UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 14, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File No. 1-10204
CPI CORP.
(Exact Name of Registrant as Specified In Its Charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
43-1256674
(I.R.S. Employer Identification No.)
1706 WASHINGTON AVENUE, ST. LOUIS, MISSOURI 63103-1790
(Address of principal executive offices) (zip code)
(314) 231-1575
(Registrant's telephone number, including area code)
NO CHANGE
-------------------------------------
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant has (1) filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
As of December 21, 1998 there were 9,829,729 shares of the
Registrant's common stock outstanding. This quarterly report on
Form 10-Q contains 31 pages, of which this is page 1.
<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSES OF RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND CASH FLOW
MANAGEMENT'S DISCUSSION AND ANALYSIS - OVERVIEW
- -----------------------------------------------
FISCAL YEARS
- ------------
The Company's fiscal year ends the first Saturday of February.
Accordingly, fiscal year 1998 will end February 6, 1999 and
consist of 52 weeks while fiscal year 1997 ended February 7, 1998
and consisted of 53 weeks. The third fiscal quarters of 1998 and
1997 consisted of sixteen-weeks and ended November 14, 1998 and
November 8, 1997, respectively.
Throughout Management's Discussion and Analysis and the Notes to
the Interim Condensed Consolidated Financial Statements,
reference to 1998 and 1997 will mean the fiscal year end 1998 and
1997, respectively, and reference to third quarter 1998 and third
quarter 1997 will mean the third fiscal quarter of 1998 and 1997,
respectively.
Due to the fifty-third week of 1997, third quarter 1998 had a
slow mid-summer week in July replaced by a strong holiday-season
week in November, making the direct comparison of both quarterly
and year-to-date information between 1998 and 1997 difficult.
JOINT VENTURE
- -------------
On October 2, 1997, the Company sold its remaining 49% interest
in Fox Photo, Inc. ("Fox") to Eastman Kodak Company ("Kodak") for
a $43.9 million non-interest bearing promissory note (the
"Promissory Note") due on January 4, 1999 (the "Disposition
Transaction"). Due to the non-interest bearing nature of the
Promissory Note, a discount of $3.9 million was established and
is being amortized into income until the maturity of the
Promissory Note. During the third quarters of 1998 and 1997,
$967,000 and $312,000, respectively, in amortization related to
the Promissory Note was recognized. In addition, $2.4 million and
$312,000 were recognized for the first three quarters of 1998 and
1997, respectively. On a prospective basis, $2.8 million will be
recognized for all of 1998.
As part of the Disposition Transaction, the Company entered into
a two-year Noncompetition and Nonsolicitation Agreement (the
2
<PAGE>
"Noncompete Agreement") with Fox under which the Company agreed
not to engage in the retail photofinishing business and, subject
to certain exceptions, not to employ Fox employees without
consent. The Company received a $10.0 million cash consideration
for entering into the Noncompete Agreement, which is being
amortized into income over the two-year period of the agreement.
Accordingly, the Company recognized $1.5 million and $522,000 of
income during the third quarter of 1998 and 1997, respectively.
For the first three quarters of 1998 and 1997, $3.8 million and
$522,000 was recognized from the amortization of the Noncompete
Agreement. Prospectively, the Company will recognize $5.0
million and $3.2 million in amortization, respectively, in fiscal
years 1998 and 1999.
In conjunction with the dissolution of the joint venture, the
Company and Fox terminated the Consulting Agreement as of October
2, 1997 and materially reduced the Service Agreement during the
first quarter of 1998. The Consulting Agreement and Service
Agreement were collateral agreements with Fox and Kodak under
which the Company provided certain administrative and management
services to Fox.
STOCK REPURCHASE
- ----------------
The Company's Board of Directors has authorized the Company to
purchase up to 4,500,000 shares of its outstanding common stock
through purchases at management's discretion from time to time at
acceptable market prices. Under this authorization, as of
November 14, 1998, the Company has purchased 3,615,046 shares for
$80.9 million at an average share price of $22.37. Acquired
shares are held as treasury stock and will be available for
general corporate purposes.
During the third quarter 1998, the Company purchased 240,000
shares of stock for $5.1 million at an average stock price of
$21.09.
In addition, in January 1998, the Company, as authorized by the
Board of Directors, completed a Dutch Auction tender offer by
purchasing 1,999,215 shares of the Company's common stock at
$23.00 per share for a total cost of $46.5 million.
The weighted average shares outstanding have been adjusted to
reflect the changes in shares outstanding resulting from the
repurchase of the Company's common stock.
FORWARD-LOOKING STATEMENTS
- --------------------------
The statements contained in this report which are not historical
facts are forward-looking statements that involve risks and
3
<PAGE>
uncertainties. Management wishes to caution the reader that
these forward-looking statements, such as the Company's outlook
for Sears Portrait Studios and Prints Plus, are not predictions;
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 ongoing ability to develop and
introduce attractive new products, the overall level of economic
activity in the Company's major markets, the effectiveness of
marketing activities of major competitors, manufacturing
interruptions, dependence on certain suppliers, fluctuations in
operating results, the attraction and retention of qualified
personnel, Year 2000 compliance issues 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, 1998.
YEAR 2000 ISSUE
- ---------------
The Year 2000 (Y2K) issue is primarily the result of computer
software and hardware using two digits rather than four to define
the applicable year. For example, the year "00" may be
recognized as 1900 rather than 2000 and may result in computers
and computer applications failing or creating erroneous results.
In reviewing Y2K issues, the Company has identified four areas of
concern:
1.) the administrative offices and laboratories located
in St. Louis, Missouri, Las Vegas, Nevada, Thomaston,
Connecticut and Mississauga, Ontario (Canada) (referred
to as "Home Office");
2.) the individual locations of the Photography segment,
which operate under the name "Sears Portrait Studios,"
(referred to as "SPS Field");
3.) the administrative support office and individual
locations of the Wall Decor segment, which operate
under the name "Prints Plus" (referred to as "Prints
Plus.") and
4.) third party vendors or suppliers.
Home Office
- -----------
Due in part to Y2K issues in older systems, fully-compliant Y2K
basic operating and data-base systems were put in place in the
Home Office by the end of the first quarter of 1998. In
addition, due to this change, all financial systems in the Home
Office were reviewed by year-end 1997 and new financial systems,
including Y2K compliance upgrades, were substantially installed
by the end of the third quarter of 1998 for an estimated cost of
$3.2 million. An additional $178,000 will be spent by the end of
second quarter 1999 to complete the final changes to all
4
<PAGE>
financial systems. Laboratory, telephone and physical plant
systems and equipment as well as all personal computers in the
Home Office are being tested for Y2K issues and, after an
analysis of the test results is made, new or upgraded systems and
equipment will be obtained by mid-1999 at an estimated cost of
$460,000.
Sears Portrait Studio Field
- ---------------------------
In 1996, as part of the Company's on-going long-range planning
and development process, the Company began the process of
updating the point-of-sale system used in the Sears Portrait
Studio (SPS) Field operations. Development of the new system,
which included Y2K compliance, continued through 1997 and,
starting in fourth quarter of 1998, the Company expects to
install the software and hardware for the new point-of-sale
system in the SPS Field locations. Full implementation of the
new system is expected to be completed by mid-1999. At the same
time the new point-of-sale system is rolled-out, upgrading of the
software used in the sales stations and camera rooms of the SPS
Field locations will be installed at negligible cost.
Prints Plus
- -----------
Although the point-of-sale system utilized by Prints Plus
locations is Y2K compliant, the hardware used to operate the
system has not been tested. Both the testing and upgrading of
the system hardware are expected to be completed by early 1999.
In addition, the upgrading of all financial and merchandise
distribution systems utilized by Prints Plus is expected to be
completed by June 1999. Total estimated cost for Y2K compliance
for all of Prints Plus is estimated to be $421,000.
Third Party
- -----------
The Company has material relationships with several large
companies providing goods and services to the Photography and
Wall Decor segments:
--Sears Roebuck and Company, the licensor of Sears
Portrait Studio, the Company's primary line of
business;
--Eastman Kodak Company, a provider of photographic
film and paper, dye sublimation paper and related
equipment and supplies;
--Sony Corporation, a provider of dye sublimation
paper and related equipment and supplies;
--MCI, a telecommunications company which provides
communication links between the Company and its
remote locations as well as telephone services
in the Home Office;
5
<PAGE>
--United Parcel Services, Roadway Package Services
and Airborne Express Services, companies which
handle the transportation of finished products
to and from the Home Office and individual
locations;
--Mercantile Bank N.A. of St. Louis and Harris Trust
and Savings Bank, financial institutions which
provide credit facilities and other banking services;
--Prudential Insurance Company and the Guardian
Insurance Company, holders of the Company's senior
debt.
All of these companies have published material indicating their
awareness of the Y2K issue and the steps they are taking to
remedy the problem. However, although the Company does not
anticipate service interruptions from its major third party
suppliers and vendors, no assurance can be given that the Company
will not experience supply disruptions due to Y2K issues.
Taking the above into consideration, while the Company has
already begun implementing changes as a result of its Y2K
assessment, a full assessment of the Y2K issues will not be
completed until the end of 1998. After all changes are
implemented and testing of the new systems or related equipment
is completed, the Company will develop contingency plans for
possible Y2K compliance problems. The Company expects to have
the contingency plans in place by November 1999.
MANAGEMENT'S DISCUSSION & ANALYSIS - RESULTS OF OPERATIONS
- ----------------------------------------------------------
<TABLE>
NET SALES (in thousands of dollars)
Sixteen-weeks Ended November 14, 1998 and November 8, 1997
<CAPTION>
Sixteen-weeks Ended
------------------------------------
Nov. 14, Nov. 8, Amount Percent
1998 1997 Change Change
------- -------- -------- -------
<S> <C> <C> <C>
Portrait Studios $106,171 $ 91,166 $ 15,005 16.5%
Wall Decor 17,834 16,990 844 5.0%
-------- -------- --------
Total net sales $124,005 $108,156 $ 15,849 14.7%
======== ======== ========
</TABLE>
6
<PAGE>
<TABLE>
NET SALES (in thousands of dollars)
Forty-weeks Ended November 14, 1998 and November 8, 1997
<CAPTION>
Forty-weeks Ended
------------------------------------
Nov. 14, Nov. 8, Amount Percent
1998 1997 Change Change
------- -------- -------- -------
<S> <C> <C> <C>
Portrait Studios $224,646 $205,623 $ 19,023 9.3%
Wall Decor 43,710 41,201 2,509 6.1%
-------- -------- --------
Total net sales $268,356 $246,824 $ 21,532 8.7%
======== ======== ========
</TABLE>
NET SALES
- ---------
As the previous tables indicate, total sales for the third
quarter and the first three quarters of 1998 increased over 1997
by 14.7% and 8.7%, respectively, reflecting increased sales in
both the Portrait Studios and Wall Decor segments. However, if
the sixteen-week third quarter and forty-week first three
quarters of 1998 were matched on a calendar basis to the same
timeframe in 1997, due to the one-week shift in sales previously
discussed, the increase in sales would have been 7.8% and 5.3%
for the third and first three quarters of 1998, respectively.
Portrait Studios 1998 sales were up 16.5% and 9.3% from the third
quarter 1997 and first three quarters of 1997, respectively.
Again of note, if a calendar match of weeks was made, third
quarter 1998 sales would have been up 8.3% over the same
timeframe in 1997 and the first three quarters of 1998 sales
would have been up 5.3% over year-to-date sales in 1997. Both
the quarterly and year-to-date increases in net sales are
attributable to improved customer traffic in the portrait studios
and higher average sales per customer due in part to price
increases and greater customer acceptance of various portrait
programs.
Portrait Studios continued to show accelerating sales increases
for the third quarter and into the fourth quarter. The Company
estimates sales for Portrait Studios for the 20-week period
ending December 12, 1998 to increase 11.5% over the comparable
calendar period of 1997.
Wall Decor 1998 sales were up 5.0% and 6.1% from the third
quarter 1997 and first three quarters of 1997, respectively.
Both the quarterly and year-to-date increases in net sales
7
<PAGE>
reflected favorable customer responses to new products.
<TABLE>
SELECTED FINANCIAL DATA
(in thousands of dollars except share and per share amounts)
Sixteen-weeks Ended November 14, 1998 and November 8, 1997
<CAPTION>
Sixteen-weeks Ended
-----------------------------------------
Nov. 14, Nov. 8, Amount Percent
1998 1997 Change Change
(Fav/(Unfav))
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Operating earnings
(loss):
Portrait Studios $ 13,577 $ 10,209 $ 3,368 33.0%
Wall Decor (674) (904) 230 25.4%
--------- --------- ---------
Total operating earnings 12,903 9,305 3,598 38.7%
General corporate
expenses 4,879 3,992 (887) (22.2%)
Interest in joint
venture loss -- 1,474 1,474 100.0%
Interest expense 1,415 1,436 21 1.5%
Interest income 1,104 725 379 52.3%
Loss on sale of interest
in Photofinishing
segment -- 4,189 4,189 100.0%
Other income 1,596 628 968 154.1%
--------- --------- ---------
Earnings (loss) before
income taxes 9,309 (433) 9,742
Income tax expense 3,258 292 (2,966)
--------- --------- ---------
Net earnings (loss) $ 6,051 $ (725) $ 6,776
========= ========= =========
Net earnings (loss) per
share:
Diluted $ 0.59 $ (0.06) $ 0.65
========= ========= =========
Basic $ 0.61 $ (0.06) $ 0.67
========= ========= =========
Weighted average number
of shares outstanding
(in thousands of
shares):
Diluted 10,200 11,871 (1,671)
========= ========= =========
Basic 9,961 11,871 (1,910)
========= ========= =========
</TABLE>
8
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
(in thousands of dollars except share and per share amounts)
Forty-weeks Ended November 14, 1998 and November 8, 1997
<CAPTION>
Forty-weeks Ended
----------------------------------------
Nov. 14, Nov. 8, Amount Percent
1998 1997 Change Change
(Fav/(Unfav))
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Operating earnings
(loss)
Portrait Studios $ 20,099 $ 19,873 $ 226 1.1%
Wall Decor (2,620) (3,196) 576 18.0%
--------- --------- ---------
Total operating earnings 17,479 16,677 802 4.8%
General corporate
expenses 10,056 9,898 (158) (1.6%)
Interest in joint
venture loss -- 3,304 3,304 100.0%
Interest expense 3,557 3,351 (206) (6.1%)
Interest income 2,734 1,125 1,609 143.0%
Loss on sale of interest
in Photofinishing
segment -- 4,189 4,189 100.0%
Other income 4,065 877 3,188 363.5%
--------- --------- ---------
Earnings (loss) before
income taxes 10,665 (2,063) 12,728
Income tax expense
(benefit) 3,733 (311) (4,044)
--------- --------- ---------
Net earnings (loss) $ 6,932 $ (1,752) $ 8,684
========= ========= =========
Net earnings (loss) per
share:
Diluted $ 0.68 $ (0.15) $ 0.83
========= ========= =========
Basic $ 0.70 $ (0.15) $ 0.85
========= ========= =========
Weighted average number
of shares outstanding
(in thousands of
shares):
Diluted 10,246 11,794 (1,548)
========= ========= =========
Basic 9,963 11,794 (1,831)
========= ========= =========
</TABLE>
9
<PAGE>
OPERATING EARNINGS
- ------------------
Primarily reflecting an increase in the Portrait Studios segment,
quarterly and year-to-date operating earnings for 1998 were up
38.7% and 4.8% from the third quarter 1997 and first three
quarters of 1997, respectively.
Portrait Studios operating earnings increased 33.0% and 1.1% for
the third quarter 1998 and first three quarters of 1998,
respectively, from 1997. If operating earnings were adjusted to
show the effect of the one-week shift previously discussed,
operating earnings for both the third quarter and year-to-date
1998 would have been lower than those recorded in the same
timeframes in 1997. This decrease in both the third quarter and
first three quarters operating earnings for the Portrait Studio
division is due to higher employment and employment related costs
which resulted from improving customer service.
If sales for the last eight weeks of the fiscal year maintain the
11.5% growth pace established during the third quarter 1998 and
first four weeks of the fourth quarter of 1998, total sales for
Portrait Studios will approach $324 million for the 52-week 1998
fiscal year compared to the $303.7 million recorded in the 53-
week 1997 fiscal year. However, due to the increased costs
previously mentioned, the Company is estimating full-year
operating margins to be 1% to 2% of sales lower in 1998 than in
1997.
Wall Decor operating losses decreased for the third quarter and
first three quarters of 1998 from the third quarter and first
three quarters of 1997. Both the quarterly and year-to-date
changes in operating earnings reflect higher sales offset
slightly by higher employment and occupancy costs.
NET EARNINGS
- ------------
Net earnings before income taxes were $9.3 million in the third
quarter 1998 compared to third quarter 1997 net losses before
income taxes of $433,000. In addition, year-to-date, net
earnings before income taxes were $10.7 million compared to $2.1
million in net losses before taxes recorded in the first three
quarters of 1997.
For both the third quarter and year-to-date, improved earnings
resulted from an increase in operating earnings; an increase in
interest income, which reflected the imputed interest from the
Kodak Note receivable; an increase in other income, which
reflected the amortization of the Non-Compete Agreement; and the
absence of both the loss on sale of interest in the photo-
finishing segment and the Company's share of operating losses
from the interest in the Fox joint venture. For further
10
<PAGE>
information regarding the effects of the dissolution of the joint
venture, see the Management's Discussion and Analysis - Overview
section entitled "Joint Venture."
EARNINGS PER SHARE
- ------------------
On a diluted basis, earnings per share for both the third quarter
and the year-to-date reflected a reduction in the weighted
average shares outstanding primarily due to the repurchase of
stock through the Dutch Auction tender offer completed in January
1998 and subsequent shares repurchased in third quarter 1998. In
addition, 1997 third quarter and year-to-date income taxes
reflected the impact of factors related to the disposition of the
Fox Photo joint venture.
The aggregate of the first, second and third quarter diluted
earnings per share does not equal year-to-date earnings per share
due to the effect of outstanding stock options being antidilutive
in the first quarter and the change in weighted number of shares
outstanding.
MANAGEMENT'S DISCUSSION & ANALYSIS-FINANCIAL CONDITION AND CASH
- ---------------------------------------------------------------
FLOW
- ----
Total assets, total liabilities and stockholders' equity for
third quarter 1998 were relatively unchanged from year-end.
However, stockholders' equity at the end of third quarter 1998
reflected a decrease from the same time last year as a result of
the Dutch Auction tender offer completed in January 1998 and
subsequent repurchase of stock in third quarter 1998.
The Company is capitalized by stockholders' equity, a $60.0
million long-term Debt Agreement and a $40.0 million Revolving
Credit Agreement. The first principal payment on the Debt
Agreement will commence in 2001. Borrowings under the Revolving
Credit Agreement for both the third quarter and first three
quarters of 1998 have been nominal.
In April 1998, one of the three domestic banks that was involved
in the Company's Revolving Credit Agreement exited the market for
this type of loan agreement. The two remaining banks elected to
increase their respective shares of the Revolving Credit
Agreement, leaving the amount unchanged.
The Company believes it has sufficient liquidity and capital
resources to meet planned capital expenditures, normal working
capital requirements and dividends to shareholders. In addition,
the Company expects a substantial increase in liquidity in fourth
quarter 1998 as the $43.9 million Note Receivable from Eastman
Kodak is due in January 1999.
11
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(in thousands of dollars except share and per share amounts)
Sixteen-weeks ended November 14, 1998 and November 8, 1997
<CAPTION>
Sixteen-weeks Ended
------------------------
Nov. 14, Nov. 8,
1998 1997
------------ -----------
<S> <C> <C>
Net sales $ 124,005 $ 108,156
Costs and expenses:
Cost of sales (exclusive of
depreciation expense shown below) 17,314 17,079
Selling, administrative and
general expenses 89,480 76,474
Depreciation 8,867 8,598
Amortization 320 692
------------ -----------
115,981 102,843
------------ -----------
Income from operations 8,024 5,313
Net interest expense 311 711
Interest in joint venture loss - 1,474
Loss on sale of interest in Photo-
finishing segment - 4,189
Other income 1,596 628
------------ -----------
Earnings (loss) before income taxes 9,309 (433)
Income tax expense 3,258 292
------------ -----------
Net earnings (loss) $ 6,051 $ (725)
============ ===========
Earnings (loss) per common share -
diluted $ 0.59 $ (0.06)
============ ===========
Weighted average number of common
and common equivalent shares
outstanding - diluted 10,200,465 11,870,663
============ ===========
Earnings (loss) per common share -
basic $ 0.61 $ (0.06)
============ ===========
Weighted average number of common
and common equivalent shares
outstanding - basic 9,960,810 11,870,663
============ ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
12
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(in thousands of dollars except share and per share amounts)
Forty-weeks ended November 14, 1998 and November 8, 1997
<CAPTION>
Forty-weeks Ended
------------------------
Nov. 14, Nov. 8,
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 268,356 $ 246,824
Costs and expenses:
Cost of sales (exclusive of
depreciation expense shown below) 39,404 41,433
Selling, administrative and
general expenses 198,407 175,792
Depreciation 22,136 21,188
Amortization 986 1,632
----------- -----------
260,933 240,045
----------- -----------
Income from operations 7,423 6,779
Net interest expense 823 2,226
Interest in joint venture loss - 3,304
Loss on sale of interest in Photo-
finishing segment - 4,189
Other income 4,065 877
----------- -----------
Earnings (loss) before income taxes 10,665 (2,063)
Income tax expense (benefit) 3,733 (311)
----------- -----------
Net earnings (loss) $ 6,932 $ (1,752)
=========== ===========
Earnings (loss) per common share-
diluted $ 0.68 $ (0.15)
=========== ===========
Weighted average number of common
and common equivalent shares
outstanding - diluted 10,246,209 11,794,471
=========== ===========
Earnings (loss) per common share-
basic $ 0.70 $ (0.15)
=========== ===========
Weighted average number of common
and common equivalent shares
outstanding - basic 9,963,052 11,794,471
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
13
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS - ASSETS
(UNAUDITED) (in thousands of dollars)
<CAPTION>
Nov. 14, Nov. 8, Feb. 7,
1998 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
Current assets:
Cash $ 675 $ 1,732 $ 1,176
Short-term investments 9,572 33,624 14,117
Receivables less
allowance of $491, $706
and $291, respectively 22,734 21,543 11,665
Notes receivable 43,461 40,347 41,085
Inventories 20,990 23,110 18,044
Prepaid expenses and
other current assets 9,239 10,403 8,139
Deferred income taxes,
net 142 - 180
Refundable income taxes - 2,644 -
----------- ------------ -----------
Total current assets 106,813 133,403 94,406
----------- ------------ -----------
Net property and
equipment 113,183 125,576 124,718
Other assets:
Intangible assets, net 636 674 665
Other long-term assets 8,269 4,805 8,972
----------- ------------ -----------
Total assets $ 228,901 $ 264,458 $ 228,761
=========== ============ ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS -
LIABILITIES (UNAUDITED)
(in thousands of dollars)
<CAPTION>
Nov. 14, Nov. 8, Feb. 7,
1998 1997 1998
----------- ------------ ----------
<S> <C> <C> <C>
Current liabilities:
Current maturities of
long-term obligations $ - $ 1,250 $ -
Accounts payable 18,797 18,121 13,565
Accrued expenses and
other liabilities 29,635 29,514 24,863
Income taxes 2,218 - 9,014
Deferred income taxes,
net - 301 -
----------- ------------ ----------
Total current
liabilities 50,650 49,186 47,442
----------- ------------ ----------
Long-term obligations,
less current maturities 59,547 59,798 59,482
Other liabilities 12,951 13,142 17,314
Deferred income taxes, net 3,905 6,727 2,431
----------- ------------ ----------
Total liabilities $ 127,053 $ 128,853 $ 126,669
----------- ------------ ----------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
15
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS -
STOCKHOLDERS' EQUITY (UNAUDITED) (in thousands of dollars except
share amounts)
<CAPTION>
Nov.14, 1998 Nov.8, 1997 Feb.7, 1998
------------ ------------ -----------
<S> <C> <C> <C>
Stockholders' equity:
Preferred stock, no par
value, 1,000,000 shares
authorized; no shares
issued and outstanding - - -
Preferred stock, Series
A, no par value - - -
Common stock, $0.40 par
value, 50,000,000
shares authorized;
17,693,990, 17,482,495
and 17,499,137 shares
outstanding at Nov. 14,
1998, Nov. 8, 1997
and Feb. 7, 1998,
respectively 7,078 6,993 6,999
Additional paid-in
capital 40,975 37,332 37,614
Retained earnings 228,774 213,230 226,032
Cumulative foreign
currency translation
adjustment (3,747) (2,521) (2,751)
----------- ------------ -----------
273,080 255,034 267,894
Treasury stock at cost,
7,864,261, 5,611,832
and 7,612,047 shares
at Nov. 14, 1998, Nov.
8, 1997 and Feb. 7,
1998, respectively (171,184) (119,280) (165,789)
Unamortized deferred
compensation-restricted
stock (48) (149) (13)
----------- ------------ -----------
Total stockholders'
equity 101,848 135,605 102,092
----------- ------------ -----------
Total liabilities and
stockholders' equity $ 228,901 $ 264,458 $ 228,761
=========== ============ ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
16
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (in thousands of dollars)
Forty-weeks ended November 14, 1998 and November 8, 1997
<CAPTION>
40-Weeks Ended
--------------------
Nov. 14, Nov. 8,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows provided by operating activities $ 12,245 $ 11,549
Cash flows provided by (used in) financing
activities:
Proceeds of long-term borrowings - 61,909
Repayment of long-term obligations - (55,951)
Issuance of common stock to
employee stock plans 3,439 4,146
Cash dividends (4,190) (4,923)
Purchase of treasury stock (5,395) (1,145)
--------- ---------
Cash flows provided by (used in) financing
activities (6,146) 4,036
--------- ---------
Cash flows used in investing activities:
Additions to property and equipment (10,601) (16,001)
Noncompete agreement - 10,000
Advance payment from venture - 4,000
Issuance of restricted stock (53) -
--------- ---------
Cash flows used in investing activities (10,654) (2,001)
--------- ---------
Effect of exchange rate changes on cash and
equivalents (490) (151)
--------- ---------
Net increase (decrease) in cash and cash
equivalents (5,045) 13,433
Cash and cash equivalents at beginning of
year 15,292 21,923
--------- ---------
Cash and cash equivalents at end of period $ 10,247 $ 35,356
========= =========
Supplemental cash flow information:
Interest paid $ 2,241 $ 2,786
========= =========
Income taxes paid $ 9,329 $ 7,109
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
17
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
RECONCILIATION OF NET EARNINGS TO CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES (UNAUDITED)
(in thousands of dollars)
Forty-weeks ended November 14, 1998 and November 8, 1997
<CAPTION>
40-Weeks Ended
-------------------
Nov. 14, Nov. 8,
1998 1997
--------- --------
<S> <C> <C>
Net earnings (loss) from operations $ 6,932 $(1,752)
Adjustments for items not requiring cash:
Depreciation and amortization 23,123 22,821
Deferred income taxes 1,513 778
Deferred compensation (517) (1,809)
Interest in joint venture loss - 3,304
Loss on sale of interest in photofinishing
segment - 4,189
Amortization of noncompete agreement (3,846) (522)
Amortization of discount on note
receivable (2,376) (312)
Other (677) (2,838)
Increase in current assets:
Receivables and inventories (14,015) (11,995)
Prepaid expenses and other current assets (1,099) (1,300)
Refundable income taxes - (2,644)
Increase (decrease) in current liabilities:
Accounts payable, accrued expenses
and other liabilities 10,003 8,778
Income taxes (6,796) (5,149)
-------- --------
Cash flows from operations $12,245 $11,549
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
18
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY - COMMON STOCK, ADDITIONAL PAID-IN
CAPITAL AND RETAINED EARNINGS (UNAUDITED)
(in thousands of dollars except share and per share amounts)
Fifty-three weeks ended February 7, 1998 and Forty-weeks ended
November 14, 1998
<CAPTION>
Add'l
Common Paid-In Retained
Stock Capital Earnings
------- -------- ---------
<S> <C> <C> <C>
Balance at February 1, 1997 $6,896 $33,283 $219,905
Issuance of common stock:
Profit sharing plan and trust
(41,639 shares) 16 684 -
Stock bonus plan (4,334 shares) 1 78 -
Employee stock plans(214,291 shares) 86 3,569 -
Foreign currency translation - - -
Dividends ($0.56 per common share) - - (6,586)
Net earnings - - 12,713
Purchase of treasury stock, at cost - - -
Amortization of deferred
compensation-restricted stock - - -
------- -------- ---------
Balance at February 7, 1998 $6,999 $37,614 $226,032
Issuance of common stock:
Profit sharing plan and trust
(25,602 shares) 10 528 -
Stock bonus plan (3,936 shares) 2 93 -
Employee stock plans(165,315 shares) 67 2,740 -
Foreign currency translation - - -
Dividends ($0.42 per common share) - - (4,190)
Net earnings - - 6,932
Purchase of treasury stock, at cost - - -
Amortization of deferred
compensation-restricted stock - - -
------- -------- ---------
Balance at November 14, 1998 $7,078 $40,975 $228,774
======= ======== =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CPI CORP. INTERIM CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT AND TREASURY
STOCK AT COST (UNAUDITED)
(in thousands of dollars except share and per share amounts)
Fifty-three weeks ended February 7, 1998 and Forty-weeks
ended November 14, 1998
<CAPTION>
Cumulative
Foreign
Currency Treasury
Translation Stock
Adjustment At Cost
----------- ----------
<S> <C> <C>
Balance at February 1, 1997 $ (1,860) $(118,136)
Issuance of common stock:
Profit sharing plan and trust
(41,639 shares) - -
Stock bonus plan (4,334 shares) - -
Employee stock plans(214,291 shares) - -
Foreign currency translation (891) -
Dividends ($0.56 per common share) - -
Net earnings - -
Purchase of treasury stock, at cost - (47,653)
Amortization of deferred
compensation-restricted stock - -
----------- ----------
Balance at February 7, 1998 $ (2,751) $(165,789)
Issuance of common stock:
Profit sharing plan and trust
(25,602 shares) - -
Stock bonus plan (3,936 shares) - -
Employee stock plans(165,315 shares) - -
Foreign currency translation (996) -
Dividends ($0.42 per common share) - -
Net earnings - -
Purchase of treasury stock, at cost - (5,395)
Amortization of deferred
compensation-restricted stock - -
----------- ----------
Balance at November 14, 1998 $ (3,747) $(171,184)
=========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
20
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY - DEFERRED COMPENSATION-RESTRICTED STOCK
AND TOTAL (UNAUDITED)
(in thousands of dollars except share and per share amounts)
Fifty-three weeks ended February 7, 1998 and Forty-weeks
ended November 14, 1998
<CAPTION>
Deferred
Compensation-
Restricted
Stock Total
------------- ----------
<S> <C> <C>
Balance at February 1, 1997 $ (563) $ 139,525
Issuance of common stock:
Profit sharing plan and trust
(41,639 shares) - 700
Stock bonus plan (4,334 shares) - 79
Employee stock plans(214,291 shares) (15) 3,640
Foreign currency translation - (891)
Dividends ($0.56 per common share) - (6,586)
Net earnings - 12,713
Purchase of treasury stock, at cost - (47,653)
Amortization of deferred
compensation-restricted stock 565 565
----------- ----------
Balance at February 7, 1998 $ (13) $ 102,092
Issuance of common stock:
Profit sharing plan and trust
(25,602 shares) - 538
Stock bonus plan (3,936 shares) - 95
Employee stock plans(165,315 shares) (53) 2,754
Foreign currency translation - (996)
Dividends ($0.42 per common share) - (4,190)
Net earnings - 6,932
Purchase of treasury stock, at cost - (5,395)
Amortization of deferred
compensation-restricted stock 18 18
----------- ----------
Balance at November 14, 1998 $ (48) $ 101,848
=========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
21
<PAGE>
CPI CORP. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments necessary for a fair presentation of the
Company's financial position as of November 14, 1998,
November 8, 1997 and February 7, 1998 and the results of its
operations and changes in its cash flows for the 40 weeks
ended November 14, 1998 and November 8, 1997. These financial
statements should be read in conjunction with the financial
statements and the notes included in the Company's annual
report on Form 10-K for its fiscal year ended
February 7, 1998.
2. The components of net interest expense are as follows:
<TABLE>
<CAPTION>
----- 40-weeks ended ------
Nov. 14, 1998 Nov. 8, 1997
------------- --------------
<S> <C> <C>
Interest expense $ 3,557 $ 3,351
Interest income (2,734) (1,125)
----------- --------------
Net interest expense $ 823 $ 2,226
=========== ==============
</TABLE>
3. Short-term investments are comprised of money market
instruments which aggregated $9.6 million, $33.6 million
and $14.1 million as of November 14, 1998, November 8, 1997
and February 7, 1998, respectively, and are stated at cost
which approximates market.
4. On October 2, 1997, the Company sold its remaining 49%
interest in Fox to Kodak for a $43.9 million non-interest
bearing Promissory Note due on January 4, 1999. Due to the
non-interest bearing nature of the Promissory Note, a
discount of $3.9 million was established and is being
amortized into income until maturity. During the third
quarters of 1998 and 1997, $967,000 and $312,000,
respectively, in amortization related to the Promissory Note
was recognized. In addition $2.4 million and $312,000 were
recognized for the first three quarters of 1998 and 1997,
respectively. On a prospective basis, $2.8 million will be
recognized for all of 1998.
As part of the Disposition Transaction, the Company entered
a two-year Noncompetition and Nonsolicitation Agreement with
Fox. The Company received $10.0 million cash consideration
which is being amortized into income over the life of the
22
<PAGE>
agreement. During the third quarters of 1998 and 1997,
amortization of the Noncompetition and Nonsolicitation
Agreement amounted to $1.5 million and $522,000, respectively.
For the first three quarters of 1998 and 1997, amortization
amounted to $3.8 million and $522,000, respectively.
Prospectively, the Company will recognize $5.0 million and
$3.2 million in amortization, respectively, in fiscal years
1998 and 1999.
5. During the first quarter of 1998, the Company adopted SFAS No.
130, "Reporting Comprehensive Income". Statement No. 130
requires the separate reporting of components of comprehensive
income, as defined. This statement requires the Company to
separately report the translation adjustments of SFAS No. 52,
"Foreign Currency Translation" as a component of comprehensive
income. Management has chosen, on an interim basis, to
disclose the requirements of this statement within the notes
to the consolidated financial statements. Comprehensive
income (loss) for the third quarters of 1998 and 1997 was
$5.7 million and ($1.0) million, respectively. For the first
three quarters of 1998 and 1997, comprehensive income (loss)
was $5.9 million and ($2.4) million, respectively.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
The following exhibits are being filed as part of
this Report:
Exhibit 11.1 - Computation of Earnings per Common
Share - Diluted
Sixteen-weeks ended November 14, 1998
and November 8, 1997
Exhibit 11.2 - Computation of Earnings per Common
Share - Diluted
Forty-weeks ended November 14, 1998
and November 8, 1997
Exhibit 11.3 - Computation of Earnings per Common
Share - Basic
Sixteen-weeks ended November 14, 1998
and November 8, 1997
Exhibit 11.4 - Computation of Earnings per Common
Share - Basic
Forty-weeks ended November 14, 1998
and November 8, 1997
Exhibit 27.1 - Financial Data Schedule
b) REPORTS ON FORM 8-K
- On September 1, 1998, CPI Corp. reported the
issuance of a press release on August 25, 1998
announcing: second quarter results from operations,
diluted EPS 13 cents versus prior-year 12 cents,
lower operating earnings offset by other income
and reduced expenses, and encouraging trends in
Sears Portrait Studio sales.
24
<PAGE>
SIGNATURE
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/ Barry Arthur
---------------------------
Barry Arthur
Authorized Officer and
Principal Financial Officer
Dated: December 22, 1998
25
<PAGE>
<TABLE>
<CAPTION>
CPI CORP.
EXHIBIT INDEX
<S> <C>
Exhibit 11.1 - Computation of Earnings per Common 27
Share - Diluted
Sixteen-weeks ended November 14, 1998
and November 8, 1997
Exhibit 11.2 - Computation of Earnings per Common 28
Share - Diluted
Forty-weeks ended November 14, 1998
and November 8, 1997
Exhibit 11.3 - Computation of Earnings per Common 29
Share - Basic
Sixteen-weeks ended November 14, 1998
and November 8, 1997
Exhibit 11.4 - Computation of Earnings per Common 30
Share - Basic
Forty-weeks ended November 14, 1998
and November 8, 1997
Exhibit 27.1 - Financial Data Schedule 31
</TABLE>
26
EXHIBIT 11.1
<TABLE>
CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE - DILUTED
(in thousands of dollars or shares except per share amounts)
Sixteen-weeks Ended November 14, 1998 and November 8, 1997
<CAPTION>
Sixteen-weeks Ended
----------------------
Nov. 14, Nov. 8,
1998 1997
--------- ---------
<S> <C> <C>
Diluted:
Net earnings (loss) applicable to common
shares $ 6,051 $ (725)
========= =========
Shares:
Weighted average number of
common shares outstanding 17,677 17,483
Shares issuable under employee
stock plans - weighted average 41 --*
Dilutive effect of exercise of
certain stock options 198 --*
Less: Treasury stock-weighted average (7,716) (5,612)
--------- ---------
Weighted average number of common and
common equivalent shares outstanding 10,200 11,871
========= =========
Net earnings (loss) per common and
common equivalent shares $ 0.59 $ (0.06)
========= =========
<FN>
* The dilutive effect of 40,290 stock options as well as
293,563 shares issuable under employee stock plans was not
considered as the effect is antidilutive.
</FN>
</TABLE>
27
EXHIBIT 11.2
<TABLE>
CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE - DILUTED
(in thousands of dollars or shares except per share amounts)
Forty-weeks Ended November 14, 1998 and November 8, 1997
<CAPTION>
Forty-weeks Ended
----------------------
Nov. 14, Nov, 8,
1998 1997
--------- ---------
<S> <C> <C>
Diluted:
Net earnings (loss) applicable to common
shares $ 6,932 $ (1,752)
========= =========
Shares:
Weighted average number of
common shares outstanding 17,624 17,378
Shares issuable under employee
stock plans - weighted average 37 --*
Dilutive effect of exercise of
certain stock options 246 --*
Less: Treasury stock-weighted average (7,661) (5,584)
--------- ---------
Weighted average number of common and
common equivalent shares outstanding 10,246 11,794
========= =========
Net earnings (loss) per common and
common equivalent shares $ 0.68 $ (0.15)
========= =========
<FN>
* The dilutive effect of 34,750 stock options as well as 179,419
shares issuable under Employee Stock Plans was not considered
as the effect is antidilutive.
</FN>
</TABLE>
28
EXHIBIT 11.3
<TABLE>
CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE - BASIC
(in thousands of dollars or shares except per share amounts)
Sixteen-weeks Ended November 14, 1998 and November 8, 1997
<CAPTION>
Sixteen-weeks Ended
----------------------
Nov. 14, Nov. 8,
1998 1997
--------- ---------
<S> <C> <C>
Basic:
Net earnings (loss) applicable to
common shares $ 6,051 $ (725)
========= =========
Shares:
Weighted average number of
common shares outstanding 17,677 17,483
Less: Treasury stock - weighted
average (7,716) (5,612)
--------- ---------
Weighted average number of common
and common equivalent shares
outstanding 9,961 11,871
========= =========
Net earnings (loss) per common and
common equivalent shares $ 0.61 $ (0.06)
========= =========
</TABLE>
29
EXHIBIT 11.4
<TABLE>
CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE - BASIC
(in thousands of dollars or shares except per share amounts)
Forty-weeks Ended November 14, 1998 and November 8, 1997
<CAPTION>
Forty-weeks Ended
----------------------
Nov. 14, Nov. 8,
1998 1997
--------- ---------
<S> <C> <C>
Basic:
Net earnings (loss) applicable to
common shares $ 6,932 $ (1,752)
========= =========
Shares:
Weighted average number of
common shares outstanding 17,624 17,378
Less: Treasury stock - weighted
average (7,661) (5,584)
--------- ---------
Weighted average number of common
and common equivalent shares
outstanding 9,963 11,794
========= =========
Net earnings (loss) per common and
common equivalent shares $ 0.70 $ (0.15)
========= =========
</TABLE>
30
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<FISCAL-YEAR-END> FEB-06-1999
<PERIOD-START> FEB-08-1998
<PERIOD-END> NOV-14-1998
<PERIOD-TYPE> 9-MOS
<CASH> 675
<SECURITIES> 9,572
<RECEIVABLES> 66,686
<ALLOWANCES> 491
<INVENTORY> 20,990
<CURRENT-ASSETS> 106,813
<PP&E> 250,275
<DEPRECIATION> (137,092)
<TOTAL-ASSETS> 228,901
<CURRENT-LIABILITIES> 50,650
<BONDS> 0
0
0
<COMMON> 7,078
<OTHER-SE> 94,770
<TOTAL-LIABILITY-AND-EQUITY> 228,901
<SALES> 268,356
<TOTAL-REVENUES> 268,356
<CGS> 39,404
<TOTAL-COSTS> 260,933
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,557
<INCOME-PRETAX> 10,665
<INCOME-TAX> 3,733
<INCOME-CONTINUING> 6,932
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,932
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.68
<PAGE>
</TABLE>
