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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended May 4, 2003

OR

For the transition period from              to             

Commission file number 0-8550

PCA International, Inc.

(Exact name of registrant as specified in its charter)

815 Matthews-Mint Hill Road

Matthews, North Carolina 28105

(Address of principal executive offices)

(Zip Code)

(704) 588-4351

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

As of June 18, 2003, there were 2,293,152 shares of the Registrant’s common stock outstanding.

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Part I. Financial Information

Item 1. Financial Statements

PCA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands)

See notes to consolidated financial statements.

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PCA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(dollar amounts in thousands)

See notes to consolidated financial statements.

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PCA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(dollar amounts in thousands)

See notes to consolidated financial statements.

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PCA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollar amounts in thousands)

See notes to consolidated financial statements.

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PCA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollar amounts in thousands, except where noted)

1. BASIS OF PRESENTATION

The accompanying unaudited Consolidated Financial Statements of PCA International, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The financial statements do not include all information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (including normal recurring accruals) necessary for a fair presentation. Operating results for the thirteen-week periods ended May 4, 2003 and May 5, 2002 are not necessarily indicative of the results for the fiscal years ending February 1, 2004 and February 2, 2003, respectively. These financial statements should be read in conjunction with the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2003.

Certain financial statement items have been reclassified to conform to the current period’s format.

2. STOCK OPTION PLAN

The Company accounts 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 relating to stock options granted to employees is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price (see Note 9 to the Consolidated Financial Statements (Item 8.) in the Annual Report on Form 10-K for the fiscal year ended February 2, 2003.)

As required by Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123, the Company provides pro forma net income disclosures for employee stock option grants as if the fair-value-based method as defined in SFAS No. 123 had been applied. The Company’s net income as reported and the proforma amounts are indicated below:

3. IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS

In April 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The Company is currently assessing the impact of this Statement which is effective for contracts entered into or modified after June 30, 2003.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Company is currently assessing the impact of this Statement which is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.

4. SEASONALITY

Sales of portrait photography and ancillary portrait photography products are highly seasonal, with the holiday season accounting for a high percentage of sales as well as operating income. The fourth quarter (generally, late October/early November through late January/early February) typically produces a large percentage of annual sales and operating income. First quarter and second quarter results may be affected by the timing of the Easter holiday.

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5. COMPREHENSIVE LOSS

Total comprehensive loss for the thirteen weeks ended May 4, 2003 and May 5, 2002 was comprised of the following:

6. DERIVATIVE: SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK

In connection with a 1999 recapitalization, the Company issued $15 million in Series A redeemable convertible preferred stock (“Series A”) for cash proceeds of $14.9 million. On December 9, 2002, a special meeting of the shareholders of the Company was held and the shareholders approved modifications to provisions of the Series A. Upon the filing of restated articles of incorporation on December 20, 2002, the liquidation and redemption provisions of the Series A were modified. The redemption of the Series A by the Company will be at the option of the holders of the Series A, rather than being mandatorily redeemable on April 30, 2011. Also, the redemption price of the Series A and the amount payable upon certain extraordinary events will be $1,000 per share plus all declared and unpaid dividends, rather than the greater of $1,000 per share or the fair market value of the common stock into which the Series A is convertible plus all declared and unpaid dividends. As a result of the change in these provisions, the Company has determined the embedded derivative in the Series A no longer meets the requirements for bifurcation and separate accounting under the provisions of SFAS No. 133.

Upon the adoption of SFAS No. 133 in fiscal 2001, the Series A met the definition of a hybrid instrument. This hybrid instrument was comprised of a debt instrument (mandatorily redeemable preferred stock), as the host contract, and an embedded derivative consisting of the conversion option, which derives its value, in part, based on the changes in fair value of the Company’s common stock. The embedded derivative instrument was not clearly and closely related to the underlying debt instrument because the economic characteristics and risks associated with this derivative are based on equity prices. Therefore, in accordance with SFAS No. 133, the Company separated the embedded derivative instrument from the host contract based on their relative fair values and classified the embedded derivative as a component of other liabilities in the consolidated balance sheets until December 20, 2002. Changes in the fair value of the derivative were classified as a component of other expenses in the consolidated statement of operations. For the thirteen weeks ended May 5, 2002, the mark-to-market change in the fair value resulted in a charge of $2.1 million.

The Company had an independent valuation performed for the derivative prior to the change in the redemption and liquidation provisions on December 20, 2002. The value of the derivative was determined to be $27.3 million on December 20, 2002. Given the change in the liquidation and redemption provisions of the Series A and, thus, the elimination of the need to bifurcate and separately account for the embedded derivative, the $27.3 million was reclassified into the Series A on the balance sheet. The revised carrying amount of the Series A on December 20, 2002 of $35.4 million is being accreted to the $15.0 million par value over the life of the Series A using the effective interest method. As of May 4, 2003 and February 2, 2003, the Series A carrying amount was $34.0 million and $34.9 million, respectively.

7. OTHER ACCRUED LIABILITIES

Other accrued liabilities are comprised of the following:

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8. OTHER LIABILITIES

Other liabilities are comprised of the following:

9. GOODWILL AND INTANGIBLE ASSETS

As of May 4, 2003 and February 2, 2003, the Company had no intangible assets subject to amortization. The following table sets forth the information for intangible assets not subject to amortization:

10. UNITED KINGDOM OPERATIONS

During the thirteen-weeks ended May 4, 2003, the Company opened its first United Kingdom (“U.K.”) studio in a Wal-Mart/ASDA store. Additionally, the Company opened a second U.K. studio on May 23, 2003. Costs of opening these studios were charged to operations as incurred.

11. BUSINESS SEGMENT AND GEOGRAPHIC DATA

The Company has two reportable segments, Retail Portraiture and Institutional Portraiture. The Retail Portraiture segment serves permanent and traveling studios in retail stores and military bases in the United States, Canada, Mexico, Germany and the United Kingdom. The Institutional Portraiture segment serves institutional markets such as church congregations and schools.

The Company evaluates performance and allocates resources based on sales and EBITDA (a non-GAAP financial measure). We define EBITDA as income (loss) before extraordinary item and cumulative effect of accounting change plus the mark-to-market adjustment expense for the embedded derivative in our Series A (other expense), plus interest, taxes, depreciation and amortization. Although the Company may maintain information at the segment level, certain indicators such as assets and capital expenditures are not evaluated at the segment level. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Annual Report on Form 10-K for the fiscal year ended February 2, 2003.

A significant portion of the Company’s assets consist of depreciable assets. Because depreciation and amortization are non-cash items, management believes the presentation of EBITDA is useful. Management believes EBITDA provides meaningful information regarding the Company’s financial condition and results of operations because EBITDA is useful for evaluating the Company’s operating performance.

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The following table reconciles net loss to EBITDA:

Business Segment Data

Geographic Data as of and for the Thirteen Weeks Ended:

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12. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS

The Company has determined that separate, complete financial statements of the guarantor entities would not be material to users of the financial statements; therefore, the following information sets forth condensed consolidated financial statements of the guarantor and non-guarantor companies (see Note 2 to the Consolidated Financial Statements (Item 8.) in the Annual Report on Form 10-K for the fiscal year ended February 2, 2003.)

PCA INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

May 4, 2003

(Unaudited)

(in thousands)

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PCA INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

February 2, 2003

(Unaudited)

(in thousands)

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PCA INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Thirteen Weeks Ended May 4, 2003

(Unaudited)

(in thousands)