UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended February 7,
2009 or
o
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ___________________ to ____________________
Commission
file number 1-10204
CPI
Corp.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of incorporation or organization)
1706
Washington Ave., St. Louis, Missouri
(Address
of principal executive offices)
|
43-1256674
(I.R.S.
Employer Identification No.)
63103
(Zip
Code)
|
Registrant’s
telephone number, including area code: 314/231-1575
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.40 per
share
|
Name of each exchange on which
registered
New York Stock
Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act.
o
Yes
x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.
o
Yes
x
No
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.
x
Yes
o
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated
filer,” “ accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act:
Large
accelerated filer
o
Non-accelerated
filer
o
Accelerated
filer
x
Smaller
reporting company
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
o
Yes
x
No
As of
July 19, 2008, the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was approximately $74,847,497 based on
the closing sales price of the common stock as reported on the New York Stock
Exchange.
As of
April 17, 2009, 6,953,015 shares of the registrant’s common stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Part III
of this Annual Report incorporates by reference certain information from the
registrant’s definitive proxy statement for the 2009 annual meeting of the
shareholders, which the registrant intends to file with the Securities
and Exchange Commission no later than 120 days after the close of the
registrant’s fiscal year ended February 7, 2009.
TABLE OF
CONTENTS
PART
I
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Business
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3
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Risk
Factors
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9
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Item 1B.
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Unresolved
Staff Comments
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12
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Properties
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12
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Legal
Proceedings
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13
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Submission
of Matters to a Vote of Security Holders
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13
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PART
II
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Market
for Registrant's Common Equity, Related Stockholder
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Matters
and Issuer Purchases of Equity Securities
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13
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Selected
Consolidated Financial Data
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14
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Management's
Discussion and Analysis of
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Financial
Condition and Results of Operations
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16
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Quantitative
and Qualitative Disclosures About
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Market
Risk
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29
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Financial
Statements and Supplementary Data
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29
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Changes
in and Disagreements with Accountants
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on
Accounting and Financial Disclosure
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71
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Controls
and Procedures
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71
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Other
Information
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73
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PART
III
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Directors,
Executive Officers and Corporate Governance
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73
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Executive
Compensation
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73
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Security
Ownership of Certain Beneficial Owners
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and
Management and Related Stockholder Matters
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73
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Certain
Relationships and Related Transactions, and Director
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Independence
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74
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Principal
Accounting Fees and Services
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74
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PART
IV
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Item
15.
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Exhibits
and Financial Statement
Schedules
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74
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80
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Forward-Looking
Statements
The
statements contained in this report, and in particular in the “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
section, that are not historical facts are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, and involve
risks and uncertainties. The Company identifies forward-looking
statements by using words such as "preliminary," "plan," "expect," "looking
ahead," "anticipate," "estimate," "believe," "should," "intend," and other
similar expressions. Management wishes to caution the reader that
these forward-looking statements, such as the Company’s outlook for portrait
studios, net income, future cash requirements, cost savings, compliance with
debt covenants, valuation allowances, reserves for charges and impairments and
capital expenditures, are only predictions or expectations; actual events or
results may differ materially as a result of risks facing the
Company. A detailed discussion of these and other risks and
uncertainties that could cause actual results and events to differ materially
from such forward-looking statements is included in the section entitled “Risk
Factors” beginning on page 9 of this report. The Company
undertakes no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or
otherwise.
PART
I
An Overview of the
Company
CPI Corp.
(“CPI”, the “Company” or “we”), a Delaware corporation formed in 1982, is a
long-standing leader, based on sittings, number of locations and related
revenues, in the professional portrait photography of young children,
individuals and families. From a single studio opened by our
predecessor company in 1942, we have grown to 3,046 studios, as of February 7,
2009, throughout the U. S., Canada, Mexico and Puerto Rico principally under
license agreements with Sears, Roebuck and Co. (“Sears”) and lease and license
agreements with Wal-Mart Stores, Inc. (“Wal-Mart”).
The
Company has provided professional portrait photography for Sears’ customers
since 1959 and has been the only Sears portrait studio operator since
1986. On June 8, 2007, the Company completed its acquisition of
substantially all of the assets (the “Assets”) of Portrait Corporation of
America (“PCA”) and certain of its affiliates (collectively, the “Sellers”) and
assumed certain liabilities of PCA (the “PCA Acquisition”). The
operations acquired in the PCA Acquisition are operating within CPI Corp. as the
PictureMe Portrait Studio
®
brand (“PMPS
brand”). For purposes of this report, the PMPS brand includes all
studios operating under Wal-Mart agreements; those in the U.S. are operating as
PictureMe Portrait Studio® and as Wal-Mart Portrait Studios in Canada and
Mexico. As a result of the PCA Acquisition, CPI is the sole operator
of portrait studios in Wal-Mart Stores and Supercenters in all fifty states in
the U.S., Canada, Mexico and Puerto Rico. As of February 7, 2009,
PictureMe Portrait Studio
®
operated 2,019
studios worldwide, including 1,642 in the U.S. and Puerto Rico, 259 in Canada
and 118 in Mexico. Approximately $110.9 million of long-lived assets
are used in our domestic operations as of February 7, 2009.
In
Canada, we operate 110 portrait studios in Sears and 259 studios in Wal-Mart and
generated $54.6 million of 2008 net sales, accounting for 12% of our
revenues. Long-lived assets employed in the Company’s Canadian
operations at February 7, 2009, amounted to $16.1 million.
In
Mexico, we operate 118 studios in Wal-Mart. With 2008 net sales of
$10.1 million, our Mexican studios accounted for 2% of our
revenues. Long-lived assets employed in the Company’s Mexican
operations at February 7, 2009, amounted to $1.6 million.
We
operate a website which supports and complements our Sears studio
operations. Searsphotos.com serves as a vehicle to archive, share
portraits via email (after a portrait session) and order additional portraits
and products. In 2008, revenues from on-line sales and services were
approximately $2.3 million.
The Company’s Products and
Services
Each of
the Company’s portrait studio brands offer customers a wide range of
differentiated portrait products, portrait choices, ordering options and service
offerings with fully digital capabilities. CPI’s full digital process
offers significant advantages compared to other portrait providers, including
being the only company that employs trained digital technicians who
optimize portrait quality during the manufacturing process. A package
sitting consists of a fixed number of portraits, all of the same pose, for a
relatively low price. Package customers may buy additional portrait sheets for a
fee. A custom sitting consists of portraits purchased by the sheet
and allows for a variety of sizes, poses and backgrounds. A
collection sitting consists of a predetermined number of portraits bundled
together at significant savings.
Our
PictureMe Portrait Studio
®
brand focuses on
the sales of packages and portrait collections. Our packages are studio-wide,
low-priced advertised “introductory” offers and provide a high volume of
portraits with less customization and more limited selections. Our associates
offer customers the opportunity to upgrade to portrait collections in which
customers receive a greater variety in terms of poses, sizes and
customization. Our Sears brand focuses on customized portrait
solutions that provide a wide variety of selection, customization and an
enhanced studio experience. Due to the wide variety and customization
allowed within our Sears studios, the customer is charged a session fee. There
are no session fees in our PictureMe Portrait Studio
®
studios.
Each
brand offers customers the opportunity to join a portrait savings
club. Each club requires a one-time membership fee for a certain
enrollment period, which is currently one year. PictureMe Portrait
Studio
®
Portrait Smiles Club members receive savings on products and services and a free
portrait sheet on each returning visit. Sears’ Super Saver Program
members also receive savings on products and services and pay no session fees
for the enrollment period. Both of these plans were designed to
promote customer loyalty while encouraging frequent return visits to the
studio.
As of
April 10, 2009, all of our studios, with the exception of 85 Sears Portrait
Studios in Canada, are digital. In Sears’ digital studios, customer
orders are either printed immediately in the studio and/or high-resolution
images are transmitted electronically to one of our processing centers for
fulfillment. PictureMe Portrait Studio
®
studios do not
offer on-site printing. Our processing centers complete the customer’s orders to
their specifications and return them to the studio for pick-up. Orders placed in
digital studios are generally available for pick-up within 10 days from the time
of order. Orders placed in film studios are delivered in approximately 2½
weeks.
Sears
Portrait Studios have the ability to upload images from any portrait session to
our safe and secure searsphotos.com website. With a code and individualized
passwords, our customers can view their images from home, share them via email
with family and friends, and place orders online for portraits or gifts such as
personalized t-shirts, mugs, mouse pads and more. The Company also
plans to launch a similar website for its PictureMe Portrait Studio
®
in
2009.
Financial and Other Business
Information
See Item
8 – Financial Statements and Supplementary Data for information on our financial
condition, including revenues and net earnings for each of the last three fiscal
years. For geographic related information, see Note 1 – Summary of
Significant Accounting Policies of the Notes to the Consolidated Financial
Statements.
The
Company’s results of operations for the fiscal year 2008 were adversely impacted
as a result of the continuing challenging economic environment, which is
affecting discretionary purchases such as portraiture. As part of the
Company’s continuing response to the ongoing market challenges, it has executed
a number of cost reductions, which include delay or cancellation of certain
expenditures, reduction in staffing and revised marketing strategies to target
the more price-sensitive customer. See Item 1A – Risk Factors and
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results
of Operations for further information related to market
challenges.
The Company’s Host
Relationships
Sears
We have
enjoyed a strong relationship with Sears for nearly 50 years under a series of
license agreements, the most recent of which was entered into on December 22,
2008, pursuant to which the Company operates professional portrait studios
at Sears locations in the U.S.
Pursuant
to the terms and subject to the conditions of the License Agreement, we have
agreed to operate professional portrait studios under the name “Sears Portrait
Studios.” The term of the License Agreement commenced on January 1, 2009, and
ends on December 31, 2014. The Company has the right to extend the
License Agreement for up to four additional years if (i) it makes over a certain
amount of capital expenditures with respect to Sears U.S. studios that are
approved by Sears within a 12 month period, (ii) the net sales under the
contract satisfy certain sales growth targets in 2013 or (iii) the Company pays
Sears the amount that we would have owed Sears if the sales growth targets were
met (taking into account amounts already paid to Sears). Under the
License Agreement, the Company has agreed to pay Sears a percentage commission
on the net sales of the Sears U.S. studios that is higher than the commission
under the previous license agreement with Sears. The Company will
share with Sears a portion of actual savings from operating productivity
improvements implemented through the cooperation of the parties. The
Company believes that the increase in commission rates will be substantially
offset by these operating productivity improvements. Under the terms
of our existing license agreement with Sears in the United States, Sears is
under no contractual obligation to invite us to open portrait studios in their
new stores. Once we do establish a portrait studio in a new Sears
store, that studio is then governed by the terms of our existing license
agreement.
The
License Agreement contains certain termination rights for both the Company and
Sears. These termination events include: (i) a breach of the License
Agreement that is not cured (if curable) within thirty (30) days of written
notice of such breach, (ii) the occurrence of a change of control of the Company
without Sears’ consent, (iii) the Company’s conviction or pleading no contest to
a felony or the Company engages in any conduct that is likely to materially
adversely affect it’s, the Sears U.S. studios or Sears, and (iv) the Company’s
failure to maintain appropriate insurance coverage or its failure to pay amounts
owed to Sears under the License Agreement when due. In addition,
Sears may terminate the License Agreement solely with respect to any affected
Sears U.S. studio due to the closing of a Sears store.
Upon
expiration of the term of the License Agreement or upon certain termination
events, Sears shall have the right to purchase certain furniture, fixtures
and equipment located at the Sears U.S. studios at fair market value, as
determined by three independent ASA certified equipment appraisals.
On
December 22, 2008, the Company and Sears entered into a Letter Agreement (the
“Letter Agreement”) to resolve all amounts owed with respect to the adjustment
provision to Earned Commissions set forth under paragraph (B)(2) to Exhibit C to
the previous license agreement which expired on December 31, 2008, and in
settlement of certain other obligations under the previous license
agreement. Pursuant to the terms and subject to the conditions of the
Letter Agreement, the Company agreed to pay Sears $6,750,000 in cash upon the
execution of the Letter Agreement, $1,500,000 in cash on April 30, 2009, and
$150,000 annually for six years. In addition, the Company agreed to transfer
325,000 shares of common stock to Sears or its designee. The Company
has previously reserved $4.2 million in connection with these
obligations. Fur further details and accounting treatment, see Note
12 and Note 16 to the Notes to the Consolidated Financial
Statements.
Throughout
the period of our relationship with Sears, Sears has never terminated the
operation of any of our studios, except in connection with Sears store
closings. As of February 7, 2009, the Company operated 887 studios
located in Sears stores and 29 freestanding studios under the Sears name in the
U.S. We provide all studio furniture, equipment, fixtures,
leasehold improvements and advertising and are also responsible for hiring,
training and compensating our employees. As a Sears licensee in
studios located in Sears stores, we enjoy the benefits of using the Sears name,
access to prime retail locations, Sears’ daily cashiering and bookkeeping
systems, store security services and Sears’ assumption of certain credit card
fees and credit and check authorization risks. Our customers also
have the convenience of using their Sears credit cards to purchase our products
and services. As a Sears licensee in freestanding studios under the Sears
name in the U.S., we pay rent and utilities at each of these locations and
benefit from the use of the Sears name and Sears’ payment for certain credit
card fees and check clearance systems.
Under a
license agreement with Sears Canada, Inc., a subsidiary of Sears, the Company
operates 110 Canadian studios as of February 7, 2009. This agreement,
dated January 1, 2003, expired December 31, 2006. We continue to
operate our Canadian studios under the terms of the aforementioned agreement as
discussions continue with Sears Canada to arrive at a mutually satisfactory
extension or new agreement. The Company pays Sears a license fee in
Canadian dollars based on total annual net sales. We provide all
studio furniture, equipment, fixtures and advertising and are responsible for
hiring, training and compensating our employees.
While
Sears has informed us that they plan to close nine Sears locations in which
we operate portrait studios, we are not aware of any specific intentions to
close a significant number of existing full-line, mall-based stores that contain
our portrait studios. There can be no assurance that some such
closures may not occur in the future thus resulting in the concurrent closure of
some of our existing portrait studios. The closure of a significant
number of Sears full-line, mall-based stores that result in the closing of
related portrait studios, to the extent such closures are not offset by openings
of portrait studios in new Sears stores or other formats or venues, could have
an adverse impact on the Company’s operations.
Wal-Mart
Upon the
PCA Acquisition on June 8, 2007, the Company became the sole operator of
portrait studios in Wal-Mart Stores and Supercenters in the U.S., Canada, Mexico
and Puerto Rico. The Company operates under the trade names PictureMe
Portrait Studio
®
in the U.S.,
Wal-Mart Portrait Studios in Canada and Estudios Fotografia in
Mexico. As of February 7, 2009, the Company operated 2,019 studios in
Wal-Mart locations worldwide and approximately 48% of our fiscal 2008 revenue
was derived from sales within Wal-Mart. We are not aware of any
specific intentions Wal-Mart has to terminate or materially reduce the scope of
our lease agreements. As part of the PCA Acquisition, we
assumed certain preexisting lease and license agreements between PCA and
Wal-Mart. These agreements are summarized below.
Effective June
8, 2007, the Company has a U.S. Master Lease Agreement with Wal-Mart
Stores East LP, Wal-Mart Stores, Inc., Wal-Mart Louisiana, LLC and Wal-Mart
Stores Texas, LLC (the “U.S. Lease Agreement”). The U.S. Lease
Agreement, negotiated by PCA and Wal-Mart during PCA’s bankruptcy proceedings,
requires us to pay a rental fee to Wal-Mart based upon a percentage of sales of
our studios operating in Wal-Mart’s U.S. stores. The agreement has an
initial term of three years but automatically extends for an additional two
years for each studio from which Wal-Mart receives rental fees for the period
July 1, 2008, through June 30, 2009, at a minimum specified rate per square
foot. For each studio in which Wal-Mart receives less than the
specified rate per square foot, the Company and Wal-Mart may mutually agree to
extend the individual studio agreement for an additional two years by written
agreement. The majority of studios are located in prominent locations
at the front of the Store or Supercenter, affording easy access to Wal-Mart’s
significant foot traffic.
Our
relationship with Wal-Mart Canada Corp. is governed by an amended and restated
license agreement effective January 1, 2006. We are required to pay
Wal-Mart Canada a license fee based on a percentage of the sales of our portrait
studios operated in Wal-Mart’s Canadian stores. The agreement has a
five-year term, and Wal-Mart Canada has an option to renew for two renewal
periods of two years each. Studios that were in operation on the
effective date of this agreement are subject to a license schedule, which
specifies expiration dates for those specific studios. Based on this
license schedule, our Canadian studios’ licenses expire as follows: 111 (all but
one of which have been renewed to-date) in 2009, 102 in 2010, 24 in 2011, 10 in
2012, 4 in 2013 and 4 in 2014. Although we anticipate that these
agreements will renew, there is no assurance of such. As of February
7, 2009, we operated 259 studios under the agreement with Wal-Mart
Canada.
Within
Mexico, our relationship with Nueva Wal-Mart De Mexico, S de R.L. de C.V.
("Nueva Wal-Mart De Mexico") is governed by an agreement dated as
of June 1, 2002, for the first 44 studios. New agreements, with the same
terms, are entered into as additional studios are added in Mexico. The
agreements run for an undefined period of time. Neither party may terminate an
agreement for a studio during the studio's first year of operation; thereafter,
either party may terminate the agreement with respect to a studio by
giving the other party written notice 30 days prior to the termination
date. Under these agreements, Nueva Wal-Mart De Mexico is compensated
based upon a percentage of our total sales in all Wal-Mart studios in
Mexico. As of February 7, 2009, we operated in 118 Nueva Wal-Mart De
Mexico studios.
Industry Background and
Competition
We
compete in a highly fragmented domestic professional portrait photography
industry, estimated to be approximately $7.8 billion. The primary customer
categories within the industry are babies, preschoolers, school-age
children (including youth sports and graduation portraits), adults,
families/groups, weddings, passports and churches. Other catergories
include: cruise ships, conventions/events, glamour and business portraits. Our
competitors include large studio chains operating in national retailers, other
national free-standing portrait studio companies, numerous regional start-ups
aided by the advancements in digital photographic technology, national school
and church photographers and a large number of independent portrait photography
providers. The majority of the industry is comprised of small, independent
photography companies and individual photographers.
Like CPI,
several other portrait photography companies provide services in retail hosts.
These companies and their retail hosts include: LifeTouch (JC Penney and
Target), Olan Mills (K-Mart, Belk’s, Meijer’s and Macy’s) and Kiddie Kandids
(Babies R Us). We believe that we are the largest of these competitors based on
revenues generated in the respective retail hosts.
A number
of other companies in the professional portrait photography industry operate
freestanding studios on a national, regional or local basis. Among
the more sizeable of these companies are Picture People and Portrait
Innovations, which operate independent mall-based or strip mall locations. In
addition, with the advancements in digital photographic technology, we have
witnessed numerous regional start-ups within the industry.
Industry
players generally compete on the basis of the following: price, service,
quality, location, product mix and convenience, including the immediate
fulfillment of finished portraits at the time of the portrait
session. Many competitors focus heavily on price and commonly feature
large portrait packages at aggressively low prices in mass marketing
promotions. Some of these same competitors have eliminated all
sitting or session fees.
Our
PictureMe Portrait Studio
®
brand focuses on
the sales of packages and portrait collections. While our products
and services are some of the lowest priced in the industry, we do not feel that
we are offering lesser value. In fact, it is our lower price that
enables the PictureMe Portrait Studio
®
customer to
attain some of the same products, services and professionalism that higher
priced studios offer. It is an added benefit to the PictureMe Portrait
Studio
®
customer that session fees do not apply. The Sears brand focuses on
customized portrait solutions that provide a wide variety of selection and
customization. Except for promotions during the year, the Sears brand
has not followed the “no session fee ever” practice because we believe a session
fee is justified by the professionalism of our photographers, the quality of our
equipment, our commitment to service and overall studio
experience. Furthermore, while our products and services are
competitively priced, they are not generally the lowest priced in the industry
as we focus on offering a better value proposition. Other competitors, notably
Picture People, have emphasized convenience and experience over low price and
also the immediate fulfillment of orders in the studio as opposed to longer lead
times of central lab fulfillment.
The
industry remains in constant transformation brought about by significant
advances in digital photographic technology. These technologies have made it
possible to capture, manipulate, store and print high-resolution digital images
in a decentralized environment. It is this digital evolution that has required
industry incumbents to review and adjust their business models while fostering a
number of new digital start-ups. The digital evolution has generated
photographic experimentation with the consumer and a “do-it-yourself” mentality
that did not exist in years past. This has impacted overall portrait studio
activity and frequency.
Seasonality and
Inflation
Our
business is highly seasonal, with the largest volume occurring in the fourth
fiscal quarter, between Thanksgiving and Christmas. For fiscal years
2008 and 2007, fourth quarter sales accounted for 33% and 38%, respectively, of
total net sales for the year. Historically, most, if not all, of the net
earnings for the year are generated in the fourth fiscal quarter. The
timing of Easter, another seasonally important time for portraiture sales, can
have a significant impact on the timing of recognition of sales revenues between
the Company’s first and second fiscal quarters. Historically, earlier
Easters translate into lower sales due to the closer proximity of the earlier
Easter date to the preceding Christmas holiday season during which customers are
most portrait-active. Most of the Company’s Easter-related sales in
fiscal year 2008, a year with an extremely early Easter, were recognized as
revenues, in accordance with the Company’s revenue recognition policies
reflected in Note 1 in the accompanying Notes to Consolidated Financial
Statements, in the first fiscal quarter. The moderate rate of
inflation over the past three years has not had a significant effect on the
Company’s revenues and profitability.
Suppliers
We
purchase photographic paper and processing chemistry from four major
manufacturers. Eastman Kodak provides photographic paper for all
central lab fulfillment pursuant to an agreement in effect through July 31,
2011. Dye sublimation paper used for proof sheets, portrait collages
and portrait orders delivered at the end of a sitting in digital studios is
provided primarily by Sony and Kanematsu. Fuji Film USA, Inc.
provides photographic chemistry for central lab fulfillment. We
purchase camera and lens components, monitors, computers, printers and other
equipment and materials from a number of leading suppliers.
Typically,
we do not encounter difficulty in obtaining equipment and materials in the
quantity and quality we require and we do not anticipate any problems in
obtaining our requirements in the future. We believe that we enjoy
good relationships with our vendors.
For film
locations in Sears Canada, we have internalized most repairs and have built an
internal knowledge base and repair capability to support our studio
equipment. Additionally, retirements of analog studio equipment have
added to our store of replacement parts. The computer and digital
equipment we use in the digital format consists of standard components that
are readily available from multiple suppliers.
CPI
operates most of its digital studios in full digital platform utilizing the
software of a single vendor for our studio photography and manufacturing
fulfillment digital systems. Our contract with our software vendor
allows CPI to scale the use of the software as necessary to support all of our
current and prospective studios and labs. The Company is testing
internally developed software that is expected to replace the software currently
in use at most studios. It is now functional in a small number of
digital studios. Once testing is complete, this software will
eliminate our reliance on the single outside vendor that we currently
use.
Intellectual
Property
We own
certain registered service marks and trademarks, including Portrait Creations®,
Smile Savers Plan®, PictureMe Portrait Studio®, BigShots® and The Portrait
Gallery®, which have been registered with the United States Patent and Trademark
Office. Our rights to these trademarks will continue as long as we
comply with the usage, filing and other legal requirements relating to the
renewal of trademarks.
The Company’s
Employees
As of
February 7, 2009, we had approximately 12,298 employees, including approximately
6,697 part-time and temporary employees.
The Company Website and
Periodic Reports
The
Company’s website address is www.cpicorp.com. We make
available, on the Investor Relations page of the website, free of charge,
press releases, annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the SEC. References to the Company’s website address do
not constitute incorporation by reference of the information contained on the
website, and the information contained on the website is not part of this
document.
Environmental
Regulation
Our
operations are subject to commonly applicable environmental protection statutes
and regulations. We do not expect that compliance with federal, state and local
provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment will have a material
effect on our capital expenditures, earnings or competitive
position. At present, we have not been identified as a potentially
responsible party under the Comprehensive Environmental Responses, Compensation
and Liability Act and have not established any reserves or liabilities relating
to environmental matters.
We wish
to caution readers that in addition to the important factors described elsewhere
in this Annual Report on Form 10-K, the following important factors, among
others, sometimes have affected, or in the future could affect, our actual
results and could cause our actual consolidated results during fiscal 2008, and
beyond, to differ materially from those expressed in any forward-looking
statements made by us or on our behalf. The risks and uncertainties
described below are not the only ones facing us and do not include other events
that we do not currently anticipate or that we currently deem immaterial that
may also affect our results of operations and financial
condition.
We
are materially dependent upon Sears and Wal-Mart.
Substantially
all of our sales are derived from sales in Sears and Wal-Mart stores. Therefore,
we are materially dependent upon our relationship with Sears and Wal-Mart, the
continued goodwill of Sears and Wal-Mart and the integrity of their brand names
in the retail marketplace. Any deterioration in our host
relationships could have a material adverse effect on us.
Because
we represent only a small fraction of Sears and Wal-Mart revenues, any
deterioration of either host relationship would have a far greater effect on us
than on our hosts.
In
addition, our competitive posture could be weakened by negative changes in
Sears’ or Wal-Mart’s competitive posture.
Our
portrait studios are substantially dependent on customer traffic generated by
our host retail stores, and if the customer traffic through these host stores
decreases due to the economic downturn or for any other reason, our sales could
be materially and adversely affected.
Our
business practices and operations need to be acceptable to our
hosts.
Because
of the importance of our Sears and Wal-Mart relationships, our business
practices and procedures must at all times be acceptable to the
host. In addition, under our agreements there are substantial
contractual rights, the most significant of which are described more fully in
“Item 1. Business,” which the host can exercise in a manner that can have a
material adverse effect on us. Consequently, in the future, we may be
required to make changes to our business practices and procedures, including
with regard to advertising and promotions, product offerings, studio facilities
and technology in response to host requests that would not be in our best
interests and could materially and adversely affect our sales, costs, margins,
business development or other aspects of our business.
Our
hosts may terminate, breach, otherwise limit or increase our expenses under our
agreements.
Our Sears
and Wal-Mart studios in the U.S., Canada and Mexico are operated pursuant to
certain license and lease agreements. Our agreements have the
following expiration dates: for our U.S. Sears studios, December 2014; for our
U.S. and Puerto Rico Wal-Mart studios, June 2010; for our Canadian Wal-Mart
Studios, 111 in 2009, 102 in 2010, 24 in 2011, 10 in 2012, 4 in 2013 and 4 in
2014; and for our Mexican Wal-Mart studios, with 30-day notice after one year of
operation. For our Canadian Sears studios, the agreement has expired and we are
currently operating our studios under the terms of such agreement as discussions
continue with Sears Canada to arrive at a mutually satisfactory extension or new
agreement. For our Puerto Rico Sears studios, the agreement expired
December 31, 2008, and the Company currently operates under the terms of the
previous agreement until a new agreement is reached, provided however, that we
pay the same commission on net sales in Puerto Rico as we now pay in the
U.S. These agreements are more fully described in “Item 1. The
Company’s Host Relationships.”
Sears and
Wal-Mart are under no obligation to renew these agreements. They may
also seek to increase the fees we pay under our agreements upon renewal of the
agreements. We do not have the contractual right to close any poorly
performing locations without Sears or Wal-Mart’s consent. In
addition, our agreements do not prohibit Sears and Wal-Mart from selling many of
the tangible goods we sell, or from processing film or digital photos, in other
departments within their stores. Furthermore, there is always the
risk that Sears or Wal-Mart might breach our agreements. The loss or breach of
the agreements could have a material adverse effect on us. An adverse change in
any other aspects of our business relationship with Sears or Wal-Mart, including
the reduction of the number of studios operated pursuant to such arrangements or
a decision by Sears or Wal-Mart to license or lease studios, respectively, to
other persons could have a material adverse effect on us.
The
economic recession has materially impacted consumer spending and may adversely
affect our financial position.
Consumer
discretionary spending has been materially and adversely impacted by the current
recession, job losses, volatile energy and food costs, greater levels of
unemployment, higher levels of consumer debt, declines in home values and in the
value of consumers' investments and savings, restrictions on the availability of
credit and other negative economic conditions which have affected consumer
confidence and disposable income. If consumer discretionary spending
continues to decline, demand for our products could decrease and we may be
forced to discount our merchandise, which in turn could reduce our revenues,
gross margins, operating cash flows and earnings. In addition, higher
transportation costs, higher costs of labor, insurance and healthcare, and other
negative economic factors may increase our cost of sales and operating
expenses. Additionally, our business is highly seasonal, with the
largest volume occurring in the fourth fiscal quarter, between Thanksgiving and
Christmas. The fourth quarters in fiscal 2008 and 2007 accounted for
approximately 33% and 38%, respectively, of total net sales for the
year. As a result, any adverse impact on our fourth quarter operating
results would significantly impact annual operating results. Our
fourth quarter operating results may fluctuate significantly based on many
factors, including holiday spending patterns, prevailing economic conditions and
weather conditions.
We
have been notified by the New York Stock Exchange (“NYSE”) that we did not meet
its continued listing requirements. If we are unable to rectify this
non-compliance, our common stock may be delisted from trading on the NYSE, which
could have a material adverse effect on the liquidity and value of our common
stock.
In
addition to several other continued listing standards, the NYSE requires that
issuers with securities listed on the NYSE maintain an average market
capitalization, over a 30-day trading period, greater than $75 million and
stockholders' equity greater than $75 million. On November 4, 2008,
the NYSE notified us that we were not in compliance with this continued listing
standard. We have submitted a business plan to the NYSE demonstrating
how we plan to regain compliance with this standard within 18 months of receipt
of the notice. On February 1, 2009, we received notice from the NYSE that
it had approved our plan and is monitoring our compliance with our
plan. If we are not able to successfully implement our business plan
within the 18-month time period allotted, our common stock may be delisted from
the NYSE. Delisting could negatively impact us by, among other
things, reducing the liquidity and market price of our common stock, reducing
the number of investors willing to hold or acquire our common stock and limiting
our ability to issue additional securities or obtain additional financing in the
future.
We
have a high level of indebtedness, which may impair our ability to operate
effectively and impair future performances.
As of
February 7, 2009, we had $105.7 million of indebtedness under the term loan
portion of our existing Credit Agreement. This level of debt and the
limitations imposed by the Company’s debt agreements could adversely affect
operating flexibility and put the Company at a competitive disadvantage. The
Company’s debt level may adversely affect future performance. The
ability to make scheduled payments of principal, to pay interest on, or to
refinance indebtedness and to satisfy other debt and lease obligations will
depend upon future operating performance, which may be affected by factors
beyond the Company’s control. In addition, there can be no assurance that future
borrowings or equity financing will be available to the Company on favorable
terms or at all for the payment or refinancing of indebtedness. If the Company
is unable to service indebtedness, the business, financial condition and results
of operations would be materially adversely affected.
The
agreements governing our debt impose restrictions on our business.
Our
credit agreement contains covenants and requires financial ratios and tests,
which impose restrictions on our business. Our ability to comply with
these restrictions may be affected by events beyond our control, including, but
not limited to, prevailing economic, financial and industry conditions. The
breach of any of these covenants or restrictions, as well as any failure to make
a payment of interest or principal when due, could result in a default under the
credit agreement. Such a default would permit our lenders to declare all amounts
borrowed from them to be due and payable, together with accrued and unpaid
interest, and the ability to borrow under this agreement could be terminated. If
we are unable to repay debt to our lenders, these lenders could proceed against
the collateral securing that debt.
If
economic conditions do not improve, or worsen, our results of operations and
financial condition could be materially adversely impacted. In addition, a
substantial or prolonged material adverse impact on our results of operations
and financial condition could affect our ability to satisfy the financial
covenants in our senior secured credit agreement, which could result in our
having to seek amendments or waivers from our lenders to avoid the termination
of commitments and/or the acceleration of the maturity of amounts that are
outstanding under our term loan and revolving credit
facility. Effective April 16, 2009, the Company amended its Credit
Agreement to allow more flexibility should the economy worsen, see further
details on the amendment in the “Liquidity and Capital Resources”
section. This amendment significantly reduces this risk of a breach
of our financial covenants. However, if the economic conditions
worsen to a degree that would not be covered by the recent amendment, the cost
of obtaining an additional amendment or waiver could be significant, and could
substantially increase our cost of borrowing over the remaining term of our
senior secured credit agreement. Further, there can be no assurance that we
would be able to obtain a future amendment or waiver. If our lenders were
unwilling to enter into an amendment or provide a waiver, all amounts
outstanding under our term loan and revolving credit facility would become
immediately due and payable.
Our
inability to remain competitive could have a detrimental impact on our results
of operations.
The
professional portrait photography industry is highly competitive. Evolving
technology and business relationships may make it easier and cheaper for our
competitors and potential competitors to develop products or services similar to
ours or to sell competing products or services in our
markets. Likewise, the proliferation of amateur digital photography
is making customers more discerning and demanding and has adversely affected
overall portrait activity/frequency.
The
companies in our industry compete on the basis of price, service, quality,
location, product mix and convenience of retail distribution
channel. If the Company cannot continue to provide perceived value
for our customers, this could have a material adverse impact on sales and
profitability. To compete successfully, we must continue to remain
competitive in areas of price, service, quality, location, product mix and
convenience of distribution.
If
our key suppliers become unable to continue to provide us supplies under our
current contracts, we will need to obtain an alternative source of supplies. If
we enter into an agreement to obtain such supplies at less desirable terms, our
financial condition and results of operations could be materially adversely
affected.
As
described in “Item 1. Suppliers,” the Company purchases photographic paper, dye
sublimation paper and chemistry from several suppliers. Additionally,
the Company utilizes the software of a single vendor for our studio photography
and manufacturing fulfillment for digital systems. If these
companies become unable to continue to provide us supplies or services under our
current arrangements or if prices are increased dramatically, we will need to
obtain alternative sources of supplies or services.
Although
management believes that the available alternative sources of supplies are
adequate, there can be no assurance we would be able to obtain such supplies at
the same or similar terms to those we currently have in place. If we enter into
an agreement to obtain such supplies at less desirable terms, our financial
condition and results of operations could be materially adversely
affected.
Should
the Company be forced to replace its digital software vendor, related costs
could increase and production could be disrupted for a period of time, which
could have a material adverse impact on the results of operations.
If
we lose our key personnel, our business may be adversely affected.
Our
continued success depends upon, to a large extent, the efforts and abilities of
our key employees, particularly our executive management team. We cannot assure
you of the continued employment of any members of management. Competition for
qualified management personnel is strong. The loss of the services of
our key employees or the failure to retain qualified employees when needed could
materially adversely affect us.
A
significant increase in piracy of our photographs could materially adversely
affect our business, financial condition or results of operations.
We
rely on copyright laws to protect our proprietary rights in our photographs.
However, our ability to prevent piracy and enforce our proprietary rights in our
photographs is limited. We are aware that unauthorized copying of photographs
occurs within our industry. A significant increase in the frequency of
unauthorized copying of our photographs could materially adversely affect our
business, financial condition and results of operations by reducing revenues
from photograph sales.
Any
disruption in our manufacturing process could have a material adverse impact on
our business.
Although
the Company is moving to internally developed software, our digital platform
currently utilizes the software of a single vendor for our studio photography
and manufacturing fulfillment digital systems. Any material
delay in the vendor’s networking environment, coupled with a failure to
identify and implement alternative solutions, could have an adverse effect upon
the operations of the business. Additionally, should this vendor no
longer operate, the Company may be forced to find another source of this
support, which could be more costly and could delay digital production for a
period of time. Although on-site printing is an available alternative
to central printing in the Sears’ digital environment, it currently would be
difficult and costly for on-site printing to replace central fulfillment during
the holiday busy season. On-site printing is not available for our
PictureMe Portrait Studio
®
business. Any disruption of our processing systems for any reason
could adversely impact our business, financial condition and results of
operations.
We
are subject to litigation and other claims that could have an adverse effect on
our business.
We
are a defendant in certain pending legal proceedings relating to allegations
that the Company failed to pay certain employees for “off the clock” work and
provide meal and rest breaks as required by law and that the Company’s operation
of PictureMe Portrait Studios® infringes on a certain trademark related to
picture books. While we believe the claims are without merit and
continue our vigorous defense, the outcome of these proceedings is difficult to
assess and quantify and therefore we cannot determine whether the financial
impact, if any, will be material to our financial position or results of
operations. The defense of these actions may be both time consuming
and expensive. If any of these legal proceedings were to result in an
unfavorable outcome, it could have a material adverse effect on our business,
financial position and results of operations.
The
impact of declines in global equity markets on asset values and interest rates
used to value the liabilities in our pension plan and changes in rules and
regulations may result in higher pension costs and the need to fund the pension
plan in future years in material amounts.
The
impact of declines in the global equity and bond markets on asset values may
result in higher pension costs and may increase and accelerate the need to fund
the pension in future years. The determination of pension expense and
pension funding are based on a variety of rules and
regulations. Changes in these rules and regulations could impact the
calculation of pension plan liabilities and the valuation of pension plan
assets. They may also result in higher pension costs and accelerate
and increase the need to fully fund the pension plan.
We
are subject to currency fluctuations from our operations within non-U.S.
markets
For
our operations conducted in Canada and Mexico, transactions are typically
denominated in local currencies. Accordingly, certain costs of our
operations in these foreign locations are also denominated in those local
currencies. Because our financial statements are stated in U.S.
dollars, changes in currency exchange rates between the U.S. dollar and other
currencies, have had, and will continue to have, an impact on our reported
financial results.
Item 1B.
|
Unresolved
Staff Comments
|
None.
The
following table sets forth certain information concerning the Company’s
principal facilities as of February 7, 2009:
|
|
APPROXIMATE
|
|
|
|
|
|
|
|
AREA
IN
|
|
|
|
OWNERSHIP
|
|
LOCATION
|
|
SQUARE
FEET
|
|
PRIMARY
USES
|
|
OR
LEASE
|
|
Matthews,
North Carolina
|
|
860,000
|
|
Administration
and Portrait processing (includes 696,000 square feet in
land)
|
|
Owned
|
(1)
|
Thomaston,
Connecticut
|
|
386,000
|
|
Administration
and Portrait processing (includes 361,000 square feet in
land)
|
|
Owned
|
(2)
|
Charlotte,
North Carolina
|
|
372,000
|
|
Administration,
Warehousing and Portrait processing (includes 315,000 square feet in
land)
|
|
Owned
|
|
Charlotte,
North Carolina
|
|
348,000
|
|
Undeveloped,
industrial land
|
|
Owned
|
(1)
|
St.
Louis, Missouri
|
|
341,000
|
|
Headquarters,
Administration and Portrait processing (includes 31,000 square feet in
land)
|
|
Owned
|
|
St.
Louis, Missouri
|
|
159,000
|
|
Parking
Lots
|
|
Owned
|
|
Brampton,
Ontario
|
|
156,000
|
|
Administration,
Warehousing and Portrait processing (includes 116,000 square feet in
land)
|
|
Owned
|
|
Charlotte,
North Carolina
|
|
147,000
|
|
Warehousing
(includes 116,000 square feet in land)
|
|
Owned
|
(1)
|
St.
Louis, Missouri
|
|
53,000
|
|
Warehousing
|
|
Leased
|
(3)
|
Charlotte,
North Carolina
|
|
51,000
|
|
Parking
Lots
|
|
Owned
|
|
St.
Louis, Missouri
|
|
20,000
|
|
Storage
Facility
|
|
Leased
|
(4)
|
(1)
|
|
Properties
are held for sale. See Note 7 to the Company's Consolidated
Financial Statements for further discussion.
|
(2)
|
|
Property
was listed for sale as of March 9, 2009.
|
(3)
|
|
Lease
term expires on July 31, 2018.
|
(4)
|
|
Lease
term expired on February 28, 2009, and we have vacated the
space.
|
Studio license/lease
agreements
As of
February 7, 2009, the Company operates portrait studios in host stores under
license and lease agreements as shown below:
NUMBER
|
|
|
|
|
OF
STUDIOS
|
|
COUNTRY
|
|
LICENSOR/LESSOR
|
|
|
|
|
|
887
|
|
United
States and Puerto Rico
|
|
Sears
|
1,642
|
|
United
States and Puerto Rico
|
|
Wal-Mart
|
110
|
|
Canada
|
|
Sears
Canada, Inc.
|
259
|
|
Canada
|
|
Wal-Mart
Canada Corp.
|
118
|
|
Mexico
|
|
Nueva
Wal-Mart de Mexico, S, de R.L. de C.V.
|
30
|
|
United
States studios not
in
Sears or Wal-Mart
|
|
Third
parties - generally leased for at least 3 years
with
some having renewal
options
|
The
Company pays Sears And Wal-Mart a fee based on annual sales within the
respective host stores. This fee covers the Company’s use of space in
the host stores, the use of Sears’ name and the use of the Wal-Mart name in
Canada and Mexico. No separate amounts are paid to hosts expressly for the use
of space.
The
Company believes that the facilities used in its operations are adequate
for its present and anticipated future operations.
Item 3.
|
Legal
Proceedings
|
The
Company and two of its subsidiaries are defendants in a lawsuit entitled
Shannon Paige, et al. v.
Consumer Programs, Inc.
, filed March 8, 2007, in the Superior Court of
the State of California for the County of Los Angeles, Case No.
BC367546. The case was subsequently removed to the United States
District Court for the Central District of California, Case No. CV 07-2498-FMC
(RCx). The Plaintiff alleges that the Company failed to pay him and
other hourly associates for “off the clock” work and that the Company failed to
provide meal and rest breaks as required by law. The Plaintiff is
seeking damages and injunctive relief for himself and others similarly
situated. On October 6, 2008, the Court denied the Plaintiffs’ motion
for class certification but allowed Plaintiffs to attempt to certify a smaller
class, thus reducing the size of the potential class to approximately
200. Plaintiffs filed a motion seeking certification of the smaller
class on November 14, 2008. The Company filed its opposition on
December 8, 2008. In January 2009, the Court denied Plaintiffs'
motion for class certification as to their claims that they
worked "off the clock". The Court also deferred ruling on
Plaintiff's motion for class certification as to their missed break claims
and stayed the action until the California Supreme Court rules on a pending
case on the issue of whether an employer must merely provide an opportunity
for employees to take a lunch break or whether an employer must actively
ensure that its employees take the break. The Company believes the
claims are without merit and continues its vigorous defense on behalf of
itself and its subsidiaries against these claims, however, an adverse ruling in
this case could require the Company to pay damages, penalties, interest and
fines.
The
Company is a defendant in a lawsuit entitled
Picture Me Press LLC v. Portrait Corporation
of America, et al.
,
Case No. 5:08cv32, which was filed in the
United States District Court for the Northern District of Ohio on January 4,
2008. The suit alleges that the Company’s operation of PictureMe
Portrait Studios infringes on Plaintiff’s trademark for its picture books and
seeks damages and injunctive relief. The Company believes the case is
without merit and is vigorously defending itself. However,
intellectual property litigation such as this case is expensive and time
consuming, and if the claim were to result in an unfavorable outcome, it could
result in significant monetary liability or prevent the Company from operating
portions of its business under current trademarks used by the
Company. In addition, an adverse resolution of this claim could
require the Company to obtain licenses to use intellectual property rights
belonging to third parties, which may be expensive to procure, or possibly to
cease using those rights altogether. Any of these results could have
a material adverse effect on the Company’s business, financial position and
results of operations. The Company has denied the claim alleged by
the Plaintiff and filed counterclaims against the
Plaintiff.
The
Company is also a defendant in other routine litigation, but does not believe
these lawsuits, individually or in combination with the cases described above,
will have a material adverse effect on its financial condition. The Company
cannot, however, give assurances that these legal proceedings will not have a
material adverse effect on its business or financial condition.
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No
matters were submitted to stockholders for a vote during the fourth quarter of
fiscal year 2008.
PART
II
Item 5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Price
Range of Common Stock and Cash Dividends
Since
April 17, 1989, the Company's common stock has been traded on the New York Stock
Exchange under the symbol CPY.
The
following tables set forth the high and low closing prices of the common stock
reported by the New York Stock Exchange and the dividends declared for each full
quarterly period during the Company's last two fiscal years.
FISCAL
YEAR 2008
|
|
|
|
|
|
|
|
|
|
(ending
February 7, 2009)
|
|
HIGH
|
|
|
LOW
|
|
|
DIVIDEND
|
|
First
Quarter
|
|
$
|
20.25
|
|
|
$
|
15.17
|
|
|
$
|
0.16
|
|
Second
Quarter
|
|
|
26.73
|
|
|
|
13.79
|
|
|
|
0.16
|
|
Third
Quarter
|
|
|
16.44
|
|
|
|
5.57
|
|
|
|
0.16
|
|
Fourth
Quarter
|
|
|
7.14
|
|
|
|
1.08
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL
YEAR 2007
|
|
|
|
|
|
|
|
|
|
(ending
February 2, 2008)
|
|
HIGH
|
|
|
LOW
|
|
|
DIVIDEND
|
|
First
Quarter
|
|
$
|
58.20
|
|
|
$
|
50.00
|
|
|
$
|
0.16
|
|
Second
Quarter
|
|
|
84.40
|
|
|
|
57.51
|
|
|
|
0.16
|
|
Third
Quarter
|
|
|
65.78
|
|
|
|
30.36
|
|
|
|
0.16
|
|
Fourth
Quarter
|
|
|
30.84
|
|
|
|
17.11
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
of Record
As of
April 17, 2009, the closing sales price of the Company’s common stock was $7.80
per share with 6,953,015 shares outstanding and 1,301 holders of
record.
Dividends
The
Company intends, from time to time, to pay cash dividends on its common stock,
as its Board of Directors deems appropriate, after consideration of the
Company's operating results, financial condition, cash requirements,
restrictions imposed by Delaware law credit agreements, including maximum limits
of cash to be used to pay for dividends, general business conditions and
such other factors as the Board of Directors deems relevant.
Issuer
Repurchases of Equity Securities
The
Company did not repurchase any equity securities during the fourth quarters of
fiscal years 2008 or 2007.
Item 6.
|
Selected
Consolidated Financial Data
|
The
summary historical consolidated financial data as of and for each of the fiscal
years in the five-year period ended February 7, 2009, set forth below have been
derived from the Company’s audited consolidated financial statements. The
information presented below should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the consolidated financial statements and related notes included
herein. The Company acquired substantially all of the assets of PCA
and certain of its affiliates and assumed certain liabilities of PCA on June 8,
2007, which affected the operating result trends as depicted in the table
below. Certain of this data has been reclassified to conform with the
current year presentation.
in
thousands except share and per share data
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENT
OF OPERATIONS (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
462,548
|
|
|
$
|
423,429
|
|
|
$
|
292,973
|
|
|
$
|
291,098
|
|
|
$
|
280,845
|
|
Cost of sales (exclusive of depreciation and amortization shown
below)
|
|
|
41,218
|
|
|
|
45,284
|
|
|
|
28,582
|
|
|
|
32,597
|
|
|
|
33,677
|
|
Selling, general and administrative expenses
|
|
|
379,372
|
|
|
|
328,419
|
|
|
|
219,911
|
|
|
|
223,762
|
|
|
|
221,715
|
|
Depreciation and amortization
|
|
|
29,432
|
|
|
|
27,291
|
|
|
|
16,861
|
|
|
|
19,904
|
|
|
|
16,360
|
|
Other charges and impairments (2)
|
|
|
13,557
|
|
|
|
7,695
|
|
|
|
1,241
|
|
|
|
2,767
|
|
|
|
15,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(1,031
|
)
|
|
|
14,740
|
|
|
|
26,378
|
|
|
|
12,068
|
|
|
|
(6,586
|
)
|
Interest expense, net (3)
|
|
|
8,527
|
|
|
|
8,818
|
|
|
|
1,815
|
|
|
|
1,098
|
|
|
|
981
|
|
Recovery (impairment) and related obligations of preferred security
interest (4)
|
|
|
-
|
|
|
|
-
|
|
|
|
887
|
|
|
|
-
|
|
|
|
(9,789
|
)
|
Loss from debt extinguishment (5)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
529
|
|
|
|
-
|
|
Other income, net
|
|
|
190
|
|
|
|
175
|
|
|
|
144
|
|
|
|
247
|
|
|
|
263
|
|
Income tax (benefit) expense
|
|
|
(2,644
|
)
|
|
|
2,080
|
|
|
|
9,164
|
|
|
|
1,889
|
|
|
|
(2,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
|
(6,724
|
)
|
|
|
4,017
|
|
|
|
16,430
|
|
|
|
8,799
|
|
|
|
(14,868
|
)
|
Net (loss) income from discontinued operations, net of tax
(1)
|
|
|
(961
|
)
|
|
|
(441
|
)
|
|
|
(103
|
)
|
|
|
73
|
|
|
|
(3,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(7,685
|
)
|
|
$
|
3,576
|
|
|
$
|
16,327
|
|
|
$
|
8,872
|
|
|
$
|
(18,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARE
AND PER SHARE DATA (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations - diluted (6)
|
|
$
|
(1.03
|
)
|
|
$
|
0.63
|
|
|
$
|
2.58
|
|
|
$
|
1.12
|
|
|
$
|
(1.88
|
)
|
Net (loss) income from continuing operations - basic (6)
|
|
$
|
(1.03
|
)
|
|
$
|
0.63
|
|
|
$
|
2.59
|
|
|
$
|
1.12
|
|
|
$
|
(1.88
|
)
|
Net (loss) income - diluted
|
|
$
|
(1.18
|
)
|
|
$
|
0.56
|
|
|
$
|
2.56
|
|
|
$
|
1.13
|
|
|
$
|
(2.35
|
)
|
Net (loss) income - basic
|
|
$
|
(1.18
|
)
|
|
$
|
0.56
|
|
|
$
|
2.57
|
|
|
$
|
1.13
|
|
|
$
|
(2.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
Average shares outstanding - diluted
|
|
|
6,510
|
|
|
|
6,416
|
|
|
|
6,376
|
|
|
|
7,881
|
|
|
|
7,888
|
|
Average shares outstanding - basic
|
|
|
6,510
|
|
|
|
6,391
|
|
|
|
6,353
|
|
|
|
7,854
|
|
|
|
7,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOW DATA (continuing operations only)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
12,663
|
|
|
$
|
39,872
|
|
|
$
|
37,993
|
|
|
$
|
18,624
|
|
|
$
|
16,371
|
|
Net cash (used in) provided by financing activities
|
|
$
|
(13,419
|
)
|
|
$
|
90,788
|
|
|
$
|
(43,567
|
)
|
|
$
|
(1,223
|
)
|
|
$
|
(24,827
|
)
|
Net cash used in investing activities
|
|
$
|
(33,488
|
)
|
|
$
|
(97,653
|
)
|
|
$
|
(2,358
|
)
|
|
$
|
(17,633
|
)
|
|
$
|
(6,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
36,074
|
|
|
$
|
14,884
|
|
|
$
|
2,760
|
|
|
$
|
20,235
|
|
|
$
|
15,157
|
|
Item
6.
|
Selected
Consolidated Financial Data (continued)
|
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,665
|
|
|
$
|
59,177
|
|
|
$
|
26,294
|
|
|
$
|
34,269
|
|
|
$
|
33,883
|
|
Current assets
|
|
|
61,480
|
|
|
|
92,835
|
|
|
|
55,164
|
|
|
|
69,629
|
|
|
|
72,875
|
|
Net fixed assets
|
|
|
50,887
|
|
|
|
56,280
|
|
|
|
26,693
|
|
|
|
41,282
|
|
|
|
41,658
|
|
Assets of supplemental retirement plan (7)
|
|
|
975
|
|
|
|
3,508
|
|
|
|
3,588
|
|
|
|
3,706
|
|
|
|
6,141
|
|
Goodwill and intangible assets (8)
|
|
|
61,664
|
|
|
|
62,956
|
|
|
|
512
|
|
|
|
512
|
|
|
|
512
|
|
Other assets
|
|
|
15,586
|
|
|
|
20,938
|
|
|
|
7,205
|
|
|
|
11,015
|
|
|
|
13,914
|
|
Total assets
|
|
|
190,593
|
|
|
|
236,517
|
|
|
|
93,162
|
|
|
|
126,144
|
|
|
|
135,100
|
|
Current liabilities
|
|
|
55,010
|
|
|
|
83,051
|
|
|
|
49,407
|
|
|
|
56,065
|
|
|
|
69,448
|
|
Other liabilities
|
|
|
32,432
|
|
|
|
33,470
|
|
|
|
23,209
|
|
|
|
25,739
|
|
|
|
25,716
|
|
Long-term debt, less current maturities
|
|
|
102,316
|
|
|
|
103,022
|
|
|
|
7,747
|
|
|
|
15,747
|
|
|
|
17,050
|
|
Stockholders' equity (6)
|
|
|
835
|
|
|
|
16,974
|
|
|
|
12,799
|
|
|
|
28,593
|
|
|
|
22,886
|
|
(1)
|
|
The
following business areas were classified as discontinued
operations in the years indicated. The financial statements for
the periods prior to the classification were reclassified to reflect
these changes:
|
|
|
|
|
|
-
In 2008, Portrait Gallery and E-Church operations
|
|
|
-
In 2007, UK Operations which were acquired in the PCA
acquisition
|
|
|
-
In 2004, mobile photography operations and the Mexican Portrait Studio
business
|
|
|
|
(2)
|
|
Other
charges and
impairments:
|
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears
fees related to settlement of the previous license agreement
(a)
|
|
$
|
7,527
|
|
|
$
|
2,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other
transition related costs - PCA Acquisition (b)
|
|
|
2,121
|
|
|
|
2,817
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Reserves
for severance and related costs (c)
|
|
|
2,046
|
|
|
|
2,035
|
|
|
|
878
|
|
|
|
2,546
|
|
|
|
3,430
|
|
Impairment
charges (d)
|
|
|
739
|
|
|
|
256
|
|
|
|
179
|
|
|
|
567
|
|
|
|
6,516
|
|
Consent
solicitation (e)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
816
|
|
Accruals
related to accelerated vesting of supplemental
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
retirement
plan benefits and guaranteed bonuses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
2004 (f)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,656
|
|
Other (g)
|
|
|
1,124
|
|
|
|
87
|
|
|
|
184
|
|
|
|
(346
|
)
|
|
|
1,261
|
|
|
|
$
|
13,557
|
|
|
$
|
7,695
|
|
|
$
|
1,241
|
|
|
$
|
2,767
|
|
|
$
|
15,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Consists
of fees and charges incurred in relation to the settlement of the previous
Sears license agreement.
|
(b)
|
|
Consists
of integration-related costs relative to the PCA
Acquisition.
|
(c)
|
|
Consists
principally of expenses and related costs for employee severance,
retirements and repositioning. Specifically, in 2008 and 2007, this cost
is primarily related to the PCA Acquisition.
|
(d)
|
|
Consists
of 2008 write-downs of certain asset values held for sale, 2007 write-offs
of software that is no longer used in the business, 2006 write-offs of
certain legacy equipment that is no longer used in the business, 2005
parts and film inventory and other asset write-offs resulting from the
conversion from an analog film environment to the full digital format and
2004 write-offs and write-downs of certain previously capitalized
technology costs.
|
(e)
|
|
Consists
of professional fees relative to the proxy consent
solicitation.
|
(f)
|
|
Consists
of costs related to accelerated vesting of executive benefits and
bonuses.
|
(g)
|
|
Costs
in 2008 primarily relate to legal expense incurred related to the
settlement of the Portraits International of the Southwest vs. CPI Corp.
case. Costs in 2007 consist of non-refundable loan commitment
fees as well as charges related to early contract terminations and
settlements with certain of the Company’s vendors and
consultants. Costs in 2006 represent investment banking and
legal services in connection with the strategic alternative
review. The net credit in 2005 relates principally to the
favorable settlement of a claim resulting in a refund related to
previously paid loan commitment fees and costs. Costs in 2004
primarily relate to early contract terminations and settlements with
certain of the Company’s vendors and consultants as a result of strategic
decisions to modify such
relationships.
|
Item
6.
|
Selected
Consolidated Financial Data (continued)
|
(3)
|
|
In
2008 and 2007, includes expense of $617,000 and $2.9 million,
respectively, in connection with marking the interest rate swap agreement
to its market value.
|
|
|
|
(4)
|
|
In
2004, the Company recorded a $7.7 million valuation reserve against the
carrying value of its preferred security interest and $2.1 million of
additional accrued lease liability obligations relating to its lease
guarantees on certain of Prints Plus’ retail stores. As the
total guarantee related to these leases had decreased with the passage of
time, the payment of rents by Prints Plus and the settlement by the
Company of certain leases rejected in bankruptcy, the related liability
was reduced by $887,000 in 2006 to reflect management’s revised estimate
of remaining potential loss.
|
|
|
|
(5)
|
|
Consists
of a make-whole fee totaling $457,000 and the write-off of unamortized
fees, both related to the early redemption of the Company’s Senior Notes
in November 2005.
|
|
|
|
(6)
|
|
The
Company recorded the repurchase of:
|
|
|
-
1,658,607 shares of common stock for $32.4 million in
2006
|
|
|
-
406,780 shares of common stock for $6.0 million in 2004,
and
|
|
|
-
54,200 shares of common stock for $935,000 in 2003.
|
|
|
|
(7)
|
|
Represents
a benefit trust established in 2000 to fund supplemental retirement
benefits for certain current and former executives.
|
|
|
|
(8)
|
|
At
the time of the PCA Acquisition, the Company acquired a host agreement and
customer list with Wal-Mart and additional goodwill. See Note 8
to the Notes to Consolidated Financial Statements for further
discussion.
|
Item 7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
designed to provide the reader of the financial statements with a narrative on
the Company’s results of operations, financial position and liquidity,
significant accounting policies and critical estimates, and the future impact of
accounting standards that have been issued but are not yet
effective. Management’s Discussion and Analysis is presented in
the following sections: Executive Overview; Results of Operations; Liquidity and
Capital Resources; and Accounting Pronouncements and Policies. The
reader should read Management’s Discussion and Analysis of Financial Condition
and Results of Operations in conjunction with the consolidated financial
statements and related notes thereto contained elsewhere in this
document.
All
references to earnings per share relate to diluted earnings per common
share.
EXECUTIVE
OVERVIEW
The
Company’s Operations
CPI Corp.
is a long-standing leader, based on sittings, number of locations and
related revenues, in the professional portrait photography of young children,
individuals and families. From a single studio opened by our
predecessor company in 1942, we have grown to 3,046 studios throughout the U.
S., Canada, Mexico and Puerto Rico principally under license agreements with
Sears and lease and license agreements with Wal-Mart. The Company has
provided professional portrait photography for Sears’ customers since 1959 and
has been the only Sears portrait studio operator since 1986.
On June
8, 2007, the Company completed the PCA Acquisition. The results of the acquired
operations have been included in the consolidated financial statements since
that date. As a result of the PCA Acquisition, CPI is the sole
operator of portrait studios in Wal-Mart Stores and Supercenters in the U.S.,
Canada, Mexico and Puerto Rico. Management has determined the
Company operates as a single reporting segment offering similar products and
services in all locations.
As of the
end of the last three fiscal years, the Company’s studio counts
were:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Within
Sears stores:
|
|
|
|
|
|
|
|
|
|
United
States and Puerto Rico
|
|
|
887
|
|
|
|
893
|
|
|
|
894
|
|
Canada
|
|
|
110
|
|
|
|
112
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
Wal-Mart stores:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States and Puerto Rico
|
|
|
1,642
|
|
|
|
1,702
|
|
|
|
-
|
|
Canada
|
|
|
259
|
|
|
|
253
|
|
|
|
-
|
|
Mexico
|
|
|
118
|
|
|
|
115
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Locations
not within Sears or Wal-Mart stores
|
|
|
30
|
|
|
|
33
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,046
|
|
|
|
3,108
|
|
|
|
1,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
April 10, 2009, all of the Company’s studios, with the exception of 85 Sears
Portrait Studios in Canada, are digital. The installation of a new
digital lab sufficient to handle the worldwide fulfillment requirements of the
PictureMe Portrait Studio
®
business was
completed in the first quarter of 2008 and has been in operation since the
second quarter. As of the end of the second quarter, the Company had
transferred all material PMPS operations to the Company’s existing support
platform. The Company also plans to deliver steadily increasing
growth through harvesting opportunities from its digital platform to create
diversified revenue streams, driving productivity and profitability gains,
leveraging our manufacturing capacity and efficiency and implementing
aggressive, targeted marketing campaigns. Such increases may be
restrained if the current economic downturn does not reverse in the foreseeable
future.
Market
Challenges
NYSE
Listing
Market
uncertainty drove the Company’s stock price down significantly in fiscal
2008. As previously announced, the Company received notice from the
New York Stock Exchange (NYSE) on November 4, 2008, that it was out of
compliance with certain of the NYSE’s listing criteria. The Company
is considered below the applicable standards because its average market
capitalization over a 30-day trading period is less than $75 million and its
stockholders' equity is less than $75 million. On February 1, 2009, the
Company received notice from the NYSE that it had accepted the Company’s plan
for continued listing. As a result, the Company’s stock will continue
to be listed on the NYSE, subject to quarterly reviews by the NYSE’s Listing and
Compliance Committee to ensure the Company’s progress toward its plan to restore
compliance with continued listing standards. In the event the Company does
not complete its plan on a timely basis, the Company's common stock could
be delisted from the NYSE.
Credit
Agreement
As of
February 7, 2009, the Company was in compliance with all debt covenants under
its Credit Agreement. Effective April 16, 2009, the Company entered
into the third amendment (the "Amendment") to its Credit Agreement to change the
interest rate structure and the amortization schedule and to replace preexisting
minimum EBITDA and interest coverage covenants with a fixed charge ratio test
(i.e., EBITDA minus capital expenditures to fixed charges) and tighten the
leverage ratio (i.e., Funded Debt to EBITDA), prospectively, with effect from
February 8, 2009. These changes were made to allow for greater
flexibility in the event that the economic climate worsens and has an impact on
the Company’s earnings. See Liquidity and Capital Resources below for
further discussion.
RESULTS
OF OPERATIONS
A summary
of consolidated results of operations and key statistics follows:
in
thousands, except share and per share data
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
462,548
|
|
|
$
|
423,429
|
|
|
$
|
292,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (exclusive of depreciation and amortization shown
below)
|
|
|
41,218
|
|
|
|
45,284
|
|
|
|
28,582
|
|
Selling, general and administrative expenses
|
|
|
379,372
|
|
|
|
328,419
|
|
|
|
219,911
|
|
Depreciation and amortization
|
|
|
29,432
|
|
|
|
27,291
|
|
|
|
16,861
|
|
Other charges and impairments
|
|
|
13,557
|
|
|
|
7,695
|
|
|
|
1,241
|
|
|
|
|
463,579
|
|
|
|
408,689
|
|
|
|
266,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
|
(1,031
|
)
|
|
|
14,740
|
|
|
|
26,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
9,147
|
|
|
|
10,652
|
|
|
|
2,380
|
|
Interest
income
|
|
|
620
|
|
|
|
1,834
|
|
|
|
565
|
|
Recovery
of preferred security interest
|
|
|
-
|
|
|
|
-
|
|
|
|
(887
|
)
|
Other
income, net
|
|
|
190
|
|
|
|
175
|
|
|
|
144
|
|
(Loss)
income from continuing operations before income tax (benefit)
expense
|
|
|
(9,368
|
)
|
|
|
6,097
|
|
|
|
25,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) expense
|
|
|
(2,644
|
)
|
|
|
2,080
|
|
|
|
9,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income from continuing operations
|
|
|
(6,724
|
)
|
|
|
4,017
|
|
|
|
16,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations, net of income tax
benefit
|
|
|
(961
|
)
|
|
|
(441
|
)
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME
|
|
$
|
(7,685
|
)
|
|
$
|
3,576
|
|
|
$
|
16,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share from continuing operations -
diluted
|
|
$
|
(1.03
|
)
|
|
$
|
0.63
|
|
|
$
|
2.58
|
|
Net
loss per share from discontinued operations - diluted
|
|
|
(0.15
|
)
|
|
|
(0.07
|
)
|
|
|
(0.02
|
)
|
Net
(loss) income per share - diluted
|
|
$
|
(1.18
|
)
|
|
$
|
0.56
|
|
|
$
|
2.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common and common equivalent shares outstanding -
diluted
|
|
|
6,510
|
|
|
|
6,416
|
|
|
|
6,376
|
|
Impact of
the PCA Purchase Price Allocation
The
purchase price of the PCA Acquisition was allocated based on fair value of the
specific tangible and intangible assets acquired and liabilities assumed at the
time of the acquisition pursuant to a valuation. The excess of the total
purchase price over the fair value of the assets acquired and liabilities
assumed at closing was recorded as goodwill, which is subject to an annual
impairment review. The Company completed its assessment of the acquisition and
the allocation of the purchase price in the second quarter of fiscal year
2008. The purchase accounting adjustments that had a material impact
on the Company’s financial position and results of operations
included:
Deferred
Revenue and Undelivered Receivables
Prior to
the acquisition, the deferred revenue related to the PCA Acquisition was $10.0
million. The purchase accounting adjustment to reflect the deferred revenue
balance at its fair value was $9.0 million, which resulted in a beginning
deferred revenue balance related to the PCA Acquisition on June 8, 2007, of
$964,000. This adjustment had the effect of reducing revenue in
periods subsequent to the acquisition. This adjustment had no impact on results
for fiscal year 2008 but resulted in lower total revenue of $8.2 million
for the period June 8, 2007, through February 2, 2008. This reduction
in revenue resulted in corresponding reductions to gross profit, operating
income and income before taxes of $7.8 million, $3.4 million and $3.4 million,
respectively.
Depreciation
As a
result of the purchase accounting associated with the PCA Acquisition, fixed
assets were recorded at approximately $35.0 million. The initial annual
depreciation for the acquired PCA fixed assets was approximately $17.8
million.
Amortization
of Acquired Intangible Assets
As a
result of the purchase accounting associated with the PCA Acquisition, $46.8
million was allocated to intangible assets related to the host agreement with
Wal-Mart ($43.7 million) and the customer list ($3.1
million). The host agreement with Wal-Mart and the customer
list are being amortized over their useful lives. This results in
higher expense in depreciation and amortization expense relative to intangible
assets. The initial annual amortization was approximately $3.8
million. Additionally, $21.2 million was allocated to goodwill, which
is a non-amortizing asset.
Acquisition
Related Interest Expense
To fund
the PCA Acquisition, the Company entered into the Second Amended and Restated
Credit Agreement, which provides for a $115.0 million term loan and a $40.0
million revolving credit facility. Outstanding long-term debt at the
date of the PCA Acquisition increased from $16.7 million to $115.0
million. This refinancing resulted in higher interest expense when
compared to the Company’s historical financial statements prior to the
acquisition.
2008 versus 2007 and 2007
versus 2006
Unless otherwise noted, the fiscal year 2008 results include the
53-weeks ended February 7, 2009, compared to 52-weeks in fiscal years 2007 and
2006, which ended February 2, 2008, and February 3, 2007, respectively.
Net sales totaled $462.5 million, $423.4 million and $293.0
million in 2008, 2007 and 2006, respectively.
·
|
Net
sales for 2008 increased $39.1 million, or 9%, to $462.5 million from the
$423.4 million reported in 2007 as a result of the inclusion of the full
53 weeks of PMPS operations in 2008 compared with only the 34-week period
of ownership in 2007. The additional operating week in
2008 resulted in appriximately $7.0 million of net sales but did not
materially impact net income or net income per diluted share.
Declining foreign currency exchange rates had a significant negative
impact of approximately $4.6 million on fiscal 2008 net sales, however,
did not materially affect net income before
tax.
|
Net sales
from the Company’s Sears Portrait Studio brand ("SPS") decreased $32.3
million, or 12%, to $242.4 million in fiscal 2008 from the $274.7 million
reported in fiscal 2007. The fiscal 2008 SPS net sales performance
was the result of a 7% decline in sittings and a 5% decline in average sale per
customer sitting. The sittings results reflect continued declines in
visit frequency among existing customers mitigated in part by relatively strong
trends in new customer acquisition and increasing loyalty plan
conversion. The average sale decline reflects a shift toward
low-price package offers and lower conversion of higher priced collection and
specialty product sales. Additionally, the unfavorable foreign exchange
rates in fiscal 2008 impacted net sales by approximately $1.1
million.
Net sales
related to the Company’s PictureMe Portrait Studio
®
("PMPS") brand
increased $71.4 million, or 48%, in fiscal 2008 to $220.1 million from $148.7
million reported in fiscal 2007 due to the additional 19 weeks’ sales included
in fiscal 2008 and the fact that a purchase accounting adjustment related to
deferred revenue at the date of acquisition resulted in a one-time decrease in
net sales of $8.2 million in fiscal 2007. On a comparable same-store
basis, PMPS net sales for fiscal 2008 represent an approximate 8% decrease
in net sales versus the comparable period of the prior year (net
sales from the period February 4, 2007, to June 8, 2007, are not reported
in the Company’s historical results). This sales performance resulted
from an approximate 20% decrease in sittings, offset in part by an approximate
15% increase in average sale per customer sitting. The Company
believes the sittings decline reflects the difficult economic environment, which
has especially pressured customer demand in lower income
categories. The Company attributes the increase in average sale per
customer sitting primarily to customers’ positive response to the new offerings
made possible by the recently instituted digital conversion and the
implementation of new sales and performance management processes.
Additoinally, the unfavorable foreign exchange rates in fiscal 2008 impacted net
sales by approximately $3.5 million.
·
|
Net
sales for 2007 increased $130.4 million, or 45%, to $423.4 million from
the $293.0 million reported in 2006 as a result of the inclusion of net
sales of $148.8 million attributable to the Company’s PMPS
brand. In accordance with purchase accounting guidelines,
PMPS’s deferred revenue balance at the June 8, 2007, date of acquisition
was reduced by a purchase accounting adjustment to record deferred revenue
at its fair value in the PictureMe Portrait Studio
®
beginning,
post-acquisition balance sheet. This purchase accounting
adjustment had the effect of reducing revenue in periods subsequent to the
acquisition for one year. The deferred revenue adjustment
resulted in a reduction in net sales of $8.2 million and an increased
pre-tax loss from operations of $3.4 million for fiscal
2007.
|
SPS net
sales for fiscal 2007 decreased $18.4 million or
6
%
to $274.6
million from the $293.0 million reported in fiscal 2006. The SPS sales
performance was the result of a 14% decline in sittings partially offset by a 9%
increase in average sale per customer sitting. The Sears Portrait
Studio brand is experiencing lower customer response to its direct marketing
programs and significantly reduced same-day business. PMPS reported
$148.8 million in sales for fiscal 2007 (for the period June 8, 2007 through
February 2, 2008).
Costs and
expenses were $463.6 million in 2008, compared with $408.7 million in 2007 and
$266.6 million in 2006.
·
|
Cost
of sales, excluding depreciation and amortization expense, was $41.2
million, $45.3 million and $28.6 million in 2008, 2007 and 2006,
respectively.
|
Cost of
sales, excluding depreciation and amortization expense, in 2008
declined from 2007 as a result of decreased production costs resulting from
lower overall manufacturing production levels, additional gains in manufacturing
productivity, savings on film and shipping costs that resulted directly from the
PMPS digital conversion, as well as decreased overhead costs as operations have
been further streamlined in connection with the PMPS acquisition and digital
conversion.
The
increase in cost of sales, excluding depreciation and amortization
expense, in 2007 as compared to 2006 is attributable to the inclusion
of the PMPS brand cost of sales from the June 8, 2007 date of
acquisition. This increase was partially offset by decreased
production costs resulting from lower overall manufacturing production levels,
additional gains in manufacturing productivity and an improved product
mix.
·
|
Selling,
general and administrative (“SG&A”) expenses were $379.4 million,
$328.4 million and $219.9 million for fiscal years 2008, 2007 and 2006,
respectively.
|
The
increase in 2008 SG&A costs is a result of the inclusion of the full 53
weeks of PMPS operations in 2008 compared with only the 34-week period of
ownership in 2007, a $5.4 million increase in digital training and travel costs
related to the conversion of PMPS studios incurred during the year and a
nonrecurring 2007 reduction of $3.9 million attributable to a change in the
Company’s vacation and sick pay policy. These increases are offset in
part by reductions in expense due to the elimination of duplicate costs,
streamlining of operations related to the PMPS brand; more effective cost
management, particularly in the areas of employment and insurance; reduced host
sales commissions due to lower sales; reduced marketing expense primarily due to
the timing of promotional programs for the busy season; and a one-time gain
recorded in relation to the settlement of certain supplemental employee
retirement plan payments.
The
increase in 2007 SG&A costs is attributable to the inclusion of the PMPS
brand costs from the June 8, 2007 date of acquisition. This increase
was partially offset by the net effect of lower studio and corporate employment
costs, reduced host sales commissions, reductions in various other operating
expense categories resulting from ongoing cost reduction efforts, increased
professional service costs, increased advertising spending and increased
restricted stock amortization expense associated with past performance
awards. The reduction in studio and employment costs included
approximately $3.9 million resulting from a change in the Company’s vacation and
sick pay policy announced in the first quarter of 2007.
·
|
Depreciation
and amortization was $29.4 million in 2008, compared to $27.3 million in
2007 and $16.9 million in 2006.
|
The
increase in 2008 is attributable to the equipment purchased for the digital
rollout. This increase is offset in part by a decline in depreciation
as a result of certain assets, acquired in connection both with the 2005 digital
conversion of SPS and the 2007 acquisition of PCA, becoming fully
depreciated.
The
increase in 2007 is attributable to the inclusion of PMPS depreciation and
amortization from the June 8, 2007 acquisition date and includes $2.8 million of
amortization resulting from the allocation of the purchase price to certain
amortizable intangible assets. The increase from the inclusion of the
PMPS depreciation and amortization was partially offset by a decline in
depreciation and amortization related to the Company’s non-PMPS
assets.
Other
charges and impairments reflect costs incurred from strategic actions
implemented by the Company to restructure its operations, costs that are
unpredictable and atypical of the Company’s operations and additional charges
due to asset impairments. Actions taken during 2008, 2007 and
2006 are as follows:
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Sears
fees related to settlement of the previous license agreement
(1)
|
|
$
|
7,527
|
|
|
$
|
2,500
|
|
|
$
|
-
|
|
Other
transition related costs - PCA Acquisition (2)
|
|
|
2,121
|
|
|
|
2,817
|
|
|
|
-
|
|
Reserves
for severance and related costs (3)
|
|
|
2,046
|
|
|
|
2,035
|
|
|
|
878
|
|
Impairment
charges (4)
|
|
|
739
|
|
|
|
256
|
|
|
|
179
|
|
Other
(5)
|
|
|
1,124
|
|
|
|
87
|
|
|
|
184
|
|
|
|
|
13,557
|
|
|
|
7,695
|
|
|
|
1,241
|
|
Recorded
as a component of other (expense) income following
income
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
guarantee reserve reduction (6)
|
|
|
-
|
|
|
|
-
|
|
|
|
887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Charges and Impairments
|
|
$
|
13,557
|
|
|
$
|
7,695
|
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists
of fees related to the settlement of the previous Sears license
agreement.
|
|
|
|
(2)
|
|
Other
transition related costs – PCA Acquisition
|
|
|
|
|
|
In
2008, costs related to the PCA Acquisition included transition-related
costs associated with combining the operations of PCA into the CPI
organization of $1.1 million and $866,000 related to litigation assumed
with the PCA Acquisition.
During
2007, in connection with the PCA Acquisition, the Company incurred
transition-related costs associated with combining the operations of PCA
into the CPI organization ($2.0 million), costs associated with the
closure of the Institutional business acquired from PCA ($265,000) and
costs associated with the transfer of contractual obligations from PCA to
CPI ($523,000).
|
|
|
|
(3)
|
|
Reserves
for severance and related costs
|
|
|
|
|
|
Charges
in 2008 and 2007 were $2.0 million in each year and principally related to
severance costs resulting from the termination of employees in connection
with the integration of operations of the PCA Acquisition into
CPI.
Charges
in 2006 were $878,000 and related principally to the separation of
employment of three executives, including the Company’s former
CEO.
|
|
|
|
(4)
|
|
Impairment
charges
|
|
|
|
|
|
During
2008, the Company incurred $739,000 primarily related to the write-down of
certain asset values held for sale.
During
2007, the Company incurred $256,000 in charges related to software
that is no longer used in the business.
During
2006, the Company incurred $179,000 in charges related to the write-off of
certain legacy equipment that is no longer used in the
business.
|
(5)
|
|
Other
|
|
|
|
|
|
Costs
in 2008 primarily include legal charges and a contract negotiation with a
director.
Costs
in 2007 related to one-time strategic studies and legal
charges.
The
Company began a process to explore strategic alternatives to enhance
shareholder value in 2006. Investment banking and legal
services in connection with this review totaled $184,000 in
2006.
|
|
|
|
(6)
|
|
Lease
guarantee reserve reduction
|
|
|
|
|
|
The
lease guarantee reserve reduction recorded in 2006 represents a partial
reversal of reserves initially recorded in 2004 related to operating lease
guarantees associated with the Company’s former Wall Décor segment, Prints
Plus. As the total guarantee related to these leases decreased
with the passage of time, the payment of rents by Prints Plus and the
settlement by the Company of certain leases rejected in bankruptcy, the
related liability was reduced to reflect management’s revised estimate of
remaining potential loss. This reserve is more fully discussed
in Note 16 in the accompanying Notes to Consolidated Financial
Statements.
|
Interest
expense was $9.1 million in 2008 compared to $10.7 million in 2007 and $2.4
million in 2006. The decrease in interest expense in 2008 compared to
2007 is primarily the result of an adjustment to the fair value of the interest
rate swap agreement that decreased interest expense by $2.3 million, offset in
part by an increase in higher average borrowings after the refinancing of the
Credit Agreement to fund the PCA Acquisition as discussed in Note 10 to the
Company's Consolidated Financial Statements included in this Annual Report on
Form 10-K. The increase in interest expense in 2007 is primarily
related to the higher average borrowings as discussed above, as well as the
charge of $2.9 million in interest expense in 2007 in connection with the
recording of the interest rate swap agreement to fair value.
Interest
income was $620,000 in 2008 as compared to $1.8 million in 2007 and $565,000 in
2006. The decrease in interest income in 2008 is primarily
attributable to lower invested balances in 2008 compared to 2007, the result of
higher capital spending in 2008 related to the digital conversion of
PictureMe Portrait Studio
®
. The
2007 increase is primarily attributable to higher invested balances in 2007 as
compared to 2006.
The
income tax (benefit) expense on (loss) income from continuing operations totaled
($2.6 million), $2.1 million and $9.2 million in 2008, 2007 and 2006,
respectively. These provisions resulted in effective tax rates of
(28%) in 2008, 34% in 2007 and 36% in 2006. The decrease in the
effective tax rate in 2008 is primarily attributable to the tax effect of WOTC
credits as a percent of pre-tax income and the exclusion of certain tax benefits
due to the current year loss. The decrease in the effective tax rate
in 2007 was primarily due to employment tax credits resulting from the PCA
Acquisition, as well as favorable settlements of two state tax audits and
refunds in 2007 related to previously paid penalties and interest in
2006.
Net
losses from discontinued operations were $961,000, $441,000 and $103,000 in
2008, 2007 and 2006, respectively. In 2008, the Company decided to
discontinue its Portrait Gallery and E-Church operations. In 2007, in
connection with the PCA Acquisition, the Company decided to sell the 5-portrait
studio operation in the United Kingdom (the “UK Operations”). These
decisions were made in order to eliminate the unprofitable
operations.
LIQUIDITY
AND CAPITAL RESOURCES
The
following table presents a summary of the Company’s cash flows for each of the
last three fiscal years:
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by:
|
|
|
|
|
|
|
|
|
|
Operating
activities (1)
|
|
$
|
11,847
|
|
|
$
|
39,466
|
|
|
$
|
37,950
|
|
Financing
activities
|
|
|
(13,419
|
)
|
|
|
90,788
|
|
|
|
(43,567
|
)
|
Investing
activities
|
|
|
(33,488
|
)
|
|
|
(97,653
|
)
|
|
|
(2,358
|
)
|
Effect
of exchange rate changes on cash
|
|
|
(452
|
)
|
|
|
282
|
|
|
|
-
|
|
Net
(decrease) increase in cash
|
|
$
|
(35,512
|
)
|
|
$
|
32,883
|
|
|
$
|
(7,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes
cash flows used in discontinued operations of $816,000, $406,000 and
$43,000 in 2008, 2007 and 2006,
respectively.
|
Net
Cash Provided By Operating Activities
Net cash
provided by operating activities was $11.8 million in 2008 as compared to $39.5
million and $38.0 million in 2007 and 2006, respectively. Cash
flows in 2008 decreased from 2007 levels primarily due to net operating losses
and the timing of payments related to changes in the various balance sheet
accounts totaling $26.7 million, $5.4 million for training and travel related to
the PMPS digital conversion, $4.3 million for fees incurred in connection with
the settlement of the previous Sears license agreement and $2.6 million related
to additional worker’s compensation premiums and claims paid primarily due to
the acquisition of PCA. These were offset in part by delays in
spending for advertising ($4.1 million), reductions in tax payments ($2.8
million), decreased payments for severance and integration-related costs
associated with the acquisition of PCA ($2.6 million) and a decrease in pension
payments ($1.9 million).
Cash
flows increased in 2007 primarily due to the timing of payments related to
changes in various balance sheet accounts and operating activities totaling
$16.4 million. This 2007 increase was largely offset by
increased spending for contributions to the pension plan ($5.0 million), higher
interest cost ($4.6 million), severance and integration-related costs associated
with the acquisition of PCA ($3.3 million), a lower level of tax refunds ($1.1
million) and increased tax payments ($881,000).
Net
Cash (Used In) Provided By Financing Activities
Net cash
(used in) provided by financing activities was ($13.4 million), $90.8 million
and ($43.6 million) in 2008, 2007 and 2006, respectively. The
increase in cash used in 2008 is primarily attributable to events from
2007. These include higher net long-term borrowings
of $106.5 million related to the PCA Acquisition and the release of
$1.0 million of restricted cash, offset in part by the payment of debt issuance
costs of $2.7 million.
The
increase in cash provided by financing activities in 2007 relates primarily to
increased net long-term borrowings of $99.1 million to fund the PCA Acquisition
and the Company’s purchase of 1,658,607 shares of stock and related costs
totaling $32.5 million on February 8, 2006, in conjunction with the Company’s
Dutch Auction self-tender offer. This was partially offset by the
payment of debt issuance costs of $2.7 million.
In
connection with the PCA Acquisition on June 8, 2007, the Company amended and
restated its Credit Agreement to a five-year term and revolving credit facility
in an amount up to $155 million, consisting of a $115 million term loan and a
$40 million revolving loan with a sub-facility for letters of credit in an
amount not to exceed $25 million. The obligations of the Company
under the Credit Agreement are secured by (i) a guaranty from certain material
direct and indirect domestic subsidiaries of the Company, and (ii) a lien on
substantially all of the assets of the Company and such
subsidiaries.
The term
loan under the Credit Agreement bears interest at the Company’s option, at
either a period-based London Interbank Offered Rate (“LIBOR”) plus a spread
ranging from 2.25% to 2.75%, or the Base Rate plus a spread ranging from 0.75%
to 1.25%. The Base Rate is determined from the greater of the prime
rate or the Federal Funds rate plus 0.50% (the “Base
Rate”). Revolving loans are priced at the Base Rate. The
Company is also required to pay a non-use fee of 0.25% to 0.50% per annum on the
unused portion of the revolving loans and letter of credit fees of 1.75% to
2.50% per annum. The interest rate spread in the case of LIBOR and
Base Rate loans and the payment of the non-use fees and the letter of credit
fees is dependent on the Company’s Ratio of Total Debt to EBITDA (as defined in
the Credit Agreement). Upon the occurrence and during the continuance
of a default, unless the required lenders otherwise consent, the interest on
obligations under the Credit Agreement will increase by two percent (2%) per
annum. Interest is payable quarterly in arrears or at the end of the
applicable LIBOR periods. Unless sooner repaid in whole or part
pursuant to the terms of the Credit Agreement, the outstanding principal balance
of the term loan is to be repaid in quarterly installments of $287,500 beginning
September 30, 2007, with a final payment being made on the maturity date
thereof. The agreement also includes mandatory prepayments based on
the Company’s levels of cash flow and certain transactions. The
mandatory prepayment based upon cash flow is calculated annually at the
conclusion of the fiscal year and is equal to 75% of excess cash flow (as
defined in the Credit Agreement). If the Ratio of Total Debt to
EBITDA is below 1.50 to 1.00 for any two consecutive fiscal years, such
percentage is reduced to 25% of excess cash flow.
The
Company incurred $2.7 million in issuance costs associated with this second
amended and restated agreement. The term loan portion of issuance
costs is being amortized using the effective interest method over the life of
the related debt. Fees associated with the revolving portion are
being amortized on a straight-line basis over the life of the revolving
commitment since there are no borrowings or repayments scheduled.
As part
of this Credit Agreement, the Company entered into an interest rate swap
agreement to manage the interest rate risk on $57.5 million of the term
loan. This swap agreement has not been designated as a hedge as it
has not been determined that it qualifies for cash flow hedge
accounting. As discussed above, payments under the term loan are
currently based on an applicable LIBOR period plus 2.75%. To
economically hedge the risk of increasing interest rates, the Company entered
into an interest rate swap that effectively converted three-month floating rate
LIBOR-based payments to a fixed rate of 4.97% plus the LIBOR-rate spread of
2.75%, resulting in a 7.72% interest rate. The contract expires in
September 2010. With LIBOR rates falling, the fixed rate loss related
to this agreement was $617,000 and $2.9 million at February 7, 2009, and
February 2, 2008, respectively, which is included in interest
expense.
The
Credit Agreement and other ancillary loan documents contain terms and provisions
(including representations, covenants and conditions) customary for transactions
of this type. The financial covenants include the maintenance of
minimum EBITDA (as defined in the Credit Agreement), a total leverage ratio test
(consolidated total debt to EBITDA) and an interest coverage
test. The Credit Agreement also contains customary events of
default.
The
proceeds of the term loan were used for working capital purposes and general
business purposes, for acquisitions permitted under the Credit Agreement
(including the acquisition of PCA (as defined in the Credit Agreement)), for
capital expenditures (including retail store expansions and conversion to
digital photography), to pay dividends and distributions on the Company’s
capital securities to the extent permitted thereunder, and to make purchases or
redemptions of the Company’s capital securities to the extent permitted
thereunder.
At
February 7, 2009, the Company had $105.7 million outstanding under the term loan
portion of its existing Credit Agreement. The Company was in
compliance with all the covenants under its Credit Agreement as of February 7,
2009.
Effective
April 16, 2009, the Company entered into the third amendment (the
"Amendment") to its Credit Agreement to change the interest rate structure
and amortization schedule and to replace preexisting minimum EBITDA and interest
coverage covenants with a fixed charge ratio test (i.e., EBITDA minus capital
expenditures to fixed charges) and tighten the leverage ratio test (i.e., Funded
Debt to EBITDA). These changes were made to allow for greater
flexibility in the event the economic climate worsens and has an impact on
the Company’s earnings.
Pursuant
to the Amendment, the term loan bears interest at the Company’s option, at
either a period-based London Interbank Offered Rate (“LIBOR”) plus a spread
ranging from 3.25% to 4.00%, or the Base Rate plus a spread ranging from 1.75%
to 2.50%. The Base Rate is determined from the greater of the prime
rate, the Federal Funds rate plus 0.50% or the LIBOR Rate plus 1.00% (the “Base
Rate”). Revolving loans are priced at the Base Rate. The
Company is also required to pay a non-use fee of 0.50% per annum on the unused
portion of the revolving loans and letter of credit fees of 3.25% to 4.00% per
annum. The interest rate spread in the case of LIBOR and Base Rate
loans and the payment of the non-use fees and the letter of credit fees is
dependent on the Company’s Ratio of Total Debt to EBITDA (as defined in the
Credit Agreement). If the Company fails to deliver required financial
statements and compliance certifications, all of the above interest rates reset
to the maximums indicated until five days following the date such statements and
certifications are submitted. The interest rates will not be reduced
if an event of default exists.
In
addition, under the Amendment, the mandatory payment schedule requires that
unless sooner repaid in whole or part pursuant to the terms of the Credit
Agreement, the outstanding principal balance of the term loan is to be repaid in
installments of $1.0 million on each of March 31, June 30 and September 30 and
$7.0 million on December 31 for all periods after the date of the Amendment,
with a final payment being made on the maturity date
thereof.
The
Company incurred $263,000 in issuance costs associated with this
Amendment, which will be amortized over the remainder of the life of the
loan in addition to fees that are currently being amortized.
We have
defined benefit and defined contribution pension plans, as described in Note 14
to the Notes to Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K. We fund these plans based on the minimum amounts
required by law plus such amounts we deem appropriate.
Net
Cash Used In Investing Activities
Net cash
used in investing activities was $33.5 million, $97.7 million and $2.4 million
in 2008, 2007 and 2006, respectively. The decrease in cash used in
2008 from 2007 was primarily due to the PCA Acquisition and related costs in
2007 totaling $83.0 million, as well as an additional $2.3 million received
related to the proceeds received and distribution of funds in excess of related
obligations from the Rabbi Trust, offset in part by an increase in capital
expenditures of $21.2 million primarily due to the PMPS digital
conversion.
The
increase in 2007 from 2006 was primarily attributable to the PCA Acquisition and
related costs in 2007 totaling $83.0 million as well as an increase
in capital expenditures in 2007 as compared to 2006 due to the PCA Acquisition,
the start of digital conversion in PictureMe Portrait Studio
®
and an investment
in certain assets to facilitate the transition resulting from the PCA
Acquisition.
Off-Balance
Sheet Arrangements
Other
than standby letters of credit primarily used to support our various large
deductible insurance programs and the ongoing guarantee of certain operating
real estate leases of Prints Plus, both of which are more fully discussed in the
“Other Commitments” table below, the Company has no additional off-balance sheet
arrangements.
Future
Cash Flows
To
facilitate an understanding of the Company’s contractual obligations and other
commitments, the table below is provided. The Company is self-insured
with stop-loss coverage for medical insurance and has a large deductible program
for worker’s compensation and general liability insurance. The
Company has established reserves for claims under these plans that have been
reported but not paid and incurred but not reported. As of February
7, 2009, estimated reserves for these claims totaled $13.4
million. These reserves have been excluded from the table below, as
we are uncertain as to the timing of when cash payments may be
required.
The table
also does not include our deferred income tax, interest rate swap and
rental and license host fee liabilities and accrued pension benefits
because the liabilitiets arenot currently estimable and/or it is not certain
when they will become due. The Company contributed $3.2 million
to its pension plan in 2008, and anticipates contributions of approximately $2.4
million in 2009, but actual amounts have not been determined. Future
contributions to the pension plan will be dependent upon legislation, future
changes in discount rates and the earnings performance of the plan
assets.
in
thousands
|
|
PAYMENTS
DUE BY PERIOD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
&
|
|
|
|
Total
|
|
|
2009
|
|
|
|
2010-11
|
|
|
|
2012-13
|
|
|
Beyond
|
|
Contractual
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (1)
|
|
$
|
105,728
|
|
|
$
|
9,288
|
|
|
$
|
20,000
|
|
|
$
|
76,440
|
|
|
$
|
-
|
|
Interest
expense (2)
|
|
|
17,116
|
|
|
|
6,585
|
|
|
|
9,356
|
|
|
|
1,175
|
|
|
|
-
|
|
Operating
leases
|
|
|
3,535
|
|
|
|
735
|
|
|
|
1,006
|
|
|
|
616
|
|
|
|
1,178
|
|
Purchase
obligations for
materials
and services (3)
|
|
|
2,451
|
|
|
|
2,252
|
|
|
|
199
|
|
|
|
-
|
|
|
|
-
|
|
Sears
Agreement settlement fees (4)
|
|
|
2,400
|
|
|
|
1,650
|
|
|
|
300
|
|
|
|
300
|
|
|
|
150
|
|
Other
liabilities (5)
|
|
|
1,383
|
|
|
|
1,315
|
|
|
|
44
|
|
|
|
12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
132,613
|
|
|
$
|
21,825
|
|
|
$
|
30,905
|
|
|
$
|
78,543
|
|
|
$
|
1,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
thousands
|
|
AMOUNT
OF COMMITMENT EXPIRATION PER PERIOD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
&
|
|
|
|
Total
|
|
|
2009
|
|
|
|
2010-11
|
|
|
|
2012-13
|
|
|
Beyond
|
|
Other
commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby
letters of credit (6)
|
|
$
|
20,552
|
|
|
$
|
20,552
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Contingent
lease obligations (7)
|
|
|
730
|
|
|
|
280
|
|
|
|
120
|
|
|
|
268
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
21,282
|
|
|
$
|
20,832
|
|
|
$
|
120
|
|
|
$
|
268
|
|
|
$
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The
long-term debt agreement includes mandatory prepayments based on the
Company’s levels of cash flow and certain transactions; these amounts for
future years are not incorporated since they are not currently
estimable. The future payments incorporate the revised
principal repayments under the Credit Agreement amendment, effective April
16, 2009. The Company, in connection with it Credit Agreement, plans
to use the cash proceeds, if any, from the sale of certain properties, as
described more fully in Note 7 to the Notes to Consolidated Financial
Statements, to pay down its long-term debt.
|
|
|
|
(2)
|
|
Amounts
represent the expected cash payments of the Company’s interest expense on
its long-term debt, calculated based on the rates included in the Credit
Agreement amendment, effective April 16, 2009.
|
|
|
|
(3)
|
|
Amount
represents outstanding purchase commitments at February 7,
2009. The purchase commitments relate principally to
photographic paper, manufacturing supplies, telecommunication services,
database maintenance contracts and marketing
initiatives.
|
|
|
|
(4)
|
|
The
Company is obligated to remit to Sears additional payments as stipulated
in the settlement of the previous license agreement. A $1.5
million payment is due to Sears on April 30, 2009, with an additional
$150,000 due on December 31 in each six successive years. These
amounts were recorded in other charges and impairments in
2008.
|
|
|
|
(5)
|
|
Amounts
consist primarily of accruals for severance and related costs, which are
recorded at the contractual amounts due.
The
Company expects to make a contribution of approximately $2.4 million to
the pension plan in 2009. The Critical Accounting Estimates
section and Note 14 to the Consolidated Financial Statements included
elsewhere in this Annual Report on Form-10-K, provide a more complete
description of the status of the Company’s pension
plan.
|
|
|
|
(6)
|
|
The
Company primarily uses standby letters of credit to collateralize its
various large deductible insurance programs. The letters of
credit generally have a one-year maturity and have auto renewal
clauses.
|
|
|
|
(7)
|
|
In
July 2001, the Company announced the completion of the sale of its Wall
Décor segment, Prints Plus, which included the ongoing guarantee of
certain operating real estate leases of Prints Plus. As of
February 7, 2009, the maximum future obligation to the Company under its
guarantee of remaining leases is approximately $1.0 million before
consideration of replacement tenant income. To recognize the
risk associated with these leases based upon the Company’s past experience
with renegotiating lease obligations and management’s evaluation of
remaining leases, all of which is more fully described in Note 16 to the
Consolidated Financial Statements, the Company has recorded lease
obligation reserves totaling approximately $730,000 at February 7, 2009.
Based on the status of remaining leases, the Company believes that the
$730,000 reserve is adequate to cover the potential losses to be realized
under the Company’s operating lease guarantees.
|
Liquidity
Cash
flows from operations, cash and cash equivalents and the seasonal borrowing
capacity under the revolving portion of the Company’s Credit Agreement,
represent expected sources of funds in 2009 to meet the Company’s obligations
and commitments, including debt service, annual dividends to shareholders,
planned capital expenditures, which are estimated not to exceed $5.0 million for
fiscal year 2009 and normal operating needs.
ACCOUNTING
PRONOUNCEMENTS AND POLICIES
Adoption
of New Accounting Standards
For
discussion on the adoption of new accounting standards, see Note 2, “Adoption of
New Accounting Standards,” in the accompanying Notes to Consolidated Financial
Statements.
Application
of Critical Accounting Policies
The
application of certain of the accounting policies utilized by the
Company requires significant judgments or a complex estimation process
that can affect the results of operations and financial position of the Company,
as well as the related footnote disclosures. The Company bases its
estimates on historical experience and other assumptions that it believes are
reasonable. If actual amounts are ultimately different from previous
estimates, the revisions are included in the Company’s results of operations for
the period in which the actual amounts become known. The Company’s
significant accounting policies are discussed in Note 1 to the Consolidated
Financial Statements; critical estimates inherent in these accounting policies
are discussed in the following paragraphs.
Business
Combinations
In
accordance with SFAS No. 141, “Business Combinations,” the Company allocates the
purchase price of acquired companies to the tangible and intangible assets
acquired and liabilities assumed based on their fair values. Valuations are
performed to assist in determining the fair values of assets acquired and
liabilities assumed, which requires management to make significant estimates and
assumptions, especially with respect to intangible assets. Management
makes estimates of fair value based upon assumptions believed to be
reasonable. These estimates are based on historical experience and
information obtained from management of the acquired
companies. Critical estimates in valuing certain of the intangible
assets include but are not limited to: future expected cash flows from portrait
sales, anticipated customer demand, the acquired company's brand awareness and
market position, the expected useful economic life of underlying agreements, as
well as assumptions about the period of time the acquired brand will continue to
be used in the combined company's product portfolio, and discount
rates.
Long-Lived Asset Recoverability
In
accordance with Statement of Financial Accounts Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived
assets, primarily property and equipment, are tested for recoverability whenever
events or changes in circumstances indicate that their carrying amount may not
be recoverable. The SFAS No. 144 impairment test is a two-step
process. If the carrying value of asset exceeds the expected future
cash flows (undiscounted and without interest) from the asset, impairment is
indicated. The impairment loss recognized is the excess of the
carrying value of the asset over its fair value less cost to sell. As
of February 7, 2009, the carrying values of certain assets held for sale
exceeded their fair values less costs to sell. As such, the Company
recorded a $627,000 charge in other charges and impairments in the 2008
Consolidated Statement of Operations to reduce the asset carrying values to
their fair values less costs to sell. See Note 7 in the
accompanying Notes to Consolidated Financial Statements.
Recoverability of Goodwill
and Acquired Intangible Assets
The
Company accounts for goodwill under SFAS No. 142, “Goodwill and Other Intangible
Assets,” which requires the Company to review goodwill for impairment on an
annual basis, and between annual tests whenever events or changes in
circumstances indicate the carrying amount may not be
recoverable. SFAS No. 142 prescribes a two-phase process for
impairment testing of goodwill. The first phase is a screen for
impairment, which compares the reporting units' estimated fair
value to their carrying values. If the carrying value
exceeds the estimated fair value in the first phase, the second phase is
performed in which the Company’s goodwill is written down to its implied fair
value, which the Company would determine based upon a number of factors,
including operating results, business plans and anticipated future cash
flows.
The
Company performs its annual impairment test at the end of its second quarter, or
more frequently if circumstances indicate the potential for
impairment. The Company completed its annual impairment test of
goodwill during the second quarter of 2008 and concluded that no
write-downs or impairment charges were required at that time.
As of
February 7, 2009, the end of the Company’s fiscal year 2008, the Company
considered possible impairment triggering events, including its market
capitalization relative to the carrying value of its net assets, as well as
other relevant factors, and concluded that no goodwill impairment
was indicated at that date, and therefore no impairment test was necessary
in the fourth quarter. The Company will continue to assess the
recoverability of the carrying value of goodwill on a quarterly basis to
determine if circumstances exist which indicate the carrying value may not be
recoverable. If there are indications at these dates that goodwill is
impaired, the Company will perform a fair value analysis of its goodwill in
accordance with its policy. If the Company were required to write-down its
goodwill, the resulting non-cash impairment charge could be significant, which
would adversely affect the Company’s financial position and results of
operations.
The
Company reviews its intangible assets with definite useful lives under SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which
requires the Company to review for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Recoverability of intangible assets with definite useful
lives is measured by a comparison of the carrying amount of the asset to the
estimated future undiscounted cash flows expected to be generated by such
assets. If such assets are considered to be impaired, the impairment
is measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets, which is determined on the basis of discounted cash
flows.
As a
result of the continuing challenging economic and consumer retail environment,
the Company’s management, in connection with the preparation of its 2008
year-end financial statements, conducted a sensitivity analysis relating to the
fair value of the Company’s intangible assets with definite useful lives and
concluded no impairment was indicated. It is possible that changes in
circumstances, existing at that time or at other times in the future, or in the
assumptions and estimates, including historical and projected cash flow data,
utilized by the Company in its evaluation of the recoverability of its
intangible assets with definite useful lives, could require the Company to
write-down its intangible assets and record a non-cash impairment charge, which
could be significant, and would adversely affect the Company’s financial
position and results of operations.
Self-insurance
Reserves
The
Company is self-insured with stop-loss coverage for medical insurance and has a
large deductible program for worker’s compensation and general liability
insurance. The Company has established reserves for claims under
these plans that have been reported but not paid and incurred but not
reported. These reserves are based upon the Company’s estimates of
the aggregate liability for uninsured claims incurred using actuarial
assumptions followed in the insurance industry and the Company’s historical
experience. Loss estimates are adjusted based upon actual claims
settlements and reported claims.
Income
Taxes
The
Company provides deferred income tax assets and liabilities based on the
estimated future tax effects of operating losses and tax credit carryforwards,
as well as the differences between the financial and tax bases of assets and
liabilities based on currently enacted tax laws. Deferred tax assets
and liabilities are measured using the enacted tax rates expected to apply in
the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The tax balances and income tax (benefit) expense recognized by
the Company are based on management’s interpretation of the tax laws of multiple
jurisdictions. Income tax (benefit) expense also reflects the
Company’s best estimates and assumptions regarding, among other things, the
level of future taxable income, interpretation of the tax laws, and tax
planning. The Company assesses temporary differences that result from
differing treatments of certain items for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities, which are shown on our consolidated balance sheet. The
Company must assess the likelihood that deferred tax assets will be
realized. To the extent the Company believes that realization is not
likely, a valuation allowance is established. When a valuation
allowance is established or increased in an accounting period, a corresponding
tax expense is recorded in our consolidated statement of
operations.
Defined Benefit Retirement
Plans
The plan
obligations and related assets of defined benefit retirement plans are presented
in Note 14 in the accompanying Notes to Consolidated Financial Statements. Plan
assets, which consist primarily of marketable equity and debt instruments, are
valued using market quotations. Plan obligations and the annual pension expense
are determined by independent actuaries and through the use of a number of
assumptions. Key assumptions in measuring the plan obligations include the
discount rate, the rate of salary increases and the estimated future return on
plan assets. In determining the discount rate, the Company utilizes the yield on
high-quality, fixed-income investments currently available with maturities
corresponding to the anticipated timing of the benefit payments. Salary increase
assumptions are based upon historical experience and anticipated future
management actions. Asset returns are based upon the anticipated average rate of
earnings expected on the invested funds of the plans. Actuarial
assumptions used in the Company’s plans at February 7, 2009, are included in
Note 14 in the accompanying Notes to Consolidated Financial
Statements. Effective February 20, 2009, the Company implemented a
freeze of future benefit accruals related to its pension plan for the remaining
grandfathered participants.
During
2008, the Company settled its liabilities related to its noncontributing defined
benefit plan through lump-sum settlements with two employees and one other
participant.
See further discussion in Note 14 in the
accompanying Notes to Consolidated Financial Statements.
The
Company has made certain other estimates that, while not involving the same
degree of judgment, are important to understanding the Company’s financial
statements. These estimates are in the areas of establishing reserves or
accruals in connection with restructuring or other business changes and with
respect to the Company’s operating lease guarantees related to its former Wall
Décor segment. On an ongoing basis, management evaluates its estimates and
judgements in these areas based on its substantial historical experience and
other relevant factors. Management’s estimates as of the date of the financial
statements reflect its best judgement giving consideration to all currently
available facts and circumstances. As such, these estimates may require
adjustment in the future, as additional facts become known or as circumstances
change.
The
Company’s management has discussed the development and selection of these
critical accounting policies with the Audit Committee of the Company’s Board of
Directors and the Audit Committee has reviewed the Company’s disclosure relating
to it in this Management Discussion and Analysis of Financial Condition and
Results of Operations.
Item 7A.
|
Quantitative and Qualitative Disclosure About Market
Risk
|
Market
risks relating to the Company’s operations result primarily from changes in
interest rates in foreign exchange rates.
At
February 7, 2009, all of the Company’s debt obligations have floating interest
rates, however, the swap agreement discussed below has effectively fixed the
rate on $57.5 million of the debt. The impact of a 1% change in
interest rates affecting the Company’s debt would be minimal and would increase
or decrease interest expense by approximately $482,000.
The
Company’s net assets, net earnings and cash flows from its Canadian and Mexican
operations are based on the U.S. dollar equivalent of such amounts measured in
the respective country’s functional currency. Assets and liabilities
are translated to U.S. dollars using the applicable exchange rates as of the end
of a reporting period. Revenues, expenses and cash flows are
translated using the average exchange rate during each period. The
Company’s Canadian operations constitute 12% of the Company’s total assets and
12% of the Company’s total sales as of and for the year ended February 7,
2009. A hypothetical 10% unfavorable change in the Canadian-to-U.S.
dollar exchange rate would cause an approximate $518,000 decrease to the
Company’s net asset balance and could materially adversely affect its revenues,
expenses and cash flows. The Company’s exposure to changes in foreign
exchange rates relative to the Mexican operations is minimal, as Mexican
operations constitute only 1% of the Company’s total assets and 2% of the
Company’s total sales as of and for the year ended February 7,
2009.
The
Company has an interest rate swap to reduce exposure to market risk from changes
in interest rates by swapping an unknown variable interest rate for a fixed
rate. This swap agreement has not been designated as a hedge as it
has been determined that it does not qualify for hedge accounting
treatment. The principal objective of this contract is to minimize
the risks and/or costs associated with the Company’s variable rate
debt. Gains and losses are recognized in the statement of operations
as interest expense throughout the interest period. The Company is
exposed to credit-related losses in the event of nonperformance by the
counterparty to this financial instrument; however, the counterparty to this
agreement is a major financial institution, and the risk of loss due to
nonperformance is considered by management to be minimal. The Company
does not hold or issue interest rate swaps for trading purposes. The
following is a summary of the economic terms of the agreement at February 7,
2009:
Notional
amount
|
|
$57,500,000
|
Fixed rate
paid
|
|
4.97%
|
Variable rate
received
|
|
3.25%
|
Effective
date
|
|
September 19,
2007
|
Expiration
date
|
|
September 17,
2010
|
Item 8.
|
Financial
Statements and Supplementary Data
|
(a)
|
FINANCIAL
STATEMENTS
|
|
PAGES
|
|
|
|
|
-
|
|
Report
of Independent Registered Public Accounting Firm
|
|
30
|
|
-
|
|
Consolidated
Balance Sheets as of February 7, 2009 and February 2, 2008
|
|
31-32
|
|
-
|
|
Consolidated
Statements of Operations for the fiscal years ended
|
|
|
|
|
February
7, 2009, February 2, 2008 and February 3, 2007
|
|
33
|
|
-
|
|
Consolidated
Statements of Changes in Stockholders' Equity
|
|
|
|
|
for
the fiscal years ended February 7, 2009, February 2, 2008 and February 3,
2007
|
|
34
|
|
-
|
|
Consolidated
Statements of Cash Flows for the fiscal years ended February 7,
2009,
|
|
|
|
|
February
2, 2008 and February 3, 2007
|
|
35-37
|
|
-
|
|
Notes
to Consolidated Financial Statements
|
|
38-70
|
The
Company's fiscal year ends the first Saturday of
February. Accordingly, fiscal year 2008 ended February 7, 2009, and
consisted of 53 weeks and fiscal years 2007 and 2006 ended February 2, 2008, and
February 3, 2007, respectively, and consisted of 52 weeks. Throughout the
"Financial Statements and Supplemental Data" section, references to 2008, 2007
or 2006 represent the fiscal years ended February 7, 2009, February 2, 2008, and
February 3, 2007, respectively.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
CPI
Corp.:
We have
audited the accompanying consolidated balance sheets of CPI Corp. and
subsidiaries (the Company) as of February 7, 2009 and February 2, 2008, and the
related consolidated statements of operations, changes in stockholders’ equity
and cash flows for each of the years in the three-year period ended February 7,
2009. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of CPI Corp. and subsidiaries
as of February 7, 2009 and February 2, 2008, and the results of their operations
and their cash flows for each of the years in the three-year period ended
February 7, 2009, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), CPI Corp. and subsidiaries’ internal control
over financial reporting as of February 7, 2009, based on criteria established
in
Internal Control –
Integrated Framework
issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated April 21, 2009 expressed
an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting.
/s/ KPMG
LLP
_________________________________
KPMG
LLP
St.
Louis, Missouri
April 21,
2009
CPI
CORP.
Consolidated
Balance Sheets – Assets
in
thousands
|
|
February
7, 2009
|
|
|
February
2, 2008
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
23,665
|
|
|
$
|
59,177
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
|
Trade
|
|
|
6,050
|
|
|
|
7,469
|
|
Other
|
|
|
923
|
|
|
|
4,030
|
|
Inventories
|
|
|
8,489
|
|
|
|
14,296
|
|
Prepaid
expenses and other current assets
|
|
|
5,800
|
|
|
|
5,174
|
|
Refundable
income taxes
|
|
|
357
|
|
|
|
-
|
|
Deferred
tax assets
|
|
|
9,581
|
|
|
|
2,673
|
|
Assets
held for sale
|
|
|
6,615
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
61,480
|
|
|
|
92,835
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
3,249
|
|
|
|
5,065
|
|
Building
and building improvements
|
|
|
32,377
|
|
|
|
34,666
|
|
Leasehold
improvements
|
|
|
4,406
|
|
|
|
5,426
|
|
Photographic,
sales and manufacturing equipment
|
|
|
178,732
|
|
|
|
166,404
|
|
Total
|
|
|
218,764
|
|
|
|
211,561
|
|
Less
accumulated depreciation and amortization
|
|
|
167,877
|
|
|
|
155,281
|
|
Property
and equipment, net
|
|
|
50,887
|
|
|
|
56,280
|
|
Other
investments - supplemental retirement plan
|
|
|
975
|
|
|
|
3,508
|
|
Goodwill
|
|
|
21,459
|
|
|
|
18,049
|
|
Intangible
assets, net
|
|
|
40,206
|
|
|
|
44,907
|
|
Deferred
tax assets
|
|
|
8,359
|
|
|
|
14,439
|
|
Other
assets
|
|
|
7,227
|
|
|
|
6,499
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
190,593
|
|
|
$
|
236,517
|
|
|
|
|
|
|
|
|
|
|
See
accompanying footnotes to the consolidated financial statements.
CPI
CORP.
Consolidated
Balance Sheets - Liabilities and Stockholders’ Equity
in
thousands, except share and per share data
|
|
February
7, 2009
|
|
|
February
2, 2008
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
1,150
|
|
|
$
|
8,697
|
|
Accounts
payable
|
|
|
6,816
|
|
|
|
14,369
|
|
Accrued
employment costs
|
|
|
10,146
|
|
|
|
10,330
|
|
Customer
deposit liability
|
|
|
12,503
|
|
|
|
21,255
|
|
Income
taxes payable
|
|
|
-
|
|
|
|
387
|
|
Sales
taxes payable
|
|
|
5,284
|
|
|
|
4,884
|
|
Accrued
advertising expenses
|
|
|
978
|
|
|
|
1,266
|
|
Accrued
expenses and other liabilities
|
|
|
18,133
|
|
|
|
21,863
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
55,010
|
|
|
|
83,051
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
102,316
|
|
|
|
103,022
|
|
Accrued
pension plan obligations
|
|
|
10,591
|
|
|
|
10,490
|
|
Supplemental
retirement plan obligations
|
|
|
1,112
|
|
|
|
3,437
|
|
Other
liabilities
|
|
|
20,729
|
|
|
|
19,543
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
189,758
|
|
|
|
219,543
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock, no par value, 1,000,000 shares authorized; no shares
outstanding
|
|
|
-
|
|
|
|
-
|
|
Preferred
stock, Series A, no par value, 200,000 shares authorized;
no
shares outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $.40 par value, 50,000,000 shares authorized; 17,089,788 and
17,028,315
|
|
|
|
|
|
|
|
|
shares
outstanding at February 7, 2009, and February 2, 2008,
respectively
|
|
|
6,836
|
|
|
|
6,811
|
|
Additional
paid-in capital
|
|
|
28,502
|
|
|
|
27,872
|
|
Retained
earnings
|
|
|
210,615
|
|
|
|
222,435
|
|
Accumulated
other comprehensive loss
|
|
|
(13,114
|
)
|
|
|
(6,725
|
)
|
|
|
|
232,839
|
|
|
|
250,393
|
|
Treasury
stock - at cost, 10,270,319 and 10,619,728 shares
at
|
|
|
|
|
|
|
|
|
February
7, 2009, and February 2, 2008, respectively
|
|
|
(232,004
|
)
|
|
|
(233,419
|
)
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
835
|
|
|
|
16,974
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
190,593
|
|
|
$
|
236,517
|
|
|
|
|
|
|
|
|
|
|
See
accompanying footnotes to the consolidated financial statements.
CPI
CORP.
Consolidated
Statements of Operations
Fifty-three
weeks ended February 7, 2009, and Fifty-two weeks ended February 2, 2008, and
February 3, 2007
in
thousands, except share and per share data
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
462,548
|
|
|
$
|
423,429
|
|
|
$
|
292,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (exclusive of depreciation and amortization shown
below)
|
|
|
41,218
|
|
|
|
45,284
|
|
|
|
28,582
|
|
Selling, general and administrative expenses
|
|
|
379,372
|
|
|
|
328,419
|
|
|
|
219,911
|
|
Depreciation and amortization
|
|
|
29,432
|
|
|
|
27,291
|
|
|
|
16,861
|
|
Other charges and impairments
|
|
|
13,557
|
|
|
|
7,695
|
|
|
|
1,241
|
|
|
|
|
463,579
|
|
|
|
408,689
|
|
|
|
266,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
|
(1,031
|
)
|
|
|
14,740
|
|
|
|
26,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
9,147
|
|
|
|
10,652
|
|
|
|
2,380
|
|
Interest
income
|
|
|
620
|
|
|
|
1,834
|
|
|
|
565
|
|
Recovery
of preferred security interest
|
|
|
-
|
|
|
|
-
|
|
|
|
887
|
|
Other
income, net
|
|
|
190
|
|
|
|
175
|
|
|
|
144
|
|
(Loss)
income from continuing operations before income tax (benefit)
expense
|
|
|
(9,368
|
)
|
|
|
6,097
|
|
|
|
25,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) expense
|
|
|
(2,644
|
)
|
|
|
2,080
|
|
|
|
9,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income from continuing operations
|
|
|
(6,724
|
)
|
|
|
4,017
|
|
|
|
16,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations, net of income tax
benefit
|
|
|
(961
|
)
|
|
|
(441
|
)
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME
|
|
$
|
(7,685
|
)
|
|
$
|
3,576
|
|
|
$
|
16,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share from continuing operations -
diluted
|
|
$
|
(1.03
|
)
|
|
$
|
0.63
|
|
|
$
|
2.58
|
|
Net
loss per share from discontinued operations - diluted
|
|
|
(0.15
|
)
|
|
|
(0.07
|
)
|
|
|
(0.02
|
)
|
Net
(loss) income per share - diluted
|
|
$
|
(1.18
|
)
|
|
$
|
0.56
|
|
|
$
|
2.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share from continuing operations - basic
|
|
$
|
(1.03
|
)
|
|
$
|
0.63
|
|
|
$
|
2.59
|
|
Net
loss per share from discontinued operations - basic
|
|
|
(0.15
|
)
|
|
|
(0.07
|
)
|
|
|
(0.02
|
)
|
Net
(loss) income per share - basic
|
|
$
|
(1.18
|
)
|
|
$
|
0.56
|
|
|
$
|
2.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per share
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common and common equivalent
|
|
|
|
|
|
|
|
|
|
|
|
|
shares outstanding-diluted
|
|
|
6,509,840
|
|
|
|
6,415,706
|
|
|
|
6,375,709
|
|
Weighted
average number of common and common equivalent
|
|
|
|
|
|
|
|
|
|
|
|
|
shares outstanding-basic
|
|
|
6,509,840
|
|
|
|
6,390,961
|
|
|
|
6,352,975
|
|
See
accompanying footnotes to the consolidated financial statements.
CPI
CORP.
Consolidated
Statements of Changes in Stockholders' Equity
Fifty-three
weeks ended February 7, 2009, and Fifty-two weeks ended February 2, 2008 and
February 3, 2007
in
thousands, except share and per share data
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
Treasury
|
|
|
compensation
-
|
|
|
|
|
|
|
Common
|
|
|
paid-in
|
|
|
Retained
|
|
|
comprehensive
|
|
|
stock,
|
|
|
restricted
|
|
|
|
|
|
|
stock
|
|
|
capital
|
|
|
earnings
|
|
|
income
(loss)
|
|
|
at
cost
|
|
|
stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at February 4, 2006
|
|
$
|
7,428
|
|
|
$
|
55,588
|
|
|
$
|
210,666
|
|
|
$
|
(11,171
|
)
|
|
$
|
(233,541
|
)
|
|
$
|
(377
|
)
|
|
$
|
28,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
16,327
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,327
|
|
Total
other comprehensive income, net of tax effect
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,128
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,128
|
|
Total
comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,455
|
|
Adoption
of SFAS 158, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(344
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(344
|
)
|
Surrender
of employee shares to satisfy personal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
liabilities upon vesting of formerly restricted shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(97
|
)
|
|
|
-
|
|
|
|
(97
|
)
|
Reclassification
of deferred compensation account
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
upon
adoption of SFAS 123R
|
|
|
-
|
|
|
|
(377
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
377
|
|
|
|
-
|
|
Purchase
of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,538
|
)
|
|
|
-
|
|
|
|
(32,538
|
)
|
Retirement
of 1,658,607 common shares acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through
Dutch Auction self-tender offer
|
|
|
(663
|
)
|
|
|
(31,875
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
32,538
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
of common stock to employee benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plans,
restricted stock awards, option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
option modification (90,414 shares)
|
|
|
25
|
|
|
|
494
|
|
|
|
-
|
|
|
|
-
|
|
|
|
581
|
|
|
|
-
|
|
|
|
1,100
|
|
Stock-based
compensation recognized
|
|
|
-
|
|
|
|
776
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
776
|
|
Excess
tax benefit related to stock-based compensation
|
|
|
-
|
|
|
|
904
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
904
|
|
Dividends
($0.64 per common share)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,050
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at February 3, 2007
|
|
$
|
6,790
|
|
|
$
|
25,510
|
|
|
$
|
222,943
|
|
|
$
|
(9,387
|
)
|
|
$
|
(233,057
|
)
|
|
$
|
-
|
|
|
$
|
12,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
3,576
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,576
|
|
Total
other comprehensive income, net of tax effect
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,662
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,662
|
|
Total
comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,238
|
|
Surrender
of employee shares to satisfy personal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
liabilities upon vesting of formerly restricted shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(551
|
)
|
|
|
-
|
|
|
|
(551
|
)
|
Issuance
of common stock to employee benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
restricted stock awards (61,606 shares)
|
|
|
21
|
|
|
|
237
|
|
|
|
-
|
|
|
|
-
|
|
|
|
189
|
|
|
|
-
|
|
|
|
447
|
|
Stock-based
compensation recognized
|
|
|
-
|
|
|
|
2,724
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,724
|
|
Decreased
tax benefit related to stock-based compensation
|
|
|
-
|
|
|
|
(599
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(599
|
)
|
Dividends
($0.64 per common share)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,084
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at February 2, 2008
|
|
$
|
6,811
|
|
|
$
|
27,872
|
|
|
$
|
222,435
|
|
|
$
|
(6,725
|
)
|
|
$
|
(233,419
|
)
|
|
$
|
-
|
|
|
$
|
16,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,685
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,685
|
)
|
Total
other comprehensive loss, net of tax effect
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,389
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,389
|
)
|
Total
comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,074
|
)
|
Surrender
of employee shares to satisfy personal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
liabilities upon vesting of formerly restricted shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(175
|
)
|
|
|
-
|
|
|
|
(175
|
)
|
Issuance
of common stock, net of forfeitures (419,478 shares)
|
|
|
25
|
|
|
|
(229
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,590
|
|
|
|
-
|
|
|
|
1,386
|
|
Stock-based
compensation recognized
|
|
|
-
|
|
|
|
1,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,037
|
|
Decreased
tax benefit related to stock-based compensation
|
|
|
-
|
|
|
|
(178
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(178
|
)
|
Dividends
($0.64 per common share)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,135
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at February 7, 2009
|
|
$
|
6,836
|
|
|
$
|
28,502
|
|
|
$
|
210,615
|
|
|
$
|
(13,114
|
)
|
|
$
|
(232,004
|
)
|
|
$
|
-
|
|
|
$
|
835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying footnotes to the consolidated financial statements.
CPI
CORP.
Consolidated
Statements of Cash Flows
Fifty-three
weeks ended February 7, 2009, and Fifty-two weeks ended February 2, 2008 and
February 3, 2007
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net (loss) income to cash flows provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(7,685
|
)
|
|
$
|
3,576
|
|
|
$
|
16,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
for items not requiring (providing) cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
29,432
|
|
|
|
27,291
|
|
|
|
16,861
|
|
Loss
from discontinued operations
|
|
|
961
|
|
|
|
441
|
|
|
|
103
|
|
Stock-based
compensation expense
|
|
|
1,037
|
|
|
|
2,724
|
|
|
|
776
|
|
Issuance
of common stock to Sears
|
|
|
865
|
|
|
|
-
|
|
|
|
-
|
|
Loss on impairment of property and equipment
|
|
|
739
|
|
|
|
-
|
|
|
|
-
|
|
Loss
on disposition of property and equipment
|
|
|
1,387
|
|
|
|
319
|
|
|
|
220
|
|
Deferred
income tax provision
|
|
|
(2,550
|
)
|
|
|
1,455
|
|
|
|
9,357
|
|
Pension,
supplemental retirement plan and profit sharing expense
|
|
|
505
|
|
|
|
2,009
|
|
|
|
2,337
|
|
Lease
guarantee reserve reduction
|
|
|
-
|
|
|
|
-
|
|
|
|
(887
|
)
|
Other
|
|
|
678
|
|
|
|
683
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash flow from operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
4,523
|
|
|
|
(1,987
|
)
|
|
|
436
|
|
Inventories
|
|
|
5,448
|
|
|
|
2,000
|
|
|
|
81
|
|
Prepaid
expenses and other current assets
|
|
|
(1,255
|
)
|
|
|
550
|
|
|
|
(636
|
)
|
Accounts
payable
|
|
|
(5,153
|
)
|
|
|
6,020
|
|
|
|
(555
|
)
|
Contribution
to pension plan
|
|
|
(3,157
|
)
|
|
|
(5,050
|
)
|
|
|
-
|
|
Supplemental
retirement plan payments
|
|
|
(1,283
|
)
|
|
|
(249
|
)
|
|
|
(283
|
)
|
Accrued
expenses and other liabilities
|
|
|
(4,365
|
)
|
|
|
(5,833
|
)
|
|
|
(2,003
|
)
|
Income
taxes payable
|
|
|
(708
|
)
|
|
|
(1,001
|
)
|
|
|
(373
|
)
|
Deferred
revenues and related costs
|
|
|
(7,720
|
)
|
|
|
2,655
|
|
|
|
(3,118
|
)
|
Other
|
|
|
964
|
|
|
|
4,269
|
|
|
|
(1,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by continuing operations
|
|
|
12,663
|
|
|
|
39,872
|
|
|
|
37,993
|
|
Cash
flows used in discontinued operations
|
|
|
(816
|
)
|
|
|
(406
|
)
|
|
|
(43
|
)
|
Cash
flows provided by operating activities
|
|
|
11,847
|
|
|
|
39,466
|
|
|
|
37,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying footnotes to the consolidated financial statements.
CPI
CORP.
Consolidated
Statements of Cash Flows (…continued)
Fifty-three
weeks ended February 7, 2009, and Fifty-two weeks ended February 2, 2008 and
February 3, 2007
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by operating activities
|
|
|
11,847
|
|
|
|
39,466
|
|
|
|
37,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows (used in) provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term obligations
|
|
|
(8,697
|
)
|
|
|
(17,241
|
)
|
|
|
(8,333
|
)
|
Proceeds from long-term borrowings
|
|
|
-
|
|
|
|
115,000
|
|
|
|
-
|
|
Payment of debt issuance costs
|
|
|
-
|
|
|
|
(2,737
|
)
|
|
|
-
|
|
Restricted cash - release compensating balance under Credit
Agreement
|
|
|
-
|
|
|
|
1,000
|
|
|
|
-
|
|
Purchase of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(32,538
|
)
|
Cash dividends
|
|
|
(4,135
|
)
|
|
|
(4,084
|
)
|
|
|
(4,050
|
)
|
Surrender of employee shares to satisfy personal tax liability upon
vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
of previously restricted stock
|
|
|
(175
|
)
|
|
|
(551
|
)
|
|
|
(97
|
)
|
Stock option exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
589
|
|
Tax (deficiency) benefit excess from stock-based
compensation
|
|
|
(178
|
)
|
|
|
(599
|
)
|
|
|
904
|
|
Other
|
|
|
(234
|
)
|
|
|
-
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by financing activities
|
|
|
(13,419
|
)
|
|
|
90,788
|
|
|
|
(43,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows (used in) provided by investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of certain net assets of Portrait Corporation of America,
Inc.,
|
|
|
|
|
|
|
|
|
|
|
|
|
net of cash and cash equivalents acquired
|
|
|
(52
|
)
|
|
|
(83,010
|
)
|
|
|
-
|
|
Additions to property and equipment
|
|
|
(36,074
|
)
|
|
|
(14,884
|
)
|
|
|
(2,760
|
)
|
Proceeds from Rabbi Trust used for supplemental retirement plan
payments
|
|
|
1,295
|
|
|
|
262
|
|
|
|
295
|
|
Distribution of Rabbi Trust funds in excess of related
obligations
|
|
|
1,311
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
32
|
|
|
|
(21
|
)
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
(33,488
|
)
|
|
|
(97,653
|
)
|
|
|
(2,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(452
|
)
|
|
|
282
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(35,512
|
)
|
|
|
32,883
|
|
|
|
(7,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
59,177
|
|
|
|
26,294
|
|
|
|
34,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
23,665
|
|
|
$
|
59,177
|
|
|
$
|
26,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying footnotes to the consolidated financial statements.
CPI
CORP.
Consolidated
Statements of Cash Flows (…continued)
Fifty-three
weeks ended February 7, 2009, and Fifty-two weeks ended February 2, 2008 and
February 3, 2007
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
7,969
|
|
|
$
|
6,509
|
|
|
$
|
2,224
|
|
Income
taxes paid, net
|
|
$
|
228
|
|
|
$
|
2,082
|
|
|
$
|
983
|
|
Supplemental
non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of treasury stock under the Employee Profit Sharing Plan
|
|
$
|
521
|
|
|
$
|
442
|
|
|
$
|
440
|
|
Issuance
of restricted stock and stock options to employees and
directors
|
|
$
|
876
|
|
|
$
|
2,690
|
|
|
$
|
785
|
|
Issuance
of common stock to Sears
|
|
$
|
865
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying footnotes to the consolidated financial statements.
CPI
CORP.
Notes
to Consolidated Financial Statements
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of Business
CPI Corp.
(the "Company") is a holding company engaged, through its wholly-owned
subsidiaries and partnerships, in selling and manufacturing professional
portrait photography of young children, individuals and families and offers
other related products and services.
The
Company operates 3,046 (unaudited) professional portrait studios as of February
7, 2009, throughout the U. S., Canada, Mexico and Puerto Rico principally under
license agreements with Sears, Roebuck and Co. (“Sears”) and lease and license
agreements with Wal-Mart Stores, Inc. (“Wal-Mart”). The Company also
operates searsphotos.com, a vehicle for the Company’s customers to archive,
share portraits via email and order additional portraits and products, and plans
to launch a similar website for PictureMe Portrait Studio
®
in
2009.
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation. Certain items in prior
years have been reclassified to conform to the current year
presentation.
Fiscal
Year
The
Company's fiscal year ends on the first Saturday of February. Unless
otherwise stated, references to years in this report relate to fiscal years
rather than to calendar years.
Fiscal
year
|
|
Ended
|
|
Weeks
|
2008
|
|
February
7, 2009
|
|
53
|
2007
|
|
February
2, 2008
|
|
52
|
2006
|
|
February
3, 2007
|
|
52
|
Business
Concentrations
Volume of
business – The Company’s customers are not concentrated in any specific
geographic region. Due to the widely dispersed nature of the
Company’s retail business across millions of customers, no single customer
accounts for a significant amount of the Company’s sales.
Revenues
– During 2008, 52% and 48% of the Company’s revenues were generated from sales
at Sears Portrait Studios, and PictureMe Portrait Studio
®
and Wal-Mart
Portrait Studios, respectively. In 2007, respective revenues were 65%
and 35%. These studios operate under agreements with Sears and
Wal-Mart in the U. S., Canada, Mexico and Puerto Rico that require the Company
to pay fees to host companies based on total annual net sales.
Sources
of supply – The Company purchases photographic paper and processing chemistry
from four major manufacturers. The Company purchases software for its
digital studios and its digital manufacturing system from a single
vendor. The Company purchases other equipment and materials for
all its operations from a number of suppliers and is not dependent upon any
other supplier for any specific kind of equipment or materials.
CPI
CORP.
Notes
to Consolidated Financial Statements
Foreign
operations – Included in the Company’s consolidated balance sheets at February
7, 2009, and February 2, 2008, are long-lived assets of $16.1 million and $25.0
million, respectively employed in the Company’s Canadian
operations. Net sales related to the Canadian operations were $54.6
million, $49.7 million and $24.1 million in fiscal 2008, 2007 and 2006,
respectively. Also included in the Company’s consolidated balance
sheet at February 7, 2009, are long-lived assets of $1.6 million and $3.1
million, respectively, employed in the Company’s Mexican
operations. Net sales related to the Company’s Mexican operations
were $10.1 million and $6.1 million in 2008 and 2007, respectively.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant
estimates include, but are not limited to, workers’ compensation and general
liability insurance reserves; employee health self-insurance reserves;
depreciation; recoverability of long-lived assets; establishing values for
identifiable intangible assets; establishing restructuring reserves, income tax
and other reserves and defined benefit retirement plan
assumptions. Actual results could differ from those
estimates.
Foreign
Currency Translations
Assets
and liabilities of foreign operations are translated into U.S. dollars at the
exchange rate in effect on the balance sheet date, while income and expense
accounts are translated at the average rates in effect during each period of the
fiscal year. Gains and losses on foreign currency translations are
included in the determination of accumulated other comprehensive (loss) income
for the year. These (losses) gains amounted to ($5.0 million), $2.5
million, and ($264,000) in 2008, 2007 and 2006, respectively.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. As of February 7, 2009, the
Company held all of its cash equivalents in a single money market
fund.
Accounts
Receivable
For all
studios operating within Sears, collections (cash, check and credit sales) are
deposited with Sears and subsequently remitted, net of commission, to CPI by
Sears. Sears’ remittances are reconciled to CPI receivables and any
differences are resolved and recorded as appropriate. There was no
allowance for doubtful accounts at February 7, 2009, and February 2, 2008, as
substantially all accounts receivable relate to amounts to be remitted by Sears,
and management has a high level of assurance of the collectibility of these
amounts.
For all
studios operating within Wal-Mart, collections are made directly by
CPI. There are no customer receivables since revenue is not recorded
until the delivery of a package which coincides with final
collection. Accordingly, no allowance for doubtful accounts is
required.
Inventories
Inventories
are stated at the lower of cost or market, with cost of all inventories being
determined by the first-in, first-out (FIFO) method. Material and
production costs incurred relating to portraits processed pending delivery to
customers, or in-process, are inventoried and expensed when the related sales
revenue is recognized.
CPI
CORP.
Notes
to Consolidated Financial Statements
Property
and Equipment
Property
and equipment is stated at cost less accumulated depreciation and
amortization.
Depreciation
and amortization on property and equipment is computed principally using the
straight-line method over estimated useful lives of the respective
assets. Photographic, sales and manufacturing equipment
purchased in the PCA Acquisition were assigned lives in accordance with their
remaining useful life. A summary of estimated useful lives is as
follows:
Building
and building improvements
|
|
15
to 19 years
|
Leasehold
improvements
|
|
5
to 15 years
|
Photographic,
sales and manufacturing equipment
|
|
2
to 7 years
|
In 2008,
a write-off of $1.7 million represents property and equipment taken out of
service in relation to completion of the digital conversion of PictureMe
Portrait Studio
®
. This
amount was recorded in the fourth quarter of 2008 and represented an
out-of-period immaterial correction of an error for the understatement of
depreciation expense of $563,000 in 2007 and $1.2 million in the first three
quarters of 2008. The $1.7 million was offset by a foreign currency impact
of $338,000.
Expenditures
for improvements are capitalized, while normal repair and maintenance costs are
charged to expense as incurred. When properties are disposed, the related cost
and accumulated depreciation are removed from the respective accounts and any
gain or loss is credited or charged to income.
In
accordance with Accounting Standards Executive Committee Statement of Position
(“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use”, photographic, sales and manufacturing equipment
includes amounts related to the capitalization of certain costs incurred in
connection with developing or obtaining software for internal use.
Business
Combinations
In
accordance with SFAS No. 141, “Business Combinations,” the Company allocates the
purchase price of acquired companies to the tangible and intangible assets
acquired and liabilities assumed based on their fair values. Valuations are
performed to assist in determining the fair values of assets acquired and
liabilities assumed, which requires management to make significant estimates and
assumptions, especially with respect to intangible assets. Management
makes estimates of fair value based upon assumptions believed to be
reasonable. These estimates are based on historical experience and
information obtained from management of the acquired
companies. Critical estimates in valuing certain of the intangible
assets include but are not limited to: future expected cash flows from portrait
sales, anticipated customer demand, the acquired company's brand awareness and
market position, the expected useful economic life of underlying agreements, as
well as assumptions about the period of time the acquired brand will continue to
be used in the combined company's product portfolio, and discount
rates.
Long-Lived
Asset Recoverability
In
accordance with Statement of Financial Accounts Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived
assets, primarily property and equipment, are tested for recoverability whenever
events or changes in circumstances indicate that their carrying amount may not
be recoverable. The SFAS No. 144 impairment test is a two-step
process. If the carrying value of asset exceeds the expected future
cash flows (undiscounted and without interest) from the asset, impairment is
indicated. The impairment loss recognized is the excess of the
carrying value of the asset over its fair value less costs to
sell. As of February 7, 2009, the carrying values of certain assets
held for sale exceeded their fair values less costs to sell. As such,
the Company recorded a $627,000 charge in other charges and impairments in the
2008 Consolidated Statement of Operations to reduce the asset carrying values to
their fair values less costs to sell. See Note 7 for further
details.
CPI
CORP.
Notes
to Consolidated Financial Statements
Recoverability
of Goodwill and Acquired Intangible Assets
The
Company accounts for goodwill under SFAS No. 142, “Goodwill and Other Intangible
Assets,” which requires the Company to test goodwill for impairment on an annual
basis, and between annual tests whenever events or changes in circumstances
indicate the carrying amount may not be recoverable. SFAS No. 142
prescribes a two-phase process for impairment testing of
goodwill. The first phase is a screen for impairment, which compares
the reporting units' estimated fair value to their carrying
values. If the carrying value exceeds the estimated fair value in the
first phase, the second phase is performed in which the Company’s goodwill is
written down to its implied fair value, which the Company would determine based
upon a number of factors, including operating results, business plans and
anticipated future cash flows.
The
Company performs its annual impairment test at the end of its second quarter, or
more frequently if circumstances indicate the potential for
impairment. The Company completed its annual impairment test of
goodwill during the second quarter of 2008 and concluded that no write-downs or
impairment charges were required at that time.
As of
February 7, 2009, the end of the Company’s fiscal year 2008, the Company
considered possible impairment triggering events, including its market
capitalization relative to the carrying value of its net assets, as well as
other relevant factors, and concluded that no goodwill impairment
was indicated at that date, and therefore no impairment test was necessary
in the fourth quarter. The Company will continue to assess the
recoverability of the carrying value of goodwill on a quarterly basis to
determine if circumstances exist which indicate the carrying value may not be
recoverable. If there are indications at those dates that goodwill is
impaired, the Company will perform a fair value analysis of its goodwill in
accordance with its policy. If the Company were required to write-down its
goodwill, the resulting non-cash impairment charge could be significant, which
would adversely affect the Company’s financial position and results of
operations.
The
Company reviews its intangible assets with definite useful lives under SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which
requires the Company to review for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Recoverability of intangible assets with definite useful
lives is measured by a comparison of the carrying amount of the asset to the
estimated future undiscounted cash flows expected to be generated by such
assets. If such assets are considered to be impaired, the impairment
is measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets, which is determined on the basis of discounted cash
flows.
As a
result of the continuing challenging economic and consumer retail environment,
the Company’s management, in connection with the preparation of its 2008
year-end financial statements, conducted a sensitivity analysis relating to the
fair value of the Company’s intangible assets with definite useful lives and
concluded no impairment was indicated. It is possible that changes in
circumstances, existing at that time or at other times in the future, or in the
assumptions and estimates, including historical and projected cash flow data,
utilized by the Company in its evaluation of the recoverability of its
intangible assets with definite useful lives, could require the Company to
write-down its intangible assets and record a non-cash impairment charge, which
could be significant, and would adversely affect the Company’s financial
position and results of operations.
CPI
CORP.
Notes
to Consolidated Financial Statements
Self-Insurance
Reserves
The
Company is self-insured with stop-loss coverage for medical insurance and has a
large deductible program for worker’s compensation and general liability
insurance. The Company has established reserves for claims under
these plans that have been reported but not paid and incurred but not
reported. These reserves are based upon the Company’s estimates of
the aggregate liability for uninsured claims incurred using actuarial
assumptions followed in the insurance industry and the Company’s historical
experience. Loss estimates are adjusted based upon actual claims settlements and
reported claims.
Revenue
Recognition and Deferred Costs
Sales
revenue is recorded when portraits and/or other merchandise is delivered to
customers. Costs incurred relating to portraits processed pending
delivery to customers, or in-process, is inventoried and expensed when the
related photographic sales revenue is recognized.
Each
brand offers customers the opportunity to join a portrait savings
club. Each club requires a one-time fee for a one-year
membership. PictureMe Portrait Studio
®
Portrait Smiles
Club members receive savings on products and services and a free portrait sheet
on each returning visit. Sears’ Super Saver Program members also
receive savings on products and services and pay no session fees for the
enrollment period. Both of these plans were designed to promote
customer loyalty while encouraging frequent return visits to the
studio. The entire fee received is deferred and amortized into
revenues on a straight-line basis over the period of the customer’s
program.
Sales and
other taxes collected from customers for remittance to governmental entities is
presented on a net basis in the statement of operations.
Advertising
Costs
The
Company expenses costs associated with newspaper, magazines and other media
advertising the first time the advertising takes place. Certain
direct-response advertising costs are capitalized. Direct-response
advertising consists of direct mail advertisements. Such capitalized
costs are amortized over the expected period of future benefits following the
delivery of the direct media in which it appears.
The
consolidated balance sheets include capitalized direct-response advertising
costs of $1.5 million and $376,000 at February 7, 2009 and February
2, 2008, respectively. Advertising expense for 2008, 2007 and 2006
was $32.3 million, $34.8 million and $28.3 million, respectively.
Derivative
Instruments and Hedging Activities
The
Company recognizes all derivative financial instruments in the consolidated
financial statements at fair value. Changes in fair values of
derivatives not qualifying for hedge accounting are reported in
earnings. As of February 7, 2009, the Company had no derivatives
qualifying for hedge accounting.
Defined
Benefit Plans
Effective
February 3, 2007, the Company adopted the recognition and disclosure provisions
as required by SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension
and Other Postretirement Plans” (“SFAS No. 158”), an amendment of FASB
statements No. 87, 88, 106 and 132R. As a result, the Company
recorded an after-tax charge of $344,000 ($555,000 pretax) in 2007, to
accumulated other comprehensive income. This statement also requires
the measurement of plan assets and benefit obligations as of the date of the
employer’s fiscal year-end statement of financial position, effective for fiscal
years ending after December 15, 2008. As such, the Company utilized a
measurement date of February 7, 2009, for fiscal year 2008, compared to December
31, 2007, for fiscal year 2007 for its defined benefit plans. The
impact of this change was not significant to the Company’s financial
statements.
CPI
CORP.
Notes
to Consolidated Financial Statements
At the
measurement date, plan assets are determined based on fair value. The
net pension and supplemental executive retirement benefit obligations and the
related periodic costs are based on, among other things, assumptions of the
discount rate, estimated return on plan assets and estimated salary increases.
These obligations and related periodic costs are measured using actuarial
techniques and assumptions. The actuarial cost method used to compute
the Retirement Plan pension liabilities and related expense is the Projected
Unit Credit method. Market related value of assets is valued with a
five-year phase-in of gains and losses. The SERP has no
assets.
Effective
February 20, 2009, the Company implemented a freeze of future benefit accruals
related to its pension plan for the remaining grandfathered participants.
During 2008, the Company settled its liabilities related to its noncontributing
defined benefit plan through lump-sum settlements with two employees and one
other participant. See further discussion in Note 14.
Postemployment
Benefits
In the
ordinary course of business, the Company provides postemployment benefits to
employees who have been terminated. The Company does not accrue
obligations related to these benefits over the service period as the applicable
service and related amounts cannot be reasonably
estimated. Obligations are accrued when terminations are probable and
estimable.
Income
Taxes
The
Company provides deferred income tax assets and liabilities based on the
estimated future tax effects of operating losses and tax credit carryforwards,
as well as the differences between the financial and tax bases of assets and
liabilities based on currently enacted tax laws. Deferred tax assets
and liabilities are measured using the enacted tax rates expected to apply in
the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The tax balances and income tax (benefit) expense recognized by
the Company are based on management’s interpretation of the tax laws of multiple
jurisdictions. Income tax (benefit) expense also reflects the
Company’s best estimates and assumptions regarding, among other things, the
level of future taxable income, interpretation of the tax laws, and tax
planning. The Company assesses temporary differences that result from
differing treatments of certain items for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities, which are shown on our consolidated balance sheet. The
Company must assess the likelihood that deferred tax assets will be
realized. To the extent the Company believes that realization is not
likely, a valuation allowance is established. When a valuation
allowance is established or increased in an accounting period, a corresponding
tax expense is recorded, when appropriate, in our consolidated statement of
operations.
Stock-based
Compensation Plans
At
February 7, 2009, the Company had various stock-based employee compensation
plans, which are described more fully in Note 13. The Company
accounts for its stock-based compensation plans under SFAS No. 123
(revised 2004), “Share-Based Payment”
(“SFAS 123R”) which
requires the Company to recognize the cost of awards of equity instruments, such
as stock options and restricted stock, based on the fair value of those awards
at the date of grant.
Per
Share Calculations
Basic
earnings per common share are computed by dividing net earnings or losses
attributable to common shareholders by the weighted-average number of common
shares outstanding for the periods presented. Diluted earnings per common share
also include the dilutive effect of potential common shares (primarily dilutive
stock options) outstanding during the period for the periods
presented.
NOTE
2 – ADOPTION OF NEW ACCOUNTING STANDARDS
In
December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (FSP) FAS 132R-1, “Employers’ Disclosures about Postretirement
Benefit Plan Assets,” (“FSP FAS 132R-1”), an amendment of SFAS No. 132 (revised
2003), “Employers’ Disclosures about Pensions and Other Postretirement
Benefits,” (“SFAS No. 132R”). This position will require more
detailed disclosures regarding defined benefit plan assets including investment
policies and strategies, major categories of plan assets, valuation techniques
used to measure the fair value of plan assets and significant concentrations of
risk within plan assets. This position becomes effective for fiscal
years ending after December 15, 2009. Upon initial application, the
provisions of this position are not
required
for earlier periods that are presented for comparative purposes. The
Company is currently evaluating the disclosure requirements of this new
position.
CPI CORP.
Notes
to Consolidated Financial Statements
In
October 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements,” (“SFAS No. 157”), which the Company adopted on February 3, 2008,
related to financial assets and financial liabilities, in an inactive market and
demonstrates how the fair value of a financial asset is determined when the
market for that financial asset is inactive. FSP 157-3 was effective
upon issuance, including prior periods for which financial statements had not
been issued. The adoption of FSP 157-3 did not have a material effect
on the Company’s results of operations or financial condition as it did not have
any financial assets in inactive markets as of February 7, 2009.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”), an amendment to SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” (“SFAS No.
133”). The statement requires enhanced disclosures that expand the
disclosure requirements in SFAS No. 133 about an entity’s derivative instruments
and hedging activities. It will require more robust qualitative
disclosures and expanded quantitative disclosures. This statement
will be effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
encouraged. It is expected that this statement will not have a
material effect on the Company’s financial statements.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” (“SFAS
No. 141R”). This statement requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction, establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed, and
requires additional disclosures by the acquirer. Under this
statement, all business combinations will be accounted for by applying the
acquisition method. SFAS No. 141R is effective for financial
statements issued for fiscal years beginning after December 15,
2008. The Company is currently evaluating the potential impact of
adoption of SFAS No. 141R on its consolidated financial statements.
However, the Company does not expect the adoption of SFAS No. 141R to have
a material effect on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” (“SFAS No. 115”)” (“SFAS No. 159”). The Statement
permits entities to choose, at specified election dates, to measure many
financial instruments and certain other items at fair value that are not
currently measured at fair value. Unrealized gains and losses on
items for which the fair value option has been elected would be reported in
earnings at each subsequent reporting date. SFAS No. 159 also
establishes presentation and disclosure requirements in order to facilitate
comparisons between entities choosing different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 does not affect
existing accounting requirements for certain assets and liabilities to be
carried at fair value. This statement became effective for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. The Company has adopted SFAS No. 159, however, has elected not to
designate any financial instruments to be subject to the fair value
option.
NOTE
3 – FAIR VALUE MEASUREMENTS
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
(“SFAS No. 157”). This statement did not require any new fair value
measurements, but rather, it provided enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair value. The
changes to current practice resulting from the application of this statement
related to the definition of fair value, the methods used to estimate fair
value, and the requirement for expanded disclosures about estimates of fair
value. This statement became effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The
effective date for this statement for all nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis, has been delayed by one
year. The Company adopted the provisions of SFAS No. 157 related to
financial assets and financial liabilities on February 3,
2008. The partial adoption of this statement did not have a material
impact on the Company’s financial statements. It is expected that the remaining
provisions of this statement will not have a material effect on the Company’s
financial statements.
Fair
value is defined as the price at which an asset could be exchanged in a current
transaction between knowledgeable, willing parties or the amount that would be
paid to transfer a liability to a new obligor, not the amount that would be paid
to settle the liability with the creditor. Where available, fair value is
based on observable market prices or parameters or derived from such prices or
parameters.
CPI
CORP.
Notes
to Consolidated Financial Statements
Where
observable prices or inputs are not available, valuation models are applied.
These valuation techniques involve some level of management estimation and
judgment, the degree of which is dependent on the price transparency for the
instruments or market and the instruments’ complexity.
Assets
and liabilities recorded at fair value in the condensed consolidated balance
sheets are categorized based upon the level of judgment associated with the
inputs used to measure their fair value. Hierarchical levels, defined by SFAS
No. 157 and directly related to the amount of subjectivity associated with the
inputs to fair valuation of these assets and liabilities, are as
follows:
Level
1 -
|
|
Inputs
were unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date.
|
|
|
|
Level
2 -
|
|
Inputs
(other than quoted prices included in Level 1) were either directly or
indirectly observable for the asset or liability through correlation with
market data at the measurement date and for the duration of the
instrument’s anticipated life.
|
|
|
|
Level
3 -
|
|
Inputs
reflected management’s best estimate of what market participants would use
in pricing the asset or liability at the measurement date. Consideration
was given to the risk inherent in the valuation technique and the risk
inherent in the inputs to the
model.
|
Determining
which hierarchical level an asset or liability falls within requires significant
judgment. The Company evaluates its hierarchy disclosures each
quarter. The following table summarizes the financial instruments
measured at fair value in the Condensed Consolidated Balance Sheet as of
February 7, 2009 (in millions):
|
|
Fair
Value Measurements
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap (1)
|
|
$
|
-
|
|
|
$
|
3.5
|
|
|
$
|
-
|
|
|
$
|
3.5
|
|
(1)
|
|
The
total fair value of the interest rate swap is included in Other
Liabilities as of February 7, 2009. This financial instrument
was valued using the “income approach” valuation
technique. This method used valuation techniques to convert
future amounts to a single present amount. The measurement was
based on the value indicated by current market expectations about those
future amounts. The Company uses its interest rate swap as a
means of managing interest rates on its outstanding fixed-rate debt
obligations. The fair value of the interest rate swap at
February 7, 2009, and February 2, 2008, was $3.5 million and
$2.9 million, respectively.
|
The
Company also uses fair value measurements when it periodically evaluates the
recoverability of goodwill, acquired intangible assets and long-lived
assets.
SFAS No.
157 requires separate disclosure of assets and liabilities measured at fair
value on a recurring basis, as documented above, from those measured at fair
value on a nonrecurring basis. As of February 7, 2009, no assets or
liabilities were measured at fair value on a nonrecurring basis.
Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Current
Assets and Current Liabilities
Excluding
deferred tax assets, the carrying amounts approximate fair value at February 7,
2009, and February 2, 2008 due to the short maturity of these financial
instruments.
CPI
CORP.
Notes
to Consolidated Financial Statements
Deferred
Tax Assets, Customer Deposit Liability and Other Long-Term
Liabilities
For these
financial instruments, fair market value is not practicable to estimate for the
following reasons:
Deferred
tax assets reverse over a variety of years and reversal periods are subject to
future income levels. These assets are recorded at the ultimate
anticipated cash inflow, without regard to the time value of money.
Other
assets, customer deposit liability and other long-term liabilities are due in
periods that exceed one year and are not traded
instruments. These instruments are recorded at the ultimate
anticipated cash value, without regard to the time value of money.
Property
and Equipment
These
assets have been purchased and held over varying timeframes, some are customized
for our own use and resale values for such used items are not readily
available. The recorded value of these instruments is discussed in
Note 1.
Other
Investments-Supplemental Retirement Plan
This
investment is recorded based on valuation reports for the related Rabbi Trust,
which approximate fair value.
Long-Term
Debt and Interest Rate Swap
As of
February 7, 2009, the Company’s long-term debt bears a rate of interest that
varies with the market. Accordingly, the fair market value is
estimated to approximate the recorded value of this
instrument. Additionally, the company has an interest rate swap
agreement for $57.5 million which bears interest at a fixed rate. At
February 7, 2009 and February 2, 2008, the fair market value of the swap
of $3.5 million and $2.9 million, respectively, was recorded in the
financial statements within other liabilities.
NOTE
4 – BUSINESS ACQUISITION
On June
8, 2007, the Company completed its acquisition of substantially all of the
assets (the “Assets”) of Portrait Corporation of America (“PCA”) and certain of
its affiliates (collectively, the “Sellers”) and assumed certain liabilities of
PCA (the “PCA Acquisition”). The PCA Acquisition was made pursuant to
the Purchase and Sale Agreement (the “Purchase Agreement”) dated as of May 1,
2007, by and among the Sellers and the Company, as thereafter
amended. The Company paid $82.5 million in cash, assumed certain
liabilities and replaced certain letters of credit outstanding under PCA’s
credit facilities maintained in bankruptcy. Additionally, fees
related to the transaction totaled $1.5 million. The Company financed
the PCA Acquisition with bank borrowings and amended its existing credit
facility in connection with the closing of the Transaction. See Note
10 for a description of this amendment.
The
operations acquired in the PCA Acquisition are operating within CPI Corp. as the
PictureMe Portrait Studio
®
brand (“PMPS
brand”). For purposes of this report, the PictureMe Portrait Studio
®
brand includes
all studios operating under Wal-Mart agreements; those in the U.S. are operating
as PictureMe Portrait Studios® and as Wal-Mart Portrait Studios in Canada and
Mexico. PictureMe Portrait Studio
®
is the sole
operator of portrait studios in Wal-Mart Stores and Supercenters in the U.S.,
Canada, Mexico and Puerto Rico. As of February 7, 2009, PictureMe
Portrait Studio
®
operated 2,019
studios worldwide, including 1,642 in the U.S. and Puerto Rico, 259 in Canada
and 118 in Mexico (unaudited).
The PCA
Acquisition was accounted for using the purchase method of accounting in
accordance with SFAS No. 141, “Business Combinations,” (“SFAS No. 141”) and,
accordingly, the results have been included in the Company’s results of
operations from the date of acquisition. The purchase price was
allocated based on fair value of the specific tangible and intangible assets and
liabilities at the
time of
the acquisition. The excess of the purchase price over the fair value
of assets acquired and liabilities assumed was recorded as
goodwill.
CPI
CORP.
Notes
to Consolidated Financial Statements
The
following table summarizes the fair values of the assets acquired and
liabilities assumed at June 8, 2007 (in thousands):
Current
assets
|
|
$
|
10,448
|
|
Property
and equipment
|
|
|
34,986
|
|
Goodwill
|
|
|
21,227
|
|
Intangibles
|
|
|
46,779
|
|
Other
assets
|
|
|
6,762
|
|
|
|
|
|
|
Total
assets acquired
|
|
$
|
120,202
|
|
|
|
|
|
|
Current
liabilities assumed
|
|
|
(27,666
|
)
|
Long-term
liabilities assumed
|
|
|
(8,606
|
)
|
|
|
|
|
|
Total
allocated purchase price
|
|
$
|
83,930
|
|
|
|
|
|
|
The
following unaudited pro forma summary presents the Company’s revenue, net loss,
basic loss per common share and diluted loss per common share as if the PCA
Acquisition had occurred on the first day of each fiscal year
presented (in thousands, except per share data):
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
506,808
|
|
|
$
|
577,408
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(18,124
|
)
|
|
$
|
(24,593
|
)
|
|
|
|
|
|
|
|
|
|
Basic
loss per common share
|
|
$
|
(2.84
|
)
|
|
$
|
(3.87
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
loss per common share
|
|
$
|
(2.84
|
)
|
|
$
|
(3.87
|
)
|
Pro forma
adjustments have been made to reflect depreciation and amortization using asset
values recognized after applying purchase accounting adjustments. Pro
forma results include non-recurring charges from pre-acquisition PCA of $2.8
million and $24.6 million, net of tax in fiscal 2007 and 2006,
respectively. Such charges related to impairments of property and
goodwill and restructuring charges that were incurred by PCA prior to
acquisition.
This pro
forma information is presented for informational purposes only and is not
necessarily indicative of actual results had the acquisition been effected at
the beginning of the respective periods presented, and is not necessarily
indicative of future results.
CPI
CORP.
Notes
to Consolidated Financial Statements
NOTE
5 – DISCONTINUED OPERATIONS
During
the fourth quarter of 2008 and third quarter of 2007, the Company decided to
discontinue its Portrait Gallery and E-Church operations, and sell its
5-portrait studio operation in the United Kingdom (the “UK Operation”),
respectively. These decisions were made in order to eliminate the
unprofitable operations. Sales and operating results for these
operations included in discontinued operations are presented in the following
table:
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
463
|
|
|
$
|
828
|
|
|
$
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
$
|
1,504
|
|
|
$
|
570
|
|
|
$
|
161
|
|
Tax
benefit
|
|
|
543
|
|
|
|
129
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations
|
|
$
|
961
|
|
|
$
|
441
|
|
|
$
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net
loss consists of costs to operate the Portrait Gallery and E-Church operations
until they were discontinued in the fourth quarter of 2008, as well as related
asset write-offs, and the costs to operate the UK Operation until its sale in
October 2007 and related asset write-offs since the proceeds from the sale were
nominal.
NOTE
6 – INVENTORIES
Inventories
consist of:
in
thousands
|
|
February
7, 2009
|
|
|
February
2, 2008
|
|
|
|
|
|
|
|
|
Raw
materials - film, paper and chemicals
|
|
$
|
2,724
|
|
|
$
|
4,902
|
|
Portraits
in process
|
|
|
1,313
|
|
|
|
2,244
|
|
Finished
portraits pending delivery
|
|
|
261
|
|
|
|
1,187
|
|
Frames
and accessories
|
|
|
426
|
|
|
|
634
|
|
Studio
supplies
|
|
|
2,495
|
|
|
|
3,636
|
|
Equipment
repair parts and supplies
|
|
|
878
|
|
|
|
1,246
|
|
Other
|
|
|
392
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,489
|
|
|
$
|
14,296
|
|
|
|
|
|
|
|
|
|
|
These
balances are net of obsolescence reserves totaling $149,000 and $277,000 at
February 7, 2009, and February 2, 2008, respectively.
NOTE
7 – ASSETS HELD FOR SALE
In
connection with the PCA Acquisition, the Company acquired a manufacturing
facility located in Matthews, North Carolina, and a warehouse and excess parcels
of land located in Charlotte, North Carolina. In the fourth and third
quarters of 2008, the Company decided to list the manufacturing facility, and
the warehouse and excess parcels of land, respectively, for sale, as they were
no longer required by the business. The Company determined these
properties meet the criteria for “held for sale accounting” under SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,” and have
presented the respective group of assets separately on the face of the
Consolidated Balance Sheet as of February 7, 2009.
CPI
CORP.
Notes
to Consolidated Financial Statements
At the
time an asset qualifies for held for sale accounting, the asset is evaluated to
determine whether or not the carrying value exceeds its fair value less cost to
sell. Any loss as a result of the carrying value being in excess of
fair value less cost to sell is recorded in the period the assets meets held for
sale accounting. Management judgment is required to assess the
criteria required to meet held for sale accounting, and estimate fair
value. As of February 7, 2009, the carrying values of the respective
assets held for sale exceeded their fair values less costs to
sell. As such, the Company recorded a $627,000 charge in other
charges and impairments in the 2008 Consolidated Statement of Operations to
reduce the asset carrying values to their fair values less costs to
sell.
The major
classes of assets included in assets held for sale in the Consolidated Balance
Sheet as of February 7, 2009, are as follows (in thousands):
Land
|
|
$
|
1,473
|
|
Buildings
and building improvements
|
|
|
5,142
|
|
Assets
held for sale
|
|
$
|
6,615
|
|
|
|
|
|
|
The
Company expects the sales of these assets will be completed within a one year
time period.
On March
9, 2009, the production facility in Thomaston, Connecticut was listed for
sale. This property will be moved to assets held for sale in the
first quarter of 2009 and was recorded within property and equipment in the
Consoldiated Balance Sheet, with a net book value of $247,000, at February
7, 2009.
NOTE
8 – GOODWILL AND INTANGIBLE ASSETS
In
connection with the PCA Acquisition, the Company recorded goodwill in the excess
of the purchase price over the fair value of assets acquired and liabilities
assumed in accordance with SFAS No. 141. Under SFAS No. 141, goodwill
is not amortized and instead is periodically evaluated for
impairment. The goodwill is expected to be fully
deductible for tax purposes over 15 years. The following table
summarizes the Company’s goodwill (in thousands):
|
|
February
7, 2009
|
|
|
February
2, 2008
|
|
|
|
|
|
|
|
|
PCA
acquisition
|
|
$
|
21,227
|
|
|
$
|
17,338
|
|
|
|
|
|
|
|
|
|
|
Goodwill
from prior acquisitions
|
|
|
512
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
Translation
impact on foreign balances
|
|
|
(280
|
)
|
|
|
199
|
|
|
|
$
|
21,459
|
|
|
$
|
18,049
|
|
|
|
|
|
|
|
|
|
|
The
following is a summary of the 2008 and 2007 changes in goodwill (in
thousands):
|
|
2008
|
|
|
2007
|
|
Balance,
beginning of year
|
|
$
|
18,049
|
|
|
$
|
512
|
|
Purchase
accounting entries
|
|
|
3,889
|
|
|
|
17,338
|
|
Translation
impact on foreign balances
|
|
|
(479
|
)
|
|
|
199
|
|
Balance,
end of year
|
|
$
|
21,459
|
|
|
$
|
18,049
|
|
|
|
|
|
|
|
|
|
|
The
increase in goodwill from Feburary 2, 2008, in relation to the PCA Acquisition,
is primarily due to corrections in the valuation of certain fixed assets
acquired and deferred tax assets recorded in conjunction with the PCA
Acquisition.
Also, in
connection with the PCA Acquisition, the Company acquired intangible assets
related to the host agreement with Wal-Mart and the customer
list. These assets were recorded in accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets” (“SFAS No. 142”). The host
agreement with Wal-Mart and the customer list are being amortized over their
useful lives of 21.5 years using the straight-line method and 6 years using an
accelerated method, respectively. The following table summarizes the
Company’s amortized intangible assets as of February 2, 2008, and February 7,
2009 (in thousands):
CPI
CORP.
Notes
to Consolidated Financial Statements
|
|
2007
|
|
|
|
|
|
|
|
|
|
Translation
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact
of
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Foreign
|
|
|
|
|
|
|
Gross
Amount
|
|
|
Amortization
|
|
|
Balances
|
|
|
Net
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
host agreement
|
|
$
|
43,982
|
|
|
$
|
(1,359
|
)
|
|
$
|
646
|
|
|
$
|
43,269
|
|
Acquired
customer list
|
|
|
3,035
|
|
|
|
(1,440
|
)
|
|
|
43
|
|
|
|
1,638
|
|
|
|
$
|
47,017
|
|
|
$
|
(2,799
|
)
|
|
$
|
689
|
|
|
$
|
44,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Translation
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact
of
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Foreign
|
|
|
|
|
|
|
Gross
Amount
|
|
|
Amortization
|
|
|
Balances
|
|
|
Net
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
host agreement
|
|
$
|
43,269
|
|
|
$
|
(2,020
|
)
|
|
$
|
(1,851
|
)
|
|
$
|
39,398
|
|
Acquired
customer list
|
|
|
1,638
|
|
|
|
(810
|
)
|
|
|
(20
|
)
|
|
|
808
|
|
|
|
$
|
44,907
|
|
|
$
|
(2,830
|
)
|
|
$
|
(1,871
|
)
|
|
$
|
40,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate amortization expense for these intangible assets was $2.8 million in
each of fiscal years 2008 and 2007. The estimated aggregate
amortization expense for the next five fiscal years is as follows:
2009
|
$2,421
|
2010
|
$2,224
|
2011
|
$2,124
|
2012
|
$2,072
|
2013
|
$2,074
|
NOTE
9 – OTHER ASSETS AND OTHER LIABILITIES
Included in accrued expenses and
other liabilities as of February 7, 2009, and February 2, 2008, is $8.7 million
and $10.4 million, respectively, in accrued host commissions and $4.7 million
and $5.6 million, respectively, related to accrued worker's compensation.
Included
in both other assets and other liabilities is $6.9 million and $6.3 million as
of February 7, 2009, and February 2, 2008, respectively, related to worker’s
compensation insurance claims that exceed the deductible of the Company and that
will be paid by the insurance carrier. Since the Company is not
released as primary obligor of the liability, it is included in both other
assets as a receivable from the insurance company and in other liabilities as an
insurance liability.
NOTE
10 – BORROWINGS
In
connection with the PCA Acquisition on June 8, 2007, the Company amended and
restated its Credit Agreement to a five-year term and revolving credit facility
in an amount up to $155 million, consisting of a $115 million term loan and a
$40 million revolving loan with a sub-facility for letters of credit in an
amount not to exceed $25 million. The obligations of the Company
under the Credit Agreement are secured by (i) a guaranty from certain material
direct and indirect domestic subsidiaries of the Company, and (ii) a lien on
substantially all of the assets of the Company and such
subsidiaries.
The term
loan under the Credit Agreement bears interest at the Company’s option, at
either a period-based London Interbank Offered Rate (“LIBOR”) plus a spread
ranging from 2.25% to 2.75%, or the Base Rate plus a spread ranging from 0.75%
to 1.25%. The Base Rate is determined from the greater of the prime
rate or the Federal Funds rate plus 0.50% (the “Base
Rate”). Revolving loans are priced at the Base Rate. The
Company is also required to pay a non-use fee of 0.25% to 0.50% per annum on the
unused portion of the revolving loans and letter of credit fees of 1.75% to
2.50% per annum. The interest rate spread in the case of LIBOR and
Base Rate loans and the payment of the non-use fees and the letter of credit
fees is dependent on the Company’s Ratio of Total Debt to EBITDA (as defined in
the Credit Agreement). Upon the occurrence and during the continuance
of a default, unless the required lenders otherwise consent, the interest on
obligations under the Credit Agreement will increase by two percent (2%) per
annum. Interest is payable quarterly in arrears or at the end of the
applicable LIBOR periods. Unless sooner repaid in whole or part
pursuant to the terms of the Credit Agreement, the outstanding principal balance
of the term loan is to be repaid in quarterly installments of $287,500 beginning
September 30, 2007, with a final payment being made on the maturity date
thereof. The agreement also includes mandatory prepayments based on
the Company’s levels of cash flow and certain transactions. The
mandatory prepayment based upon cash flow is calculated annually at the
conclusion of the fiscal year and is equal to 75% of excess cash flow (as
defined in the Credit Agreement). If the Ratio of Total Debt to
EBITDA is below 1.50 to 1.00 for any two consecutive fiscal years, such
percentage is reduced to 25% of excess cash flow.
CPI
CORP.
Notes
to Consolidated Financial Statements
The
Company incurred $2.7 million in issuance costs associated with this second
amended and restated agreement. The term loan portion of issuance
costs is being amortized using the effective interest method over the life of
the related debt. Fees associated with the revolving portion are
being amortized on a straight-line basis over the life of the revolving
commitment since there are no borrowings or repayments scheduled.
As part
of this Credit Agreement, the Company entered into an interest rate swap
agreement to manage the interest rate risk on $57.5 million of the term
loan. This swap agreement has not been designated as a hedge as it
has not been determined that it qualifies for cash flow hedge
accounting. As discussed above, payments under the term loan are
currently based on an applicable LIBOR period plus 2.75%. To
economically hedge the risk of increasing interest rates, the Company entered
into an interest rate swap that effectively converted three-month floating rate
LIBOR-based payments to a fixed rate of 4.97% plus the LIBOR-rate spread of
2.75%, resulting in a 7.72% interest rate. The contract expires in
September 2010. With LIBOR rates falling, the fixed rate loss related
to this agreement was
$617,000
and $2.9 million at February 7, 2009, and February 2, 2008, respectively, which
is included in interest expense.
The
Credit Agreement and other ancillary loan documents contain terms and provisions
(including representations, covenants and conditions) customary for transactions
of this type. The financial covenants include the maintenance of
minimum EBITDA (as defined in the Credit Agreement), a total leverage ratio test
(consolidated total debt to EBITDA) and an interest coverage
test. The Credit Agreement also contains customary events of
default.
The
proceeds of the term loan were used for working capital purposes and general
business purposes, for acquisitions permitted under
the
Credit Agreement (including the acquisition of PCA (as defined in the Credit
Agreement)), for capital expenditures (including retail store expansions and
conversion to digital photography), to pay dividends and distributions on the
Company’s capital securities to the extent permitted thereunder, and to make
purchases or redemptions of the Company’s capital securities to the extent
permitted thereunder.
Outstanding
debt obligations are as follows:
in
thousands
|
|
February
7, 2009
|
|
|
February
2, 2008
|
|
|
|
|
|
|
|
|
Term
loan portion of the Credit Agreement,
|
|
|
|
|
|
|
net
of unamortized issuance costs
|
|
$
|
103,466
|
|
|
$
|
111,719
|
|
Less:
current maturities
|
|
|
1,150
|
|
|
|
8,697
|
|
|
|
$
|
102,316
|
|
|
$
|
103,022
|
|
|
|
|
|
|
|
|
|
|
There
were no short-term borrowings outstanding at February 7, 2009, or February 2,
2008.
As of
February 7, 2009, long-term debt maturities are as follows:
in
thousands
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
1,150
|
|
|
$
|
1,150
|
|
2010
|
|
|
1,150
|
|
|
|
1,150
|
|
2011
|
|
|
1,150
|
|
|
|
1,150
|
|
2012
|
|
|
102,278
|
|
|
|
102,278
|
|
|
|
$
|
105,728
|
|
|
$
|
105,728
|
|
Unamortized
issuance costs
|
|
|
2,262
|
|
|
|
2,706
|
|
|
|
$
|
103,466
|
|
|
$
|
103,022
|
|
|
|
|
|
|
|
|
|
|
Mandatory
prepayments have not been reflected in maturities for 2009 through 2011, as the
amounts required based on cash flows, if any, are not currently
estimable.
CPI
CORP.
Notes
to Consolidated Financial Statements
Effective
April 16, 2009, the Company entered into the third amendment (the
"Amendment") to its Credit Agreement to change the interest rate structure
and the amortization schedule and to replace preexisting minimum EBITDA and
interest coverage covenants with a fixed charge ratio test (i.e., EBITDA minus
capital expenditures to fixed charges) and tighten the leverage ratio test
(i.e., Funded Debt to EBITDA). These changes were made to allow
for greater flexibility in the event that the economic climate worsens and has
an impact on the Company’s earnings.
Pursuant
to the Amendment, the term loan bears interest at the Company’s
option, at either a period-based London Interbank Offered Rate (“LIBOR”) plus a
spread ranging from 3.25% to 4.00%, or the Base Rate plus a spread ranging from
1.75% to 2.50%. The Base Rate is determined from the greater of the
prime rate, the Federal Funds rate plus 0.50% or the LIBOR Rate plus 1.00% (the
“Base Rate”). Revolving loans are priced at the Base
Rate. The Company is also required to pay a non-use fee of 0.50% per
annum on the unused portion of the revolving loans and letter of credit fees of
3.25% to 4.00% per annum. The interest rate spread in the case of
LIBOR and Base Rate loans and the payment of the non-use fees and the letter of
credit fees is dependent on the Company’s Ratio of Total Debt to EBITDA (as
defined in the Credit Agreement). If the Company fails to deliver
required financial statements and compliance certifications, all of the above
interest rates reset to the maximums indicated until five days following the
date such statements and certifications are submitted. The interest
rates will not be reduced if an event of default exists.
In
addition, under the Amendment, the mandatory payment schedule requires that
unless sooner repaid in whole or part pursuant to the terms of the Credit
Agreement, the outstanding principal balance of the term loan is to be repaid in
installments of $1.0 million on each of March 31, June 30 and September 30 and
$7.0 million on December 31 for all periods after the date of the Amendment,
with a final payment being made on the maturity date
thereof.
The
Company incurred $263,000 in issuance costs associated with this amendment,
which will be amortized over the remainder of the life of the loan in addition
to fees that are currently being amortized.
NOTE
11 – STOCKHOLDERS’ EQUITY
Share
Repurchase
On
February 8, 2006, the Company purchased 1,658,607 shares at $19.50 per share or
a total consideration of approximately $32.4 million as a result of a Dutch
Auction self-tender offer. The Company funded the purchase of shares
tendered in the tender offer through a combination of cash on hand and $7
million of incremental term loan funds. Had the shares from this
transaction been deducted from total shares outstanding as of February 5, 2004
(the beginning of fiscal 2005), pro forma diluted earnings (loss) per share
would have been $1.03 per share for 2005.
Shareholder
Rights Plan
The
Company has a Shareholders Rights Plan ("Rights Plan") under which holders of
CPI Corp. common stock after March 2000 are granted a dividend distribution of
one right (a "Right") for each share of Company common stock
held. Each right entitles stockholders to buy one one-hundredth of a
share of Series A Participating Preferred Stock of the Company at an exercise
price of $96.00. Each preferred share fraction is designed to be
equivalent in voting and dividend rights to one share of common
stock.
The
Rights will be exercisable and will trade separately from the shares of common
stock only if a person or group, with certain exceptions, acquires beneficial
ownership of 20% or more of the shares of common stock or commences a tender or
exchange offer that would result in such person or group beneficially owning 20%
or more of the shares of common stock. Prior to this time, the Rights
will not trade separately from the common stock. The Company may redeem the
Rights at $.001 per Right at any time prior to the occurrence of one of these
events. All Rights expire on March 13, 2010.
CPI
CORP.
Notes
to Consolidated Financial Statements
Each
Right will entitle its holders to purchase, at the Right's then-current exercise
price, common stock of CPI Corp. having a value of twice the Right’s exercise
price. This amounts to the right to buy common stock of the Company
at half price. Rights owned by the party triggering the exercise of Rights will
not be exercisable. In addition, if after any person has become a
20%-or-more stockholder, the Company is involved in a merger or other business
combination transaction with another person in which its shares of common stock
are exchanged or converted, or sells 50% or more of its assets or earning power
to another person, each Right will entitle its holder to purchase, at the
Right’s then-current exercise price, shares of common stock of such other person
having a value of twice the Right's exercise price.
On
September 5, 2007, the Company entered into Amendment No. 1 (the “First
Amendment”) which permits the Knightspoint Group, which includes the Chairman of
the Board and two other directors, to obtain beneficial ownership of up to 30%
of the Company’s common shares, with certain restrictions, including that each
member of the Knightspoint Group must grant an irrevocable proxy to the
Secretary of the Company to vote from time to time the pro rata number of shares
of the Company’s common shares owned by such person in excess of 20% of the
Company’s common shares outstanding (the “Excess Shares”). Further,
the Secretary must vote the Excess Shares in the same proportion as the votes of
all stockholders of the Company, including the Knightspoint
Group. Each person who ceases to be a member of the Knightspoint
Group is precluded from acquiring shares if, as a result, such person would
become the owner of the greater of the following (i) the percentage of the
Company’s outstanding shares that such person beneficially owned immediately
after it ceased being part of the Knightspoint Group and (ii) 20% of the
Company’s outstanding shares.
On
December 21, 2007, the Company entered into Amendment No. 2 (the “Second
Amendment”) to permit the Knightspoint Group to acquire up to 40% of the
Company’s common shares, subject to the same restrictions as described above
with regard to the First Amendment.
Comprehensive
(Loss) Income and Accumulated Other Comprehensive (Loss) Income
The
presentation of other comprehensive income for the year ended February 3, 2007
was adjusted to exclude the impact of the adoption of SFAS No. 158.
The
following table shows the computation of comprehensive (loss)
income:
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(7,685
|
)
|
|
$
|
3,576
|
|
|
$
|
16,327
|
|
Other
comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(4,959
|
)
|
|
|
2,510
|
|
|
|
(264
|
)
|
Defined
benefit plans (1)
|
|
|
(1,430
|
)
|
|
|
152
|
|
|
|
2,392
|
|
Total
accumulated other comprehensive (loss) income
|
|
|
(6,389
|
)
|
|
|
2,662
|
|
|
|
2,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive (loss) income
|
|
$
|
(14,074
|
)
|
|
$
|
6,238
|
|
|
$
|
18,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Net
of tax (benefit) expense of ($876), $93, and $1,255 for 2008, 2007 and 2006,
respectively.
The
following table displays the components of accumulated other comprehensive
(loss) income as of February 7, 2009, February 2, 2008 and February 3,
2007:
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
(3,351
|
)
|
|
$
|
1,608
|
|
|
$
|
(902
|
)
|
Unfunded
projected benefit obligation, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
-
|
|
|
|
(131
|
)
|
|
|
(178
|
)
|
Unamortized
net actuarial losses
|
|
|
(9,763
|
)
|
|
|
(8,202
|
)
|
|
|
(8,307
|
)
|
Accumulated
other comprehensive loss
|
|
$
|
(13,114
|
)
|
|
$
|
(6,725
|
)
|
|
$
|
(9,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPI
CORP.
Notes
to Consolidated Financial Statements
The
Company adopted Statement of Financial Accounting Standards No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132R (“SFAS No. 158”) as of
February 3, 2007. SFAS No. 158 requires the Company to recognize the
funded status of defined benefit plans as an asset or liability in its balance
sheet. Funded status represents the difference between the projected
benefit liability obligation of the plan and the market value of the plan’s
assets. Previously unrecognized amounts are now included in
accumulated other comprehensive (loss) income under SFAS No.
158. Changes in these amounts in the future will be adjusted as they
occur through accumulated other comprehensive (loss) income.
NOTE
12 – OTHER CHARGES AND IMPAIRMENTS
Other
charges and impairments recorded as a component of (loss) income from operations
included:
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Sears
fees related to settlement of the previous license agreement
|
|
$
|
7,527
|
|
|
$
|
2,500
|
|
|
$
|
-
|
|
Other
transition related costs - PCA Acquisition
|
|
|
2,121
|
|
|
|
2,817
|
|
|
|
-
|
|
Reserves
for severance and related costs
|
|
|
2,046
|
|
|
|
2,035
|
|
|
|
878
|
|
Impairment
charges
|
|
|
739
|
|
|
|
256
|
|
|
|
179
|
|
Other
|
|
|
1,124
|
|
|
|
87
|
|
|
|
184
|
|
|
|
|
13,557
|
|
|
|
7,695
|
|
|
|
1,241
|
|
Recorded
as a component of other (expense) income following
income
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
guarantee reserve reduction
|
|
|
-
|
|
|
|
-
|
|
|
|
887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Charges and Impairments
|
|
$
|
13,557
|
|
|
$
|
7,695
|
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears
Fees Related to Settlement of the Previous License Agreement
In 2008
and 2007, the Company incurred certain fees and charges in relation to the
settlement of the previous Sears license agreement. These fees and
charges are discussed further in Item 1, “Business” and in Note 16.
Other
Transition Related Costs – PCA Acquisition
During
2008, ongoing expense related to PCA included legal expense of $866,000 related
to the PictureMe Press case and lab closure- related expense of
$902,000. The remainder of expense relates to ongoing legal expenses
and consultants.
During
2007, in connection with the PCA Acquisition, the Company incurred
transition-related costs associated with combining the operations of PCA into
the CPI organization ($2.0 million), costs associated with the closure of the
Institutional business acquired from PCA ($265,000), and cure costs associated
with contractual obligations transferred from PCA to CPI
($523,000).
Reserves
for Severance and Related Costs
Charges
in 2008 and 2007 were principally related to severance costs resulting from the
termination of employees in connection with the integration of operations of the
PCA Acquisition into CPI.
Charges
in 2006 represent $878,000 related principally to the separation of employment
of three executives, including the Company’s former CEO.
CPI
CORP.
Notes
to Consolidated Financial Statements
Impairment
Charges
During
2008, the Company incurred $739,000 related to the closure of the write-downs of
certain asset values held for sale.
During
2007, the Company incurred $256,000 in charges related to software that is no
longer used in the business.
During
2006, the Company incurred $179,000 in charges related to the write-offs of
certain legacy equipment that is no longer used in the business.
Other
Costs in
2008 primarily relate to legal expense of $913,000 incurred for the settlement
of the Portraits International of the Southwest vs. CPI Corp. case.
The remainder relates to executive recruitment expense and a contract
negotiation with a director.
Costs in
2007 related to one-time strategic studies and legal charges.
The
Company began a process to explore strategic alternatives to enhance shareholder
value in 2006. Investment banking and legal services in connection
with this review totaled $184,000 in 2006.
Lease
Guarantee Reserve Reduction
The lease
guarantee reduction recorded in 2006 represents a partial reversal of reserves
initially recorded in 2004 related to operating lease guarantees associated with
the Company’s former Wall Décor segment, Prints Plus. As the total
guarantee related to these leases decreased with the passage of time, the
payment of rents by Prints Plus and the settlement by the Company of certain
leases rejected in bankruptcy, the related liability was reduced to reflect
management’s revised estimate of remaining potential loss. This reserve is more
fully discussed in Note 16.
The
following is a summary of the 2008 and 2007 activity in the reserves established
in connection with the Company’s restructuring and other
initiatives:
in
thousands
|
|
|
|
|
|
|
|
Asset
|
|
|
|
|
|
|
|
|
|
Reserve
|
|
|
2008
|
|
|
Write-
|
|
|
|
|
|
Reserve
|
|
|
|
Balance
|
|
|
Charges
|
|
|
Downs/
|
|
|
Cash
|
|
|
Balance
|
|
|
|
Feb.
2, 2008
|
|
|
(Credits)
|
|
|
Impairments
|
|
|
Payments
|
|
|
Feb.
7, 2009
|
|
Recorded
as a component of (loss) income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears
fees related to settlement of previous license agreement
|
|
$
|
2,500
|
|
|
$
|
7,527
|
|
|
$
|
-
|
|
|
$
|
(7,809
|
)
|
|
$
|
2,218
|
|
Other
transition related costs - PCA Acquisition
|
|
|
472
|
|
|
|
2,121
|
|
|
|
-
|
|
|
|
(2,124
|
)
|
|
|
469
|
|
Reserves
for severance and related costs
|
|
|
1,575
|
|
|
|
2,046
|
|
|
|
-
|
|
|
|
(2,437
|
)
|
|
|
1,184
|
|
Impairment
charges
|
|
|
-
|
|
|
|
739
|
|
|
|
(739
|
)
|
|
|
-
|
|
|
|
-
|
|
Lease
guarantee reserve
|
|
|
744
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
730
|
|
Other
|
|
|
-
|
|
|
|
1,138
|
|
|
|
-
|
|
|
|
(1,061
|
)
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,291
|
|
|
$
|
13,557
|
|
|
$
|
(739
|
)
|
|
$
|
(13,431
|
)
|
|
$
|
4,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPI
CORP.
Notes
to Consolidated Financial Statements
in
thousands
|
|
|
|
|
|
|
|
Asset
|
|
|
|
|
|
|
|
|
|
Reserve
|
|
|
2007
|
|
|
Write-
|
|
|
|
|
|
Reserve
|
|
|
|
Balance
|
|
|
Charges
|
|
|
Downs/
|
|
|
Cash
|
|
|
Balance
|
|
|
|
Feb.
3, 2007
|
|
|
(Credits)
|
|
|
Impairments
|
|
|
Payments
|
|
|
Feb.
2, 2008
|
|
Recorded
as a component of income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears
fees related to settlement of previous license agreement
|
|
$
|
-
|
|
|
$
|
2,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,500
|
|
Other
transition related costs - PCA Acquisition
|
|
|
-
|
|
|
|
2,817
|
|
|
|
-
|
|
|
|
(2,345
|
)
|
|
|
472
|
|
Reserves
for severance and related costs
|
|
|
449
|
|
|
|
2,035
|
|
|
|
-
|
|
|
|
(909
|
)
|
|
|
1,575
|
|
Impairment
charges
|
|
|
-
|
|
|
|
256
|
|
|
|
(256
|
)
|
|
|
-
|
|
|
|
-
|
|
Lease
guarantee reserve
|
|
|
744
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
744
|
|
Other
|
|
|
-
|
|
|
|
87
|
|
|
|
-
|
|
|
|
(87
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,193
|
|
|
$
|
7,695
|
|
|
$
|
(256
|
)
|
|
$
|
(3,341
|
)
|
|
$
|
5,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
remaining reserves primarily relate to severance and fees related to settlement
of the previous Sears license agreement and are expected to be paid principally
in 2009, with certain Sears fees being paid throughout 2014, see Note
16. Reserves relating to the Company’s guarantee of certain retail
store leases of Prints Plus will be reduced as settlements or payments occur or
as the related statutes of limitations expire.
NOTE
13 – STOCK-BASED COMPENSATION PLANS
At
February 7, 2009, the Company had outstanding awards under various stock-based
employee compensation plans that have been approved by the Company’s
shareholders.
Effective
May 29, 2008, the Board of Directors adopted the CPI Corp. Omnibus Incentive
Plan (the "Plan"), which was approved by the stockholders at the 2008 Annual
Meeting of Stockholders, held on July 17, 2008. The Plan replaced the CPI
Corp. Stock Option Plan, as amended and restated on December 16, 1997, and the
CPI Corp. Restricted Stock Plan, as amended and restated on April 14, 2005
(collectively the "Predecessor Plans") that were previously approved by the
Board of Directors, and no further shares will be issued under the Predecessor
Plans. The Plan will provide the Company with flexibility to award
employees, directors and consultants of the Company (the "Service Providers")
both short-term and long-term equity-based and cash incentives. The
purposes of the Plan are (i) to attract and retain highly competent persons;
(ii) to provide incentives to Service Providers that align their interests with
those of the Company's stockholders; and (iii) to promote the success of the
business of the Company. Awards under the Plan are granted by the
Compensation Committee of the Board (the "Committee"), provided that the Board
shall be responsible for administering this Plan with respect to awards to
non-employee directors. The Committee has the authority, among other
things, to (i) select the Service Providers to whom awards may be granted and
the types of awards to be granted to each; (ii) to determine the number of
shares to be covered by each award; (iii) to determine whether, to what
extent, and under what circumstances an award may be settled in cash, common
stock, other securities, or other awards; (iv) to prescribe, amend,
and rescind rules and regulations relating to the Plan; and (v) to make all
other determinations and take all other action described in the Plan or as the
Committee otherwise deems necessary or advisable. Total shares of common
stock available for delivery pursuant to awards under the Plan are 800,000
shares. The Company has reserved these shares under its authorized,
unissued shares. At February 7, 2009, 560,243 of these shares were
available for future grants.
Types of
awards authorized under the Plan include (i) stock options to purchase shares of
common stock, including ISOs and nonstatutory stock options, which will be
granted with an exercise price not less than 100% of the fair market value of
the common stock on the date of grant; (ii) stock appreciation rights (“SARs”),
which confer the right to receive an amount, settled in cash, common stock or
other awards, equal to the excess of the fair market value of a share of common
stock on the date of exercise over the exercise price of the SAR; (iii)
restricted stock, which is common stock subject to restrictions on
transferability and other restrictions, such as payment of respective
taxes, with respect to which a participant has the voting rights of a
stockholder during the period of restriction; (iv) restricted stock units, which
are awards of a right to receive shares of the Company’s common stock and are
subject to restrictions on transferability and other restrictions, such as
payment of respective taxes; (v) performance awards, including performance
shares or performance units, which are settled after an applicable performance
period has ended to the extent to which corresponding performance and/or market
goals have been achieved and (vi) other awards, including awards that are
payable in shares of common stock or the value of which is based on the value of
shares of common stock, and awards to be settled in cash or other property other
than common stock.
CPI
CORP.
Notes
to Consolidated Financial Statements
A copy of
the Plan is included in Annex A within the Company’s 2008 Proxy filed with the
U.S. Securities and Exchange Commission on June 23, 2008.
The
Company accounts for stock-based compensation plans in accordance with SFAS No.
123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which requires
companies to recognize the cost of awards of equity instruments, such as stock
options and restricted stock, based on the fair value of those awards at the
date of grant.
The
following descriptions reflect pertinent information with respect to the various
stock-based employee compensation plans:
Stock
Option Plans
As of
February 7, 2009, 217,500 stock options have been granted under the
Plan. Of these total stock options, 157,500 vest in three equal
increments on their anniversary dates, however, do not become exercisable unless
certain market conditions are met prior to expiration. The first
increment vests on the first anniversary date and is exercisable when the common
stock trades in excess of $25.00 for a minimum of 20 consecutive trading days,
the second increment vests on the second anniversary date and is exercisable
when the common stock trades in excess of $45.00 for a minimum of 20 consecutive
trading days and the third increment vests on the third anniversary and is
exercisable when the common stock trades in excess of $65.00 for a minimum of 20
consecutive trading days. An additional 30,000 of these share options
vested on February 7, 2009, and are exercisable with respect to 10,000 shares
when each of the three market conditions noted above are met. The
remaining 30,000 shares vest on February 6, 2010, and are exercisable with
respect to 15,000 shares when the $45.00 and $65.00 market conditions noted
above are met. For all share options, if the target common stock
price is met for a minimum of 20 consecutive trading days prior to the vesting
schedules noted above, the exercise dates would be the vesting schedule
dates. These stock options were granted during the third quarter of
fiscal year 2008 and expire on various dates through 2018.
The
following table summarizes information about stock options outstanding under the
Plan at February 7, 2009:
|
|
|
Options
Outstanding and Exercisable
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Remaining
Contractual
|
|
|
Weighted-Average
|
|
|
Number
of Shares
|
|
|
Weighted
Average
|
|
Range
of Exercise Prices
|
|
|
Outstanding
|
|
|
Life
(Years)
|
|
|
Exercise
Price
|
|
|
Exercisable
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12.21
- 13.58
|
|
|
|
217,500
|
|
|
|
8.18
|
|
|
$
|
13.04
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
217,500
|
|
|
|
8.18
|
|
|
$
|
13.04
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
February 7, 2009, there is no intrinsic value (the difference beetween the
exercise price and market value) for any outstanding options.
The
Company estimates the fair value of its stock options with a market-based
performance condition under the Plan using Monte Carlo simulations for each of
the market conditions noted above. The Company has determined that
its historical stock price volatility is an appropriate indicator of expected
volatility. In the absence of a reasonable historical pattern of
stock option exercises in relation to these types of stock options, the Company
has determined a 50% post-vest exercise rate is appropriate. This
assumes that exercise will occur at the mid-point of the exercisable
date and expiration of the stock options. The volatility and
interest rate presented in the table below reflect the expected term assuming a
50% post-vest exercise rate. The expected dividend yield is estimated
using the last dividend distribution prior to the grant date and the stock value
on the grant date as the Company believes this to be representative of future
dividends. The interest rate is determined based on the implied yield
available on U.S. Treasury zero-coupon issues in effect at the time of grant
with a remaining term equal to the derived term of the
award. The Company’s weighted-average assumptions are presented as
follows:
|
|
2008
|
|
Expected
term until exercise (years)
|
|
|
3.45
- 8.09
|
|
Expected
stock price volatility
|
|
|
41.97%
- 52.05
|
%
|
Weighted-average
stock price volatility
|
|
|
44.23
|
%
|
Expected
dividends
|
|
|
4.71%
- 5.24
|
%
|
Risk-free
interest rate
|
|
|
2.55
- 3.59
|
%
|
|
|
|
|
|
CPI
CORP.
Notes
to Consolidated Financial Statements
The
weighted-average grant-date fair value per share of stock options granted was
$3.09 for the 53 weeks ended February 7, 2009. The Company recognized
stock-based compensation expense of $87,000, resulting in a deferred tax benefit
of $32,000 for the 53 weeks ended February 7, 2009, based on the grant-date
fair values of stock options granted and the derived service
periods. As of February 7, 2009, total unrecognized compensation cost
related to non-vested stock options granted under the Plan was
$586,000. This unrecognized compensation cost will be recognized over
a weighted-average period of 3.6 years.
The
Company also has stock options issued and outstanding related to its previous
amended and restated nonqualified stock option plan, under which certain
officers and key employees could receive options to acquire shares of the
Company’s common stock. A total of 1,700,000 shares had been
authorized for issuance under this previous plan. The fair value of
each option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the assumptions listed in the following
table. The assumptions below apply only to option modifications as
all other outstanding options vested prior to the beginning of fiscal year 2005
and no options have been granted since this time. There were no
modifications in 2008.
|
|
2007
|
|
|
2006
|
|
Dividend
yield
|
|
|
3.4
|
%
|
|
|
3.4
|
%
|
Stock
volatility factor
|
|
|
37.0
|
%
|
|
|
37.0
|
%
|
Risk-free
interest rate
|
|
|
3.0
|
%
|
|
|
3.0
|
%
|
Expected
life of options
|
|
1
year
|
|
|
1
year
|
|
Expense
related to modifications in 2007 and 2007 was $6,000 and $71,000,
respectively.
The
following table summarizes the status of the Company’s stock options under the
previous plan as of February 7, 2009, and changes during the 53-week period then
ended:
|
|
2008
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
Balance
at beginning of year
|
|
|
35,046
|
|
|
$
|
15.56
|
|
Granted
|
|
|
-
|
|
|
|
|
|
Cancelled
or expired
|
|
|
(20,000
|
)
|
|
|
16.50
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of year balance
|
|
|
15,046
|
|
|
$
|
14.30
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
15,046
|
|
|
$
|
14.30
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes information about stock options outstanding under the
Company’s previous plan at February 7, 2009:
|
|
|
Options
Outstanding and Exercisable
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Remaining
Contractual
|
|
|
Weighted-Average
|
|
Exercise
Prices
|
|
|
Outstanding
|
|
|
Life
(Years)
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12.96
|
|
|
|
10,046
|
|
|
|
1.70
|
|
|
$
|
12.96
|
|
$
|
17.00
|
|
|
|
5,000
|
|
|
|
1.18
|
|
|
|
17.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
15,046
|
|
|
|
1.53
|
|
|
$
|
14.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 7, 2009, there is no intrinsic value (the difference between
the exercise price and market value) for any outstanding options.
CPI
CORP.
Notes
to Consolidated Financial Statements
Restricted
Stock Plans
Prior to
adoption of the new Plan, effective May 29, 2008, the Company had an amended and
restated restricted stock plan for which 550,000 shares of common stock had been
reserved for issuance to key employees and members of the Board of
Directors. Nonvested stock is valued based on the fair market
value of the Company’s common stock on the grant date and the value
is recognized as compensation expense over the service
period.
On March
5, 2008, the Board of Directors approved a grant of 18,015 shares
of nonvested stock to certain employees in conjunction with the payment of
2007 performance awards. On March 5, 2008, and September 15, 2008,
the Board of Directors approved grants of 10,294 and 1,336 shares, respectively,
of nonvested stock to its members of the Board of Directors in lieu of 2008
board retainer fees and certain committee chair fees they receive as directors
of the Company. On May 29, 2008, the Board of Directors approved a grant
of 14,706 shares of nonvested stock to its Chairman of the Board as
additional compensation for services rendered. Shares issued under
these four grants vested on February 7, 2009.
On
September 22, 2008, and November 12, 2008, the Board of Directors approved
grants of 4,095 shares and 8,636 shares of nonvested stock to its Chairman
of the Board as part of the Chairman’s Agreement. Shares issued under
theses grants vested on November 8, 2008, and February 7, 2009,
respectively.
On
September 22, 2008, the Compensation Committee of the Board of Directors also
approved a grant of 8,190 shares of common stock to its Chairman of the Board as
part of the Chairman’s Agreement. Compensation expense recognized in
relation to this grant totaled $100,000.
Changes
in restricted stock are as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Value
|
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Value
|
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Value
|
|
Nonvested
stock, beginning of year
|
|
|
1,584
|
|
|
$
|
18.95
|
|
|
|
4,448
|
|
|
$
|
17.99
|
|
|
|
29,727
|
|
|
$
|
17.20
|
|
Granted
|
|
|
57,082
|
|
|
|
15.76
|
|
|
|
53,250
|
|
|
|
50.52
|
|
|
|
44,207
|
|
|
|
17.75
|
|
Vested
|
|
|
(53,811
|
)
|
|
|
15.79
|
|
|
|
(55,836
|
)
|
|
|
48.81
|
|
|
|
(52,223
|
)
|
|
|
17.39
|
|
Forfeited
|
|
|
(3,799
|
)
|
|
|
15.80
|
|
|
|
(278
|
)
|
|
|
54.00
|
|
|
|
(17,263
|
)
|
|
|
17.83
|
|
Nonvested
stock, end of year
|
|
|
1,056
|
|
|
$
|
18.95
|
|
|
|
1,584
|
|
|
$
|
18.95
|
|
|
|
4,448
|
|
|
$
|
17.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense related to nonvested stock
|
|
$
|
850,000
|
|
|
|
|
|
|
$
|
2,724,000
|
|
|
|
|
|
|
$
|
776,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
February 7, 2009, total unrecognized compensation cost related to
nonvested stock was $19,000. This unrecognized compensation cost
will be recognized over a weighted-average period of 1.5 years.
NOTE
14 – EMPLOYEE BENEFIT PLANS
Expenses
(income) for retirement and savings-related benefit plans were as
follows:
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Profit
sharing
|
|
$
|
590
|
|
|
$
|
526
|
|
|
$
|
442
|
|
Pension
plan expense
|
|
|
818
|
|
|
|
1,202
|
|
|
|
1,614
|
|
Supplemental
retirement plan (income) expense
|
|
|
(903
|
)
|
|
|
281
|
|
|
|
281
|
|
Total,
net
|
|
$
|
505
|
|
|
$
|
2,009
|
|
|
$
|
2,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPI
CORP.
Notes
to Consolidated Financial Statements
Profit
Sharing
Under the
Company’s profit-sharing plan, as amended and restated, eligible employees may
elect to invest from 1% to 50% of their base compensation, subject to annual
limitations, in a trust fund, the assets of which are invested in securities
other than Company stock. The Company matches at 50% of the employees’
investment contributions, up to a maximum of 5% of the employees’
compensation. Effective January 1, 2009, this maximum increased to
8%. The Company's matching contributions are made in shares of its common
stock which vest incrementally at 1/3 per year of service or 100% once an
employee has completed three years of service with the
Company. Expenses related to the profit-sharing plan are accrued in
the year to which the awards relate, based on the fair market value of the
Company's common stock to be issued, determined as of the date
earned.
Defined
Benefit Plans
The
Company maintains a qualified, noncontributory pension plan that covers all
full-time U. S. employees meeting certain age and service
requirements. The plan provides pension benefits based on an
employee's length of service and the average compensation earned from the later
of the hire date or January 1, 1998, to the retirement date. On
February 3, 2004, the Company amended its pension plan to implement a freeze of
future benefit accruals under the plan, except for those employees with ten
years of service and who had attained age 50 at April 1, 2004, who were
grandfathered and whose benefits continued to accrue. Effective
February 20, 2009, the Company amended its pension plan to implement a freeze of
future benefit accruals for the remaining grandfathered
participants. The information disclosed below includes the impact of
these amendments.
As stated
in Note 1, the Company is required, under SFAS No. 158, to measure plan assets
and benefit obligations as of the date of its fiscal year end, effective for
fiscal years ending after December 15, 2008. As such, the Company
utilized a measurement date of February 7, 2009, and December 31, 2007, for
fiscal years 2008 and 2007, respectively, for its pension plan.
The
Company's funding policy is to contribute annually at least the minimum amount
required by government funding standards, but not more than is tax
deductible. Plan assets consist primarily of cash equivalents, fixed
income securities, domestic and international equity securities and exchange
traded index funds. The Company seeks to maximize returns and
minimize risk of the plan’s investment portfolio by diversifying the risks of
the portfolio over many different industries and sectors. During
2008, the Company decided to gradually transition the plan from its previous
asset allocation to a more traditional conservative asset mix, as indicated in
the tables below. The Company’s pension plan weighted average asset
allocations, by asset category, are as follows:
|
|
Target
|
|
|
Plan
Assets at
|
Asset
Category
|
|
Allocation
|
|
|
February
7, 2009
|
Equity
securities
|
|
|
50
|
%
|
|
|
48
|
%
|
Debt
securities
|
|
|
45
|
%
|
|
|
49
|
%
|
Cash
and cash equivalents
|
|
|
5
|
%
|
|
|
3
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
Plan
Assets at
|
|
Asset
Category
|
|
Allocation
|
|
|
December
31, 2007
|
|
Equity
securities
|
|
|
60
|
%
|
|
|
61
|
%
|
Debt
securities
|
|
|
40
|
%
|
|
|
39
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
CPI
CORP.
Notes
to Consolidated Financial Statements
The
Company uses a variety of outside sources to determine the overall expected
long-term rate of return on plan assets. The expectation is created
based on the asset allocation assumptions noted and the selection of the most
efficient blend of returns and risk characteristics. In developing
this rate, assumptions were made about the number of asset classes used,
expected return of each class, the associated risk inherent in the asset class
and the correlation between the asset classes.
The
Company also maintains a noncontributory defined benefit plan providing
supplemental retirement benefits for certain current and former key
executives. The cost of providing these benefits is accrued over the
remaining expected service lives of the active plan
participants. During 2008, the Company settled its liabilities
through lump-sum settlements with two employees and one other participant, which
resulted in a net reduction of liability due to the reductions in future
benefits. These settlements resulted in immediate recognition of
income of $1.2 million. Net supplemental retirement benefit (income)
costs for 2008, 2007 and 2006 were ($903,000), $281,000 and $281,000,
respectively. The supplemental retirement plan is unfunded and as
such does not have a specific investment policy or long-term rate of return
assumption. However, certain assets will be used to finance these
future obligations and consist of investments in a Rabbi Trust amounting to
$975,000 and $3.5 million at February 7, 2009, and February 2, 2008,
respectively. In 2009, the Company expects to pay approximately
$90,000 of scheduled supplemental retirement plan benefit payments from the
assets of the Rabbi Trust.
SFAS No.
158 requires employers to recognize the funded status of a defined benefit
retirement plan as an asset or liability in its statements of financial position
and to recognize changes in that funded status in comprehensive income in the
year in which the changes occur. SFAS No. 158 was adopted by the
Company effective February 3, 2007. Based on the projected benefit
obligations of the Company’s defined benefit plan and supplemental retirement
plan, the aggregate underfunded status of the Company’s defined benefit
retirement plans at January 1, 2007 was $20.1 million and the recorded liability
was $19.6 million. As a result of adopting this standard, the Company
recognized an additional accrued benefit liability of $422,000 and eliminated an
intangible asset for unrecognized prior service costs
of $133,000. The impact of these changes was recognized as
an adjustment to other comprehensive loss of $344,000, which is net of a
$211,000 tax benefit in 2006.
The
following benefit payments, which reflect expected future service, are expected
to be paid as follows:
in
thousands
|
|
Pension
Plan
|
|
|
Supplemental
Retirement
|
|
|
|
Benefits
|
|
|
Plan
Benefits
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
2,020
|
|
|
$
|
90
|
|
2010
|
|
|
2,040
|
|
|
|
10
|
|
2011
|
|
|
2,200
|
|
|
|
70
|
|
2012
|
|
|
2,300
|
|
|
|
110
|
|
2013
|
|
|
2,370
|
|
|
|
110
|
|
2014
- 2019
|
|
|
14,620
|
|
|
|
590
|
|
The
Company contributed $3.2 million and $5.1 million to its pension plan in 2008
and 2007, respectively. The Company estimates a 2009 contribution of
approximately $2.4 million. Future contributions to the pension plan
will be dependent upon legislation, future changes in discount rates and the
earnings performance of plan assets.
CPI
CORP.
Notes
to Consolidated Financial Statements
The
following table summarizes benefit obligation and plan asset activity for the
retirement plans:
|
|
Defined
Benefit Plans
|
|
|
|
Pension
Plan
|
|
|
Supplemental
Retirement Plan
|
|
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
50,245
|
|
|
$
|
51,836
|
|
|
$
|
3,617
|
|
|
$
|
3,702
|
|
Service cost
|
|
|
279
|
|
|
|
279
|
|
|
|
71
|
|
|
|
77
|
|
Interest cost
|
|
|
2,983
|
|
|
|
2,936
|
|
|
|
212
|
|
|
|
206
|
|
Actuarial gains
|
|
|
(8,184
|
)
|
|
|
(1,494
|
)
|
|
|
(461
|
)
|
|
|
(118
|
)
|
Benefit payments
|
|
|
(2,168
|
)
|
|
|
(3,312
|
)
|
|
|
(1,322
|
)
|
|
|
(250
|
)
|
Plan amendments (1)
|
|
|
(292
|
)
|
|
|
-
|
|
|
|
(916
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year (2) (3)
|
|
$
|
42,863
|
|
|
$
|
50,245
|
|
|
$
|
1,201
|
|
|
$
|
3,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at beginning of year
|
|
$
|
37,857
|
|
|
$
|
35,472
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Actual (loss) return on plan assets
|
|
|
(8,864
|
)
|
|
|
647
|
|
|
|
-
|
|
|
|
-
|
|
Employer contributions (4)
|
|
|
3,157
|
|
|
|
5,050
|
|
|
|
1,322
|
|
|
|
249
|
|
Benefit payments
|
|
|
(2,168
|
)
|
|
|
(3,312
|
)
|
|
|
(1,322
|
)
|
|
|
(249
|
)
|
Plan amendments (5)
|
|
|
270
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at end of year
|
|
$
|
30,252
|
|
|
$
|
37,857
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(12,611
|
)
|
|
$
|
(12,388
|
)
|
|
$
|
(1,201
|
)
|
|
$
|
(3,617
|
)
|
Unrecognized prior service cost
|
|
|
-
|
|
|
|
89
|
|
|
|
-
|
|
|
|
123
|
|
Unrecognized net loss (gain)
|
|
|
16,445
|
|
|
|
13,859
|
|
|
|
(725
|
)
|
|
|
(658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
3,834
|
|
|
$
|
1,560
|
|
|
$
|
(1,926
|
)
|
|
$
|
(4,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of consolidated balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
$
|
(12,611
|
)
|
|
$
|
(12,388
|
)
|
|
$
|
(1,201
|
)
|
|
$
|
(3,617
|
)
|
Accumulated other comprehensive loss
|
|
|
16,445
|
|
|
|
13,948
|
|
|
|
(725
|
)
|
|
|
(535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
3,834
|
|
|
$
|
1,560
|
|
|
$
|
(1,926
|
)
|
|
$
|
(4,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Plan
amendments for the pension plan include an adjustment of $272,000 in
expense due to the change in measurement date and curtailment income of
$564,000 related to the freeze of benefits for previously grandfathered
employees. Plan amendments for the supplemental retirement plan
include $562,000 in curtailment income related to the lump-sum
settlement of benefits for two employees and a $354,000 gain related to
the lump-sum settlement payment to a third participant.
|
(2)
|
|
At
February 7, 2009, and February 2, 2008, the accumulated benefit obligation
for the pension plan was $42.9 million and $49.6 million,
respectively.
|
(3)
|
|
At
February 7, 2009, and February 2, 2008, the accumulated benefit obligation
for the supplemental retirement plan was $1.2 million and $3.5 million,
respectively.
|
(4)
|
|
For
the fiscal year ended February 2, 2008, contributions to the pension plan
included $771,000 that was contributed after the measurement date but
prior to year-end. For the supplemental retirement plan for the
fiscal years ended February 7, 2009, and February 2, 2008, the employer
contributions were financed through the liquidation of investments in the
Company’s Rabbi Trust.
|
(5)
|
|
Plan
amendment includes an adjustment of $270,000 in expense due to the change
in measurement date.
|
CORP.
Notes
to Consolidated Financial Statements
The
following table summarizes the net prior service cost and net actuarial
(gain)/loss recorded as “Accumulated Other Comprehensive Loss” and recognized in
earnings in fiscal year 2008 and 2007:
|
|
|
|
|
Supplemental
|
|
|
|
|
in thousands
|
|
Pension
Plan
|
|
|
Retirement
Plan
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Prior
Service Cost, net of tax:
|
|
|
|
|
|
|
|
|
|
Unrealized losses on net prior service cost at February 3,
2007
|
|
$
|
83
|
|
|
$
|
95
|
|
|
$
|
178
|
|
Recognition of net prior service cost in earnings
|
|
|
(28
|
)
|
|
|
(19
|
)
|
|
|
(47
|
)
|
Unrealized losses on net prior service cost at February 2,
2008
|
|
|
55
|
|
|
|
76
|
|
|
|
131
|
|
Recognition of net prior service cost in earnings
|
|
|
(27
|
)
|
|
|
(19
|
)
|
|
|
(46
|
)
|
Recognition of curtailment benefit in earnings
|
|
|
(28
|
)
|
|
|
(57
|
)
|
|
|
(85
|
)
|
Unrealized losses on net prior service cost at February 7,
2009
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial
(Gain) Loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses (gains) on net actuarial (gain)/loss at February 3,
2007
|
|
$
|
8,662
|
|
|
$
|
(355
|
)
|
|
$
|
8,307
|
|
Net actuarial losses (gains) recorded in accumulated other comprehensive
loss
|
|
|
485
|
|
|
|
(74
|
)
|
|
|
411
|
|
Recognition of net actuarial (losses)/gains in earnings
|
|
|
(537
|
)
|
|
|
21
|
|
|
|
(516
|
)
|
Unrealized losses (gains) on net actuarial (gain)/loss at February 2,
2008
|
|
|
8,610
|
|
|
|
(408
|
)
|
|
|
8,202
|
|
Net actuarial gains recorded in accumulated other comprehensive
loss
|
|
|
2,025
|
|
|
|
(854
|
)
|
|
|
1,171
|
|
Recognition of net actuarial (losses)/gains in earnings
|
|
|
(439
|
)
|
|
|
37
|
|
|
|
(402
|
)
|
Recognition of settlement and curtailment benefit in
earnings
|
|
|
-
|
|
|
|
775
|
|
|
|
775
|
|
Unrealized losses (gains) on net actuarial (gain)/loss at February 7,
2009
|
|
$
|
10,196
|
|
|
$
|
(450
|
)
|
|
$
|
9,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
amounts of net prior service cost and net actuarial loss for the pension plan
expected to be recognized in earnings during fiscal year 2009 are $0 and
$198,000, respectively. The amounts of net prior service cost and net
actuarial loss for the supplemental retirement plan expected to be recognized in
earnings during fiscal year 2009 are $0 and ($151,000),
respectively.
CPI
CORP.
Notes
to Consolidated Financial Statements
The
following table sets forth the components of net periodic benefit cost for the
retirement plans:
in
thousands
|
|
Pension
Plan
|
|
|
Supplemental
Retirement Plan
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
279
|
|
|
$
|
279
|
|
|
$
|
404
|
|
|
$
|
71
|
|
|
$
|
77
|
|
|
$
|
75
|
|
Interest
cost
|
|
|
2,983
|
|
|
|
2,936
|
|
|
|
2,869
|
|
|
|
212
|
|
|
|
206
|
|
|
|
200
|
|
Expected
return on plan assets
|
|
|
(3,242
|
)
|
|
|
(2,924
|
)
|
|
|
(2,799
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization
of prior service cost
|
|
|
44
|
|
|
|
44
|
|
|
|
44
|
|
|
|
31
|
|
|
|
31
|
|
|
|
31
|
|
Amortization
of net loss (gain)
|
|
|
710
|
|
|
|
867
|
|
|
|
1,096
|
|
|
|
(59
|
)
|
|
|
(33
|
)
|
|
|
(25
|
)
|
Curtailment
expense (income)
|
|
|
44
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(469
|
)
|
|
|
-
|
|
|
|
-
|
|
Net
gain due to settlements
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(689
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
818
|
|
|
$
|
1,202
|
|
|
$
|
1,614
|
|
|
$
|
(903
|
)
|
|
$
|
281
|
|
|
$
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table sets forth the weighted-average plan assumptions and other
data:
|
|
Pension
Plan
|
|
|
Supplemental
Retirement Plan
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine
benefit
obligations at fiscal year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
7.25
|
%
|
|
6.00
|
%
|
|
5.75
|
%
|
|
7.25
|
%
|
|
6.00
|
%
|
|
5.75
|
%
|
Rate of increase in future compensation
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
2.00
|
%
|
|
2.00
|
%
|
|
2.00
|
%
|
Weighted-average
assumptions used to determine
net
periodic
benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
6.00
|
%
|
|
5.75
|
%
|
|
5.50
|
%
|
|
6.00
|
%
|
|
5.75
|
%
|
|
5.50
|
%
|
Expected long-term return on plan assets
|
|
8.25
|
%
|
|
8.25
|
%
|
|
8.25
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Rate of increase in future compensation
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.75
|
%
|
|
2.00
|
%
|
|
2.00
|
%
|
|
2.00
|
%
|
For the
discount rate in 2008, the Company used a methodology under which a yield curve
was developed from various yields on a large universe of Aa-rated bonds.
The plan's projected cash flows were matched to this yield curve and a present
value developed accordingly.
The
following table provides the required information for the pension plan and
supplemental retirement plan as in both cases benefit obligations are in excess
of plan assets:
in
thousands
|
|
Pension
Plan
|
|
|
Supplemental
Retirement Plan
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation
|
|
$
|
42,863
|
|
|
$
|
50,245
|
|
|
$
|
1,201
|
|
|
$
|
3,617
|
|
Accumulated
benefit obligation
|
|
|
42,863
|
|
|
|
49,647
|
|
|
|
1,201
|
|
|
|
3,520
|
|
Fair
value of plan assets
|
|
|
30,252
|
|
|
|
37,857
|
|
|
|
-
|
|
|
|
-
|
|
The
Company also maintains a noncontributory pension plan that covers all Sears
Portrait Studios Canadian employees meeting certain service
requirements. The plan provides pension benefits based on an
employee’s length of service and annual compensation earned. As of
February 28, 2005, the Company amended its plan to implement a freeze of future
benefit accruals, except for certain employees who were both over 50 years of
age and had ten or more years of service with the Company on that
date. The Company contributed approximately $123,000 and $220,000 to
this retirement plan as of its measurement dates of February 7, 2009, and
December 31, 2007, respectively. Plan assets were $2.0 million and
$2.9 million as of February 7, 2009, and December 31, 2007, respectively, and
consisted of several Canadian equity and fixed income funds. No
liability is reflected in the Company’s consolidated financial statements as the
plan is fully funded.
CPI
CORP.
Notes
to Consolidated Financial Statements
NOTE
15– INCOME TAXES
The total
income tax (benefit) provision is summarized in the following
table:
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Total
income tax (benefit) provision:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(2,644
|
)
|
|
$
|
2,080
|
|
|
$
|
9,164
|
|
Discontinued operations
|
|
|
(543
|
)
|
|
|
(129
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) provision
|
|
$
|
(3,187
|
)
|
|
$
|
1,951
|
|
|
$
|
9,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
components of income tax (benefit) provision from continuing operations
were:
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(94
|
)
|
|
$
|
(56
|
)
|
|
$
|
(430
|
)
|
Deferred
|
|
|
(1,784
|
)
|
|
|
254
|
|
|
|
8,411
|
|
Federal
income tax
|
|
|
(1,878
|
)
|
|
|
198
|
|
|
|
7,981
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
681
|
|
|
|
143
|
|
Deferred
|
|
|
(314
|
)
|
|
|
(368
|
)
|
|
|
813
|
|
State
income tax
|
|
|
(314
|
)
|
|
|
313
|
|
|
|
956
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
|
|
94
|
|
Deferred
|
|
|
(452
|
)
|
|
|
1,569
|
|
|
|
133
|
|
Foreign
income tax
|
|
|
(452
|
)
|
|
|
1,569
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income tax provision from continuing operations
|
|
$
|
(2,644
|
)
|
|
$
|
2,080
|
|
|
$
|
9,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax
benefit from discontinued operations was $543,000, $129,000 and $58,000 in 2008,
2007 and 2006, respectively; see Note 5.
A
reconciliation of expected income tax (benefit) expense from continuing
operations at the federal statutory rate of 34% to the Company’s applicable
income tax (benefit) expense follows:
in
thousands
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Tax
at statutory rate (34%)
|
|
$
|
(3,184
|
)
|
|
$
|
2,073
|
|
|
$
|
8,702
|
|
State
income tax, at statutory rate, net of
federal
income tax benefit
|
|
|
(207
|
)
|
|
|
244
|
|
|
|
632
|
|
Tax
effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
not deductible
|
|
|
370
|
|
|
|
249
|
|
|
|
184
|
|
Tax
credits and exclusions
|
|
|
(798
|
)
|
|
|
(691
|
)
|
|
|
(244
|
)
|
Valuation
allowance
|
|
|
726
|
|
|
|
457
|
|
|
|
-
|
|
Foreign
taxes
|
|
|
248
|
|
|
|
385
|
|
|
|
41
|
|
Tax
settlements
|
|
|
223
|
|
|
|
(620
|
)
|
|
|
(151
|
)
|
US
tax benefit of foreign tax deduction
|
|
|
(22
|
)
|
|
|
(17
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable
income tax (benefit) expense
|
|
$
|
(2,644
|
)
|
|
$
|
2,080
|
|
|
$
|
9,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPI
CORP.
Notes
to Consolidated Financial Statements
In July
2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in
income taxes recognized in the financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.” FIN 48
provides guidance on the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The
Company adopted the provisions of FIN 48 effective February 4, 2007, which had
no impact on the financial statements of the Company upon adoption. The
Company had a balance of liability for uncertain tax positions of $2.7 million
as of February 3, 2008, and February 7, 2009, with no changes occurring in the
balance during 2008. The Company and its subsidiaries file income tax
returns in the U.S. federal jurisdition, many states, Mexican and Canadian
jurisdictions. The Company is no longer subject to U.S. federal income tax
examinations for the years prior to 2003. Ongoing examinations by various
state taxing authorities date back to February 1, 2003.
In
preparing its tax return, the Company is required to interpret complex tax laws
and regulations and utilize income and cost allocation methods to determine its
taxable income. On an ongoing basis, the Company is subject to
examination by federal, state and foreign taxing authorities that may give rise
to differing interpretation of the complex laws, regulations and
methods. No examinations were finalized in the current reporting
year. At February 7, 2009, the Company believes that the aggregate
amount of any additional tax liabilities that may arise from other examinations
by taxing authorities, if any, will not have a material adverse effect on the
financial condition, results of operations or cash flow of the
Company.
Deferred
income tax assets and liabilities reflect the tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for the same items for income tax
reporting purposes.
The
components of the Company’s net deferred tax assets as of February 7, 2009, and
February 2, 2008, were:
in
thousands
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
|
|
|
|
|
Federal,
state and foreign operating and capital loss carryforwards
|
|
$
|
11,263
|
|
|
$
|
3,806
|
|
Pension
and supplemental retirement plan benefits
|
|
|
4,502
|
|
|
|
5,541
|
|
Reserves,
principally due to accrual for financial reporting
purposes
|
|
|
4,241
|
|
|
|
3,047
|
|
Federal,
state and foreign tax credit carryforwards
|
|
|
3,578
|
|
|
|
3,735
|
|
Interest
rate swap
|
|
|
1,325
|
|
|
|
1,113
|
|
Property
and equipment, principally due to differences in
depreciation
|
|
|
-
|
|
|
|
2,719
|
|
Other
|
|
|
-
|
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
Gross
deferred tax assets
|
|
|
24,909
|
|
|
|
20,229
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
Property
and equipment, principally due to differences in
depreciation
|
|
|
(2,221
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Gross
deferred tax liabilities
|
|
|
(2,221
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(4,748
|
)
|
|
|
(3,117
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$
|
17,940
|
|
|
$
|
17,112
|
|
|
|
|
|
|
|
|
|
|
The
Company had net operating loss carryforwards for federal, state and Canadian tax
purposes of approximately $17.9 million, $577,000 and $645,000, respectively,
which begin to expire in 2028, 2012 and 2010, respectively. The
Company also has alternative minimum tax credit carryforwards of approximately
$468,000. The Company has General Business Tax Credit carryforwards
totaling $3.0 million, which expire in tax years 2027 through
2028.
CPI
CORP.
Notes
to Consolidated Financial Statements
The
Company regularly assesses the likelihood that deferred tax assets will be
recovered through future taxable income. To the extent the Company
believes that it is more likely than not that a deferred tax asset will not be
realized, a valuation allowance is established. At February 2, 2008, the Company
had a valuation allowance of approximately $3.1 million to offset deferred tax
assets related to capital and net operating loss carryforwards. In
the year ended February 7, 2009, an additional $588,000 valuation allowance for
the tax benefit of the loss incurred by the Mexican operation and a $1.0 million
valuation allowance, recorded as a purchase accounting adjustment, for the tax
benefit of U.S. utilization of Canadian depreciation were
recorded. It is management’s belief that the remaining deferred tax
assets meet the criteria for realization, including expected future earnings
sufficient to support the realization of deferred tax assets. If
these unrecognized tax benefits were recognized, approximately $4.7 million
would impact the effective tax rate. While it is expected that the
amount of unrecognized tax benefits will change in the next 12 months, the
Company does not expect the change to have a significant impact on the results
of operations or the financial position of the Company. The Company
recognizes interest expense and penalties related to the unrecognized tax
benefits in income tax expense. The Company had $36,000 and $0
accrued interest and penalties as of February 7, 2009, and February 2, 2008,
respectively.
The
American Jobs Creation Act (“AJCA”) which was enacted on October 22, 2004,
created a temporary incentive for U. S. multinationals to repatriate accumulated
earnings outside the U. S. by providing an 85 percent dividends received
deduction for certain dividends from controlled foreign corporations. The
Company elected to apply this provision to qualifying earnings repatriations in
fiscal year 2006, providing taxes of approximately $472,000.
At
February 7, 2009, approximately $3.3 million of foreign subsidiary net earnings
was considered permanently invested in those businesses. U.S. income
taxes have not been provided for such earnings. It is not practicable to
determine the amount of unrecognized deferred tax liabilities associated with
such earnings.
NOTE
16 – COMMITMENTS AND CONTINGENCIES
Operating
Lease Commitments
The
Company leases various premises and equipment under noncancellable operating
lease agreements with initial terms in excess of one year and expiring at
various dates through fiscal year 2018. The leases generally provide
for the lessee to pay maintenance, insurance, taxes and certain other operating
costs of the leased property.
Rental
expense during 2008, 2007 and 2006, on all operating leases was $1.4 million,
$1.4 million and $1.3 million, respectively.
Minimum
rental payments under operating leases with initial terms in excess of one year
at February 7, 2009, are as follows:
2009
|
|
$
|
735
|
|
2010
|
|
|
592
|
|
2011
|
|
|
414
|
|
2012
|
|
|
351
|
|
2013
|
|
|
265
|
|
Beyond
|
|
|
1,178
|
|
Total
minimum payments
|
|
$
|
3,535
|
|
|
|
|
|
|
Standby
Letters of Credit
As of
February 7, 2009, the Company had standby letters of credit outstanding in the
principal amount of $20.6 million primarily used in conjunction with the
Company’s various large deductible insurance programs.
CPI
CORP.
Notes
to Consolidated Financial Statements
Purchase
Commitments
As of
February 7, 2009, the Company had outstanding purchase commitments for goods and
services of $2.5 million. Of these commitments, $435,000 are
unconditional purchase obligations related to telecommunication services and
database maintenance contracts. Expense related to these
unconditional purchase obligations during 2008, 2007 and 2006 was $499,000,
$421,000 and $711,000, respectively.
Future
payments under these unconditional purchase obligations at February 7, 2009, are
as follows:
2009
|
|
$
|
240
|
|
2010
|
|
|
148
|
|
2011
|
|
|
47
|
|
|
|
|
|
|
Total
minimum payments
|
|
$
|
435
|
|
|
|
|
|
|
Contingent
Lease Obligations
In July
2001, the Company announced the completion of the sale of its Wall Décor
segment, Prints Plus, which included the ongoing guarantee of certain operating
real estate leases of Prints Plus. As of February 7, 2009, the
maximum future obligation to the Company under its guarantee of remaining leases
is approximately $1.0 million before consideration of replacement tenant
income. To recognize the risk associated with these leases based upon
the Company’s past experience with renegotiating lease obligations and the
management’s evaluation of remaining lease liabilities, the Company has recorded
lease obligation reserves totaling approximately $730,000 at February 7,
2009. Based on the status of remaining leases, the Company believes
that the $730,000 reserve is adequate to cover the potential losses to be
realized under the Company’s remaining operating lease guarantees.
Settlement Commitment
The
Company is obligated to remit Sears additional payments as stipulated in the
settlement of the previous license agreement. A $1.5 million payment
is due to Sears on April 30, 2009, with an additional $150,000 due on December
31
st
in
each 6 successive years. Future discounted payments as of February 7,
2009 are as follows:
2009
|
|
$
|
1,638
|
|
2010
|
|
|
127
|
|
2011
|
|
|
117
|
|
2012
|
|
|
108
|
|
2013
|
|
|
99
|
|
2014
|
|
|
91
|
|
|
|
$
|
2,180
|
|
|
|
|
|
|
CPI
CORP.
Notes
to Consolidated Financial Statements
Legal
Proceedings
The
Company and two of its subsidiaries are defendants in a lawsuit entitled
Shannon Paige, et al. v.
Consumer Programs, Inc.
, filed March 8, 2007, in the Superior Court of
the State of California for the County of Los Angeles, Case No.
BC367546. The case was subsequently removed to the United States
District Court for the Central District of California, Case No. CV 07-2498-FMC
(RCx). The Plaintiff alleges that the Company failed to pay him and
other hourly associates for “off the clock” work and that the Company failed to
provide meal and rest breaks as required by law. The Plaintiff is
seeking damages and injunctive relief for himself and others similarly
situated. On October 6, 2008, the Court denied the Plaintiffs’ motion
for class certification but allowed Plaintiffs to attempt to certify a smaller
class, thus reducing the size of the potential class to approximately
200. Plaintiffs filed a motion seeking certification of the smaller
class on November 14, 2008. The Company filed its opposition on
December 8, 2008. In January 2009, the Court denied Plaintiffs'
motion for class certification as to their claims that they
worked "off the clock". The Court also deferred ruling on
Plaintiff's motion for class certification as to their missed break claims
and stayed the action until the California Supreme Court rules on a pending
case on the issue of whether an employer must merely provide an opportunity
for employees to take a lunch break or whether an employer must actively
ensure that its employees take the break. The Company believes the
claims are without merit and continues its vigorous defense on behalf of
itself and its subsidiaries against these claims, however, an adverse ruling in
this case could require the Company to pay damages, penalties, interest and
fines.
The
Company is a defendant in a lawsuit entitled
Picture Me Press LLC v. Portrait Corporation
of America, et al.
,
Case No. 5:08cv32, which was filed in the
United States District Court for the Northern District of Ohio on January 4,
2008. The suit alleges that the Company’s operation of PictureMe
Portrait Studios infringes on Plaintiff’s trademark for its picture books and
seeks damages and injunctive relief. The Company believes the case is
without merit and is vigorously defending itself. However,
intellectual property litigation such as this case is expensive and time
consuming, and if the claim were to result in an unfavorable outcome, it could
result in significant monetary liability or prevent the Company from operating
portions of its business under current trademarks used by the
Company. In addition, an adverse resolution of this claim could
require the Company to obtain licenses to use intellectual property rights
belonging to third parties, which may be expensive to procure, or possibly to
cease using those rights altogether. Any of these results could have
a material adverse effect on the Company’s business, financial position and
results of operations. The Company has denied the claim alleged by
the Plaintiff and filed counterclaims against the
Plaintiff.
The
Company is also a defendant in other routine litigation, but does not believe
these lawsuits, individually or in combination with the cases described above,
will have a material adverse effect on its financial condition. The Company
cannot, however, give assurances that these legal proceedings will not have a
material adverse effect on its business or financial condition.
CPI
CORP.
Notes
to Consolidated Financial Statements
NOTE
17 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
in
thousands, except share and per share data
|
|
|
|
|
|
April
26,
|
|
|
July
19,
|
|
|
November
8,
|
|
|
February
7,
|
|
FISCAL
YEAR 2008
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(12
weeks)
|
|
|
(12
weeks)
|
|
|
(16
weeks)
|
|
|
(13
weeks)
|
|
Net
sales
|
|
$
|
103,367
|
|
|
$
|
89,562
|
|
|
$
|
115,690
|
|
|
$
|
153,929
|
|
Gross
profit
|
|
|
90,203
|
|
|
|
77,591
|
|
|
|
99,880
|
|
|
|
137,606
|
|
Net
(loss) income from continuing operations
|
|
|
(92
|
)
|
|
|
(3,416
|
)
|
|
|
(13,057
|
)
|
|
|
9,841
|
|
Net
loss from discontinued operations
|
|
|
(164
|
)
|
|
|
(186
|
)
|
|
|
(284
|
)
|
|
|
(327
|
)
|
Net
(loss) income
|
|
|
(256
|
)
|
|
|
(3,602
|
)
|
|
|
(13,341
|
)
|
|
|
9,514
|
|
Net
(loss) income per share from continuing operations-
diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(2.02
|
)
|
|
$
|
1.47
|
|
Net
loss per share from discontinued operations- diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
Net
(loss) income per share - diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.56
|
)
|
|
$
|
(2.06
|
)
|
|
$
|
1.42
|
|
Net
(loss) income per share from continuing operations- basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(2.02
|
)
|
|
$
|
1.48
|
|
Net
loss per share from discontinued operations- basic
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
Net
(loss) income per share- basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.56
|
)
|
|
$
|
(2.06
|
)
|
|
$
|
1.43
|
|
Weighted
average number of common and equivalent shares - diluted
|
|
|
6,450
|
|
|
|
6,468
|
|
|
|
6,479
|
|
|
|
6,682
|
|
Weighted
average number of common and equivalent shares - basic
|
|
|
6,450
|
|
|
|
6,468
|
|
|
|
6,479
|
|
|
|
6,641
|
|
in
thousands, except share and per share data
|
|
|
|
|
|
April
28,
|
|
|
July
21,
|
|
|
November
10,
|
|
|
February
2,
|
|
FISCAL
YEAR 2007
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(12
weeks)
|
|
|
(12
weeks)
|
|
|
(16
weeks)
|
|
|
(12
weeks)
|
|
Net
sales
|
|
$
|
57,654
|
|
|
$
|
67,996
|
|
|
$
|
135,205
|
|
|
$
|
162,574
|
|
Gross
profit
|
|
|
49,257
|
|
|
|
57,460
|
|
|
|
114,815
|
|
|
|
143,864
|
|
Net
income (loss) from continuing operations
|
|
|
2,629
|
|
|
|
(4,442
|
)
|
|
|
(9,969
|
)
|
|
|
15,801
|
|
Net
loss from discontinued operations
|
|
|
(74
|
)
|
|
|
(159
|
)
|
|
|
(138
|
)
|
|
|
(72
|
)
|
Net
income (loss)
|
|
|
2,555
|
|
|
|
(4,601
|
)
|
|
|
(10,107
|
)
|
|
|
15,729
|
|
Net
income (loss) per share from continuing operations-
diluted
|
|
$
|
0.41
|
|
|
$
|
(0.70
|
)
|
|
$
|
(1.56
|
)
|
|
$
|
2.46
|
|
Net
loss per share from discontinued operations- diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
Net
income (loss) per share - diluted
|
|
$
|
0.40
|
|
|
$
|
(0.72
|
)
|
|
$
|
(1.58
|
)
|
|
$
|
2.45
|
|
Net
income (loss) per share from continuing operations- basic
|
|
$
|
0.41
|
|
|
$
|
(0.70
|
)
|
|
$
|
(1.56
|
)
|
|
$
|
2.47
|
|
Net
loss per share from discontinued operations- basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
Net
income (loss) per share- basic
|
|
$
|
0.40
|
|
|
$
|
(0.72
|
)
|
|
$
|
(1.58
|
)
|
|
$
|
2.46
|
|
Weighted
average number of common and equivalent shares - diluted
|
|
|
6,388
|
|
|
|
6,386
|
|
|
|
6,402
|
|
|
|
6,434
|
|
Weighted
average number of common and equivalent shares - basic
|
|
|
6,363
|
|
|
|
6,386
|
|
|
|
6,402
|
|
|
|
6,409
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
|
None.
Item 9A.
|
Controls and Procedures
|
a)
|
Evaluation
of Disclosure Controls and
Procedures
|
The
Company’s management maintains disclosure controls and procedures that are
designed to provide reasonable assurances that information required to be
disclosed in the reports we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Commission’s rules and forms. These controls and procedures are
also designed to ensure that such information is accumulated and communicated to
our management, including our principal executive and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating disclosure controls and
procedures, we have recognized that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving
the desired control objective. Management is required to apply
judgment in evaluating its controls and procedures.
Under the
supervision of and with the participation of management, including the Chief
Executive Officer and the Chief Financial Officer, the Company conducted an
evaluation of the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934) as of February 7, 2009. Based on
this evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective
as of February 7, 2009.
b)
|
Management’s
Assessment of Internal Control Over Financial
Reporting
|
CPI’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of
the Securities Exchange Act of 1934). CPI’s management, under the
supervision of and with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of the Company’s internal control over financial reporting as of
February 7, 2009. In making this assessment, the Company used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in
Internal Control -
Integrated Framework
. Based on the Company’s evaluation under
such framework, management concluded that the Company’s internal control over
financial reporting was effective as of February 7, 2009.
KPMG LLP,
an independent registered public accounting firm, has issued an audit report on
the effectiveness of the Company’s internal control over financial reporting as
of February 7, 2009, which is included in Item 9A (e) below.
c)
|
Remediation
of Prior Material Weaknesses
|
The
Company previously reported that, as of February 2, 2008, certain controls and
procedures were not effective because of material weaknesses in our procedures
surrounding controls over the accounting for income taxes, the interest rate
swap and advertising costs. As a result of these deficiencies, errors
existed in the Company’s presentation of its consolidated financial statements
that were corrected prior to the issuance of the fiscal year 2007 consolidated
financial statements. To remediate these weaknesses, the Company
implemented the following:
·
|
Effective
controls over tax depreciation amounts, which included the timely
resolution of reconciling items between the Company’s tax returns, the
Company’s tax depreciation records, and the calculations of deferred taxes
and income tax expense
|
·
|
Management
monitoring controls to ensure those reconciliation controls are designed
and operating effectively
|
·
|
Policies
and procedures to ensure the fair value of the interest rate swap is
properly determined and recorded
|
·
|
Management
monitoring controls to policies and procedures over determining and
recording of the interest rate swap is designed and operating
effectively
|
·
|
Policies
and procedures to ensure the accrual for unpaid advertising costs is
properly determined and recorded
|
·
|
Management
monitoring controls for policies and procedures over the determination and
recording of the advertising accrual to ensure controls are designed and
operating effectively
|
The above
additional procedures have enhanced the internal control environment such that
the material weaknesses no longer exist at February 7, 2009.
d)
|
Changes
in Internal Control Over Financial
Reporting
|
There
were no changes in the Company’s internal control over financial reporting
during the quarter ended February 7, 2009, which were identified in connection
with management’s evaluation required by paragraph (d) of Rule 13a-15 of the
Securities Exchange Act of 1934, that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
e)
|
Report of Independent Registered Public Accounting
Firm
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
CPI
Corp.:
We have
audited CPI Corp. and subsidiaries’ (the Company’s) internal control over
financial reporting as of February 7, 2009, based on criteria established
in
Internal Control –
Integrated Framework
issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Item 9A (b) “Management’s Assessment of Internal
Control Over Financial Reporting”. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of February 7, 2009, based on criteria
established in
Internal
Control – Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of February 7, 2009 and February 2, 2008, and the related consolidated
statements of operations, changes in stockholders’ equity and cash flows for
each of the years in the three-year period ended February 7, 2009, and our
report dated April 21, 2009 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG
LLP
_________________________________
KPMG
LLP
St.
Louis, Missouri
April 21,
2009
Item 9B.
|
Other Information
|
None.
PART
III
Item 10.
|
Directors, Executive Officers and Corporate
Governance
|
The
response to this Item required by Item 401 of Regulation S-K, with respect to
directors, incorporates by reference the information under the caption “Election
of Directors” and “Executive Officers” in the Proxy Statement for the 2009
Annual Meeting of Stockholders (the “Proxy Statement”) and, with respect to the
audit committee, incorporates by reference the information under the caption
“Board and Committee Meetings” and “Report of Audit Committee” of the Proxy
Statement.
The
response to this Item required by Item 405 of Regulation S-K incorporates by
reference the information under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement.
The
Company has adopted a Corporate Governance Code of Business Conduct and Ethics
applicable to all field management and corporate office employees, officers and
directors. This code is applicable to senior executive officers including the
principal executive officer, principal financial officer and principal
accounting officer of the Company. The Company’s Corporate Governance Code of
Business Conduct and Ethics is available on the Company’s website at
www.cpicorp.com. The Company intends to post on its website any
amendments to, or waivers from its Corporate Governance Code of Business Conduct
and Ethics applicable to senior executive officers. The Company will
provide stockholders with a copy of its Corporate Governance Code of Business
Conduct and Ethics without charge upon written request directed to the Company’s
Secretary at the Company’s address set forth on the cover page of this Annual
Report on Form 10-K.
Item 11.
|
Executive Compensation
|
The
response to this Item incorporates by reference the information under the
captions “Executive Compensation,” “Compensation Discussion and Analysis,”
“Report of the Compensation Committee on Executive Compensation,” “Summary
Compensation Table,” “Grants of Plan-Based Awards in 2008,” “Outstanding Equity
Awards at 2008 Fiscal Year-End,” “Option Exercises and Stock Vested for 2008,”
“Nonqualified Deferred Compensation in 2008,” “Employment Contracts,
Termination of Employment and Change in Control Arrangements,” “Compensation
Committee Interlocks and Insider Participation,” “Board and Committee
Meetings” and “Director Compensation for Fiscal Year 2008,” in the
Proxy Statement.
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The
response to this Item incorporates by reference the information under the
caption “Security Ownership of Certain Beneficial Owners” in the Proxy
Statement.
The
following table provides information as of February 7, 2009, regarding the
number of shares of common stock that were issuable under the Company’s equity
compensation plans.
|
|
|
|
|
|
Number
of securities
|
|
|
|
|
Number
of securities
|
|
Weighted-average
|
|
remaining
available
|
|
|
|
|
to
be issued upon
|
|
exercise price
|
|
for
future issuance under
|
|
|
|
|
exercise
of outstanding
|
|
of
outstanding
|
|
equity
compensation
|
|
|
|
|
|
|
options,
warrants
|
|
plans
(excluding securities
|
|
|
Plan
Category
|
|
and
rights (a)
|
|
and
rights (b)
|
|
reflected
in column (a)) (c)
|
|
|
Equity
compensation plans
|
|
|
|
|
|
|
|
|
approved
by security holders (1)
|
|
|
232,546
|
|
$
|
13.13
|
|
|
560,243
|
(2)
|
|
Equity
compensation plans not
|
|
|
|
|
|
|
|
|
|
|
|
approved
by security holders (3)
|
|
|
-
|
|
|
-
|
|
|
80,232
|
(4)
|
|
Total
|
|
$
|
232,546
|
|
$
|
13.13
|
|
|
640,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes
15,046 stock options issued and outstanding under the Company’s previous
amended and restated nonqualified stock option plan and 217,500 stock
options issued and outstanding under the Company’s current plan, effective
May 29, 2008. See Note 13 for further discussion of the
Company’s stock based compensation plans.
|
(2)
|
|
Represents
total shares of common stock available for issuance pursuant to awards
under the Company’s Omnibus Incentive Plan, effective May 29,
2008. See Note 13 for further discussion of this
plan.
|
(3)
|
|
The
only plan not approved by security holders is the Company’s stock bonus
plan. This plan was enacted in fiscal 1982 and is no longer
active. The remaining awards granted under this plan vested in
fiscal 2003.
|
(4)
|
|
Represents
80,232 shares reserved for issuance under the Company’s inactive stock
bonus plan.
|
Item 13.
|
Certain Relationships and Related Transactions, and Director
Independence
|
The
response to this Item incorporates by reference the relevant information under
the captions “Certain Relationships and Related Transactions” and “Director
Independence” in the Proxy Statement.
Item 14.
|
Principal Accounting Fees and Services
|
The
response to this Item incorporates by reference the information under the
caption “Fees Paid to Independent Registered Public Accounting Firm” in the
Proxy Statement.
PART
IV
Item 15.
|
Exhibits and Financial Statement
Schedules
|
(a)
|
CERTAIN
DOCUMENTS FILED AS PART OF FORM
10-K
|
(1.)
|
FINANCIAL STATEMENTS
|
|
PAGES
|
|
|
|
|
|
-
|
|
Report
of Independent Registered Public Accounting Firm
|
|
30
|
|
-
|
|
Consolidated
Balance Sheets as of February 7, 2009, and February 2,
2008
|
|
31-32
|
|
-
|
|
Consolidated
Statements of Operations for the fiscal years ended
|
|
|
|
|
|
February 7, 2009, February 2, 2008, and February 3, 2007
|
|
33
|
|
-
|
|
Consolidated
Statements of Changes in Stockholders' Equity for the
fiscal
|
|
|
|
|
|
|
years
ended February 7, 2009, February 2, 2008, and February 3,
2007
|
|
34
|
|
-
|
|
Consolidated
Statements of Cash Flows for the fiscal years ended
|
|
|
|
|
|
|
February
7, 2009, February 2, 2008, and February 3, 2007
|
|
35-37
|
|
-
|
|
Notes
to Consolidated Financial Statements
|
|
38-70
|
(2.)
|
FINANCIAL
STATEMENT SCHEDULES
Schedules to the consolidated financial statements
required by Regulation S-X are omitted since the required
information
is included in the
footnotes.
|
(3.)
|
EXHIBITS
FILED UNDER ITEM 601 OF REGULATION S-K
The exhibits to this Annual Report on
Form 10-K are listed on the accompanying index and are
incorporated
herein by reference or are filed as
part of this Annual Report on Form
10-K.
|
EXHIBIT
|
|
|
NUMBER
|
|
DESCRIPTION
|
|
|
|
(3.1)
|
|
Articles
of Incorporation of the Company, incorporated by reference to CPI Corp.'s
Annual Report
|
|
|
for
fiscal year 1989 on Form 10-K, Exhibit 3.1, filed April 30,
1990.
|
|
|
|
(3.2)
|
|
Amended
and Restated By-laws of the Company, effective November 24,
2008, and incorporated
|
|
|
by
reference to CPI Corp.'s Form 8-K, Exhibit 3.1, filed December 1,
2008.
|
|
|
|
(4.1)
|
|
Form
of Rights Agreement, dated as of March 13, 2000, between CPI Corp. and
Harris Trust and
|
|
|
Savings
Bank, incorporated by reference to CPI Corp.'s Form 8-A, Exhibit 4.5,
dated March 14, 2000.
|
|
|
|
(4.2)
|
|
First
Amendment to Form of Rights Agreement, dated September 5, 2007, by
and between
|
|
|
CPI
Corp. and Computershare Trust Company, N.A., incorporated by reference to
CPI Corp.'s
|
|
|
Form
8-K, Exhibit 4.1, filed September 6, 2007.
|
|
|
|
(4.3)
|
|
Second
Amendment to Form of Rights Agreement, dated December 21, 2007, by
and between
|
|
|
CPI
Corp. and Computershare Trust Company, N.A., incorporated by reference to
CPI Corp.'s
|
|
|
Form
8-K, Exhibit 4.1, filed December 21, 2007.
|
|
|
|
(10.1)
|
|
License
Agreement Sears, Roebuck De Puerto Rico, Inc. dated January 1, 1999,
incorporated by
|
|
|
reference
to CPI Corp.'s Annual Report for fiscal year 1998 on Form 10-K, Exhibit
10.30,
|
|
|
filed
May 5, 1999.
|
|
|
|
(10.2)
|
|
Development
and License Agreement dated January 31, 2001, between Sears, Roebuck &
Co. and
|
|
|
Consumer
Programs, Incorporated, incorporated by reference to CPI Corp.'s Annual
Report for
|
|
|
fiscal
year 2000 on Form 10-K, Exhibit 10.15, filed May 30,
2001.
|
|
|
|
(10.3)
|
|
Third
Amendment dated June 5, 2002, to Sears License Agreement, incorporated
by reference to
|
|
|
CPI
Corp.'s Form 10-Q, Exhibit 10.51, filed June 7, 2002.
|
|
|
|
(10.4)
|
|
Sixth
Amendment dated November 20, 2002, to Sears License Agreement,
incorporated by reference
|
|
|
to
CPI Corp.'s Form 10-Q, Exhibit 10.54, filed December 11,
2002.
|
|
|
|
(10.5)
|
|
Third
Amendment to Sears License Agreement (Off Mall) dated November 20, 2002,
incorporated by
|
|
|
reference
to CPI Corp.'s Form 10-Q, Exhibit 10.55, filed December 11,
2002.
|
|
|
|
(10.6)
|
|
Fourth
Amendment to Sears License Agreement (Off Mall) dated November 20, 2002,
incorporated by
|
|
|
reference
to CPI Corp.'s Form 10-Q, Exhibit 10.56, filed December 11,
2002.
|
|
|
|
(10.7)
|
|
Fifth
Amendment to Sears License Agreement (Off Mall) dated November 20, 2002,
incorporated by
|
|
|
reference
to CPI Corp.'s Form 10-Q, Exhibit 10.57, filed December 11,
2002.
|
|
|
|
(10.8)
|
|
Sears
License Agreement dated January 1, 2003, by and between Sears, Canada,
Inc., Sears Roebuck & Co.
|
|
|
and
CPI Corp. incorporated, by reference to CPI Corp.'s Annual Report for
fiscal year 2002
|
|
|
on
Form 10-K, Exhibit 10.64, filed May 16, 2003.
|
|
|
|
(10.9)
|
|
Seventh
Amendment dated August 11, 2003, to Sears License Agreement, incorporated
by reference
|
|
|
to
CPI Corp.'s Form 10-Q, Exhibit 10.69, filed August 27,
2003.
|
|
|
|
(10.10)
|
|
Eighth
Amendment dated September 1, 2003, to Sears License Agreement,
incorporated by reference to
|
|
|
CPI
Corp.'s Form 10-Q, Exhibit 10.70, filed December 18,
2003.
|
|
|
|
(10.11)
|
|
Fourth
Amendment dated June 5, 2002, to License Agreement by and between Sears,
Roebuck and Co.
|
|
|
and
CPI Corp., incorporated by reference to CPI Corp.'s Annual Report for
fiscal year 2003
|
|
|
on
Form 10-K, Exhibit 10.74, filed April 22, 2004.
|
|
|
|
(10.12)
|
|
Sixth
Amendment dated April 29, 2004, to License Agreement (Off
Mall) by and between Sears,
|
|
|
Roebuck
and Co. and CPI Corp., incorporated by reference to CPI Corp.'s Form
10-Q,
|
|
|
Exhibit
10.83, filed June 10,
2004.
|
EXHIBIT
INDEX (…continued)
EXHIBIT
|
|
|
NUMBER
|
|
DESCRIPTION
|
|
|
|
|
|
|
(10.13)*
|
|
Employment
Agreement dated February 6, 2000, by and between Jane E. Nelson and CPI
Corp.,
|
|
|
incorporated
by reference to CPI Corp.'s Annual Report for fiscal year 1999 on Form
10-K,
|
|
|
Exhibit
10.36, filed April 26, 2000.
|
|
|
|
(10.14)*
|
|
Employment
Agreement dated December 31, 2008, by and between Jane E. Nelson
and
|
|
|
CPI
Corp., incorporated by reference to CPI Corp.'s Form 8-K, Exhibit A within
Exhibit
|
|
|
10.67,
filed January 7, 2009.
|
|
|
|
(10.15)*
|
|
CPI
Corp. 1981 Stock Bonus Plan (As Amended and Restated effective February 3,
1991), incorporated by
|
|
|
reference
to CPI Corp.'s Annual Report for fiscal year 1992 on Form 10-K, Exhibit
10.29, filed May 5, 1993.
|
|
|
|
(10.16)*
|
|
First
Amendment to CPI Corp. 1981 Stock Bonus Plan (As Amended and Restated
effective
|
|
|
February
3, 1991) effective January 1, 1995, incorporated by reference to CPI
Corp.'s Annual
|
|
|
Report
for fiscal year 2000 on Form 10-K, Exhibit 10.30, filed May 3,
2001.
|
|
|
|
(10.17)*
|
|
CPI
Corp. Deferred Compensation and Retirement Plan for Non-Management
Directors
|
|
|
(Amended
and Restated as of January 28, 2000), incorporated by reference to CPI
Corp.'s Annual
|
|
|
Report
for fiscal year 2000 on Form 10-K, Exhibit 10.31, filed May 3,
2001.
|
|
|
|
(10.18)*
|
|
Deferred
Compensation and Stock Appreciation Rights Plan (Amended and Restated as
of
|
|
|
June
6, 1996), incorporated by reference to CPI Corp.'s Annual
Report for fiscal year 2000
|
|
|
on
Form 10-K, Exhibit 10.32, filed May 3, 2001.
|
|
|
|
(10.19)*
|
|
CPI
Corp. Stock Option Plan (Amended and Restated effective as of December 16,
1997),
|
|
|
incorporated
by reference to CPI Corp.'s Annual Report for fiscal year 2000
on Form 10-K,
|
|
|
Exhibit
10.34, filed May 3, 2001.
|
|
|
|
(10.20)*
|
|
CPI
Corp. Key Executive Deferred Compensation Plan (As Amended and Restated
June 6, 1996),
|
|
|
incorporated
by reference to CPI Corp.'s Annual Report for fiscal year 2000 on Form
10-K,
|
|
|
Exhibit
10.36, filed May 3, 2001.
|
|
|
|
(10.21)*
|
|
Employment
Agreement dated April 8, 2002, by and between Gary W. Douglass and CPI
Corp.,
|
|
|
incorporated
by reference to CPI Corp.'s Annual Report for fiscal year 2001 on Form
10-K,
|
|
|
Exhibit
10.50, filed May 1, 2002.
|
|
|
|
|
|
Second
Amendment to Exhibit C dated April 10, 2008, to Employment Agreement dated
April 8, 2002,
|
|
|
and
amended as of October 1, 2003, and July 3, 2007, by and between Gary W.
Douglass and CPI Corp.,
|
|
|
filed
within this Form 10-K as Exhibit 10.22.
|
|
|
|
(10.23)*
|
|
First
Amendment to CPI Corp. Deferred Compensation and Retirement Plan for
Non-Management
|
|
|
Directors
(As Amended and Restated as of January 28, 2002), incorporated by
reference to
|
|
|
CPI
Corp.'s Form 10-Q, Exhibit 10.52, filed June 7, 2002.
|
|
|
|
(10.24)*
|
|
Employment
Agreement dated October 21, 2002, by and between Peggy J. Deal and CPI
Corp.,
|
|
|
incorporated
by reference to CPI Corp.'s Form 10-Q, Exhibit 10.58, filed December 11,
2002.
|
|
|
|
(10.25)
|
|
First
Amendment dated September 30, 2002, to CPI Corp. Retirement Plan and
Trust, incorporated by
|
|
|
reference
to CPI Corp.'s Annual Report for fiscal year 2002 on Form 10-K, Exhibit
10.65,
|
|
|
filed
May 16, 2003.
|
|
|
|
(10.26)
|
|
Second
Amendment dated November 29, 2002, to CPI Corp. Retirement Plan and Trust,
incorporated by
|
|
|
reference
to CPI Corp.'s Annual Report for fiscal year 2002 on Form 10-K, Exhibit
10.66,
|
|
|
filed
May 16, 2003.
|
|
|
|
(10.27)
|
|
Third
Amendment dated February 6, 2004, to CPI Corp. Retirement Plan and Trust,
incorporated by
|
|
|
reference
to CPI Corp.'s Annual Report for fiscal year 2003 on Form 10-K,
Exhibit 10.73,
|
|
|
filed
April 21,
2004.
|
EXHIBIT
INDEX (…continued)
EXHIBIT
|
|
|
NUMBER
|
|
DESCRIPTION
|
|
|
|
(10.28)*
|
|
CPI
Corp. Restricted Stock Plan as Amended and Restated effective as of April
14, 2005,
|
|
|
incorporated
by reference to CPI Corp.'s Annual Report for fiscal year 2004 on Form
10-K,
|
|
|
Exhibit
10.86, filed April 21, 2005.
|
|
|
|
(10.29)*
|
|
CPI
Corp. Performance Plan adopted effective as of April 14, 2005,
incorporated by reference
|
|
|
to
CPI Corp.'s Annual Report for fiscal year 2004 on Form 10-K,
Exhibit 10.90, filed April 21, 2005.
|
|
|
|
(10.30)*
|
|
CPI
Corp. Non-Employee Directors Restricted Stock Policy Pursuant to the CPI
Corp.
|
|
|
Restricted
Stock Plan adopted by the Company April 14, 2005, incorporated by
reference
|
|
|
to
CPI Corp.'s Annual Report for fiscal year 2004 on Form 10-K, Exhibit
10.91, filed April 21, 2005.
|
|
|
|
|
|
CPI
Corp. Non-Employee Directors Restricted Stock Policy pursuant to the CPI
Corp. Omnibus
|
|
|
Incentive
Plan effective as of August 14, 2008, filed within this Form 10-K as
Exhibit 10.31.
|
|
|
|
(10.32)*
|
|
CPI
Corp. Non-Employee Directors Restricted Stock Policy (Restricted Stock
Election),
|
|
|
adopted
by the Company April 14, 2005, incorporated by reference to CPI Corp.'s
Annual Report
|
|
|
for
fiscal year 2004 on Form 10-K, Exhibit 10.92, filed April 21,
2005.
|
|
|
|
(10.33)
*
|
|
CPI
Corp. Non-Employee Directors Restricted Stock Policy (Restricted Stock
Election),
|
|
|
effective
August 14, 2008, filed within this Form 10-K as Exhibit
10.33.
|
|
|
|
(10.34)*
|
|
Form
of Option Agreement, incorporated by reference to CPI Corp.'s Form 8-K,
Exhibit 10.1,
|
|
|
filed
August 21, 2008.
|
|
|
|
(10.35)*
|
|
Form
of Restricted Stock Award Agreement, incorporated by reference to CPI
Corp.'s Annual Report
|
|
|
for
fiscal year 2004 on Form 10-K, Exhibit 10.93, filed April 21,
2005.
|
|
|
|
(10.36)*
|
|
CPI
Corp. Omnibus Incentive Plan, incorporated by reference to CPI Corp.'s
Form DEF 14A,
|
|
|
Annex
A, filed June 23, 2008.
|
|
|
|
(10.37)*
|
|
Employment
Agreement by and between CPI Corp. and Renato Cataldo, incorporated by
reference
|
|
|
to
CPI Corp.'s Form 10-Q, Exhibit 10.10, filed September 1, 2005. File
No. 1-10204
|
|
|
|
(10.38)*
|
|
Confidentiality,
Noncompetition and Nonsolicitation Agreement by and between CPI Corp.
and
|
|
|
Renato
Cataldo, incorporated by reference to CPI Corp.'s Form 10-Q, Exhibit
10.104, filed September 1, 2005.
|
|
|
|
(10.39)*
|
|
Letter
from the Company regarding Supplemental Retirement Benefits, dated June
28, 2006,
|
|
|
delivered
to Richard Tarpley, incorporated by reference to CPI Corp.'s Form
8-K,
|
|
|
Exhibit
10.61, filed July 5, 2006.
|
|
|
|
(10.40)*
|
|
Letter
from the Company regarding Supplemental Retirement Benefits, dated June
28, 2006,
|
|
|
delivered
to Jane E. Nelson, incorporated by reference to CPI Corp.'s Form
8-K,
|
|
|
Exhibit
10.62, filed July 5, 2006.
|
|
|
|
(10.41)*
|
|
Employment
Agreement dated September 12, 2007, by and between Thomas Gallahue
and
|
|
|
CPI
Corp., incorporated by reference to CPI Corp.'s Form 8-K, Exhibit
10.60,
|
|
|
filed
September 18, 2007.
|
|
|
|
(10.42)
|
|
Purchase
and Sale Agreement dated as of May 1, 2007, by and among Portrait
Corporation
|
|
|
of
America, PCA LLC, American Studios, Inc., PCA Photo Corporation of
Canada,
|
|
|
PCA
National LLC, PCA Finance Corp., Inc., Photo Corporation of American,
Inc.,
|
|
|
(each,
a "Seller") and CPI Corp., incorporated by reference to CPI Corp.'s form
8-K,
|
|
|
Exhibit
2.1, filed May 3, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT
INDEX (…continued)
EXHIBIT
|
|
|
NUMBER
|
|
DESCRIPTION
|
|
|
|
(10.43)
|
|
Amendment
No. 1 to the Purchase and Sale Agreement dated as of May 1, 2007,
by
|
|
|
and
among Portrait Corporation of America, PCA LLC, American Studios,
Inc.,
|
|
|
PCA
Photo Corporation of Canada, PCA National LLC, PCA Finance Corp.,
Inc.,
|
|
|
Photo
Corporation of American, Inc., (each, a "Seller") and CPI Corp.,
such
|
|
|
amendment
effective as of May 21, 2007, incorporated by reference to CPI
Corp.'s
|
|
|
form
8-K, Exhibit 2.1, filed May 25, 2007.
|
|
|
|
(10.44)
|
|
Amendment
No. 2 to the Purchase and Sale Agreement dated as of June 8, 2007,
by
|
|
|
and
among Portrait Corporation of America, PCA LLC, American Studios,
Inc.,
|
|
|
PCA
Photo Corporation of Canada, PCA National LLC, PCA Finance Corp.,
Inc.,
|
|
|
Photo
Corporation of American, Inc., (each, a "Seller") and CPI
Corp.,
|
|
|
incorporated
by reference to CPI Corp.'s form 8-K, Exhibit 2.3, filed June 24,
2007.
|
|
|
|
(10.45)
|
|
Second
Amended and Restated Credit Agreement dated as of June 8, 2007,
among
|
|
|
the
Company, the financial institutions that are or may from time to time
become parties
|
|
|
thereto
and LaSalle Bank National Association, as administrative agent and
arranger
|
|
|
for
the lenders, incorporated herein by reference to CPI Corp.'s Form
8-K,
|
|
|
Exhibit
10.1, filed June 14, 2007.
|
|
|
|
(10.46)
|
|
Second
Amendment to that certain Second Amended and Restated Credit
Agreement,
|
|
|
among
the Company, the financial institutions that are or may from time to time
become
|
|
|
parties
thereto and LaSalle Bank National Association, as administative agent
and
|
|
|
arranger
for the lenders, dated December 10, 2008, incorporated by reference to CPI
Corp.'s
|
|
|
Form
8-K, Exhibit 10.1, filed December 19, 2008.
|
|
|
|
(10.47)
|
|
Third
Amendment to that certain Second Amended and Restated Credit
Agreement,
|
|
|
among
the Company, the financial institutions that are or may from time to time
become
|
|
|
parties
thereto and Bank of America, N.A. as successor to LaSalle Bank
National Association,
|
|
|
as
administrative agent and arranger for the lenders, effective April
16, 2009, incorporated
|
|
|
by
reference to CPI Corp.'s Form 8-K, Exhibit 10.47, filed April 21,
2009.
|
|
|
|
(10.48)
|
|
Master
Lease Agreement between Wal-Mart Stores East, L.P., Wal-Mart
Stores, Inc.,
|
|
|
Wal-Mart
Louisiana, LLC, Wal-Mart Stores Texas, LP and Portrait Corporation
of
|
|
|
America,
Inc., effective June 8, 2007, incorporated herein by reference to CPI
Corp.'s
|
|
|
Form
10-Q, Exhibit 10.59, filed August 30, 2007.
(Confidential
treatment requested
|
|
|
for portions of this
document).
|
|
|
|
(10.49)
|
|
First
Amendment to the Master Lease Agreement between Wal-Mart Stores, East,
LP,
|
|
|
Wal-Mart
Stores, Inc., Wal-Mart Louisiana, LLC, Wal-Mart Stores Texas, LP
and
|
|
|
Portrait
Corporation of America, Inc., effective June 8, 2007, incorporated herein
by
|
|
|
reference
to CPI Corp.'s Form 10-Q, Exhibit 10.60, filed December 20,
2007.
|
|
|
|
(10.50)
|
|
Second
Amendment to the Master Lease Agreement between Wal-Mart Stores, East,
LP,
|
|
|
Wal-Mart
Stores, Inc., Wal-Mart Louisiana, LLC, Wal-Mart Stores Texas, LP
and
|
|
|
Portrait
Corporation of America, Inc., effective June 8, 2007, incorporated herein
by
|
|
|
reference
to CPI Corp.'s Form 10-Q, Exhibit 10.61, filed December 20,
2007.
|
EXHIBIT
INDEX (…continued)
EXHIBIT
|
|
|
NUMBER
|
|
DESCRIPTION
|
|
|
|
(10.51)
|
|
License
Agreement dated December 22, 2008, by and between CPI Corp., Consumer
Programs Incorporated,
|
|
|
a
subsidiary of the Company, and Sears, Roebuck and Co. (confidential
treatment requested for portions
|
|
|
of
this document), incorporated by reference to CPI Corp.'s Form 8-K, Exhibit
10.1, filed December 24, 2008.
|
|
|
|
(10.52)
|
|
Letter
Agreement dated December 22, 2008, by and between CPI Corp., Consumer
Programs Incorporated, a
|
|
|
subsidiary
of the Company, and Sears, Roebuck and Co., incorporated by reference to
CPI Corp.'s
|
|
|
Form
8-K, Exhibit 10.2, filed December 24, 2008.
|
|
|
|
(10.53)*
|
|
Employment
Agreement by and between CPI Corp. and Dale Heins, dated April 23,
2008,
|
|
|
incorporated
herein by reference to CPI Corp.'s Form 8-K, Exhibit 10.62, filed April
24, 2008.
|
|
|
|
(10.54)*
|
|
Employment
Agreement by and between CPI Corp. and Jim Mills, dated September 2,
2008,
|
|
|
incorporated
herein by reference to CPI Corp.'s Form 10-Q, Exhibit 10.65,
filed
|
|
|
December
20, 2007.
|
|
|
|
(10.55)*
|
|
Chairman's
Agreement by and between CPI Corp. and David Meyer, dated September 22,
2008,
|
|
|
incorporated
herein by reference to CPI Corp.'s Form 10-Q, Exhibit
10.65,
|
|
|
filed
December 20, 2007.
|
|
|
|
(10.56)*
|
|
Settlement
and Release Agreement by and between Consumer Programs Incorporated
and
|
|
|
Jane
E. Nelson entered into as of December 31, 2008, incorporated herein by
reference
|
|
|
to
CPI Corp.'s Form 8-K, Exhibit 10.67, filed January 7,
2009.
|
|
|
|
(10.57)*
|
|
Release
and Settlement Agreement by and between Consumer Programs Incorporated
and
|
|
|
Gary
W. Douglass entered into as of December 31, 2008, incorporated herein by
reference to
|
|
|
CPI
Corp.'s Form 8-K, Exhibit 10.68, filed January 7, 2009.
|
|
|
|
|
|
Computation
of (Loss) Income Per Share - Diluted
|
|
|
|
|
|
Computation
of (Loss) Income Per Share - Basic
|
|
|
|
|
|
Subsidiaries
of the Registrant
|
|
|
|
|
|
Independent
Registered Public Accounting Firm's Consent
|
|
|
|
|
|
Certification
Pursuant to Rule 13a-14(a) Under the Securities and Exchange Act of
1934
|
|
|
by
the President and Chief Executive Officer
|
|
|
|
|
|
Certification
Pursuant to Rule 13a-14(a) Under the Securities and Exchange Act of
1934
|
|
|
by
the Executive Vice President, Finance and Chief Financial
Officer
|
|
|
|
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of
the
|
|
|
Sarbanes-Oxley
Act of 2002 by the President and Chief Executive Officer and
the
|
|
|
Executive
Vice President, Finance and Chief Financial
Officer
|
(c)
|
Financial Statement
Schedules:
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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 on the 21
st
day
of April 2009.
|
CPI CORP.
|
|
|
|
|
|
|
By:
|
/s/Renato
Cataldo
|
|
|
|
Renato
Cataldo
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities
indicated.
SIGNATURES
OF DIRECTORS AND PRINCIPAL OFFICERS
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
/s/
|
|
Renato
Cataldo
|
|
President
and Chief Executive Officer
|
|
April
21, 2009
|
|
|
|
(Renato
Cataldo)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
David
M. Meyer
|
|
Chairman
of the Board of Directors
|
|
April
21, 2009
|
|
|
|
(David
M. Meyer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
James
J. Abel
|
|
Director
|
|
April
21, 2009
|
|
|
|
(James
J. Abel)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
Peter
Feld
|
|
Director
|
|
April
21, 2009
|
|
|
|
|
(Peter
Feld)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
Michael
S. Koeneke
|
|
Director
|
|
April
21, 2009
|
|
|
|
(Michael
S. Koeneke)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
Michael
Glazer
|
|
Director
|
|
April
21, 2009
|
|
|
|
(Michael
Glazer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
John
Turner White, IV
|
|
Director
|
|
April
21, 2009
|
|
|
|
(John
Turner White, IV)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
Dale
Heins
|
|
Senior
Vice President, Finance,
|
|
April
21, 2009
|
|
|
|
(Dale
Heins)
|
|
Chief
Financial Officer and Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
Rose
O'Brien
|
|
Vice
President, Corporate Controller
|
|
April
21, 2009
|
|
|
|
(Rose
O'Brien)
|
|
and
Principal Accounting Officer
|
|
|
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