 431,766
============== ================ ================
INCOME TAXES PAID..................................................... $ 3,160,160 $ 3,059,180 $ 800,410
============== ================ ================
SCHEDULE OF NONCASH FINANCING ACTIVITIES:
STOCK OPTIONS CANCELED AND UNEARNED COMPENSATION CREDITED............. $ -- $ 8,932 $ 69,665
============== ================ ================
WARRANTS ISSUED TO PURCHASE COMMON STOCK.............................. $ 549,000 $ -- $ --
============== ================ ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 1997;
JANUARY 28, 1996; AND JANUARY 29, 1995
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 87.2%, 94.8%, and 95.1% of
consolidated sales during the fiscal years ended February 2, 1997;
January 28, 1996; and January 29, 1995, 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. The Company operates
its U.S. studios in Wal-Mart stores under the terms of the license
agreement between Wal-Mart and American Studios, Inc. (see note 2).
Wal-Mart may amend or terminate this agreement at any time at its sole
discretion. The loss of the license to do business in Kmart or Wal-Mart
stores would have a materially adverse effect on the Company. Kmart's
or Wal-Mart's closing of a significant number of discount stores could
have a material impact on the Company's revenues and could result in a
write-off of leasehold improvements and furniture and equipment in the
affected locations. No estimate can be made of the impact to earnings
if Kmart or Wal-Mart should close a significant number of locations.
FISCAL YEAR:
The Company's fiscal year ends on the Sunday nearest the end of
January. The fiscal year ended February 2, 1997 was a 53-week year. The
fiscal years ended January 28, 1996 and January 29, 1995 were 52-week
years. The Company's fiscal year that will end February 1, 1998, will
be 52 weeks.
FOREIGN CURRENCY TRANSACTIONS:
Gains and losses on foreign currency transactions are included in the
determination of net income for the period. The amount of such gain and
(loss) was $10,940; $19,474; and $(100,452) for the fiscal years ended
February 2, 1997; January 28, 1996; and January 29, 1995, respectively.
SUPPLEMENTAL CASH FLOW INFORMATION:
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
F-8
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 1997;
JANUARY 28, 1996; AND JANUARY 29, 1995
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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
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
INTANGIBLE ASSETS:
Substantially all intangible assets are amortized over 35 years by the
straight-line method. The recoverability of intangible assets is
evaluated by the Company on the basis of undiscounted expected future
cash flows from the acquired operations before interest for the
remaining amortization period. If impairment exists, the carrying
amount of the intangible assets is reduced based on the estimated
shortfall of cash flows.
PHOTOGRAPHIC SALES AND DEFERRED COSTS:
Digital photographic sales are recorded when portraits are purchased.
All sales in fiscal 1996, 1995, and the fourth quarter of fiscal 1994
were digital photographic sales. In 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
F-9
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 1997;
JANUARY 28, 1996; AND JANUARY 29, 1995
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
POSTRETIREMENT BENEFITS:
The Company sponsors a postretirement health care plan for retirees and
certain current employees. The Company measures the cost of its
obligations based on actuarial assumptions. The cost of this program is
not funded.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company is required to disclose in its consolidated financial
statements the fair value of all financial instruments, including
assets and liabilities both on- and off-balance sheet, for which it is
practicable to estimate such fair value. Fair value methods,
assumptions, and estimates for the Company are as follows:
o 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.
o Non-current liabilities--the carrying amount approximates fair
value because such liabilities consist primarily of actuarially
determined postretirement liabilities using current market rate
assumptions and long-term debt at market rates currently offered.
COSTS AND EXPENSES:
Advertising and promotional costs consist of the direct mail,
television broadcasting, and print media costs, and the payroll and
related taxes, benefits and other costs for employees in the
adult/family market who directly promote and acquire customers, as well
as the cost of church directories.
Costs of photographic sales are all the direct and indirect portrait
production costs: salaries, commissions, payroll taxes, related
benefits and traveling costs for all photography personnel, as well as
the recruiting and training costs of these employees. The costs of
film, accessories, photography equipment depreciation and maintenance,
supplies, and distribution are also included in this category.
Store commissions and selling costs include the commissions paid to
each chain based on a percentage of net sales, salaries, commissions,
payroll taxes, related benefits and travel costs for all sales
personnel, and recruiting and training, sales supplies, sales equipment
depreciation, and related distribution costs.
F-10
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 1997;
JANUARY 28, 1996; AND JANUARY 29, 1995
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RESEARCH AND DEVELOPMENT:
The Company spent $1,321,000; $1,033,000; and $748,000 on research and
development activities during the years ended February 2, 1997; January
28, 1996; and January 29, 1995, respectively. Such costs are charged to
operations 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 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:
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 of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
2. ACQUISITION:
On January 27, 1997, PCA acquired 95% 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 is based
in Charlotte, North Carolina, and is engaged in the sale of
photographic color portraits of children, adults, and families. The
acquisition has been 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
F-11
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 1997;
JANUARY 28, 1996; AND JANUARY 29, 1995
2. ACQUISITION (CONTINUED):
ASI have not been included in PCA's consolidated financial statements.
The excess of the purchase price over the fair value of the net
identifiable assets acquired of $59,134,104 has been recorded as an
intangible asset and is being amortized on a straight-line basis over
35 years.
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 and 1995,
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.
FOR THE FISCAL YEARS ENDED
--------------------------------------
FEBRUARY 2, 1997 January 28, 1996
(UNAUDITED) (Unaudited)
-------------- --------------------
Net sales.......... $ 263,974,050 $ 246,614,535
============== =============
Net loss........... $ (855,898) $ (1,168,645)
============== =============
Loss per share..... $ (0.11) $ (0.14)
============== =============
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.
3. DEBT:
The Company signed a new loan agreement on January 27, 1997 with
NationsBank of North Carolina, N. A. ("NationsBank") for a $75.8
million senior tender facility which includes a $25 million revolving
credit facility. The senior tender facility matures the earlier of June
30, 1997 or the closing of the merger between the Company's wholly
owned subsidiary, ASI Acquisition Corporation, and American Studios,
Inc. The revolving credit facility shall be due and payable in full 5
years from closing. Interest on the senior tender facility is computed
at a rate equal to the Alternate Base Rate (defined as the higher of
(i) the NationsBank Prime Rate and (ii) the Federal Funds rate plus
.50%) plus 1%. The revolving credit facility shall bear interest at a
rate equal to LIBOR plus 3% or the Alternate Base Rate (as defined
above) plus 2%.
On February 28, 1997, the senior tender facility was replaced by senior
secured permanent facilities of $90 million, which include the $25
million revolving credit facility. The senior term loan of $65 million
and the revolving credit facility bear interest at a rate equal to
LIBOR
F-12
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 1997;
JANUARY 28, 1996; AND JANUARY 29, 1995
3. DEBT (CONTINUED):
plus an applicable margin or an Alternate Base Rate plus an applicable
margin. The applicable margin is based on an EBITDA ratio and ranges
from .75% to 2.5%. Aggregate annual maturities for each of the five
fiscal years subsequent to February 2, 1997 are as follows: $0 in 1997,
$10 million in 1998, $15 million in 1999, $20 million in 2000, and $20
million in 2001.
Borrowings under the agreements are secured, and minimum levels of
adjusted earnings, tangible net worth, an interest coverage ratio, and
a fixed charge ratio must be maintained in addition to other financial
covenants. The amount of debt is reduced by 150,000 stock warrants
issued to NationsBank to purchase common stock of the Company. The
warrants expire January 27, 2002. The amount available under the
revolving credit facility is reduced by outstanding letters of credit.
As of February 2, 1997, the Company had letters of credit of $3,560,750
for its workers' compensation insurance. As of January 28, 1996, there
were outstanding letters of credit of $350,000. As of February 2, 1997,
debt outstanding related to the senior tender facility is $57,833,770.
The components of net interest expense (income) were:
FOR THE FISCAL YEARS ENDED
--------------------------------------------
FEBRUARY 2, January 28, January 29,
1997 1996 1995
-------------- -------------- --------------
INTEREST INCOME........ $ (225,748) $ (123,865) $ (156,424)
INTEREST EXPENSE....... 404,969 582,788 562,571
-------------- -------------- --------------
NET.................... $ 179,221 $ 458,923 $ 406,147
============== ============== ==============
4. 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
--------------------------------------------
FEBRUARY 2, January 28, January 29,
1997 1996 1995
-------------- -------------- --------------
CURRENT:
FEDERAL.......... $2,824,740 $2,888,851 $1,457,788
STATE............ 957,859 1,082,736 361,835
-------------- -------------- --------------
3,782,599 3,971,587 1,819,623
-------------- -------------- --------------
DEFERRED:
FEDERAL.......... (1,270,094) 1,178,154 919,088
STATE............ (369,452) 96,429 335,639
-------------- -------------- --------------
(1,639,546) 1,274,583 1,254,727
-------------- -------------- --------------
TOTAL PROVISION....... $2,143,053 $5,246,170 $3,074,350
============== ============== ==============
F-13
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 1997;
JANUARY 28, 1996; AND JANUARY 29, 1995
4. INCOME TAXES (CONTINUED):
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
---------------------------------------------------------
FEBRUARY 2, January 28, January 29,
1997 1996 1995
--------------- ------------- ---------------
TAX EXPENSE AT STATUTORY
FEDERAL RATES..................... $1,746,548 $4,402,166 $2,531,916
TAX EFFECT OF EXPENSES
NOT DEDUCTIBLE PURSUANT TO
TAX REFORM ACT OF 1986............ 71,011 65,338 88,885
STATE INCOME TAXES, NET
OF FEDERAL INCOME TAX
BENEFIT........................... 388,349 766,458 460,333
TAX EFFECTS RELATED TO
FOREIGN SUBSIDIARY................ 14,200 13,203 6,297
OTHER.................................. (77,055) (995) (13,081)
--------------- ------------- ---------------
TOTAL PROVISION........................ $2,143,053 $5,246,170 $3,074,350
=============== ============= ===============
F-14
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 1997;
JANUARY 28, 1996; AND JANUARY 29, 1995
4. 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
February 2, 1997 and January 28, 1996 are presented below:
FEBRUARY 2, January 28,
1997 1996
---------------- --------------
DEFERRED TAX ASSETS:
CURRENT:
ACCOUNTS RECEIVABLE, PRINCIPALLY DUE TO ALLOWANCE FOR
DOUBTFUL ACCOUNTS........................................... $ 346,360 $ 403,553
INVENTORY, PRINCIPALLY DUE TO OBSOLESCENCE RESERVE............ 600,155 147,136
LIFE AND HEALTH, PRINCIPALLY DUE TO ADOPTION OF SFAS NO. 106.. 153,696 152,753
STOCK OPTIONS, PRINCIPALLY DUE TO COMPENSATION ELEMENT........ 139,806 259,978
WORKERS' COMPENSATION......................................... 2,414,430 743,792
RESERVES, PRINCIPALLY DUE TO ACCRUAL FOR FINANCIAL
REPORTING PURPOSES.......................................... 942,945 459,940
STUDIO CLOSURE COSTS, PRINCIPALLY DUE TO ACCRUAL FOR
FINANCIAL REPORTING PURPOSES............................... 2,396,400 --
---------------- --------------
GROSS CURRENT DEFERRED TAX ASSETS............................. 6,993,792 2,167,152
NONCURRENT:
ALTERNATIVE MINIMUM TAX AND OTHER TAX CREDITS................. 875,538 --
NET OPERATING LOSS CARRYFORWARD............................... 2,770,246 --
LIFE AND HEALTH, PRINCIPALLY DUE TO ADOPTION OF SFAS NO. 106.. 1,154,131 1,240,375
OTHER......................................................... 498,892 --
---------------- --------------
GROSS NONCURRENT DEFERRED TAX ASSETS.......................... 5,298,807 1,240,375
---------------- --------------
GROSS DEFERRED TAX ASSETS..................................... 12,292,599 3,407,527
---------------- --------------
DEFERRED TAX LIABILITIES:
NONCURRENT:
PLANT AND EQUIPMENT, PRINCIPALLY DUE TO DIFFERENCES IN
DEPRECIATION................................................ (5,296,956) (5,802,945)
---------------- --------------
NET DEFERRED TAX ASSETS (LIABILITIES).............................. $ 6,995,643 $ (2,395,418)
================ ==============
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.
F-15
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 1997;
JANUARY 28, 1996; AND JANUARY 29, 1995
4. INCOME TAXES (CONTINUED):
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 February 2, 1997.
At February 2, 1997, the Company has federal net operating loss
carryforwards of approximately $6,422,000 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 $786,000.
5. OTHER ACCRUED LIABILITIES:
FEBRUARY 2, January 28,
1997 1996
---------------- ---------------
COSTS ACCRUED TO COMPLETE CHURCH
DIRECTORIES................................... $ 992,786 $ 948,671
ACCRUED TAXES OTHER THAN INCOME................... 2,377,105 584,170
ACCRUED EXPENSES.................................. 8,686,672 1,925,132
COSTS TO CLOSE 415 KMART PORTRAIT STUDIOS......... 3,343,000 --
---------------- ---------------
TOTAL............................................. $ 15,399,563 $3,457,973
================ ===============
6. 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 1996, 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
-------------------------------------------------------
FEBRUARY 2, January 28, January 29,
1997 1996 1995
---------------- --------------- ----------------
CONTRIBUTIONS.................... $421,000 $1,429,000 $904,000
FORFEITURES...................... (212,000) (172,000) (253,000)
================ =============== ================
NET CONTRIBUTION................. $209,000 $1,257,000 $651,000
================ =============== ================
F-16
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 1997;
JANUARY 28, 1996; AND JANUARY 29, 1995
6. EMPLOYEE BENEFITS (CONTINUED):
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 February 2, 1997; January
28, 1996; and January 29, 1995. There were no assumptions for trends
since the Company's obligation was limited to the dollar amounts
previously stated.
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
-----------------------------------------------------------
FEBRUARY 2, January 28, January 29,
1997 1996 1995
--------------- ------------- -------------
SERVICE COST............................ $ 61,000 $ 58,000 $ 83,000
INTEREST RELATED COST................... 192,000 192,000 192,000
--------------- ------------- -------------
NET PERIODIC COST....................... $253,000 $250,000 $275,000
=============== ============= =============
On February 2, 1997, the accrued cost was $2.9 million, of which
$160,000 was classified as current liabilities.
7. 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 $237,923;
$249,444; and $254,494 for the fiscal years ended February 2, 1997;
January 28, 1996; and January 29, 1995, 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-17
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 1997;
JANUARY 28, 1996; AND JANUARY 29, 1995
8. STOCK OPTIONS:
On March 6, 1996, the Board of Directors adopted the 1996 Omnibus
Long-Term Compensation Plan (the "1996 Plan") providing for the
issuance of up to 811,550 shares 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 and was approved by the Company's
shareholders at the 1996 Annual Meeting on May 22, 1996. 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. The
exercise price for stock options and stock Awards may not be less than
the fair market value of the common stock on the date of grant. As of
February 2, 1997, options for 342,850 shares were available for future
grant under the 1996 Plan, and 200,000 shares were exercisable and
out-of-the money.
The 1990 Plan provides for the grant of non-qualified stock options to
key employees and nonemployee directors. As of February 2, 1997;
January 28, 1996; and January 29, 1995, options for 588,450; 403,350;
and 322,550 shares, respectively, were exercisable and in-the-money.
The 1992 Plan provides for the grant of non-qualified stock options to
key employees and nonemployee directors of the Company. As of February
2, 1997; January 28, 1996; and January 29, 1995, options for 297,900;
0; and 0 shares, respectively, were exercisable and in-the-money.
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. 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:
FOR THE FISCAL YEARS ENDED
----------------------------
FEBRUARY 2, January 28,
1997 1996
------------- -------------
Net income As reported $2,993,854 $7,617,169
============= =============
Pro forma $2,374,079 $7,556,540
============= =============
Earnings per share As reported $0.37 $0.94
============= =============
Pro forma $0.29 $0.93
============= =============
F-18
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 1997;
JANUARY 28, 1996; AND JANUARY 29, 1995
8. STOCK OPTIONS (CONTINUED):
Pro forma net income reflects only options granted in fiscal 1996 and
1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected
over the options' vesting periods and compensation cost for options
granted prior to January 30, 1995 is not considered.
The following table sets forth information regarding the 1990, 1992,
and 1996 Plans with respect to the exercise, cancellation, expiration,
and grant of options during the previous three fiscal years:
WEIGHTED
NUMBER OF AVERAGE
SHARES OPTION PRICE
--------------- -----------
OPTIONS OUTSTANDING JANUARY 30, 1994... 1,787,750 $ 9.54
EXERCISED.............................. (22,100) $ 1.67
CANCELED............................... (101,600) $11.71
GRANTED................................ 216,500 $ 9.57
---------------
OPTIONS OUTSTANDING JANUARY 29, 1995... 1,880,550 $ 9.49
EXERCISED.............................. (66,200) $ 4.49
CANCELED............................... (109,700) $10.70
GRANTED................................ 199,800 $11.25
---------------
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
===============
At February 2, 1997, the range of exercise prices, the weighted-average
exercise price, and the weighted-average contractual remaining life of
options outstanding are as follows:
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
$ 1.67 to $ 4.92 204,050 3.1 years $ 1.68 204,050 $ 1.68
$ 9.25 to $12.88 893,800 6.9 years $10.40 470,200 $10.47
$14.12 to $17.13 738,200 6.6 years $16.29 412,100 $15.98
=============== ================
$ 1.67 to $17.13 1,836,050 6.4 years $11.80 1,086,350 $10.91
=============== ================
F-19
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 1997;
JANUARY 28, 1996; AND JANUARY 29, 1995
9. 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 February 28, 1997 restricts the
Company from repurchasing any shares of the Company's stock.
10. 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. During the second quarter of fiscal 1994, the Company adjusted
downward, by $0.4 million after-taxes, the remaining reserve for
discontinued operations.
Discontinued operations consist of income on disposal of the Department
Store Division of $412,406 (net of income taxes of $280,189), for the
fiscal year ended January 29, 1995.
F-20
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 1997;
JANUARY 28, 1996; AND JANUARY 29, 1995
11. UNAUDITED QUARTERLY FINANCIAL DATA:
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 1997
----------------------------------------------------------------------
February 2, October 27, July 28, April 28,
1997 1996 1996 1996
-------------- --------------- -------------- ---------------
SALES......................... $ 51,801,203 $37,093,025 $ 31,116,836 $36,087,986
GROSS PROFIT*................. $ 15,250,619 $ 7,165,823 $ 5,773,728 $ 8,802,429
NET INCOME.................... $ 981,667 $ 641,112 $ 232,297 $ 1,138,778
PRIMARY AND FULLY DILUTED
EARNINGS PER COMMON SHARE. $ 0.12 $ 0.08 $ 0.03 $ 0.14
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
NET INCOME.................... $ 4,890,197 $ 1,677,469 $ 198,502 $ 851,001
PRIMARY AND FULLY DILUTED
EARNINGS PER COMMON SHARE. $ 0.62 $ 0.21 $ 0.02 $ 0.10
*SALES LESS ADVERTISING AND PROMOTIONAL COSTS, COST OF PHOTOGRAPHIC
SALES, AND STORE COMMISSIONS AND SELLING COSTS.
F-21
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 FEBRUARY 2, 1997:
Allowance for doubtful accounts... $1,011,350 $ 129,563 $ 272,952 867,961
========== ========== =============== ==========
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
========== ========== =============== ==========
S-1