UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 4, 2003
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-8550
PCA International, Inc.
(Exact name of registrant as specified in its charter)
| North Carolina | 56-0888429 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
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.
| Page No. | ||||
| Part I. |
1 | |||
| Item 1. |
1 | |||
| Consolidated Balance Sheets as of May 4, 2003 (Unaudited) and February 2, 2003 |
1 | |||
| 3 | ||||
| 4 | ||||
| 5 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
12 | ||
| Item 3. |
15 | |||
| Item 4. |
15 | |||
| Part II. |
15 | |||
| Item 6. |
15 | |||
| 16 | ||||
| 17 | ||||
i
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
(dollar amounts in thousands)
| May 4, 2003 |
February 2, 2003 | |||||
| (unaudited) | ||||||
| ASSETS |
||||||
| CURRENT ASSETS: |
||||||
| Cash and cash equivalents |
$ | 4,398 | $ | 2,522 | ||
| Accounts receivable |
1,901 | 1,723 | ||||
| Inventories |
11,675 | 10,542 | ||||
| Deferred income taxes |
4,303 | 4,303 | ||||
| Prepaid expenses and other assets |
3,490 | 2,971 | ||||
| Total current assets |
25,767 | 22,061 | ||||
| PROPERTY AND EQUIPMENT: |
||||||
| Land and improvements |
2,305 | 2,305 | ||||
| Buildings and improvements |
12,698 | 12,698 | ||||
| Photographic, sales and finishing equipment |
127,847 | 123,530 | ||||
| Studio improvements |
20,494 | 19,457 | ||||
| Construction in progress |
3,030 | 1,143 | ||||
| Total |
166,374 | 159,133 | ||||
| Less accumulated depreciation and amortization |
104,387 | 101,371 | ||||
| Property and equipment, net |
61,987 | 57,762 | ||||
| GOODWILL |
51,600 | 51,557 | ||||
| DEFERRED FINANCING COSTS, NET |
9,625 | 10,023 | ||||
| DEFERRED INCOME TAXES, NONCURRENT |
12,332 | 11,027 | ||||
| OTHER ASSETS |
34 | 39 | ||||
| TOTAL ASSETS |
$ | 161,345 | $ | 152,469 | ||
See notes to consolidated financial statements.
1
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(dollar amounts in thousands)
| May 4, 2003 |
February 2, 2003 |
|||||||
| (unaudited) | ||||||||
| LIABILITIES AND SHAREHOLDERS' DEFICIENCY |
||||||||
| CURRENT LIABILITIES: |
||||||||
| Short-term borrowings |
$ | 7,400 | $ | — | ||||
| Current portion of long-term debt |
97 | 94 | ||||||
| Accounts payable—trade |
26,647 | 26,627 | ||||||
| Accrued insurance |
3,933 | 3,960 | ||||||
| Accrued income taxes |
480 | 495 | ||||||
| Accrued compensation |
5,397 | 4,740 | ||||||
| Accrued interest |
5,702 | 12,084 | ||||||
| Other accrued liabilities |
14,966 | 9,853 | ||||||
| Total current liabilities |
64,622 | 57,853 | ||||||
| LONG-TERM DEBT |
218,481 | 217,153 | ||||||
| OTHER LIABILITIES |
5,822 | 3,791 | ||||||
| TOTAL LIABILITIES |
288,925 | 278,797 | ||||||
| COMMITMENTS AND CONTINGENCIES |
||||||||
| SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $10.00 par value (authorized—200,000 shares; outstanding—15,000 shares) |
34,042 | 34,924 | ||||||
| SHAREHOLDERS' DEFICIENCY: |
||||||||
| Common stock, $0.20 par value (authorized—20,000,000 shares; issued and outstanding—2,293,152 shares) |
458 | 458 | ||||||
| Warrants to purchase Series A redeemable convertible preferred stock (issued and outstanding—287) |
642 | 642 | ||||||
| Warrants to purchase common stock (issued and outstanding—306,610) |
2,947 | 2,947 | ||||||
| Additional paid-in capital |
2,861 | 2,861 | ||||||
| Deficit |
(168,534 | ) | (167,741 | ) | ||||
| Accumulated other comprehensive income (loss) |
4 | (419 | ) | |||||
| Total shareholders' deficiency |
(161,622 | ) | (161,252 | ) | ||||
| TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY |
$ | 161,345 | $ | 152,469 | ||||
See notes to consolidated financial statements.
2
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollar amounts in thousands)
| For the Thirteen Weeks Ended |
||||||||
| May 4, 2003 |
May 5, 2002 |
|||||||
| SALES |
$ | 71,556 | $ | 67,922 | ||||
| COST OF SALES |
55,362 | 50,937 | ||||||
| GROSS PROFIT |
16,194 | 16,985 | ||||||
| GENERAL AND ADMINISTRATIVE |
11,502 | 9,939 | ||||||
| AMORTIZATION OF INTANGIBLES |
— | 48 | ||||||
| INCOME FROM OPERATIONS |
4,692 | 6,998 | ||||||
| INTEREST INCOME |
2 | 2 | ||||||
| INTEREST EXPENSE |
(7,674 | ) | (6,754 | ) | ||||
| OTHER EXPENSE |
— | (2,066 | ) | |||||
| LOSS BEFORE INCOME TAXES |
(2,980 | ) | (1,820 | ) | ||||
| INCOME TAX BENEFIT |
1,305 | — | ||||||
| NET LOSS |
$ | (1,675 | ) | $ | (1,820 | ) | ||
See notes to consolidated financial statements.
3
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollar amounts in thousands)
| For the Thirteen Weeks Ended |
||||||||
| May 4, 2003 |
May 5, 2002 |
|||||||
| OPERATING ACTIVITIES: |
||||||||
| Net loss |
$ | (1,675 | ) | $ | (1,820 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
2,726 | 2,316 | ||||||
| Amortization of deferred financing cost |
429 | 745 | ||||||
| Interest expense-effective interest method |
— | (320 | ) | |||||
| Change in fair value of derivative instruments |
— | 2,066 | ||||||
| Amortization of debt discounts |
153 | — | ||||||
| Provision for deferred income taxes |
(1,305 | ) | — | |||||
| Loss on disposal of property and equipment |
45 | — | ||||||
| Changes in assets and liabilities which provided (used) cash: |
||||||||
| Accounts receivable |
(178 | ) | (936 | ) | ||||
| Inventories |
(1,133 | ) | 629 | |||||
| Prepaid expenses and other assets |
(519 | ) | 48 | |||||
| Other noncurrent assets |
5 | (9 | ) | |||||
| Accounts payable—trade |
20 | 1,619 | ||||||
| Accrued expenses |
615 | 36 | ||||||
| Accrued interest |
(6,382 | ) | 458 | |||||
| Other current and non-current accrued liabilities |
7,144 | 2,875 | ||||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
(55 | ) | 7,707 | |||||
| INVESTING ACTIVITIES: |
||||||||
| Purchase of property and equipment |
(6,384 | ) | (4,093 | ) | ||||
| Proceeds from sales of property and equipment |
2 | — | ||||||
| NET CASH USED IN INVESTING ACTIVITIES |
(6,382 | ) | (4,093 | ) | ||||
| FINANCING ACTIVITIES: |
||||||||
| Increase in borrowings under senior secured credit facility |
21,900 | 7,500 | ||||||
| Repayment of senior secured credit facility and capital lease obligations |
(13,322 | ) | (6,520 | ) | ||||
| Repayment of senior subordinated term loans |
— | (2,750 | ) | |||||
| Deferred financing cost |
(31 | ) | — | |||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
8,547 | (1,770 | ) | |||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH |
(234 | ) | (87 | ) | ||||
| INCREASE IN CASH AND CASH EQUIVALENTS |
1,876 | 1,757 | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
2,522 | 2,885 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 4,398 | $ | 4,642 | ||||
See notes to consolidated financial statements.
4
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:
| For the Thirteen Weeks Ended |
||||||||
| May 4, 2003 |
May 5, 2002 |
|||||||
| Net loss attributable to common shareholders: |
||||||||
| As reported |
$ | (1,675 | ) | $ | (1,820 | ) | ||
| Proforma |
$ | (1,685 | ) | $ | (1,822 | ) | ||
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.
5
5. COMPREHENSIVE LOSS
Total comprehensive loss for the thirteen weeks ended May 4, 2003 and May 5, 2002 was comprised of the following:
| For the Thirteen Weeks Ended |
||||||||
| May 4, 2003 |
May 5, 2002 |
|||||||
| Net loss |
$ | (1,675 | ) | $ | (1,820 | ) | ||
| Foreign currency translation adjustment, net of taxes |
423 | (173 | ) | |||||
| Total comprehensive loss |
$ | (1,252 | ) | $ | (1,993 | ) | ||