##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended January 29, 2006
 or
 o
    
    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
 PORTRAIT CORPORATION OF AMERICA, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of
incorporation or organization)
    
    57-1208051
(I.R.S. Employer
Identification No.)815 Matthews-Mint Hill Road, Matthews, NC
(Address of principal executive offices)
    
    28105
(Zip Code)
 Registrants
telephone number, including area code: (704) 847-8011
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
  o þ
  þ o
 o þ
 þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  o þ
   Documents Incorporated by Reference: None




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##### 



PORTRAIT CORPORATION OF AMERICA, INC.
FORM 10-K
FISCAL YEAR ENDED JANUARY 29, 2006
 TABLE OF CONTENTS
 Item Number inForm 10-K
    
    
    
    PagePART I1.
    
    Business
    
    11A.
    
    Risk Factors
    
    121B.
    
    Unresolved Staff Comments
    
    222.
    
    Properties
    
    223.
    
    Legal Proceedings
    
    224.
    
    Submission of Matters to a Vote of Security Holders
    
    22PART II5.
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    236.
    
    Selected Financial Data
    
    237.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    277A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    448.
    
    Financial Statements and Supplementary Data
    
    469.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
    
    899A.
    
    Controls and Procedures
    
    909B.
    
    Other Information
    
    91PART III10.
    
    Directors and Executive Officers of the Registrant
    
    9111.
    
    Executive Compensation
    
    9512.
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    9913.
    
    Certain Relationships and Related Transactions
    
    10214.
    
    Principal Accounting Fees and Services
    
    102PART IV15.
    
    Exhibits and Financial Statement Schedules
    
    104(a)
    
    1. Financial Statements
    
    1042. Financial Statement Schedules
    
    1043. Exhibits
    
    104Schedule II
    
    Valuation and Qualifying Accounts
    
    105Signatures
    
    
    
    106




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##### 



PART I
 ITEM 1. BUSINESS
 Company Overview
    ®
  1




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##### 



-
    
    we are not required to undertake the effort and expense to identify and obtain real
estate locations for our studios, but instead open substantially all of our new studios
in prime Wal-Mart locations;-
    
    our new studios require lesser amounts of working capital and capital expenditures; and-
    
    our new studios generate immediate revenues because of their location in Wal-Mart
stores without the extended new store opening ramp-up of a typical specialty retailer.
   Industry
  2




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##### 



Competitive Strengths
 -
    
    Leading Market Position.In fiscal 2005, we believe no other professional
portrait provider served more customers in retail hosts or operated more
permanent studio locations than our Company. We served over 6.7 million
customers domestically and as of January 29, 2006, we operated 2,129
permanent portrait studios domestically.-
    
    Strong, Mutually Beneficial Relationship with Wal-Mart.By aligning our
strategy with Wal-Marts providing low-cost, high quality products, we have
enjoyed a mutually beneficial, long-term relationship. Since 1998, we have
been the sole operator of portrait photography studios in Wal-Mart stores in
North America. The majority of our permanent Wal-Mart studios are located in
prominent locations at the front of the store or Supercenter, affording us
easy access to Wal-Marts unrivaled customer foot traffic. In return, we
provide Wal-Mart with strong profit per square foot and provide consumers
with high quality photography at every day low prices.
At January 29, 2006, Wal-Mart had 3,189 stores and Supercenters in the U.S.
as well as 1,847 stores internationally. We operate in 2,129 or 67%
Wal-Mart stores in the U.S. and 363 internationally. We have been able to
significantly increase the number of permanent studios in Wal-Mart, having
grown in North America from 1,112 permanent studios at the beginning of
fiscal 1998 to 2,466 studios at the end of fiscal 2005, representing a CAGR
of 10.5%. Sales from our Wal-Mart business totaled $315.2 million for the
fiscal year ended January 29, 2006, which represents a CAGR of 11.1% from
$150.6 million in fiscal 1998. As a result of this growth, we have been able
to significantly expand brand awareness for Wal-Mart Portrait Studios.-
    
    Low Cost Producer. We believe we have one of the lowest-cost portrait
production systems in the industry. This cost advantage is due primarily to:
 -
    
    a modest capital expenditure requirement for each new studio;-
    
    low maintenance costs associated with our proprietary
integrated imaging and portrait processing system;
 3




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##### 



-
    
    our integrated digital imaging system, which allows
customers to view digital proofs and select only the
desired images before any printing occurs;-
    
    our efficient and flexible integrated portrait photography
and production process system, which simplifies and
automates the production process, resulting in higher
volume, lower labor costs, less waste, and allows us to
leverage our existing scalable infrastructure.-
    
    a marketing focus on selling larger portrait collections
based on more poses, which lowers the average production
cost per unit as more units are produced per customer.
 -
    
    Focus on Innovation. We strive to maintain a strong focus on new product
development. Recently, we expanded our portfolio of products to include all
occasion greeting cards, ornaments, puzzles and large-format canvas
portraits. Leveraging our digital imaging system, we have augmented our
product offerings with digital portraits on CD or disk, the Portrait
GalleryTM, available immediately after the portrait session with e-mail
capability. The Portrait Gallery is sold with PhotoParade, a companion
software on CD, that enables customers to create themed screensavers and
print-at-home projects such as portrait stickers, gift tags and portrait
magnets.
 Business Strategy
  -
    
    Increase Same Studio Sales.In order to address our declining same
store sales trends, we have implemented a series of highly focused,
tactical operating initiatives designed to restore our core U.S.
Wal-Mart studio business back to prior positive same studio sales
growth. Examples of these initiatives include:
 -
    
    Reorganizing field operations management to put an
emphasis on training and retaining studio personnel: to
include-
    
    placing a renewed emphasis on photographer certification;-
    
    instituting a new bonus program for our field associates
and a new PCA Partner program to recognize superior
performance;-
    
    launching new marketing initiatives, including selected
coordinated marketing efforts with Wal-Mart, increased
customer direct mailing programs and participation in
Wal-Mart advertising circular;-
    
    changing our studio hours to better serve our customers
demand (this change was based on a detailed study of our
sales by hour);-
    
    re-configuring backend packages, based on customer
feedback, to increase their value and provide more order
flexibility to our customers; and-
    
    increasing our average front end collection rates on
custom ordered portraits which increase final collection
rates.
 Additionally, we are looking at our business more qualitatively
including the use of focus groups, customer surveys, market testing,
etc. to insure we understand our customers needs and address those
needs. We believe these initiatives will result in improvements
primarily in average transaction size
 4




---



##### 



per customer, as well as improved
customer traffic as our current fiscal year progresses.-
    
    Continue to Participate in Wal-Marts Growth. Based upon our
relationship with Wal-Mart, we believe we have the strongest platform
for expansion in the industry as Wal-Mart continues its growth.
However, such growth will be more focused than in prior years. Working
closely with Wal-Mart, in fiscal 2005, we opened 176 permanent studios
but closed 85.-
    
    Disciplined Extension of Our International Presence. We believe that
international markets for professional portrait photography services
represent an attractive growth opportunity for PCA primarily in Canada
and Mexico. We intend to grow our international market share primarily
through our relationship with Wal-Mart. As of January 29, 2006, we
operated 241 studios in Wal-Mart Canada and 96 studios in Wal-Mart
Mexico, and 26 Wal-Mart locations in Germany and the U.K. We continue
to assess the viability of our European operations. See Item 1.
BusinessRisk FactorsRisks Related to Our BusinessOur international
expansion may not be successful and may expose us to additional risks
that could adversely affect our business.-
    
    Disciplined Extension into Non-Portrait Photography Related Concepts.
With the opening of 12 Fun Factory locations in Wal-Mart, we have the
opportunity to expand our presence in Wal-Mart stores with this
child-centered, value-priced concept.-
    
    Critically assessing our business channels and internal costs.
Evaluating all business channels for strategic importance and profit
contribution and ceasing to operate non-contributing channels and
critically evaluating all our operations, support and administrative
functions, for cost saving opportunities.
 The Portrait Photography Experience
  Permanent Studios
   5




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##### 



Modular Traveling Studios ©
  6




---



##### 



Distribution Channels
   -
    
    Wal-Mart Portrait Studios. We are currently the sole provider of
portrait studios in Wal-Mart in all 50 states as well as Canada,
Mexico, Germany and the U.K. As of January 29, 2006, we had 2,492
permanent studios in Wal-Mart stores in the U.S., Canada, Mexico,
Germany and the U.K. Our U.S. operations in Wal-Mart stores accounted
for approximately 84.0%, 84.8% and 85.8% of consolidated sales in
fiscal 2005, 2004 and 2003, respectively. Our international operations
in Wal-Mart stores contributed 12.8%, 11.1% and 9.5% of consolidated
sales for fiscal 2005, 2004 and 2003, respectively. We operate our
studios in Wal-Mart stores under license and lease agreements.-
    
    Other Retail. In fiscal 2004, we began offering embroidery services
and gift personalization in Wal-Mart stores through Hometown
Threads® locations. We franchised 47 these locations as of
January 29, 2006. Additionally, we had 12 Fun Factory locations, our
stuffed animal, child-centered, value-priced concept.-
    
    GoPortraits. In 2003, we developed a free-standing retail concept
called GoPortraits that features an all-digital portrait photography
studio. We also provide services, including digital photographic
retouching, and on-site production of film and digital images.
  -
    
    Through our institutional channel, we target primarily church
accounts. Our institutional operations accounted for less than 3% of
overall sales for fiscal 2005, 2004 and 2003.
 Technology, Manufacturing and Software Development
    7




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##### 



TM TM ® ®
 Marketing and Sales
      Raw Materials and Suppliers
   8




---



##### 



9




---



##### 



Employees
  Governmental Regulations
  Licenses, Trademarks and Patents
 Wal-Mart Licenses
 United States
     10




---



##### 



Canada
 Mexico
 Germany
 United Kingdom
 Hometown Threads ® . ®
 Fun Factory
 11




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##### 



Other Licenses and Concessions
 Meijer
 Navy/Marines
  Army/Air Force
 Callisto (PhotoParade®) TM TM ® ®
 Other
 ITEM 1A. 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 or financial condition, and could cause
our actual consolidated results or financial condition during fiscal 2006, and beyond, to differ
materially from those experienced in prior periods or 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.
   We continued to experience a downturn in our results of operations in fiscal 2005. We had a
net loss, deficiency of earnings to fixed charges and negative net worth.
  12




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##### 



Substantial doubt has been raised about the ability of the Company to continue as a going concern.
   Failure
to pay interest on Notes
 3 4
 If we fail to favorably resolve tax disputes with various taxing authorities our financial
condition and results of operations may be materially adversely affected.
  13




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##### 



We were unable to timely file our Annual Report on Form 10-K for fiscal 2005 and our Quarterly
Reports on Form 10-Q for the thirteen weeks ended May 1, 2005 and the thirty-nine weeks ended
October 30, 2005. We may not be able to accurately and timely file our periodic reports and our
financial condition and results of operations may be materially adversely affected as a result.
    Our business practices and operations need to be acceptable to Wal-Mart.
   -
    
    relocate any studio location in a Wal-Mart store at Wal-Marts request;
 14




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##### 



-
    
    obtain Wal-Marts prior written approval of all advertising;-
    
    maintain specified levels of workers compensation and liability insurance;-
    
    operate the studios for specified hours every day that the Wal-Mart store is open;-
    
    indemnify Wal-Mart from any claim by an employee, vendor or portrait studio
customer relating to studio operation or for accident or injury anywhere in the
Wal-Mart store;-
    
    observe all Wal-Mart policies relating to customer service; and-
    
    observe all Wal-Mart policies relating to the activities of our employees in the
Wal-Mart store;
  -
    
    make improvements to our Wal-Mart studios without Wal-Marts prior written consent;-
    
    conduct any fire, 50% off or similar sales;-
    
    issue a press release using the Wal-Mart name without Wal-Marts consent; and-
    
    advertise on radio or television without Wal-Marts consent.
 Wal-Mart may terminate, breach, otherwise limit or increase our expenses under our license or
lease agreements.
   15




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##### 



An economic downturn, a reduction in consumer spending or decreased customer traffic in our
host stores could materially adversely affect our business.
   We may not be able to finance the rapid growth we may experience.
  Our failure to maintain good relations with our major suppliers of photographic film, paper
and processing chemistry could materially adversely affect our source of supply and our financial
condition.
   16




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##### 



Our inability to raise prices could limit our growth.
  If we lose our key personnel, our business may be adversely affected.
  Our business may be adversely affected if we cannot manage the growth of our operations or
generate sufficient cash flow or obtain sufficient capital to fund future growth.
  17




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##### 



Our expansion into geographic areas we already serve could adversely affect our business.
  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.
  If our competitors initiate price-cutting or changes in package configurations or introduce
new technology, we may experience lower sales or higher costs.
     Our international expansion may not be successful and may expose us to additional risks that
could adversely affect our business.
 18




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##### 



We may not be able to keep pace with the evolution of technology and develop and invest in new
technologies as required to compete effectively.
  A significant increase in piracy of our photographs could materially adversely affect our
business, financial condition or results of operations.
  Any disruption in our manufacturing process 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.
  -
    
    $50.0 million of 14% senior secured notes due 2009;-
    
    $20.0 million of letters of credit due 2009;-
    
    $10.0 million of senior secured revolving credit facility due 2009;
 19




---



##### 



-
    
    $165.0 million of 11.875 % senior notes due 2009;-
    
    $10.0 million of 13.75% senior subordinated notes due 2010;-
    
    $30.0 million of 16.5% senior subordinated discount notes and $22.3
million of additional principal outstanding from capitalized interest
on such notes due 2010; and-
    
    $22.8 million of extended vendor payables due
June 2006, unless we are
able to negotiate a further extension of this obligation.
   The agreements governing our debt impose restrictions on our business.
  -
    
    incur more debt;-
    
    make acquisitions or investments;-
    
    merge or consolidate with others;-
    
    dispose of assets or use asset sale proceeds;-
    
    create liens on our assets; and-
    
    pledge capital stock of any subsidiary that is held by PCA LLC, PCA
Finance Corp. or any of their domestic subsidiaries.
  Forward Looking Statements
 20




---



##### 



-
    
    risks associated with substantial indebtedness, leverage, debt service, liquidity and the
ability to obtain other sources of financing and/or restructure our debt;-
    
    risks associated with managements ability to successfully design and implement a plan to
improve results of operations;-
    
    risks associated with digital photographic technology;-
    
    risks associated with our ability to extend payment terms with our vendors;-
    
    risks associated with operating in countries outside the U.S.;-
    
    risks associated with our relationship with Wal-Mart, our principal business relationship;-
    
    performance of our new or existing studios and their future operating results;-
    
    risks of competition from companies including, but not limited to, those currently
operating in other photography markets;-
    
    risks associated with the domestic professional portrait photography industry; and
 21




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##### 



-
    
    other risks and uncertainties affecting Portrait Corporation of
America, Inc. and its subsidiaries referred to in this Form 10-K (see
Part I, Item 1A., Risk Factors and Part II, Item 7., Managements
Discussion and Analysis of Financial Condition and Results of
Operations) and in our other current and periodic filings with the
Securities and Exchange Commission.
    ITEM 2. PROPERTIES
     ITEM 3. LEGAL PROCEEDINGS
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  22




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##### 



PART II
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
   ITEM 6. SELECTED FINANCIAL DATA
  For the Fiscal Year2005
    
    2004(13)
    
    2003(13)
    
    2002(13)
    
    2001(1)(13)(in thousands)Statement of Operations Data:Sales (2)
    
    $
    325,516
    
    
    $
    323,553
    
    
    $
    324,814
    
    
    $
    296,616
    
    
    $
    258,403Costs of sales
    
    
    268,747
    
    
    
    258,396
    
    
    
    245,028
    
    
    
    219,551
    
    
    
    192,362Gross profit
    
    
    56,769
    
    
    
    65,157
    
    
    
    79,786
    
    
    
    77,065
    
    
    
    66,041General and administrative expenses (3)
    
    
    51,471
    
    
    
    47,669
    
    
    
    45,610
    
    
    
    41,300
    
    
    
    37,652Amortization of intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192
    
    
    
    1,971Income from operations
    
    
    5,298
    
    
    
    17,488
    
    
    
    34,176
    
    
    
    35,573
    
    
    
    26,418Interest expense, net
    
    
    38,760
    
    
    
    32,459
    
    
    
    30,706
    
    
    
    28,610
    
    
    
    29,681Other expense (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,776
    
    
    
    15,026Early extinguishment of debt (5)
    
    
    980
    
    
    
    
    
    
    
    
    
    
    
    4,569
    
    
    
    Income tax provision (benefit) (6)
    
    
    
    
    
    
    14,769
    
    
    
    2,148
    
    
    
    (14,817
    )
    
    
    43Income (loss) before cumulative effect of accounting
change
    
    
    (34,442
    )
    
    
    (29,740
    )
    
    
    1,322
    
    
    
    14,435
    
    
    
    (18,332
    )Cumulative effect of accounting change (7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,728
    )Net income (loss)
    
    $
    (34,442
    )
    
    $
    (29,740
    )
    
    $
    1,322
    
    
    $
    14,435
    
    
    $
    (20,060
    )
 23




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##### 



For the Fiscal Year2005
    
    2004(13)
    
    2003(13)
    
    2002(13)
    
    2001(1)(13)(in thousands)Cash Flow Data:Purchases of property and equipment
    
    $
    12,934
    
    
    $
    21,382
    
    
    $
    21,080
    
    
    $
    17,046
    
    
    $
    12,924Depreciation and amortization
    
    
    14,101
    
    
    
    12,818
    
    
    
    11,408
    
    
    
    10,168
    
    
    
    9,114Net cash provided by (used in) operating
activities
    
    
    (10,549
    )
    
    
    24,248
    
    
    
    17,994
    
    
    
    30,901
    
    
    
    12,522Net cash used in investing activities
    
    
    (12,930
    )
    
    
    (22,522
    )
    
    
    (21,066
    )
    
    
    (17,046
    )
    
    
    (12,924
    )Net cash provided by (used in) financing
activities
    
    
    16,223
    
    
    
    8,713
    
    
    
    6,031
    
    
    
    (14,598
    )
    
    
    (963
    )Other Financial Data:Ratio of earnings to fixed charges (8)
    
    
    
    
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    Same studio sales percentage increase (decrease)
(9)
    
    
    (4.0
    )%
    
    
    (7.0
    )%
    
    
    1.5
    %
    
    
    5.2
    %
    
    
    3.2
    %
 At End of Fiscal Year2005
    
    
    2004(13)
    
    
    2003(13)
    
    
    2002(13)
    
    
    2001(1)(13)Balance Sheet Data: (in thousands)Cash and cash equivalents
    
    $
    7,973
    
    
    $
    15,178
    
    
    $
    4,820
    
    
    $
    2,515
    
    
    $
    2,870Working capital (deficit) (10)
    
    
    (318,702
    )
    
    
    (39,393
    )
    
    
    (39,592
    )
    
    
    (36,253
    )
    
    
    (50,322
    )Total assets
    
    
    161,310
    
    
    
    166,792
    
    
    
    163,665
    
    
    
    150,981
    
    
    
    129,294Total consolidated debt
    
    
    274,955
    
    
    
    245,862
    
    
    
    229,937
    
    
    
    217,247
    
    
    
    217,961Series A preferred stock
    
    
    15,000
    
    
    
    15,000
    
    
    
    15,000
    
    
    
    15,000
    
    
    
    7,688Consolidated shareholders deficiency
    
    
    (204,820
    )
    
    
    (171,041
    )
    
    
    (141,144
    )
    
    
    (142,793
    )
    
    
    (179,177
    )Studio/Store Data:Number of permanent studios and stores:Wal-Mart:U.S.(11)
    
    
    2,136
    
    
    
    2,063
    
    
    
    1,900
    
    
    
    1,707
    
    
    
    1,537Canada, Mexico, Germany and U.K.(11)
    
    
    368
    
    
    
    340
    
    
    
    301
    
    
    
    256
    
    
    
    210Other (12)
    
    
    1
    
    
    
    13
    
    
    
    39
    
    
    
    38
    
    
    
    30Total
    
    
    2,505
    
    
    
    2,416
    
    
    
    2,240
    
    
    
    2,001
    
    
    
    1,777
 24




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##### 



For the Fiscal Year2005
    
    2004
    
    2003
    
    2002
    
    2001Studio/Store Opening Data:Number of new permanent studios and stores opened:Wal-Mart:U.S.(11)
    
    
    157
    
    
    
    163
    
    
    
    193
    
    
    
    170
    
    
    
    156Canada, Mexico, Germany and U.K.(11)
    
    
    30
    
    
    
    39
    
    
    
    45
    
    
    
    46
    
    
    
    39Wal-Mart and Other (12)
    
    
    (98
    )
    
    
    (26
    )
    
    
    1
    
    
    
    8
    
    
    
    20Total
    
    
    89
    
    
    
    176
    
    
    
    239
    
    
    
    224
    
    
    
    215
 Notes
 
 (1)
    
    fiscal year 2001 consisted of 53 weeks. (All other years presented consisted of 52 weeks.)(2)
    
    The following table sets forth our sales by channel: For the Fiscal Year2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands)Wal-Mart
    
    $
    315,165
    
    
    $
    310,253
    
    
    $
    309,398
    
    
    $
    279,692
    
    
    $
    247,404Other
    
    
    10,351
    
    
    
    13,300
    
    
    
    15,416
    
    
    
    16,924
    
    
    
    10,999Total
    
    $
    325,516
    
    
    $
    323,553
    
    
    $
    324,814
    
    
    $
    296,616
    
    
    $
    258,403
 (3)
    
    The amount for fiscal 2001 includes $0.8 million of expenses incurred
to close our studios in Kmart stores, including severance, net of
reimbursements received from Kmart for unamortized leasehold
improvements.(4)
    
    Other expense in fiscal 2001 and 2002 represented the cumulative
mark-to-market adjustment for the relevant fiscal year for the
embedded derivative in our Series A redeemable convertible preferred
stock in accordance with Statement of Financial Accounting Standards
No. 133 (SFAS No. 133), Accounting for Derivative Instruments and
Hedging Activities, as amended (see Note (7) below), which we adopted
in fiscal 2001. On December 9, 2002, a special meeting of the
shareholders of PCA was held and the shareholders approved
modifications to the provisions of our Series A redeemable convertible
preferred stock. Upon the filing of restated articles of
incorporation on December 20, 2002, we modified the liquidation and
redemption provisions of our Series A redeemable convertible preferred
stock. As a result of these changes, we have determined the embedded
derivative in our Series A redeemable convertible preferred stock no
longer meets the requirements of bifurcation and separate accounting
under the provisions of SFAS No. 133. See Notes (4) and (11) of our
consolidated financial statements. 25




---



##### 



(5)
    
    On July 15, 2005, PCA LLC and PCA Finance Corp., our wholly-owned
subsidiaries, issued $50 million of senior secured notes due 2009.
The proceeds from the notes were used to fully repay PCA LLCs prior
senior secured credit facility of $32.5 million. As a result, the
Company recognized a charge of $.98 million for early extinguishment
of debt equal to the unamortized deferred financing costs and
administrative fees on this debt. On June 27, 2002, PCA LLC and PCA
Finance Corp. issued $165.0 million in senior notes due 2009. Also
on June 27, 2002, PCA LLC entered into our prior senior secured
credit facility, PCA LLC issued $10.0 million of senior subordinated
notes, and we issued $30.0 million of senior subordinated discount
notes. The net proceeds from the issuance of the senior notes,
together with borrowings under our prior senior secured credit
facility and the proceeds from the sale of the senior subordinated
notes and the senior subordinated discount notes, were used to repay
our other previously outstanding senior secured credit facility, our
previously outstanding senior subordinated term loans, and related
interest and fees. As a result of these extinguishments, we realized
a loss on the early extinguishment of debt in fiscal 2002 of $4.6
million. This loss was comprised of $10.2 million for the write-off
of deferred financing costs less $5.6 million for the write-off of
accrued effective interest on retired increasing rate debt.(6)
    
    For fiscal 2004 and 2001, a valuation allowance was provided against
deferred tax assets since we concluded it was more likely than not
that such deferred tax assets would not ultimately be realized. For
fiscal 2002, we concluded it was more likely than not that we would
be able to utilize substantially all of the existing deferred tax
assets. Therefore, substantially all of the valuation allowance in
fiscal 2001 was reversed in fiscal 2002. This change in the
valuation allowance generated a tax benefit and additional net income
of $18.6 million in fiscal 2002 which were subsequently reversed as a
charge in fiscal 2004. See Note (8) of our consolidated financial
statements.(7)
    
    Effective for fiscal 2001, we adopted SFAS No. 133. Our Series A
preferred stock contained an embedded derivative under SFAS No. 133
which required bifurcation and separate accounting. As a result, PCA
recorded a cumulative effect of accounting change under SFAS No. 133
of $(1.7) million for fiscal 2001. In addition, we recorded $(15.0)
million in fiscal 2001 of other expense as we marked the embedded
derivative to market in accordance with SFAS No. 133. See Note (4)
above.(8)
    
    For purposes of computing the ratio of earnings to fixed charges,
earnings consist of income from continuing operations before income
taxes plus fixed charges. Fixed charges consist of net interest
expense and amortization of deferred financing costs. For fiscal
2003, earnings were sufficient to cover fixed charges by $3.5
million. However, for fiscal 2005, 2004, 2002, and 2001, earnings
were insufficient to cover fixed charges by $34.4 million, $15.0
million, $0.4 million, and $18.3 million, respectively.(9)
    
    We consider a studio to be in our same studio sales calculation once
it has been open for fifty-two weeks (i.e., in its fifty-third week).
Same studio sales represent only Wal-Mart studios, both domestically
and internationally.(10)
    
    Current assets minus current liabilities. 26




---



##### 



(11)
    
    Includes 7 Fun Factory Stores in the U.S. and 5 in Canada of
which 6 were opened in the U.S. in fiscal 2005 and 5 in Canada.(12)
    
    In fiscal 2005, 85 permanent studios in Wal-Mart were closed
including 83 in the U.S., and 1 each in Canada and Europe.
Additionally, 11 Military and 1 Go Portraits studios were
closed. We also sold 1 Hometown Threads store.(13)
    
    The selected financial data has been restated to give effect to
the matters discussed in Note 17 to the consolidated financial
statements.
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Description of the Company
 ® ®
 27




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##### 



Selected Performance Metrics
  Fiscal Year(1)2005
    
    2004
    
    2003(dollar amounts in millions)Financial and Operating Data:Sales
    
    $
    325.5
    
    
    $
    323.6
    
    
    $
    324.8Gross profit
    
    
    56.8
    
    
    
    65.2
    
    
    
    79.8Income from operations
    
    
    5.3
    
    
    
    17.5
    
    
    
    34.2Income (loss) before taxes
    
    
    (34.4
    )
    
    
    (15.0
    )
    
    
    3.5Net income (loss) (2)
    
    
    (34.4
    )
    
    
    (29.7
    )
    
    
    1.3Permanent studios/stores at end of year
    
    
    2,505
    
    
    
    2,416
    
    
    
    2,240Change in permanent studios/stores (3)
    
    
    89
    
    
    
    176
    
    
    
    239Customers served (in millions)
    
    
    6.7
    
    
    
    7.3
    
    
    
    7.3Change over Prior Year:Sales
    
    
    .6
    %
    
    
    (0.4
    )%
    
    
    9.5
    %Gross profit
    
    
    (12.9
    )%
    
    
    (18.3
    )%
    
    
    3.5
    %Income from operations
    
    
    (69.7
    )%
    
    
    (48.8
    )%
    
    
    (3.9
    )%Income (loss) before taxes
    
    
    (130.0
    )%
    
    
    (531.4
    )%
    
    
    1,008.4
    %Net income (loss) (2)
    
    
    (15.8
    )%
    
    
    (2,349.6
    )%
    
    
    (90.8
    )%Permanent studios/stores
    
    
    3.7
    %
    
    
    7.9
    %
    
    
    11.9
    %New permanent studios/stores (3)
    
    
    (49.4
    )%
    
    
    (26.4
    )%
    
    
    6.7
    %Customers served
    
    
    (8.2
    )%
    
    
    0.4
    %
    
    
    9.2
    %Same studio sales percentage increase (decrease) (4)
    
    
    (4.0
    )%
    
    
    (7.0
    )%
    
    
    1.5
    %
 
 (1)
    
    Our fiscal years 2005, 2004, and 2003 ended on January 29, 2006,
January 30, 2005, and February 1, 2004, respectively. Each fiscal year
presented consisted of 52 weeks.(2)
    
    For fiscal 2005 and 2004, a valuation allowance was provided against
deferred tax assets since we concluded it was more likely than not
that such deferred tax assets would not ultimately be realized. See
Note (8) of our consolidated financial statements.(3)
    
    In fiscal 2005, we opened 176 new permanent studios and 11 Fun Factory
store in Wal-Mart stores worldwide. However, we closed 85 Wal-Mart
permanent studios, 11 Military and 1 Go Portrait studios and sold 1
Hometown Threads store.(4)
    
    We consider a studio to be in our same studio sales calculation once
it has been open for fifty-two weeks (i.e., in its fifty-third week).
Same studio sales represent Wal-Mart studios, both domestically and
internationally, as such calculation is not significant for our
non-Wal-Mart business. 28




---



##### 



Executive Summary
 Financial Results
   Managements Plan
  
    
    reorganizing field operations management to put an emphasis on
training and retaining studio personnel;
    
    placing a renewed emphasis on photographer certification;
    
    instituting a new bonus program for our field associates and a new PCA
Partner program to recognize superior performance;
    
    launching new marketing initiatives, including selected coordinated
marketing efforts with Wal-Mart, increased customer direct mailing
programs and participation in a Wal-Mart advertising circular;
    
    changing our studio hours to better serve our customers demand (this
change was based on a detailed study of our sales by hour);
    
    re-configuring backend packages, based on customer feedback, to
increase their value and provide more order flexibility to our
customers;
    
    increasing our average front end collection rates on custom ordered
portraits which increase final collection rates;
    
    looking at our business more qualitatively using focus groups,
customer surveys, market testing, among other tools to insure we
understand our customers needs and address those needs;
    
    more controlled and focused growth with Wal-Mart  working closely with
Wal-Mart in fiscal 2005, we opened 176 permanent studios but closed
85.
 29




---



##### 




    
    disciplined expansion internationally  we believe Canada and Mexico
provide an attractive platform for international growth and we are
assessing the viability of our European operations;
    
    disciplined expansion into non-portrait photography related
concepts  with the opening of 12 Fun Factory locations in Wal-Mart, we have the
opportunity to expand our presence in Wal-Mart stores with this
child-centered, value-priced concept;
    
    critically evaluating all our operations, support and administrative
functions, for cost saving opportunities; and
    
    evaluating all business channels for strategic importance and profit
contribution and ceasing to operate non-contributing channels.
 Our Key Suppliers
  Going
Concern Paragraph in Auditors Report
   Late Filing of Form 10-K, Form 10-Q and Form 8-K
  30




---



##### 



Reclassification
of Long Term Debt to Current Liabilities
  Financing Transactions
  31




---



##### 



Non-Portrait Photography-Related Specialty Retail Concepts
 Hometown Threads ® ,
 Sales and Expenses
   32




---



##### 



Statement of Operations  By Percentage of Sales
  Fiscal Year2005
    
    
    2004
    
    
    2003Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    82.5
    
    
    
    79.9
    
    
    
    75.4Gross profit
    
    
    17.5
    
    
    
    20.1
    
    
    
    24.6General and administrative
    
    
    15.8
    
    
    
    14.7
    
    
    
    14.0Income from operations
    
    
    1.7
    
    
    
    5.4
    
    
    
    10.5Interest expense, net
    
    
    (11.9
    )
    
    
    (10.0
    )
    
    
    (9.5
    )Early extinguishment of debt
    
    
    (.3
    )%
    
    
    
    
    
    
    Income (loss) before income taxes
    
    
    (10.6
    )%
    
    
    (4.6
    )
    
    
    1.1Income tax (provision) benefit
    
    
    
    
    
    
    (4.6
    )
    
    
    (0.7
    )Net income (loss)
    
    
    (10.6
    )%
    
    
    (9.2
    )%
    
    
    0.4
    %
 33




---



##### 



Results of Operations
 2005 Fiscal Year Compared With 2004 Fiscal Year.
  AmountAttributable to
    
    (in millions)4.0% decrease in same studio sales in Wal-Mart permanent portrait studios
    
    $
    (11.6
    )Wal-Mart permanent portrait studios not yet included in the same studio sales base
    
    
    19.6Decrease in sales in our Wal-Mart traveling locations due to fewer locations visited
    
    
    (4.6
    )Total increase attributable to our Wal-Mart portrait photography business
    
    
    3.4Decrease in other retail businesses
    
    
    (0.4
    )Decrease in sales in institutional segment as a result of a decrease in photography
sessions in churches
    
    
    (1.1
    )Total increase in sales
    
    $
    1.9
  Attributable to
    
    %Decline in same studio sales, more studios and less customer traffic
resulted in an increase in retail photography labor, license fees,
commissions, general studio costs, manufacturing and other product costs as
a percentage of sales.
    
    
    (3.1
    )%Decrease in marketing & travel spending
    
    
    0.7Increase in depreciation expense due to studio expansion and supplies freight
    
    
    (0.6
    )Other
    
    
    0.4Total decrease in gross profit percentage
    
    
    (2.6
    )%
  34




---



##### 



AmountAttributable to
    
    (in millions)Increase in labor costs due to increase in studio openings and
changes in customer service.
    
    $
    3.4Decrease in legal, professional, meetings and seminars primarily
as a result of cancellation of the Companys annual sales
meeting.
    
    
    (0.8
    )Increase in travel, business development and recruiting expenses.
    
    
    1.0Other
    
    
    0.2Total increase in general and administrative expenses
    
    $
    3.8
   AmountAttributable to
    
    (in millions)Increase from senior subordinated discount notes issued in June 2002
    
    $
    1.2Increase from supplier provided financing
    
    
    0.7Increase from new senior secured notes issued July 2005
    
    
    3.9Increase in LC fees and underwriting fees
    
    
    .8Other
    
    
    (0.3
    )Total increase in interest expense
    
    $
    6.3
    2004 Fiscal Year Compared With 2003 Fiscal Year.
 35




---



##### 



AmountAttributable to
    
    (in millions)7.0% decrease in same studio sales in Wal-Mart permanent portrait studios
    
    $
    (20.2
    )Wal-Mart permanent portrait studios not yet included in the same studio sales base
    
    
    24.9Decrease in sales in our Wal-Mart traveling locations due to fewer locations visited
    
    
    (4.3
    )Total increase attributable to our Wal-Mart portrait photography business
    
    
    0.4Increase in other retail businesses
    
    
    0.4Decrease in sales in institutional segment as a result of a decrease in photography
sessions in churches
    
    
    (2.0
    )Total decrease in sales
    
    $
    (1.2
    )
  Attributable to
    
    %Increase in retail photography labor, general studio supplies,
freight costs for portraits and supplies and distribution costs as
a percentage of sales due to decrease in same studio sales
    
    
    (3.2
    )%Increase in life and health insurance costs for retail employees
    
    
    (0.3
    )Change in our product mix
    
    
    (0.7
    )Increase in depreciation expense due to studio expansion
    
    
    (0.4
    )Other
    
    
    0.1Total decrease in gross profit percentage
    
    
    (4.5
    )%
  36




---



##### 



AmountAttributable to
    
    (in millions)Increase in professional services primarily related to our
Sarbanes-Oxley effort, legal services and audit fees
    
    $
    2.3Decrease in workers compensation expense and general
casualty insurance expense primarily due to elevated charges
experienced in fiscal 2003
    
    
    (1.8
    )Reduction in expense related to termination of benefit plan
for certain retired employees
    
    
    (1.1
    )Increase in foreign currency transaction gain
    
    
    (0.3
    )Managements estimate of settlement of outstanding tax
claims due to Mexican tax authority from our Mexican
subsidiary as the result of suspected fraudulent activities
conducted by Mexican employees
    
    
    1.5Other increases related to Mexican subsidiary
    
    
    0.7Loss on disposal of property, plant and equipment
    
    
    0.6Other
    
    
    0.2Total increase in general and administrative expenses
    
    $
    2.1
   AmountAttributable to
    
    (in millions)Increase from senior subordinated discount notes issued in June 2002
    
    $
    1.0Increase from supplier provided financing
    
    
    0.3Increase from prior senior secured credit facility entered into June 2002
    
    
    0.5Total increase in interest expense
    
    $
    1.8
   37




---



##### 



Liquidity and Capital Resources
 Liquidity
   3 4
  38




---



##### 



Seasonality.
 Purchases of Property and Equipment
 39




---



##### 



Net Cash Used in/Provided by Operating Activities
 AmountChanges Attributable to
    
    (in millions)Net loss
    
    $
    (4.7
    )Trade accounts payable
    
    
    (18.0
    )Deferred income taxes
    
    
    (13.4
    )Other current accrued liabilities
    
    
    (2.2
    )Other non-current accrued liabilities
    
    
    1.1Inventories
    
    
    (1.7
    )Accrued interest
    
    
    1.3Prepaid expenses and other assets
    
    
    (1.6
    )Depreciation and amortization
    
    
    1.7Early extinguishment of debt
    
    
    1.0Paid-in-kind interest
    
    
    1.1Other
    
    
    0.6Total decrease in cash provided by operating activities
    
    $
    (34.8
    )
  AmountChanges Attributable to
    
    (in millions)Net loss
    
    $
    (31.1
    )Trade accounts payable
    
    
    15.4Deferred income taxes
    
    
    11.6Other current accrued liabilities
    
    
    3.6Other non-current accrued liabilities
    
    
    (2.7
    )Inventories
    
    
    2.5Accrued interest
    
    
    2.1Prepaid expenses and other assets
    
    
    1.5Depreciation and amortization
    
    
    1.4Loss on disposal
    
    
    0.6Paid-in-kind interest
    
    
    1.0Accounts receivable
    
    
    0.6Other
    
    
    (0.2
    )Total increase in cash provided by operating activities
    
    $
    6.3
 Net Cash Used in Investing Activities
 Net Cash Provided by/Used in Financing Activities
 40




---



##### 



Interest Rate Exposure.
 Contractual Obligations and Commercial Commitments
  41




---



##### 



Repayment by PeriodMoreLess than
    
    
    2-3 years
    
    
    4-5 years
    
    
    Than 51 year
    
    
    (fiscal
    
    
    (fiscal
    
    
    years(fiscal
    
    
    2007 &
    
    
    2009 &
    
    
    (beyondTotal
    
    
    2006)
    
    
    2008)
    
    
    2010
    
    
    fiscal 2010(in millions)Short-term debt obligations:Senior secured notes due 2009
    
    $
    50.0
    
    
    $
    0.0
    
    
    $
    0.0
    
    
    $
    50.0
    
    
    $
    0.00Interest payments on senior secured
notes due 2009.
    
    
    23.9
    
    
    
    7.0
    
    
    
    14.0
    
    
    
    2.9
    
    
    
    0.0Senior notes due 2009
    
    
    165.0
    
    
    
    
    
    
    
    
    
    
    
    165.0
    
    
    
    0.0Interest payments on senior notes due
2009
    
    
    78.4
    
    
    
    19.6
    
    
    
    39.2
    
    
    
    19.6
    
    
    
    Senior subordinated notes
    
    
    10.0
    
    
    
    
    
    
    
    
    
    
    
    10.0Interest payments on senior
subordinated notes
    
    
    6.3
    
    
    
    1.4
    
    
    
    2.8
    
    
    
    2.1
    
    
    
    Senior subordinated discount notes
(original principal amount)
    
    
    30.0
    
    
    
    
    
    
    
    
    
    
    
    30.0Paid-in-kind interest capitalized on
senior subordinated discount notes
    
    
    36.3
    
    
    
    
    
    
    
    
    
    
    
    36.3Total short-term debt obligations
    
    
    399.9
    
    
    
    28.0
    
    
    
    56.0
    
    
    
    315.9
    
    
    
    0.0Other obligations:Operating lease obligations
    
    
    1.5
    
    
    
    0.9
    
    
    
    0.6
    
    
    
    0.0
    
    
    
    0.0Sub-lease guarantee obligations
    
    
    2.1
    
    
    
    0.6
    
    
    
    1.1
    
    
    
    0.4
    
    
    
    0.0Series A preferred stock
    
    
    15.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.0Minimum
film, paper and chemical purchases
    
    
    15.2
    
    
    
    12.1
    
    
    
    3.1
    
    
    
    
    
    
    
    Total other obligations
    
    
    33.8
    
    
    
    13.6
    
    
    
    4.8
    
    
    
    .4
    
    
    
    15.0Total contractual cash obligations
    
    $
    433.7
    
    
    $
    41.6
    
    
    $
    60.8
    
    
    $
    316.3
    
    
    
    15.0
 Off Balance Sheet Arrangements
  Critical Accounting Policies
  42




---



##### 



Revenue Recognition and Deferred Costs
 Workers Compensation and General Insurance
 Income Tax
 Goodwill
  43




---



##### 



Depreciation of Property and Equipment
 Land improvements
    
    
    10 to 30 yearsBuildings and improvements
    
    
    10 to 55 yearsPhotographic, sales and finishing equipment
    
    
    3 to 13 yearsStudio improvements
    
    
    3 to 10 years
  Long-Lived Asset Impairments
 Inflation
  ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    44




---



##### 



Fiscal 2005
    
    Fiscal 2004
    
    Fiscal 2003(in thousands)+10
    %
    
    
    -10
    %
    
    
    +10
    %
    
    
    -10
    %
    
    
    +10
    %
    
    
    -10
    %Canada
    
    $
    (26
    )
    
    $
    26
    
    
    $
    (287
    )
    
    $
    372
    
    
    $
    (492
    )
    
    $
    617Mexico
    
    $
    43
    
    
    $
    (43
    )
    
    $
    (177
    )
    
    $
    212
    
    
    $
    (291
    )
    
    $
    363Germany
    
    $
    (44
    )
    
    $
    44
    
    
    $
    (275
    )
    
    $
    329
    
    
    $
    (178
    )
    
    $
    209U.K.
    
    $
    (6
    )
    
    $
    6
    
    
    $
    (32
    )
    
    $
    39
    
    
    $
    (25
    )
    
    $
    26
  45




---



##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Reports of Independent Registered Public Accounting Firms
    
    
    47Consolidated Balance Sheets as of January 29, 2006 and January 30, 2005
    
    
    48Consolidated Statements of Operations for the fiscal year ended
January 29, 2006, January 30, 2005 and February 1, 2004 (Restated).
    
    
    50Consolidated Statements of Shareholders Deficiency and Comprehensive
Income (Loss) for the fiscal year ended January 29, 2006, January 30,
2005 and February 1, 2004 (Restated).
    
    
    51Consolidated Statements of Cash Flows for the fiscal year ended
January 29, 2006, January 30, 2005 and February 1, 2004 (Restated).
    
    
    52Notes to Consolidated Financial Statements
    
    
    54
 46




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


47-1



---



##### 



Deloitte & Touche LLP
   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
     
   47-2




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
 January 29,
    
    January 30,2006
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    7,973
    
    
    $
    15,178Accounts receivable
    
    
    2,668
    
    
    
    2,781Inventories
    
    
    12,344
    
    
    
    11,439Deferred income taxes
    
    
    
    
    
    
    108Prepaid expenses and other assets
    
    
    4,364
    
    
    
    3,303Total current assets
    
    
    27,349
    
    
    
    32,809PROPERTY AND EQUIPMENT:Land and improvements
    
    
    2,306
    
    
    
    2,306Buildings and improvements
    
    
    13,893
    
    
    
    13,684Photographic, sales and finishing equipment
    
    
    164,068
    
    
    
    152,315Studio improvements
    
    
    28,095
    
    
    
    26,530Construction in progress
    
    
    598
    
    
    
    3,048Total
    
    
    208,960
    
    
    
    197,883Accumulated depreciation and amortization
    
    
    (136,951
    )
    
    
    (123,974
    )Property and equipment, net
    
    
    72,009
    
    
    
    73,909GOODWILL
    
    
    53,046
    
    
    
    52,989OTHER INTANGIBLE ASSETS
    
    
    135
    
    
    
    135DEFERRED FINANCING COSTS, NET
    
    
    8,605
    
    
    
    6,823OTHER ASSETS
    
    
    166
    
    
    
    127TOTAL ASSETS
    
    $
    161,310
    
    
    $
    166,792
 See notes to consolidated financial statements.
 48




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(dollar amounts in thousands)
 January 29,
    
    January 30,2006
    
    2005LIABILITIES AND SHAREHOLDERS DEFICIENCYCURRENT LIABILITIES:Short-term borrowings
    
    $
    21
    
    
    $
    Current portion of long-term debt
    
    
    274,934
    
    
    
    182Accounts payabletrade
    
    
    30,658
    
    
    
    36,179Accrued insurance
    
    
    5,193
    
    
    
    4,141Accrued income taxes
    
    
    1,930
    
    
    
    2,022Accrued compensation
    
    
    5,257
    
    
    
    4,834Accrued interest
    
    
    11,893
    
    
    
    10,377Other accrued liabilities
    
    
    16,165
    
    
    
    14,467Total current liabilities
    
    
    346,051
    
    
    
    72,202LONG-TERM DEBT
    
    
    
    
    
    
    245,680DEFERRED INCOME TAXES
    
    
    
    
    
    
    108OTHER LIABILITIES
    
    
    5,079
    
    
    
    4,843TOTAL LIABILITIES
    
    
    351,130
    
    
    
    322,833COMMITMENTS AND CONTINGENCIESSERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$0.01 par value at January 29, 2006 and January
30, 2005 (authorized200,000 shares;
outstanding15,000 shares)
    
    
    15,000
    
    
    
    15,000SHAREHOLDERS DEFICIENCY:Common stock, $0.01 par value at January 29,
2006 and at January 30, 2005
(authorized20,000,000 shares; issued and
outstanding at January 29, 2006 and January
30, 2005 2,294,352 shares)
    
    
    23
    
    
    
    23Warrants to purchase Series A redeemable
convertible preferred stock (issued and
outstanding287)
    
    
    642
    
    
    
    642Warrants to purchase common stock (issued
and outstanding306,610)
    
    
    2,947
    
    
    
    2,947Additional paid-in capital
    
    
    24,104
    
    
    
    24,104Deferred compensation
    
    
    (182
    )
    
    
    (256
    )Accumulated deficit
    
    
    (232,675
    )
    
    
    (198,233
    )Accumulated other comprehensive income/(loss)
    
    
    321
    
    
    
    (268
    )Total shareholders deficiency
    
    
    (204,820
    )
    
    
    (171,041
    )TOTAL LIABILITIES AND SHAREHOLDERS DEFICIENCY
    
    $
    161,310
    
    
    $
    166,792
 See notes to consolidated financial statements.
 49




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands)
 Fiscal Year EndedFebruary 1,2004January 29,
    
    January 30,
    
    (as restated;2006
    
    2005
    

see Note 17)SALES
    
    $
    325,516
    
    
    $
    323,553
    
    
    $
    324,814COST OF SALES
    
    
    268,747
    
    
    
    258,396
    
    
    
    245,028GROSS PROFIT
    
    
    56,769
    
    
    
    65,157
    
    
    
    79,786GENERAL AND ADMINISTRATIVE
    
    
    51,471
    
    
    
    47,669
    
    
    
    45,610INCOME FROM OPERATIONS
    
    
    5,298
    
    
    
    17,488
    
    
    
    34,176INTEREST INCOME
    
    
    25
    
    
    
    8
    
    
    
    10INTEREST EXPENSE
    
    
    (38,785
    )
    
    
    (32,467
    )
    
    
    (30,716
    )EARLY EXTINGUISHMENT OF DEBT
    
    
    (980
    )
    
    
    
    
    
    
    (LOSS) INCOME BEFORE INCOME TAXES
    
    
    (34,442
    )
    
    
    (14,971
    )
    
    
    3,470INCOME TAX (PROVISION)
    
    
    
    
    
    
    (14,769
    )
    
    
    (2,148
    )NET (LOSS) INCOME
    
    $
    (34,442
    )
    
    $
    (29,740
    )
    
    $
    1,322
 See notes to consolidated financial statements.
 50




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIENCY AND COMPREHENSIVE INCOME (LOSS)
(dollar amounts in thousands)
 Accumul-atedWarrants to Purchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherSeries A Redeemable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compre-
    
    Compre-
    
    TotalConvertible Preferred
    
    Warrants to Purchase
    
    Additional
    
    Deferred
    
    Accumul-
    
    hensive
    
    hensive
    
    Share-Common Stock
    
    Stock
    
    Common Stock
    
    Paid-In
    
    Comp-
    
    ated
    
    Income
    
    Income
    
    holdersShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    ensation
    
    Deficit
    
    (Loss)
    
    (Loss)
    
    DeficiencyBALANCE, FEBRUARY 2, 2003 (as
restated; see Note 17)
    
    
    2,293,152
    
    
    $
    458
    
    
    
    287
    
    
    $
    642
    
    
    
    306,610
    
    
    $
    2,947
    
    
    $
    23,273
    
    
    
    
    
    
    $
    (169,815
    )
    
    
    
    
    
    $
    (298
    )
    
    $
    (142,793
    )Comprehensive income:Net income (as restated; see Note 17)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,322
    
    
    $
    1,322
    
    
    
    
    
    
    
    1,322Foreign currency translation
adjustment, net of tax (as
restated; see Note 17)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    264
    
    
    
    264
    
    
    
    264Total comprehensive
income (as restated; see
Note 17)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,586Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    386
    
    
    $
    (333
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53Issuance of common stock
    
    
    1,200
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10BALANCE, FEBRUARY 1, 2004 (as
restated; see Note 17)
    
    
    2,294,352
    
    
    
    459
    
    
    
    287
    
    
    
    642
    
    
    
    306,610
    
    
    
    2,947
    
    
    
    23,668
    
    
    
    (333
    )
    
    
    (168,493
    )
    
    
    
    
    
    
    (34
    )
    
    
    (141,144
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,740
    )
    
    $
    (29,740
    )
    
    
    
    
    
    
    (29,740
    )Foreign currency translation
adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (234
    )
    
    
    (234
    )
    
    
    (234
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (29,974
    )Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77Effect of merger and
reincorporation
    
    
    
    
    
    
    (436
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    436BALANCE, JANUARY 30, 2005
    
    
    2,294,352
    
    
    
    23
    
    
    
    287
    
    
    
    642
    
    
    
    306,610
    
    
    
    2,947
    
    
    
    24,104
    
    
    
    (256
    )
    
    
    (198,233
    )
    
    
    
    
    
    
    (268
    )
    
    
    (171,041
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,442
    )
    
    $
    (34,442
    )
    
    
    
    
    
    
    (34,442
    )Foreign currency translation
adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    589
    
    
    
    589
    
    
    
    589Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (33,853
    )Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74BALANCE, JANUARY 29, 2006
    
    
    2,294,352
    
    
    $
    23
    
    
    
    287
    
    
    $
    642
    
    
    
    306,610
    
    
    $
    2,947
    
    
    $
    24,104
    
    
    $
    (182
    )
    
    $
    (232,675
    )
    
    
    
    
    
    $
    321
    
    
    $
    (204,820
    )
 See notes to consolidated financial statements.
 51




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
 Fiscal Year EndedFebruary 1,2004January 29,
    
    January 30,
    
    (as restated;2006
    
    2005
    

see Note 17)OPERATING ACTIVITIES:Net income (loss)
    
    $
    (34,442
    )
    
    $
    (29,740
    )
    
    $
    1,322Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:Depreciation and amortization
    
    
    14,101
    
    
    
    12,818
    
    
    
    11,408Amortization of deferred financing costs
    
    
    2,073
    
    
    
    1,643
    
    
    
    1,642Paid-in-kind interest
    
    
    7,661
    
    
    
    6,538
    
    
    
    5,579Early extinguishment of debt
    
    
    980
    
    
    
    
    
    
    
    Amortization of debt discounts
    
    
    614
    
    
    
    614
    
    
    
    614Amortization
of deferred compensation
    
    
    74
    
    
    
    77
    
    
    
    53Provision for deferred income taxes
    
    
    
    
    
    
    13,440
    
    
    
    1,890Loss on disposal of property and equipment
    
    
    1,210
    
    
    
    1,356
    
    
    
    781Changes in assets and liabilities which provided (used) cash:Accounts receivable
    
    
    113
    
    
    
    (163
    )
    
    
    (733
    )Inventories
    
    
    (905
    )
    
    
    797
    
    
    
    (1,694
    )Prepaid expenses and other assets
    
    
    (1,301
    )
    
    
    324
    
    
    
    (1,210
    )Other non-current assets
    
    
    (39
    )
    
    
    7
    
    
    
    (3
    )Accounts payabletrade
    
    
    (5,521
    )
    
    
    12,512
    
    
    
    (2,901
    )Accrued expenses
    
    
    1,383
    
    
    
    787
    
    
    
    959Accrued interest
    
    
    1,516
    
    
    
    180
    
    
    
    (1,887
    )Other current accrued liabilities
    
    
    1,698
    
    
    
    3,894
    
    
    
    286Other non-current accrued liabilities
    
    
    236
    
    
    
    (836
    )
    
    
    1,888NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES
    
    
    (10,549
    )
    
    
    24,248
    
    
    
    17,994INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (12,934
    )
    
    
    (21,382
    )
    
    
    (21,080
    )Purchase of Hometown Threads®
    
    
    
    
    
    
    (1,140
    )
    
    
    Proceeds from disposal of property and equipment
    
    
    4
    
    
    
    
    
    
    
    14NET CASH USED IN INVESTING ACTIVITIES
    
    
    (12,930
    )
    
    
    (22,522
    )
    
    
    (21,066
    )
 See notes to consolidated financial statements.
 52




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(dollar amounts in thousands)
 Fiscal Year EndedFebruary 1,2004January 29,
    
    January 30,
    
    (as restated;2006
    
    2005
    

see Note 17)FINANCING ACTIVITIES:Proceeds from issuance of senior notes
    
    
    50,000
    
    
    
    
    
    
    
    Increase in borrowings under senior secured credit facility
    
    
    53,600
    
    
    
    78,800
    
    
    
    93,000Repayment of senior secured credit facility and capital
lease obligations
    
    
    (82,619
    )
    
    
    (69,859
    )
    
    
    (86,894
    )Repayment of installment purchase agreement
    
    
    (163
    )
    
    
    (228
    )
    
    
    Deferred financing cost
    
    
    (4,595
    )
    
    
    
    
    
    
    (85
    )Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    10NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    16,223
    
    
    
    8,713
    
    
    
    6,031EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    51
    
    
    
    (81
    )
    
    
    (654
    )(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (7,205
    )
    
    
    10,358
    
    
    
    2,305CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    15,178
    
    
    
    4,820
    
    
    
    2,515CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    
    7,973
    
    
    $
    15,178
    
    
    $
    4,820SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid
    
    $
    27,025
    
    
    $
    23,435
    
    
    $
    24,658Income taxes paid
    
    $
    286
    
    
    $
    293
    
    
    $
    116NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES:Service contract acquired under installment
purchase agreement
    
    $
    
    
    
    $
    
    
    
    $
    60Property and equipment acquired under installment
purchase agreement
    
    $
    
    
    
    $
    
    
    
    $
    331Property and equipment acquired under capital lease
    
    $
    
    
    
    $
    60
    
    
    $
    Paid-in-kind interest capitalized
    
    $
    7,661
    
    
    $
    6,538
    
    
    $
    5,579
 See notes to consolidated financial statements.
 53




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except share data, per share data and where noted)
 1. Description of Business and Summary of Significant Accounting Policies
 Description of Business
 Principles of Consolidation
 Fiscal Year
 Concentrations
 Source of Revenue
 Source of Supply
 Use of Estimates
 Foreign Currency Transactions
 54




---



##### 



Cash and Cash Equivalents
 Accounts Receivable
 Inventories
 Property and Equipment
 Land improvements
    
    
    10 to 30 yearsBuildings and improvements
    
    
    10 to 55 yearsPhotographic, sales and finishing equipment
    
    
    3 to 15 yearsStudio improvements
    
    
    3 to 10 years
    Impairment of Long-Lived Assets
 Goodwill
  55




---



##### 



Deferred Financing Costs
 Insurance
 Postretirement Benefits
 Revenue Recognition and Deferred Costs
 Cost of Sales
 Advertising
 Studio Pre-opening Costs
 Income Taxes
 56




---



##### 



Stock-Based Compensation
      For the Fiscal Year EndedFebruary 1,2004January 29,
    
    January 30,
    
    (as restated;2006
    
    2005
    
    see Note 16)Net income (loss):As reported
    
    $
    (34,442
    )
    
    $
    (29,740
    )
    
    $
    1,322Recorded stock compensation expense
    
    
    74
    
    
    
    77
    
    
    
    53Pro forma stock compensation expense
    
    
    (92
    )
    
    
    (108
    )
    
    
    (84
    )Pro forma net income (loss)
    
    $
    (34,460
    )
    
    $
    (29,771
    )
    
    $
    1,291
 57




---



##### 



Fair Value of Financial Instruments
 
 
 Related Party Transactions
 Impact of Newly Issued Accounting Standards
 58




---



##### 



2. Operations, Liquidity and Other Matters
     59




---



##### 



3 4
 Managements Plan
   -
    
    Reorganizing field operations management to put an emphasis on
training and retaining studio personnel to include a renewed emphasis
on photographer certification;-
    
    instituting a new bonus program for our field associates and a new PCA
Partner program to recognize superior performance;-
    
    launching new marketing initiatives, including selected coordinated
marketing efforts with Wal-Mart, increased customer direct mailing
programs and inclusion in Wal-Marts advertising circulars;-
    
    Changing our studio hours to better serve our customers demand (this
change was based on a detailed study of our sales by hour);-
    
    re-introducing a mid-tier price point in our package offers in order
to promote customer trade ups and changing our backend packages to
increase their value and provide more order flexibility to our
customers;-
    
    increasing our average front end collection rates on custom ordered
portraits which studies
 60




---



##### 



have shown correlate to increased final
collection rates;-
    
    looking at our business more qualitatively using focus groups,
customer surveys, market testing, etc. to ensure we understand our
customers needs and address those needs;-
    
    more controlled and focused growth with Wal-Mart  working closely with
Wal-Mart in fiscal 2005, we opened 176 permanent studios but closed
85 in recognition of the fact that a more selective studio
openings schedule better meets both parties objectives;-
    
    disciplined expansion internationally  we believe Canada and Mexico
provide an attractive platform for international growth and we are
assessing the viability of our European operations;-
    
    disciplined expansion into non-portrait photography related
concepts  with the opening of 12 Fun Factory locations in Wal-Mart, we have the
opportunity to expand our presence in Wal-Mart stores with this
child-centered, value-priced concept;-
    
    critically evaluating all our operations, support and administrative
functions, for cost saving opportunities; and-
    
    evaluating all business channels for strategic importance and profit
contribution and ceasing to operate non-contributing channels.
   Foreign Tax Claims
  61




---



##### 



Defaults under Debt Agreements
    62




---



##### 



3. Debt
  Face
    
    
    
    
    
    OutstandingDate
    
    
    
    Value
    
    Discount
    
    Amounts
    
    Interest
    
    MaturityIssued
    
    Description
    
    (Million)
    
    (Million)
    
    (Millions)
    
    Rate
    
    Date6/27/02
    
    Sr. Notes Unsecured (1)
    
    $
    165.0
    
    
    $
    1.5
    
    
    $
    163.5
    
    
    
    11.875
    %
    
    8/1/096/27/02
    
    Sr. Subordinated Notes (2)
    
    $
    10.0
    
    
    $
    .2
    
    
    $
    9.8
    
    
    
    13.75
    %
    
    6/27/106/27/02
    
    Sr. Subordinated Discount
Notes (3)
    
    $
    52.3
    
    
    $
    .7
    
    
    $
    51.6
    
    
    
    16.5
    %
    
    6/27/107/15/05
    
    Sr. Secured Notes (4)
    
    $
    50.0
    
    
    
    
    
    
    $
    50.0
    
    
    
    14.0
    %
    
    6/1/097/15/05
    
    Revolving Credit (5)
    
    $
    10.0
    
    
    
    
    
    
    
    
    
    
    Floating
        
    5/1/097/15/05
    
    Letters of Credit (5)
    
    $
    20.0
    
    
    
    
    
    
    
    
    
    
    Floating
        
    5/1/09Total Short Term Debt
    
    $
    307.3
    
    
    $
    2.4
    
    
    $
    274.9
 
 (1)
    
    Redeemable at the Companys option at the greater of 101% or makewhole premium plus
accrued and unpaid interest.(2)
    
    Interest payable semi-annually in arrears.(3)
    
    $30 million face value, interest added to principal through 6/27/07. Thereafter
interest payable in cash semi-annually in arrears.(4)
    
    Interest payable monthly.(5)
    
    Interest payable monthly at a floating rate of 5.0% over the prime or LIBOR rate until
July 30, 2006. Thereafter, interest is at a floating rate of 1.75%-3.00% or 3.75%-5.00%
over prime or LIBOR respectively. Borrowing may be limited based on the Companys trailing
twelve months EBITDA.   January 29, 2006
    
    
    January 30, 2005Senior Notes, net of discount
    
    $
    163,555
    
    
    $
    163,142Senior Secured Credit Facility
    
    
    50,000
    
    
    
    29,000Senior Subordinated Notes (Opco
Notes), net of discount
    
    
    9,778
    
    
    
    9,728Senior Subordinated Discount Notes
(Parent Notes), net of discount
    
    
    51,588
    
    
    
    43,776
 63




---



##### 



January 29, 2006
    
    
    January 30, 2005Other
    
    
    34
    
    
    
    216Total debt
    
    
    274,955
    
    
    
    245,862Lesscurrent portion of long-term debt
    
    
    21
    
    
    
    182Long-term debt
    
    $
    274,934
    
    
    $
    245,680
  2006
    
    
    212007
    
    
    2008
    
    
    2009
    
    
    215,0002010 and thereafter
    
    
    62,266Total debt maturities
    
    
    277,287Debt discounts
    
    
    (2,332
    )Total debt
    
    $
    274,955
 4. Derivative Instruments
 Series A Redeemable Convertible Preferred Stock
  5. Inventories
  January 29,
    
    
    January 30,2006
    
    
    2005Photographic developing materials
    
    $
    4,552
    
    
    $
    4,366Photographic supplies
    
    
    5,528
    
    
    
    5,089Sales supplies
    
    
    1,265
    
    
    
    1,061Repair parts
    
    
    999
    
    
    
    923Total Inventory
    
    $
    12,344
    
    
    $
    11,439
 6. Other Accrued Liabilities
 64




---



##### 



January 30,
    
    
    January 30,2006
    
    
    2005Accrued taxes other than income
    
    
    1,217
    
    
    $
    2,655Other accrued expenses
    
    
    4,968
    
    
    
    6,398Deferred revenue
    
    
    2,917
    
    
    
    Customer deposits
    
    
    7,063
    
    
    
    5,414Total other accrued liabilities
    
    $
    16,165
    
    
    $
    14,467
 7. Other Liabilities
  January 30,
    
    
    January 30,2006
    
    
    2005Accrued interest
    
    $
    790
    
    
    $
    695Long-term portion of workers compensation obligations
    
    
    4,158
    
    
    
    4,053Long-term occupancy obligations
    
    
    131
    
    
    
    95Total other liabilities
    
    $
    5,079
    
    
    $
    4,843
 8. Income Taxes
  Fiscal Year EndedJanuary 29,
    
    
    January 30,
    
    
    February 1,2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    77State
    
    
    
    
    
    
    
    
    
    
    (476
    )Foreign
    
    
    
    
    
    
    (1,329
    )
    
    
    (95
    )Total current
    
    
    
    
    
    
    (1,329
    )
    
    
    (494
    )Deferred:Federal
    
    
    9,081
    
    
    
    2,229
    
    
    
    (2,581
    )State
    
    
    1,952
    
    
    
    678
    
    
    
    (158
    )Foreign
    
    
    41
    
    
    
    1,001
    
    
    
    1,085Valuation allowance change
    
    
    (11,074
    )
    
    
    (17,348
    )
    
    
    Total deferred
    
    
    
    
    
    
    (13,440
    )
    
    
    (1,654
    )Total (provision) benefit
    
    $
    
    
    
    $
    (14,769
    )
    
    $
    (2,148
    )
  65




---



##### 



66




---



##### 



For the Fiscal Year EndedJanuary 29,
    
    
    January 30,
    
    
    February 1,2006
    
    
    2005
    
    
    2004Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentTax (provision) benefit
at U.S. statutory
federal rates
    
    $
    11,710
    
    
    
    34
    %
    
    $
    5,090
    
    
    
    34
    %
    
    $
    (1,180
    )
    
    
    (34
    )%Expenses not deductible
    
    
    34
    
    
    
    (1
    )
    
    
    (197
    )
    
    
    (1
    )
    
    
    (210
    )
    
    
    (6
    )State income tax
(provision) benefit, net
of federal income tax
(provision) benefit
    
    
    1,268
    
    
    
    4
    
    
    
    447
    
    
    
    3
    
    
    
    (416
    )
    
    
    (13
    )Additional foreign
subsidiary taxes
    
    
    (1,488
    )
    
    
    
    
    
    
    (1,941
    )
    
    
    (13
    )
    
    
    334
    
    
    
    10Non-deductible interest
    
    
    (959
    )
    
    
    (3
    )
    
    
    (820
    )
    
    
    (5
    )
    
    
    (676
    )
    
    
    (19
    )Valuation allowance
    
    
    (11,074
    )
    
    
    (36
    )
    
    
    (17,348
    )
    
    
    (117
    )
    
    
    
    
    
    
    Release of tax reserves
    
    
    269
    
    
    
    1Other
    
    
    240
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total (provision) benefit
    
    $
    0
    
    
    
    0
    %
    
    $
    (14,769
    )
    
    
    (99
    )%
    
    $
    (2,148
    )
    
    
    (62
    )%
 67




---



##### 



January 29,
    
    
    January 30,2006
    
    
    2005Deferred tax assets:Current:Inventory, principally due to obsolescence reserve
    
    $
    242
    
    
    $
    237Workers compensation accrual
    
    
    1,271
    
    
    
    1,271Deferred revenue
    
    
    1,507
    
    
    
    1,612Other
    
    
    630
    
    
    
    254Valuation allowance
    
    
    (2,807
    )
    
    
    (2,086
    )Net current deferred tax assets
    
    
    843
    
    
    
    1,288Non-current:Alternative minimum tax and other tax credits
    
    
    1,333
    
    
    
    1,333Net operating loss carry-forward (federal, state,
foreign)
    
    
    26,191
    
    
    
    16,944Intangibles
    
    
    (147
    )
    
    
    29Stock option, principally due to compensation
element
    
    
    803
    
    
    
    803Interest expense deferred for tax
    
    
    6,118
    
    
    
    3,933Workers compensation accrual
    
    
    1,935
    
    
    
    1,662Other
    
    
    60
    
    
    
    Valuation allowance
    
    
    (25,692
    )
    
    
    (15,339
    )Net non-current deferred tax assets
    
    
    10,601
    
    
    
    9,365Total deferred tax assets
    
    
    11,444
    
    
    
    10,653Deferred tax liabilities:Current:Prepaid expenses
    
    
    (843
    )
    
    
    (1,179
    )Non-current:Plant and equipment, principally due to
differences in depreciation
    
    
    (10,601
    )
    
    
    (9,474
    )Total deferred tax liabilities
    
    
    (11,444
    )
    
    
    (10,653
    )Net deferred tax assets
    
    $
    0
    
    
    $
    0
   9. Employee Benefits
  68




---



##### 



10. Commitments and Contingencies
  Operating
    
    
    CapitalFiscal Year
    
    Leases
    
    
    Leases2006
    
    
    874
    
    
    
    242007
    
    
    391
    
    
    
    132008
    
    
    167
    
    
    
    2009
    
    
    21
    
    
    
    2010
    
    
    0
    
    
    
    2011
    
    
    0
    
    
    
    Total
    
    $
    1,453
    
    
    $
    37Less amounts representing interest
    
    
    
    
    
    
    3Total principal on capital leases
    
    
    
    
    
    $
    34
    69




---



##### 



® ®
 Fiscal Year
    
    Amount2006
    
    
    6622007
    
    
    6072008
    
    
    4822009
    
    
    2602010
    
    
    112Total
    
    $
    2,123
  11. Redeemable Convertible Preferred StockSeries A
    70




---



##### 



12. Stock Options and Warrants
 Stock Options
   Warrants
  71




---



##### 



Common Stock Optionsand Warrants OutstandingWeighted Average
    
    Number ofNumber
    
    Remaining
    
    Common Stock OptionsExercise Prices
    
    Outstanding
    
    Contractual Life
    
    and Warrants Exercisable$
    0.01
    
    
    
    52,460
    
    
    
    4.4
    
    
    
    52,460$
    0.20
    
    
    
    254,150
    
    
    
    0.6
    
    
    
    254,150$
    8.00
    
    
    
    406,800
    
    
    
    3.0
    
    
    
    280,550$
    18.50
    
    
    
    5,000
    
    
    
    2.1
    
    
    
    5,000$
    26.50
    
    
    
    186,950
    
    
    
    3.6
    
    
    
    118,950$
    30.00
    
    
    
    124,500
    
    
    
    4.8
    
    
    
    90,200Total
    
    
    1,029,860
    
    
    
    
    
    
    
    801,310
  January 29,
    
    January 30,
    
    February 1,Weighted average fair value per option
    
    2006
    
    2005
    
    2004Assumption used:Weighted average expected volatility
    
    
    40
    %
    
    
    N/A
    
    
    
    40
    %Weighted average expected dividend yield
    
    
    0
    %
    
    
    N/A
    
    
    
    0
    %Weighted average risk-free interest rate
    
    
    4.45
    %
    
    
    N/A
    
    
    
    3.85
    %Weighted average expected life, in years
    
    
    8.00
    
    
    
    N/A
    
    
    
    8.00
  72




---



##### 



Number of
    
    WeightedCommon
    
    AverageShares
    
    PriceOptions and warrants outstanding February 1, 2004
    
    
    1,066,110
    
    
    $
    14.19Options cancelled
    
    
    (9,750
    )
    
    
    (18.44
    )Options and warrants outstanding January 30, 2005
    
    
    1,056,360
    
    
    
    14.15Options cancelled
    
    
    (257,500
    )
    
    
    (26.45
    )Options granted
    
    
    231,000
    
    
    
    17.10Options and warrants outstanding January 29, 2006
    
    
    1,029,860
    
    
    $
    11.73
 13. Business Segments
    73




---



##### 



74




---



##### 



Business Segment Data
 Retail
    
    
    Institutional
    
    
    ConsolidatedFor the year ended January 29, 2006Net (loss)
    
    $
    (33,043
    )
    
    $
    (1,399
    )
    
    $
    (34,442
    )Reconciling items:Depreciation and amortization
    
    
    13,950
    
    
    
    151
    
    
    
    14,101Interest income
    
    
    (25
    )
    
    
    
    
    
    
    (25
    )Interest expense
    
    
    37,642
    
    
    
    1,143
    
    
    
    38,785Early debt extinguishment
    
    
    980
    
    
    
    
    
    
    
    980Adjusted EBITDA
    
    $
    19,504
    
    
    $
    (105
    )
    
    $
    19,399For the year ended January 30, 2005Net (loss)
    
    $
    (27,441
    )
    
    $
    (2,299
    )
    
    $
    (29,740
    )Reconciling items:Depreciation and amortization
    
    
    12,642
    
    
    
    176
    
    
    
    12,818Income tax provision
    
    
    14,029
    
    
    
    740
    
    
    
    14,769Interest income
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Interest expense
    
    
    31,368
    
    
    
    1,099
    
    
    
    32,467Adjusted EBITDA
    
    $
    30,590
    
    
    $
    (284
    )
    
    $
    30,306For the year ended February 1, 2004Net income (loss)
    
    $
    2,490
    
    
    $
    (1,168
    )
    
    $
    1,322Reconciling items:Depreciation and amortization
    
    
    11,225
    
    
    
    183
    
    
    
    11,408Income tax benefit
    
    
    2,132
    
    
    
    16
    
    
    
    2,148Interest income
    
    
    (10
    )
    
    
    
    
    
    
    (10
    )Interest expense
    
    
    29,532
    
    
    
    1,184
    
    
    
    30,716Adjusted EBITDA
    
    $
    45,369
    
    
    $
    215
    
    
    $
    45,584For the year ended January 29, 2006Sales
    
    $
    316,153
    
    
    $
    9,363
    
    
    $
    325,516Adjusted EBITDA
    
    $
    19,504
    
    
    $
    (105
    )
    
    $
    19,399Total assets
    
    $
    159,224
    
    
    $
    2,086
    
    
    $
    161,310For the year ended January 30, 2005Sales
    
    $
    313,126
    
    
    $
    10,427
    
    
    $
    323,553Adjusted EBITDA
    
    $
    30,590
    
    
    $
    (284
    )
    
    $
    30,306Total assets
    
    $
    165,786
    
    
    $
    1,006
    
    
    $
    166,792For the year ended February 1, 2004Sales
    
    $
    312,357
    
    
    $
    12,457
    
    
    $
    324,814Adjusted EBITDA
    
    $
    45,369
    
    
    $
    215
    
    
    $
    45,584Total assets
    
    $
    162,435
    
    
    $
    1,230
    
    
    $
    163,665
 75




---



##### 



Geographic Data
 OtherUnited States
    
    
    Canada
    
    
    Mexico
    
    
    Foreign
    
    
    ConsolidatedJanuary 29, 2006Sales
    
    $
    283,697
    
    
    $
    29,448
    
    
    $
    10,466
    
    
    $
    1,905
    
    
    $
    325,516Long-term assets
    
    $
    121,211
    
    
    $
    8,278
    
    
    $
    2,525
    
    
    $
    1,947
    
    
    $
    133,961Deferred tax assets
    
    $
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    $January 30, 2005Sales
    
    $
    287,548
    
    
    $
    25,179
    
    
    $
    9,359
    
    
    $
    1,467
    
    
    $
    323,553Long-term assets
    
    $
    121,477
    
    
    $
    7,848
    
    
    $
    2,310
    
    
    $
    2,348
    
    
    $
    133,983Deferred tax assets
    
    $
    108
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    108February 1, 2004Sales
    
    $
    294,067
    
    
    $
    21,466
    
    
    $
    8,446
    
    
    $
    835
    
    
    $
    324,814
 14. Acquisitions, Goodwill and Intangible Assets
  ® ® ® ®
  January 29,
    
    
    January 30,2006
    
    
    2005Unamortized intangible assets:Goodwill
    
    $
    53,046
    
    
    $
    52,989Trademark
    
    
    135
    
    
    
    135Total goodwill and intangible assets
    
    $
    53,181
    
    
    $
    53,124
 ®
 76




---



##### 



15. Guarantor and Non-Guarantor Financial Statements
  77




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
January 29, 2006
 Non-Parent/
    
    
    
    
    
    
    Guarantor
    
    
    guarantorGuarantor
    
    
    Co-issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalAssets:Cash and cash
equivalents
    
    
    
    
    
    
    
    
    
    $
    7,759
    
    
    $
    214
    
    
    
    
    
    
    $
    7,973Accounts
receivable
    
    
    
    
    
    
    
    
    
    
    2,438
    
    
    
    230
    
    
    
    
    
    
    
    2,668Inventories
    
    
    
    
    
    
    
    
    
    
    12,292
    
    
    
    52
    
    
    
    
    
    
    
    12,344Deferred income
taxesPrepaid expenses and
other assets
    
    
    
    
    
    
    
    
    
    
    4,184
    
    
    
    180
    
    
    
    
    
    
    
    4,364Total
current assets
    
    
    
    
    
    
    
    
    
    
    26,673
    
    
    
    676
    
    
    
    
    
    
    
    27,349Investments and
inter-company accounts
    
    
    (137,138
    )
    
    
    93,434
    
    
    
    (52,928
    )
    
    
    (15,428
    )
    
    
    112,060Property and
equipment, net
    
    
    
    
    
    
    
    
    
    
    67,546
    
    
    
    4,463
    
    
    
    
    
    
    
    72,009Goodwill,
intangible and other
assets, net
    
    
    
    
    
    
    
    
    
    
    53,335
    
    
    
    9
    
    
    
    3
    
    
    
    53,347Deferred
financing costs, net
    
    
    
    
    
    
    
    
    
    
    8,605
    
    
    
    
    
    
    
    
    
    
    
    8,605Total assets
    
    
    (137,138
    )
    
    
    93,434
    
    
    
    103,231
    
    
    
    (10,280
    )
    
    
    112,063
    
    
    
    161,310Liabilities and
shareholders equity
(deficiency):Short-term borrowingsCurrent portion of
long-term debt
    
    
    51,588
    
    
    
    223,333
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    274,955Accounts
payabletrade
    
    
    
    
    
    
    
    
    
    
    30,401
    
    
    
    257
    
    
    
    
    
    
    
    30,658Accrued insurance
    
    
    
    
    
    
    
    
    
    
    5,193
    
    
    
    
    
    
    
    
    
    
    
    5,193Accrued income
taxes
    
    
    1,930
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,930Accrued
compensation
    
    
    
    
    
    
    
    
    
    
    5,156
    
    
    
    101
    
    
    
    
    
    
    
    5,257
 78




---



##### 



Non-Parent/
    
    
    
    
    
    
    Guarantor
    
    
    guarantorGuarantor
    
    
    Co-issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalAccrued interest
    
    
    622
    
    
    
    10,373
    
    
    
    898
    
    
    
    
    
    
    
    
    
    
    
    11,893Other accrued
liabilities
    
    
    
    
    
    
    
    
    
    
    16,138
    
    
    
    27
    
    
    
    
    
    
    
    16,165Total current
liabilities
    
    
    54,140
    
    
    
    233,706
    
    
    
    57,820
    
    
    
    385
    
    
    
    
    
    
    
    346,051Long-term debt,
less current portionDeferred income taxes
    
    
    (1,723
    )
    
    
    1,723Other liabilities
    
    
    790
    
    
    
    
    
    
    
    4,289
    
    
    
    
    
    
    
    
    
    
    
    5,079Series A
redeemable convertible
preferred stock
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Total
shareholders equity
(deficiency)
    
    
    (205,345
    )
    
    
    (141,995
    )
    
    
    41,122
    
    
    
    (10,665
    )
    
    
    112,063
    
    
    
    (204,820
    )Total
liabilities and
shareholders
equity
(deficiency)
    
    $
    (137,138
    )
    
    $
    93,434
    
    
    $
    103,231
    
    
    $
    (10,280
    )
    
    $
    112,063
    
    
    $
    161,310
 79




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
January 30, 2005
 Non-Parent/
    
    
    Co-
    
    
    Guarantor
    
    
    guarantorGuarantor
    
    
    issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalAssets:Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    14,341
    
    
    $
    837
    
    
    $
    
    
    
    $
    15,178Accounts receivable
    
    
    
    
    
    
    
    
    
    
    2,145
    
    
    
    636
    
    
    
    
    
    
    
    2,781Inventories
    
    
    
    
    
    
    
    
    
    
    11,391
    
    
    
    48
    
    
    
    
    
    
    
    11,439Deferred income taxes
    
    
    (1,090
    )
    
    
    1,090
    
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    108Prepaid expenses and other
assets
    
    
    
    
    
    
    
    
    
    
    3,300
    
    
    
    3
    
    
    
    
    
    
    
    3,303Total current assets
    
    
    (1,090
    )
    
    
    1,090
    
    
    
    31,285
    
    
    
    1,524
    
    
    
    
    
    
    
    32,809Investments and
inter-company accounts
    
    
    (113,404
    )
    
    
    93,885
    
    
    
    (54,830
    )
    
    
    (11,531
    )
    
    
    85,880
    
    
    
    Property and equipment, net
    
    
    
    
    
    
    
    
    
    
    69,258
    
    
    
    4,651
    
    
    
    
    
    
    
    73,909Goodwill, intangible and
other assets, net
    
    
    
    
    
    
    
    
    
    
    53,244
    
    
    
    7
    
    
    
    
    
    
    
    53,251Deferred financing costs, net
    
    
    1,404
    
    
    
    5,419
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,823Total assets
    
    $
    (113,090
    )
    
    $
    100,394
    
    
    $
    98,957
    
    
    $
    (5,349
    )
    
    $
    85,880
    
    
    $
    166,792Liabilities and
shareholders equity
(deficiency):Short-term borrowings
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Current portion of long-term
debt
    
    
    
    
    
    
    
    
    
    
    182
    
    
    
    
    
    
    
    
    
    
    
    182Accounts payabletrade
    
    
    
    
    
    
    
    
    
    
    35,743
    
    
    
    436
    
    
    
    
    
    
    
    36,179Accrued insurance
    
    
    
    
    
    
    
    
    
    
    4,141
    
    
    
    
    
    
    
    
    
    
    
    4,141Accrued income taxes
    
    
    66
    
    
    
    1,883
    
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    2,022Accrued compensation
    
    
    
    
    
    
    
    
    
    
    4,771
    
    
    
    63
    
    
    
    
    
    
    
    4,834Accrued interest
    
    
    
    
    
    
    10,377
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,377Other accrued liabilities
    
    
    
    
    
    
    
    
    
    
    12,698
    
    
    
    1,769
    
    
    
    
    
    
    
    14,467Total current liabilities
    
    
    66
    
    
    
    12,260
    
    
    
    57,535
    
    
    
    2,341
    
    
    
    
    
    
    
    72,202Long-term debt, less
current portion
    
    
    43,776
    
    
    
    201,870
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    245,680Deferred income taxes
    
    
    (1,724
    )
    
    
    1,724
    
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    108Other liabilities
    
    
    695
    
    
    
    
    
    
    
    4,148
    
    
    
    
    
    
    
    
    
    
    
    4,843Series A redeemable
convertible preferred stock
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Total shareholders equity
(deficiency)
    
    
    (170,903
    )
    
    
    (115,460
    )
    
    
    37,132
    
    
    
    (7,690
    )
    
    
    85,880
    
    
    
    (171,041
    )Total liabilities and
shareholders equity (deficiency)
    
    $
    (113,090
    )
    
    $
    100,394
    
    
    $
    98,957
    
    
    $
    (5,349
    )
    
    $
    85,880
    
    
    $
    166,792
 80




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Fiscal Year Ended January 29, 2006
 Non-Parent/
    
    
    
    
    
    
    Guarantor
    
    
    guarantorGuarantor
    
    
    Co-issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    $
    
    
    
    $
    313,145
    
    
    $
    12,371
    
    
    $
    
    
    
    $
    325,516Cost of sales
    
    
    
    
    
    
    
    
    
    
    258,061
    
    
    
    12,879
    
    
    
    (2,193
    )
    
    
    268,747Gross profit
    
    
    
    
    
    
    
    
    
    
    55,084
    
    
    
    (508
    )
    
    
    2,193
    
    
    
    56,769General and administrative
    
    
    
    
    
    
    
    
    
    
    46,918
    
    
    
    2,360
    
    
    
    2,193
    
    
    
    51,471Income (loss) from operations
    
    
    
    
    
    
    
    
    
    
    8,166
    
    
    
    (2,868
    )
    
    
    
    
    
    
    5,298Interest income
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25Interest expense
    
    
    (7,907
    )
    
    
    (29,755
    )
    
    
    (1,123
    )
    
    
    
    
    
    
    
    
    
    
    (38,785
    )Early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (980
    )
    
    
    
    
    
    
    
    
    
    
    (980
    )Investment income (loss) in
equity of wholly-owned
subsidiaries
    
    
    (26,535
    )
    
    
    3,220
    
    
    
    (2,868
    )
    
    
    
    
    
    
    26,183
    
    
    
    Income (loss) before income
taxes
    
    
    (34,442
    )
    
    
    (26,535
    )
    
    
    3,220
    
    
    
    (2,868
    )
    
    
    26,183
    
    
    
    (34,442
    )Income tax benefit (provision)Net income (loss)
    
    $
    (34,442
    )
    
    $
    (26,535
    )
    
    $
    3,220
    
    
    $
    (2,868
    )
    
    $
    26,183
    
    
    $
    (34,442
    )
 PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Fiscal Year Ended January 30, 2005
 Non-Parent/
    
    
    Co-
    
    
    Guarantor
    
    
    guarantorGuarantor
    
    
    issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    $
    
    
    
    $
    312,726
    
    
    $
    10,827
    
    
    $
    
    
    
    $
    323,553Cost of sales
    
    
    
    
    
    
    
    
    
    
    246,896
    
    
    
    11,500
    
    
    
    
    
    
    
    258,396Gross profit
    
    
    
    
    
    
    
    
    
    
    65,830
    
    
    
    (673
    )
    
    
    
    
    
    
    65,157General and administrative
    
    
    
    
    
    
    
    
    
    
    44,307
    
    
    
    3,362
    
    
    
    
    
    
    
    47,669Income (loss) from operations
    
    
    
    
    
    
    
    
    
    
    21,523
    
    
    
    (4,035
    )
    
    
    
    
    
    
    17,488Interest income
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    2
    
    
    
    
    
    
    
    8Interest expense
    
    
    (6,932
    )
    
    
    (25,105
    )
    
    
    (430
    )
    
    
    
    
    
    
    
    
    
    
    (32,467
    )Investment income (loss) in
equity of wholly-owned
subsidiaries
    
    
    (12,056
    )
    
    
    17,108
    
    
    
    (3,991
    )
    
    
    
    
    
    
    (1,061
    )
    
    
    Income (loss) before income taxes
    
    
    (18,988
    )
    
    
    (7,997
    )
    
    
    17,108
    
    
    
    (4,033
    )
    
    
    (1,061
    )
    
    
    (14,971
    )Income tax benefit (provision)
    
    
    (10,752
    )
    
    
    (4,059
    )
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    (14,769
    )Net income (loss)
    
    $
    (29,740
    )
    
    $
    (12,056
    )
    
    $
    17,108
    
    
    $
    (3,991
    )
    
    $
    (1,061
    )
    
    $
    (29,740
    )
 81




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Fiscal Year Ended February 1, 2004
(as restated; see Note 17)
 Non-Parent/
    
    
    Co-
    
    
    Guarantor
    
    
    guarantorGuarantor
    
    
    issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    $
    
    
    
    $
    315,533
    
    
    $
    9,281
    
    
    $
    
    
    
    $
    324,814Cost of sales
    
    
    
    
    
    
    
    
    
    
    234,483
    
    
    
    10,545
    
    
    
    
    
    
    
    245,028Gross profit
    
    
    
    
    
    
    
    
    
    
    81,050
    
    
    
    (1,264
    )
    
    
    
    
    
    
    79,786General and administrative
    
    
    
    
    
    
    
    
    
    
    44,942
    
    
    
    668
    
    
    
    
    
    
    
    45,610Income (loss) from operations
    
    
    
    
    
    
    
    
    
    
    36,108
    
    
    
    (1,932
    )
    
    
    
    
    
    
    34,176Interest income
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    1
    
    
    
    
    
    
    
    10Interest expense
    
    
    (5,948
    )
    
    
    (24,755
    )
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    (30,716
    )Investment income (loss) in
equity of wholly-owned
subsidiaries
    
    
    5,728
    
    
    
    34,117
    
    
    
    (1,987
    )
    
    
    
    
    
    
    (37,858
    )
    
    
    Income (loss) before income taxes
    
    
    (220
    )
    
    
    9,362
    
    
    
    34,117
    
    
    
    (1,931
    )
    
    
    (37,858
    )
    
    
    3,470Income tax benefit (provision)
    
    
    1,542
    
    
    
    (3,634
    )
    
    
    
    
    
    
    (56
    )
    
    
    
    
    
    
    (2,148
    )Net income (loss)
    
    $
    1,322
    
    
    $
    5,728
    
    
    $
    34,117
    
    
    $
    (1,987
    )
    
    $
    (37,858
    )
    
    $
    1,322
 82




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Fiscal Year Ended January 29, 2006
 Non-Parent/
    
    
    Co-
    
    
    Guarantor
    
    
    guarantorGuarantor
    
    
    issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet cash (used in)
provided by
operating
activities
    
    
    
    
    
    $
    (25,624
    )
    
    $
    13,493
    
    
    $
    1,582
    
    
    
    
    
    
    $
    (10,549
    )Net cash used in
investing
activities
    
    
    
    
    
    
    
    
    
    
    (11,038
    )
    
    
    (1,892
    )
    
    
    
    
    
    
    (12,930
    )Net cash provided
by (used in)
financing
activities
    
    
    
    
    
    
    25,624
    
    
    
    (9,401
    )
    
    
    
    
    
    
    
    
    
    
    16,223Effect of exchange
rate changes on
cash
    
    
    
    
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    51(Decrease) in cash
and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    (6,895
    )
    
    
    (310
    )
    
    
    
    
    
    
    (7,205
    )Cash and cash
equivalents at
beginning of period
    
    
    
    
    
    
    
    
    
    
    14,654
    
    
    
    524
    
    
    
    
    
    
    
    15,178Cash and cash
equivalents at end
of period
    
    $
    
    
    
    $
    
    
    
    $
    7,759
    
    
    $
    214
    
    
    
    
    
    
    $
    7,973
 PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Fiscal Year Ended January 30, 2005
 Non-Parent/
    
    
    Co-
    
    
    Guarantor
    
    
    guarantorGuarantor
    
    
    issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet cash provided
by (used in)
operating
activities
    
    $
    
    
    
    $
    (9,000
    )
    
    $
    31,015
    
    
    $
    2,153
    
    
    $
    80
    
    
    $
    24,248Net cash used in
investing
activities
    
    
    
    
    
    
    
    
    
    
    (20,630
    )
    
    
    (1,892
    )
    
    
    
    
    
    
    (22,522
    )Net cash provided
by (used in)
financing
activities
    
    
    
    
    
    
    9,000
    
    
    
    (287
    )
    
    
    
    
    
    
    
    
    
    
    8,713Effect of exchange
rate changes on
cash
    
    
    
    
    
    
    
    
    
    
    (198
    )
    
    
    197
    
    
    
    (80
    )
    
    
    (81
    )Increase in cash
and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    9,900
    
    
    
    458
    
    
    
    
    
    
    
    10,358Cash and cash
equivalents at
beginning of period
    
    
    
    
    
    
    
    
    
    
    4,441
    
    
    
    379
    
    
    
    
    
    
    
    4,820Cash and cash
equivalents at end
of period
    
    $
    
    
    
    $
    
    
    
    $
    14,341
    
    
    $
    837
    
    
    $
    
    
    
    $
    15,178
 83




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Fiscal Year Ended February 1, 2004
(as restated; see Note 17)
 Non-Parent/
    
    
    Co-
    
    
    Guarantor
    
    
    guarantorGuarantor
    
    
    issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet cash provided
by (used in)
operating
activities
    
    $
    19
    
    
    $
    (6,060
    )
    
    $
    21,681
    
    
    $
    2,344
    
    
    $
    10
    
    
    $
    17,994Net cash used in
investing
activities
    
    
    
    
    
    
    
    
    
    
    (19,193
    )
    
    
    (1,873
    )
    
    
    
    
    
    
    (21,066
    )Net cash provided
by (used in)
financing
activities
    
    
    (19
    )
    
    
    6,060
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    6,031Effect of exchange
rate changes on
cash
    
    
    
    
    
    
    
    
    
    
    (359
    )
    
    
    (295
    )
    
    
    
    
    
    
    (654
    )Increase in cash
and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    2,129
    
    
    
    176
    
    
    
    
    
    
    
    2,305Cash and cash
equivalents at
beginning of period
    
    
    
    
    
    
    
    
    
    
    2,312
    
    
    
    203
    
    
    
    
    
    
    
    2,515Cash and cash
equivalents at end
of period
    
    $
    
    
    
    $
    
    
    
    $
    4,441
    
    
    $
    379
    
    
    $
    
    
    
    $
    4,820
 84




---



##### 



16. Selected Quarterly Financial Data (unaudited)
  Fiscal Quarters EndedMay 1, 2005
    
    July 31, 2005Sales
    
    $
    78,168
    
    
    $
    66,900Gross Profit
    
    
    15,205
    
    
    
    8,457Income (loss) from operations
    
    
    2,481
    
    
    
    (2,864
    )Net (loss) income
    
    
    (6,076
    )
    
    
    (12,944
    )
 Fiscal Quarters EndedOctober 30, 2005
    
    January 29, 2006Sales
    
    $
    70,557
    
    
    $
    109,891Gross Profit
    
    
    5,820
    
    
    
    27,287(Loss) income from operations
    
    
    (7,884
    )
    
    
    13,565Net (loss) income
    
    
    (18,560
    )
    
    
    3,138
 Fiscal Quarters EndedMay 2, 2004
    
    August 1, 2004Sales
    
    $
    79,896
    
    
    $
    68,442Gross Profit
    
    
    17,106
    
    
    
    11,264Income from operations
    
    
    5,362
    
    
    
    766Net(loss) income
    
    
    (1,285
    )
    
    
    (2,127
    )
 Fiscal Quarters EndedOctober 31, 2004
    
    January 30, 2005Sales
    
    $
    68,829
    
    
    $
    106,386Gross Profit
    
    
    7,481
    
    
    
    29,306(Loss) income from operations
    
    
    (6,305
    )
    
    
    17,665Net (loss) income
    
    
    (34,388
    )
    
    
    8,060
 85




---



##### 



17. Restatement
   86




---



##### 



As of and for the
    
    As of and for theFiscal Year Ended
    
    Fiscal Year EndedFebruary 1, 2004
    
    February 2, 2003As Previously
    
    
    
    
    
    As PreviouslyReported
    
    As Restated
    
    Reported
    
    As RestatedConsolidated balance sheets:Cash and cash equivalents
    
    $
    4,820
    
    
    $
    4,820
    
    
    $
    2,522
    
    
    $
    2,515Accounts receivable
    
    
    2,349
    
    
    
    2,593
    
    
    
    1,723
    
    
    
    1,860Deferred income taxes
    
    
    3,124
    
    
    
    1,605Prepaid expenses and
other assets
    
    
    4,018
    
    
    
    3,626
    
    
    
    2,971
    
    
    
    2,357Total current assets
    
    
    26,547
    
    
    
    24,880
    
    
    
    22,061
    
    
    
    21,577Photographic, sales and
finishing equipment
    
    
    139,742
    
    
    
    138,679
    
    
    
    123,530
    
    
    
    122,682Accumulated depreciation
and amortization
    
    
    111,776
    
    
    
    111,931
    
    
    
    101,371
    
    
    
    101,504Property and equipment,
net
    
    
    68,040
    
    
    
    66,822
    
    
    
    57,762
    
    
    
    56,781Deferred income taxes,
non-current
    
    
    10,316
    
    
    
    11,835Other assets
    
    
    34
    
    
    
    19
    
    
    
    39
    
    
    
    16Total assets
    
    
    165,046
    
    
    
    163,665
    
    
    
    152,469
    
    
    
    150,981Accounts payabletrade
    
    
    23,672
    
    
    
    23,667
    
    
    
    26,627
    
    
    
    26,568Accrued insurance
    
    
    4,055
    
    
    
    4,043
    
    
    
    3,960
    
    
    
    3,955Accrued income taxes
    
    
    
    
    
    
    
    
    
    
    495
    
    
    
    542Accrued compensation
    
    
    5,270
    
    
    
    5,309
    
    
    
    4,740
    
    
    
    4,754Other accrued liabilities
    
    
    10,128
    
    
    
    10,119
    
    
    
    9,853
    
    
    
    9,833Total current liabilities
    
    
    64,459
    
    
    
    64,472
    
    
    
    57,853
    
    
    
    57,830Total liabilities
    
    
    289,796
    
    
    
    289,809
    
    
    
    278,797
    
    
    
    278,774Accumulated deficit
    
    
    (166,851
    )
    
    
    (168,493
    )
    
    
    (168,229
    )
    
    
    (169,815
    )Accumulated other
comprehensive loss
    
    
    (282
    )
    
    
    (34
    )
    
    
    (419
    )
    
    
    (298
    )Total shareholders
deficiency
    
    
    (139,750
    )
    
    
    (141,144
    )
    
    
    (141,328
    )
    
    
    (142,793
    )Total liabilities and
shareholders deficiency
    
    
    165,046
    
    
    
    163,665
    
    
    
    152,469
    
    
    
    150,981Statements of operations:Costs of sales
    
    
    244,375
    
    
    
    245,028
    
    
    
    219,872
    
    
    
    219,551Gross profit
    
    
    80,439
    
    
    
    79,786
    
    
    
    76,744
    
    
    
    77,065General and
administrative
    
    
    46,263
    
    
    
    45,610
    
    
    
    41,090
    
    
    
    41,300Income from operations
    
    
    34,176
    
    
    
    34,176
    
    
    
    35,462
    
    
    
    35,573Income (loss) before
income taxes
    
    
    3,470
    
    
    
    3,470
    
    
    
    (493
    )
    
    
    (382
    )Income tax benefit
(provision)
    
    
    (2,092
    )
    
    
    (2,148
    )
    
    
    14,869
    
    
    
    14,817Net income
    
    
    1,378
    
    
    
    1,322
    
    
    
    14,376
    
    
    
    14,435
 87




---



##### 



Fiscal Year Ended
    
    Fiscal Year EndedFebruary 1, 2004
    
    February 2, 2003As Previously
    
    
    
    
    
    As PreviouslyReported
    
    As Restated
    
    Reported
    
    As RestatedStatement of cash flows:Net income
    
    $
    1,378
    
    
    $
    1,322
    
    
    
    14,376
    
    
    
    14,435Depreciation and
amortization
    
    
    11,386
    
    
    
    11,408
    
    
    
    10,090
    
    
    
    10,168Accounts receivable
    
    
    (626
    )
    
    
    (733
    )
    
    
    (230
    )
    
    
    (560
    )Prepaid expenses and
other assets
    
    
    (987
    )
    
    
    (1,210
    )
    
    
    51
    
    
    
    296Other noncurrent assets
    
    
    5
    
    
    
    (3
    )
    
    
    (32
    )
    
    
    (6
    )Accounts payabletrade
    
    
    (2,955
    )
    
    
    (2,901
    )
    
    
    2,571
    
    
    
    2,416Accrued expenses
    
    
    988
    
    
    
    959
    
    
    
    931
    
    
    
    956Other current accrued
liabilities
    
    
    275
    
    
    
    286
    
    
    
    112
    
    
    
    92Net cash provided by
operating activities
    
    
    18,330
    
    
    
    17,994
    
    
    
    30,972
    
    
    
    30,901Purchases of property
and equipment
    
    
    (21,314
    )
    
    
    (21,080
    )
    
    
    (17,037
    )
    
    
    (17,046
    )Net cash used in
investing activities
    
    
    (21,300
    )
    
    
    (21,066
    )
    
    
    (17,037
    )
    
    
    (17,046
    )Effect of exchange
rate changes on cash
    
    
    (763
    )
    
    
    (654
    )
    
    
    300
    
    
    
    388Increase (decrease) in
cash and cash
equivalents
    
    
    2,298
    
    
    
    2,305
    
    
    
    (363
    )
    
    
    (355
    )Cash and cash
equivalents at
beginning of period
    
    
    2,522
    
    
    
    2,515
    
    
    
    2,885
    
    
    
    2,870Cash and cash
equivalents at end of
period
    
    
    
    
    
    
    
    
    
    
    2,522
    
    
    
    2,515
 18. Subsequent
Events
 Purchase agreement with Sony Electronics
  Discontinue
traveling photography
  Failure to File 10-Q for the Period Ended April 30, 2006:
 88




---



##### 



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
       89




---



##### 



ITEM 9A. CONTROLS AND PROCEDURES
 Disclosure controls and procedures
 Internal control over financial reporting
 .
    90




---



##### 



ITEM 9B. OTHER INFORMATION
  PART III
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 Board of Directors
  Name
    
    Age
    
    AffiliationTerry J. Blumer
    
    47
    
    Jupiter PartnersR. David Alexander
    
    48
    
    PCAJohn F. Klein
    
    43
    
    Jupiter PartnersEric A. Scheuermann
    
    40
    
    Jupiter PartnersJohn A. Sprague
    
    53
    
    Jupiter Partners
     91




---



##### 



Executive Officers of Registrant
  Name
    
    Age
    
    Positions and OfficesR. David Alexander
    
    48
    
    President, Chief Executive Officer and Chairman of the BoardJames O. Mattox
    
    53
    
    Executive Vice President, OperationsJ. Robert Wren, Jr.
    
    59
    
    Executive Vice President, General Counsel and Secretary, Interim Chief Financial OfficerRickey Pickett
    
    43
    
    Chief Information OfficerTodd J. Fine
    
    37
    
    Senior Vice President, U.S. Wal-Mart Operations
     92




---



##### 



Committees of Our Board
 Audit committee
 93




---



##### 



Compensation committee
 -
    
    reviews and approves corporate goals and objectives relevant to the
compensation of our executive officers;-
    
    evaluates the performance of our executive officers; and-
    
    sets the compensation level of our officers based on its evaluation.
 Code of Ethics
  94




---



##### 



ITEM 11. EXECUTIVE COMPENSATION
  Summary Compensation Table
 Long-TermCompensationAnnual Compensation
    
    AwardsSecuritiesOther Annual
    
    Underlying
    
    All OtherFiscal
    
    
    
    
    
    
    
    
    
    Compensation
    
    Options
    
    CompensationName and Principal Position
    
    Year
    
    Salary ($)
    
    Bonus ($)
    
    ($)
    
    (#)
    
    ($)R. David Alexander (11/5/05-1/29/06)
    
    
    2005
    
    
    
    108,333
    
    
    
    
    
    
    
    
    
    
    
    188,000
    
    
    
    135
    (2)President, Chief ExecutiveOfficer and ChairmanBarry J. Feld (1/31/05-10/21/05)(3)
    
    
    2005
    
    
    
    289,744
    
    
    
    
    
    
    
    (1)
    
    
    
    
    
    
    
    11,237
    (2)President, Chief Executive
    
    
    2004
    
    
    
    400,000
    
    
    
    
    
    
    
    (1)
    
    
    
    
    
    
    
    5,090
    (2)Officer and Chairman
    
    
    2003
    
    
    
    400,000
    
    
    
    145,000
    
    
    
    (1)
    
    
    
    
    
    
    
    1,658
    (2)James O. Mattox
    
    
    2005
    
    
    
    241,000
    
    
    
    
    
    
    
    (1)
    
    
    
    
    
    
    
    1,027
    (2)Executive Vice President,
    
    
    2004
    
    
    
    241,000
    
    
    
    
    
    
    
    (1)
    
    
    
    
    
    
    
    1,524
    (2)Operations
    
    
    2003
    
    
    
    241,000
    
    
    
    35,000
    
    
    
    (1)
    
    
    
    2,000
    
    
    
    1,524
    (2)J. Robert Wren, Jr.
    
    
    2005
    
    
    
    260,000
    
    
    
    
    
    
    
    (1)
    
    
    
    
    
    
    
    2,090
    (2)Executive Vice President,
    
    
    2004
    
    
    
    260,000
    
    
    
    
    
    
    
    (1)
    
    
    
    
    
    
    
    3,096
    (2)General Counsel and
    
    
    2003
    
    
    
    260,000
    
    
    
    7,500
    
    
    
    (1)
    
    
    
    
    
    
    
    3,096
    (2)SecretaryDonald Norsworthy (1/31/05-9/21/05) (3)
    
    
    2005
    
    
    
    150,340
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,473
    (2)Executive Vice President, Chief
    
    
    2004
    
    
    
    235,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,245
    (2)Financial Officer and Treasurer
    
    
    2003
    
    
    
    204,936
    
    
    
    80,000
    
    
    
    
    
    
    
    10,000
    
    
    
    549
    (2)Todd J. Fine (3/8/04  1/29/06)
    
    
    2005
    
    
    
    196,667
    
    
    
    
    
    
    
    (1)
    
    
    
    15,000
    
    
    
    215
    (2)Senior Vice President U.S.Wal-Mart Operations
    
    
    2004
    
    
    
    135,385
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,014
    (2)Rickey Pickett (5/05  1/29/06)
    
    
    2005
    
    
    
    143,750
    
    
    
    
    
    
    
    (1)
    
    
    
    
    
    
    
    155
    (2)Chief Information Officer
 
 (1)
    
    Perquisites and other personal benefits did not exceed the lesser of either $50,000 or 10% of
the total annual salary and bonus reported under the headings of Salary and Bonus.(2)
    
    Includes amounts received as group term life insurance and key person life insurance benefits.
Mr. Feld received vacation pay, and Mr. Norsworthy received separation pay and vacation pay.(3)
    
    Mr. Feld resigned from the Company effective October 21, 2005 and Mr. Norsworthy resigned
effective September 21, 2005.. 95




---



##### 



Option Grants During 2005
  Individual Grants% of TotalNumber of
    
    OptionsSecurities
    
    Granted toUnderlying
    
    Employees in
    
    Exercise or
    
    
    
    
    
    Grant DateOptions
    
    Fiscal Year
    
    Base Price
    
    Expiration
    
    PresentName
    
    Granted(#)(1)
    
    (%)
    
    ($/Sh)
    
    Date
    
    Value(2)R. David Alexander
    
    
    125,000
    
    
    
    54.1
    %
    
    $
    8.00
    
    
    
    11/15/13
    
    
    $
    063,000
    
    
    
    27.3
    %
    
    $
    26.50
    
    
    
    11/15/13
    
    
    $
    0Barry J. Feld
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    James O. Mattox
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J. Robert Wren, Jr.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Todd J. Fine
    
    
    15,000
    
    
    
    6.5
    %
    
    $
    30.00
    
    
    
    4/28/13
    
    
    $
    0Rickey Pickett
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Donald Norsworthy
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    These options vest in four equal installments on each succeeding anniversary of
the grant date.(2)
    
    The present date grant value of these options was determined to be $0
based on a Black-Scholes valuation performed by the Company. (For assumptions used see Note
12, Stock Options and Warrants under the Notes to Consolidated Financial Statements
contained herein). Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
  Number of Securities UnderlyingUnexercised Options Held atFiscal Year End Exercisable/Name
    
    Un-exercisable (#)R. David Alexander
    
    
    0/188,000Barry J. Feld
    
    
    85,000/0James O. Mattox
    
    
    32,900/2,200J. Robert Wren, Jr.
    
    
    28,400/0Todd J. Fine
    
    
    0/15,000
 Employment and Severance Arrangements
 96




---



##### 



97




---



##### 



Management Stock Option Plan
     98




---



##### 



Compensation of Directors
  Compensation Committee Interlocks and Insider Participation
   ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  99




---



##### 



Amount and Nature of
    
    Percent ofName and Address of Beneficial Owner(s)
    
    Beneficial Ownership(1)
    
    ClassJupiter Partners II L.P. and Ganymede II LLC (2)
    
    
    3,832,812
    (3)
    
    
    91.9
    %Terry J. Blumer
    
    
    3,832,812
    (4)
    
    
    91.9
    %Barry J. Feld
    
    
    86,334
    (5)
    
    
    3.6
    %John F. Klein
    
    
    3,832,812
    (4)
    
    
    91.9
    %Eric F. Scheuermann
    
    
    3,832,812
    (4)
    
    
    91.9
    %John A. Sprague
    
    
    3,832,812
    (4)
    
    
    91.9
    %Bank of America Corporation
    
    
    152,490
    (6)
    
    
    6.2
    %Joseph H. Reich
    
    
    115,405
    
    
    
    5.0
    %James O. Mattox
    
    
    39,940
    (5) (7)
    
    
    1.7
    %J. Robert Wren, Jr.
    
    
    46,066
    (5) (8)
    
    
    2.0
    %All executive officers and directors as a group (9 persons)
    
    
    3,918,818
    (5)
    
    
    93.7
    %
 
 *
    
    Less than 1%(1)
    
    Pursuant to Rule 13d-3 under the Exchange Act, beneficial ownership of
a security consists of sole or shared voting power, including power to
vote or direct the vote, and/or sole or shared investment power,
including the power to dispose or direct the disposition, with respect
to the security through any contract, arrangement, understanding,
relationship or otherwise. Except as otherwise set forth below, each
beneficial owner exercises sole voting and sole investment power over
the shares indicated. All shares of common stock issued upon
conversion of currently convertible preferred stock or preferred stock
convertible within 60 days after the date set forth above or subject
to options that are currently exercisable or exercisable within 60
days after the date set forth above are deemed to be beneficially
owned by the holders of such preferred stock or options. For the
purpose of calculating each holders or the executive officers and
directors as a group percentage of the class, no shares of common
stock issued upon conversion of such convertible preferred stock or
subject to such options are deemed to be outstanding other than shares
of common stock issued upon conversion of such convertible preferred
stock or subject to options held by such holder or members of such
group.(2)
    
    Ganymede II LLC is the general partner of Jupiter Partners II L.P.
The address for Jupiter Partners II L.P., Ganymede II LLC and Messrs.
Blumer, Klein, Scheuermann and Sprague is 12 East 49th Street, 36th
Floor, New York, New York 10017.(3)
    
    Includes 1,875,000 shares of common stock that will be issued upon
conversion of shares of Series A preferred stock.(4)
    
    Represents shares of common stock beneficially owned by Jupiter
Partners II L.P. Messrs. Blumer, Scheuermann, Sprague and Klein
exercise investment and voting power over the shares beneficially
owned by Jupiter Partners II L.P. Each of Messrs. Blumer, Sprague,
Scheuermann and Klein disclaim beneficial ownership of all common
stock owned by Jupiter Partners II L.P., except to the extent of their
respective beneficial ownership interests in Jupiter Partners II L.P.(5)
    
    The numbers and percentages of shares shown in the table above include
stock options covering common stock exercisable and preferred stock
convertible into common stock within 60 days of the date set forth
above as follows: Mr. Blumer1,875,000; Mr. Klein1,875,000; Mr.
Mattox32,900; Mr. Scheuermann1,875,000; Mr. Sprague1,875,000;
and Mr. Wren28,400; and all executive officers and directors as a
group (including such individuals)1,936,300. Such persons and
members of such group disclaim any beneficial ownership of the shares
subject to such options. 100




---



##### 



(6)
    
    Represents shares of common stock that are to be issued upon the
exercise of outstanding warrants held by a subsidiary of Bank of
America Corporation. The address for Bank of America Corporation is
100 North Tryon Street, Charlotte, North Carolina 28255.(7)
    
    Includes 300 shares owned by Mr. Mattoxs children.(8)
    
    Includes 15,000 shares of common stock owned by a partnership of which
Mr. Wren is a general partner. 101




---



##### 



Equity Compensation Plan Information
  (c)Number ofsecurities available(a)
    
    
    
    
    
    for future issuanceNumber of securities
    
    (b)
    
    under equityto be issued upon
    
    Weighted average
    
    compensation plansexercise of
    
    exercise price of
    
    (excludingoutstanding options,
    
    outstanding options,
    
    securities reflectedPlan Category
    
    warrants and rights
    
    warrants and rights
    
    in column (a))Equity compensation
plans approved by
security holders
    
    
    1,065,735
    
    
    
    $ 11.34
    
    
    
    87,650Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,065,735
    
    
    
    $ 11.34
    
    
    
    87,650
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 102




---



##### 



Audit Fees
 Audit-Related Fees
 Tax Fees
 All Other Fees
  103




---



##### 



PART IV
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
  1.
    
    Financial StatementsThe financial statements listed in the Index to Consolidated Financial Statements
in Part II, Item 8, are filed as part of this report.2.
    
    ScheduleThe Schedule, Valuation and Qualifying Accounts, provided below is filed as part
of this report.3.
    
    ExhibitsSee the Exhibit Index to Exhibits filed with this report.
As noted, the exhibits are filed with or incorporated by reference in this report.
 104




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
 TaxValuationBalance
    
    Allowance
    
    
    
    
    
    Decrease inat
    
    Charged to
    
    Charged to
    
    Tax
    
    BalanceBeginning
    
    Income Tax
    
    Other
    
    Valuation
    
    at End ofDescription
    
    of Period
    
    Provision
    
    Accounts
    
    Allowance
    
    PeriodYear ended January
29, 2006 income tax
valuation allowance
    
    $
    17,425
    
    
    $
    11,074
    
    
    $
    
    
    
    $
    
    
    
    $
    28,499Year ended January
30, 2005 income tax
valuation allowance
    
    $
    77
    
    
    $
    17,348
    
    
    $
    
    
    
    $
    
    
    
    $
    17,425Year ended February
1, 2004 income tax
valuation allowance
    
    $
    77
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    77
 105




---



##### 



SIGNATURES
  PORTRAIT CORPORATION OF AMERICA, INC.By:
    
    /s/ R. David AlexanderR. David AlexanderPresident, Chief Executive Officer andChairman of the Board
  /s/ R. David Alexander

R. David Alexander
    
    President, Chief Executive Officer,
     Chairman and Director
     (Principal Executive Officer)
    
    June 20, 2006/s/ James Robert Wren, Jr.

James Robert Wren, Jr.
    
    Executive Vice President, General Counsel, 
     Interim Chief Financial Officer, 
     Secretary and Treasurer
     (Principal Financial and Accounting
     Officer)
    
    June 20, 2006/s/ Terry J. Blumer
    
    Director
    
    June 20, 2006Terry J. Blumer/s/ John F. Klein
    
    Director
    
    June 20, 2006John F. Klein/s/ Eric F. Scheuermann
    
    Director
    
    June 20, 2006Eric F. Scheuermann/s/ John A. Sprague
    
    Director
    
    June 20, 2006John A. Sprague
 106




---



##### 



EXHIBIT INDEX
  ExhibitNumber
    
    Description2.1
    
    
    Agreement and Plan of Merger, dated August 6, 2004, between Portrait Corporation
of America, Inc. and PCA International, Inc. (incorporated by reference to
Exhibit 2.1 to the Current Report on Form 8-K of Portrait Corporation of America,
Inc. filed August 10, 2004 (file No. 000-08550)).3.1
    
    
    Certificate of Incorporation of Portrait Corporation of America, Inc.
(incorporated by reference to Exhibit 3.1 to Annual Report on Form 10-K for the
fiscal year ended January 30, 2005 (SEC file number 0-8550)).3.2
    
    
    By-laws of Portrait Corporation of America, Inc. (incorporated by reference to
Exhibit 3.2 to Annual Report on Form 10-K for the fiscal year ended January 30,
2005 (SEC file number 0-8550)).3.3
    
    
    Certificate of the Powers, Designations, Preferences and Rights of the Series A
Redeemable Convertible Preferred Stock of Portrait Corporation of America, Inc. (incorporated by reference to Exhibit 3.3 to Annual Report on Form 10-K for the
fiscal year ended January 30, 2005 (SEC file number 0-8550)).4.1
    
    
    Indenture, dated as of June 27, 2002, among PCA LLC, PCA Finance Corp., the
Guarantors party thereto and The Bank of New York, as trustee (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form S-4 filed by PCA
LLC and PCA Finance Corp. on August 23, 2002 (File No. 333-98653; No.
333-98653-01 to 333-98653-07)).4.2
    
    
    Form of 11.875% Senior Note due 2009 of PCA LLC and PCA Finance Corp.
(incorporated by reference to Exhibit A to Exhibit 4.1 to the Registration
Statement on Form S-4 filed by PCA LLC and PCA Finance Corp. on August 23, 2002
(File No. 333-98653; No. 333-98653-01 to 333-98653-07)).4.3
    
    
    Exchange and Registration Rights Agreement, dated as of June 20, 2002, among PCA
LLC, PCA Finance Corp., the Guarantors party thereto, and Goldman, Sachs & Co.
and Banc of America Securities LLC as initial purchasers (incorporated by
reference to Exhibit 4.3 to the Registration Statement on Form S-4 filed by PCA
LLC and PCA Finance Corp. on August 23, 2002 (File No. 333-98653; No.
333-98653-01 to 333-98653-07)).4.4
    
    
    Purchase Agreement, dated as of June 27, 2002, among PCA LLC, the Guarantors
party thereto, and GS Mezzanine Partners II, L.P. and GS Mezzanine Partners II
Offshore, L.P. (incorporated by reference to Exhibit 4.4 to the Registration
Statement on Form S-4 filed by PCA LLC and PCA Finance Corp. on August 23, 2002
(File No. 333-98653; No. 333-98653-01 to 333-98653-07)).4.5
    
    
    Form of 13.75% Senior Subordinated Note of PCA LLC (incorporated by reference to
Exhibit 4.5 to the Registration Statement on Form S-4 filed by PCA LLC and PCA
Finance Corp. on August 23, 2002 (File No. 333-98653; No. 333-98653-01 to
333-98653-07)).4.6
    
    
    Purchase Agreement, dated as of June 27, 2002, among PCA International, Inc., and
GS Mezzanine Partners II, L.P. and GS Mezzanine Partners II Offshore, L.P.
(incorporated by reference to Exhibit 4.6 to the Registration Statement on Form
S-4 filed by PCA LLC and PCA Finance Corp. on August 23, 2002 (File No.
333-98653; No. 333-98653-01 to 333-98653-07)).4.7
    
    
    Form of 16.50% Senior Subordinated Note of PCA International, Inc. (incorporated
by reference to Exhibit 4.7 to the Registration Statement on Form S-4 filed by
PCA LLC and PCA Finance Corp. on August 23, 2002 (File No. 333-98653; No.
333-98653-01 to 333-98653-07)).
 107




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##### 



ExhibitNumber
    
    Description4.8
    
    
    Waiver, dated as of July 15, 2005, with respect to the Purchase Agreement, among
Portrait Corporation of America, Inc. (formerly PCA International, Inc.), GS
Mezzanine Partners II, L.P. and GS Mezzanine Partners II Offshore, L.P., dated as
of June 27, 2002 (incorporated by reference to Exhibit 4.8 to Annual Report on
Form 10-K for the fiscal year ended January 30, 2005 (SEC file number 0-8550)).4.9
    
    
    Waiver, dated as of July 15, 2005, with respect to the Purchase Agreement, among
PCA LLC, the guarantors named therein, GS Mezzanine Partners II, L.P. and GS
Mezzanine Partners II Offshore, L.P., dated as of June 27, 2002 (incorporated by
reference to Exhibit 4.9 to Annual Report on Form 10-K for the fiscal year ended
January 30, 2005 (SEC file number 0-8550)).4.10
    
    
    The First Amendment, dated as of July 15, 2005, with respect to the Purchase
Agreement among Portrait Corporation of America, Inc. (formerly PCA
International, Inc.), GS Mezzanine Partners II, L.P. and GS Mezzanine Partners II
Offshore, L.P., dated as of June 27, 2002 (incorporated by reference to Exhibit
4.10 to Annual Report on Form 10-K for the fiscal year ended January 30, 2005
(SEC file number 0-8550)).4.11
    
    
    The First Amendment, dated as of July 15, 2005, with respect to the Purchase
Agreement among PCA LLC, the guarantors named therein, GS Mezzanine Partners II,
L.P. and GS Mezzanine Partners II Offshore, L.P., dated as of June 27, 2002
(incorporated by reference to Exhibit 4.11 to Annual Report on Form 10-K for the
fiscal year ended January 30, 2005 (SEC file number 0-8550)).4.12
    
    
    Indenture, dated as of July 15, 2005, among PCA LLC and PCA Finance Corp., the
Guarantors party thereto and The Bank of New York Trust Company, N.A., as trustee
(incorporated by reference to Exhibit 4.12 to Annual Report on Form 10-K for the
fiscal year ended January 30, 2005 (SEC file number 0-8550)).4.13
    
    
    Form of 14% Senior Secured Note due 2009 of PCA LLC and PCA Finance Corp.
(incorporated by reference to Exhibit A to Exhibit 4.12 to Annual Report on Form
10-K for the fiscal year ended January 30, 2005 (SEC file number 0-8552)).4.14
    
    
    Security Agreement, dated as of July 15, 2005, among the Grantors listed on the
signature pages thereto and those additional entities that thereafter become
parties thereto and The Bank of New York Trust Company, N.A., in its capacity as
collateral agent for the trustee and the noteholders (incorporated by reference
to Exhibit 4.14 to Annual Report on Form 10-K for the fiscal year ended January
30, 2005 (SEC file number 0-8550)).10.1
    
    
    The Credit Agreement, dated as of July 15, 2005, among the lenders identified on
the signature pages thereto, Wells Fargo Foothill, Inc., as the arranger and
administrative agent for the lenders, PCA LLC, each of PCA LLCs subsidiaries
identified on the signature pages thereto and Portrait Corporation of America,
Inc. (formerly PCA International, Inc.) (incorporated by reference to Exhibit
10.1 to Annual Report on Form 10-K for the fiscal year ended January 30, 2005
(SEC file number 0-8550)).10.2
    
    
    Third Amendment to Credit Agreement,
Waiver, Consent and Forbearance Agreement, dated as of June 20, 2006, among the lenders
identified on the signature pages thereto, Wells Fargo Foothill, Inc., as the arranger and
administrative agent for the lenders, PCA LLC, and each of PCA LLCs
subsidiaries identified on the signature pages thereto (filed herewith).10.3
    
    
    The General Continuing Guaranty, dated as of July 15, 2005, among the persons
listed on the signature pages thereto under the caption Guarantors and any
additional entities acceding thereto, in favor of Wells Fargo Foothill, Inc., as
arranger and administrative agent for the Lenders (incorporated by reference to
Exhibit 10.2 to Annual Report on Form 10-K for the fiscal year ended January 30,
2005 (SEC file number 0-8550)).10.4
    
    
    The Security Agreement, dated as of July 15, 2005, among the Grantors listed on
the signature pages thereto and those additional entities that thereafter become
parties thereto and Wells Fargo Foothill, Inc., in its capacity as administrative
agent for the Lender Group and the Bank Product Providers (incorporated by
reference to Exhibit 10.3 to Annual Report on Form 10-K for the fiscal year ended
January 30, 2005 (SEC file number 0-8550)).10.5
    
    
    AGFA/PCA 2002 Sales Contract, dated as of February 4, 2002, between Agfa
Corporation and PCA International, Inc. (portions of this exhibit have been
omitted and filed separately with the Commission) (incorporated by reference to
Exhibit 10.3 to the Registration
 108




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##### 



ExhibitNumber
    
    DescriptionStatement on Form S-4 filed by PCA LLC and PCA
Finance Corp. on August 23, 2002 (File No. 333-98653; No. 333-98653-01 to
333-98653-07)).10.6
    
    
    Amendment No. 1, dated as of April 5, 2002, to the AGFA/PCA 2002 Sales Contract
(incorporated by reference to Exhibit 10.4 to the Registration Statement on Form
S-4 filed by PCA LLC and PCA Finance Corp. on August 23, 2002 (File No.
333-98653; No. 333-98653-01 to 333-98653-07)).10.7
    
    
    Amendment No. 2, dated as of June 28, 2002, to the AGFA/PCA 2002 Sales Contract
(filed herewith).10.8
    
    
    Letter Agreement, dated as of June 15, 2005, between Agfa Photo USA Corporation
and Portrait Corporation of America, Inc., amending the AGFA/PCA 2002 Sales
Contract (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K
for the fiscal year ended January 30, 2005 (SEC file number 0-8550)).10.9
    
    
    Subordination Agreement dated as of July 15, 2005 between Wells Fargo Foothill,
Inc. and Agfa (filed herewith).10.10
    
    
    Amendment No. 3, dated as of September 28, 2005, to the AGFA/PCA 2002 Sales
Contract (portions of this exhibit have been omitted and filed
separately with the Commission) (filed herewith).10.11
    
    
    Amendment No. 4, dated as of October 17,
2005, to AGFA/PCA 2002 Sales Contract (filed herewith).10.12
    
    
    Sub-Tenancy Contract, dated as of June 1, 2002, between Nueva Wal Mart De Mexico,
S DE R.L. DE C.V. and American Studios De Mexico, S.A. DE C.V. (portions of this
exhibit have been omitted and filed separately with the Commission) (incorporated
by reference to Exhibit 10.5 to the Registration Statement on Form S-4 filed by
PCA LLC and PCA Finance Corp. on August 23, 2002 (File No. 333-98653; No.
333-98653-01 to 333-98653-07)).10.13
    
    
    License Agreement, dated as of April 4, 2002, between Wal-Mart Stores, Inc. and
PCA International, Inc. (portions of this exhibit have been omitted and filed
separately with the Commission) (incorporated by reference to Exhibit 10.6 to
Amendment No. 1 to the Registration Statement on Form S-4 filed by PCA LLC and
PCA Finance Corp. on October 22, 2002 (File No. 333-98653; No. 333-98653-01 to
333-98653-07)).10.14
    
    
    Amendment
No. 1 to Wal-Mart Master License Agreement, dated as of June 17, 2002
(incorporated by reference to Exhibit 10.7 to the Registration Statement on Form
S-4 filed by PCA LLC and PCA Finance Corp. on August 23, 2002 (File No.
333-98653; No. 333-98653-01 to 333-98653-07)).10.15
    
    
    Amendment Number 2 to Wal-Mart Master In-Store license, dated June 24, 2004,
between Wal-Mart Stores, Inc. and PCA International, Inc. (portions of this
exhibit have been omitted and filed separately with the Commission) (incorporated
by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Portrait
Corporation of America, Inc. filed September 14, 2004 (file number 0-08550)).10.16
    
    
    License Agreement, dated as of February 9, 1996, between Wal-Mart Canada, Inc.
and PCA International, Inc. (portions of this exhibit have been omitted and filed
separately with the Commission) (incorporated by reference to Exhibit 10.8 to the
Registration Statement on Form S-4 filed by PCA LLC and PCA Finance Corp. on
August 23, 2002 (File No. 333-98653; No. 333-98653-01 to 333-98653-07)).10.17
    
    
    Amended and Restated License Agreement as of January 1, 2006, between Wal-Mart
Canada, Corp. and PCA International, Inc. (portions of this exhibit have been
omitted and filed separately with the Commission) (filed herewith).10.18+
    
    
    1998 Stock Option Plan of PCA International, Inc. (incorporated by reference to
Exhibit 10.9 to the Registration Statement on Form S-4 filed by PCA LLC and PCA
Finance Corp. on August 23, 2002 (File No. 333-98653; No. 333-98653-01 to
333-98653-07)).10.19+
    
    
    Form of Stock Option Agreement relating to the 1998 Stock Option Plan
(incorporated by reference to Exhibit 10.10 to the Registration Statement on Form
S-4 filed by PCA LLC and PCA Finance Corp. on August 23, 2002 (File No.
333-98653; No. 333-98653-01 to 333-98653-07)).
 
 109




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##### 



ExhibitNumber
    
    Description10.20+
    
    
    1996 Omnibus Long-Term Compensation Plan of PCA International, Inc. (incorporated
herein by reference to Exhibit 10(j) to the Quarterly Report on Form 10-Q of PCA
International, Inc. for the quarter ended April 28, 1996 (SEC file number
0-8550)).10.21
    
    
    Purchase Agreement, dated as of June 20, 2002, among PCA LLC, PCA Finance Corp.,
the Guarantors party thereto, and Goldman, Sachs & Co. and Banc of America
Securities LLC as initial purchasers (incorporated by reference to Exhibit 10.12
to the Registration Statement on Form S-4 filed by PCA LLC and PCA Finance Corp.
on August 23, 2002 (File No. 333-98653; No. 333-98653-01 to 333-98653-07)).10.22+
    
    
    Form of Agreement relating to the 1996 Omnibus Long-Term Compensation Plan of PCA
International, Inc. (incorporated by reference to Exhibit 10.13 to the
Registration Statement on Form S-4 filed by PCA LLC and PCA Finance Corp. on
August 23, 2002 (File No. 333-98653; No. 333-98653-01 to 333-98653-07)).10.23
    
    
    Warrant Agreement, dated as of August 25, 1999, between United States Trust
Company of New York and PCA International, Inc. (incorporated by reference to
Exhibit 10.14 to the Registration Statement on Form S-4 filed by PCA LLC and PCA
Finance Corp. on August 23, 2002 (File No. 333-98653; No. 333-98653-01 to
333-98653-07)).10.24
    
    
    Warrant Agreement, dated as of June 27, 2002, among PCA International, Inc., and
GS Mezzanine Partners II, L.P. and GS Mezzanine Partners II Offshore, L.P.
(incorporated by reference to Exhibit 10.15 to the Registration Statement on Form
S-4 filed by PCA LLC and PCA Finance Corp. on August 23, 2002 (File No.
333-98653; No. 333-98653-01 to 333-98653-07)).10.25
    
    
    Stockholders Agreement, dated as of August 25, 1998, among PCA International,
Inc., Jupiter Partners II L.P. and the other parties thereto (incorporated by
reference to Exhibit 10.16 to Amendment No. 1 to the Registration Statement on
Form S-4 filed by PCA LLC and PCA Finance Corp. on October 22, 2002 (File No.
333-98653; No. 333-98653-01 to 333-98653-07)).10.26
    
    
    Stockholders Agreement, dated as of August 25, 1999, among Jupiter Partners II
L.P., Nationsbridge, L.L.C., The Chase Manhattan Bank and PCA International, Inc.
(incorporated by reference to Exhibit 10.17 to the Registration Statement on Form
S-4 filed by PCA LLC and PCA Finance Corp. on August 23, 2002 (File No.
333-98653; No. 333-98653-01 to 333-98653-07)).10.27
    
    
    Stockholders Agreement, dated as of June 27, 2002, among Jupiter Partners II
L.P., PCA International, Inc., GS Mezzanine Partners II, L.P. and GS Mezzanine
Partners II Offshore, L.P. (incorporated by reference to Exhibit 10.18 to the
Registration Statement on Form S-4 filed by PCA LLC and PCA Finance Corp. on
August 23, 2002 (File No. 333-98653; No. 333-98653-01 to 333-98653-07)).10.28
    
    
    Registration Rights Agreement, dated as of August 25, 1999, among PCA
International, Inc. and the purchasers party thereto (incorporated by reference
to Exhibit 10.19 to the Registration Statement on Form S-4 filed by PCA LLC and
PCA Finance Corp. on August 23, 2002 (File No. 333-98653; No. 333-98653-01 to
333-98653-07)).10.29
    
    
    Registration Rights Agreement, dated as of August 25, 1998, between Jupiter
Partners II L.P. and PCA International, Inc. (incorporated by reference to
Exhibit 10.20 to the Registration Statement on Form S-4 filed by PCA LLC and PCA
Finance Corp. on August 23, 2002 (File No. 333-98653; No. 333-98653-01 to
333-98653-07)).10.30
    
    
    Registration Rights Agreement, dated as of June 27, 2002, among PCA
International, Inc. and the Purchasers party thereto (incorporated by reference
to Exhibit 10.21 to the Registration Statement on Form S-4 filed by PCA LLC and
PCA Finance Corp. on August 23, 2002 (File No. 333-98653; No. 333-98653-01 to
333-98653-07)).10.31+
    
    
    Employment and Non-Compete Agreement, dated as of January 28, 1997, between J.
Robert
 
 110




---



##### 



ExhibitNumber
    
    DescriptionWren, Jr. and PCA International, Inc. (incorporated herein by reference to
Exhibit 10(n) to the Annual Report on Form 10-K of PCA International, Inc. for
the year ended February 2, 1997 (SEC file number 0-8550)).10.32+
    
    
    Employment and Non-Compete Agreement, dated as of January, 1997, between James O.
Mattox and PCA International, Inc. (incorporated by reference to Exhibit 10.25 to
the Registration Statement on Form S-4 filed by PCA LLC and PCA Finance Corp. on
August 23, 2002 (File No. 333-98653; No. 333-98653-01 to 333-98653-07)).10.33+
    
    
    PCA Employment Agreement, dated March 8, 2004, between PCA International, Inc.
and all of its subsidiaries and Todd J. Fine (incorporated by reference to
Exhibit 10.31 to Annual Report on Form 10-K for the fiscal year ended January 30,
2005 (SEC file number 0-8550)).10.34+
    
    
    PCA Employment Agreement, dated November 2, 2005, between PCA International, Inc.
and all of its subsidiaries and R. David Alexander (portions of this
exhibit have been omitted and filed separately with the Commission) (filed herewith).10.35
    
    
    ISDA Master Agreement, dated as of January 27, 1997, between National Bank, N.A.
and PCA International, Inc. (incorporated by reference to Exhibit 10.28 to
Amendment No. 1 to the Registration Statement on Form S-4 filed by PCA LLC and
PCA Finance Corp. on October 22, 2002 (File No. 333-98653; No. 333-98653-01 to
333-98653-07)).10.36
    
    
    Extension Agreement, dated as of March 31, 2002, among Wal-Mart Canada Corp., PCA
Photo Corporation of Canada, Inc. and PCA International, Inc. (incorporated by
reference to Exhibit 10.29 to Amendment No. 1 to the Registration Statement on
Form S-4 filed by PCA LLC and PCA Finance Corp. on October 22, 2002 (File No.
333-98653; No. 333-98653-01 to 333-98653-07)).10.37
    
    
    Extension Agreement, dated as of April 4, 2002, among Wal-Mart Canada Corp., PCA
Photo Corporation of Canada, Inc. and PCA International, Inc. (incorporated by
reference to Exhibit 10.30 to Amendment No. 1 to the Registration Statement on
Form S-4 filed by PCA LLC and PCA Finance Corp. on October 22, 2002 (File No.
333-98653; No. 333-98653-01 to 333-98653-07)).10.38
    
    
    License Amending Agreement, dated February 7, 2003, between Wal-Mart Canada
Corp., PCA Photo Corporation of Canada, Inc. and PCA International,
Inc. (incorporated by reference to Exhibit 10.35 to Annual Report
on Form 10-K for the fiscal year ended January 30, 2005
(SEC file number 0-8550)).10.39
    
    
    Letter Agreement, dated January 29, 2004, of PCA International, Inc. and PCA
Photo Corporation of Canada, Inc. (incorporated by reference to Exhibit 10.36 to
Annual Report on Form 10-K for the fiscal year ended January 30, 2005 (SEC file
number 0-8550)).10.40
    
    
    Professional Lab Sales Agreement beginning January 1, 2006 between Eastman Kodak
Company and PCA LLC (portions of this exhibit have been omitted and filed
separately with the Commission) (filed herewith).10.41
    
    
    Supply Agreement dated December 2, 2005, between Fuji Photo Film U.S.A., Inc. and
PCA LLC (portions of this exhibit have been omitted and filed separately with the
Commission) (filed herewith).12.1
    
    
    Statement of Computation of Ratios of Earnings to Fixed Charges (filed herewith).21.1
    
    
    Subsidiaries of Portrait Corporation of America, Inc. (filed herewith).31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 (filed herewith).31.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 (filed herewith).
 
 111