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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended February 2, 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)

Registrant’s telephone number, including area code: (704) 588-4351

Indicate by check mark whether 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 amendments to this Form 10-K.    x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of August 4, 2002, was $5,430,130. This value is based on a price per share of Common Stock of $19.10 on such date.

The number of shares of Common Stock outstanding as of May 2, 2003 was 2,293,152.

PCA INTERNATIONAL, INC.

FORM 10-K

FISCAL YEAR ENDED FEBRUARY 2, 2003

TABLE OF CONTENTS

PART I

ITEM 1.    BUSINESS

Overview

PCA International, Inc. (and its subsidiaries, together referred to as “PCA” unless otherwise noted) is one of the largest providers of professional portrait photography products and services in North America based on sales, number of customers and studio locations. We are a leader in the domestic pre-school portrait photography market, and we believe we are also the third largest company in the domestic professional portrait industry. While the industry is highly competitive and fragmented, there are four portrait photography companies operating within large host retailers on a national basis: Olan Mills (Kmart), CPI Corporation (Sears), LifeTouch (JCPenney and Target) and PCA (Wal-Mart). For the fiscal year ended February 2, 2003, we served over 7.0 million customers through our retail and institutional channels and, at fiscal year end, operated 2,001 permanent portrait studios. Operating under the trade name Wal-Mart Portrait Studios, we are the sole portrait photography provider for Wal-Mart Stores, Inc., the world’s largest retailer in terms of sales. As of February 2, 2003, we operated 1,963 permanent portrait studios in Wal-Mart discount stores and supercenters in the United States, Canada, Mexico and Germany and provided traveling portrait photography services to approximately 1,100 additional Wal-Mart store locations in the United States. As of February 2, 2003, we also operated 38 permanent studios in other retail channels, such as Meijer, Inc. and select military bases. We also serve institutional channels, such as church congregations and schools, using a traveling photography format. For the fiscal year ended February 2, 2003, we had sales of $296.6 million.

We believe we have one of the industry’s lowest cost portrait services due primarily to our vertically integrated and technologically advanced operations. We use an integrated digital imaging system that allows our customers to view a digital proof of each pose during the photography session and to select the desired images before any printing occurs. This proprietary system also automates and links the image selection process with the immediate sale of custom portrait packages and integrates our studios with our portrait processing and production system. This system, which includes two state-of-the-art processing facilities and a distribution center in the Charlotte, North Carolina area, is fully scaleable as we set up new portrait studio locations and expand into other channels. By integrating our portrait photography and production processes, we are able to minimize processing costs, provide prompt, automated service and grow with minimal incremental capital commitment as we leverage our existing infrastructure. As a result of our low cost structure, we can offer portrait packages, which include up to 43 portraits of one pose, at substantially lower prices than those of our competitors. Prices for our lowest priced portrait packages begin at $4.88 per package with no additional charges, compared to an estimated range of $4.95 to $9.99 for the lowest priced packages of our competitors. We do not charge sitting fees or handling charges, while our competitors’ packages typically require additional sitting fees, subject fees or handling charges of up to $9.99.

PCA has been in operation since 1967. Until January 1997, our business consisted principally of operating portrait studios in Kmart stores. At that time, PCA acquired American Studios, Inc., which was then the primary portrait photography provider to Wal-Mart stores in the United States and Mexico. As we expanded our Wal-Mart business, we began in the second quarter of fiscal 1997 to close certain of our underperforming studios in Kmart stores. In response to these closings and our expansion in Wal-Mart, Kmart initiated closure of a number of our studios. In August 1998, PCA consummated a recapitalization pursuant to which Jupiter Partners II L.P. (“Jupiter Partners”) became PCA’s controlling stockholder and thereafter hired a new senior management team. Led by Barry Feld, PCA’s Chairman, President and Chief Executive Officer, new management commenced wide-ranging initiatives to improve our cash flow and market share. After receiving a commitment from Wal-Mart to accelerate our expansion in Wal-Mart stores, we made a strategic decision to close all Kmart studios and redeploy those assets into Wal-Mart. We completed this process by the end of fiscal 2000. Sales from our Wal-Mart business has grown at a compound annual growth rate of 15.8% from fiscal 1997 to 2002.

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PCA International, Inc. was organized as a North Carolina corporation in 1967. Our address is 815 Matthews-Mint Hill Road, Matthews, North Carolina 28105. Our corporate web site address is www.pcaintl.com. None of the information posted on our website is incorporated by reference into this Annual Report on Form 10-K.

Competitive Strengths

Our principal competitive advantages include the following:

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have developed a proprietary integrated system that allows customers to select their choice of portraits prior to actual production and that automatically links the image selection process to the sale and production of the portrait package. This technology is fully scaleable. As we continue our rapid expansion plans, each new outlet or channel requires minimal incremental expenditures. We are also on the forefront of developing new all-digital photography growth platforms, including a free-standing specialty retail concept called GoPortraits Digital Destination. In addition, we strive to maintain a strong focus on new product development. We have expanded our portfolio of products to include all-occasion greeting cards and large-format canvas portraits. In fiscal 1999, we introduced Portrait Gallery^TM, which allows customers to purchase, on the same day as their portrait session, a disk containing their digital portrait images. We enhanced this product in fiscal 2000 by providing PhotoParade^®, companion software on CD that enables customers to use their digital portrait images to create animated screensavers and e-mail them to family and friends the same day as the photography session. During fiscal 2003, we intend to further enhance the Portrait Gallery^TM/PhotoParade^® product offering.

Business Strategy

Our business strategy is to capitalize on our strengths by implementing the following initiatives:

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Industry Overview

We operate within the domestic professional portrait photography industry, offering child, adult and family portraits both through permanent studios and traveling locations in retail hosts as well as through traveling locations in churches and other institutional channels. The primary markets within the professional portrait photography industry are pre-school children, school age children (including graduation portraits), adults, families/groups, weddings, passports, and churches as well as others, such as cruise ships, conventions/events, and glamour and executive portraits.

We are one of the largest participants in the domestic pre-school portrait photography market (children under six years old), which has been characterized historically by stable growth in line with a steady increase in domestic births. This steady growth is expected to continue since, according to the United States Census Bureau, births are projected to remain above 4.0 million annually in the U.S. for the next ten years. Moreover, the population of grandparents, a common recipient of portrait photography, is growing as Americans live longer, which could result in the number of portrait sittings exceeding historical growth rates in the future. The domestic pre-school portrait photography market tends to be less susceptible to economic cyclicality than the overall retail industry as parents continue to have portraits taken as their children grow.

Competition

We operate within the highly fragmented professional portrait photography industry. Our competitors include the following:

The provision of portrait photography services in retail hosts is a business dominated by a few large national competitors. Other than PCA, there are only three companies that operate in retail hosts on a national basis. These are CPI, which operates in Sears; Lifetouch, which operates in JCPenney and Target; and Olan Mills, which operates in Kmart. We are the largest of these competitors by the number of customers served in retail hosts and the number of studios.

A number of companies in the professional portrait photography industry operate free-standing studios on a national, regional or local basis. In addition to providing photography services in retail hosts, both CPI, through its Sears Portrait Studios brand, and Olan Mills operate through this format. Independent studios and portrait photographers are the most numerous competitors in the industry and generate the largest percentage of industry sales. Few barriers to entry exist through this format. However, these competitors typically lack processing scale and geographic coverage.

Companies within our industry compete on the basis of value, price, quality, access, service, package size and technology. Additionally, where portrait companies operate within retail hosts, the relative convenience of the host’s stores and consumer preferences for such retail hosts are also important competitive factors. We believe our products and services are very competitive in terms of all of these attributes.

We believe we offer the best value proposition in the industry: we offer portrait packages with generous quantities of portraits at economical price points and charge no additional sitting or session fees. The quality of our photography and finished portraits is competitive. Our photography and customer services and studio technology compare well relative to competition in the discount retail channel. Generally located in the front of major retail stores, our portrait studios are highly accessible.

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We are closely aligned with the Wal-Mart brand and reliant upon the host store environments and store demographics in which we operate. On a market by market basis, our competitive posture can be weakened with negative changes in the store environments or shifts in store demographics away from our target customer.

The Portrait Photography Experience

We provide our photography services in permanent studios in our retail hosts. We also service certain retail hosts and institutional customers through traveling locations.

Permanent Studios.    The typical permanent studio occupies an average of 250 square feet and consists of a camera area, a portrait viewing and sales area, and a reception area with a point-of-sale computer. Generally, the permanent studio is staffed by one to three studio associates who perform both the photography and sales functions. The majority of our professional portrait photography studios are open from 10:00 a.m. to 7:00 p.m., seven days a week.

Our permanent portrait studios are equipped with an integrated photography and sales system and point-of-sale system. The photographic system integrates a professional film camera and digital imaging capability. As the subject is photographed, each pose is captured on film and presented digitally on a computer monitor for the customer to preview and approve before proceeding to the next pose. The digital photographic images are then sent electronically to a sales computer in an adjacent area, where a studio associate presents the digital portrait images and, prompted by our software sales program, explains the portrait packages available. Guided by the studio associate, the customer customizes an order by choosing the poses, sizes and quantities desired. A portrait order receipt is printed with black and white thumbnails of the selected poses. The studio associate completes the transaction at the point-of-sale system and the customer either pays in full or makes a deposit and returns in approximately three weeks to pick up the finished portraits.

Our principal products sold through our studio operations are portraits and derivative products produced from the photography images we create. Our portraits are printed on photographic paper and are available in a variety of sizes from wallet-size to wall portraits as large as 20 inches by 24 inches. Our derivative products include all-occasion greeting cards, large format canvas portraits, and portraits on disks. Portrait and derivative products account for substantially all of our sales.

Traveling Locations.    We service Wal-Mart stores and supercenters where we do not have a permanent studio with a traveling studio location. These traveling locations operate in designated Wal-Mart stores at regularly scheduled intervals throughout the year for a period of approximately five days every seven to twelve weeks. Several days prior to the scheduled arrival of one of our photographers at the host store, we advertise our traveling promotions by offering an assortment of color portraits at a special price. A traveling location in Wal-Mart occupies approximately 100 square feet and consists of a table, camera, lights, and portable backdrops. These traveling locations utilize a non-digital photographic and sales system, in which the photography session occurs separately from the sales process. Approximately three weeks after photographs are taken, a sales associate sets up a temporary sales area in the host store and for one to five days assists customers in selecting portraits for purchase. Given the non-digital nature of this system, customers in our traveling locations may purchase only portraits in the sizes and quantities produced; no derivative products are available for purchase. Photographers and sales associates transport by personal vehicle all requisite camera, studio equipment and sales materials.

Our institutional business is conducted on a traveling basis and utilizes our integrated digital photography and sales system. We contract with institutions, primarily church congregations, to photograph and sell individual and family portraits. We do not pay commissions to the host institutions, but we do provide 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 host institution or directly to the consumer. In fiscal 2000, we began operations to provide school portrait photography and we continue to assess the viability of this market.

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Distribution Channels

We have the following four primary distribution channels:

Technology, Manufacturing and Software Development

Our technology, manufacturing and software development groups are focused on developing and implementing advanced capabilities and technology applications for our portrait studios and processing labs. As digital photographic imaging converges with information and communications technologies, we continually explore the application of new technologies to determine whether they are cost effective on a large-scale basis.

Leveraging our proprietary digital imaging system, we are one of the few companies in the portrait photography industry to have developed a vertically integrated operation. Our technology is fully scaleable; as we continue our rapid expansion plans and add new outlets or channels to our studio infrastructure, the new studios will be integrated seamlessly into our automated production system with minimal incremental expenditures.

Our proprietary digital imaging system allows customers to view a digital proof of each pose during the photography session and to select the desired images from which to make a purchase decision. Immediately after the photography session, customers then customize their portrait purchases using a computerized sales system, guided by studio associates, that enables customers to select specific poses, portrait sizes, and quantities for purchase. Customers return to the studio approximately three weeks later to pick up the finished portraits. We believe the increased flexibility and choice provided to customers by the digital system has improved customer satisfaction and increased average purchases. As a result of our digital imaging system, we print only portraits purchased by customers, eliminating waste associated with traditional photography sales. Furthermore, the integration of our digital studio infrastructure with our automated production system allows us to minimize production and processing costs, provide prompt, automated service and grow with a minimal incremental capital commitment as we leverage our existing infrastructure.

As a by-product of our digital imaging system, we have been able to offer customers their digital images on a computer floppy disk, the Portrait Gallery^™, for purchase at the end of portrait sessions. We enhanced this

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product in fiscal 2000 by providing PhotoParade^®, companion software on CD that enables customers to use their digital images to create animated screensavers and e-mail them to family and friends on the same day as photography sessions. We license this product under an exclusive arrangement with Callisto Corporation, the owner of the PhotoParade^® trademark.

We have over 450 employees in our two state-of-the art manufacturing production operations. Our technology group, which consists of 18 engineers, designs, develops and implements camera technologies, studio equipment such as lighting and background systems, and production and automation systems used in our film processing and portrait production labs. In fiscal 2002, this group expanded our digital production process used to provide large-format canvas portraits and specialty products. Our information technology organization consists of 54 employees involved in software and systems development, infrastructure support and maintenance for both corporate and studio systems. Within this organization, our software development group for studio systems develops and supports our proprietary digital imaging system, sales systems and point-of-sale systems. This group advances our systems on a continual basis by enhancing systems features and incorporating evolving technologies. Our software development group also provides system support for ongoing changes in portrait-offer configurations and marketing promotions.

Marketing and Sales

Our marketing group’s responsibilities include the creation and cost-effective production and placement of all in-store advertising, in-studio displays and general multi-media advertising. The marketing group performs all strategic marketing functions including, but not limited to, cross-promotion development, media planning and analysis, studio sales support, and customer/market research. Our marketing group also manages the daily working relationships with external advertising agencies and free-lance support and our proprietary customer database. This database allows us to apply targeted advertising strategies.

We attract customers to our studios with a variety of advertising methods including in-store, point-of-sale merchandising, newspaper advertising, direct mail to prior and prospective customers, in-store cross-promotional efforts and internet marketing campaigns. We advertise under the name of our retail host and include the name PCA International and our logo on all promotional and advertising materials. We seek to maintain an advertising presence throughout the year in all geographic markets where we operate permanent studios.

Training and development of our studio associates are critical to customer acquisition and retention and building sales at the studio level. Studio associates participate in a certification program that develops their technical and retail management skills and ensures consistent portrait quality. This program permits studio associates to progress from Portrait Specialists to Portrait Artists and eventually leads to the Master Photographer designation. Studio associates learn the photographic, retail management and customer service skills to provide quality service and customer satisfaction. Studio associates are supported by a technical Help Desk and a customer support center with a toll-free customer service line. Production and headquarters personnel also participate in training specifically designed to enhance the customer’s total portrait experience. We also provide an annual portrait competition among our studio associates to encourage them to develop their photography skills and enhance their composition using creative ideas for new poses and props.

In addition, working with Walmart.com, we have expanded our internet presence. We have developed ongoing e-mail marketing programs to support our studio business by increasing the frequency of direct communication with our target customers and outreach marketing to new customers. In fiscal 2002, we established an e-commerce initiative, www.moreportraits.com (a PCA-owned and operated web site), where customers are able to reorder portraits and other select products online. We continue to expand the number of participating studios on this program. Our company web site, www.pcaintl.com, provides information about each of our portrait photography businesses including our specialty retail concept, GoPortraits Digital Destination, in the Charlotte, North Carolina metropolitan area.

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Raw Materials and Suppliers

AGFA Corporation is our principal supplier of photographic film, paper and processing chemistry and has been our supplier for 30 years. Our current relationship with AGFA is governed by a contract dated February 4, 2002. The contract has a five-year term that the parties agreed to negotiate in good faith to renew six months prior to the expiration date. The terms of the contract require us to purchase substantially all of our requirements in North America for photographic film, paper and processing chemistry and in exchange we receive certain discounts on purchases made. AGFA can terminate the sales contract if we breach the contract in any way and fail to cure such breach within 30 days after notice. AGFA has the right to terminate upon shorter notice or immediately in the event of bankruptcy or insolvency relating to us and a violation of the trademark provisions of the sales contract.

Our management believes the available alternative sources of such supplies are adequate. Additionally, we have not found it necessary to carry significant amounts of inventory to ensure a continuous allotment of raw materials.

We build our own cameras and believe we have an adequate supply of cameras and camera components. The computer and digital equipment used by us in our integrated digital imaging system consists of standard components that are readily available from multiple suppliers.

Employees

At February 2, 2003, we had approximately 7,000 full-time and part-time employees. As of February 2, 2003, none of our employees were covered by a collective bargaining agreement. We believe employee relations are satisfactory.

Governmental Regulations

We are subject to various federal and state laws and regulations, including the Occupational Safety and Health Act and federal and state environmental laws. We are not aware of any material violation of such laws and regulations. Continued compliance is not expected to have a material effect upon our competitive position, financial condition, or results of operation.

Licenses, Trademarks and Patents

Wal-Mart Licenses

United States.    Within the United States our relationship with Wal-Mart Stores, Inc. is governed by a license agreement dated April 4, 2002. This agreement has a five-year term that automatically renews for an additional five-year term with respect to each individual location covered thereby unless either party gives notice of its intent to terminate the relationship at least 180 days prior to the end of the term.

The terms of the license agreement require us to pay a fee to Wal-Mart based upon our gross sales. The license allows us to use the trade name “Wal-Mart Portrait Studio” and to use Wal-Mart designated space within its stores. The license prohibits Wal-Mart from licensing a permanent portrait studio to any other person in the stores in which we operate.

Wal-Mart can terminate the license if we breach the agreement in any way and fail to cure such breach within fifteen days after notice. Certain events give Wal-Mart the right to terminate upon shorter notice or immediately. These events are (1) our failure to pay the license fee or deliver financial information within the time periods specified under the agreement, (2) certain events of bankruptcy or insolvency relating to us, (3) our causing liens on Wal-Mart’s property that are not discharged in the manner required under the agreement, (4) us vacating or injuring the licensed premises or (5) us or any of our employees, licensees, agents, officers, suppliers or contractors violating any law or committing any illegal act associated with the licensed premises. Termination

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provisions also apply if we open certain competing businesses or in the event of governmental property condemnations. These default provisions relate only to individual locations affected by the violation. Wal-Mart can terminate the agreement with respect to all locations if we are in default of the license with respect to one-third or more of our locations. Finally, Wal-Mart can temporarily suspend the agreement with respect to an individual location in the event of certain other events.

Studios that began operations after the execution of the license on April 4, 2002, have a five-year term that commences upon their opening date and renews for an additional period of five years unless either party gives notice of termination on or before 180 days prior to the end of the term. As of February 2, 2003, in the United States, we operated in 1,707 Wal-Mart permanent studios and approximately 1,100 traveling locations. Since the execution of the Wal-Mart license agreement on April 4, 2002, through February 2, 2003, PCA opened 138 portrait studios in United States Wal-Marts.

Canada.    Within Canada, our relationship with Wal-Mart Canada, Inc. is governed by a license agreement dated February 9, 1996. Studios that began operations on and after the execution of the license on February 9, 1996, have a five-year term that commences upon their opening date and can be renewed at the option of Wal-Mart Canada. As of February 2, 2003, we operated in 190 Canadian Wal-Mart permanent studios. To date, all studios that have completed their initial five-year term have been renewed by Wal-Mart Canada. The terms of the license agreement are similar to our U.S. license agreement. Termination rights are generally similar to those under the U.S. license agreement except that Wal-Mart also has the right to terminate with respect to an individual studio if we sell substantially all of the assets of our Canadian subsidiary or fail to own majority voting control in such subsidiary or operate a competing business within a 25-mile radius of a Wal-Mart store. Wal-Mart can terminate the agreement with respect to all locations, subject to 180 days notice, if one-third or more of the licensed stores are susceptible to termination, or have been terminated, under the agreement.

The licenses with respect to our Canadian Wal-Mart studios expire as follows: 46 studios in fiscal 2004, 79 studios in fiscal 2005, 32 studios in fiscal 2006, 25 studios in fiscal 2007, and 8 studios in fiscal 2008.

Mexico.    Within Mexico, our relationship with Nueva Wal-Mart De Mexico, S.A. de R.L. de C.V. (“Nueva Wal-Mart De Mexico”) is governed by an agreement dated as of June 1, 2002 for an undefined period of time. Either we or Nueva Wal-Mart De Mexico may terminate this agreement at any time upon 30 days written notice after May 31, 2003. Under this agreement, Nueva Wal-Mart De Mexico is compensated based upon our total net sales. As of February 2, 2003, we operated in 60 Nueva Wal-Mart De Mexico permanent studios. When these studios complete their initial one-year term they will continue until terminated pursuant to the agreement’s notice provisions.

Germany.    Within Germany, our relationship with Wal-Mart Germany GmbH & CO.KG (“Wal-Mart Germany”) is governed by an agreement dated as of August 28, 2002. The agreement expires after 2 years, but will automatically renew for successive periods of 3 months each if not terminated by either party. Either party can terminate this agreement at the end of any term upon three months notice. This agreement allows us to use Wal-Mart designated space within its stores. Under this agreement, Wal-Mart Germany is compensated based upon our total net sales. As of February 2, 2003, we operated in 6 Wal-Mart Germany permanent studios.

United Kingdom.    Within the United Kingdom, our relationship with ASDA Stores Limited (“Wal-Mart U.K.”) is governed by a license agreement dated as of February 5, 2003. The agreement expires after 10 years. Under this agreement, Wal-Mart U.K. is compensated based upon our total net sales. We opened our first Wal-Mart U.K. permanent studio on February 7, 2003.

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Other Licenses and Concessions

Meijer.    As of February 2, 2003, we operated in 24 Meijer permanent studios. Our relationship with Meijer, Inc. is governed by two master in-store license agreements dated June 25, 2001. These agreements give us the ability to operate a portrait studio in select Meijer stores. The term of the license for each studio begins on the earlier of the projected start date for each Meijer location and the date we commence operations in such location, and ends on the last day of the third license year. A license year is defined as the 12-month period from August 1 to July 31. Under this agreement, our licenses for 19 Meijer studios will terminate on December 31, 2004, and the licenses for 5 Meijer studios will terminate on December 31, 2005.

The terms of our master in-store license agreements with Meijer require us to pay, on a monthly basis with respect to each location, a base license fee and a supplemental license fee based upon our gross receipts. The license agreements permit us to use our designated space within Meijer’s locations solely for the purpose of operating a portrait studio and selling select portrait related products.

These license agreements can be terminated by us or Meijer with respect to any or all of licensed Meijer locations at any time upon 90 days prior written notice. In addition, Meijer has the right to terminate the agreement upon shorter notice periods or without notice in the event of (1) our failure to perform our obligations under the license agreement or pay license fees as required by the agreement, (2) our default in the performance of any non-financial covenants contained in the agreement, (3) any of the Meijer studios not being open for business during the hours specified in the agreement, (4) certain events of bankruptcy or insolvency relating to us, or (5) our abandonment of any studios covered by the agreement.

Navy.    We currently operate a studio within the Navy Exchange Naval Station Norfolk pursuant to an agreement that expires on April 30, 2004 and contains the possibility of three extensions of 12 months each upon mutual agreement of the parties. We pay a fee to Navy Exchange Norfolk based upon our total gross sales. The items to be sold as well as the prices charged by us are subject to the approval of the Navy Exchange Norfolk general manager.

In addition, we operate a studio within the Navy Exchange, Pearl Harbor, Hawaii, pursuant to an agreement that commenced October 25, 2002 and expires on October 24, 2004. We pay a fee to Hawaii District Navy Exchange based upon our total gross sales. The items sold as well as the prices charged by us are subject to the approval of the Technical Representative for the Hawaii District Navy Exchange.

Army/Air Force.    We have an agreement with the Army & Air Force Exchange Service (“AAFES”) that governs our sale of professional photography services in select AAFES exchanges in the United States. This agreement expires July 31, 2005. As of February 2, 2003, we operated eleven studios in AAFES exchanges.

The terms of the contract require us to pay a fee to AAFES based upon our total gross sales at AAFES exchanges. This contract allows us to operate our portrait studios during similar hours of operation as the AAFES exchanges governed by this contract and to use designated space within such exchanges.

This contract may be terminated in whole or in part by AAFES or us for any reason upon 90 days written notice and immediately upon written notice in the event of (1) our failure to pay license fees under the agreement, (2) certain events of bankruptcy or insolvency relating to us, or (3) our failure to perform our obligations under the agreement. In addition, this contract will automatically terminate, with respect to an AAFES exchange, upon the dispatch of written notice to us that such AAFES exchange is inactivated or the Army or Air Force base at which such exchange is located has been inactivated.

Callisto (PhotoParade^®).    Under our arrangement with Callisto Corporation, we agree to pay to Callisto a royalty based on gross retail sales derived from the sale of each Portrait Gallery^™ disk. We have agreed to sell

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the Portrait Gallery^™ disk only as a bundled product with Callisto’s PhotoParade^® screen saver CD. Furthermore, Callisto has agreed to pay PCA a royalty based on internet sales generated from customers who link to Callisto’s web site from the PhotoParade^® CD sold in our studios.

Other.    We own other patents, trademarks and licenses we do not believe are material to our business.

Risk Factors

We wish to caution readers that in addition to the important factors described elsewhere in this Annual Report on Form 10-K, the following important factors, among others, sometimes have affected, or in the future could affect, our actual results and could cause our actual consolidated results during fiscal 2003, and beyond, to differ materially from those expressed in any forward-looking statements made by us or on our behalf.

Risks Related to Our Business

We are materially dependent upon Wal-Mart, and Wal-Mart may terminate, breach or otherwise limit our license agreements.

We are materially dependent upon our relationship with Wal-Mart, the continued goodwill of Wal-Mart and the integrity of the Wal-Mart brand name in the retail marketplace. Approximately 94.3% of our sales for fiscal 2002 was derived from sales in Wal-Mart stores. Our Wal-Mart permanent studios in the United States, Canada, Mexico, Germany and the U.K. are operated pursuant to license agreements. The license agreements can be terminated or suspended by Wal-Mart for various reasons, some of which are beyond our control. Our license agreements with various Wal-Mart entities have the following expiration dates: (1) for our U.S. Wal-Mart studios, the fifth anniversary of the opening of a Wal-Mart studio, if no renewal option is exercised; (2) for our Canadian Wal-Mart studios, various expiration dates, ranging from fiscal 2004 to 2008, depending upon the date each studio commenced operations; (3) for our Mexican Wal-Mart studios, terminable at will by either party after May 31, 2003; (4) for our Germany Wal-Mart studios, 2 years from August 28, 2002, but automatically renewed for successive periods of 6 months each if not terminated by either party (either party can terminate at the end of any term upon 3 months notice); and (5) for our U.K. Wal-Mart studios, 10 years from February 5, 2003. These agreements are more fully described in “—Licenses, Trademarks and Patents—Wal-Mart Licenses.”

Wal-Mart is under no definitive obligation to renew existing locations. We do not have the right to close any poorly performing locations prior to the expiration of the term of the license for such locations. Although the license agreements prohibit Wal-Mart from licensing a permanent portrait studio to any other person in the stores in which we operate, they do not make us the exclusive provider for all Wal-Mart stores. In addition, the license agreements do not prohibit Wal-Mart from selling many of the tangible goods we sell, or from developing film, in other departments within its stores. In addition, there is always the risk that Wal-Mart might breach a license agreement. The loss or breach of any license from Wal-Mart would have a material adverse effect on our business, financial condition and results of operations. An adverse change in any other aspects of our business relationship with Wal-Mart, the reduction of the number of studios operated pursuant to such arrangements or changes in Wal-Mart’s expansion plans could have a material adverse effect on our business, financial condition and results of operations. See “—Licenses, Trademarks and Patents—Wal-Mart Licenses.”

A prolonged economic downturn, a reduction in consumer spending or decreased customer traffic in our host stores could materially adversely affect our business.

Portrait photography services may be affected by prolonged, negative trends in the general economy. Any reduction in consumer confidence or disposable income in general may affect companies in this specialty retail service industry more significantly than companies in other industries. In addition, the portrait studios in Wal-Mart stores and Meijer stores rely largely on customer traffic generated by the host stores. The host stores, as part of the retail industry, may be affected by a prolonged downturn in the economy and a decrease in discretionary income of potential customers. For example, we previously provided portrait photography services in host stores operated by Kmart, which is currently in bankruptcy proceedings. During the term of our relationship with

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Kmart, Kmart’s financial health worsened, and negatively impacted our own performance. There is no assurance that Wal-Mart or any other host stores in which we may operate will not suffer similar financial difficulties. A reduction in host store traffic would adversely affect our business, financial condition and results of operations.

We have experienced a history of net losses and deficiency of earnings to fixed charges.

For fiscal 2002, 2001 and 2000, we had net income of $14.4 million and a net loss of $19.3 million and $15.3 million, respectively. For fiscal 2002, 2001 and 2000, earnings were insufficient to cover fixed charges by $0.4 million, $17.4 million and $9.7 million, respectively. Although, we anticipate curing our deficiency of earnings to fixed charges, we may not succeed in establishing earnings sufficient to achieve this goal. A continued net loss and/or deficiency of earnings to fixed charges may prevent us from pursuing our strategies for growth and could cause us to be unable to meet our debt obligations, capital expenditure requirements or working capital needs.

We may not be able to finance the rapid growth we may experience.

Under our United States license agreement with Wal-Mart, Wal-Mart must license us 150 net new stores in each of the next four years and use its best efforts to do so thereafter. Further, Wal-Mart has agreed to use its best efforts to build our studios into the blueprint for all new Wal-Mart stores of 100,000 square feet or larger. We anticipate opening a studio in all new Wal-Mart stores where our studios are incorporated into the blueprint. There is no assurance that we can generate sufficient capital from operations or that outside financing sources will be available to finance such rapid growth. Further, the rapid growth of portrait studios within Wal-Mart could reduce the capital available for growth outside of Wal-Mart.

If we lose our key personnel, our business may be adversely affected.

Our continued success depends upon, to a large extent, the efforts and abilities of our key employees, particularly Barry Feld, our President, Chief Executive Officer and Chairman of the Board. See “Item 10. Directors and Executive Officers of the Registrant.” Mr. Feld’s departure would result in a loss of leadership and a strong contact person with Wal-Mart. We cannot assure you of the continued employment of Mr. Feld or any other members of management. Competition for qualified management personnel is intense. The loss of the services of our key employees or the failure to retain qualified employees when needed could materially adversely affect us.

Our business may be adversely affected if we cannot manage our operations or generate sufficient cash flow or obtain sufficient capital to fund future growth.

We intend to expand rapidly as Wal-Mart opens new stores. Our future growth will require us to manage our expanding domestic and international operations and to adapt our operational, manufacturing, financial and management systems to respond to changes in our business environment while maintaining a competitive cost structure. The expansion of our business has placed and will continue to place significant demands on us to improve our operational, manufacturing, financial and management systems, to develop further the management skills of our managers and supervisors, and to continue to retain, train, motivate and effectively manage our employees.

Our failure to manage any future growth effectively could materially adversely affect us. In addition, we have substantial fixed costs due to our two production facilities in the Charlotte, North Carolina area. These fixed costs make us vulnerable in the event of an economic downturn or other inability to generate sufficient cash flow.

We have experienced reduced sales at existing studios when we have opened new studios in close proximity to existing studios. Success of our growth strategy will depend on our ability to effectively minimize this effect. In addition, our license agreement with Wal-Mart prohibits us from opening a new non-Wal-Mart studio within a certain distance of any store where we operate a Wal-Mart portrait studio. We will need to ensure this prohibition does not negatively impact our non-Wal-Mart expansion plans.

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Additionally, our ability to maintain and increase our sales base and to respond to shifts in customer demand and changes in industry trends will be partially dependent on our ability to generate sufficient cash flow or obtain sufficient capital for the purpose of, among other things, financing capital expenditures, infrastructure growth and acquisitions. There can be no assurances that we will be able to generate sufficient cash flow or that financing will be available on acceptable terms, or permitted to be incurred under the terms of our senior secured credit facility and any future indebtedness, to fund our future growth. Our failure to generate sufficient cash flow or obtain sufficient financing to fund our future growth could materially adversely affect us.

Our fourth quarter sales and income are disproportionately high and we are vulnerable to downturns in consumer holiday spending that can adversely affect our business.

Because of the retail nature of our services and our locations in discount stores, our business is highly seasonal. The holiday season accounts for a high percentage of our sales and operating income, and our fourth fiscal quarter, typically late October/early November through late January/early February, generally produces a large percentage of annual sales and operating income. The fourth quarters in fiscal 2002, 2001, and 2000 have accounted for approximately 33%, 35%, and 33%, respectively, of our annual sales and 62%, 78%, and 89%, respectively, of our annual operating income. Our operations can be adversely affected by inclement weather, especially during the important fiscal fourth quarter.

If our competitors initiate price-cutting or changes in package configurations or introduce new technology, we may experience lower sales or higher costs.

The professional portrait photography industry, including both permanent and traveling studios, is highly competitive. Certain of our competitors and potential competitors are more established, benefit from greater name recognition and have significantly greater capital and resources than we do. Moreover, evolving technology and business relationships may erode any proprietary barriers to entry that could keep our competitors from developing products or services similar to ours or from selling competing products or services in our markets.

The companies in the industry compete on the basis of value, price, quality, access, service, package size, technology and convenience of retail distribution channel. The major professional portrait studio companies, including CPI Corporation, Lifetouch and Olan Mills, operate permanent studios in retail chains and independent locations. To compete successfully, we must continue to remain competitive in areas of value, price, quality, access, service, package size, technology and convenience.

The evolution of digital portrait technology has introduced additional competition from companies, such as Picture People, which operate independent locations specializing in such portrait technology. Although we have not experienced a significant decline in the discount retail distribution channel due to such technology or companies, there can be no assurance that such technology, or companies specializing in such technology, will not take significant business from us if we do not also invest in such technology, resulting in either lower sales or higher cost of operation.

Furthermore, consumer products, particularly those that are value-priced, are subject to significant price competition. There can be no assurance we will not be forced to engage in price-cutting initiatives to respond to competitive and consumer pressures. The failure of our sales volumes to grow sufficiently to improve overall sales and income as a result of a competitive price reduction could materially adversely affect our business. See “—Competition.”

We are dependent upon key suppliers.

We are dependent upon AGFA Corporation as our key supplier of photographic film, paper and processing chemistry, which are manufactured in Germany. Any disruption in the business of AGFA or in the delivery of supplies from AGFA could have a material adverse impact on our business.

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Our international expansion may not be successful and may expose us to additional risks that could adversely affect our business.

International operations in Canada, Mexico and Germany accounted for 8.1% of sales during fiscal 2002. We expect international sales to increase in the future as we continue to grow in Canada and Mexico and, potentially, as we continue to launch operations in Europe (our first U.K. studio opened February 7, 2003). Therefore, we would be more vulnerable to risks involving the geographic distance of operations, differences in language or culture, changes in business regulations and taxation and currency fluctuations and political instability. Further, there is no proven market for portrait photography services in retail studio locations in Europe. Therefore, our in-store studio model may not perform well in Europe.

We may not be able to keep pace with the evolution of technology and develop and invest in new technologies as required to effectively compete.

The evolution of digital portrait technology, computer technology, manufacturing technology and information technology may make it difficult to support present technologies or require us to invest in new technologies. There can be no assurance that we can generate sufficient capital from operations or that outside financing sources will be available to invest in such evolving technologies. To the extent we do invest in such technology, there is no assurance our investment will lead to increased sales or profits. In addition, our ability to develop digital technology, e-commerce capabilities and other new information and distribution technologies may affect our prospects.

Any disruption in our manufacturing process could have a material adverse impact on our business.

We are dependent upon the efficient operation of our portrait processing facilities to maintain our portrait quality, timeliness of delivery and low cost operation. Any disruption of the manufacturing process for any reason could have a material adverse impact on our business.

Risks Related to Our Indebtedness

Our substantial indebtedness could materially adversely affect our business and prevent us from fulfilling our debt obligations.

We have outstanding a substantial amount of debt. As of February 2, 2003, this debt consisted primarily of the following:

In addition, at that date, we were able to borrow $25.4 million of additional available credit under our senior secured credit facility, subject to satisfaction of customary borrowing conditions.

Our substantial amount of debt, as well as the guarantees of and security interests in the assets of our subsidiaries, could have material adverse consequences for holders of our securities and for us, including but not limited to