UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended November 14,
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.)
|
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 whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
x
Yes
o
No
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
December 21, 2009, _,___,___ shares of the registrant’s common stock were
outstanding.
CPI
CORP.
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
16
and 40 WEEKS ENDED NOVEMBER 14, 2009
PART
I.
|
|
FINANCIAL
INFORMATION
|
|
Page
|
|
|
|
|
|
|
|
|
|
Financial
Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim
Consolidated Balance Sheets
|
|
|
|
|
|
|
November
14, 2009 (Unaudited) and February 7, 2009
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
Interim
Consolidated Statements of Operations (Unaudited)
|
|
|
|
|
|
|
16
and 40 weeks Ended November 14, 2009 and November 8, 2008
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
Interim
Consolidated Statement of Changes in Stockholders'
|
|
|
|
|
|
|
Equity
(Unaudited) 40 weeks Ended November 14, 2009
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
Interim
Consolidated Statements of Cash Flow (Unaudited)
|
|
|
|
|
|
|
40
weeks Ended November 14, 2009 and November 8, 2008
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
Notes
to Interim Consolidated Financial Statements (Unaudited)
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
Controls
and Procedures
|
|
27
|
|
|
|
|
|
|
|
PART
II.
|
|
OTHER
INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibits
|
|
28
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
PART
I.
|
|
FINANCIAL
INFORMATION
|
Item 1
.
|
|
Financial
Statements
|
CPI
CORP.
Interim
Consolidated Balance Sheets - Assets
in
thousands
|
|
November
14, 2009
|
|
|
February
7, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,286
|
|
|
$
|
23,665
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade
|
|
|
10,711
|
|
|
|
6,050
|
|
Other
|
|
|
926
|
|
|
|
923
|
|
Inventories
|
|
|
9,804
|
|
|
|
8,489
|
|
Prepaid expenses and other current assets
|
|
|
12,436
|
|
|
|
5,800
|
|
Refundable income taxes
|
|
|
457
|
|
|
|
357
|
|
Deferred tax assets
|
|
|
14,259
|
|
|
|
9,581
|
|
Assets held for sale
|
|
|
6,577
|
|
|
|
6,615
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
63,456
|
|
|
|
61,480
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
2,185
|
|
|
|
3,249
|
|
Buildings and building improvements
|
|
|
25,184
|
|
|
|
32,377
|
|
Leasehold improvements
|
|
|
4,460
|
|
|
|
4,406
|
|
Photographic, sales and manufacturing equipment
|
|
|
168,780
|
|
|
|
178,732
|
|
Total
|
|
|
200,609
|
|
|
|
218,764
|
|
Less accumulated depreciation and amortization
|
|
|
162,850
|
|
|
|
167,877
|
|
Property and equipment, net
|
|
|
37,759
|
|
|
|
50,887
|
|
Prepaid
debt fees
|
|
|
2,462
|
|
|
|
2,262
|
|
Goodwill
|
|
|
21,759
|
|
|
|
21,459
|
|
Intangible
assets, net
|
|
|
39,349
|
|
|
|
40,206
|
|
Deferred
tax assets
|
|
|
8,796
|
|
|
|
8,359
|
|
Other
assets
|
|
|
7,715
|
|
|
|
8,202
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
181,296
|
|
|
$
|
192,855
|
|
|
|
|
|
|
|
|
|
|
See accompanying footnotes to the
interim consolidated financial statements.
CPI
CORP.
Interim
Consolidated Balance Sheets – Liabilities and Stockholders’ Equity
in
thousands, except share and per share data
|
|
November
14, 2009
|
|
|
February
7, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
22,000
|
|
|
$
|
1,150
|
|
Accounts payable
|
|
|
6,685
|
|
|
|
6,816
|
|
Accrued employment costs
|
|
|
13,295
|
|
|
|
10,146
|
|
Customer deposit liability
|
|
|
19,599
|
|
|
|
12,503
|
|
Sales taxes payable
|
|
|
4,355
|
|
|
|
5,284
|
|
Accrued advertising expenses
|
|
|
7,479
|
|
|
|
978
|
|
Accrued expenses and other liabilities
|
|
|
13,024
|
|
|
|
18,133
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
86,437
|
|
|
|
55,010
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
75,458
|
|
|
|
104,578
|
|
Accrued
pension plan obligations
|
|
|
9,502
|
|
|
|
10,591
|
|
Other
liabilities
|
|
|
16,492
|
|
|
|
21,841
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
187,889
|
|
|
|
192,020
|
|
|
|
|
|
|
|
|
|
|
CONTINGENCIES
(see Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, $0.40 par value, 50,000,000 shares authorized; 9,180,135 and
17,089,788
|
|
|
|
|
|
|
|
|
shares outstanding at November 14, 2009 and February 7, 2009,
respectively
|
|
|
3,672
|
|
|
|
6,836
|
|
Additional
paid-in capital
|
|
|
28,639
|
|
|
|
55,413
|
|
Retained
earnings
|
|
|
20,939
|
|
|
|
183,704
|
|
Accumulated
other comprehensive loss
|
|
|
(10,711
|
)
|
|
|
(13,114
|
)
|
|
|
|
42,539
|
|
|
|
232,839
|
|
Treasury
stock - at cost, 2,175,591 and 10,270,319 shares at November 14, 2009
and
|
|
|
|
|
|
|
|
|
February 7, 2009, respectively
|
|
|
(49,132
|
)
|
|
|
(232,004
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
(6,593
|
)
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
181,296
|
|
|
$
|
192,855
|
|
|
|
|
|
|
|
|
|
|
See
accompanying footnotes to the interim consolidated financial
statements.
CPI
CORP.
Interim
Consolidated Statements of Operations
(Unaudited)
in
thousands, except share and per share data
|
|
16
Weeks Ended
|
|
|
40
Weeks Ended
|
|
|
|
November
14, 2009
|
|
|
November
8, 2008
|
|
|
November
14, 2009
|
|
|
November
8, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
107,286
|
|
|
$
|
115,689
|
|
|
$
|
282,130
|
|
|
$
|
308,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (exclusive of depreciation and amortization shown
below)
|
|
|
8,032
|
|
|
|
11,288
|
|
|
|
21,643
|
|
|
|
31,412
|
|
Selling, general and administrative expenses
|
|
|
99,940
|
|
|
|
109,552
|
|
|
|
245,480
|
|
|
|
269,761
|
|
Depreciation and amortization
|
|
|
6,320
|
|
|
|
8,616
|
|
|
|
17,913
|
|
|
|
21,673
|
|
Other charges and impairments
|
|
|
1,144
|
|
|
|
2,092
|
|
|
|
3,751
|
|
|
|
4,946
|
|
|
|
|
115,436
|
|
|
|
131,548
|
|
|
|
288,787
|
|
|
|
327,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(8,150
|
)
|
|
|
(15,859
|
)
|
|
|
(6,657
|
)
|
|
|
(19,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
2,542
|
|
|
|
3,866
|
|
|
|
5,961
|
|
|
|
6,753
|
|
Interest
income
|
|
|
130
|
|
|
|
87
|
|
|
|
370
|
|
|
|
567
|
|
Other
income, net
|
|
|
236
|
|
|
|
56
|
|
|
|
253
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income tax benefit
|
|
|
(10,326
|
)
|
|
|
(19,582
|
)
|
|
|
(11,995
|
)
|
|
|
(25,300
|
)
|
Income
tax benefit
|
|
|
(3,524
|
)
|
|
|
(6,507
|
)
|
|
|
(4,094
|
)
|
|
|
(8,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
|
(6,802
|
)
|
|
|
(13,075
|
)
|
|
|
(7,901
|
)
|
|
|
(16,573
|
)
|
Net
loss from discontinued operations
|
|
|
-
|
|
|
|
(266
|
)
|
|
|
-
|
|
|
|
(625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(6,802
|
)
|
|
$
|
(13,341
|
)
|
|
$
|
(7,901
|
)
|
|
$
|
(17,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share from continuing operations - diluted
|
|
$
|
(0.97
|
)
|
|
$
|
(2.02
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(2.56
|
)
|
Net
loss per share from discontinued operations - diluted
|
|
|
-
|
|
|
|
(0.04
|
)
|
|
|
-
|
|
|
|
(0.10
|
)
|
Net
loss per share - diluted
|
|
$
|
(0.97
|
)
|
|
$
|
(2.06
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(2.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share from continuing operations - basic
|
|
$
|
(0.97
|
)
|
|
$
|
(2.02
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(2.56
|
)
|
Net
loss per share from discontinued operations - basic
|
|
|
-
|
|
|
|
(0.04
|
)
|
|
|
-
|
|
|
|
(0.10
|
)
|
Net
loss per share - basic
|
|
$
|
(0.97
|
)
|
|
$
|
(2.06
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(2.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common and common equivalent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares outstanding - diluted
|
|
|
7,003,832
|
|
|
|
6,479,496
|
|
|
|
6,987,746
|
|
|
|
6,467,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common and common equivalent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares outstanding - basic
|
|
|
7,003,832
|
|
|
|
6,479,496
|
|
|
|
6,987,746
|
|
|
|
6,467,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying footnotes to the interim consolidated financial
statements.
CPI
CORP.
Interim
Consolidated Statement of Changes in Stockholders’ Equity
(Unaudited)
Forty
weeks ended November 14, 2009
in
thousands, except share and per share data
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
Treasury
|
|
|
|
|
|
|
Common
|
|
|
paid-in
|
|
|
Retained
|
|
|
comprehensive
|
|
|
stock,
|
|
|
|
|
|
|
stock
|
|
|
capital
|
|
|
earnings
|
|
|
loss
|
|
|
at
cost
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at February 7, 2009
|
|
$
|
6,836
|
|
|
$
|
55,413
|
|
|
$
|
183,704
|
|
|
$
|
(13,114
|
)
|
|
$
|
(232,004
|
)
|
|
$
|
835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,901
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,901
|
)
|
Total
other comprehensive income (consisting primarily of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
foreign
exchange impact)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,403
|
|
|
|
-
|
|
|
|
2,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,498
|
)
|
Surrender
of employee shares for taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(30
|
)
|
|
|
(30
|
)
|
Retirement
of treasury stock (8,000,000 shares, at average cost)
|
|
|
(3,200
|
)
|
|
|
(25,939
|
)
|
|
|
(151,527
|
)
|
|
|
-
|
|
|
|
180,666
|
|
|
|
-
|
|
Issuance
of common stock and restricted stock awards, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
forfeitures
(90,347 shares)
|
|
|
36
|
|
|
|
(1,653
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,236
|
|
|
|
619
|
|
Stock-based
compensation recognized
|
|
|
-
|
|
|
|
818
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
818
|
|
Dividends
($0.48 per common share)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,337
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at November 14, 2009
|
|
$
|
3,672
|
|
|
$
|
28,639
|
|
|
$
|
20,939
|
|
|
$
|
(10,711
|
)
|
|
$
|
(49,132
|
)
|
|
$
|
(6,593
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying footnotes to the interim consolidated financial
statements.
CPI
CORP.
Interim
Consolidated Statements of Cash Flows
(Unaudited)
in
thousands
|
|
40
Weeks Ended
|
|
|
|
November
14, 2009
|
|
|
November
8, 2008
|
|
Reconciliation
of net loss to cash flows provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(7,901
|
)
|
|
$
|
(17,198
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments
for items not requiring (providing) cash:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
17,913
|
|
|
|
21,673
|
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
625
|
|
Stock-based compensation expense
|
|
|
818
|
|
|
|
703
|
|
Loss on disposition of property and equipment
|
|
|
976
|
|
|
|
894
|
|
Deferred income tax provision
|
|
|
(4,451
|
)
|
|
|
(9,753
|
)
|
Pension, supplemental retirement plan and profit sharing
expense
|
|
|
680
|
|
|
|
1,310
|
|
Other
|
|
|
781
|
|
|
|
515
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash flow from operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,527
|
)
|
|
|
814
|
|
Inventories
|
|
|
(1,097
|
)
|
|
|
2,248
|
|
Prepaid expenses and other current assets
|
|
|
(5,912
|
)
|
|
|
(8,286
|
)
|
Accounts payable
|
|
|
(163
|
)
|
|
|
(3,527
|
)
|
Contribution to pension plan
|
|
|
(1,245
|
)
|
|
|
(2,693
|
)
|
Accrued expenses and other liabilities
|
|
|
(1,524
|
)
|
|
|
381
|
|
Income taxes payable
|
|
|
(98
|
)
|
|
|
(440
|
)
|
Deferred revenues and related costs
|
|
|
6,078
|
|
|
|
(279
|
)
|
Other
|
|
|
(186
|
)
|
|
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used in) continuing operations
|
|
|
142
|
|
|
|
(13,119
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows used in discontinued operations
|
|
|
-
|
|
|
|
(534
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used in) operating activities
|
|
|
142
|
|
|
|
(13,653
|
)
|
|
|
|
|
|
|
|
|
|
See
accompanying footnotes to the interim consolidated financial
statements.
CPI
CORP.
Interim
Consolidated Statements of Cash Flows (continued)
(Unaudited)
in
thousands
|
|
40
Weeks Ended
|
|
|
|
November
14, 2009
|
|
|
November
8, 2008
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used in) operating activities
|
|
|
142
|
|
|
|
(13,653
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows used in financing activities:
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(8,270
|
)
|
|
|
(8,410
|
)
|
Payment of debt issuance costs
|
|
|
(943
|
)
|
|
|
-
|
|
Proceeds from short-term borrowings
|
|
|
-
|
|
|
|
5,500
|
|
Cash dividends
|
|
|
(3,337
|
)
|
|
|
(3,096
|
)
|
Other
|
|
|
(13
|
)
|
|
|
(131
|
)
|
Cash flows used in financing activities
|
|
|
(12,563
|
)
|
|
|
(6,137
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows (used in) provided by investing activities:
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(4,508
|
)
|
|
|
(31,198
|
)
|
Proceeds from sale of property and equipment
|
|
|
1,326
|
|
|
|
2
|
|
Other
|
|
|
130
|
|
|
|
95
|
|
Cash flows used in investing activities
|
|
|
(3,052
|
)
|
|
|
(31,101
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
94
|
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(15,379
|
)
|
|
|
(51,054
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
23,665
|
|
|
|
59,177
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
8,286
|
|
|
$
|
8,123
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
5,487
|
|
|
$
|
5,807
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net
|
|
$
|
440
|
|
|
$
|
1,019
|
|
|
|
|
|
|
|
|
|
|
Supplemental
non-cash financing activities:
|
|
|
|
|
|
|
|
|
Issuance of treasury stock under the Employee Profit Sharing
Plan
|
|
$
|
594
|
|
|
$
|
521
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock and stock options to employees and
directors
|
|
$
|
800
|
|
|
$
|
870
|
|
|
|
|
|
|
|
|
|
|
See
accompanying footnotes to the interim consolidated financial
statements.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
NOTE
1 -
|
DESCRIPTION
OF BUSINESS AND INTERIM CONSOLIDATED FINANCIAL STATEMENTS
|
CPI Corp.
(the “Company”) operates 2,938 professional portrait studios as of November 14,
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 Walmart Stores, Inc. (“Walmart”). 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
launched a similar website for PictureMe Portrait Studio® in the third quarter
of 2009.
The
Interim Consolidated Balance Sheet as of November 14, 2009, the related Interim
Consolidated Statements of Operations for the 16 and 40 weeks ended November 14,
2009, and November 8, 2008, the Interim Consolidated Statement of Changes in
Stockholders’ Equity for the 40 weeks ended November 14, 2009, and the Interim
Consolidated Statements of Cash Flows for the 40 weeks ended November 14, 2009,
and November 8, 2008, are unaudited. The interim consolidated
financial statements reflect all adjustments (consisting only of normal
recurring accruals), which are, in the opinion of management, necessary for a
fair presentation of the results for the interim periods presented. The interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the CPI Corp.
2008 Annual Report on Form 10-K for its fiscal year ended February 7,
2009. The results of operations for the interim periods should not be
considered indicative of results to be expected for the full year.
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 and goodwill; establishing
restructuring reserves; defined benefit retirement plan assumptions; income tax
and other reserves. Actual results could differ from those
estimates.
Certain
reclassifications have been made to the 2008 financial statements to conform
with the current year presentation, including the reclassification from
additional paid in capital to retained earnings, at February 7, 2009, of a $26.9
million adjustment deriving from the retirement of treasury stock in fiscal year
2006, and the reclassification of approximately $2.3 million of unamortized
prepaid debt fees from long-term debt.
NOTE
2 -
|
ADOPTION
OF NEW ACCOUNTING STANDARDS
|
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB No. 162” (“SFAS No. 168”). SFAS No. 168 provided
for the FASB Accounting Standards Codification (“ASC” or the “Codification”) to
become the single official source of authoritative, nongovernmental U.S.
GAAP. The Codification did not change U.S. GAAP but reorganized
existing literature and is effective for interim and fiscal years ending after
September 15, 2009. The Company adopted the provisions of SFAS No.
168 (referenced as ASC Topic 105, “Generally Accepted Accounting Principles”
(“ASC Topic 105”) under the Codification) on July 26, 2009. The
effect was not material to the Company’s financial statements; however,
references to legacy U.S. GAAP, where appropriate, have been replaced with their
respective ASC references. Additionally, all authoritative U.S. GAAP
issued by the FASB after July 1, 2009, has been designed to update the
Codification and will now be referred to as Accounting Standards Updates
(“ASU”). ASU No. 2009-01, “Topic 105 – Generally Accepted Accounting
Principles – amendments based on SFAS No. 168” issued in June 2009, created ASC
Topic 105, as noted above, in the General Principles and Objective Section of
the Codification and includes SFAS No. 168 in its entirety, including the
accounting standards update instructions.
In
September 2009, the FASB issued ASU No. 2009-06, “Income Taxes” (“ASU No.
2009-06”). ASU No. 2009-06 provides additional implementation
guidance to improve current accounting by helping to achieve consistent
application of accounting for uncertainty in income taxes and is effective for
interim and annual periods ending after September 15, 2009. The
Company adopted the applicable requirements of ASU No. 2009-06 on July 26, 2009,
and the effect was not material to the Company’s financial
statements.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
In August
2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and Disclosures”
(“ASU No. 2009-05”). ASU No. 2009-05 supplements and amends the
guidance in ASC Topic 820, “Fair Value Measurements and Disclosures” to clarify
how an entity should measure the fair value of liabilities and outlines
alternative valuation methods and a hierarchy for their use. ASU No.
2009-05 also clarifies that restrictions preventing the transfer of a liability
should not be considered as a separate input or adjustment in the measurement of
its fair value. ASU No. 2009-05 is effective for interim and annual
periods beginning after issuance of the Update. The Company adopted
the applicable requirements of ASU No. 2009-05 on July 26, 2009, and the effect
was not material to the Company’s financial statements.
ASC Topic
855, “Subsequent Events” (“ASC Topic 855”) (formerly SFAS No. 165, “Subsequent
Events” issued by the FASB in May 2009 and effective for interim and fiscal
years ending after June 15, 2009) establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In
accordance with ASC Topic 855, the Company performed an evaluation of subsequent
events through December 21, 2009, the date which the financial statements were
issued, and determined no subsequent events had occurred which would require
adjustment to or additional disclosure in its interim consolidated financial
statements.
ASC Topic
715, “Compensation – Retirement Benefits” (“ASC Topic 715”) (which includes
certain disclosure requirements issued under FASB Staff Position SFAS No.
132R-1, “Employers’ Disclosure about Postretirement Benefit Plan Assets”, an
amendment of SFAS No. 132 (revised 2003), “Employers’ Disclosure about Pensions
and Other Postretirement Benefits”, in December 2008 and effective for fiscal
years ending after December 15, 2009) requires more detailed disclosures
regarding defined benefit pension 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. These enhanced disclosures are required for
fiscal years ending after December 15, 2009. Upon initial
application, the enhanced disclosures are not required for earlier periods that
are presented for comparative purposes. The Company is currently
evaluating the enhanced disclosure requirements under ASC Topic
715.
NOTE
3 -
|
FAIR
VALUE MEASUREMENTS
|
FASB ASC
Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”) defines
fair value, sets a framework for measuring fair value, which refers to certain
valuation concepts and practices, and requires certain disclosures about fair
value measurements.
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.
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 Interim 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 ASC Topic 820 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.
|
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
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 Interim Consolidated Balance Sheet as of November
14, 2009 (in millions):
|
|
Fair
Value Measurements
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap (1)
|
|
$
|
-
|
|
|
$
|
2.7
|
|
|
$
|
-
|
|
|
$
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
total fair value of the interest rate swap is included in Accrued Expenses
and Other Liabilities as of November 14, 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. Accordingly, the fair market value is estimated to
approximate the recorded value of this instrument. The fair
value of the interest rate swap at November 14, 2009, and February 7,
2009, was $2.7 million and $3.5 million,
respectively.
|
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 November 14,
2009, and February 7, 2009, due to the short maturity of these financial
instruments.
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.
Goodwill
and Intangible Assets
The
Company uses fair value measurements when it periodically evaluates the
recoverability of goodwill, and when it is required to assess the fair value of
intangible assets in the event of an indication of impairment. See
further discussion in Note 7 to this Form 10-Q.
Property
and Equipment
These
assets have been purchased and held over varying timeframes; some are customized
for the Company’s own use and resale values for such used items are not readily
available. The Company uses fair value measurements when it is
required to estimate the fair value of property and equipment in the event of an
indication of impairment. The recorded value of these assets is
further discussed in Note 1 in the CPI Corp. 2008 Annual Report on Form 10-K for
its fiscal year ended February 7, 2009.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
NOTE
4 -
|
DISCONTINUED
OPERATIONS
|
During
the fourth quarter of 2008, the Company decided to discontinue its Portrait
Gallery and E-Church operations. This decision was made in order to
eliminate the unprofitable operations. Sales and operating results
for these operations included in discontinued operations for the 16 and 40 weeks
ended November 8, 2008, are presented in the following table:
in
thousands
|
|
16
Weeks Ended
|
|
|
40
Weeks Ended
|
|
|
|
November
8, 2008
|
|
|
November
8, 2008
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
160
|
|
|
$
|
304
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
$
|
426
|
|
|
$
|
998
|
|
Tax
benefit
|
|
|
160
|
|
|
|
373
|
|
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations
|
|
$
|
266
|
|
|
$
|
625
|
|
|
|
|
|
|
|
|
|
|
The net
loss consists of costs to operate the Portrait Gallery and E-Church operations
for the 16 and 40 weeks ended November 8, 2008, as well as related asset
write-offs.
Inventories
consist of:
in
thousands
|
|
November
14, 2009
|
|
|
February
7, 2009
|
|
|
|
|
|
|
|
|
Raw
materials - film, paper and chemicals
|
|
$
|
2,929
|
|
|
$
|
2,724
|
|
Portraits
in process
|
|
|
2,010
|
|
|
|
1,313
|
|
Finished
portraits pending delivery
|
|
|
147
|
|
|
|
261
|
|
Frames
and accessories
|
|
|
438
|
|
|
|
426
|
|
Studio
supplies
|
|
|
3,134
|
|
|
|
2,495
|
|
Equipment
repair parts and supplies
|
|
|
728
|
|
|
|
878
|
|
Other
|
|
|
418
|
|
|
|
392
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,804
|
|
|
$
|
8,489
|
|
|
|
|
|
|
|
|
|
|
These
balances are net of obsolescence reserves totaling $165,842 and $149,000 at
November 14, 2009, and February 7, 2009, respectively.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
NOTE
6 -
|
ASSETS
HELD FOR SALE
|
In
connection with its acquisition of substantially all of the assets of Portrait
Corporation of America (“PCA”) and certain of its affiliates and the assumption
of certain liabilities of PCA on June 7, 2007, (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 third and fourth quarters of 2008, the Company
ceased use of the warehouse and excess parcels of land, and the manufacturing
facility, respectively, and committed to a plan to sell such assets as they were
no longer required by the business. In the first and third quarters
of 2009, the Company also ceased use of and committed to a plan to sell its
production facilities located in Thomaston, Connecticut, and Brampton, Ontario,
as the facilities are no longer required due to the restructuring and
consolidation of the Company’s manufacturing processes and the elimination of
film production.
The
Company determined these properties meet the criteria for “held for sale
accounting” under ASC Topic 360, “Property, Plant, and Equipment” (“ASC Topic
360”) and has presented the respective group of assets separately on the face of
the Consolidated Balance Sheet as of November 14, 2009, with the exception of
the warehouse in Charlotte, North Carolina, which was sold during the second
quarter of 2009. The sale of the warehouse resulted in net proceeds
to the Company of $982,000, which was used to pay down outstanding long-term
debt in the second quarter of 2009 and resulted in a loss of $123,000, which was
recognized in other charges and impairments in the second quarter of
2009.
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 asset meets “held
for sale accounting”. Management judgment is required to assess the
criteria required to meet “held for sale accounting”, and estimate the expected
net amount recoverable upon sale. As of November 14, 2009, the
carrying values of the respective assets held for sale did not exceed their fair
values less costs to sell. The Company expects the sales of these
assets will be completed within approximately a one year time
period.
The major
classes of assets included in assets held for sale in the Interim Consolidated
Balance Sheet are as follows:
in
thousands
|
|
November
14, 2009
|
|
|
February
7, 2009
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,338
|
|
|
$
|
1,473
|
|
Buildings
and building improvements
|
|
|
4,239
|
|
|
|
5,142
|
|
|
|
|
|
|
|
|
|
|
Assets
held for sale
|
|
$
|
6,577
|
|
|
$
|
6,615
|
|
|
|
|
|
|
|
|
|
|
NOTE
7 -
|
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, “Business Combinations” (“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
|
|
November
14, 2009
|
|
|
February
7, 2009
|
|
|
|
|
|
|
|
|
PCA
acquisition
|
|
$
|
21,227
|
|
|
$
|
21,227
|
|
|
|
|
|
|
|
|
|
|
Goodwill
from prior acquisitions
|
|
|
512
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
Translation
impact on foreign balances
|
|
|
20
|
|
|
|
(280
|
)
|
|
|
$
|
21,759
|
|
|
$
|
21,459
|
|
|
|
|
|
|
|
|
|
|
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
The
Company accounts for goodwill under ASC Topic 350, “Intangibles – Goodwill and
Other” (“ASC Topic 350”) 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. ASC Topic 350 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. As of July 25, 2009, the end of the Company’s second
quarter, the Company completed its annual impairment test and concluded that the
estimated fair values of its reporting units exceeded their carrying values, and
therefore, no impairment was indicated. As of November 14, 2009, the
end of the Company’s 2009 third quarter, the Company considered possible
impairment triggering events since the July 25, 2009, impairment test date,
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. The reporting units, for
purposes of this test, have fair values substantially in excess of carrying
value.
Also, in
connection with the PCA Acquisition, the Company acquired intangible assets
related to the host agreement with Walmart 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 Walmart 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 November 14, 2009.
in
thousands
|
|
Net
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of Period
|
|
|
Amortization
|
|
|
Translation
Impact
of
Foreign Balances
|
|
|
Net
Balance at
End
of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
host agreement
|
|
$
|
39,398
|
|
|
$
|
(1,548
|
)
|
|
$
|
982
|
|
|
$
|
38,832
|
|
Acquired
customer list
|
|
|
808
|
|
|
|
(308
|
)
|
|
|
17
|
|
|
|
517
|
|
|
|
$
|
40,206
|
|
|
$
|
(1,856
|
)
|
|
$
|
999
|
|
|
$
|
39,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company reviews its intangible assets with definite useful lives under ASC Topic
360, 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.
NOTE
8 -
|
OTHER
ASSETS AND OTHER LIABILITIES
|
Included
in accrued expenses and other liabilities as of November 14, 2009, and February
7, 2009, is $3.0 million and $8.7 million, respectively, in accrued host
commissions and $3.9 million and $4.7 million, respectively, related to accrued
worker’s compensation.
Included
in both other assets and other liabilities is $6.6 million and $6.9 million as
of November 14, 2009, and February 7, 2009, 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.
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 (as defined, EBITDA minus
capital expenditures to fixed charges) and tighten the leverage ratio test (as
defined, 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. Further details related to the
Amendment are included in the CPI Corp. 2008 Annual Report on Form
10-K. The Company was in compliance with its covenants under its
Credit Agreement as of November 14, 2009.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
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.
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 $943,000 in fees paid to creditors associated with this
Amendment, which is being amortized over the remainder of the life of the loan
in addition to fees that are currently being amortized, the amounts of which are
included in prepaid debt fees in the Interim Consolidated Balance Sheet as of
November 14, 2009.
In the
second quarter of 2009, the Company made a voluntary prepayment of $5.0 million
of outstanding principal of the debt. Additionally, the Company
applied proceeds of $982,000 in the second quarter of 2009 from the sale of the
Charlotte, North Carolina warehouse to the outstanding principal of the debt in
connection with certain mandatory prepayment requirements under its Credit
Agreement. Such amounts have been reduced from long-term debt in the
Interim Consolidated Balance Sheet as of November 14, 2009.
On
December 21, 2009, the Company made a voluntary debt prepayment of $19.0 million
toward the $7.0 million required amortization payment due on December 31, 2009
and a portion of its estimated excess cash flow payment, due May 7,
2010. The prepaid amount is classified as a current
liability.
NOTE
10 -
|
STOCK-BASED
COMPENSATION PLANS AND STOCKHOLDERS’ EQUITY
|
At
November 14, 2009, the Company had outstanding awards under various stock-based
employee compensation plans, which are described more fully in Note 13 of the
Notes to the Consolidated Financial Statements in the Company’s 2008 Annual
Report on Form 10-K.
On July
17, 2008, the stockholders approved the CPI Corp. Omnibus Incentive Plan (the
"Plan"). 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. Total shares of common
stock available for delivery pursuant to awards under the Plan are 800,000
shares. At November 14, 2009, 469,896 of these shares were available for future
grants.
The
Company accounts for stock-based compensation plans in accordance with ASC Topic
718, “Compensation-Stock Compensation” 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 table summarizes information about stock options outstanding under the
Plan at November 14, 2009. There was no activity or modifications to
stock options under the Plan in the first three quarters of fiscal year
2009.
|
|
Options
Outstanding and Exercisable
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Range
of
|
|
Number
of Shares
|
|
Remaining
Contractual
|
|
Weighted-Average
|
|
Number
of Shares
|
|
Weighted
Average
|
Exercise
Prices
|
|
Outstanding
|
|
Life
(Years)
|
|
Exercise
Price
|
|
Exercisable
|
|
Exercise
Price
|
$ 12.21
- 13.58
|
|
217,500
|
|
7.42
|
|
$ 13.04
|
|
-
|
|
$ -
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
217,500
|
|
7.42
|
|
$ 13.04
|
|
-
|
|
$ -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
As of
November 14, 2009, there is no aggregate intrinsic value for the outstanding
options (the difference between the Company’s closing stock price on the last
trading day of the third quarter of 2009 and the exercise price, multiplied by
the number of in-the-money options) that would have been received by the option
holders had all option holders exercised their options on November 14,
2009. This amount changes based on the quoted market price of the
Company’s stock.
The
Company estimates the fair value of its stock options with a market-based
performance condition under the Plan using Monte Carlo
simulations. Weighted-average assumptions used in calculating the
fair value of these stock options are included in Note 13 in the CPI Corp. 2008
Annual Report on Form 10-K for its fiscal year ended February 7,
2009.
The
Company recognized stock-based compensation expense of $151,000, resulting in a
deferred tax benefit of $52,000 for the 40 weeks ended November 14, 2009, based
on the grant-date fair values of stock options granted and the derived service
periods. As of November 14, 2009, total unrecognized compensation
cost related to nonvested stock options granted under the Plan was
$435,000. This unrecognized compensation cost will be recognized over
a weighted-average remaining period of 2.9 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. As of November 14, 2009, under this previous
plan, the Company had 15,046 stock options issued and outstanding, with a
weighted-average exercise price of $14.30. There was no activity
related to these options during the 40-week period ended November 14,
2009. The following table summarizes information about stock options
outstanding under this previous plan at November 14, 2009:
Options
Outstanding and Exercisable
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Remaining
Contractual
|
|
Weighted-Average
|
Exercise
Price
|
|
Shares
|
|
Life
(Years)
|
|
Exercise
Price
|
$ 12.96
|
|
10,046
|
|
0.93
|
|
$ 12.96
|
17.00
|
|
5,000
|
|
0.42
|
|
17.00
|
|
|
|
|
|
|
|
Total
|
|
15,046
|
|
0.76
|
|
$ 14.30
|
|
|
|
|
|
|
|
As of
November 14, 2009, there was no aggregate intrinsic value for the outstanding
options (the difference between the Company’s closing stock price on the last
trading day of the third quarter of 2009 and the exercise price, multiplied by
the number of in-the-money options) that would have been received by the option
holders had all option holders exercised their options on November 14,
2009. This amount changes based on the quoted market price of
the Company’s stock.
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. All 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
February 18, 2009, the Board of Directors approved a grant of 7,003 shares of
nonvested stock to its Chairman of the Board as additional compensation for
services rendered. Shares issued under this grant vested on May 2,
2009. On April 27, 2009, the Board of Directors approved a grant of
39,386 shares of nonvested stock to certain employees in conjunction with the
payment of 2008 performance awards. On February 25, 2009, and
September 8, 2009, the Board of Directors approved grants of 24,160 and 1,711
shares of nonvested stock, respectively, to its members of the Board of
Directors in lieu of 2009 board retainer fees and certain committee chair fees
they receive as directors of the Company. On April 27, 2009, the
Board of Directors approved a grant of 8,296 shares to its Chairman of the
Board. These shares vested immediately on the grant
date. On May 4, 2009, and July 27, 2009, the Board of Directors
approved grants of 4,604 and 2,784 shares of nonvested stock, respectively, to
its Chairman of the Board pursuant to the Chairman’s
Agreement. Shares issued under these grants vested on July 25, 2009,
and November 14, 2009, respectively.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
Changes
in nonvested stock are as follows:
|
|
40
Weeks Ended November 14, 2009
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Grant-Date
Value
|
|
Nonvested
stock, beginning of period
|
|
|
1,056
|
|
|
$
|
18.95
|
|
Granted
|
|
|
93,196
|
|
|
|
8.96
|
|
Vested
|
|
|
(22,687
|
)
|
|
|
10.06
|
|
Forfeited
|
|
|
(5,252
|
)
|
|
|
6.70
|
|
|
|
|
|
|
|
|
|
|
Nonvested
stock, end of period
|
|
|
66,313
|
|
|
$
|
8.92
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense related
|
|
|
|
|
|
|
|
|
to
nonvested stock
|
|
$
|
667,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
November 14, 2009, total unrecognized compensation cost related to nonvested
stock was $164,655. This unrecognized compensation cost will be
recognized over a weighted-average remaining period of approximately three
months.
On
November 16, 2009, the Company declared a fourth quarter cash dividend of 16
cents per share which was paid on December 7, 2009, to shareholders of record as
of November 30, 2009.
NOTE
11 -
|
EMPLOYEE
BENEFIT PLANS
|
The
Company maintains a qualified, noncontributory pension plan that covers all
full-time United States 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 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 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. 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.
The
following table sets forth the components of net periodic benefit cost for the
defined benefit plans:
in
thousands
|
|
16
Weeks Ended
|
|
|
16
Weeks Ended
|
|
|
|
Pension
Plan
|
|
|
Supplemental
Retirement Plan
|
|
|
|
November
14, 2009
|
|
|
November
8, 2008
|
|
|
November
14, 2009
|
|
|
November
8, 2008
|
|
Components
of net periodic benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
-
|
|
|
$
|
83
|
|
|
$
|
-
|
|
|
$
|
22
|
|
Interest cost
|
|
|
951
|
|
|
|
923
|
|
|
|
26
|
|
|
|
65
|
|
Expected return on plan
assets
|
|
|
(967
|
)
|
|
|
(996
|
)
|
|
|
-
|
|
|
|
-
|
|
Amortization of prior service
cost
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
9
|
|
Amortization of net loss
(gain)
|
|
|
78
|
|
|
|
215
|
|
|
|
(47
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
62
|
|
|
$
|
239
|
|
|
$
|
(21
|
)
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
thousands
|
|
40
Weeks Ended
|
|
|
40
Weeks Ended
|
|
|
|
Pension
Plan
|
|
|
Supplemental
Retirement Plan
|
|
|
|
November
14, 2009
|
|
|
November
8, 2008
|
|
|
November
14, 2009
|
|
|
November
8, 2008
|
|
Components
of net periodic benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
-
|
|
|
$
|
207
|
|
|
$
|
-
|
|
|
$
|
55
|
|
Interest
cost
|
|
|
2,378
|
|
|
|
2,305
|
|
|
|
65
|
|
|
|
163
|
|
Expected
return on plan assets
|
|
|
(2,418
|
)
|
|
|
(2,488
|
)
|
|
|
-
|
|
|
|
-
|
|
Amortization
of prior service cost
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
|
|
24
|
|
Amortization
of net loss (gain)
|
|
|
196
|
|
|
|
537
|
|
|
|
(116
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
156
|
|
|
$
|
595
|
|
|
$
|
(51
|
)
|
|
$
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
The
Company contributed $1.2 million to its pension plan in the first three quarters
of 2009 and estimates it will contribute a further $315,000 for fiscal year
2009. Future contributions to the pension plan will be dependent upon
legislation, future changes in discount rates and the earnings performance of
plan assets.
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 under the plan, except for those employees with ten or more
years of service and who had attained age 50 on that date (the “Grandfathered
Members”), who were grandfathered and whose benefits continued to
accrue. On June 10, 2009, the Company amended the plan to implement a
freeze of future benefit accruals for the remaining Grandfathered Members,
effective July 31, 2009. The freeze of future benefit accruals for
the remaining Grandfathered Members did not have a material effect on the
Company’s financial statements.
In
accordance with ASC Topic 740, “Income Taxes” which clarifies the accounting for
uncertainty in income taxes recognized in the financial statements, the
following required information is provided:
·
|
Unrecognized
tax benefits were approximately $2.7 million at both November 14, 2009,
and February 7, 2009. If these unrecognized tax benefits were
recognized, approximately $2.7 million would impact the effective tax
rate. It is not expected the amount of these unrecognized tax
benefits will change in the next 12 months.
|
·
|
The
Company recognizes interest expense and penalties related to the
above-unrecognized tax benefits within income tax expense. Due
to the nature of the unrecognized tax benefits, the Company had $82,000
and $36,000 accrued interest and penalties as of November 14, 2009,
and February 7, 2009, respectively.
|
·
|
The
Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction, many states, Mexican and Canadian
jurisdictions. The Company is no longer subject to U.S. Federal
income tax examination for the years prior to 2003. There
are currently no ongoing examinations by state taxing
authorities.
|
NOTE
13 -
|
COMMITMENTS
AND CONTINGENCIES
|
Standby
Letters of Credit
As of
November 14, 2009, the Company had standby letters of credit outstanding in the
principal amount of $20.1 million primarily used in conjunction with the
Company’s various large deductible insurance programs.
Settlement
Commitment
The
Company is obligated to remit Sears additional payments as stipulated in the
settlement of the previous license agreement. An amount of $150,000
is due on December 31
st
in
each 6 successive years, commencing December 31, 2009; these amounts have been
accrued at present value in the Interim Consolidated Balance Sheet as of
November 14, 2009.
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 November 14, 2009, the
maximum future obligation to the Company under its guarantee of remaining leases
is approximately $443,000 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 $342,000 at November 14,
2009. Based on the status of remaining leases, the Company believes
that the $342,000 reserve is adequate to cover the potential losses to be
realized under the Company’s remaining operating lease
guarantees.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
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 was 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 alleged that the Company’s use of the name
PictureMe Portrait Studios® infringed Plaintiff’s trademark for its picture
books and sought damages and injunctive
relief. The parties agreed to full resolution of the
claims of the case on August 12, 2009. The case was dismissed
with prejudice on October 2, 2009. The matter has resulted in
the Company recording a $0.1 million charge in other charges and impairments in
the third quarter of 2009, totaling $0.5 million YTD; net of expected
(probable) insurance reimbursement of $0.6 million for expenses related to the
matter, for which a receivable is recorded as of November 14, 2009.
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 2.
|
|
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 interim 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
unless otherwise noted.
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 2,938 studios throughout the U.S.,
Canada, Mexico and Puerto Rico, principally under license agreements with Sears
and lease and license agreements with Walmart. The Company has
provided professional portrait photography for Sears’ customers since 1959 and
has been the only Sears portrait studio operator since 1986. CPI is
the sole operator of portrait studios in Walmart 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 third quarter in fiscal years 2009 and 2008, the Company’s studio
counts were:
|
|
November
14, 2009
|
|
|
November
8, 2008
|
|
Within
Sears stores:
|
|
|
|
|
|
|
United
States and Puerto Rico
|
|
|
873
|
|
|
|
891
|
|
Canada
|
|
|
110
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
Within
Walmart stores:
|
|
|
|
|
|
|
|
|
United
States and Puerto Rico
|
|
|
1,552
|
|
|
|
1,656
|
|
Canada
|
|
|
259
|
|
|
|
254
|
|
Mexico
|
|
|
115
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
Locations
not within Sears or Walmart stores
|
|
|
29
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,938
|
|
|
|
3,062
|
|
|
|
|
|
|
|
|
|
|
Certain
under-performing PMPS studios have been closed since the third quarter of 2008
in order to improve overall financial results.
As of
September 17, 2009, all of the Company’s studios are
digital. Effective August 19, 2009, the Company entered into a new
six-year license agreement with Sears Canada, pursuant to which the Company will
operate professional portrait studios in approximately 110 Sears locations in
Canada. The terms of the agreement provide greater operating
flexibility than the previous contract. As a result of this new
agreement, the Company converted all remaining film studios in Canada to a
digital format in the 2009 third quarter. The Company plans to
deliver steadily increasing growth through harvesting opportunities from its
digital platform to create diversified revenue streams, driving productivity and
profitability gains, leveraging its manufacturing capacity and efficiency and
implementing aggressive, targeted marketing campaigns.
RESULTS
OF OPERATIONS
A summary
of consolidated results of operations and key statistics follows:
in
thousands, except share and per share data
|
|
16
Weeks Ended
|
|
|
40
Weeks Ended
|
|
|
|
November
14, 2009
|
|
|
November
8, 2008
|
|
|
November
14, 2009
|
|
|
November
8, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
107,286
|
|
|
$
|
115,689
|
|
|
$
|
282,130
|
|
|
$
|
308,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (exclusive of depreciation and amortization shown
below)
|
|
|
8,032
|
|
|
|
11,288
|
|
|
|
21,643
|
|
|
|
31,412
|
|
Selling, general and administrative expenses
|
|
|
99,940
|
|
|
|
109,552
|
|
|
|
245,480
|
|
|
|
269,761
|
|
Depreciation and amortization
|
|
|
6,320
|
|
|
|
8,616
|
|
|
|
17,913
|
|
|
|
21,673
|
|
Other charges and impairments
|
|
|
1,144
|
|
|
|
2,092
|
|
|
|
3,751
|
|
|
|
4,946
|
|
|
|
|
115,436
|
|
|
|
131,548
|
|
|
|
288,787
|
|
|
|
327,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(8,150
|
)
|
|
|
(15,859
|
)
|
|
|
(6,657
|
)
|
|
|
(19,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
2,542
|
|
|
|
3,866
|
|
|
|
5,961
|
|
|
|
6,753
|
|
Interest
income
|
|
|
130
|
|
|
|
87
|
|
|
|
370
|
|
|
|
567
|
|
Other
income, net
|
|
|
236
|
|
|
|
56
|
|
|
|
253
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income tax benefit
|
|
|
(10,326
|
)
|
|
|
(19,582
|
)
|
|
|
(11,995
|
)
|
|
|
(25,300
|
)
|
Income
tax benefit
|
|
|
(3,524
|
)
|
|
|
(6,507
|
)
|
|
|
(4,094
|
)
|
|
|
(8,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
|
(6,802
|
)
|
|
|
(13,075
|
)
|
|
|
(7,901
|
)
|
|
|
(16,573
|
)
|
Net
loss from discontinued operations
|
|
|
-
|
|
|
|
(266
|
)
|
|
|
-
|
|
|
|
(625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(6,802
|
)
|
|
$
|
(13,341
|
)
|
|
$
|
(7,901
|
)
|
|
$
|
(17,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share from continuing operations - diluted
|
|
$
|
(0.97
|
)
|
|
$
|
(2.02
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(2.56
|
)
|
Net
loss per share from discontinued operations - diluted
|
|
|
-
|
|
|
|
(0.04
|
)
|
|
|
-
|
|
|
|
(0.10
|
)
|
Net
loss per share - diluted
|
|
$
|
(0.97
|
)
|
|
$
|
(2.06
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(2.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share from continuing operations - basic
|
|
$
|
(0.97
|
)
|
|
$
|
(2.02
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(2.56
|
)
|
Net
loss per share from discontinued operations - basic
|
|
|
-
|
|
|
|
(0.04
|
)
|
|
|
-
|
|
|
|
(0.10
|
)
|
Net
loss per share - basic
|
|
$
|
(0.97
|
)
|
|
$
|
(2.06
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(2.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common and common equivalent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares outstanding - diluted
|
|
|
7,003,832
|
|
|
|
6,479,496
|
|
|
|
6,987,746
|
|
|
|
6,467,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common and common equivalent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares outstanding - basic
|
|
|
7,003,832
|
|
|
|
6,479,496
|
|
|
|
6,987,746
|
|
|
|
6,467,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 weeks
ended November 14, 2009 compared to 16 weeks ended November 8,
2008
The Company reported a net loss of $6.8
million, or ($0.97) per diluted share, for the fiscal 2009 third quarter ended
November 14, 2009, versus a net loss of $13.3 million, or ($2.06) per diluted
share, in the comparable quarter of fiscal 2008. The Company believes
its third quarter fiscal year 2009 results reflect the successful integration
and upgrade of the PictureMe Portrait Studio® studios as well as the impact of
cost reductions and productivity improvements implemented throughout the
organization.
Net sales
totaled $107.3 million and $115.7 million in the third quarter of fiscal 2009
and 2008, respectively.
·
|
Net
sales for the fiscal 2009 third quarter decreased $8.4 million, or 7.2%,
to $107.3 million from the $115.7 million reported in the third quarter of
2008. Excluding negative impacts of net revenue recognition
change ($3.5 million) and store closures ($2.7 million) and the
positive effect of a shift in calendar end of the quarter, comparable
same-store sales decreased approximately 7.2%. The calendar
adjustment accounts for the shift in the Veteran’s Day week from the
fourth quarter in 2008 to the third quarter in 2009. Veteran’s
Day week initiates the holiday season for portrait activity, and
therefore, this adjustment was necessary to achieve
comparability.
|
·
|
Net
sales from the Company’s PictureMe Portrait Studio® brand (PMPS), on a
comparable same-store basis, excluding impacts of net revenue recognition
change, loyalty program revenue deferral, store closures and other items,
totaling $0.9 million, increased 4.5% in the third quarter of 2009 to
$60.7 million from $58.1 million in the third quarter of
2008. The improved PMPS sales performance for the third quarter
was the result of an approximate 24.9% increase in average sale per
customer sitting, offset in part by an approximate 16.4% decline in the
number of sittings.
|
·
|
During
the third quarter of 2009, net sales from the Company’s Sears Portrait
Studio brand (SPS), on a comparable same-store basis, excluding impacts of
net revenue recognition change, loyalty program revenue deferral, store
closures and other items, totaling $1.1 million, was $52.9 million, a
decrease of 17.7% from $64.4 million in the third quarter of
2008. SPS sales performance for the third quarter was the
result of a decline of approximately 18.9% in the number of sittings,
offset slightly by an increase of 1.5% in sales per
sitting.
|
Costs and
expenses were $115.4 million in the third quarter of 2009, down from the
$131.5 million recorded in the third quarter of 2008. The Company
remains committed to its cost-reduction initiatives and will continue its
financial discipline heading into 2010.
·
|
Cost
of sales, excluding depreciation and amortization expense was $8.0 million
in the third quarter of 2009, compared with $11.3 million in the third
quarter of 2008. The decrease is principally attributable
to lower overall manufacturing production levels, improved productivity
due to lab consolidations, the elimination of film and related
shipping costs stemming from the PMPS digital conversion, and decreased
overhead costs resulting from the integration of the PMPS
operations.
|
·
|
Selling,
general and administrative (SG&A) expenses were $99.9 million for the
third quarter of 2009, compared with $109.6 million in the third quarter
of 2008. The decrease in SG&A expenses primarily relates to
lower studio employment costs of $3.0 million due to scheduling
improvements and selected operating hour reductions; lower other
employment costs of $1.5 million primarily due to changes in exchange
rates, cost control and lower sales levels; fiscal 2008 nonrecurring costs
of $1.7 million associated with the PMPS digital conversion; elimination
of duplicative costs in connection with the PMPS integration totaling $1.3
million; reduced employee insurance costs of $1.3 million due to lower
participation and claims levels; reduced workers’ compensation expense of
$1.2 million due to improved claims management; and $3.0 million in other
cost reductions attributable to cost control initiatives, operating
efficiencies and lower sales levels. These decreases were
offset in part by increases in higher average hourly studio rates of
approximately $1.2 million in connection with new studio and field
initiatives; an increase due to a change in the estimate methods used for
recognizing advertising cost of $0.9 million; and increased host
commission rates per contractual agreements of $1.2
million.
|
·
|
Depreciation
and amortization expense was $6.3 million in the third quarter of 2009,
compared with $8.6 million in the third quarter of
2008. Depreciation expense decreased due to a
reduction in expense related to the streamlining of manufacturing
facilities as well as certain assets from the SPS digital conversion
that have become fully depreciated in fiscal 2009; however, it was
offset in part by an increase as a result of the digital equipment
purchased for the PMPS digital conversion throughout fiscal
2008
|
·
|
In
the third quarter of 2009, the Company recognized $1.1 million in other
charges and impairments, compared with $2.1 million recognized in the
third quarter of 2008. The current-year charges are primarily
associated with lab closures. The prior-year charges are
primarily associated with approximately $0.5 million of litigation costs,
$0.7 million of fees incurred in connection with the settlement of the
previous Sears license agreement, and $0.9 million of PMPS integration
charges, including severance and lab closure
costs.
|
Interest
expense was $2.5 million in the third quarter of 2009 compared with $3.9 million
in the comparable prior year period. The decrease in interest expense
primarily relates to the change in the interest rate swap value of $1.6
million.
Income
tax benefit from continuing operations was $3.5 million in the third quarter of
2009 compared to $6.5 million in the third quarter of 2008. The
resulting effective tax rates were 34.1% in 2009 and 33.2% in
2008. The change in the effective tax rate in 2009 is primarily
attributable to a decrease in Canadian tax rates.
Net
losses from discontinued operations were $0 and $266,000 in the third quarters
of 2009 and 2008, respectively. During the fourth quarter of 2008,
the Company decided to discontinue its Portrait Gallery and E-Church operations
in order to eliminate the unprofitable operations.
40 weeks ended November 14,
2009 compared to 40 weeks ended November 8, 2008
The
Company reported a net loss of $7.9 million, or ($1.13) per diluted share, for
the first three quarters of fiscal year 2009, ended November 14, 2009, versus a
net loss of $17.2 million, or ($2.66) per diluted share, in the comparable prior
year period. The Company believes its first three quarters’ 2009
results reflect the successful integration and upgrade of the PictureMe Portrait
Studio® studios as well as the impact of cost reductions and productivity
improvements implemented throughout the organization.
Net sales
totaled $282.1 million and $308.6 million in the first three quarters of fiscal
2009 and 2008, respectively.
·
|
Net
sales for the first three quarters of 2009 decreased $26.5 million, or
8.6% to $282.1 million from the $308.6 million reported in the first three
quarters of 2008. Excluding the negative impacts of store
closures ($6.0 million), net revenue recognition change ($4.3 million),
revenue deferral related to positive response to the Company’s loyalty
programs ($4.2 million), and other net adjustments ($0.9
million), and the positive effects of a shift in calendar end of the
quarter ($5.5 million) and foreign currency translation ($4.9 million),
comparable same-store sales decreased $11.7 million, or
3.8%. The calendar adjustment accounts for the shift in the
Veteran’s Day week from the fourth quarter in 2008 to the third quarter in
2009. Veteran’s Day week initiates the holiday season for
portrait activity, and therefore, this adjustment was necessary to achieve
comparability.
|
·
|
Net
sales from the Company’s PictureMe Portrait Studio® brand (“PMPS”), on a
comparable same-store basis, excluding impacts of foreign currency
translation, store closures, net revenue recognition change, loyalty
program revenue deferral and other items, totaling ($12.9) million,
increased 10.4%, in the first three quarters of 2009 to $158.1 million
from $143.2 million in the first three quarters of
2008. PMPS sales performance for the first three quarters was
the result of an approximate 37.5% increase in average sale per customer
sitting, offset in part by an approximate 19.7% decline in the number of
sittings. The Company attributes its increase in average sale
per customer sitting primarily to customers’ positive response to the new
offerings made possible by the recently completed digital conversion and
the implementation of new sales and performance management
processes. The Company believes the sittings decline reflects
the difficult economic environment, which has especially pressured
customer demand in lower income
categories.
|
·
|
Net
sales from the Company’s Sears Portrait Studio brand (“SPS”), on a
comparable same-store basis, excluding impacts of loyalty program revenue
deferral, foreign currency translation, net revenue recognition change,
store closures and other items, totaling ($2.2) million, decreased to
$136.3 million, a decrease of 16.3%, from the $163.0 million in the
first three quarters of 2008. SPS sales performance for the
first three quarters was the result of declines in the number of sittings
and sales per sitting of approximately 16.3% and 0.1%,
respectively. The Company believes the decline in SPS
brand sales reflects the difficult economic environment, which pressured
sittings volumes (particularly in the off-season) and led to an especially
pronounced reduction in walk-in business not tied to the Company’s direct
marketing programs. The Company believes declines have been
mitigated in part by improving execution of the Company’s customer
outreach and loyalty programs.
|
Costs and
expenses were $288.8 million in the first three quarters of 2009, down
significantly from the $327.8 million recorded in the first three quarters of
2008.
·
|
Cost
of sales, excluding depreciation and amortization expense, was $21.6
million in the first three quarters of 2009, compared with $31.4 million
in the first three quarters of 2008. The decrease is
principally attributable to lower overall manufacturing production levels,
improved product mix, increased manufacturing productivity, the
elimination of film and related shipping costs stemming from the PMPS
digital conversion, and decreased overhead costs resulting from the
integration of the PMPS operations.
|
·
|
Selling,
general and administrative (“SG&A”) expenses were $245.5 million for
the first three quarters of 2009, compared with $269.8 million in the
first three quarters of 2008. The decrease in SG&A expenses
primarily relates to lower studio employment costs of $8.7 million due to
scheduling improvements and selected operating hour reductions; fiscal
2008 nonrecurring costs of $5.3 million associated with the PMPS digital
conversion; lower field and other employment costs of $4.1 million
primarily due to restructuring field management, changes in exchange
rates, cost control and lower sales levels; elimination of duplicative
costs in connection with the PMPS integration totaling $3.8 million;
reduced workers’ compensation expense of $2.4 million due to improved
claims management; reduced employee insurance costs of $2.4 million
related to lower participation and claims levels; and $5.4 million in
other net cost reductions attributable to cost control initiatives,
operating efficiencies and lower sales levels. These decreases
were offset in part by increases in higher average hourly studio rates of
approximately $4.6 million in connection with new studio and field
initiatives; and increased host commission rates per contractual
agreements of $3.2
million.
|
·
|
Depreciation
and amortization decreased to $17.9 million in the first three quarters of
2009 from $21.7 million in the first three quarters of
2008. The decrease in depreciation and amortization is
primarily attributable to certain assets, acquired in connection with the
2007 acquisition of PCA, becoming fully depreciated subsequent to the
prior-year first quarter and a reduction in expense related to the
streamlining of manufacturing facilities. This decrease is
offset in part by an increase in depreciation attributable to the
equipment purchased for the PMPS digital conversion throughout fiscal year
2008.
|
·
|
In
the first three quarters of 2009, the Company recognized $3.8 million in
other charges and impairments, compared with $4.9 million recognized in
the first three quarters of 2008. The current year charges are
primarily associated with certain PMPS integration charges, including
severance of $1.0 million and lab closure costs of $1.4 million, proxy
contest fees of $0.9 million, and litigation costs of $0.5
million. The prior-year charges are primarily associated with
certain fees incurred in connection with the settlement of the previous
Sears license agreement of $1.7 million, litigation costs of $1.5 million,
and certain PMPS integration charges, including severance and lab closure
costs of $1.7 million.
|
Interest
expense was $6.0 million in the first three quarters of 2009 compared with $6.8
million in the comparable prior year period. The decrease in interest
expense primarily relates to the change in the interest rate swap value of $0.9
million.
Interest
income was $370,000 in the first three quarters of 2009 compared with $567,000
in the comparable prior year period. This decrease primarily relates
to lower average invested balances in the first three quarters of 2009 as
compared to the first three quarters of 2008, the result of higher capital
spending throughout 2008 related to the digital conversion of PMPS.
Income
tax benefit from continuing operations was $4.1 million in the first three
quarters of 2009 compared to $8.7 million in the comparable prior year
period. The resulting effective tax rates were 34.1% in 2009 and
34.5% in 2008. The change in the effective tax rate in 2009 is
primarily attributable to a projected decrease in the impact of job tax credits
offset by a decrease in Canadian tax rates.
Net
losses from discontinued operations were $0 and $625,000 in the first three
quarters of 2009 and 2008, respectively. During the fourth quarter of
2008, the Company decided to discontinue its Portrait Gallery and E-Church
operations in order to eliminate the unprofitable operations.
LIQUIDITY
AND CAPITAL RESOURCES
The
following table presents a summary of the Company’s cash flows for the first
three quarters of 2009 and 2008:
in
thousands
|
|
40
Weeks Ended
|
|
|
|
November
14, 2009
|
|
|
November
8, 2008
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
142
|
|
|
$
|
(13,653
|
)
|
Financing
activities
|
|
|
(12,563
|
)
|
|
|
(6,137
|
)
|
Investing
activities
|
|
|
(3,052
|
)
|
|
|
(31,101
|
)
|
Effect
of exchange rate changes on cash
|
|
|
93
|
|
|
|
(163
|
)
|
Net
decrease in cash
|
|
$
|
(15,380
|
)
|
|
$
|
(51,054
|
)
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided By (Used In) Operating Activities
Net cash
provided by operating activities was $142K during the first three quarters of
2009 compared to net cash used of $13.7 million in the comparable period of
2008. Cash flows in the first three quarters of 2009 increased from
the first three quarters of 2008 primarily due to net operating income and the
timing of payments related to changes in the various balance sheet accounts
totaling approximately $13.6 million, a decrease in pension contributions of
$1.5 million and an increase in income tax refunds, net of payments, of $1.0
million. These increases were offset in part by additional cash used
related to advertising of approximately $1.2 million, primarily for the Easter
holiday, and $1.4 million in bonus and incentives related to new studio and
field initiatives.
Net
Cash Used In Financing Activities
Net cash
used by financing activities was $12.6 million during the first three quarters
of 2009 compared to net cash used of $6.1 million in the comparable period of
2008. The first three quarters of 2008 included short-term borrowings
of $5.5 million that did not recur in 2009. Additionally, 2009
included $943,000 in fees paid to creditors in connection with the Amendment to
the Credit Agreement in the first quarter of 2009, the amount of which is being
amortized over the remainder of the life of the loan in addition to fees that
are currently being amortized.
At
November 14, 2009, the Company had $97.0 million outstanding under its existing
Credit Agreement. The Company was in compliance with its covenants
under its Credit Agreement as of November 14, 2009.
On
December 21, 2009, the Company made a voluntary debt prepayment of $19.0 million
toward the $7.0 million required amortization payment due on December 31, 2009
and a portion of its estimated excess cash flow payment due on May 7,
2010. The prepaid amount is classified as a current
liability. This payment was made from fourth quarter operating cash
flow.
Net
Cash Used In Investing Activities
Net cash
used in investing activities was $3.1 during the first three quarters of 2009 as
compared to $31.1 million during the first three quarters of
2008. This decrease was primarily attributable to a decrease in
capital expenditures of $26.7 million in the first three quarters of 2009
compared to the prior year comparable period since the digital conversion is now
completed. Additionally, the company received proceeds from the sale
of property and equipment of $1.3 million, primarily related to the sales of the
Charlotte, North Carolina warehouse in the second quarter of 2009.
Off-Balance
Sheet Arrangements
Other
than standby letters of credit primarily used to support the Company’s 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 following Commitments and Contingencies section, the Company
has no additional off-balance sheet arrangements.
Commitments
and Contingencies
Standby Letters of
Credit
As of
November 14, 2009, the Company had standby letters of credit outstanding in the
principal amount of $20.1 million primarily used in conjunction with the
Company’s various large deductible insurance programs.
Settlement
Commitment
The
Company is obligated to remit Sears additional payments as stipulated in the
settlement of the previous license agreement. An amount of $150,000
is due on December 31
st
in
each 6 successive years, commencing December 31, 2009; these amounts have been
accrued at present value in the Interim Consolidated Balance Sheet as of
November 14, 2009.
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 November 14, 2009, the
maximum future obligation to the Company under its guarantee of remaining leases
is approximately $443,000 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 $342,000 at November 14,
2009. Based on the status of remaining leases, the Company believes
that the $342,000 reserve is adequate to cover the potential losses to be
realized under the Company’s remaining 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 to be approximately $5.0
million for fiscal 2009, and normal operating needs.
ACCOUNTING
PRONOUNCEMENTS AND POLICIES
Adoption of New Accounting
Standards
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB No. 162” (“SFAS No. 168”). SFAS No. 168 provided
for the FASB Accounting Standards Codification (“ASC” or the “Codification”) to
become the single official source of authoritative, nongovernmental U.S.
GAAP. The Codification did not change U.S. GAAP but reorganized
existing literature and is effective for interim and fiscal years ending after
September 15, 2009. The Company adopted the provisions of SFAS No.
168 (referenced as ASC Topic 105, “Generally Accepted Accounting Principles”
(“ASC Topic 105”) under the Codification) on July 26, 2009. The
effect was not material to the Company’s financial statements; however,
references to legacy U.S. GAAP, where appropriate, have been replaced with their
respective ASC references. Additionally, all authoritative U.S. GAAP
issued by the FASB after July 1, 2009, has been designed to update the
Codification and will now be referred to as Accounting Standards Updates
(“ASU”). ASU No. 2009-01, “Topic 105 – Generally Accepted Accounting
Principles – amendments based on SFAS No. 168” issued in June 2009, created ASC
Topic 105, as noted above, in the General Principles and Objective Section of
the Codification and includes SFAS No. 168 in its entirety, including the
accounting standards update instructions.
In
September 2009, the FASB issued ASU No. 2009-06, “Income Taxes” (“ASU No.
2009-06”). ASU No. 2009-06 provides additional implementation
guidance to improve current accounting by helping to achieve consistent
application of accounting for uncertainty in income taxes and is effective for
interim and annual periods ending after September 15, 2009. The
Company adopted the applicable requirements of ASU No. 2009-06 on July 26, 2009,
and the effect was not material to the Company’s financial
statements.
In August
2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and Disclosures”
(“ASU No. 2009-05”). ASU No. 2009-05 supplements and amends the
guidance in ASC Topic 820, “Fair Value Measurements and Disclosures” to clarify
how an entity should measure the fair value of liabilities and outlines
alternative valuation methods and a hierarchy for their use. ASU No.
2009-05 also clarifies that restrictions preventing the transfer of a liability
should not be considered as a separate input or adjustment in the measurement of
its fair value. ASU No. 2009-05 is effective for interim and annual
periods beginning after issuance of the Update. The Company adopted
the applicable requirements of ASU No. 2009-05 on July 26, 2009, and the effect
was not material to the Company’s financial statements.
ASC Topic
855, “Subsequent Events” (“ASC Topic 855”) (formerly SFAS No. 165, “Subsequent
Events” issued by the FASB in May 2009 and effective for interim and fiscal
years ending after June 15, 2009) establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In
accordance with ASC Topic 855, the Company performed an evaluation of subsequent
events through December 21, 2009, the date which the financial statements were
issued, and determined no subsequent events had occurred which would require
adjustment to or additional disclosure in its interim consolidated financial
statements.
ASC Topic
715, “Compensation – Retirement Benefits” (“ASC Topic 715”) (which includes
certain disclosure requirements issued under FASB Staff Position SFAS No.
132R-1, “Employers’ Disclosure about Postretirement Benefit Plan Assets”, an
amendment of SFAS No. 132 (revised 2003), “Employers’ Disclosure about Pensions
and Other Postretirement Benefits”, in December 2008 and effective for fiscal
years ending after December 15, 2009) requires more detailed disclosures
regarding defined benefit pension 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. These enhanced disclosures are required for
fiscal years ending after December 15, 2009. Upon initial
application, the enhanced disclosures are not required for earlier periods that
are presented for comparative purposes. The Company is currently
evaluating the enhanced disclosure requirements under ASC Topic
715.
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 Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Company’s 2008
Annual Report on Form 10-K, and below.
Long-Lived
Asset Recoverability
In
accordance with ASC Topic 360, “Property, Plant, and Equipment” (“ASC Topic
360”) 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 impairment test, as
prescribed under ASC Topic 360, 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 November 14, 2009, no
impairment was indicated.
Recoverability
of Goodwill and Acquired Intangible Assets
The
Company accounts for goodwill under ASC Topic 350, “Intangibles – Goodwill and
Other” (“ASC Topic 350”) 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. ASC Topic 350 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. As of July 25, 2009, the end of the Company’s second
quarter, the Company completed its annual impairment test and concluded that the
estimated fair values of its reporting units exceeded their carrying values, and
therefore, no impairment was indicated. As of November 14, 2009, the
end of the Company’s 2009 third quarter, the Company considered possible
impairment triggering events since the July 25, 2009, impairment test date,
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. The reporting units, for
purposes of this test, have fair values substantially in excess of carrying
value.
The
Company reviews its intangible assets with definite useful lives under ASC Topic
360, 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 challenging economic and consumer retail environment, as of
November 14, 2009, the Company considered possible impairment triggering events,
including projected cash flow data, as well as other relevant factors, and
concluded that no impairment was indicated at that date. It is
possible that changes in circumstances, assumptions or 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.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
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 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. Such risks include, but are not limited to: the Company’s
dependence on Sears and Walmart, the approval of the Company’s business
practices and operations by Sears and Walmart, the termination, breach,
limitation or increase of the Company’s expenses by Sears under the license
agreements, or Walmart under the lease and license agreements, customer demand
for the Company’s products and services, the economic recession and resulting
decrease in consumer spending, manufacturing interruptions, dependence on
certain suppliers, competition, dependence on key personnel, fluctuations in
operating results, a significant increase in piracy of the Company’s
photographs, widespread equipment failure, compliance with debt covenants, high
level of indebtedness, implementation of marketing and operating strategies,
outcome of litigation and other claims, impact of declines in global equity
markets to pension plan, impact of foreign currency translation and other risks
as may be described in the Company’s filings with the Securities and Exchange
Commission, including its Form 10-K for the year ended February 7,
2009. 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” included in the Company’s 2008 Annual Report on Form 10-K that is filed
with the Securities and Exchange Commission. 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.
Item 3
.
|
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
Market
risks relating to the Company’s operations result primarily from changes in
interest rates and foreign exchange rates.
At
November 14, 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 $399,600.
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 14.4% of the Company’s total assets and
12.5% of the Company’s total sales as of and for the 40 weeks ended November 14,
2009. A hypothetical 10% unfavorable change in the Canadian-to-U.S.
dollar exchange rate would cause an approximate $818,000 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 0.9% of the Company’s total assets and 2.1% of the
Company’s total sales as of and for the 40 weeks ended November 14,
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 November 14,
2009:
Notional
amount
|
|
$
|
57,500,000
|
|
|
|
|
|
|
Fixed
rate paid
|
|
|
4.97
|
%
|
|
|
|
|
|
Variable
rate received
|
|
|
0.25
|
%
|
|
|
|
|
|
Effective
date
|
|
September
17, 2007
|
|
|
|
|
|
|
Expiration
date
|
|
September
17, 2010
|
|
Item 4
.
|
|
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 it files or submits 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 November 14, 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 November 14, 2009.
b)
|
Changes
in Internal Control Over Financial
Reporting
|
There
were no changes in the Company’s internal control over financial reporting
during the quarter ended November 14, 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.
PART
II. OTHER INFORMATION
Items 1,
1A, 2, 3, 4 and 5 are inapplicable and have been omitted.
Exhibits: An
Exhibit index has been filed as part of this Report on Page E-1 and is
incorporated herein by reference.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CPI
CORP.
(Registrant)
By: /s/Dale
Heins
________________________________
Dale Heins
Senior Vice President, Finance
and
Chief
Financial Officer
(Principal
Financial Officer)
By: /s/Rose
O’Brien
________________________________
Rose O’Brien
Vice
President, Corporate Controller
(Principal
Accounting Officer)
Date:
December 22, 2009
CPI
CORP.
E-1
EXHIBIT INDEX
|
|
Amendment
to Chairman's Agreement by and between CPI Corp. and David Meyer, dated
September 25, 2009.
|
|
|
(Confidential
treatment requested for portions of this document.)
|
|
|
|
|
|
Computation
of Per Common Share Loss - Diluted - for the 16 and 40 weeks ended
November 14, 2009, and November 8, 2008.
|
|
|
|
|
|
Computation
of Per Common Share Loss - Basic - for the 16 and 40 weeks ended November
14, 2009, and November 8, 2008.
|
|
|
|
|
|
Certification
Pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934
by the Chief Executive Officer.
|
|
|
|
|
|
Certification
Pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934
by the 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 Chief Executive Officer and the Chief Financial
Officer.
|
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