##### 



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 1934For the quarterly period ended October 30, 2005OR ̈
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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
    
    57-1208051(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 815 Matthews-Mint Hill Road
Matthews, North Carolina 28105
(Address of principal executive offices)
(Zip Code)
 (704) 847-8011
(Registrants telephone number, including area code)
 x  ̈
 
  ̈  ̈ x
  ̈ x




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##### 



PORTRAIT CORPORATION OF AMERICA, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED OCTOBER 30, 2005
 TABLE OF CONTENTS
 Item Number inForm 10-Q Page
    
    
    
    PagePART I. FINANCIAL INFORMATION1.
    
    Financial Statements (Unaudited)
    
    
    1Condensed Consolidated Balance Sheets as of October
30, 2005 and January 30, 2005
    
    
    1Condensed Consolidated Statements of Operations for
the Thirteen Weeks and Thirty-Nine Weeks Ended
October 30, 2005 and October 31, 2004
    
    
    3Condensed Consolidated Statements of Cash Flows for
the Thirty-Nine Weeks Ended October 30, 2005 and
October 31, 2004
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    52.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    223.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    324.
    
    Controls and Procedures
    
    
    33PART II. OTHER INFORMATION5.
    
    Other Information
    
    
    356.
    
    Exhibits
    
    
    35Signatures
    
    
    36




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##### 



PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements
 PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollar amounts in thousands)
 October 30,
    
    
    January 30,2005
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    4,347
    
    
    $
    15,178Accounts receivable
    
    
    2,986
    
    
    
    2,781Inventories
    
    
    14,917
    
    
    
    11,439Deferred income taxes
    
    
    108
    
    
    
    108Prepaid expenses and other current assets
    
    
    8,156
    
    
    
    3,303Total current assets
    
    
    30,514
    
    
    
    32,809PROPERTY AND EQUIPMENT:Land and improvements
    
    
    2,306
    
    
    
    2,306Buildings and improvements
    
    
    13,893
    
    
    
    13,684Photographic, sales and finishing equipment
    
    
    160,606
    
    
    
    152,315Studio improvements
    
    
    28,020
    
    
    
    26,530Construction in progress
    
    
    2,196
    
    
    
    3,048Total
    
    
    207,021
    
    
    
    197,883Accumulated depreciation and amortization
    
    
    (133,973
    )
    
    
    (123,974
    )Property and equipment, net
    
    
    73,048
    
    
    
    73,909GOODWILL
    
    
    53,027
    
    
    
    52,989OTHER INTANGIBLE ASSETS
    
    
    135
    
    
    
    135DEFERRED FINANCING COSTS, NET
    
    
    9,318
    
    
    
    6,823OTHER ASSETS
    
    
    173
    
    
    
    127TOTAL ASSETS
    
    $
    166,215
    
    
    $
    166,792
 See notes to condensed consolidated financial statements.
 1




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##### 



PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
(dollar amounts in thousands)
 October 30,
    
    
    January 30,2005
    
    
    2005LIABILITIES AND SHAREHOLDERS DEFICIENCYCURRENT LIABILITIES:Short-term borrowings
    
    $
    3,200
    
    
    $
    Current portion of long-term debt
    
    
    21
    
    
    
    182Accounts payabletrade
    
    
    34,922
    
    
    
    36,179Accrued insurance
    
    
    4,216
    
    
    
    4,141Accrued income taxes
    
    
    1,894
    
    
    
    2,022Accrued compensation
    
    
    5,807
    
    
    
    4,834Accrued interest
    
    
    7,034
    
    
    
    10,377Other accrued liabilities
    
    
    24,214
    
    
    
    14,467TOTAL CURRENT LIABILITIES
    
    
    81,308
    
    
    
    72,202LONG-TERM DEBT
    
    
    270,803
    
    
    
    245,680DEFERRED INCOME TAXES
    
    
    108
    
    
    
    108OTHER LIABILITIES
    
    
    7,043
    
    
    
    4,843TOTAL LIABILITIES
    
    
    359,262
    
    
    
    322,833COMMITMENTS AND CONTINGENCIESSERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$0.01 par value at October 30, 2005 and at January
30, 2005 (authorized200,000 shares;
outstanding15,000 shares)
    
    
    15,000
    
    
    
    15,000SHAREHOLDERS DEFICIENCY:Common stock, $0.01 par value at October 30,
2005 and at January 30, 2005
(authorized20,000,000 shares; issued and
outstanding at October 30, 2005 and at
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
    
    
    (200
    )
    
    
    (256
    )Accumulated deficit
    
    
    (235,813
    )
    
    
    (198,233
    )Accumulated other comprehensive income (loss)
    
    
    250
    
    
    
    (268
    )Total shareholders deficiency
    
    
    (208,047
    )
    
    
    (171,041
    )TOTAL LIABILITIES AND SHAREHOLDERS DEFICIENCY
    
    $
    166,215
    
    
    $
    166,792
 See notes to condensed consolidated financial statements.
 2




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##### 



PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollar amounts in thousands)
 For the Thirteen
    
    
    For the Thirty-NineWeeks Ended
    
    
    Weeks EndedOctober 30,
    
    
    October 31,
    
    
    October 30,
    
    
    October 31,2005
    
    
    2004
    
    
    2005
    
    
    2004SALES
    
    $
    70,557
    
    
    $
    68,829
    
    
    $
    215,625
    
    
    $
    217,167COST OF SALES
    
    
    64,737
    
    
    
    61,348
    
    
    
    186,143
    
    
    
    181,316GROSS PROFIT
    
    
    5,820
    
    
    
    7,481
    
    
    
    29,482
    
    
    
    35,851GENERAL AND ADMINISTRATIVE
    
    
    13,704
    
    
    
    13,786
    
    
    
    37,749
    
    
    
    36,028LOSS FROM OPERATIONS
    
    
    (7,884
    )
    
    
    (6,305
    )
    
    
    (8,267
    )
    
    
    (177
    )INTEREST INCOME
    
    
    13
    
    
    
    1
    
    
    
    20
    
    
    
    5INTEREST EXPENSE
    
    
    (10,689
    )
    
    
    (8,310
    )
    
    
    (28,353
    )
    
    
    (24,188
    )EARLY EXTINGUISHMENT OF
DEBT
    
    
    
    
    
    
    
    
    
    
    (980
    )LOSS BEFORE INCOME TAXES
    
    
    (18,560
    )
    
    
    (14,614
    )
    
    
    (37,580
    )
    
    
    (24,360
    )INCOME TAX PROVISION
    
    
    
    
    
    
    (19,774
    )
    
    
    
    
    
    
    (13,440
    )NET LOSS
    
    $
    (18,560
    )
    
    $
    (34,388
    )
    
    $
    (37,580
    )
    
    $
    (37,800
    )
 See notes to condensed consolidated financial statements.
 3




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##### 



PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollar amounts in thousands)
 For the Thirty-NineWeeks EndedOctober 30,
    
    
    October 31,2005
    
    
    2004OPERATING ACTIVITIES:Net loss
    
    $
    (37,580
    )
    
    $
    (37,800
    )Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:Depreciation and amortization
    
    
    10,303
    
    
    
    9,349Amortization of deferred financing costs
    
    
    1,463
    
    
    
    1,241Paid-in-kind interest
    
    
    3,679
    
    
    
    3,139Early extinguishment of debt
    
    
    980
    
    
    
    Amortization of debt discounts
    
    
    460
    
    
    
    461Stock compensation expense
    
    
    56
    
    
    
    58Provision for deferred income taxes
    
    
    
    
    
    
    13,440Loss on disposal of property and equipment
    
    
    566
    
    
    
    338Changes in assets and liabilities which provided (used) cash:Accounts receivable
    
    
    (205
    )
    
    
    (1,703
    )Inventories
    
    
    (3,478
    )
    
    
    (1,038
    )Prepaid expenses and other current assets
    
    
    (5,093
    )
    
    
    (8
    )Other non-current assets
    
    
    (46
    )
    
    
    Accounts payabletrade
    
    
    (1,257
    )
    
    
    15,345Accrued expenses
    
    
    920
    
    
    
    704Accrued interest
    
    
    (3,343
    )
    
    
    (4,498
    )Other current accrued liabilities
    
    
    9,747
    
    
    
    6,201Other liabilities
    
    
    2,200
    
    
    
    1,411NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    
    
    (20,628
    )
    
    
    6,640INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (9,759
    )
    
    
    (17,133
    )Purchase of Hometown Threads
    
    
    
    
    
    
    (1,140
    )Proceeds from sales of property and equipment
    
    
    4
    
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (9,755
    )
    
    
    (18,273
    )FINANCING ACTIVITIES:Proceeds from issuance of senior secured notes
    
    
    50,000
    
    
    
    Increase in borrowings under senior secured credit facility
    
    
    49,200
    
    
    
    67,800Repayment of senior secured credit facility and capital lease obligations
    
    
    (75,014
    )
    
    
    (50,856
    )Repayment of installment purchase agreement
    
    
    (163
    )
    
    
    (228
    )Deferred financing costs
    
    
    (4,698
    )
    
    
    (42
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    19,325
    
    
    
    16,674EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    227
    
    
    
    (143
    )(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (10,831
    )
    
    
    4,898CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    15,178
    
    
    
    4,820CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    4,347
    
    
    $
    9,718SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid
    
    $
    23,798
    
    
    $
    22,112Income taxes paid
    
    $
    288
    
    
    $
    390
 See notes to condensed consolidated financial statements.
 4




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##### 



PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollar amounts in thousands, except where noted)
 1. Organization and Basis of Presentation
  2. Operations, Liquidity and Other Matters
  Operations and Liquidity
   5




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##### 



Managements Plan
    6




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##### 



Foreign Tax Claims
  Defaults under Debt
  7




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##### 



3. Concentration of Sales
  4. Impact of Newly Issued Accounting Standards
    5. Stock Option Plan
   8




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##### 



For the Thirteen Weeks Ended
    
    
    For the Thirty-Nine Weeks EndedOctober 30,
    
    
    October 31,
    
    
    October 30,
    
    
    October 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss:As reported
    
    $
    (18,560
    )
    
    $
    (34,388
    )
    
    $
    (37,580
    )
    
    $
    (37,800
    )Recorded stock
compensation expense
    
    
    18
    
    
    
    8
    
    
    
    40
    
    
    
    32Pro forma stock
compensation expense
    
    
    (22
    )
    
    
    (18
    )
    
    
    (55
    )
    
    
    (56
    )Pro forma net loss
    
    $
    (18,564
    )
    
    $
    (34,398
    )
    
    $
    (37,595
    )
    
    $
    (37,824
    )
  9




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##### 



6. Seasonality
  7. Comprehensive Loss
  For the Thirteen Weeks Ended
    
    
    For the Thirty-Nine Weeks EndedOctober 30,
    
    
    October 31,
    
    
    October 30,
    
    
    October 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss
    
    $
    (18,560
    )
    
    $
    (34,388
    )
    
    $
    (37,580
    )
    
    $
    (37,800
    )Foreign currency translation
adjustment
    
    
    437
    
    
    
    176
    
    
    
    518
    
    
    
    304Total comprehensive loss
    
    $
    (18,123
    )
    
    $
    (34,212
    )
    
    $
    (37,062
    )
    
    $
    (37,496
    )
 8. Inventory
  October 30,
    
    January 30,2005
    
    2005Photographic developing materials
    
    $
    6,375
    
    
    $
    4,366Photographic supplies
    
    
    6,179
    
    
    
    5,089Sales supplies
    
    
    1,394
    
    
    
    1,061Repair parts
    
    
    969
    
    
    
    923Total Inventory
    
    $
    14,917
    
    
    $
    11,439
 9. Other Accrued Liabilities
  October 30
    
    
    January 30,2005
    
    
    2005Accrued taxes other than income
    
    $
    2,507
    
    
    $
    2,655Other accrued expenses
    
    
    5,623
    
    
    
    5,267Deferred revenue
    
    
    4,836
    
    
    
    1,131Customer deposits
    
    
    11,248
    
    
    
    5,414Total other accrued liabilities
    
    $
    24,214
    
    
    $
    14,467
 10




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##### 



10. Other Liabilities
  October 30,
    
    January 30,2005
    
    2005Long-term portion of workers
compensation obligations
    
    $
    4,158
    
    
    $
    4,053Accrued interest
    
    
    2,766
    
    
    
    695Long-term occupancy obligations
    
    
    119
    
    
    
    95Total other accrued liabilities
    
    $
    7,043
    
    
    $
    4,843
 11. Debt
  OutstandingFace Value
    
    
    
    Discount
    
    
    
    Amounts
    
    
    
    Interest
    
    
    
    MaturityDate Issued
    
    
    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)
    
    
    $
    48.3
    
    
    
    $
    .8
    
    
    
    $
    47.5
    
    
    
    
    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
    
    
    
    6/1/097/15/05
    
    
    Letters of Credit (5)
    
    
    $
    20.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    Floating
    
    
    
    6/1/09Total Long Term Debt
    
    
    
    
    
    
    
    
    
    
    
    
    $
    270.8
 
 (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 limits may be limited based on the
Companys trailing twelve months EBITDA. (See further discussion in the Companys Form
10-K for its period ended January 30, 2005.)   11




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##### 



12. Commitments and Contingencies
    13. Goodwill and Intangible Assets
  October 30,
    
    
    January 30,2005
    
    
    2005Unamortized intangible assets:Goodwill
    
    $
    53,027
    
    
    $
    52,989Trademark
    
    
    135
    
    
    
    135Total goodwill and intangible assets
    
    $
    53,162
    
    
    $
    53,124
  12




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##### 



14. Business Segment and Geographic Data
    13




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##### 



Business Segment Data
 Retail
    
    
    Institutional
    
    
    ConsolidatedFor the thirteen weeks ended October
30, 2005:Net loss
    
    $
    (18,336
    )
    
    $
    (224
    )
    
    $
    (18,560
    )Reconciling items:Depreciation and amortization
    
    
    3,292
    
    
    
    38
    
    
    
    3,330Interest income
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )Interest expense
    
    
    10,298
    
    
    
    391
    
    
    
    10,689Adjusted EBITDA
    
    $
    (4,759
    )
    
    $
    205
    
    
    $
    (4,554
    )For the thirteen weeks ended October
31, 2004:Net income (loss)
    
    $
    (33,079
    )
    
    $
    (1,309
    )
    
    $
    (34,388
    )Reconciling items:Depreciation and amortization
    
    
    3,048
    
    
    
    46
    
    
    
    3,094Income tax provision
    
    
    18,872
    
    
    
    902
    
    
    
    19,774Interest income
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Interest expense
    
    
    7,952
    
    
    
    358
    
    
    
    8,310Adjusted EBITDA
    
    $
    (3,208
    )
    
    $
    (3
    )
    
    $
    (3,211
    )For the thirty-nine weeks ended
October 30, 2005:Net loss
    
    $
    (36,723
    )
    
    $
    (857
    )
    
    $
    (37,580
    )Reconciling items:Depreciation and amortization
    
    
    10,190
    
    
    
    113
    
    
    
    10,303Interest income
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )Interest expense
    
    
    27,455
    
    
    
    898
    
    
    
    28,353Early extinguishment of debt
    
    
    951
    
    
    
    29
    
    
    
    980Adjusted EBITDA
    
    $
    1,853
    
    
    $
    183
    
    
    $
    2,036For the thirty-nine weeks ended
October 31, 2004:Net loss
    
    $
    (36,029
    )
    
    $
    (1,771
    )
    
    $
    (37,800
    )Reconciling items:Depreciation and amortization
    
    
    9,212
    
    
    
    137
    
    
    
    9,349Income tax provision
    
    
    12,753
    
    
    
    687
    
    
    
    13,440Interest income
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Interest expense
    
    
    23,291
    
    
    
    897
    
    
    
    24,188Adjusted EBITDA
    
    $
    9,222
    
    
    $
    (50
    )
    
    $
    9,172
 14




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##### 



Retail
    
    
    Institutional
    
    
    ConsolidatedFor the thirteen weeks
ended October 30, 2005:Sales
    
    $
    67,695
    
    
    $
    2,862
    
    
    $
    70,557Adjusted EBITDA
    
    $
    (4,759
    )
    
    $
    205
    
    
    $
    (4,554
    )Total assets
    
    $
    163,363
    
    
    $
    2,852
    
    
    $
    166,215For the thirteen weeks
ended October 31, 2004:Sales
    
    $
    65,748
    
    
    $
    3,081
    
    
    $
    68,829Adjusted EBITDA
    
    $
    (3,208
    )
    
    $
    (3
    )
    
    $
    (3,211
    )For the thirty-nine weeks
ended October 30, 2005:Sales
    
    $
    208,451
    
    
    $
    7,174
    
    
    $
    215,625Adjusted EBITDA
    
    $
    1,853
    
    
    $
    183
    
    
    $
    2,036Total assets
    
    $
    163,363
    
    
    $
    2,852
    
    
    $
    166,215For the thirty-nine weeks
ended October 31, 2004:Sales
    
    $
    208,991
    
    
    $
    8,176
    
    
    $
    217,167Adjusted EBITDA
    
    $
    9,222
    
    
    $
    (50
    )
    
    $
    9,172
 Geographic Data
 United
    
    
    
    
    
    
    
    
    
    
    OtherStates
    
    
    Canada
    
    
    Mexico
    
    
    Foreign
    
    
    ConsolidatedOctober 30, 2005Sales for the
thirteen weeks
ended
    
    $
    60,888
    
    
    $
    6,694
    
    
    $
    2,517
    
    
    $
    458
    
    
    $
    70,557Sales for the
thirty-nine
weeks ended
    
    $
    189,179
    
    
    $
    17,447
    
    
    $
    7,660
    
    
    $
    1,339
    
    
    $
    215,625Long-term assets
    
    $
    123,384
    
    
    $
    7,788
    
    
    $
    2,488
    
    
    $
    2,041
    
    
    $
    135,701October 31, 2004Sales for the
thirteen weeks
ended
    
    $
    60,857
    
    
    $
    5,376
    
    
    $
    2,245
    
    
    $
    351
    
    
    $
    68,829Sales for the
thirty-nine
weeks ended
    
    $
    194,980
    
    
    $
    14,586
    
    
    $
    6,699
    
    
    $
    902
    
    
    $
    217,167Long-term assets
    
    $
    123,505
    
    
    $
    7,356
    
    
    $
    2,141
    
    
    $
    2,271
    
    
    $
    135,273
 15




---



##### 



15. Guarantor and Non-Guarantor Financial Statements
  16




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
October 30, 2005
 Parent/
    
    
    
    
    
    
    Guarantor
    
    
    Non-guarantorGuarantor
    
    
    Co-issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalAssets:Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    4,075
    
    
    $
    272
    
    
    $
    
    
    
    $
    4,347Accounts receivable
    
    
    
    
    
    
    
    
    
    
    2,713
    
    
    
    273
    
    
    
    
    
    
    
    2,986Inventories
    
    
    
    
    
    
    
    
    
    
    14,855
    
    
    
    62
    
    
    
    
    
    
    
    14,917Deferred income taxes
    
    
    (1,090
    )
    
    
    1,090
    
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    108Prepaid expenses and
other assets
    
    
    
    
    
    
    
    
    
    
    8,007
    
    
    
    149
    
    
    
    
    
    
    
    8,156Total current assets
    
    
    (1,090
    )
    
    
    1,090
    
    
    
    29,758
    
    
    
    756
    
    
    
    
    
    
    
    30,514Investments and
intercompany accounts
    
    
    (144,988
    )
    
    
    80,065
    
    
    
    (52,056
    )
    
    
    (12,921
    )
    
    
    129,900
    
    
    
    Property and equipment,
net
    
    
    
    
    
    
    
    
    
    
    68,528
    
    
    
    4,520
    
    
    
    
    
    
    
    73,048Goodwill, intangible and
other assets, net
    
    
    
    
    
    
    
    
    
    
    53,323
    
    
    
    9
    
    
    
    3
    
    
    
    53,335Deferred financing costs,
net
    
    
    1,271
    
    
    
    8,047
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,318Total assets
    
    $
    (144,807
    )
    
    $
    89,202
    
    
    $
    99,553
    
    
    $
    (7,636
    )
    
    $
    129,903
    
    
    $
    166,215Liabilities and
shareholders (deficiency):Short-term borrowings
    
    $
    
    
    
    $
    3,200
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,200Current portion of
long-term debt
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    21Accounts payabletrade
    
    
    
    
    
    
    
    
    
    
    34,610
    
    
    
    312
    
    
    
    
    
    
    
    34,922Accrued insurance
    
    
    
    
    
    
    
    
    
    
    4,216
    
    
    
    
    
    
    
    
    
    
    
    4,216Accrued income taxes
    
    
    66
    
    
    
    1,754
    
    
    
    66
    
    
    
    8
    
    
    
    
    
    
    
    1,894Accrued compensation
    
    
    
    
    
    
    
    
    
    
    5,735
    
    
    
    72
    
    
    
    
    
    
    
    5,807Accrued interest
    
    
    
    
    
    
    6,352
    
    
    
    682
    
    
    
    
    
    
    
    
    
    
    
    7,034Other accrued liabilities
    
    
    
    
    
    
    
    
    
    
    22,212
    
    
    
    2,002
    
    
    
    
    
    
    
    24,214Total current
liabilities
    
    
    66
    
    
    
    11,306
    
    
    
    67,542
    
    
    
    2,394
    
    
    
    
    
    
    
    81,308Long-term debt, less
current portion
    
    
    47,568
    
    
    
    223,217
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    270,803Deferred income taxes
    
    
    (1,724
    )
    
    
    1,724
    
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    108Other liabilities
    
    
    2,766
    
    
    
    
    
    
    
    4,277
    
    
    
    
    
    
    
    
    
    
    
    7,043Series A redeemable
convertible preferred stock
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Total shareholders
(deficiency)
    
    
    (208,483
    )
    
    
    (147,045
    )
    
    
    27,608
    
    
    
    (10,030
    )
    
    
    129,903
    
    
    
    (208,047
    )Total liabilities
and shareholders
(deficiency)
    
    $
    (144,807
    )
    
    $
    89,202
    
    
    $
    99,553
    
    
    $
    (7,636
    )
    
    $
    129,903
    
    
    $
    166,215
 17




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
January 30, 2005
 Parent/
    
    
    
    
    
    
    Guarantor
    
    
    Non-guarantorGuarantor
    
    
    Co-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
intercompany 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 (deficiency):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
(deficiency)
    
    
    (170,903
    )
    
    
    (115,460
    )
    
    
    37,132
    
    
    
    (7,690
    )
    
    
    85,880
    
    
    
    (171,041
    )Total liabilities
and shareholders
(deficiency)
    
    $
    (113,090
    )
    
    $
    100,394
    
    
    $
    98,957
    
    
    $
    (5,349
    )
    
    $
    85,880
    
    
    $
    166,792
 18




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Thirteen Weeks Ended October 30, 2005
 Parent/
    
    
    
    
    
    
    Guarantor
    
    
    Non-guarantorGuarantor
    
    
    Co-issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    $
    
    
    
    $
    67,582
    
    
    $
    2,975
    
    
    $
    
    
    
    $
    70,557Cost of sales
    
    
    
    
    
    
    
    
    
    
    63,059
    
    
    
    3,222
    
    
    
    (1,544
    )
    
    
    64,737Gross profit
    
    
    
    
    
    
    
    
    
    
    4,523
    
    
    
    (247
    )
    
    
    1,544
    
    
    
    5,820General and administrative
    
    
    
    
    
    
    
    
    
    
    11,171
    
    
    
    989
    
    
    
    1,544
    
    
    
    13,704Loss from operations
    
    
    
    
    
    
    
    
    
    
    (6,648
    )
    
    
    (1,236
    )
    
    
    
    
    
    
    (7,884
    )Interest income
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    13Interest expense
    
    
    (2,095
    )
    
    
    (8,231
    )
    
    
    (363
    )
    
    
    
    
    
    
    
    
    
    
    (10,689
    )Investment income (loss)
in equity of wholly-owned
subsidiaries
    
    
    (16,465
    )
    
    
    (8,234
    )
    
    
    (1,236
    )
    
    
    
    
    
    
    25,935
    
    
    
    Net loss
    
    $
    (18,560)
    
    
    $
    (16,465
    )
    
    $
    (8,234
    )
    
    $
    (1,236
    )
    
    $
    25,935
    
    
    $
    (18,560
    )
 PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Thirteen Weeks Ended October 31, 2004
 Parent/
    
    
    
    
    
    
    Guarantor
    
    
    Non-guarantorGuarantor
    
    
    Co-issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    $
    
    
    
    $
    66,233
    
    
    $
    2,596
    
    
    $
    
    
    
    $
    68,829Cost of sales
    
    
    
    
    
    
    
    
    
    
    60,870
    
    
    
    2,347
    
    
    
    (1,869
    )
    
    
    61,348Gross profit
    
    
    
    
    
    
    
    
    
    
    5,363
    
    
    
    249
    
    
    
    1,869
    
    
    
    7,481General and administrative
    
    
    
    
    
    
    
    
    
    
    9,670
    
    
    
    2,247
    
    
    
    1,869
    
    
    
    13,786Loss from operations
    
    
    
    
    
    
    
    
    
    
    (4,307
    )
    
    
    (1,998
    )
    
    
    
    
    
    
    (6,305
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Interest expense
    
    
    (1,826
    )
    
    
    (6,341
    )
    
    
    (143
    )
    
    
    
    
    
    
    
    
    
    
    (8,310
    )Investment income (loss)
in equity of wholly-owned
subsidiaries
    
    
    (18,130
    )
    
    
    (6,447
    )
    
    
    (1,997
    )
    
    
    
    
    
    
    26,574
    
    
    
    Income (loss) before
income taxes
    
    
    (19,956
    )
    
    
    (12,788
    )
    
    
    (6,447
    )
    
    
    (1,997
    )
    
    
    26,574
    
    
    
    (14,614
    )Income tax provision
    
    
    (14,432
    )
    
    
    (5,342
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,774
    )Net income (loss)
    
    $
    (34,388)
    
    
    $
    (18,130
    )
    
    $
    (6,447
    )
    
    $
    (1,997
    )
    
    $
    26,574
    
    
    $
    (34,388
    )
 19




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Thirty-Nine Weeks Ended October 30, 2005
 Parent/
    
    
    
    
    
    
    Guarantor
    
    
    Non-guarantorGuarantor
    
    
    Co-issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    $
    
    
    
    $
    206,626
    
    
    $
    8,999
    
    
    $
    
    
    
    $
    215,625Cost of sales
    
    
    
    
    
    
    
    
    
    
    178,263
    
    
    
    9,424
    
    
    
    (1,544
    )
    
    
    186,143Gross profit (loss)
    
    
    
    
    
    
    
    
    
    
    28,363
    
    
    
    (425
    )
    
    
    1,544
    
    
    
    29,482General and administrative
    
    
    
    
    
    
    
    
    
    
    34,189
    
    
    
    2,016
    
    
    
    1,544
    
    
    
    37,749Income (loss) from
operations
    
    
    
    
    
    
    
    
    
    
    (5,826
    )
    
    
    (2,441
    )
    
    
    
    
    
    
    (8,267
    )Interest income
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20Interest expense
    
    
    (5,995
    )
    
    
    (21,587
    )
    
    
    (771
    )
    
    
    
    
    
    
    
    
    
    
    (28,353
    )Early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (980
    )
    
    
    
    
    
    
    
    
    
    
    (980
    )Investment income (loss) in
equity of wholly-owned
subsidiaries
    
    
    (31,585
    )
    
    
    (9,998
    )
    
    
    (2,441
    )
    
    
    
    
    
    
    44,024
    
    
    
    Net loss
    
    $
    (37,580
    )
    
    $
    (31,585
    )
    
    $
    (9,998
    )
    
    $
    (2,441
    )
    
    $
    44,024
    
    
    $
    (37,580
    )
 PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Thirty-Nine Weeks Ended October 31, 2004
 Parent/
    
    
    
    
    
    
    Guarantor
    
    
    Non-guarantorGuarantor
    
    
    Co-issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalSales
    
    $
    
    
    
    $
    
    
    
    $
    209,566
    
    
    $
    7,601
    
    
    $
    
    
    
    $
    217,167Cost of sales
    
    
    
    
    
    
    
    
    
    
    175,633
    
    
    
    7,552
    
    
    
    (1,869
    )
    
    
    181,316Gross profit (loss)
    
    
    
    
    
    
    
    
    
    
    33,933
    
    
    
    49
    
    
    
    1,869
    
    
    
    35,851General and administrative
    
    
    
    
    
    
    
    
    
    
    30,510
    
    
    
    3,649
    
    
    
    1,869
    
    
    
    36,028Income (loss) from
operations
    
    
    
    
    
    
    
    
    
    
    3,423
    
    
    
    (3,600
    )
    
    
    
    
    
    
    (177
    )Interest income
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    2
    
    
    
    
    
    
    
    5Interest expense
    
    
    (5,144
    )
    
    
    (18,759
    )
    
    
    (285
    )
    
    
    
    
    
    
    
    
    
    
    (24,188
    )Investment income (loss) in
equity of wholly-owned
subsidiaries
    
    
    (20,346
    )
    
    
    (457
    )
    
    
    (3,598
    )
    
    
    
    
    
    
    24,401
    
    
    
    Income (loss) before income
taxes
    
    
    (25,490
    )
    
    
    (19,216
    )
    
    
    (457
    )
    
    
    (3,598
    )
    
    
    24,401
    
    
    
    (24,360
    )Income tax provision
    
    
    (12,310
    )
    
    
    (1,130
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,440
    )Net income (loss)
    
    $
    (37,800
    )
    
    $
    (20,346
    )
    
    $
    (457
    )
    
    $
    (3,598
    )
    
    $
    24,401
    
    
    $
    (37,800
    )
 20




---



##### 



PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Thirty-Nine Weeks Ended October 30, 2005
 Parent/
    
    
    
    
    
    
    Guarantor
    
    
    Non-guarantorGuarantor
    
    
    Co-issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet cash used
in operating
activities
    
    $
    
    
    
    $
    (19,502
    )
    
    $
    (892
    )
    
    $
    (234
    )
    
    $
    
    
    
    $
    (20,628
    )Net cash used in
investing
activities
    
    
    
    
    
    
    
    
    
    
    (9,255
    )
    
    
    (500
    )
    
    
    
    
    
    
    (9,755
    )Net cash provided
by (used in)
financing
activities
    
    
    
    
    
    
    19,502
    
    
    
    (177
    )
    
    
    
    
    
    
    
    
    
    
    19,325Effect of exchange
rate changes on
cash
    
    
    
    
    
    
    
    
    
    
    58
    
    
    
    169
    
    
    
    
    
    
    
    227Decrease in cash
and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    (10,266
    )
    
    
    (565
    )
    
    
    
    
    
    
    (10,831
    )Cash and cash
equivalents at
beginning of period
    
    
    
    
    
    
    
    
    
    
    14,341
    
    
    
    837
    
    
    
    
    
    
    
    15,178Cash and cash
equivalents at end
of period
    
    
    
    
    
    
    
    
    
    $
    4,075
    
    
    $
    272
    
    
    $
    
    
    
    $
    4,347
 PORTRAIT CORPORATION OF AMERICA, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Thirty-Nine Weeks Ended October 31, 2004
 Parent/
    
    
    
    
    
    
    Guarantor
    
    
    Non-guarantorGuarantor
    
    
    Co-issuers
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet cash
provided by (used
in) operating
activities
    
    $
    
    
    
    $
    (16,958
    )
    
    $
    21,986
    
    
    $
    1,530
    
    
    $
    82
    
    
    $
    6,640Net cash used in
investing
activities
    
    
    
    
    
    
    
    
    
    
    (16,961
    )
    
    
    (1,312
    )
    
    
    
    
    
    
    (18,273
    )Net cash provided
by (used in)
financing
activities
    
    
    
    
    
    
    16,958
    
    
    
    (284
    )
    
    
    
    
    
    
    
    
    
    
    16,674Effect of exchange
rate changes on
cash
    
    
    
    
    
    
    
    
    
    
    (476
    )
    
    
    415
    
    
    
    (82
    )
    
    
    (143
    )Increase in cash
and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    4,265
    
    
    
    633
    
    
    
    
    
    
    
    4,898Cash and cash
equivalents at
beginning of period
    
    
    
    
    
    
    
    
    
    
    4,441
    
    
    
    379
    
    
    
    
    
    
    
    4,820Cash and cash
equivalents at end
of period
    
    $
    
    
    
    $
    
    
    
    $
    8,706
    
    
    $
    1,012
    
    
    $
    
    
    
    $
    9,718
 21




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Results of Operations
 Thirty-Nine Weeks Ended October 30, 2005 Compared With Thirty-Nine Weeks Ended October 31, 2004.
  AmountAttributable to
    
    (in millions)6.4% decrease in same studio sales in Wal-Mart permanent portrait studios
    
    $
    (12.5
    )Wal-Mart permanent portrait studios not yet included in the same studio
sales base
    
    
    14.5Decrease in sales in our Wal-Mart traveling locations due to fewer
locations visited
    
    
    (2.7
    )Total decrease attributable to our Wal-Mart portrait photography business
    
    
    (0.7
    )Increase in other Wal-Mart retail concepts
    
    
    1.4Total increase in Wal-Mart sales
    
    
    0.7Decrease in sales in institutional segment
    
    
    (1.0
    )Decrease in other retail sales
    
    
    (1.2
    )Total decrease in sales
    
    $
    (1.5
    )
   22




---



##### 



Attributable to
    
    % of salesIncrease in retail photography labor and general studio
supplies as a percentage of sales due to decrease in same
studio sales
    
    
    (2.1
    )Increase in depreciation expense as a percentage of sales due
to decrease in same studio sales
    
    
    (0.4
    )Other
    
    
    (0.4
    )Total decrease in gross profit percentage
    
    
    (2.9
    )
  AmountAttributable to
    
    (in millions)Savings recognized in Q2 2004 related to termination of
benefit plan for certain retired employees
    
    $
    1.1Decrease in workers compensation expense and general
casualty insurance expense primarily due to elevated charges
experienced in YTD 2004
    
    
    (0.8
    )Increase in payroll cost
    
    
    1.9Decrease in meeting costs
    
    
    (0.3
    )Decrease in health insurance costs
    
    
    (0.1
    )Other
    
    
    (0.1
    )Total increase in general and administrative expenses
    
    $
    1.7
   AmountAttributable to
    
    (in millions)Increase from Parent Notes issued in June 2002
    
    $
    0.9Increase from prior senior secured credit facility entered into June 2002
    
    
    0.7Increase from supplier provided financing
    
    
    0.4Increase from Senior Secured Notes issued in July 2005
    
    
    2.2Total increase in interest expense
    
    $
    4.2
   23




---



##### 



Thirteen Weeks Ended October 30, 2005 Compared With Thirteen Weeks Ended October 31, 2004.
  AmountAttributable to
    
    (in millions)4.2% decrease in same studio sales in Wal-Mart permanent portrait studios
    
    $
    (2.6
    )Wal-Mart permanent portrait studios not yet included in the same studio
sales base
    
    
    4.5Decrease in sales in our Wal-Mart traveling locations due to fewer
locations visited
    
    
    (0.3
    )Total increase attributable to our Wal-Mart portrait photography business
    
    
    1.6Increase in other Wal-Mart retail concepts
    
    
    0.7Total increase in Wal-Mart sales
    
    
    2.3Decrease in sales in institutional segment
    
    
    (0.2
    )Decrease in other retail sales
    
    
    (0.4
    )Total increase in sales
    
    $
    1.7
  24




---



##### 



Attributable to
    
    % of salesIncrease in retail photography labor and general studio
supplies as a percentage of sales due to decrease in same
studio sales
    
    
    (3.6
    )Increase in depreciation expense as a percentage of sales due
to decrease in same studio sales
    
    
    (0.3
    )Decrease in film and other products as a percentage of sales
    
    
    1.4Other
    
    
    (0.2
    )Total decrease in gross profit percentage
    
    
    (2.7
    )
  AmountAttributable to
    
    (in millions)Decrease from amount recorded in Q3 2004 as managements best estimate
of potential settlement of tax issues with regard to the Companys
Mexican subsidiary
    
    $
    (1.5
    )Decrease in health insurance costs due to change in health benefit plan
    
    
    (0.3
    )Decrease in workers compensation expense and general casualty
insurance expense primarily due to elevated charges experienced in Q3
2004
    
    
    (0.1
    )Decrease in professional services
    
    
    (0.3
    )Increase in payroll cost
    
    
    1.1Increase in foreign currency transaction loss
    
    
    0.7Other
    
    
    0.3Total decrease in general and administrative expenses
    
    $
    (0.1
    )
   AmountAttributable to
    
    (in millions)Increase from prior senior secured credit facility entered into June 2002
    
    $
    0.1Increase from Senior Secured Notes issued in July 2005
    
    
    1.9Increase from Parent Notes issued in June 2002
    
    
    0.3Increase from supplier provided financing
    
    
    0.1Total increase in interest expense
    
    $
    2.4
  25




---



##### 



Liquidity and Capital Resources
 Liquidity
    26




---



##### 



Managements Plan
     27




---



##### 



Foreign Tax Claims.
 Defaults under Debt.
  Long-term Debt.
  OutstandingFace Value
    
    
    
    Discount
    
    
    
    Amounts
    
    
    
    Interest
    
    
    
    MaturityDate Issued
    
    
    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)
    
    
    $
    48.3
    
    
    
    $
    .8
    
    
    
    $
    47.5
    
    
    
    
    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
    
    
    
    6/1/097/15/05
    
    
    Letters of Credit (5)
    
    
    $
    20.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    Floating
    
    
    
    6/1/09Total Long Term Debt
    
    
    
    
    
    
    
    
    
    
    
    
    $
    270.8
 
 (1)
    
    Redeemable at the Companys option at greater of 101% or
make-whole premium plus accrued
and unpaid interest. 28




---



##### 



(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 limits may be limited based on the
Companys trailing twelve months EBITDA. (See description in Form 10K for the period
ending January 30, 2005.)   Seasonality .
 Purchases of Property and Equipment
 Net Cash Provided by (Used in) Operating Activities .
 Net Cash Used in Investing Activities
 29




---



##### 



Net Cash Provided by Financing Activities .
 Critical Accounting Policies
  Changes in Studios/Stores
  Forward-Looking Statements
    
    
    risks associated with our substantial indebtedness, leverage, debt service,
liquidity and the ability to obtain other sources of financing and/or restructure our
debt;
    
    effectiveness of managements 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;
 30




---



##### 




    
    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
    
    other risks and uncertainties affecting Portrait Corporation of America, 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.
  31




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
    Q3 2005
    
    

Q3 2004(in thousands)+10
    %
    
    
    -10
    %
    
    
    +10
    %
    
    
    -10
    %Canada
    
    $
    
    
    
    $
    3
    
    
    $
    (36
    )
    
    $
    (29
    )Mexico
    
    $
    28
    
    
    $
    (14
    )
    
    $
    (2
    )
    
    $
    7Germany
    
    $
    4
    
    
    $
    2
    
    
    $
    (12
    )
    
    $
    8U.K.
    
    $
    49
    
    
    $
    (57
    )
    
    $
    30
    
    
    $
    (37
    )
 YTD 2005
    
    
    YTD 2004(in thousands)+10
    %
    
    
    -10
    %
    
    
    +10
    %
    
    
    -10
    %Canada
    
    $
    92
    
    
    $
    (110
    )
    
    $
    (236
    )
    
    $
    218Mexico
    
    $
    (499
    )
    
    $
    614
    
    
    $
    (486
    )
    
    $
    599Germany
    
    $
    (377
    )
    
    $
    473
    
    
    $
    (263
    )
    
    $
    319U.K.
    
    $
    (49
    )
    
    $
    59
    
    
    $
    (33
    )
    
    $
    40
  32




---



##### 



Item 4. Controls and Procedures
 Disclosure controls and procedures
  Internal control over financial reporting
     33




---



##### 



34




---



##### 



PART II. OTHER INFORMATION
 Item 5. Other Information
    Item 6. Exhibits
 Section 302 Certification of Principal Executive Officer
 Section 302 Certification of Principal Financial Officer
 35




---



##### 



SIGNATURES
  Portrait Corporation of America, Inc.
(Registrant)By:
    
    /s/ R. David AlexanderR. David Alexander
President, Chief Executive Officer,
     and Chairman of the BoardBy:
    
    /s/ James Robert Wren, Jr.James Robert Wren, Jr.
Executive Vice President, General Counsel,
     Interim Chief Financial Officer,
     Secretary and TreasurerDated: April 27, 2006
 36