UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended May 2,
2009 or
o
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ___________________ to ____________________
Commission
file number 1-10204
CPI
Corp.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of incorporation or organization)
1706
Washington Ave., St. Louis, Missouri
(Address
of principal executive offices)
|
43-1256674
(I.R.S.
Employer Identification No.)
63103
(Zip
Code)
|
Registrant’s
telephone number, including area code:
314/231-1575
|
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
Common
Stock, par value $0.40 per share
|
Name
of each exchange on which registered
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
o
Yes
x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
o
Yes
x
No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
Yes
o
No
Indicate
by check mark 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
June 9, 2009, 7,005,301 shares of the registrant’s common stock were
outstanding.
CPI
CORP.
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
12
WEEKS ENDED MAY 2, 2009
PART
I.
|
|
FINANCIAL
INFORMATION
|
|
|
Page
|
|
|
|
|
|
|
|
|
|
|
|
Item
1.
|
|
Financial
Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
2, 2009 (Unaudited) and February 7, 2009
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Weeks Ended May 2, 2009 and April 26, 2008
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
(Unaudited) 12 Weeks Ended May 2, 2009
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Weeks Ended May 2, 2009 and April 26, 2008
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management's
Discussion and Analysis of Financial Condition
|
|
|
|
|
|
and
Results of Operations
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative
and Qualitative Disclosures about Market Risk
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
and Procedures
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
6.
|
|
Exhibits
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
PART
I.
|
|
FINANCIAL
INFORMATION
|
Item
1.
|
|
Financial
Statements
|
CPI
CORP.
Interim
Consolidated Balance Sheets -
Assets
in
thousands
|
|
May
2, 2009
|
|
|
February
7, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
26,839
|
|
|
$
|
23,665
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
|
Trade
|
|
|
7,436
|
|
|
|
6,050
|
|
Other
|
|
|
789
|
|
|
|
923
|
|
Inventories
|
|
|
8,307
|
|
|
|
8,489
|
|
Prepaid
expenses and other current assets
|
|
|
8,047
|
|
|
|
5,800
|
|
Refundable income
taxes
|
|
|
512
|
|
|
|
357
|
|
Deferred tax assets
|
|
|
9,823
|
|
|
|
9,581
|
|
Assets
held for sale
|
|
|
6,852
|
|
|
|
6,615
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
68,605
|
|
|
|
61,480
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
3,114
|
|
|
|
3,249
|
|
Buildings and building
improvements
|
|
|
28,744
|
|
|
|
32,377
|
|
Leasehold
improvements
|
|
|
4,472
|
|
|
|
4,406
|
|
Photographic, sales and
manufacturing equipment
|
|
|
177,234
|
|
|
|
178,732
|
|
Total
|
|
|
213,564
|
|
|
|
218,764
|
|
Less
accumulated depreciation and amortization
|
|
|
167,538
|
|
|
|
167,877
|
|
Property and equipment,
net
|
|
|
46,026
|
|
|
|
50,887
|
|
Goodwill
|
|
|
21,518
|
|
|
|
21,459
|
|
Intangible
assets, net
|
|
|
39,856
|
|
|
|
40,206
|
|
Deferred
tax assets
|
|
|
6,873
|
|
|
|
8,359
|
|
Other
assets
|
|
|
7,882
|
|
|
|
8,202
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
190,760
|
|
|
$
|
190,593
|
|
|
|
|
|
|
|
|
|
|
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
|
|
May
2, 2009
|
|
|
February
7, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
10,000
|
|
|
$
|
1,150
|
|
Accounts payable
|
|
|
8,125
|
|
|
|
6,816
|
|
Accrued
employment costs
|
|
|
11,168
|
|
|
|
10,146
|
|
Customer deposit
liability
|
|
|
16,663
|
|
|
|
12,503
|
|
Sales
taxes payable
|
|
|
2,028
|
|
|
|
5,284
|
|
Accrued
advertising expenses
|
|
|
1,698
|
|
|
|
978
|
|
Accrued
expenses and other liabilities
|
|
|
14,745
|
|
|
|
18,133
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
64,427
|
|
|
|
55,010
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
92,428
|
|
|
|
102,316
|
|
Accrued
pension plan obligations
|
|
|
10,122
|
|
|
|
10,591
|
|
Other
liabilities
|
|
|
20,421
|
|
|
|
21,841
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
187,398
|
|
|
|
189,758
|
|
|
|
|
|
|
|
|
|
|
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; 9,176,288 and
17,089,788
|
|
|
|
|
|
|
|
|
shares
outstanding at May 2, 2009 and February 7, 2009,
respectively
|
|
|
3,671
|
|
|
|
6,836
|
|
Additional
paid-in capital
|
|
|
27,960
|
|
|
|
55,413
|
|
Retained
earnings
|
|
|
33,424
|
|
|
|
183,704
|
|
Accumulated
other comprehensive loss
|
|
|
(12,561
|
)
|
|
|
(13,114
|
)
|
|
|
|
52,494
|
|
|
|
232,839
|
|
Treasury
stock - at cost, 2,175,591 and 10,270,319 at May 2, 2009
and
|
|
|
|
|
|
|
|
|
February 7, 2009,
respectively
|
|
|
(49,132
|
)
|
|
|
(232,004
|
)
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
3,362
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
190,760
|
|
|
$
|
190,593
|
|
|
|
|
|
|
|
|
|
|
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
|
|
12
Weeks Ended
|
|
|
|
May
2, 2009
|
|
|
April
26, 2008
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
93,467
|
|
|
$
|
103,367
|
|
|
|
|
|
|
|
|
|
|
Cost
and expenses:
|
|
|
|
|
|
|
|
|
Cost of
sales (exclusive of depreciation and amortization shown
below)
|
|
|
6,959
|
|
|
|
10,533
|
|
Selling, general and administrative
expenses
|
|
|
75,153
|
|
|
|
82,820
|
|
Depreciation and
amortization
|
|
|
6,039
|
|
|
|
7,494
|
|
Other
charges and impairments
|
|
|
420
|
|
|
|
1,518
|
|
|
|
|
88,571
|
|
|
|
102,365
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
4,896
|
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
1,491
|
|
|
|
1,521
|
|
Interest
income
|
|
|
122
|
|
|
|
362
|
|
Other
income, net
|
|
|
9
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax provision (benefit)
|
|
|
3,536
|
|
|
|
(151
|
)
|
Income
tax provision (benefit)
|
|
|
1,207
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
|
2,329
|
|
|
|
(92
|
)
|
Net
loss from discontinued operations
|
|
|
-
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
2,329
|
|
|
$
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share from continuing operations -
diluted
|
|
$
|
0.34
|
|
|
$
|
(0.01
|
)
|
Net
loss per share from discontinued operations - diluted
|
|
|
-
|
|
|
|
(0.03
|
)
|
Net
income (loss) per share - diluted
|
|
$
|
0.34
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share from continuing operations - basic
|
|
$
|
0.34
|
|
|
$
|
(0.01
|
)
|
Net
loss per share from discontinued operations - basic
|
|
|
-
|
|
|
|
(0.03
|
)
|
Net
income (loss) per share - basic
|
|
$
|
0.34
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common and common equivalent
|
|
|
|
|
|
|
|
|
shares
outstanding - diluted
|
|
|
6,948,799
|
|
|
|
6,452,035
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common and common equivalent
|
|
|
|
|
|
|
|
|
shares
outstanding - basic
|
|
|
6,948,799
|
|
|
|
6,452,035
|
|
|
|
|
|
|
|
|
|
|
See
accompanying footnotes to the interim consolidated financial
statements.
CPI
CORP.
Interim
Consolidated Statement of Changes
in Stockholders’ Equity
(Unaudited)
Twelve
weeks ended May 2, 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
income
|
|
|
-
|
|
|
|
-
|
|
|
|
2,329
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,329
|
|
Total
other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
553
|
|
|
|
-
|
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,882
|
|
Surrender
of employee shares to satisfy personal tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities upon vesting of
formerly restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
(4,271 shares)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(30
|
)
|
|
|
(30
|
)
|
Retirement
of treasury stock (8,000,000 shares, at average
cost)
|
|
|
(3,200
|
)
|
|
|
(25,940
|
)
|
|
|
(151,526
|
)
|
|
|
-
|
|
|
|
180,666
|
|
|
|
-
|
|
Issuance
of common stock and restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86,500
shares)
|
|
|
35
|
|
|
|
(1,671
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,236
|
|
|
|
600
|
|
Stock-based
compensation recognized
|
|
|
-
|
|
|
|
158
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
158
|
|
Dividends
($0.16 per common share)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,083
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at May 2, 2009
|
|
$
|
3,671
|
|
|
$
|
27,960
|
|
|
$
|
33,424
|
|
|
$
|
(12,561
|
)
|
|
$
|
(49,132
|
)
|
|
$
|
3,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying footnotes to the interim consolidated financial
statements.
CPI
CORP.
Interim
Consolidated Statements of Cash
Flows
(Unaudited)
in
thousands
|
|
12
Weeks Ended
|
|
|
|
May
2, 2009
|
|
|
April
26, 2008
|
|
Reconciliation
of net income (loss) to cash flows provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
2,329
|
|
|
$
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments
for items not requiring (providing) cash:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
6,039
|
|
|
|
7,494
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
|
164
|
|
Stock-based compensation
expense
|
|
|
158
|
|
|
|
72
|
|
(Gain)
loss on disposition of property and equipment
|
|
|
(157
|
)
|
|
|
166
|
|
Deferred income tax
provision
|
|
|
1,375
|
|
|
|
(329
|
)
|
Pension, supplemental retirement
plan and profit sharing expense
|
|
|
186
|
|
|
|
758
|
|
Other
|
|
|
193
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash flow from operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,223
|
)
|
|
|
1,952
|
|
Inventories
|
|
|
222
|
|
|
|
1,354
|
|
Prepaid
expenses and other current assets
|
|
|
(1,794
|
)
|
|
|
(1,132
|
)
|
Accounts payable
|
|
|
1,316
|
|
|
|
(3,581
|
)
|
Contribution to pension
plan
|
|
|
(516
|
)
|
|
|
(464
|
)
|
Accrued
expenses and other liabilities
|
|
|
(4,955
|
)
|
|
|
(7,226
|
)
|
Income
taxes payable
|
|
|
(154
|
)
|
|
|
(362
|
)
|
Deferred revenues and related
costs
|
|
|
3,627
|
|
|
|
(731
|
)
|
Other
|
|
|
(658
|
)
|
|
|
(881
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used in) continuing operations
|
|
|
5,988
|
|
|
|
(2,848
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows used in discontinued operations
|
|
|
-
|
|
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used in) operating activities
|
|
|
5,988
|
|
|
|
(2,994
|
)
|
|
|
|
|
|
|
|
|
|
See
accompanying footnotes to the interim consolidated financial
statements.
CPI
CORP.
Interim
Consolidated Statements of Cash Flows (continued)
(Unaudited)
in
thousands
|
|
12
Weeks Ended
|
|
|
|
May
2, 2009
|
|
|
April
26, 2008
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used in) operating activities
|
|
|
5,988
|
|
|
|
(2,994
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows used in financing activities:
|
|
|
|
|
|
|
|
|
Repayment of long-term
debt
|
|
|
(288
|
)
|
|
|
(288
|
)
|
Payment
of debt issuance costs
|
|
|
(943
|
)
|
|
|
-
|
|
Cash
dividends
|
|
|
(1,083
|
)
|
|
|
(1,026
|
)
|
Other
|
|
|
(32
|
)
|
|
|
(175
|
)
|
Cash
flows used in financing activities
|
|
|
(2,346
|
)
|
|
|
(1,489
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows (used in) provided by investing activities:
|
|
|
|
|
|
|
|
|
Additions to property and
equipment
|
|
|
(907
|
)
|
|
|
(11,299
|
)
|
Proceeds from sale of property and
equipment
|
|
|
335
|
|
|
|
-
|
|
Other
|
|
|
50
|
|
|
|
(1
|
)
|
Cash
flows used in investing activities
|
|
|
(522
|
)
|
|
|
(11,300
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
54
|
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
3,174
|
|
|
|
(15,845
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
23,665
|
|
|
|
59,177
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
26,839
|
|
|
$
|
43,332
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,461
|
|
|
$
|
1,846
|
|
|
|
|
|
|
|
|
|
|
Income
taxes (received) paid, net
|
|
$
|
(57
|
)
|
|
$
|
471
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
714
|
|
|
$
|
424
|
|
|
|
|
|
|
|
|
|
|
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 3,013 professional portrait studios as of May 2, 2009,
throughout the U. S., Canada, Mexico and Puerto Rico, principally under license
agreements with Sears, Roebuck and Co. ("Sears") and lease and license
agreements with Wal-Mart Stores, Inc. (“Wal-Mart”). The Company also
operates searsphotos.com, a vehicle for the Company’s customers to archive,
share portraits via email and order additional portraits and products, and plans
to launch a similar website for PictureMe Portrait Studio® in 2009.
The
Interim Consolidated Balance Sheet as of May 2, 2009, the related Interim
Consolidated Statements of Operations for the 12 weeks ended May 2, 2009, and
April 26, 2008, the Interim Consolidated Statement of Changes in Stockholders’
Equity for the 12 weeks ended May 2, 2009, and the Interim Consolidated
Statements of Cash Flows for the 12 weeks ended May 2, 2009, and April 26, 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; reviewing values for
identifiable intangible assets; 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.
NOTE
2 -
|
ADOPTION
OF NEW ACCOUNTING STANDARDS
|
In April
2009, the Financial Accounting Standards Board (“FASB”) issued three related
Staff Positions (FSP) intended to provide additional application guidance and
enhanced disclosures regarding fair value measurements and impairments of
securities: (i) FSP Statement of Financial Accounting Standards
(“SFAS”) No. 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly,” (“FSP SFAS No. 157-4”), (ii) FSP SFAS No.
107-1 and Accounting Principles Board Opinion (“APB”) No. 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” (“FSP SFAS No. 107-1 and
APB No. 28-1”) and (iii) FSP SFAS No. 115-2 and FSP SFAS No. 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments,” (“FSP SFAS No. 115-2 and
FSP SFAS No. 124-2”).
FSP SFAS
No. 157-4 provides guidelines for making fair value measurements more consistent
with the principles presented in SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”). FSP SFAS No. 157-4 relates to determining fair values when
the volume and level of activity for an asset or liability have significantly
decreased. This position reaffirms SFAS No. 157, stating the
objective of fair value measurement is to reflect the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction (as opposed to a distressed or forced transaction) between market
participants at the date of the financial statements under current market
conditions.
FSP SFAS
No. 107-1 and APB No. 28-1 relate to fair value disclosure for any financial
instrument not currently reflected on the balance sheet at fair
value. Prior to this position, fair values for such assets and
liabilities were only disclosed annually. This position requires
these disclosures on a quarterly basis, providing qualitative and quantitative
information about fair value estimates for all those financial instruments not
measured on the balance sheet at fair value.
FSP SFAS
No. 115-2 and FSP SFAS No. 124-2 related to other-than-temporary impairments is
intended to bring greater consistency to the timing of impairment recognition
and provide greater clarity to investors about the credit and noncredit
components of impaired debt securities that are not expected to be
sold. The measure of impairment in comprehensive income remains fair
value. This position also requires increased and timelier disclosures
sought by investors regarding expected cash flows, credit losses and an aging of
securities with unrealized losses.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
These
positions are effective for interim and fiscal years ending after June 15,
2009. The Company is currently evaluating the impact of adoption of
these standards.
In
December 2008, the FASB issued FSP SFAS No. 132R-1, “Employers’ Disclosure about
Postretirement Benefit Plan Assets,” (“FSP SFAS No. 132R-1”), an amendment of
SFAS No. 132 (revised 2003), “Employers’ Disclosure about Pensions and Other
Postretirement Benefits,” (“SFAS No. 132R”). FSP SFAS No. 132R-1
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. This position
is effective for fiscal years ending after December 15, 2009. Upon
initial application, the provisions of this position are not required for
earlier periods that are presented for comparative purposes. The
Company is currently evaluating the disclosure requirements of this new
position.
In June
2008, the FASB issued Staff Position No. EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities,” (“FSP EITF No. 03-6-1”). FSP EITF No. 03-6-1 states that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are considered
participating securities and shall be included in the computation of Earnings
per Share pursuant to the two-class method under SFAS No. 128, “Earnings per
Share.” The Company adopted this position on February 8, 2009, and
the effect was not material to the Company’s financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”), an amendment to SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” (“SFAS No.
133”). The statement requires enhanced disclosures that expand the
disclosure requirements in SFAS No. 133 about an entity’s derivative instruments
and hedging activities. It will require more robust qualitative
disclosures and expanded quantitative disclosures. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The adoption of SFAS No. 161 did
not have a material effect on the Company’s financial statements.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” (“SFAS
No. 141R”). This statement requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction, establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed, and
requires additional disclosures by the acquirer. Under this
statement, all business combinations will be accounted for by applying the
acquisition method. SFAS No. 141R is effective for financial
statements issued for fiscal years beginning after December 15,
2008. The adoption of SFAS No. 141R did not have a material effect on
the Company’s financial statements.
NOTE
3 -
|
FAIR
VALUE MEASUREMENTS
|
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
(“SFAS No. 157”). This statement did not require any new fair value
measurements, but rather, it provided enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair value. The
changes to current practice resulting from the application of this statement
related to the definition of fair value, the methods used to estimate fair
value, and the requirement for expanded disclosures about estimates of fair
value. This statement became effective for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years. The effective date for
this statement for all nonfinancial assets and nonfinancial liabilities, except
for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis, was delayed by one
year. Nonfinancial assets that were impacted by this deferral
included goodwill, intangible assets and property and equipment. The
Company adopted the provisions of SFAS No. 157 related to financial assets and
financial liabilities on February 3, 2008, and the effect was not material to
the Company’s financial statements. The Company adopted the remaining
provisions related to nonfinancial assets and nonfinancial liabilities on
February 8, 2009. The full impact of adoption of these remaining
provisions is uncertain as the Company will be performing its annual goodwill
impairment test in the second quarter.
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.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
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 SFAS No. 157 and directly related to the amount of subjectivity associated
with the inputs to fair valuation of these assets and liabilities, are as
follows:
Level
1 -
|
|
Inputs
were unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date.
|
|
|
|
Level
2 -
|
|
Inputs
(other than quoted prices included in Level 1) were either directly or
indirectly observable for the asset or liability through correlation with
market data at the measurement date and for the duration of the
instrument’s anticipated life.
|
|
|
|
Level
3 -
|
|
Inputs
reflected management’s best estimate of what market participants would use
in pricing the asset or liability at the measurement date. Consideration
was given to the risk inherent in the valuation technique and the risk
inherent in the inputs to the
model.
|
Determining
which hierarchical level an asset or liability falls within requires significant
judgment. The Company evaluates its hierarchy disclosures each
quarter. The following table summarizes the financial instruments
measured at fair value in the Interim Consolidated Balance Sheet as of May 2,
2009 (in millions):
|
|
Fair
Value Measurements
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap (1)
|
|
$
|
-
|
|
|
$
|
3.2
|
|
|
$
|
-
|
|
|
$
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The
total fair value of the interest rate swap is included in Other
Liabilities as of May 2, 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 May 2, 2009, and February 7, 2009, was
$3.2 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 May 2, 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.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
Goodwill
and Intangible Assets
The
Company uses fair value measurements when it periodically evaluates the
recoverability of goodwill and acquired intangible assets. 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
periodically evaluates the recoverability of property and
equipment. The recorded value of these instruments 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.
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 first quarter
of fiscal year 2008 are presented in the following table:
in
thousands
|
|
12
Weeks Ended
|
|
|
|
April
26, 2008
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
76
|
|
|
|
|
|
|
Operating loss
|
|
$
|
267
|
|
Tax benefit
|
|
|
103
|
|
|
|
|
|
|
Net
loss from discontinued operations
|
|
$
|
164
|
|
|
|
|
|
|
The net
loss consists of costs to operate the Portrait Gallery and E-Church operations
until they were discontinued in the fourth quarter of 2008, as well as related
asset write-offs.
Inventories
consist of:
in
thousands
|
|
May
2, 2009
|
|
February
7, 2009
|
|
|
|
|
|
Raw
materials - film, paper and chemicals
|
$
|
2,304
|
|
$ 2,724
|
Portraits
in process
|
|
1,631
|
|
1,313
|
Finished
portraits pending delivery
|
|
366
|
|
261
|
Frames
and accessories
|
|
402
|
|
426
|
Studio
supplies
|
|
2,560
|
|
2,495
|
Equipment
repair parts and supplies
|
|
623
|
|
878
|
Other
|
|
421
|
|
392
|
|
|
|
|
|
Total
|
$
|
8,307
|
|
$ 8,489
|
|
|
|
|
|
These
balances are net of obsolescence reserves totaling $167,000 and $149,000 at May
2, 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
decided to list the warehouse and excess parcels of land, and the
manufacturing facility, respectively, for sale, as they were no longer required
by the business. In the first quarter of 2009, the Company also
decided to list for sale its production facility located in Thomaston,
Connecticut, as the facility is no longer required due to the restructuring and
consolidation of the Company’s manufacturing processes. The Company
determined these properties meet the criteria for “held for sale accounting”
under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” and has presented the respective group of assets separately on the face
of the Consolidated Balance Sheet as of May 2, 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 fair
value. As of May 2, 2009, the carrying values of the respective
assets held for sale did not exceed their fair values less costs to
sell.
The major
classes of assets included in assets held for sale in the Interim Consolidated
Balance Sheet are as follows:
in
thousands
|
|
May
2, 2009
|
|
|
February
7, 2009
|
|
|
|
|
|
|
Land
|
$
|
1,607
|
|
$
|
1,473
|
Buildings
and building improvements
|
|
5,245
|
|
|
5,142
|
|
|
|
|
|
|
Assets held for sale
|
$
|
6,852
|
|
$
|
6,615
|
|
|
|
|
|
|
The
Company expects the sales of these assets will be completed within a one year
time period from the respective periods that they met the criteria for "held for
sale accounting".
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 the 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:
thousands
|
|
May
2, 2009
|
|
|
February
7, 2009
|
|
|
|
|
|
|
|
|
PCA
acquisition
|
|
$
|
21,227
|
|
|
$
|
21,227
|
|
|
|
|
|
|
|
|
|
|
Goodwill
from prior acquisitions
|
|
|
512
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
Translation
impact on foreign balances
|
|
|
(221
|
)
|
|
|
(280
|
)
|
|
|
$
|
21,518
|
|
|
$
|
21,459
|
|
|
|
|
|
|
|
|
|
|
The
Company accounts for goodwill under SFAS No. 142, “Goodwill and Other Intangible
Assets,” which requires the Company to test goodwill for impairment on an annual
basis, and between annual tests whenever events or changes in circumstances
indicate the carrying amount may not be recoverable. SFAS No. 142
prescribes a two-phase process for impairment testing of
goodwill. The first phase is a screen for impairment, which compares
the reporting units’ estimated fair value to their carrying
values. If the carrying value exceeds the estimated fair value in the
first phase, the second phase is performed in which the Company’s goodwill is
written down to its implied fair value, which the Company would determine based
upon a number of factors, including operating results, business plans and
anticipated future cash flows.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
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 May 2, 2009, the end of the Company’s 2009 first
quarter, the Company considered possible impairment triggering events, including
its market capitalization relative to the carrying value of its net assets, as
well as other relevant factors, and concluded that no goodwill impairment was
indicated at that date, and therefore, no impairment test was necessary in the
first quarter. The Company will complete its annual impairment test
at the end of its second quarter, which ends July 25, 2009. If the
Company were required to write-down its goodwill at that date, the resulting
non-cash impairment charge could be significant, which would adversely affect
the Company’s financial position and results of operations.
Also, in
connection with the PCA Acquisition, the Company acquired intangible assets
related to the host agreement with Wal-Mart and the customer
list. These assets were recorded in accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets” (“SFAS No. 142”). The host
agreement with Wal-Mart and the customer list are being amortized over their
useful lives of 21.5 years using the straight-line method and 6 years using an
accelerated method, respectively. The following table summarizes the
Company’s amortized intangible assets as of May 2, 2009.
in
thousands
|
|
Balance
at
|
|
|
|
|
|
Translation
Impact
|
|
|
Net
Balance at
|
|
|
|
Beginning
of Period
|
|
|
Amortization
|
|
|
of
Foreign Balances
|
|
|
End
of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
host agreement
|
|
$
|
39,398
|
|
|
$
|
(458
|
)
|
|
$
|
195
|
|
|
$
|
39,135
|
|
Acquired
customer list
|
|
|
808
|
|
|
|
(91
|
)
|
|
|
4
|
|
|
|
721
|
|
|
|
$
|
40,206
|
|
|
$
|
(549
|
)
|
|
$
|
199
|
|
|
$
|
39,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company reviews its intangible assets with definite useful lives under SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which
requires the Company to review for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Recoverability of intangible assets with definite useful
lives is measured by a comparison of the carrying amount of the asset to the
estimated future undiscounted cash flows expected to be generated by such
assets. If such assets are considered to be impaired, the impairment
is measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets, which is determined on the basis of discounted cash
flows.
As a
result of the challenging economic and consumer retail environment, as of May 2,
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 future
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.
NOTE 8 -
|
OTHER
ASSETS AND OTHER LIABILITIES
|
Included
in accrued expenses and other liabilities as of May 2, 2009, and February 7,
2009, is $5.7 million and $8.7 million, respectively, in accrued host
commissions and $4.9 million and $4.7 million, respectively, related to accrued
worker’s compensation.
Included
in both other assets and other liabilities is $6.7 million and $6.9 million as
of May 2, 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.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
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 financial covenants
under its Credit Agreement as of May 2, 2009.
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.
As of May
2, 2009, contractual long-term debt maturities in the Credit Agreement are as
follows:
in
thousands
|
|
|
|
|
|
|
|
2010
|
|
$
|
10,000
|
|
2011
|
|
|
10,000
|
|
2012
|
|
|
85,440
|
|
|
|
$
|
105,440
|
|
Unamortized
fees and issuance costs
|
|
|
(3,012
|
)
|
|
|
$
|
102,428
|
|
|
|
|
|
|
In June 2009, the Company
determined it will make a voluntary prepayment of an additional $5.0 million of
outstanding principal of the debt in the second quarter of 2009. Such
amount is classified as noncurrent in the Consolidated Balance Sheet as of May
2, 2009.
NOTE
10 -
|
STOCK-BASED
COMPENSATION PLANS
|
At May 2,
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 May 2, 2009, 473,743 of these shares were available for future
grants.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
The
Company accounts for stock-based compensation plans in accordance with SFAS No.
123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which requires
companies to recognize the cost of awards of equity instruments, such as stock
options and restricted stock, based on the fair value of those awards at the
date of grant.
The
following table summarizes information about stock options outstanding under the
Plan at May 2, 2009. There was no activity or modifications to stock
options under the Plan in the first quarter of fiscal year 2009.
|
|
Options
Outstanding and Exercisable
|
Range
of
|
|
Number
of Shares
|
|
Weighted-Averge
RemainingContractual
|
|
Weighted-Average
|
|
Number
of Shares
|
|
Weighted
Average
|
Exercise
Prices
|
|
Outstanding
|
|
Life
(Years)
|
|
Exercise
Price
|
|
Exercisable
|
|
Exercise
Price
|
$ 12.21
- 13.58
|
217,500
|
|
7.95
|
|
$ 13.04
|
|
-
|
|
$ -
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
217,500
|
|
7.95
|
|
$ 13.04
|
|
-
|
|
$ -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May
2, 2009, there is no intrinsic value (the exercise price less market value) for
any outstanding
options.
The
Company estimates the fair value of its stock options with a market-based
performance condition under the Plan using Monte Carlo
simulations. 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 $45,000, resulting in a
deferred tax benefit of $15,000, for the 12 weeks ended May 2, 2009, based on
the grant-date fair values of stock options granted and the derived service
periods. As of May 2, 2009, total unrecognized compensation cost
related to nonvested stock options granted under the Plan was
$541,000. This unrecognized compensation cost will be recognized over
a weighted-average remaining period of 3.4 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 May 2, 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 12-week period ended May 2, 2009. The
following table summarizes information about stock options outstanding under
this previous plan at May 2, 2009:
Options
Outstanding and Exercisable
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Remaining
Contractual
|
|
Weighted-Average
|
Exercise
Price
|
|
Shares
|
|
Life
(Years)
|
|
Exercise
Price
|
$ 12.96
|
|
10,046
|
|
1.47
|
|
$ 12.96
|
17.00
|
|
5,000
|
|
0.95
|
|
17.00
|
|
|
|
|
|
|
|
Total
|
|
15,046
|
|
1.30
|
|
$ 14.30
|
|
|
|
|
|
|
|
As of May
2, 2009, there is no intrinsic value (the exercise price less market value) for
any outstanding options.
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, March 3,
2009 and April 27, 2009, the Board of Directors approved grants of 24,160, 8,296
and 5,252 shares, respectively, of nonvested stock to its members of the Board
of Directors in lieu of certain 2008 and 2009 board retainer fees and certain
committee chair fees they receive as directors of the Company.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
Changes
in nonvested stock are as follows:
|
|
12
Weeks Ended May 2, 2009
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Grant-Date
Value
|
|
Nonvested
stock, beginning of period
|
|
|
1,056
|
|
|
$
|
18.95
|
|
Granted
|
|
|
84,097
|
|
|
|
8.49
|
|
Vested
|
|
|
(7,003
|
)
|
|
|
6.51
|
|
Nonvested
stock, end of period
|
|
|
78,150
|
|
|
$
|
8.80
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense related
|
|
|
|
|
|
|
|
|
to
nonvested stock
|
|
$
|
113,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May
2, 2009, total unrecognized compensation cost related to nonvested stock was
$630,000. This unrecognized compensation cost will be recognized over
a weighted-average remaining period of 0.8 years.
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:
|
|
12
Weeks Ended
|
|
|
12
Weeks Ended
|
|
in
thousands
|
|
Pension
Plan
|
|
|
Supplemental
Retirement Plan
|
|
|
|
May
2, 2009
|
|
|
April
26, 2008
|
|
|
May
2, 2009
|
|
|
April
26, 2008
|
|
Components
of net periodic benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
-
|
|
|
$
|
62
|
|
|
$
|
-
|
|
|
$
|
16
|
|
Interest
cost
|
|
|
713
|
|
|
|
691
|
|
|
|
19
|
|
|
|
49
|
|
Expected
return on plan assets
|
|
|
(725
|
)
|
|
|
(746
|
)
|
|
|
-
|
|
|
|
-
|
|
Amortization
of prior service cost
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
7
|
|
Amortization
of net loss (gain)
|
|
|
59
|
|
|
|
161
|
|
|
|
(35
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
47
|
|
|
$
|
178
|
|
|
$
|
(16
|
)
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company contributed $516,000 to its pension plan in the first quarter of 2009
and estimates it will contribute a further $1.0 million 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.
CPI CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
In July
2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in
income taxes recognized in the financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.” The following
information required by FIN 48 is provided:
●
|
Unrecognized
tax benefits were approximately $2.7 million at both May 2, 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 $53,000
and $36,000 accrued interest and penalties as of May 2, 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. Ongoing examinations by various state taxing
authorities date back to February 1,
2003.
|
NOTE
13 -
|
COMMITMENTS
AND CONTINGENCIES
|
Standby
Letters of Credit
As of May
2, 2009, the Company had standby letters of credit outstanding in the principal
amount of $20.5 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. As such, $1.5 million
was due to Sears on April 30, 2009, and paid on May 7, 2009, and an
additional $150,000 is due on December 31
st
in each
6 successive years, commencing December 31, 2009. These amounts have
been accrued in the Interim Consolidated Balance Sheet as of May 2,
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 May 2, 2009, the maximum
future obligation to the Company under its guarantee of remaining leases is
approximately $1.0 million before consideration of replacement tenant
income. To recognize the risk associated with these leases based upon
the Company’s past experience with renegotiating lease obligations and the
management’s evaluation of remaining lease liabilities, the Company has recorded
lease obligation reserves totaling approximately $710,000 at May 2,
2009. Based on the status of remaining leases, the Company believes
that the $710,000 reserve is adequate to cover the potential losses to be
realized under the Company’s remaining operating lease guarantees.
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.
CPI
CORP.
Notes
to Interim Consolidated Financial Statements
(Unaudited)
The
Company is a defendant in a lawsuit entitled
Picture Me Press LLC v.
Portrait Corporation of America, et al.
, Case No. 5:08cv32, which was
filed in the United States District Court for the Northern District of Ohio on
January 4, 2008. The suit alleges that the
Company’s use
of the name PictureMe Portrait Studios® infringes on Plaintiff’s trademark for
its picture books and seeks damages and injunctive relief. The
Company believes the case is without merit and is vigorously defending
itself. However, intellectual property litigation such as this case
is expensive and time consuming, and if the claim were to result in an
unfavorable outcome, it could result in significant monetary liability or
prevent the Company from operating portions of its business under current
trademarks used by the Company. In addition, an adverse resolution of
this claim could require the Company to obtain licenses to use intellectual
property rights belonging to third parties, which may be expensive to procure,
or possibly to cease using those rights altogether. Any of these
results could have a material adverse effect on the Company’s business,
financial position and results of operations. The Company has denied
the claim alleged by the Plaintiff and filed counterclaims against the
Plaintiff.
The
Company is also a defendant in other routine litigation, but does not believe
these lawsuits, individually or in combination with the cases described above,
will have a material adverse effect on its financial condition. The Company
cannot, however, give assurances that these legal proceedings will not have a
material adverse effect on its business or financial condition.
Item
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 3,013 studios throughout the U.S.,
Canada, Mexico and Puerto Rico, principally under license agreements with Sears
and lease and license agreements with Wal-Mart. The Company has
provided professional portrait photography for Sears’ customers since 1959 and
has been the only Sears portrait studio operator since 1986. CPI is
the sole operator of portrait studios in Wal-Mart Stores and Supercenters in the
U.S., Canada, Mexico and Puerto Rico. Management has determined
the Company operates as a single reporting segment offering similar products and
services in all locations.
As of the
end of the first quarter in fiscal years 2009 and 2008, the Company’s studio
counts were:
|
|
May
2, 2009
|
|
April
26, 2008
|
Within
Sears stores:
|
|
|
|
|
|
United
States and Puerto Rico
|
|
884
|
|
891
|
|
Canada
|
|
110
|
|
112
|
|
|
|
|
|
Within
Wal-Mart stores:
|
|
|
|
|
|
United
States and Puerto Rico
|
|
1,617
|
|
1,702
|
|
Canada
|
|
259
|
|
253
|
|
Mexico
|
|
113
|
|
115
|
|
|
|
|
|
Locations
not within Sears or Wal-Mart stores
|
|
30
|
|
32
|
|
|
|
|
|
Total
|
|
3,013
|
|
3,105
|
|
|
|
|
|
|
|
|
|
Certain
under-performing PMPS studios have been closed since the first quarter of 2008
in order to improve overall financial results.
As of
June 10, 2009, all of the Company’s studios, with the exception of 84 Sears
Portrait Studios in Canada, are digital. 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 per share data
|
|
12
Weeks Ended
|
|
|
|
May
2, 2009
|
|
|
April
26, 2008
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
93,467
|
|
|
$
|
103,367
|
|
|
|
|
|
|
|
|
|
|
Cost
and expenses:
|
|
|
|
|
|
|
|
|
Cost of
sales (exclusive of depreciation and amortization shown
below)
|
|
|
6,959
|
|
|
|
10,533
|
|
Selling, general and administrative
expenses
|
|
|
75,153
|
|
|
|
83,038
|
|
Depreciation and
amortization
|
|
|
6,039
|
|
|
|
7,494
|
|
Other
charges and impairments
|
|
|
420
|
|
|
|
1,300
|
|
|
|
|
88,571
|
|
|
|
102,365
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
4,896
|
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
1,491
|
|
|
|
1,521
|
|
Interest
income
|
|
|
122
|
|
|
|
362
|
|
Other
income, net
|
|
|
9
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax provision (benefit)
|
|
|
3,536
|
|
|
|
(151
|
)
|
Income
tax provision (benefit)
|
|
|
1,207
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
|
2,329
|
|
|
|
(92
|
)
|
Net
loss from discontinued operations
|
|
|
-
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
2,329
|
|
|
$
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share from continuing operations -
diluted
|
|
$
|
0.34
|
|
|
$
|
(0.01
|
)
|
Net
loss per share from discontinued operations - diluted
|
|
|
-
|
|
|
|
(0.03
|
)
|
Net
income (loss) per share - diluted
|
|
$
|
0.34
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share from continuing operations - basic
|
|
$
|
0.34
|
|
|
$
|
(0.01
|
)
|
Net
loss per share from discontinued operations - basic
|
|
|
-
|
|
|
|
(0.03
|
)
|
Net
income (loss) per share - basic
|
|
$
|
0.34
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common and common equivalent
|
|
|
|
|
|
|
|
|
shares
outstanding - diluted
|
|
|
6,948,799
|
|
|
|
6,452,035
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common and common equivalent
|
|
|
6,948,799
|
|
|
|
6,452,035
|
|
shares
outstanding - basic
|
|
|
|
|
|
|
|
|
12 weeks ended May 2, 2009
compared to 12 weeks ended April 26, 2008
The
Company reported net income of $2.3 million, or $0.34 per diluted share, for the
12-week first quarter ended May 2, 2009, versus a net loss of $256,000, or
($0.04) per diluted share, in the comparable quarter of fiscal
2008. Revenue deferral associated with the timing of Easter
negatively affected net income in the first quarter of fiscal 2009 by
approximately $1.6 million, or $0.23 per diluted share. The
Company believes its first 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 $93.5 million and $103.4 million in the first quarter of fiscal 2009 and
2008, respectively.
●
|
Net
sales for the first quarter of 2009 decreased $9.9 million, or 9.6%, to
$93.5 million from the $103.4 million reported in the first quarter of
2008. Excluding impacts of revenue deferral associated with the
timing of Easter ($3.7 million), foreign exchange translation ($2.8
million), revenue deferral related to positive response to the Company’s
loyalty programs ($2.3 million) and store closures ($1.9 million),
comparable same-store sales increased $820,000, or
0.8%.
|
Net sales
from the Company’s PictureMe Portrait Studio® brand (“PMPS”), on a comparable
same-store basis, excluding revenue deferral adjustments associated with the
timing of Easter and the Company's loyalty program, foreign currency
translation, store closures and other items, totaling $6.6 million, increased
$6.6 million, or 13.7%, in the first quarter of 2009 to $54.7 million from $48.1
million reported in the first quarter of 2008. PMPS sales performance
for the first quarter was the result of an approximate 32.8% increase in average
sale per customer sitting, offset in part by an approximate 14.5% 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 revenue deferral adjustments associated with the
timing of Easter and the Company’s loyalty program, foreign currency
translation, store closures and other items, totaling $4.1 million, decreased
$5.7 million, or 11.0%, to $46.3 million in the first quarter of 2009 from the
$52.0 million reported in the first quarter of 2008. SPS sales
performance for the first quarter was the result of declines in the number of
sittings and sales per sitting of approximately 9.5% and 1.6%,
respectively. The Company believes the decline in SPS brand sales
reflects the difficult economic environment and, especially, the related
reduction in same-day, walk-in business. The decline was mitigated
substantially by improved execution of the Company’s customer outreach and
loyalty programs.
Costs and
expenses were $88.6 million in the first quarter of 2009, compared with $102.4
million in the comparable prior year period.
●
|
Cost
of sales, excluding depreciation and amortization expense, was $7.0
million in the first quarter of 2009 compared with $10.5 million in the
comparable prior year period. The decrease in cost of
sales, excluding depreciation and amortization expense, is principally
attributable to lower overall manufacturing production levels, improved
product mix, increased manufacturing productivity, eliminated 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 $75.2 million for
the first quarter of 2009, compared with $82.9 million in the first
quarter of 2008. The decrease in SG&A expenses primarily
relates to the elimination of duplicative costs in connection with the
PMPS integration; fiscal year 2008 nonrecurring costs associated with the
PMPS digital conversion; lower studio employment costs due to scheduling
improvements and selected operating hour reductions; reduced employee
insurance costs related to changes in plan design and lower enrollment;
and favorable foreign exchange rate translation. These
decreases were offset in part by increases in marketing expense due to
additional promotional programs for the Easter holiday; higher average
hourly studio rates; and increased sales incentives in connection with new
studio and field initiatives.
|
●
|
Depreciation
and amortization decreased to $6.0 million in the first quarter of 2009
from $7.5 million in the first quarter 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. 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 quarter of 2009 and 2008, the Company recognized $420,000 and
$1.5 million, respectively, in other charges and impairments primarily
associated with certain PMPS integration charges, including severance and
lab closure costs. The prior-year charges also include certain
fees incurred in connection with the settlement of the previous Sears
license agreement.
|
Interest
expense was constant at $1.5 million in both the first quarter of 2009 and
2008. This was the result of a decrease in lower average borrowings
and interest rates in relation to the Credit Agreement, offset equally by an
increase in the interest rate swap value.
Interest
income was $122,000 in the first quarter of 2009 compared to $362,000 in the
first quarter of 2008. This decrease is primarily attributable to
lower average invested balances in 2009 as compared to 2008, the result of
higher capital spending throughout 2008 related to the digital conversion of
PMPS.
Income
tax expense from continuing operations was $1.2 million in the first quarter of
2009 compared to a benefit of $59,000 in the first quarter of
2008. The resulting effective tax rates were 34.1% in 2009 and 38.8%
in 2008. The decrease in the effective tax rate in 2009 is primarily
attributable to a projected decrease in anticipated profitability as a result of
current economic conditions, a projected increase in job tax credits and a
decrease in Canadian tax rates.
Net
losses from discontinued operations were $0 and $164,000 in the first 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
quarter of 2009 and 2008:
in
thousands
|
|
12
Weeks Ended
|
|
|
|
May
2, 2009
|
|
|
April
26, 2008
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
(1)
|
|
$
|
5,988
|
|
|
$
|
(2,994
|
)
|
Financing
activities
|
|
|
(2,346
|
)
|
|
|
(1,489
|
)
|
Investing
activities
|
|
|
(522
|
)
|
|
|
(11,300
|
)
|
Effect
of exchange rate changes on cash
|
|
|
54
|
|
|
|
(62
|
)
|
Net
increase (decrease) in cash
|
|
$
|
3,174
|
|
|
$
|
(15,845
|
)
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes
cash flows used in discontinued operations of $0 and $146,000 in the first
quarter of 2009 and 2008,
respectively.
|
Net
Cash Provided By (Used In) Operating Activities
Net cash
provided by operating activities was $6.0 million during the first quarter of
2009 compared to net cash used of $3.0 million in the comparable period of
2008. Cash flows in the first quarter of 2009 increased from first
quarter 2008 levels primarily due to net operating income and the timing of
payments related to changes in the various balance sheet accounts totaling
approximately $9.0 million and $1.3 million related to a reduction in worker’s
compensation premiums and claims paid. These increases were offset in
part by additional cash used related to advertising of approximately $1.3
million for the Easter holiday.
Net
Cash Used In Financing Activities
The
increase in cash used in financing activities in the first quarter of 2009
is primarily attributable to the payment of $943,000 in fees paid to creditors
incurred in connection with the Amendment to the Credit Agreement in the first
quarter of 2009.
Effective
April 16, 2009, the Company entered into 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 for its fiscal year ended February
7, 2009.
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.
At May 2,
2009, the Company had $105.4 million outstanding under its existing Credit
Agreement. The Company was in compliance with all the covenants under
its Credit Agreement as of May 2, 2009.
In June 2009, the Company
determined it will make a voluntary prepayment of an additional $5.0 million of
outstanding principal of the debt in the second quarter of 2009. Such
amount is classified as noncurrent in the Consolidated Balance Sheet as of May
2, 2009.
Net
Cash Used In Investing Activities
Net cash
used in investing activities was $522,000 during the first quarter of 2009 as
compared to $11.3 million during the first quarter of 2008. This
decrease was primarily attributable to a decrease in capital expenditures of
$10.4 million in the first quarter of 2009 compared to the prior year comparable
period since the digital conversion is now completed.
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 May
2, 2009, the Company had standby letters of credit outstanding in the principal
amount of $20.5 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. As such, $1.5 million
was due to Sears on April 30, 2009, and paid on May 7, 2009, and an
additional $150,000 is due on December 31
st
in each
6 successive years, commencing December 31, 2009. These amounts have
been accrued in the Interim Consolidated Balance Sheet as of May 2,
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 May 2, 2009, the maximum
future obligation to the Company under its guarantee of remaining leases is
approximately $1.0 million before consideration of replacement tenant
income. To recognize the risk associated with these leases based upon
the Company’s past experience with renegotiating lease obligations and the
management’s evaluation of remaining lease liabilities, the Company has recorded
lease obligation reserves totaling approximately $710,000 at May 2,
2009. Based on the status of remaining leases, the Company believes
that the $710,000 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 not to exceed $5.0 million for
fiscal 2009, and normal operating needs.
ACCOUNTING
PRONOUNCEMENTS AND POLICIES
Adoption of New Accounting
Standards
In April
2009, the Financial Accounting Standards Board (“FASB”) issued three related
Staff Positions (FSP) intended to provide additional application guidance and
enhanced disclosures regarding fair value measurements and impairments of
securities: (i) FSP Statement of Financial Accounting Standards
(“SFAS”) No. 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly,” (“FSP SFAS No. 157-4”), (ii) FSP SFAS No.
107-1 and Accounting Principles Board Opinion (“APB”) No. 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” (“FSP SFAS No. 107-1 and
APB No. 28-1”) and (iii) FSP SFAS No. 115-2 and FSP SFAS No. 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments,” (“FSP SFAS No. 115-2 and
FSP SFAS No. 124-2”).
FSP SFAS
No. 157-4 provides guidelines for making fair value measurements more consistent
with the principles presented in SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”). FSP SFAS No. 157-4 relates to determining fair values when
the volume and level of activity for an asset or liability have significantly
decreased. This position reaffirms SFAS No. 157, stating the
objective of fair value measurement is to reflect the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction (as opposed to a distressed or forced transaction) between market
participants at the date of the financial statements under current market
conditions.
FSP SFAS
No. 107-1 and APB No. 28-1 relate to fair value disclosure for any financial
instrument not currently reflected on the balance sheet at fair
value. Prior to this position, fair values for such assets and
liabilities were only disclosed annually. This position requires
these disclosures on a quarterly basis, providing qualitative and quantitative
information about fair value estimates for all those financial instruments not
measured on the balance sheet at fair value.
FSP SFAS
No. 115-2 and FSP SFAS No. 124-2 related to other-than-temporary impairments is
intended to bring greater consistency to the timing of impairment recognition
and provide greater clarity to investors about the credit and noncredit
components of impaired debt securities that are not expected to be
sold. The measure of impairment in comprehensive income remains fair
value. This position also requires increased and timelier disclosures
sought by investors regarding expected cash flows, credit losses and an aging of
securities with unrealized losses.
These
positions are effective for interim and fiscal years ending after June 15,
2009. The Company is currently evaluating the impact of adoption of
these standards.
In
December 2008, the FASB issued FSP SFAS No. 132R-1, “Employers’ Disclosure about
Postretirement Benefit Plan Assets,” (“FSP SFAS No. 132R-1”), an amendment of
SFAS No. 132 (revised 2003), “Employers’ Disclosure about Pensions and Other
Postretirement Benefits,” (“SFAS No. 132R”). FSP SFAS No. 132R-1
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. This position
is effective for fiscal years ending after December 15, 2009. Upon
initial application, the provisions of this position are not required for
earlier periods that are presented for comparative purposes. The
Company is currently evaluating the disclosure requirements of this new
position.
In June
2008, the FASB issued Staff Position No. EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities,” (“FSP EITF No. 03-6-1”). FSP EITF No. 03-6-1 states that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are considered
participating securities and shall be included in the computation of Earnings
per Share pursuant to the two-class method under SFAS No. 128, “Earnings per
Share.” The Company adopted this position on February 8, 2009, and
the effect was not material to the Company’s financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”), an amendment to SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” (“SFAS No.
133”). The statement requires enhanced disclosures that expand the
disclosure requirements in SFAS No. 133 about an entity’s derivative instruments
and hedging activities. It will require more robust qualitative
disclosures and expanded quantitative disclosures. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The adoption of SFAS No. 161 did
not have a material effect on the Company’s financial statements.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” (“SFAS
No. 141R”). This statement requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction, establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed, and
requires additional disclosures by the acquirer. Under this
statement, all business combinations will be accounted for by applying the
acquisition method. SFAS No. 141R is effective for financial
statements issued for fiscal years beginning after December 15,
2008. The adoption of SFAS No. 141R did not have a material effect on
the Company’s financial statements.
Application of Critical
Accounting Policies
The
application of certain of the accounting policies utilized by the Company
requires significant judgments or a complex estimation process that can affect
the results of operations and financial position of the Company, as well as the
related footnote disclosures. The Company bases its estimates on
historical experience and other assumptions that it believes are
reasonable. If actual amounts are ultimately different from previous
estimates, the revisions are included in the Company’s results of operations for
the period in which the actual amounts become known. The Company’s
significant accounting policies are discussed in 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 Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived
assets, primarily property and equipment, are tested for recoverability whenever
events or changes in circumstances indicate that their carrying amount may not
be recoverable. The SFAS No. 144 impairment test is a two-step
process. If the carrying value of asset exceeds the expected future
cash flows (undiscounted and without interest) from the asset, impairment is
indicated. The impairment loss recognized is the excess of the
carrying value of the asset over its fair value less cost to sell. As
of May 2, 2009, no impairment was indicated.
Recoverability
of Goodwill and Acquired Intangible Assets
The
Company accounts for goodwill under SFAS No. 142, “Goodwill and Other Intangible
Assets,” which requires the Company to test goodwill for impairment on an annual
basis, and between annual tests whenever events or changes in circumstances
indicate the carrying amount may not be recoverable. SFAS No. 142
prescribes a two-phase process for impairment testing of
goodwill. The first phase is a screen for impairment, which compares
the reporting units’, estimated fair value to their carrying
values. If the carrying value exceeds the estimated fair value in the
first phase, the second phase is performed in which the Company’s goodwill is
written down to its implied fair value, which the Company would determine based
upon a number of factors, including operating results, business plans and
anticipated future cash flows.
The
Company performs its annual impairment test at the end of its second quarter, or
more frequently if circumstances indicate the potential for
impairment. As of May 2, 2009, the end of the Company’s 2009 first
quarter, the Company considered possible impairment triggering events, including
its market capitalization relative to the carrying value of its net assets, as
well as other relevant factors, and concluded that no goodwill impairment was
indicated at that date, and therefore, no impairment test was necessary in the
first quarter. The Company will complete its annual impairment test
at the end of its second quarter, which ends July 25, 2009. If the
Company were required to write-down its goodwill at that date, the resulting
non-cash impairment charge could be significant, which would adversely affect
the Company’s financial position and results of operations.
The
Company reviews its intangible assets with definite useful lives under SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which
requires the Company to review for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Recoverability of intangible assets with definite useful
lives is measured by a comparison of the carrying amount of the asset to the
estimated future undiscounted cash flows expected to be generated by such
assets. If such assets are considered to be impaired, the impairment
is measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets, which is determined on the basis of discounted cash
flows.
As
a result of the challenging economic and consumer retail environment, as of May
2, 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 Wal-Mart, the approval of the Company’s business
practices and operations by Sears and Wal-Mart, the termination, breach,
limitation or increase of the Company’s expenses by Sears under the license
agreements, or Wal-Mart under the lease and license agreements, customer demand
for the Company’s products and services, the economic recession and resulting
decrease in consumer spending, compliance with the NYSE listing requirements,
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 May 2,
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 $479,000.
The
Company’s net assets, net earnings and cash flows from its Canadian and Mexican
operations are based on the U.S. dollar equivalent of such amounts measured in
the respective country’s functional currency. Assets and liabilities
are translated to U.S. dollars using the applicable exchange rates as of the end
of a reporting period. Revenues, expenses and cash flows are
translated using the average exchange rate during each period. The
Company’s Canadian operations constitute 11.3% of the Company’s total assets and
10.1% of the Company’s total sales as of and for the quarter ended May 2,
2009. A hypothetical 10% unfavorable change in the Canadian-to-U.S.
dollar exchange rate would cause an approximate $155,000 decrease to the
Company’s net asset balance and could materially adversely affect its revenues,
expenses and cash flows. The Company’s exposure to changes in foreign
exchange rates relative to the Mexican operations is minimal, as Mexican
operations constitute only 1.1% of the Company’s total assets and 1.8% of the
Company’s total sales as of and for the quarter ended May 2, 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 May 2,
2009:
Notional
amount
|
|
$ 57,500,000
|
|
|
|
Fixed
rate paid
|
|
4.97%
|
|
|
|
Variable
rate received
|
|
0.45%
|
|
|
|
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 May 2, 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 May
2, 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 May 2, 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
I
I.
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:
June 11, 2009
CPI
CORP.
E-1
EXHIBIT INDEX
|
|
Computation
of Per Common Share Income (Loss) - Diluted - for the 12 weeks ended May
2, 2009, and April 26, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
Computation
of Per Common Share Income (Loss) - Basic - for the 12 weeks ended May 2,
2009, and April 26, 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.
|
|