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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



| | 
| | 



FORM 10-Q



| | 
| | 



(Mark One)



|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------



For the quarterly period ended May 4, 2003



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



For the transition period from              to



Commission file number 0-8550



| | 
| | 



PCA International, Inc.

(Exact name of registrant as specified in its charter)



| | 
| | 



|North Carolina                                                 |  | 56-0888429                       
|-------------------------------------------------------------- |  | ---------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



815 Matthews-Mint
Hill Road

Matthews, North Carolina 28105

(Address of principal executive offices)

(Zip Code)



(704) 588-4351

(Registrants telephone number, including area code)



| | 
| | 



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



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



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##### Table of Contents

Table of Contents



|         |  |                                                                                                                |  | Page No.
|-------- |  | -------------------------------------------------------------------------------------------------------------- |  | --------
|Part I.  |  | Financial Information                                                                                          |  | 1       
|         |  |                                                                                                               
|Item 1.  |  | Financial Statements                                                                                           |  | 1       
|         |  |                                                                                                               
|         |  | Consolidated Balance Sheets as of May 4, 2003 (Unaudited) and February 2, 2003                                 |  | 1       
|         |  |                                                                                                               
|         |  | Consolidated Statements of Operations Thirteen Weeks Ended May 4, 2003 (Unaudited) and May 5, 2002 (Unaudited) |  | 3       
|         |  |                                                                                                               
|         |  | Consolidated Statements of Cash Flows Thirteen Weeks Ended May 4, 2003 (Unaudited) and May 5, 2002 (Unaudited) |  | 4       
|         |  |                                                                                                               
|         |  | Notes to Consolidated Financial Statements (Unaudited)                                                         |  | 5       
|         |  |                                                                                                               
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 12      
|         |  |                                                                                                               
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                     |  | 15      
|         |  |                                                                                                               
|Item 4.  |  | Controls and Procedures                                                                                        |  | 15      
|         |  |                                                                                                               
|Part II. |  | Other Information                                                                                              |  | 15      
|         |  |                                                                                                               
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                               |  | 15      
|         |  |                                                                                                               
|         |  | Signatures                                                                                                     |  | 16      
|         |  |                                                                                                               
|         |  | Certifications                                                                                                 |  | 17      



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##### Table of Contents

Part I. Financial Information



Item 1. Financial Statements



PCA
INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands)



|                                               |  | May 4,2003  |         | February 2, 2003
|---------------------------------------------- |  | ----------- | ------- | ----------------
|                                               |  | (unaudited) |         |                 
|ASSETS                                         |  |             |         |                 
|CURRENT ASSETS:                                |  |             |         |                 
|Cash and cash equivalents                      |  | $           | 4,398   |                 
|Accounts receivable                            |  |             | 1,901   |                 
|Inventories                                    |  |             | 11,675  |                 
|Deferred income taxes                          |  |             | 4,303   |                 
|Prepaid expenses and other assets              |  |             | 3,490   |                 
|                                               |  |             |         |                 
|Total current assets                           |  |             | 25,767  |                 
|PROPERTY AND EQUIPMENT:                        |  |             |         |                 
|Land and improvements                          |  |             | 2,305   |                 
|Buildings and improvements                     |  |             | 12,698  |                 
|Photographic, sales and finishing equipment    |  |             | 127,847 |                 
|Studio improvements                            |  |             | 20,494  |                 
|Construction in progress                       |  |             | 3,030   |                 
|                                               |  |             |         |                 
|Total                                          |  |             | 166,374 |                 
|Less accumulated depreciation and amortization |  |             | 104,387 |                 
|                                               |  |             |         |                 
|Property and equipment, net                    |  |             | 61,987  |                 
|GOODWILL                                       |  |             | 51,600  |                 
|DEFERRED FINANCING COSTS, NET                  |  |             | 9,625   |                 
|DEFERRED INCOME TAXES, NONCURRENT              |  |             | 12,332  |                 
|OTHER ASSETS                                   |  |             | 34      |                 
|                                               |  |             |         |                 
|TOTAL ASSETS                                   |  | $           | 161,345 |                 
|                                               |  |             |         |                 





See notes to consolidated financial statements.





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PCA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(dollar amounts in thousands)



|                                                                                                                         |  | May 4,2003  |          |   | February 2, 2003 |  
|------------------------------------------------------------------------------------------------------------------------ |  | ----------- | -------- | - | ---------------- | -
|                                                                                                                         |  | (unaudited) |          |   |                  |  
|LIABILITIES AND SHAREHOLDERS' DEFICIENCY                                                                                 |  |             |          |   |                  |  
|CURRENT LIABILITIES:                                                                                                     |  |             |          |   |                  |  
|Short-term borrowings                                                                                                    |  | $           | 7,400    |   |                  | $
|Current portion of long-term debt                                                                                        |  |             | 97       |   |                  |  
|Accounts payabletrade                                                                                                   |  |             | 26,647   |   |                  |  
|Accrued insurance                                                                                                        |  |             | 3,933    |   |                  |  
|Accrued income taxes                                                                                                     |  |             | 480      |   |                  |  
|Accrued compensation                                                                                                     |  |             | 5,397    |   |                  |  
|Accrued interest                                                                                                         |  |             | 5,702    |   |                  |  
|Other accrued liabilities                                                                                                |  |             | 14,966   |   |                  |  
|                                                                                                                         |  |             |          |   |                  |  
|Total current liabilities                                                                                                |  |             | 64,622   |   |                  |  
|LONG-TERM DEBT                                                                                                           |  |             | 218,481  |   |                  |  
|OTHER LIABILITIES                                                                                                        |  |             | 5,822    |   |                  |  
|                                                                                                                         |  |             |          |   |                  |  
|TOTAL LIABILITIES                                                                                                        |  |             | 288,925  |   |                  |  
|COMMITMENTS AND CONTINGENCIES                                                                                            |  |             |          |   |                  |  
|SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $10.00 par value (authorized200,000 shares; outstanding15,000
shares) |  |             | 34,042   |   |                  |  
|SHAREHOLDERS' DEFICIENCY:                                                                                                |  |             |          |   |                  |  
|Common stock, $0.20 par value (authorized20,000,000 shares; issued and outstanding2,293,152 shares)                    |  |             | 458      |   |                  |  
|Warrants to purchase Series A redeemable convertible preferred stock (issued and outstanding287)                        |  |             | 642      |   |                  |  
|Warrants to purchase common stock (issued and outstanding306,610)                                                       |  |             | 2,947    |   |                  |  
|Additional paid-in capital                                                                                               |  |             | 2,861    |   |                  |  
|Deficit                                                                                                                  |  |             | (168,534 | ) |                  |  
|Accumulated other comprehensive income (loss)                                                                            |  |             | 4        |   |                  |  
|                                                                                                                         |  |             |          |   |                  |  
|Total shareholders' deficiency                                                                                           |  |             | (161,622 | ) |                  |  
|                                                                                                                         |  |             |          |   |                  |  
|TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY                                                                           |  | $           | 161,345  |   |                  | $
|                                                                                                                         |  |             |          |   |                  |  



See notes to
consolidated financial statements.



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PCA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(dollar amounts in thousands)



|                            |  | For the ThirteenWeeks Ended |       
|--------------------------- |  | --------------------------- | ------
|                            |  | May 4,2003                  |       
|SALES                       |  | $                           | 71,556
|COST OF SALES               |  |                             | 55,362
|                            |  |                             |       
|GROSS PROFIT                |  |                             | 16,194
|GENERAL AND ADMINISTRATIVE  |  |                             | 11,502
|AMORTIZATION OF INTANGIBLES |  |                             |      
|                            |  |                             |       
|INCOME FROM OPERATIONS      |  |                             | 4,692 
|INTEREST INCOME             |  |                             | 2     
|INTEREST EXPENSE            |  |                             | (7,674
|OTHER EXPENSE               |  |                             |      
|                            |  |                             |       
|LOSS BEFORE INCOME TAXES    |  |                             | (2,980
|INCOME TAX BENEFIT          |  |                             | 1,305 
|                            |  |                             |       
|NET LOSS                    |  | $                           | (1,675
|                            |  |                             |       



See notes to
consolidated financial statements.



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PCA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollar amounts in thousands)



|                                                                                          |  | For the Thirteen WeeksEnded |        
|----------------------------------------------------------------------------------------- |  | --------------------------- | -------
|                                                                                          |  | May 4,2003                  |        
|OPERATING ACTIVITIES:                                                                     |  |                             |        
|Net loss                                                                                  |  | $                           | (1,675 
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                             |        
|Depreciation and amortization                                                             |  |                             | 2,726  
|Amortization of deferred financing cost                                                   |  |                             | 429    
|Interest expense-effective interest method                                                |  |                             |       
|Change in fair value of derivative instruments                                            |  |                             |       
|Amortization of debt discounts                                                            |  |                             | 153    
|Provision for deferred income taxes                                                       |  |                             | (1,305 
|Loss on disposal of property and equipment                                                |  |                             | 45     
|Changes in assets and liabilities which provided (used) cash:                             |  |                             |        
|Accounts receivable                                                                       |  |                             | (178   
|Inventories                                                                               |  |                             | (1,133 
|Prepaid expenses and other assets                                                         |  |                             | (519   
|Other noncurrent assets                                                                   |  |                             | 5      
|Accounts payabletrade                                                                    |  |                             | 20     
|Accrued expenses                                                                          |  |                             | 615    
|Accrued interest                                                                          |  |                             | (6,382 
|Other current and non-current accrued liabilities                                         |  |                             | 7,144  
|                                                                                          |  |                             |        
|NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                       |  |                             | (55    
|                                                                                          |  |                             |        
|INVESTING ACTIVITIES:                                                                     |  |                             |        
|Purchase of property and equipment                                                        |  |                             | (6,384 
|Proceeds from sales of property and equipment                                             |  |                             | 2      
|                                                                                          |  |                             |        
|NET CASH USED IN INVESTING ACTIVITIES                                                     |  |                             | (6,382 
|                                                                                          |  |                             |        
|FINANCING ACTIVITIES:                                                                     |  |                             |        
|Increase in borrowings under senior secured credit facility                               |  |                             | 21,900 
|Repayment of senior secured credit facility and capital lease obligations                 |  |                             | (13,322
|Repayment of senior subordinated term loans                                               |  |                             |       
|Deferred financing cost                                                                   |  |                             | (31    
|                                                                                          |  |                             |        
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                       |  |                             | 8,547  
|                                                                                          |  |                             |        
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                   |  |                             | (234   
|                                                                                          |  |                             |        
|INCREASE IN CASH AND CASH EQUIVALENTS                                                     |  |                             | 1,876  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                          |  |                             | 2,522  
|                                                                                          |  |                             |        
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                |  | $                           | 4,398  
|                                                                                          |  |                             |        



See notes to
consolidated financial statements.



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PCA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollar amounts in thousands, except where noted)



1. BASIS OF PRESENTATION



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



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



2. STOCK OPTION PLAN



The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense relating to stock options granted to employees is recorded on the date of grant only if the current market price of the underlying
stock exceeds the exercise price (see Note 9 to the Consolidated Financial Statements (Item 8.) in the Annual Report on Form 10-K for the fiscal year ended February 2, 2003.)



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



|                                              |  | For the Thirteen Weeks Ended |       
|--------------------------------------------- |  | ---------------------------- | ------
|                                              |  | May 4, 2003                  |       
|Net loss attributable to common shareholders: |  |                              |       
|As reported                                   |  | $                            | (1,675
|                                              |  |                              |       
|Proforma                                      |  | $                            | (1,685
|                                              |  |                              |       



3. IMPACT OF NEWLY ISSUED
ACCOUNTING STANDARDS



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



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



4. SEASONALITY



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



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5. COMPREHENSIVE LOSS



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



|                                                      |  | For the Thirteen Weeks Ended |       
|----------------------------------------------------- |  | ---------------------------- | ------
|                                                      |  | May 4,2003                   |       
|Net loss                                              |  | $                            | (1,675
|Foreign currency translation adjustment, net of taxes |  |                              | 423   
|                                                      |  |                              |       
|Total comprehensive loss                              |  | $                            | (1,252
|                                                      |  |                              |       



6. DERIVATIVE: SERIES A REDEEMABLE
CONVERTIBLE PREFERRED STOCK



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



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



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



7. OTHER ACCRUED LIABILITIES



Other accrued liabilities are comprised of the following:



|                                |  | May 4,2003 |        | February 2,2003
|------------------------------- |  | ---------- | ------ | ---------------
|Accrued taxes other than income |  | $          | 2,719  |                
|Other accrued expenses          |  |            | 4,209  |                
|Customer deposits               |  |            | 8,038  |                
|                                |  |            |        |                
|                                |  | $          | 14,966 |                
|                                |  |            |        |                



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8. OTHER LIABILITIES



Other liabilities are comprised of the following:



|                                                       |  | May 4,2003 |       | February 2,2003
|------------------------------------------------------ |  | ---------- | ----- | ---------------
|Accrued interest                                       |  | $          | 1,905 |                
|Long-term portion of retiree benefit obligation        |  |            | 1,041 |                
|Long-term portion of workers' compensation obligations |  |            | 2,876 |                
|                                                       |  |            |       |                
|                                                       |  | $          | 5,822 |                
|                                                       |  |            |       |                



9. GOODWILL AND INTANGIBLE ASSETS



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



|                               |  | May 4,2003                   |        | February 2,2003
|------------------------------ |  | ---------------------------- | ------ | ---------------
|Unamortized intangible assets: |  |                              |        |                
|Goodwill                       |  | $                            | 51,600 |                
|                               |  |                              |        |                
|                               | 
|                               |  | For the Thirteen Weeks Ended
|                               |  | May 4,2003                   |        | May 5,2002     
|Aggregate amortization expense |  | $                            |       |                
|                               |  |                              |        |                



10. UNITED KINGDOM OPERATIONS



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



11. BUSINESS SEGMENT AND GEOGRAPHIC DATA



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



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



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



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The following table reconciles net loss to EBITDA:



|                                         |  | Retail Portraiture |        |   | Institutional Portraiture |   |      | Consolidated | 
|---------------------------------------- |  | ------------------ | ------ | - | ------------------------- | - | ---- | ------------ | 
|For the thirteen weeks ended May 4, 2003 |  |                    |        |   |                           |   |      |              | 
|Net loss                                 |  | $                  | (1,284 | ) |                           | $ | (391 | )            | 
|Add back:                                |  |                    |        |   |                           |   |      |              | 
|Depreciation and amortization            |  |                    | 2,674  |   |                           |   | 52   |              | 
|Income tax benefit                       |  |                    | (1,265 | ) |                           |   | (40  | )            | 
|Interest income                          |  |                    | (2     | ) |                           |   |     |              | 
|Interest expense                         |  |                    | 7,394  |   |                           |   | 280  |              | 
|Other expense                            |  |                    |       |   |                           |   |     |              | 
|                                         |  |                    |        |   |                           |   |      |              | 
|EBITDA                                   |  | $                  | 7,517  |   |                           | $ | (99  | )            | 
|                                         |  |                    |        |   |                           |   |      |              | 
|For the thirteen weeks ended May 5, 2002 |  |                    |        |   |                           |   |      |              | 
|Net loss                                 |  | $                  | (1,269 | ) |                           | $ | (551 | )            | 
|Add back:                                |  |                    |        |   |                           |   |      |              | 
|Depreciation and amortization            |  |                    | 2,276  |   |                           |   | 40   |              | 
|Income tax benefit                       |  |                    |       |   |                           |   |     |              | 
|Interest income                          |  |                    | (2     | ) |                           |   |     |              | 
|Interest expense                         |  |                    | 6,431  |   |                           |   | 323  |              | 
|Other expense                            |  |                    | 2,066  |   |                           |   |     |              | 
|                                         |  |                    |        |   |                           |   |      |              | 
|EBITDA                                   |  | $                  | 9,502  |   |                           | $ | (188 | )            | 
|                                         |  |                    |        |   |                           |   |      |              | 



Business Segment Data



|                                         |  | Retail Portraiture |        | Institutional Portraiture |   |       | Consolidated
|---------------------------------------- |  | ------------------ | ------ | ------------------------- | - | ----- | ------------
|For the thirteen weeks ended May 4, 2003 |  |                    |        |                           |   |       |             
|Sales                                    |  | $                  | 68,548 |                           | $ | 3,008 |             
|EBITDA                                   |  | $                  | 7,517  |                           | $ | (99   | )           
|                                         |  |                    |       
|For the thirteen weeks ended May 5, 2002 |  |                    |        |                           |   |       |             
|Sales                                    |  | $                  | 64,549 |                           | $ | 3,373 |             
|EBITDA                                   |  | $                  | 9,502  |                           | $ | (188  | )           



Geographic Data as of and for the
Thirteen Weeks Ended:



|                  |  | United States |         | Canada |   | Mexico |  | OtherForeign |       | Consolidated
|----------------- |  | ------------- | ------- | ------ | - | ------ |  | ------------ | ----- | ------------
|May 4, 2003       |  |               |         |        |   |        |  |              |       |             
|Sales             |  | $             | 66,099  |        | $ | 3,412  |  | $            | 1,955 |             
|Long-lived assets |  |               | 103,496 |        |   | 5,924  |  |              | 3,101 |             
|                  |  |               |         |        |  
|May 5, 2002       |  |               |         |        |   |        |  |              |       |             
|Sales             |  | $             | 63,198  |        | $ | 3,200  |  | $            | 1,524 |             
|Long-lived assets |  |               | 96,558  |        |   | 4,956  |  |              | 2,813 |             





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12. GUARANTOR AND NON-GUARANTOR FINANCIAL
STATEMENTS



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



PCA INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

May 4, 2003

(Unaudited)

(in thousands)



|                                                        |  | Parent/Guarantor |          |   | Issuer andGuarantorEntities |   |          | Non-guarantorEntities |  |   | Eliminations |   | Total |  
|------------------------------------------------------- |  | ---------------- | -------- | - | --------------------------- | - | -------- | --------------------- |  | - | ------------ | - | ----- | -
|Assets:                                                 |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  
|Cash and cash equivalents                               |  | $                |         |   |                             | $ | 4,175    |                       |  | $ | 223          |   |       | $
|Accounts receivable                                     |  |                  |         |   |                             |   | 1,711    |                       |  |   | 190          |   |       |  
|Inventories                                             |  |                  |         |   |                             |   | 11,624   |                       |  |   | 51           |   |       |  
|Deferred income taxes                                   |  |                  |         |   |                             |   | 4,303    |                       |  |   |             |   |       |  
|Prepaid expenses and other assets                       |  |                  |         |   |                             |   | 2,900    |                       |  |   | 590          |   |       |  
|                                                        |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  
|Total current assets                                    |  |                  |         |   |                             |   | 24,713   |                       |  |   | 1,054        |   |       |  
|                                                        |  |                  |          |   |                            
|Investments and intercompany receivables                |  |                  | (127,580 | ) |                             |   | (8,822   | )                     |  |   | (4,164       | ) |       |  
|Property and equipment, net                             |  |                  |         |   |                             |   | 57,808   |                       |  |   | 4,179        |   |       |  
|Goodwill, intangible and other assets, net              |  |                  |         |   |                             |   | 51,612   |                       |  |   | 22           |   |       |  
|Deferred financing costs, net                           |  |                  |         |   |                             |   | 9,625    |                       |  |   |             |   |       |  
|Deferred income taxes, noncurrent                       |  |                  |         |   |                             |   | 12,332   |                       |  |   |             |   |       |  
|                                                        |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  
|Total assets                                            |  | $                | (127,580 | ) |                             | $ | 147,268  |                       |  | $ | 1,091        |   |       | $
|                                                        |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  
|Liabilities and shareholders' equity (deficiency):      |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  
|Short-term borrowings                                   |  | $                |         |   |                             | $ | 7,400    |                       |  | $ |             |   |       | $
|Current portion of long-term debt                       |  |                  |         |   |                             |   | 97       |                       |  |   |             |   |       |  
|Accounts payabletrade                                  |  |                  |         |   |                             |   | 26,503   |                       |  |   | 144          |   |       |  
|Accrued insurance                                       |  |                  |         |   |                             |   | 3,933    |                       |  |   |             |   |       |  
|Accrued income taxes                                    |  |                  |         |   |                             |   | 480      |                       |  |   |             |   |       |  
|Accrued compensation                                    |  |                  |         |   |                             |   | 5,341    |                       |  |   | 56           |   |       |  
|Accrued interest                                        |  |                  |         |   |                             |   | 5,702    |                       |  |   |             |   |       |  
|Other accrued liabilities                               |  |                  |         |   |                             |   | 14,907   |                       |  |   | 59           |   |       |  
|                                                        |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  
|Total current liabilities                               |  |                  |         |   |                             |   | 64,363   |                       |  |   | 259          |   |       |  
|                                                        |  |                  |          |   |                            
|Long-term debt, less current portion                    |  |                  |         |   |                             |   | 218,481  |                       |  |   |             |   |       |  
|Other liabilities                                       |  |                  |         |   |                             |   | 5,822    |                       |  |   |             |   |       |  
|Series A redeemable convertible preferred stock         |  |                  | 34,042   |   |                             |   |         |                       |  |   |             |   |       |  
|Total shareholders' equity (deficiency)                 |  |                  | (161,622 | ) |                             |   | (141,398 | )                     |  |   | 832          |   |       |  
|                                                        |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  
|Total liabilities and shareholders' equity (deficiency) |  | $                | (127,580 | ) |                             | $ | 147,268  |                       |  | $ | 1,091        |   |       | $
|                                                        |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  



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##### Table of Contents

PCA INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

February 2, 2003

(Unaudited)

(in thousands)



|                                                        |  | Parent/Guarantor |          |   | Issuer andGuarantorEntities |   |          | Non-guarantorEntities |  |   | Eliminations |   | Total |  
|------------------------------------------------------- |  | ---------------- | -------- | - | --------------------------- | - | -------- | --------------------- |  | - | ------------ | - | ----- | -
|Assets:                                                 |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  
|Cash and cash equivalents                               |  | $                |         |   |                             | $ | 2,312    |                       |  | $ | 210          |   |       | $
|Accounts receivable                                     |  |                  |         |   |                             |   | 1,472    |                       |  |   | 251          |   |       |  
|Inventories                                             |  |                  |         |   |                             |   | 10,493   |                       |  |   | 49           |   |       |  
|Deferred income taxes                                   |  |                  |         |   |                             |   | 4,303    |                       |  |   |             |   |       |  
|Prepaid expenses and other assets                       |  |                  |         |   |                             |   | 2,356    |                       |  |   | 615          |   |       |  
|                                                        |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  
|Total current assets                                    |  |                  |         |   |                             |   | 20,936   |                       |  |   | 1,125        |   |       |  
|                                                        |  |                  |          |   |                            
|Investments and intercompany receivables                |  |                  | (126,328 | ) |                             |   | (10,481  | )                     |  |   | (3,619       | ) |       |  
|Property and equipment, net                             |  |                  |         |   |                             |   | 54,044   |                       |  |   | 3,718        |   |       |  
|Goodwill, intangible and other assets, net              |  |                  |         |   |                             |   | 51,570   |                       |  |   | 26           |   |       |  
|Deferred financing costs, net                           |  |                  |         |   |                             |   | 10,023   |                       |  |   |             |   |       |  
|Deferred income taxes, noncurrent                       |  |                  |         |   |                             |   | 11,027   |                       |  |   |             |   |       |  
|                                                        |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  
|Total assets                                            |  | $                | (126,328 | ) |                             | $ | 137,119  |                       |  | $ | 1,250        |   |       | $
|                                                        |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  
|Liabilities and shareholders' equity (deficiency):      |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  
|Current portion of long-term debt                       |  | $                |         |   |                             | $ | 94       |                       |  | $ |             |   |       | $
|Accounts payabletrade                                  |  |                  |         |   |                             |   | 26,467   |                       |  |   | 160          |   |       |  
|Accrued insurance                                       |  |                  |         |   |                             |   | 3,960    |                       |  |   |             |   |       |  
|Accrued income taxes                                    |  |                  |         |   |                             |   | 495      |                       |  |   |             |   |       |  
|Accrued compensation                                    |  |                  |         |   |                             |   | 4,697    |                       |  |   | 43           |   |       |  
|Accrued interest                                        |  |                  |         |   |                             |   | 12,084   |                       |  |   |             |   |       |  
|Other accrued liabilities                               |  |                  |         |   |                             |   | 9,776    |                       |  |   | 77           |   |       |  
|                                                        |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  
|Total current liabilities                               |  |                  |         |   |                             |   | 57,573   |                       |  |   | 280          |   |       |  
|                                                        |  |                  |          |   |                            
|Long-term debt, less current portion                    |  |                  |         |   |                             |   | 217,153  |                       |  |   |             |   |       |  
|Other liabilities                                       |  |                  |         |   |                             |   | 3,791    |                       |  |   |             |   |       |  
|Series A redeemable convertible preferred stock         |  |                  | 34,924   |   |                             |   |         |                       |  |   |             |   |       |  
|Total shareholders' equity (deficiency)                 |  |                  | (161,252 | ) |                             |   | (141,398 | )                     |  |   | 970          |   |       |  
|                                                        |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  
|Total liabilities and shareholders' equity (deficiency) |  | $                | (126,328 | ) |                             | $ | 137,119  |                       |  | $ | 1,250        |   |       | $
|                                                        |  |                  |          |   |                             |   |          |                       |  |   |              |   |       |  



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##### Table of Contents

PCA INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Thirteen Weeks Ended
May 4, 2003

(Unaudited)

(in thousands)



|                                                              |  | Parent/Guarantor |        |   | Issuer andGuarantorEntities |   |        | Non-guarantorEntities |  |   | Eliminations |   | Total |  
|------------------------------------------------------------- |  | ---------------- | ------ | - | --------------------------- | - | ------ | --------------------- |  | - | ------------ | - | ----- | -
|Sales                                                         |  | $                |       |   |                             | $ | 69,511 |                       |  | $ | 2,045        |   |       | $
|Cost of sales                                                 |  |                  |       |   |                             |   | 53,210 |                       |  |   | 2,152        |   |       |  
|                                                              |  |                  |        |   |                             |   |        |                       |  |   |              |   |       |  
|Gross profit                                                  |  |                  |       |   |                             |   | 16,301 |                       |  |   | (107         | ) |       |  
|General and administrative                                    |  |                  |       |   |                             |   | 11,405 |                       |  |   | 97           |   |       |  
|Amortization of intangibles                                   |  |                  |       |   |                             |   |       |                       |  |   |             |   |       |  
|                                                              |  |                  |        |   |                             |   |        |                       |  |   |              |   |       |  
|Income (loss) from operations                                 |  |                  |       |   |                             |   | 4,896  |                       |  |   | (204         | ) |       |  
|Interest income                                               |  |                  |       |   |                             |   | 2      |                       |  |   |             |   |       |  
|Interest expense                                              |  |                  |       |   |                             |   | (7,674 | )                     |  |   |             |   |       |  
|Other expense                                                 |  |                  |       |   |                             |   |       |                       |  |   |             |   |       |  
|Investment income (loss) in equity of wholly-owned subsidiary |  |                  | (1,675 | ) |                             |   | (204   | )                     |  |   |             |   |       |  
|                                                              |  |                  |        |   |                             |   |        |                       |  |   |              |   |       |  
|Income (loss) before income taxes                             |  |                  | (1,675 | ) |                             |   | (2,980 | )                     |  |   | (204         | ) |       |  
|Income tax benefit                                            |  |                  |       |   |                             |   | 1,305  |                       |  |   |             |   |       |  
|                                                              |  |                  |        |   |                             |   |        |                       |  |   |              |   |       |  
|Net income (loss)                                             |  | $                | (1,675 | ) |                             | $ | (1,675 | )                     |  | $ | (204         | ) |       | $
|                                                              |  |                  |        |   |                             |   |        |                       |  |   |              |   |       |  



PCA INTERNATIONAL,
INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Thirteen Weeks Ended May 5, 2002

(Unaudited)

(in thousands)



|                                                              |  | Parent/Guarantor |        |   | Issuer andGuarantorEntities |   |        | Non-guarantorEntities |  |   | Eliminations |   |  | Total |    
|------------------------------------------------------------- |  | ---------------- | ------ | - | --------------------------- | - | ------ | --------------------- |  | - | ------------ | - |  | ----- | ---
|Sales                                                         |  | $                |       |   |                             | $ | 66,398 |                       |  | $ | 1,524        |   |  | $     |   
|Cost of sales                                                 |  |                  |       |   |                             |   | 49,545 |                       |  |   | 1,392        |   |  |       |   
|                                                              |  |                  |        |   |                             |   |        |                       |  |   |              |   |  |       |    
|Gross profit                                                  |  |                  |       |   |                             |   | 16,853 |                       |  |   | 132          |   |  |       |   
|General and administrative                                    |  |                  |       |   |                             |   | 9,648  |                       |  |   | 291          |   |  |       |   
|Amortization of intangibles                                   |  |                  |       |   |                             |   | 48     |                       |  |   |             |   |  |       |   
|                                                              |  |                  |        |   |                             |   |        |                       |  |   |              |   |  |       |    
|Income (loss) from operations                                 |  |                  |       |   |                             |   | 7,157  |                       |  |   | (159         | ) |  |       |   
|Interest income                                               |  |                  |       |   |                             |   | 2      |                       |  |   |             |   |  |       |   
|Interest expense                                              |  |                  |       |   |                             |   | (6,753 | )                     |  |   | (1           | ) |  |       |   
|Other expense                                                 |  |                  | (2,066 | ) |                             |   |       |                       |  |   |             |   |  |       |   
|Investment income (loss) in equity of wholly-owned subsidiary |  |                  | 246    |   |                             |   | (160   | )                     |  |   |             |   |  |       | (86
|                                                              |  |                  |        |   |                             |   |        |                       |  |   |              |   |  |       |    
|Income (loss) before income taxes                             |  |                  | (1,820 | ) |                             |   | 246    |                       |  |   | (160         | ) |  |       | (86
|Income tax benefit (provision)                                |  |                  |       |   |                             |   |       |                       |  |   |             |   |  |       |   
|                                                              |  |                  |        |   |                             |   |        |                       |  |   |              |   |  |       |    
|Net income (loss)                                             |  | $                | (1,820 | ) |                             | $ | 246    |                       |  | $ | (160         | ) |  | $     | (86
|                                                              |  |                  |        |   |                             |   |        |                       |  |   |              |   |  |       |    





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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Results of Operations



Thirteen Weeks Ended May 4, 2003 Compared With Thirteen Weeks Ended May 5, 2002.



Sales for the thirteen weeks ended May 4, 2003 (Q1 2003)
increased 5.4% to $71.6 million from $67.9 million for the thirteen weeks ended May 5, 2002 (Q1 2002). Sales from our Wal-Mart business were the largest contributor to growth, increasing 6.2% in Q1 2003 to $68.0 million from $64.0
million in Q1 2002. The increase in Q1 2003 was the result of sales from newly opened permanent studios of $5.7 million offset by a decrease in same studio sales of $1.5 million. The decrease in same store sales is the result of the timing of the
Easter holiday and our revenue recognition policy to record sales when portraits are delivered to customers. The Easter holiday occurred in fiscal week eleven in Q1 2003 as compared to fiscal week eight in Q1 2002. Only 12.0% of customers
photographed during the week of Easter were delivered by the end of Q1 2003 while 92.3% were delivered by the end of Q1 2002. We ended Q1 2003 with 2,049 permanent studios, representing 219 more studios than at the end of Q1 2002.



Gross profit decreased 4.8% to $16.2 million in Q1 2003 from $17.0 million in
Q1 2002. Gross profit as a percentage of sales decreased to 22.6% in Q1 2003 from 25.0% in Q1 2002. The decrease we experienced in Q1 2003 was volume related due to the timing of the delivery of Easter portraits. Because of our policy to recognize
sales and related cost of sales only upon the delivery of portraits to customers and Easter occurring late in Q1 2003, a substantial portion of Easter week portrait sales and cost of sales was recognized in the second quarter of fiscal 2003. In
fiscal 2002, portrait delivery for the peak Easter volume was substantially completed in Q1 2002.



General and administrative expenses increased 15.5% in Q1 2003 to $11.5 million from $10.0 million in Q1 2002. General and administrative expenses as a
percentage of sales were 16.1% and 14.7% for Q1 2003 and Q1 2002, respectively. This increase of $1.5 million is a result of an increase in workers compensation, life and health insurance, professional services, cost of living adjustments for
corporate personnel and employee incentives.



Operating income
decreased 33.0% in Q1 2003 to $4.7 million from $7.0 million in Q1 2002. Operating income as a percentage of sales decreased to 6.6% in Q1 2003 from 10.3% in Q1 2002. These changes reflect the net effect of changes in gross profit and general and
administrative expenses as described above.



Net interest
expense increased 13.6% in Q1 2003 to $7.7 million from $6.7 million in Q1 2002 as a result of increased borrowings under our credit facility to help finance the expansion of our business and the increase in the weighted averaged interest rate of
our debt.



Other expense was $0 in Q1 2003 as compared to $2.1
million in Q1 2002. Other expense in Q1 2002 represented the mark-to-market adjustment for the derivative in our Series A redeemable convertible stock (Series A), which met the criteria of an embedded derivative under SFAS 133,
Accounting for Derivative Instruments and Hedging Activities (as amended), which we adopted in fiscal 2001. The embedded derivative value was computed based on several factors including the underlying value of our common stock at the time of
computation. On December 9, 2002, our shareholders approved modifications to the terms of our Series A and it became effective upon the filing of restated articles of incorporation on December 20, 2002. We determined, based on these modified terms,
the embedded derivative no longer meets the requirements for bifurcation and separate accounting. Therefore, no mark-to-market adjustment was made in Q1 2003.



Liquidity and Capital Resources



Liquidity. Our principal sources of liquidity are cash flow from operations and borrowings under our senior secured credit facility. Our principal
uses of cash are capital expenditures and seasonal working capital. During Q1 2003, we used $6.4 million in cash on capital expenditures as compared to $4.1 million during Q1 2002. Our working capital deficit has decreased to $38.9 million at the
end of Q1 2003 from $53.0 million at the end of Q1 2002, primarily as a result of our retirement of our previous debt structure and replacing it with a more favorable debt structure.



Due to the seasonality of our operations, cash is generally consumed during the first three quarters and generated during
the remaining fourth quarter. During the Christmas season, which falls in our fourth quarter, families emphasize the need for portraits as gifts and/or inclusions in holiday cards, making it our busiest quarter of the fiscal year.



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##### Table of Contents

On June 27, 2002, we completed an offering of $165 million 11.875% senior notes due 2009 through our
wholly owned subsidiaries, PCA LLC and PCA Finance Corp. Payment of the senior notes is unconditionally guaranteed, jointly and severally, by PCA International, Inc. and certain of PCA LLCs domestic subsidiaries. PCA LLC also entered into a
senior secured credit facility on June 27, 2002, which allows it to borrow up to $50.0 million of which $25.0 million may be standby and commercial letters of credit. As of May 4, 2003, $22.4 million was outstanding in revolving loans in addition to
$10.8 million in letters of credit. We had additional availability of $16.8 million. As of May 4, 2003, the weighted average interest rate on this facility was 5.63%. The senior secured credit facility is guaranteed by PCA International, Inc. and
certain of PCA LLCs domestic subsidiaries. Also on June 27, 2002, PCA LLC issued $10.0 million of senior subordinated notes due June 27, 2010. These notes are subordinated to the senior secured credit facility and the 11.875% senior notes and
are guaranteed by PCA International, Inc. and certain of PCA LLCs domestic subsidiaries. These notes bear interest payable in cash semiannually, in arrears, at a rate of 13.75% per year. Also on June 27, 2002, PCA International, Inc. issued
$30.0 million of senior subordinated discount notes due June 27, 2010. These notes are subordinated to PCA International, Inc.s guarantee of the senior secured credit facility and the senior notes. These notes bear interest at a rate of 16.5%
per year. Through June 27, 2007, interest will be added to the outstanding principal amount semiannually, in arrears. After June 27, 2007, interest will be payable in cash semiannually in arrears at the rate of 16.5%. Each of these individual debt
instruments contain covenants which we were in compliance with as of May 4, 2003.



Capital Expenditures. Capital expenditures were $6.4 million in Q1 2003 as compared to $4.1 million in Q1 2002. Capital expenditures were principally for equipment and studio improvements in new permanent
studios, as well as for expenditures for the upgrade of certain equipment in existing permanent studios. Capital expenditures were financed from borrowings under our senior secured credit facility. The most significant capital expenditures
contemplated over the next five years will be for new studio openings.



Net Cash Provided by (Used in) Operating Activities. Net cash used in operating activities was $55,000 in Q1 2003 as compared to net cash provided by operating activities of $7.7 million in Q1 2002. The decrease in cash provided by
operating activities of $7.8 million was primarily due to the $5.1 million decrease in net cash provided by operating assets and liabilities (the most significant change being the timing of our accrued interest payments; our senior notes interest
payment was made on February 3, 2003) and the $2.3 million decrease in operating income as a result of the difference in timing of the Easter holiday.



Net Cash Used in Investing Activities. Net cash used in investing activities increased to $6.4 million in Q1 2003 from $4.1 million in Q1 2002. The
reason for this increase is the acceleration of our expansion in the Wal-Mart host environment.



Net Cash Provided by (Used in) Financing Activities. Net cash provided by financing activities was $8.5 million in Q1 2003 and net cash used in
financing activities was $1.8 million in Q1 2002. Financing activities in Q1 2003 primarily related to the ordinary borrowings and repayments under our senior secured credit facility.



Preferred Stock. Prior to December 2002, we determined our Series A met the definition of a hybrid instrument. This
hybrid instrument was comprised of a debt instrument (mandatorily redeemable preferred stock) as the host contract and an embedded derivative consisting of a conversion option, which derived its value, in part, based on the changes in the fair value
of our common stock. Therefore, we separated the embedded derivative, valued it, and classified it as a component of Other Liabilities in our balance sheet. We valued the embedded derivative using the Black-Scholes option pricing model
with an assumption of fair value of our underlying common stock. To value our common stock, we used the income approach, which considers expected returns on investment, which are discounted or capitalized at an appropriate rate of return to reflect
investor risks and hazards. A discounted net cash flow analysis was utilized which provides an indication of value based upon the present value of anticipated future cash flows, discounted at an appropriate present worth factor reflecting the risk
inherent in the investment. In addition, we applied a discount because there is not a readily available market for our common stock. The value of our common stock we calculated, therefore, could be different if we applied a different discount with
regard to the marketability of our common stock as well as if we applied a different discount rate in our discounted net cash flow analysis. Consequently, the value of the embedded derivative could have changed based on differences in assumptions
used in valuing our common stock.



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##### Table of Contents

In December 2002, our shareholders approved modifications to the liquidation and redemption provisions of
the Series A. The redemption of the Series A is now at the option of the holders of the Series A, rather than being mandatorily redeemable on April 30, 2011. Also, the redemption price of the Series A and the amount payable upon certain
extraordinary events will be $1,000 per share plus all declared and unpaid dividends, rather than the greater of $1,000 per share of the fair market value of the common stock into which the Series A is convertible plus all declared and unpaid
dividends. As a result of the change in these provisions, we have determined the embedded derivative in the Series A no longer meets the requirements for bifurcation and separate accounting. Therefore, in Q1 2002 we recognized $2.1 million in other
expense for the mark-to-market adjustment related to the fair value of the embedded derivative while we recognized no expense in Q1 2003.



Recent Developments



During the thirteen-weeks ended May 4, 2003, we opened our first United Kingdom (U.K.) studio in a Wal-Mart/ASDA store. Costs of opening these
studios were charged to operations as incurred. No material costs were incurred during the thirteen week period ended May 4, 2003. Additionally, we opened a second studio in the U.K. on May 23, 2003.



Forward-Looking Statements



Certain statements in this Quarterly Report on Form 10-Q, including
statements under Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 3. Quantitative and Qualitative Disclosures About Market Risk, that are not historical facts,
including information concerning possible or assumed future results of operations of PCA International, Inc. and its subsidiaries and those statements preceded by, followed by, or that include the words may, believes,
expects, anticipates, or the negation thereof, or similar expressions, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements which address
operating performance, events or developments that are expected or anticipated to occur in the future, including statements relating to revenue growth, earnings growth or statements expressing general optimism about future operating results, are
forward-looking statements within the meaning of the Reform Act.



These forward-looking statements are based on our current expectations, speak only as of the date of this Quarterly Report on Form 10-Q and are susceptible to a number of risks, uncertainties and other factors. Our actual results,
performance and achievements may differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. For those statements, we claim the protection of the safe-harbor for forward-looking
statements contained in the Reform Act.



Factors that may cause
actual results to differ from expected results include, among others



| |  |  | Risks associated with substantial indebtedness, leverage, debt service and liquidity;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Risks associated with our relationship with Wal-Mart, our principal business relationship;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Performance of our new stores and their future operating results;
| | - |  | -----------------------------------------------------------------



| |  |  | Risks of competition from, including, but not limited to, companies currently operating in other photography markets;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Risks associated with the domestic professional portrait photography industry; and
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Other risks and uncertainties affecting PCA International, Inc. and its subsidiaries referred to in this Form 10-Q (see especially Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations and Item 3. Quantitative and Qualitative Disclosures About Market Risk) and in our other current and periodic filings with the Securities and Exchange Commission, all of
which are difficult or impossible to predict accurately and many of which are beyond our control.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary
statements contained or referred to in this section. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q might not occur.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk



Our exposure to market risks from changes in interest rates relates primarily to the effects that changes in interest rates have on floating rate debt. To lower or limit overall borrowing costs, from time to time, we
may enter into interest rate hedging agreements to modify the interest characteristics of portions of our outstanding debt. As of May 4, 2003, we have not entered into any interest rate hedging agreements. In addition, a 1.0% change in the interest
rate on our senior secured credit facility would have a $0.2 million annualized effect on our financial position and results of operations based on the outstanding balance on our senior secured credit facility as of May 4, 2003.



We conduct business in foreign currencies in Canada, Mexico, Germany and the United Kingdom.
A 10% change in the value of all foreign currencies would not have a material effect on our financial position, liquidity or results of operations.



Item 4. Controls and Procedures



The Companys
Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of a date within 90 days prior to the filing date of this Report, that
the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated
and communicated to the Companys management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.



There were no significant changes in the Companys internal controls or in other factors
that could significantly affect these controls subsequent to the date of such evaluation.



Part II. Other Information



Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits:
|--- |  | ---------



None.



|(b) |  | Reports on Form 8-K:
|--- |  | --------------------



No reports were filed during the period covered by this report.



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SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



PCA International, Inc.(Registrant)By:

/S/    BARRY J. FELDBarry J. FeldPresident, Chief Executive Officer, and
Chairman of the Board




By:

/S/    DON NORSWORTHYDon NorsworthyExecutive Vice President, Chief Financial Officer and TreasurerDated:

June 18, 2003




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CERTIFICATIONS



PRINCIPAL EXECUTIVE
OFFICER CERTIFICATION



I, Barry J. Feld, President, Chief Executive Officer,
and Chairman of the Board of PCA International, Inc. (the Registrant), certify that:



1. I have reviewed this Quarterly Report on Form 10-Q of PCA International, Inc.;



2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;



3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;



4. The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Registrant and have:



a)
designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this Quarterly Report is being prepared;



b) evaluated the
effectiveness of the Registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the Evaluation Date); and



c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;



5. The Registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrants auditors and the audit committee of Registrants board of directors (or
persons performing the equivalent functions):



a) all
significant deficiencies in the design or operation of internal controls which could adversely affect the Registrants ability to record, process, summarize and report financial data and have identified for the Registrants auditors any
material weaknesses in internal controls; and



b) any fraud,
whether or not material, that involves management or other employees who have a significant role in the Registrants internal controls; and



6. The Registrants other certifying officer and I have indicated in this Quarterly Report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



Date:  June 18, 2003



By:

/S/    BARRY J.
FELDBarry J. FeldPresident, Chief Executive Officer, and Chairman of the Board




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PRINCIPAL FINANCIAL OFFICER CERTIFICATION



I, Don Norsworthy, Executive Vice President and Chief Financial Officer of PCA International, Inc. (the Registrant), certify
that:



1. I have reviewed this Quarterly Report on Form 10-Q of PCA
International, Inc.;



2. Based on my knowledge, this Quarterly Report does not
contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
Quarterly Report;



3. Based on my knowledge, the financial statements, and
other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;



4. The Registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:



a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;



b) evaluated the effectiveness of the Registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this
Quarterly Report (the Evaluation Date); and



c)
presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;



5. The Registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrants
auditors and the audit committee of Registrants board of directors (or persons performing the equivalent functions):



a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrants ability to record,
process, summarize and report financial data and have identified for the Registrants auditors any material weaknesses in internal controls; and



b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal controls;
and



6. The Registrants other certifying officer and I have indicated in
this Quarterly Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.



Date:  June 18, 2003



By:

/S/    DON
NORSWORTHYDon NorsworthyExecutive Vice President, Chief Financial Officer and Treasurer




18