UNITED STATES SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 7, 1998
COMMISSION FILE NUMBER 1-10204
------------------------------
CPI CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1256674
(State of Incorporation) (I.R.S. Employer
Identification No.)
1706 WASHINGTON AVENUE
ST. LOUIS, MISSOURI 63103-1790
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (314) 231-1575
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------------------ -----------------------
Common Stock $0.40 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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
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 _____.
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS
PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN
DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY
REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.
YES __X__ NO _____.
Aggregate market value of the Registrant's voting stock held by
non-affiliates, based upon the closing price of said stock on the
New York Stock Exchange - Composite Transaction Listing on
May 5, 1998 ($25.81 per share): $243,984,345.
As of May 5, 1998, 9,992,491 shares of the Common Stock,
$0.40 par value, of the Registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Annual Report to Shareholders for the year ended
February 7, 1998, are incorporated by reference into Parts I, II
and IV of this Report.
Portions of the Proxy Statement relating to the Annual Meeting
of Shareholders to be held June 11, 1998, are incorporated by
reference into Part III of this Report.
<PAGE>
PAGE NUMBERS REFER TO PAPER DOCUMENT
<TABLE>
TABLE OF CONTENTS
PAGE
<S> <C>
PART I
- ------
Item 1. Business 3-6
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Results of Votes of Security Holders 8
PART II
- -------
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 9
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 10
PART III
- --------
Item 10. Directors, Executive Officers, Promoters, and
Control Persons of the Registrant 11
Item 11. Executive Compensation 11
Item 12. Security Ownership of Certain Beneficial
Owners and Management 11
Item 13. Certain Relationships and Related Transactions 11
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 12-20
Signatures 21-22
Independent Auditors Report 23
Schedule II Valuation and Qualifying Accounts 24
</TABLE>
<PAGE>
PART I
ITEM I. BUSINESS
THE COMPANY
- -----------
CPI Corp. is a holding company engaged, through its
subsidiaries, in developing and marketing consumer services and
related products through a network of centrally-managed, small
retail locations. Founded in 1942, CPI Corp. became a publicly
held company in 1982 and currently operates professional portrait
studios throughout the United States, Canada and Puerto Rico and
posters, prints and framing outlets throughout the United States.
Unless the context otherwise requires, references herein to the
"Company" or "CPI Corp." mean CPI Corp., its consolidated
subsidiaries and their predecessor companies.
EXISTING BUSINESSES
- -------------------
For the fiscal year ended February 7, 1998, approximately 83%
of net sales and substantially all of the operating earnings
(before deduction of general corporate expenses, net interest
income (expense), other income and income tax expense) were derived
from the Sears Portrait Studio business. The Company has operated
portrait studios as a Sears Roebuck and Company ("Sears") licensee
since 1961, when it was one of more than 15 Sears portrait
photography licensees. Today, the Company is the only operator of
Sears Portrait Studios in the United States, Canada and Puerto
Rico. The Company is materially dependent upon the continued
goodwill of Sears and the integrity of the Sears name in the retail
marketplace. The Company believes that its relationship with Sears
is excellent and that it has been beneficial to both companies.
(See "BUSINESS RELATIONSHIP WITH SEARS.")
In addition, since the 1993 acquisition of Prints Plus, Inc.
("Prints Plus"), the Company operates a wall decor business.
Prints Plus is a posters, prints and custom framing retail chain
with 156 stores located in malls throughout the United States.
The Company's executive offices are located at 1706 Washington
Avenue,St. Louis, Missouri, 63103-1790. CPI Corp.'s telephone
number is (314) 231-1575 and address on the world-wide web is
http://www.cpicorp.com.
OTHER BUSINESSES
- ----------------
In 1982, the Company started a photofinishing business and
continued operations until October 1996. The following is a
chronological listing of the Company's business activities in the
photofinishing business:
3
<PAGE>
1982-1991 Expanded photofinishing business to include 334
locations operating under the name of CPI
Photofinishing.
August 1991- Acquired Fox Photo, Inc., which operated 305
locations under the name Fox Photo.
December 1992- Purchased operational assets of Pemtom, Inc.,
operating 25 locations under the name of Proex.
June 1996- Sold 50 one-hour photofinishing stores to Wolf
Camera, Inc.
October 1996- Established a joint venture with Eastman Kodak
Company by selling 51% interest in existing
photofinishing operations.
October 1997- Sold remaining 49% interest to Eastman Kodak
Company and entered into a two-year
Noncompetition and Nonsolicitation Agreement in
which the Company agreed not to engage in the
retail photofinishing business and not to employ
previous photofinishing employees without
consent.
The Company, from 1988 until 1996, also operated an Electronic
Publishing division. In April 1996, the Company announced its
intentions to sell the assets of this division, and in May of 1996,
the sale was completed and the Company classified the Electronic
Publishing operation as a discounted operation in fiscal year 1995
and reclassified the prior years' financial statements to reflect
this change.
RELATIONSHIP WITH SEARS
- -----------------------
The Company operates its 1,026 Sears Portrait Studio locations
under a license agreement. The agreement is terminable by either
the Company or Sears with respect to any or all studios upon
90-days notice. Early in 1993, Sears announced plans to close 113
stores, which included 38 Sears stores with portrait studios. The
Company relocated some of these studios to new sites in the same
market areas. Except in connection with store closings, Sears has
never terminated the operation of any Company studio under any
license agreement. The relationship with Sears, which started in
1959, is long-standing and the Company has no reason to believe
that Sears will exercise its rights under the agreement to reduce
materially the scope of the Company's business with Sears.
The Company and Sears entered into its current license
agreement for fixed location studios as of January 1, 1994. This
agreement expires on December 31, 1998. The agreement provides
that the Company pay Sears a license fee of 15% of total annual net
sales for studios located in a Sears store. Net sales are defined
as gross sales less customer returns, allowances and sales taxes.
The Company provides all studio furniture, equipment, fixtures and
leasehold improvements and conducts advertising at its own expense,
4
<PAGE>
and is responsible for hiring, training and compensating the
Company employees and must indemnify Sears against all claims.
The Company's freestanding studios in retail malls that
operate under the Sears name pay a license fee of 7.5% of total
annual net sales per studio and benefit from advertising under the
Sears name.
All of the Company's Canadian studios operate under a
nonexclusive license agreement with Sears Canada, Inc., a
subsidiary of Sears. The agreement, originally negotiated in 1977,
renews automatically on a year-to-year basis but is terminable by
either party on 60 days' notice. The license fee is 15% of net
sales. The Company provides all studio furniture, equipment,
fixtures and leasehold improvements and conducts all advertising at
its own expense and is responsible for its Canadian employees.
As a Sears licensee, the Company enjoys the benefits of its
use of the Sears name, Sears' daily cashiering and bookkeeping
system, store security services and customers' ability to use their
Sears credit cards to purchase the Company's products or services,
for which Sears bears the credit risk of authorized credit card
use.
FOR ADDITIONAL INFORMATION, SEE THE REGISTRANT'S 1997 ANNUAL REPORT
TO SHAREHOLDERS, EXHIBIT 13 OF THIS FILING, IN THE DISCUSSION
ENTITLED "SEARS AND CPI - A SYMBIOTIC PAIRING."
COMPETITION
- -----------
In the portrait photography business, the Company competes
with a number of companies that operate fixed-location, traveling
and freestanding photography studios. Independent professional
photographers also compete with the Company in various locations.
The Company believes that its portrait photography products are
competitive in terms of price, quality and convenience of purchase
with similar products of its competitors.
In the wall decor segment, the Company competes with numerous
national, regional and local framing retailers serving the home
furnishings market. The primary competitors in this business are
franchise locations, small regional chains and many individual
stores which focus on custom framing. Other competitors in this
segment include mass merchants and other specialty home furnishings
stores which offer a fixed selection of pre-framed prints. The
Company believes it is competitive in this segment by offering a
large selection of prints and frames, fast custom framing service
and competitive pricing.
5
<PAGE>
SUPPLIER RELATIONSHIPS
- ----------------------
The Company purchases photographic paper and film for its
studio operations from two major manufacturers. The Company
purchases other equipment and supplies used in its studios from a
number of suppliers and is not dependent upon any supplier for any
specific kind of equipment. The Company has had no difficulty in
the past obtaining sufficient material to conduct its businesses.
The Company believes its relations with suppliers are good.
SEASONALITY
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In the professional portrait photography business, sales are
seasonal, with the largest volume occurring in the 16-week third
and 12-week fourth fiscal quarters preceding and including the
Thanksgiving/Christmas season.
In the wall decor business, sales are seasonal, with the
largest volume occurring in the fourth fiscal quarter preceding and
including the Thanksgiving/Christmas season.
EMPLOYEES
- ---------
At February 7, 1998, the Company had approximately 7,911
employees. Approximately 5,032 of these employees were part-time
or temporary employees. The Company's employees are not members of
any union and the Company has experienced no work stoppages. The
Company believes that its relations with its employees are good.
ADDITIONAL INFORMATION REQUIRED UNDER THIS ITEM I IS CONTAINED IN
THE REGISTRANT'S 1997 ANNUAL REPORT TO SHAREHOLDERS, EXHIBIT 13 OF
THIS FILING, IN THE DISCUSSION OF THE COMPANY'S BUSINESS SEGMENTS
FOUND IN THE NOTES TO CONSOLIDATED STATEMENTS, ITEM 13 ENTITLED
"INDUSTRY SEGMENT INFORMATION."
6
<PAGE>
ITEM 2. PROPERTIES
The following table sets forth certain information concerning
the Company's principal facilities:
<TABLE>
Principal Facilities - CPI Corp.
<CAPTION>
APPROXIMATE
AREA IN PRIMARY OWNERSHIP
LOCATION SQUARE FEET USES OR LEASE
- ------------------- ------------ ------------------ ----------
<S> <C> <C> <C>
St. Louis, Missouri 300,000 Administration and Owned
Photoprocessing
St. Louis, Missouri 78,312 Warehousing Leased (1)
St. Louis, Missouri 8,820 Warehousing Leased (2)
St. Louis, Missouri 14,340 Printing Leased (3)
Brampton, Ontario 40,000 Administration, Owned
Warehousing and
Photoprocessing
Las Vegas, Nevada 12,200 Photoprocessing Leased (4)
Thomaston, Connecticut 25,000 Administration and Owned
Photoprocessing
Concord, California 43,088 Administration, Leased (5)
Warehousing and
Manufacturing
<FN>
(1) Lease term expires on June 30, 1999.
(2) Lease term expires on December 31, 1998.
(3) Lease term expires on November 30, 1999.
(4) Lease term expires on July 31, 1998.
(5) Lease term expires on March 31, 2002.
</FN>
</TABLE>
The Company operates 937 portrait studios in Sears stores
pursuant to the license agreement with Sears. See "RELATIONSHIP
WITH SEARS." The Company also operates 89 Sears Portrait Studios
located in shopping centers without Sears stores, which are
generally leased for at least three years with some having renewal
options. The 156 wall decor locations operated by the company are
generally in enclosed regional malls with lease terms of ten years
without renewal options.
7
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There are various suits pending against the Company, none of
which is material in nature. It is the opinion of management that
the ultimate liability, if any, resulting from such suits will not
materially affect the consolidated financial position or results of
operations of the Company.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
No matters were submitted to stockholders for a vote during
the fourth quarter of fiscal year 1997.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Information required under this Item is contained in the
Registrant's 1997 Annual Report to Shareholders, Exhibit 13 of this
filing, in the section titled "Selected Quarterly Financial Data,"
and will be contained in the Registrant's 1998 Proxy Statement, to
be dated within 120 days of the end of the Registrant's fiscal year
1997, and is incorporated herein by reference.
As of April 9, 1998, the market price of the Registrant's
common stock was $26.19 per share with 9,918,327 shares
outstanding and approximately 2,458 holders of record.
ITEM 6. SELECTED FINANCIAL DATA
Information required under this Item is contained in the
Registrant's 1997 Annual Report to Shareholders, Exhibit 13 of
this filing, in the section titled "Financial Highlights," and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information required under this Item is contained in the
Registrant's 1997 Annual Report to Shareholders, Exhibit 13 of this
filing, in the sections titled "Management's Discussion and
Analysis - Overview," "Management's Discussion and Analysis -
Financial Condition," "Management's Discussion and Analysis -
Results of Operations," and "Management's Discussion and Analysis
of Cash Flows," and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required under this Item is contained in the
Registrant's 1997 Annual Report to Shareholders, Exhibit 13 of
this filing, in the sections titled "Consolidated Balance Sheets,"
"Consolidated Statements of Earnings," "Consolidated Statement of
Changes in Stockholders' Equity," "Consolidated Statement of Cash
Flows," "Notes to Consolidated Financial Statements" and
"Selected Quarterly Financial Data," and is incorporated herein
by reference. Additional information required under this Item is
contained in this Annual Report to Shareholders, Schedule II of
this filing, in the section titled "Valuation and Qualifying
Account", and is incorporated herein by reference.
9
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
10
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS OF THE REGISTRANT
Information required under this Item will be contained in the
Registrant's 1998 Proxy Statement, to be dated within 120 days of
the end of the Registrant's fiscal year 1997, and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item will be contained in the
Registrant's 1998 Proxy Statement, to be dated within 120 days of
the end of the Registrant's fiscal year 1997, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required under this Item will be contained in the
Registrant's 1998 Proxy Statement, to be dated within 120 days of
the end of the Registrant's fiscal year 1997, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
11
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Index to Certain Documents
(1) Independent Auditor's Reports
These reports are included in this filing under the sections
titled "Independent Auditors' Report" in this Form 10-K and
"Exhibit 13" (under the title "Independent Auditors' Report"
in the Registrant's 1997 Annual Report to Shareholders), and
are incorporated herein by reference.
(2) Financial Statements:
(a) Consolidated Balance Sheets as of February 7, 1998
and February 1, 1997
(b) Consolidated Statements of Earnings for the fiscal years
ended February 7, 1998, February 1, 1997 and
February 3, 1996
(c) Consolidated Statements of Changes in Stockholders'
Equity for the fiscal years ended February 7, 1998,
February 1, 1997 and February 3, 1996
(d) Consolidated Statements of Cash Flows for the fiscal
years ended February 7, 1998, February 1, 1997 and
February 3, 1996
Information required under these items is contained in the
Registrant's 1997 Annual Report to Shareholders, Exhibit 13
of this filing, under the sections titled "Consolidated
Balance Sheets," "Consolidated Statements of Earnings,"
"Consolidated Statement of Changes in Stockholders'
Equity," and "Consolidated Statements of Cash Flows," and
is incorporated herein by reference.
(3) Notes to Consolidated Financial Statements
This information is included in the Registrant's 1997 Annual
Report to Shareholders, Exhibit 13 of this filing, under
the section titled "Notes to Consolidated Financial
Statements," and is incorporated herein by reference.
(4) Financial Statement Schedules
II. Valuation and Qualifying Accounts
This information is included in this filing under the
section titled "Schedule II" in this Form 10-K (page
24), and is incorporated herein by reference.
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<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (Continued)
All other schedules and notes under Regulation S-X are
omitted because they are either not applicable, not
required or the information called for therein appears in
the consolidated financial statements or notes thereto.
(b) Reports on Form 8-K
On November 14, 1997, the Company filed a Form 8-K Current
Report disclosing the issuance of a press release which
announced: due to a decline in customer activity in recent
weeks, third quarter sales in the Portrait Studio division
will fall short of prior expectation. However, operating
earnings are expected to show an increase in the Portrait
Studio division. In addition the impact of the sale of the
Fox Photo joint venture to Kodak was discussed.
On December 8, 1997, the Company filed a Form 8-K Current
Report disclosing the issuance of a press release which
announced third quarter results: operating earnings in Sears
Portrait Studios increase 24.2% on flat sales while wall
decor segment continues weak sales activity and charges
related to sale of joint venture obscure operating earnings
increase, resulting in net loss.
On December 9, 1997, the Company filed a Form 8-K Current
Report disclosing the issuance of a press release which
announced: the commencement today of an offer to purchase up
to 2,350,000 shares of common stock, or approximately 19.8%
of its shares outstanding, from existing stockholders through
a procedure commonly referred to as a "Dutch Auction" tender
offer in which stockholders can tender their shares at prices
not in excess of $23.00 nor less than $18.00 per share. The
offer expires at 12:00 midnight, New York City time on
January 7, 1998.
On January 8, 1998, the Company filed a Form 8-K Current
Report disclosing the issuance of two press releases which
announced: sales in the Sears Portrait Studios business have
shown an increase over last year's comparable period through
the Christmas week and preliminary results of the Company's
Dutch Auction.
On January 14, 1998, the Company filed a Form 8-K Current
Report disclosing the issuance of a press release which
announced the final results of the Company's Dutch Auction
tender offer, which had expired on January 7, 1998.
Specifically, 1,999,215 shares tendered under the Dutch
Auction were purchased by the Company at $23.00 per share.
13
<PAGE>
(c) Index to Exhibits
EXHIBIT 3. ARTICLES OF INCORPORATION AND BYLAWS
Information required by this Exhibit 3 is incorporated by reference
to the below listed documents with corresponding filing date and
registration or Commission file numbers where applicable.
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- ----------------------------- ------------- -------- -----------
<S> <C> <C> <C>
(3.1) Articles of Annual Report 4/30/90 1-10204
Incorporation on Form 10-K
dated 4/27/90
(3.2) Bylaws Annual Report 4/30/90 1-10204
on Form 10-K
dated 4/27/90
(3.3) Amendment to Bylaws Annual Report 5/4/94 1-10204
on Form 10-K
dated 4/6/94
(3.4) Amendment to Bylaws Form 8-K 8/3/95 0-11227
(3.5) Amendment to Bylaws Annual Report 5/2/97 1-10204
on Form
10-K405
dated 4/3/97
</TABLE>
14
<PAGE>
EXHIBIT 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING DEBENTURES
Information required by this Exhibit 4 is incorporated by reference
to the below listed documents with corresponding filing date and
registration or Commission file numbers where applicable.
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- ----------------------------- ------------- -------- -----------
<S> <C> <C> <C>
(4.1) Articles of Incorporation Annual Report 4/30/90 1-10204
and Bylaws on Form 10-K
dated 4/27/90
(4.2) Note Agreement for Series Form 10-Q 9/3/93 1-10204
A Senior Notes Due August
31, 2000 and Series B
Notes Due August 31, 2000
(4.3) Pledge Agreement Form 10-Q 9/3/93 1-10204
(4.4) Series A Senior Note Due Form 10-Q 9/3/93 1-10204
August 31, 2000, No. R-A1
(4.5) Series B Senior Note Due Form 10-Q 9/3/93 1-10204
August 31, 2000, No. R-B1
(4.6) Series B Senior Note Due Form 10-Q 9/3/93 1-10204
August 31, 2000, No. R-B2
(4.7) CPI Corp. Shareholder Form 8-A 5/2/89 -
Rights Plan
(4.8) First Amendment to CPI Form 10-Q 9/3/93 1-10204
Corp. Shareholder Rights
Plan
(4.9) Second Amendment to CPI Form 8-K 8/3/95 0-11227
Corp. Shareholder Rights
Plan
(4.10) First Amendment to Note Form 10-Q 9/2/94 1-10204
Agreement dated 2/24/94
(4.11) Second Amendment to Note Form 10-Q 9/2/94 1-10204
Agreement dated 6/14/94
</TABLE>
15
<PAGE>
EXHIBIT 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING DEBENTURES (Continued)
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- ----------------------------- ------------- -------- -----------
<S> <C> <C> <C>
(4.12) Note Agreement for Form 8-K 7/1/97 0-11227
CPI Corp. Senior
Notes dated June 16,
1997
(4.13) CPI Corp. 7.46% Form 8-K 7/1/97 0-11227
Senior Notes due
June 16, 2007,
PPN 12617# ACO
(4.14) CPI Corp. 7.46% Form 8-K 7/1/97 0-11227
Senior Notes due
June 16, 2007,
Security No. !Inv5641!
(4.15) Registration of Form S-8 3/31/98 002-86403
50,000 shares of common
to be issued under the
CPI Corp. 1981 Stock
Bonus Plan
(4.16) Registration of Form S-8 3/31/98 002-86403
250,000 shares of
common stock to be
issued under the CPI
Corp. Employees Profit
Sharing Plan and Trust
</TABLE>
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<PAGE>
EXHIBIT 10. MATERIAL CONTRACTS
<TABLE>
<CAPTION>
PAGE NUMBER
FORM 10-K
-------------
<S> <C>
(10.1) Employment Contract 25
Alyn V. Essman
(10.2) Employment Contract 26
Russell H. Isaak
(10.3) Employment Contract 27
Patrick J. Morris
(10.4) Employment Contract 28
Barry C. Arthur
(10.5) Employment Contract 29
Fran Scheper
</TABLE>
Additional information required by this Exhibit 10 is incorporated
by reference to the below listed documents with corresponding
filing date and registration or Commission file numbers where
applicable.
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- ----------------------------- ------------- -------- -----------
<S> <C> <C> <C>
(10.6) CPI Corp. 1981 Stock Annual Report 5/5/93 1-10204
Bonus Plan (As Amended on Form 10-K,
and Restated on 2/3/91) dated 4/30/93
(10.7) Deferred Compensation Annual Report 5/1/92 1-10204
and Stock Appreciation on Form 10-K,
Rights dated 4/24/92
(10.8) CPI Corp. Restricted Annual Report 5/1/92 1-10204
Stock Plan on Form 10-K,
dated 4/24/92
(10.9) Deferred Compensation Annual Report 5/1/92 1-10204
and Retirement Plan for on Form 10-K,
Non-Management Directors dated 4/24/92
</TABLE>
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<PAGE>
EXHIBIT 10. MATERIAL CONTRACTS (Continued)
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- ----------------------------- ------------- -------- -----------
<S> <C> <C> <C>
(10.10) CPI Corp. Stock Option Form S-8 7/28/92 33-50082
Plan (As Amended and
Restated effective 2/2/92)
(10.11) Registration of Form 8-A 3/21/89 -
Securities on the New
York Stock Exchange
(10.12) CPI Corp. Shareholder Exhibit to 5/2/89 -
Rights Plan Form 8-A
(10.13) CPI Voluntary Stock Form D 3/31/93 -
Option Plan
(10.14) First Amendment to CPI Form 10-Q 9/3/93 1-10204
Corp. Shareholder Rights
Plan
(10.15) Second Amendment to CPI Form 8-K 8/3/95 0-11227
Corp. Shareholder Rights
Plan
(10.16) $60 Million Revolving Form 10-Q 9/1/95 1-10204
Credit Agreement
(10.17) $25 Million Revolving Form 10-Q 9/1/95 1-10204
Credit Note with
Mercantile Bank
(10.18) $20 Million Revolving Form 10-Q 9/1/95 1-10204
Credit Note with
Harris Trust & Savings
(10.19) $15 Million Revolving Form 10-Q 9/1/95 1-10204
Credit Note with
The Daiwa Bank
(10.20) License Agreement - Annual Report 5/3/95 1-10204
Sears, Roebuck & Co. on Form 10-K
dated 4/6/95
</TABLE>
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<PAGE>
EXHIBIT 10. MATERIAL CONTRACTS (Continued)
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- ----------------------------- ------------- -------- -----------
<S> <C> <C> <C>
(10.21) Employment Contract - Annual Report 5/3/95 1-10204
Jane E. Nelson * on Form 10-K
dated 4/6/95
(10.22) CPI Consent to Annual Report 5/2/96 1-10204
Assignment and on Form 10-K
Assumption of $15 dated 4/4/96
Million Revolving
Credit Note
(10.23) Notification of Annual Report 5/2/96 1-10204
Assignment and on Form 10-K
Assumption of $15 dated 4/4/96
Million Credit Note
Agreement
(10.24) $40 Million Revolving Form 10-Q 12/8/97 1-10204
Credit Agreement
(10.25) $17 Million Revolving Form 10-Q 8/29/97 1-10204
Credit Note with
Mercantile Bank
National Association
(10.26) $13 Million Revolving Form 10-Q 8/29/97 1-10204
Credit Note with
Harris Trust and Savings
(10.27) $10 Million Revolving Form 10-Q 8/29/97 1-10204
Credit Note with
The Sumitomo Bank,
Limited
<FN>
* Employment contract is automatically renewed and extended for
one year unless terminated by the Board of Directors or the
employee.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Page Number
Form 10-K
-----------
<S> <C>
EXHIBIT 11. COMPUTATION OF EARNINGS PER COMMON SHARE 30-31
EXHIBIT 13. 1997 ANNUAL REPORT TO SHAREHOLDERS 32
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT 33
EXHIBIT 23. INDEPENDENT AUDITORS' CONSENT 34
EXHIBIT 27. FINANCIAL DATA SCHEDULE
</TABLE>
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CPI CORP.
BY: /s/ Alyn V. Essman
-------------------------
(Alyn V. Essman)
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated.
SIGNATURES OF DIRECTORS AND PRINCIPAL OFFICERS
<TABLE>
<CAPTION>
Signature Title Date
- ------------------- ------------------------ -------------
<S> <C> <C>
/s/ Alyn V. Essman Chairman of the Board, April 9, 1998
- ----------------------- Chief Executive Officer
(Alyn V. Essman) and Director (Principal
Executive Officer)
/s/ Milford Bohm Director April 9, 1998
- -----------------------
(Milford Bohm)
/s/ Mary Ann Krey Director April 9, 1998
- -----------------------
(Mary Ann Krey)
/s/ Lee Liberman Director April 9, 1998
- -----------------------
(Lee Liberman)
/s/ Nicholas L. Reding Director April 9, 1998
- -----------------------
(Nicholas L. Reding)
/s/ Martin Sneider Director April 9, 1998
- -----------------------
(Martin Sneider)
</TABLE>
21
<PAGE>
SIGNATURES OF DIRECTORS AND PRINCIPAL OFFICERS (Continued)
<TABLE>
<CAPTION>
Signature Title Date
- ------------------- ------------------------ -------------
<S> <C> <C>
/s/ Robert L. Virgil Director April 9, 1998
- -----------------------
(Robert L. Virgil)
/s/ Russell Isaak President and Director April 9, 1998
- -----------------------
(Russell Isaak)
/s/ Patrick J. Morris Senior Executive Vice April 9, 1998
- ----------------------- President and Director
(Patrick J. Morris)
/s/ Barry C. Arthur Vice President and April 9, 1998
- ----------------------- Treasurer (Principal
(Barry C. Arthur) Financial and
Accounting Officer)
</TABLE>
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CPI Corp.:
Under date of April 9, 1998, we reported on the consolidated
balance sheets of CPI Corp. and subsidiaries as of February 7, 1998
and February 1, 1997, and the related consolidated statements of
earnings, changes in stockholders' equity, and cash flows for each
of the fiscal years in the three-year period ended February 7,
1998, as contained in the 1997 annual report to stockholders.
These consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K of CPI
Corp. for the 1997 fiscal year. In connection with our audits of
the aforementioned consolidated financial statements, we have also
audited the related financial statement schedule as listed in the
accompanying index. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is
to express an opinion on this financial statement schedule based
on our audits.
In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG PEAT MARWICK LLP
St. Louis, Missouri
April 9, 1998
23
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
CPI CORP. CONSOLIDATED ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES
FISCAL YEARS ENDED FEBRUARY 7, 1998, FEBRUARY 1, 1997
AND FEBRUARY 3, 1996
<TABLE>
<CAPTION>
FEBRUARY 7, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning
of year $ 382 $ 1,216 $ 1,277
========= ========= =========
Balance at end
of year $ 291 $ 382 $ 1,216
========= ========= =========
</TABLE>
The majority of receivable amounts at year ending February 7,
1998 and February 1, 1997, respectively are due from portrait
studio customers for amounts collected or to be collected, for
which the Company assumes all credit risks.
Prior to February 1, 1997, receivable balances for which an
allowance for uncollectible receivables is established relate
primarily to sales recorded through use of Company commercial
charge accounts for photofinishing and other products and
services.
The majority of the allowance for uncollectible receivables is
computed and adjusted every four weeks based on a predetermined
percentage of the related receivable balances. These percentages
are determined using historical results adjusted for current
economic conditions. As a result, the Company does not record
separate additions or deductions to the allowance for individual
accounts but rather adjusts every four weeks for the net change in
the computed allowance based on gross receivable balances.
24
EXHIBIT (10.1)
Employment Contract - Alyn V. Essman
25
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated February 8, 1998, between CONSUMER PROGRAMS
INCORPORATED, a Missouri corporation (the "Corporation"), and Alyn
V. Essman (the "Executive").
WHEREAS, the Corporation currently employs the Executive in
the capacity of Chairman of the Board and Chief Executive Officer,
and the Executive is one of the key executives of the Corporation;
WHEREAS, there is much competition for the type of business
performed by the Corporation in the locales in which the
Corporation operates, and the Corporation and Executive acknowledge
that the Corporation is active in the product markets in which it
competes;
WHEREAS, Executive, during his or her employment, has been and
will be entrusted with confidential information;
WHEREAS, Executive and the Corporation recognize and
acknowledge that, to ensure the continued growth and stability of
the Corporation, it is necessary to obtain an agreement from
Executive not to compete with the Corporation and not to disclose
confidential information of the Corporation; and
WHEREAS, the Corporation desires that the Executive continue
in the employ of the Corporation as a result of his or her
experience with the Corporation and his or her potential for making
future contributions to the Corporation, and the Executive is
willing to make a commitment to remain in such employ upon the
terms and subject to the conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises
contained herein and other good and valuable consideration, the
parties hereto hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement:
(a) "Affiliated Companies" shall mean any corporation (or
other business entity) controlling, controlled by or under common
control with the Corporation.
(b) "Beneficiary" shall mean the person designated in
writing by the Executive as his or her beneficiary under this
Agreement, or in the absence of such designation, his or her
estate.
(c) Cause shall mean:
(1) prior to a Change of Control, (i) conduct or
activity of the Executive materially detrimental to the
Corporation's reputation or business (including financial)
operations; (ii) gross or habitual neglect or breach of duty or
<PAGE>
misconduct of the Executive in discharging the duties of his or her
position; or (iii) prolonged absence by the Executive from
his or her duties (other than on account of illness or disability)
without the consent of the Corporation.
(2) after a Change of Control, (i) an act or acts of
dishonesty on the Executive's part which are intended to result in
his or her substantial personal enrichment at the expense of the
Corporation; (ii) any material violation by the Executive of his or
her obligations and covenants pursuant to this Agreement which is
demonstrably willful and deliberate on the Executive's part and
which results in material injury to the Corporation; or (iii) the
conviction of Executive of a felony or of a crime involving moral
turpitude.
(d) A "Change of Control" shall mean a change in control of
a nature that would be required to be reported in response to Item
1(a) of the Current Report on Form 8-K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended ("Exchange Act") or would have been
required to be so reported but for the fact that such event had
been "previously reported" as that term is defined in Rule 12b-2 of
Regulation 12B of the Exchange Act unless the transactions that
give rise to the change in control are approved or ratified by a
majority of the members of the Incumbent Board of CPI Corp. who are
not employees of the Corporation; provided that, without
limitation, notwithstanding anything herein to the contrary, such
a change in control shall be deemed to have occurred if (a) any
Person is or becomes the beneficial owner (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of
CPI Corp. representing 40% or more of the combined voting power of
CPI Corp.'s then outstanding securities ordinarily (apart from
rights accruing under special circumstances) having the right to
vote at elections of directors ("Voting Securities"), (b)
individuals who constitute the Board of CPI Corp. on the date
hereof (the "Incumbent Board") cease for any reason to constitute
at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election, or
nomination for election by CPI Corp.'s shareholders, was approved
by a vote of at least three-quarters of the directors comprising
the Incumbent Board (either by a specific vote or by approval of
the proxy statement of CPI Corp. in which such person is named as
a nominee for director, without objection to such nomination) shall
be, for purposes of this clause (b), considered as though such
person were a member of the Incumbent Board, or (c) approval by the
stockholders of CPI Corp. of a reorganization, merger or
consolidation, in each case, with respect to which persons who were
the stockholders of CPI Corp. immediately prior to such
reorganization, merger or consolidation do not, immediately
thereafter, own, directly or indirectly, more than 50% of the
combined voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's then
<PAGE>
outstanding voting securities, or a liquidation or dissolution of
CPI Corp. or of the sale of all or substantially all of the assets
of CPI Corp. For purposes of this Agreement, the term "Person"
shall mean and include any individual, corporation, partnership,
group, association or other "person," as such term is used in
Section 14(d) of the Exchange Act, other than CPI Corp., the
Corporation or an Affiliated Company or any employee benefit
plan(s) sponsored or maintained by the Corporation or any
Affiliated Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as
may be amended from time to time.
(f) "Continuing Directors" shall have the meaning set forth
in Paragraph 3(G) of Article Ten of CPI Corp.'s Certificate of
Incorporation.
(g) "Fiscal Year" shall mean the Fiscal Year of the
Corporation.
(h) "Permanent Disability" shall mean the inability of
Executive to perform the services contemplated by Section 4 hereof
for a period of at least one hundred eighty (180) consecutive
calendar days or for thirty-five (35) weeks (whether or not
consecutive) in any twelve (12) month period on account of any
sickness, injury or other infirmity or disability.
(i) "Retirement" shall mean the Executive's voluntary or
involuntary termination of employment with the Corporation except
for termination on account of (A) Cause as defined in Subsection
6(b) hereof, (B) death or (C) Permanent Disability before attaining
age sixty-five (65).
(j) "Term of Employment" shall have the meaning set forth
in Section 3 hereof.
(k) "Vesting Percentage" shall mean the percentage of
Supplemental Retirement Benefits, death benefits, and disability
benefits in which Executive has a nonforfeitable interest (except
in the event of termination for Cause) based upon the number of
Years of Service Executive has completed, determined as follows:
<PAGE>
<TABLE>
<CAPTION>
COMPLETED YEARS VESTING
OF SERVICE PERCENTAGE
--------------- ----------
<S> <C> <C>
0 0%
1 10%
2 20%
3 30%
4 40%
5 50%
6 60%
7 70%
8 80%
9 90%
10 100%
</TABLE>
Notwithstanding anything herein to the contrary, if Executive's
employment with the Corporation terminates following a Change of
Control, unless such termination is for Cause, for purposes of
Subsections 5(g), 5(h), and 5(i) of this Agreement Executive shall
be deemed to have completed ten (10) Years of Service and his or
her Vesting Percentage shall be deemed to be 100%.
(l) "Year of Service" shall mean any Fiscal Year during
which the Executive has worked for the Corporation at least one
thousand (1,000) hours, including Fiscal Years prior to the
effective date of this Agreement.
2. EMPLOYMENT. The Corporation hereby employs and engages the
services of the Executive as one of its key executives initially in
the position of CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
of the Corporation for the Term of Employment set forth in Section
3. The Executive agrees to serve the Corporation for the Term of
Employment as provided herein.
3. TERM OF EMPLOYMENT. The Executive's Term of Employment
shall be a period commencing on the date hereof and ending one (1)
year thereafter; provided, however, that upon the expiration of the
aforesaid period (the "Expiration Date") and upon each anniversary
of the Expiration Date, the Term of Employment shall automatically
be extended for an additional one (1) year period unless Executive
or the Corporation notifies the other in writing at least sixty
(60) days prior to the commencement of such one (1) year period of
an intention to terminate this Agreement. Notwithstanding anything
herein to the contrary, the Term of Employment shall terminate upon
Executive's death or Permanent Disability as set forth in
subsection 6(a) hereof or upon the Corporation's termination of
Executive's employment for Cause pursuant to subsection 6(b)
hereof.
<PAGE>
4. POSITION AND DUTIES.
(a) Prior to a Change of Control, during the Term of
Employment, the Executive shall serve the Corporation in such
capacity as the Corporation may determine. After a Change of
Control, during the Term of Employment, the Executive's position,
authority and responsibilities, the type of work he or she is asked
to perform, and the status and stature of the people with whom he
or she is asked to work, shall be comparable to that existing with
respect to the Executive as of the date immediately prior to the
Change of Control, and after a Change of Control the Executive's
services shall be performed at the location where the Executive was
employed as of the date immediately prior to the Change of Control,
or at such other location as may be mutually agreed between the
Corporation and the Executive.
(b) The Executive agrees to devote his or her full business
time during normal business hours to the business and affairs of
the Corporation (except as otherwise provided herein) and to use
his or her best efforts to promote the interests of the Corporation
and its Affiliated Companies and to perform faithfully and
efficiently the responsibilities assigned to him or her in
accordance with the terms of this Agreement to the extent necessary
to discharge such responsibilities, except for (i) service on
corporate, civic or charitable boards or committees not
significantly interfering with the performance of such
responsibilities and (ii) periods of vacation and sick leave to
which he or she is entitled. It is expressly understood and agreed
that the Executive's continuing service on any boards and
committees with which he or she shall be connected, as a member or
otherwise, as of the date hereof, or any such service approved by
the Corporation during the Term of Employment, shall not be deemed
to interfere with the performance of the Executive's services to
the Corporation pursuant to this subparagraph 4(b).
5. COMPENSATION AND OTHER CONDITIONS OF EMPLOYMENT.
(a) BASE SALARY. During the Term of Employment, the
Executive shall receive an annual base salary (the "Base Salary"),
in equal installments payable weekly or at such other intervals as
salary is normally paid by the Corporation to its employees, at an
annual rate established by the Corporation and any Affiliated
Companies as of the date hereof. The Base Salary shall be reviewed
at least once each year and may be increased at any time and from
time to time by action of the Board of Directors of CPI Corp., any
committee thereof or any individual having authority to take such
action, in accordance with the Corporation's regular practices.
Any increase in the Base Salary shall not serve to limit or reduce
any other obligation of the Corporation hereunder, and after such
increase the Base Salary shall not be reduced from such increased
level.
<PAGE>
(b) ANNUAL BONUS. After a Change of Control, in addition
to the Base Salary, the Executive shall be awarded for each Fiscal
Year during the Term of Employment an annual bonus (the "Annual
Bonus") (pursuant to any bonus plan or program of the Corporation,
any incentive plan or program of the Corporation, or otherwise) in
cash at least equal to the highest bonus paid or payable to the
Executive in respect of any of the Fiscal Years during the three
Fiscal Years immediately prior to the date of the Change of
Control. Prior to a Change of Control, the amount of the
Executive's Annual Bonus shall be determined in accordance with the
Corporation's regular practice.
(c) OTHER COMPENSATION PLANS. After a Change of Control,
in addition to the Base Salary and Annual Bonus payable as
hereinabove provided, during the Term of Employment, the Executive
shall be entitled to participate in all other compensation plans
and programs, including, without limitation, savings plans, stock
option plans, and retirement plans of the Corporation and its
Affiliated Companies (collectively, the "Savings Plans"), on a
basis at least equivalent to that provided by the Corporation and
its Affiliated Companies to the Executive under such programs
immediately prior to the date of the Change of Control. Prior to
a Change of Control, the Executive's entitlement to participate in
the Savings Plans shall be determined in accordance with the
Corporation's regular practice. Prior to a Change of Control,
nothing herein shall be construed to prevent the Corporation from
amending or altering any such plans in accordance with the terms
thereof. All agreements between the Corporation and the Executive
existing on the date hereof providing for special pension,
retirement or similar benefits are continued by this Agreement.
(d) BENEFIT PLANS. After a Change of Control, during the
Term of Employment, the Executive, his or her spouse, or his or her
dependents, as the case may be, shall be entitled to receive all
amounts which he or she, his or her spouse or his or her dependents
are or would have been entitled to receive as benefits under all
other benefit plans of the Corporation and its Affiliated
Companies, including, without limitation, medical, dental,
disability, group life, accidental death and travel accident
insurance plans and programs (collectively, the "Benefit Plans") on
a basis at least as favorable to the Executive as on the date
immediately prior to the date of the Change of Control. Prior to
a Change of Control, the Executive's and such other persons'
entitlement to participate in the Benefit Plans shall be determined
in accordance with the Corporation's regular practice.
(e) EXPENSES. During the Term of Employment, the Executive
shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by the Executive in accordance with
the regular policies and procedures of the Corporation.
(f) OFFICE AND SUPPORT STAFF. After a Change of Control
<PAGE>
the Executive shall be entitled to an office or offices of a size
and with furnishings and other appointments, and to secretarial and
other assistance, at least equal to those provided to the Executive
as of the date immediately prior to the date of the Change of
Control.
(g) DEATH BENEFITS. In the event of Executive's death
after completion of at least ten (10) Years of Service, unless (1)
Executive's employment with the Corporation was terminated for
Cause or (2) Executive (or his or her Beneficiary) is entitled to
receive Supplemental Retirement Benefits pursuant to subsection
5(i), the Corporation shall pay to Executive's Beneficiary an
annual death benefit equal to forty percent (40%) (but not to
exceed $150,000) of the highest annual Base Salary paid to
Executive from and after fiscal year 1997 (as defined in subsection
5(a) hereof) for the Fiscal Year of his or her termination of
employment with the Corporation, payable in equal monthly
installments, commencing with the month following the month of
Executive's death and ending with the two-hundred fortieth (240th)
month following the month of Executive's death. In the event that
Executive dies before age 65 but has not completed at least ten
(10) Years of Service with the Corporation, death benefits shall be
reduced to an amount equal to the benefits determined under the
preceding sentence multiplied by the Vesting Percentage applicable
to Executive.
(h) DISABILITY BENEFITS. In the event of Executive's
Permanent Disability prior to attaining age 65 and prior to
termination of employment with the Corporation, unless Executive's
employment with the Corporation was terminated for Cause, the
Corporation shall pay Executive annual disability benefits equal to
forty percent (40%) (but not to exceed $150,000) of the highest
annual Base Salary paid to Executive from and after fiscal year
1997 for the Fiscal Year in which the Executive terminated
employment with the Corporation, payable in equal monthly
installments, commencing with the month following the month in
which Executive terminated employment as a result of Permanent
Disability and ending on the earlier of (i) the month in which
Executive reaches age 65 or (ii) the month of his or her death.
In the event that at the time of Permanent Disability Executive has
not completed at least ten (10) Years of Service, the disability
benefits shall be reduced to an amount equal to the benefits
determined under the preceding sentence multiplied by the Vesting
Percentage applicable to Executive. Disability benefits pursuant
to this subsection (h) shall be reduced by any amounts paid to
Executive under the Corporation's long-term disability insurance
policy, but shall not be reduced for any payments received by
Executive from Social Security or from any disability insurance
coverage individually owned by Executive.
(i) SUPPLEMENTAL RETIREMENT BENEFITS.
<PAGE>
(1) In the event of Executive's Retirement after
completion of at least ten (10) Years of Service, unless
Executive's employment with the Corporation was terminated for
Cause, the Corporation shall pay Executive retirement benefits for
twenty (20) years in an annual amount equal to forty percent (40%)
(but not to exceed $150,000) of the highest annual Base Salary paid
to Executive from and after fiscal year 1997 for the Fiscal Year of
his or her Retirement ("Supplemental Retirement Benefits"). In the
event of Executive's Retirement before completion of ten (10) Years
of Service, Corporation shall pay Executive retirement benefits on
the same terms as set forth in the preceding sentence except that
retirement benefits shall be reduced to an amount equal to
Supplemental Retirement Benefits multiplied by the Vesting
Percentage.
(2) Supplemental Retirement Benefits shall be payable
in two hundred forty (240) equal monthly installments commencing
with the month following the later of (i) the month of Executive's
Retirement or (ii) the month during which Executive reaches age
sixty-five (65). If Executive dies prior to the end of the two
hundred forty (240) month period during which Supplemental
Retirement Benefits are payable, Supplemental Retirement Benefits
shall be payable during the remainder of such 240-month period to
his or her Beneficiary.
(3) Notwithstanding anything herein to the contrary, in
the event of Executive's termination of employment with the
Corporation prior to attaining age 65 as a result of Permanent
Disability, if Executive attains age 65 and his or her employment
with the Corporation was not terminated for Cause, the Corporation
shall pay to Executive the Supplemental Retirement Benefits set
forth in this Subsection 5(i) in accordance with Executive's
Vesting Percentage, commencing as of the month following the month
in which Executive attains age 65; provided, however, that any
Supplemental Retirement Benefits paid pursuant to this sentence
shall be reduced by any amounts paid to Executive under the
Corporation's long-term disability insurance policy (but shall not
be reduced for any payments received by Executive from Social
Security or from any disability insurance coverage individually
owned by Executive) for the same period.
(j) SURVIVABILITY OF DEATH AND SUPPLEMENTAL RETIREMENT
BENEFITS. In the event of Executive's Retirement or death,
Executive's entitlement to death benefits pursuant to
Subsection 5(g) hereof and Supplemental Retirement Benefits
pursuant to Subsection 5(i) hereof shall survive the Term of
Employment and Executive or his or her Beneficiary shall be
entitled to such death benefits and Supplemental Retirement
Benefits based on the same terms and conditions as would have been
applicable had his or her death or Retirement, as the case may be,
occurred during the Term of Employment.
<PAGE>
6. TERMINATION OF EMPLOYMENT.
(a) DEATH OR PERMANENT DISABILITY. Except for the
obligations of the Corporation set forth in this Subsection 6(a),
this Agreement shall terminate automatically upon the Executive's
death or Permanent Disability. In the event of such termination,
the Corporation shall pay to the Executive's Beneficiary or, in the
event of Permanent Disability, the Executive or his or her legal
representative, all benefits and Base Salary accrued through the
date of termination, including, without limitation, amounts payable
under any plan referred to in Subsection 5(d) plus any benefits to
which Executive may be entitled pursuant to Subsection 5(g),
Subsection 5(h) or Subsection 5(i) hereof.
(b) CAUSE. The Corporation may terminate the Executive's
employment for Cause. If the Executive's employment is terminated
for Cause, the Corporation shall pay the Executive his or her full
accrued Base Salary through the effective date of the termination
of his or her employment (which shall be no earlier than the date
of receipt of notice thereof) at the rate in effect at the time of
such termination, and the Corporation shall have no further
obligations to the Executive under this Agreement.
(c) NOTIFICATION PRIOR TO ONE YEAR EXTENSION. Either
Executive or the Corporation may terminate this Agreement by
notifying the other party in writing of an intention to do so at
least sixty (60) days prior to the commencement of a one-year
extension period described in Section 3 hereof.
(d) PAYMENTS FOR INVOLUNTARY TERMINATION WITHOUT CAUSE.
(1) If prior to a Change of Control (i) the Corporation
terminates Executive's employment (other than for Cause pursuant to
subsection 6(b) hereof), or (ii) the Executive's employment
terminates by reason of the Corporation's termination of this
Agreement pursuant to subsection 6(c)hereof, the Corporation shall
pay Executive following such involuntary termination his or her
full accrued Base Salary through the date of termination of
employment plus an amount equal to fifty percent (50%) of
Executive's Base Salary for the fiscal year in which termination
occurs, payable in twenty-six (26) equal weekly installments or at
such other intervals as salary is normally paid by the Corporation
to its employees. The payment pursuant to this Subsection 6(d)(1)
and any payments to which Executive may be entitled pursuant to
Subsections 5(g), 5(h), and 5(i) shall be in full discharge of any
claims, actions, demands or damages of every nature and description
which Executive might have or might assert against the Corporation
or any Affiliated Company in connection with or arising from the
termination of Executive's employment or the termination of this
Agreement.
(2) If following a Change of Control (i) the
<PAGE>
Corporation terminates Executive's employment (other than for Cause
pursuant to Subsection 6(b) hereof), or (ii) the Executive's
employment terminates by reason of the Corporation's termination of
this Agreement pursuant to subsection (c) hereof, the Corporation
shall, at the time of such involuntary termination, make a lump sum
cash payment to Executive equal to 200% of his or her Base Salary
for the Fiscal Year of termination. In addition to the payment
pursuant to this Subsection 6(d)(2) and any payments to which
Executive may be entitled pursuant to Subsections 5(g), 5(h) and
5(i), Executive shall be entitled to all remedies available under
this Agreement or at law in respect of any damages suffered by
Executive as a result of an involuntary termination of employment
without Cause.
7. GROSS-UP FOR PARACHUTE TAX.
(a) GENERAL. In the event that following a Change of
Control Executive becomes entitled to any payments (whether
pursuant to this Employment Agreement or any other plan,
arrangement or agreement) from the Corporation in the nature of
compensation ("Parachute Payments") that in the opinion of a
certified public accounting firm (selected in the manner set forth
in Subsection 7(b)) or that under the provisions of a notice of
assessment from the Internal Revenue Service causes imposition of
the tax under Section 4999 of the Code or any similar tax that may
hereafter be imposed (the "Excise Tax"), the Corporation shall pay
Executive, at the time specified in Subsection 7(d), the Gross-Up
Payment (as determined in accordance with Subsection 7(c)).
(b) SELECTION OF C.P.A. Within fifteen (15) days after any
termination of Executive's employment following a Change of
Control, the majority of the Continuing Directors as of the date
immediately prior to the Change of Control shall select a certified
public accounting firm (the "C.P.A.") to determine the amount, if
any, of the Excise Tax and the amount, if any, of the Gross-Up
Payments.
(c) AMOUNT OF GROSS-UP PAYMENTS.
(1) The Gross-Up Payments shall be in an amount such
that the net amount retained by Executive with respect to
the Parachute Payments and Gross-Up Payments, after deduction of
any Excise Tax to which the Parachute Payments may be subject and
any federal, state, and local income taxes and Excise Tax upon the
Gross-Up Payments, shall be equal to the gross amount of the
Parachute Payments.
(2) For purposes of determining the amount of the
Gross-Up Payments, Executive shall be deemed to pay federal income
taxes at the applicable rate of federal income taxation for the
calendar year in which the Gross-Up Payment is to be made and state
and local income taxes at the applicable rate of taxation for the
<PAGE>
calendar year in which the Gross-Up Payment is to be made.
(3) In the event that the Excise Tax is subsequently
determined to exceed the amount taken into account at the time the
Gross-Up Payment is made pursuant to Subsection 7(d)(1) hereof
(including any excess attributable to any Parachute Payments the
existence or amount of which could not be accurately determined at
the time of the Gross-Up Payment), the Corporation shall make an
additional Gross-Up Payment in respect of such excess (plus any
interest and addition to tax payable with respect to such excess)
within fifteen (15) days after the amount of such excess is
determined by the C.P.A. or by the Internal Revenue Service (the
"IRS") in a notice of assessment.
(d) TIMING OF GROSS-UP PAYMENTS. Gross-Up Payments other
than Gross-Up Payments pursuant to Subsection 7(c)(3) shall be paid
not later than forty-five (45) days following payment of any
Parachute Payments to which the Gross-Up Payments are attributable;
provided, however, that if the amount of such Gross-Up Payment or
portion thereof cannot be finally determined on or before such day,
the Corporation shall pay to Executive on such day an estimate, as
determined in good faith by the Corporation, of the minimum amount
of such payments and shall pay the remainder of such payments
(together with interest at the applicable federal rate provided in
Section l274(d) of the Code) as soon as the amount thereof can be
determined by the C.P.A., but in no event later than forty-five
(45) days after payment of such Parachute Payments.
(e) CORPORATION'S RIGHT TO DESIGNATE TAX REPRESENTATIVE;
ASSIGNMENT OF REFUND PROCEEDS. If the IRS proposes an assessment
of the Excise Tax against Executive or proposes an additional
assessment of Excise Tax in excess of the amount previously
reported by Executive:
(1) Executive shall within five (5) days after receipt
from the IRS of notice of the proposed Excise Tax assessment notify
the Corporation in writing and furnish the Corporation with copies
of all correspondence from the IRS relating to the proposed Excise
Tax assessment.
(2) The Corporation shall be authorized to designate an
attorney and/or accountant (the "Tax Representative") to serve as
Executive's exclusive representative with respect to all
proceedings with the IRS relating to the proposed Excise Tax
assessment, including but not limited to negotiating a settlement
or compromise of the proposed Excise Tax assessment, filing a claim
for refund with respect thereto, and seeking judicial review of any
disallowance of a claim for refund. Executive hereby agrees to
execute an appropriate power of attorney authorizing the Tax
Representative to represent Executive with respect to the Excise
Taxes. Executive further agrees to take any other appropriate
actions reasonably requested by the Tax Representative in
<PAGE>
connection therewith; provided, however, that the Corporation shall
reimburse Executive for any expenses incurred by Executive as a
result of compliance with such requests.
(3) If the Tax Representative files a claim for refund
of Excise Taxes with respect to which the Corporation has made a
Gross-Up Payment and such refund claim is allowed by the IRS or by
the final judgment of a court of competent jurisdiction, Executive
shall endorse the refund check payable to the Corporation and shall
send the refund check to the Corporation not later than five (5)
days after receipt from the IRS.
(4) If the Corporation designates a Tax Representative,
the Corporation shall pay all of his or her professional fees and
expenses and hold Executive harmless from any claims in connection
therewith. The Tax Representative shall keep Executive timely
informed of all significant developments in the Excise Tax matter
and shall send to Executive copies of all correspondence relating
thereto.
(5) Notwithstanding anything herein to the contrary, if
the Corporation is in material breach of any of its obligations
pursuant to this Agreement, the Corporation's rights pursuant to
this Subsection 7(e) shall be extinguished and Executive shall have
the right to revoke any power of attorney executed pursuant to this
Subsection 7(e).
8. NO OBLIGATION TO MITIGATE DAMAGES. The Executive shall not
be obligated to mitigate any damages by seeking other employment or
otherwise, and no amount payable hereunder and no benefit or
service credit for benefits shall be reduced in the event that the
Executive shall accept alternative employment.
9. BENEFITS PAYABLE ONLY FROM CORPORATE ASSETS.
(a) NO TRUST. Nothing contained in this Agreement, and no
action taken pursuant to its provisions by either party
hereto shall create, or be construed to create, a trust of any
kind, or a fiduciary relationship between the Corporation and the
Executive or his or her Beneficiary.
(b) EXECUTIVE'S STATUS AS UNSECURED GENERAL CREDITOR. The
payment of any benefits hereunder to the Executive or his or her
Beneficiary shall be made from assets which shall continue, for all
purposes, to be a part of the general assets of the Corporation; no
person shall have or acquire any interest in such assets by virtue
of the provisions of this Agreement. To the extent that the
Executive or his or her Beneficiary acquires a right to receive
payments from the Corporation under the provisions hereof, such
right shall be no greater than the right of any unsecured general
creditor of the Corporation.
<PAGE>
(c) RECOVERY OF COST OF PROVIDING BENEFITS. In the event
that, in its discretion, the Corporation purchases an insurance
policy insuring the life of the Executive to enable the Corporation
to recover, in whole or in part, the cost of providing any benefits
hereunder, neither the Executive nor his or her Beneficiary under
this Agreement shall have or acquire any rights whatsoever
therein. The Corporation shall be the sole owner and beneficiary
of any such policy and, as such, shall possess and may exercise all
incidents of ownership therein.
10. DETERMINATION OF BENEFITS AND CLAIMS PROCEDURE. The
Corporation shall make all determinations as to rights to benefits
under this Agreement. Subject to and in compliance with the
specific procedures contained in the applicable regulations
promulgated under the Employee Retirement Income Security Act of
1974, as amended: (i) any decision by the Corporation denying a
claim for benefits under this Agreement by the Executive or his or
her Beneficiary shall be stated in writing by the Corporation and
delivered or mailed to the claimant; (ii)each such notice shall set
forth the specific reasons for the denial, written to the best of
the Corporation's ability in a manner that may be understood
without legal or actuarial counsel; and (iii)the Corporation shall
afford a reasonable opportunity to the claimant whose claim for
benefits has been denied for a review of the decision denying such
claim.
11. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation
in any benefit, bonus, incentive or other plan or program provided
by the Corporation or any Affiliated Companies and for which the
Executive may qualify, nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any other
agreements with the Corporation or any Affiliated Companies.
Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan or program of the
Corporation or any Affiliated Companies shall be payable in
accordance with the terms of such plan or program.
12. FULL SETTLEMENT. After a Change of Control, the
Corporation's obligation to make the payments provided for herein
and otherwise to perform its obligations hereunder shall not be
affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the
Corporation may have against the Executive or others. Unless it is
finally determined by a court of competent jurisdiction after all
available appeals that the Corporation has validly terminated the
Executive's employment for Cause, the Corporation agrees to pay, to
the full extent permitted by law, all legal fees and expenses which
the Executive may reasonably incur as a result of any contest
(regardless of the outcome thereof) by the Corporation or others of
the validity or enforceability of, or liability under, any
provision of this Agreement or any guarantee of performance
<PAGE>
thereof, plus, in each case, interest compounded quarterly, on the
total unpaid amount determined be payable hereunder, such interest
to be calculated on the basis of the prime commercial lending rate
announced by Mercantile Bank, N.A. in effect from time to time, for
the period commencing on the date of such contest and ending on
the date on which the Corporation shall pay such amount.
13. COVENANTS.
(a) NON-COMPETITION.
(1) Executive recognizes that during the course of
Executive's employment with the Corporation, Executive has been and
will be instructed about and become acquainted with confidential
information of the Corporation, including, without limitation,
customer lists, methods of sales, the existence and contents and
terms of this Agreement, methods of sales procurement, sales
procurement techniques, sales procedures and equipment/supply
information, equipment and supply acquisition procedures and
processes and sources, customer evaluation procedures, customer
maintenance and supply maintenance procedures and corresponding
information relating to persons, firms and corporations which are
or may become customers of the Corporation and, further, companies
from which the Corporation obtains various products and supplies
for sale, resale and distribution to customers of the Corporation.
This confidential information further includes, but is not limited
to, customer identity, supplier identity and terms, purchase terms,
sales techniques, purchase conditions and rates, customer needs,
billing procedures and processes, contacts and customer
information. Further, Executive agrees and acknowledges that the
development and assemblage and maintenance of the customer base of
the Corporation has taken extraordinary time, money, resources,
training, and effort by the Corporation and its employees.
(2) Executive agrees that he or she will not during the
Term of Employment and for a period of two (2) years following
cessation of his or her employment at the Corporation ("Restricted
Period"), for any cause or reason, directly or indirectly:
(A) engage in any business in competition with the
Corporation and its Affiliates or supply and sell to present
customers, former customers and prospects of the Corporation and
its Affiliates; or
(B) own, manage, operate, control, advise, be
employed by, consult, or materially participate in, or be
materially involved in any manner with the ownership, management,
operation or control of, individually or through any other entity
or device, any business that competes with the business then
conducted by the Corporation or any Affiliate; provided, however,
that mere ownership as an investor of not more than five percent
(5%) of the securities of a corporation or other business
<PAGE>
enterprise shall not in and of itself be deemed to violate this
Section 13(b)(2)(B).
(b) NONDISCLOSURE OF CONFIDENTIAL INFORMATION.
(1) Executive will not, except as authorized by the
Corporation in writing, during or at any time after the termination
of Executive's employment with the Corporation, directly or
indirectly, use for himself or herself or others, or disclose,
communicate, divulge, furnish to, or convey to any other person,
firm, or corporation, any secret or confidential information,
knowledge or data of the Corporation or that of third parties
obtained by Executive during the period of his or her employment
with the Corporation. Such information, knowledge or data
includes, without limitation, the following:
(A) Secret or confidential matters of a technical
nature such as, but not limited to, methods, know-how,
formulations, compositions, processes, discoveries, machines,
inventions, computer programs, and similar items or research
projects involving such items,
(B) Secret or confidential matters of a business
nature such as, but not limited to, marketing policies or
strategies, information about costs, price lists, purchasing and
purchasing policies, profits, market, sales or lists of customers,
customer history information, and
(C) Secret or confidential matters pertaining to
future developments such as, but not limited to, research and
development or future marketing or merchandising.
(2) Executive, upon termination of his or her
employment with the Corporation, or at any other time upon the
Corporation's request, shall deliver promptly to the Corporation
all manuals, letters, notes, notebooks, reports, formulations,
computer programs and similar items, memoranda, lists of customers,
customer history information and all other materials and copies
thereof relating in any way to the Corporation's business and in
any way obtained by Executive during the term of employment with
the Corporation which are in his or her possession or under his or
her control; and Executive will not make or retain any copies of
any of the foregoing and will so represent to the Corporation upon
termination of his or her employment.
(c) INDUCEMENT.
(1) Executive agrees that during the Term of
Employment and during the Restricted Period, Executive shall not
use any confidential information for the purposes of inducing or
attempting to induce any present, former, or prospective customer
of the Corporation or its Affiliates to become a customer of
<PAGE>
Executive or any person, firm, or corporation, or business
association with which Executive is affiliated in any capacity with
respect to the markets supplied by the Corporation or its
Affiliates.
(2) Executive agrees that during the Term of
Employment and during the Restricted Period, Executive shall not
directly or indirectly solicit for employment or employ any of the
Corporation's employees to work for Executive or any business
association with which/whom Executive is affiliated, or to work for
any other company in the markets supplied by the Corporation or its
Affiliates.
(d) INTEREST OF PARTIES. Executive agrees that the
duration of the limitations set forth in this Section 13 are
reasonable under the circumstances, considering Executive's
position with the Corporation and other relevant factors, and that
this will not constitute a serious handicap to Executive in
securing future employment.
(e) DISCLOSURE TO CORPORATION. Executive shall
promptly communicate and disclose to the Corporation all
information, observations and data obtained by Executive in the
course of Executive's employment. All written materials, records
and documents made by Executive or coming into Executive's
possession during the Term of Employment concerning any inventions,
products, processes or equipment, manufactured, used, developed,
investigated or considered by the Corporation or any Affiliated
Companies shall be the property of the Corporation, and upon
termination of the Term of Employment, or upon request of the
Corporation during the Term of Employment, Executive shall
promptly deliver the same to the Corporation.
Executive agrees to render to the Corporation such reports of the
activities of the business undertaken by Executive or conducted
under Executive's direction during the Term of Employment as the
Corporation may reasonably request.
(f) INVENTIONS.
(1) Executive shall promptly communicate and
disclose in writing to the Corporation all those inventions and
developments whether patentable or not, as well as patents and
patent applications (hereinafter collectively called "Inventions"),
made, conceived, developed or purchased by Executive, or under
which Executive acquires the right to grant licenses or to become
licensed, alone or jointly with others, during the Term of
Employment, which have arisen or may arise out of Executive's
employment, or relate to any matters pertaining to, applicable to,
or useful in connection with, the business or affairs of the
Corporation or any Affiliated Companies. All of Executive's right,
title and interest in, to and under all such inventions, licenses
<PAGE>
and rights to grant licenses shall be the sole property of the
Corporation. Any such inventions disclosed to anyone by Executive
within one (1) year after the termination of the Term of Employment
for any cause whatsoever shall be deemed to have been made or
conceived by Executive during the Term of Employment.
(2) As to all such inventions, Executive shall,
upon request of the Corporation, during the Term of Employment or
thereafter:
(A) Execute all documents which the
Corporation shall deem necessary or proper
to enable it to establish title to such
inventions, or other rights, and to enable
it to file and prosecute applications for
letters patent of the United States and any
foreign country; and
(B) Do all things (including the giving
of evidence in suits and other proceedings)
which the Corporation shall deem necessary
or proper to obtain, maintain or to assert
patents for any and all such inventions or
to assert its rights in any inventions not
patented.
All expenses incident to any action required by the Corporation or
taken on its behalf pursuant to the provisions of this paragraph
shall be borne by the Corporation including without limitation a
reasonable payment for Executive's time and expenses involved in
case he or she is not then in its employ.
(g) LITIGATION. Executive agrees that during the
Term of Employment or thereafter, Executive shall do all things,
including the giving of evidence in suits and other proceedings,
which the Corporation shall deem necessary or proper to obtain,
maintain or assert rights accruing to the Corporation during the
Term of Employment and in connection with which Executive has
knowledge, information or expertise. All reasonable expenses
incurred by Executive during the Term of Employment or thereafter
in fulfilling the duties set forth in this Section, shall be
reimbursed by the Corporation to the full extent legally
appropriate including, without limitation, a reasonable payment for
Executive's time in the event this Agreement has terminated prior
to the time Executive renders such assistance, advice and counsel.
14. EQUITY. The parties hereto agree that the services to be
rendered by Executive are special, unique and of an extraordinary
character. In the event of the breach by Executive of any of the
provisions of this Agreement, the Corporation, in addition and as
a supplement to such other rights and remedies as may exist in its
favor, may apply to any court of law or equity having jurisdiction
to enforce the specific performance of this Agreement, and/or may
<PAGE>
apply for injunctive relief against any act which would violate any
of the provisions of this Agreement.
15. EFFECT ON PRIOR AGREEMENTS. This Agreement shall supersede
and replace any and all prior employment agreements entered into
between Executive and the Corporation or any Affiliated Company,
including but not limited to that certain Employment Agreement
dated February 5, 1995. This Agreement contains the entire
understanding of the parties hereto with respect to the subject
matter hereof.
16. NO ASSIGNMENT.
(a) This Agreement is personal to the Executive and without
the prior written consent of the Corporation shall not be
assignable by the Executive other than by will or the laws of
descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by the Executive's legal
representatives and Beneficiary.
(b) This Agreement shall inure to the benefit of and be
binding upon the Corporation and its successors. The Corporation
shall require any successor to all or substantially all of the
business and/or assets of the Corporation, whether direct or
indirect, by purchase, merger, consolidation, acquisition of stock,
or otherwise, by an agreement in form and substance satisfactory to
the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent as the
Corporation would be required to perform if no such succession had
taken place.
17. SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision or clause were omitted.
18. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Missouri, without
reference to principles of conflict of laws. The captions of this
Agreement are not part of the provisions hereof and shall have no
force or effect. This Agreement may not be amended or modified
other than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) In the event that litigation is required to enforce any
provision of this Agreement, subject to the provisions of Section
12 hereof, the prevailing party shall be entitled to reasonable
attorneys fees.
<PAGE>
(c) All notices and other communications hereunder shall be
in writing and shall be given by hand delivery to the other party
or by registered or certified mail, return receipt requested,
postage prepaid, addressed as follows:
IF TO THE EXECUTIVE:
Alyn V. Essman
21 Somerset Downs Drive
St. Louis, Missouri 63124
IF TO THE CORPORATION:
Consumer Programs, Incorporated
1706 Washington Avenue
St. Louis, Missouri 63103
Attention: Russ Isaak, President
or to such other address as either party shall have furnished to
the other in writing in accordance herewith. Notice and
communications shall be effective when actually received by the
addressee.
(d) This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter hereof.
(e) The Corporation may withhold from any amounts payable
under this Agreement such federal, state or local taxes as shall be
required to be withheld pursuant to any applicable law or
regulation.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement in duplicate, all as of the day and year first above
written.
CONSUMER PROGRAMS INCORPORATED
BY: /s/ Russell H. Isaak
------------------------------
President
BY: /s/ Alyn V. Essman
------------------------------
Alyn V. Essman
EXHIBIT (10.2)
Employment Contract - Russell H. Isaak
26
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated February 8, 1998, between CONSUMER PROGRAMS
INCORPORATED, a Missouri corporation (the "Corporation"), and
Russell Isaak (the "Executive").
WHEREAS, the Corporation currently employs the Executive in
the capacity of President, and the Executive is one of the key
executives of the Corporation;
WHEREAS, there is much competition for the type of business
performed by the Corporation in the locales in which the
Corporation operates, and the Corporation and Executive acknowledge
that the Corporation is active in the product markets in which it
competes;
WHEREAS, Executive, during his or her employment, has been and
will be entrusted with confidential information;
WHEREAS, Executive and the Corporation recognize and
acknowledge that, to ensure the continued growth and stability of
the Corporation, it is necessary to obtain an agreement from
Executive not to compete with the Corporation and not to disclose
confidential information of the Corporation; and
WHEREAS, the Corporation desires that the Executive continue
in the employ of the Corporation as a result of his or her
experience with the Corporation and his or her potential for making
future contributions to the Corporation, and the Executive is
willing to make a commitment to remain in such employ upon the
terms and subject to the conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises
contained herein and other good and valuable consideration, the
parties hereto hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement:
(a) "Affiliated Companies" shall mean any corporation (or
other business entity) controlling, controlled by or under common
control with the Corporation.
(b) "Beneficiary" shall mean the person designated in
writing by the Executive as his or her beneficiary under this
Agreement, or in the absence of such designation, his or her
estate.
(c) Cause shall mean:
(1) prior to a Change of Control, (i) conduct or
activity of the Executive materially detrimental to the
Corporation's reputation or business (including financial)
operations; (ii) gross or habitual neglect or breach of duty or
<PAGE>
misconduct of the Executive in discharging the duties of his or
her position; or (iii) prolonged absence by the Executive from
his or her duties (other than on account of illness or
disability) without the consent of the Corporation.
(2) after a Change of Control, (i) an act or acts of
dishonesty on the Executive's part which are intended to result in
his or her substantial personal enrichment at the expense of the
Corporation; (ii) any material violation by the Executive of his or
her obligations and covenants pursuant to this Agreement which is
demonstrably willful and deliberate on the Executive's part and
which results in material injury to the Corporation; or (iii) the
conviction of Executive of a felony or of a crime involving moral
turpitude.
(d) A "Change of Control" shall mean a change in control of
a nature that would be required to be reported in response to Item
1(a) of the Current Report on Form 8-K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended ("Exchange Act") or would have been
required to be so reported but for the fact that such event had
been "previously reported" as that term is defined in Rule 12b-2 of
Regulation 12B of the Exchange Act unless the transactions that
give rise to the change in control are approved or ratified by a
majority of the members of the Incumbent Board of CPI Corp. who are
not employees of the Corporation; provided that, without
limitation, notwithstanding anything herein to the contrary, such
a change in control shall be deemed to have occurred if (a) any
Person is or becomes the beneficial owner (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of
CPI Corp. representing 40% or more of the combined voting power of
CPI Corp.'s then outstanding securities ordinarily (apart from
rights accruing under special circumstances) having the right to
vote at elections of directors ("Voting Securities"), (b)
individuals who constitute the Board of CPI Corp. on the date
hereof (the "Incumbent Board") cease for any reason to constitute
at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election, or
nomination for election by CPI Corp.'s shareholders, was approved
by a vote of at least three-quarters of the directors comprising
the Incumbent Board (either by a specific vote or by approval of
the proxy statement of CPI Corp. in which such person is named as
a nominee for director, without objection to such nomination) shall
be, for purposes of this clause (b), considered as though such
person were a member of the Incumbent Board, or (c) approval by the
stockholders of CPI Corp. of a reorganization, merger or
consolidation, in each case, with respect to which persons who were
the stockholders of CPI Corp. immediately prior to such
reorganization, merger or consolidation do not, immediately
thereafter, own, directly or indirectly, more than 50% of the
combined voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's then
<PAGE>
outstanding voting securities, or a liquidation or dissolution of
CPI Corp. or of the sale of all or substantially all of the assets
of CPI Corp. For purposes of this Agreement, the term "Person"
shall mean and include any individual, corporation, partnership,
group, association or other "person," as such term is used in
Section 14(d) of the Exchange Act, other than CPI Corp., the
Corporation or an Affiliated Company or any employee benefit
plan(s) sponsored or maintained by the Corporation or any
Affiliated Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as
may be amended from time to time.
(f) "Continuing Directors" shall have the meaning set forth
in Paragraph 3(G) of Article Ten of CPI Corp.'s Certificate of
Incorporation.
(g) "Fiscal Year" shall mean the Fiscal Year of the
Corporation.
(h) "Permanent Disability" shall mean the inability of
Executive to perform the services contemplated by Section 4 hereof
for a period of at least one hundred eighty (180) consecutive
calendar days or for thirty-five (35) weeks (whether or not
consecutive) in any twelve (12) month period on account of any
sickness, injury or other infirmity or disability.
(i) "Retirement" shall mean the Executive's voluntary or
involuntary termination of employment with the Corporation except
for termination on account of (A) Cause as defined in Subsection
6(b) hereof, (B) death or (C) Permanent Disability before attaining
age sixty-five (65).
(j) "Term of Employment" shall have the meaning set forth
in Section 3 hereof.
(k) "Vesting Percentage" shall mean the percentage of
Supplemental Retirement Benefits, death benefits, and disability
benefits in which Executive has a nonforfeitable interest (except
in the event of termination for Cause) based upon the number of
Years of Service Executive has completed, determined as follows:
<PAGE>
<TABLE>
<CAPTION>
COMPLETED YEARS VESTING
OF SERVICE PERCENTAGE
--------------- ----------
<S> <C> <C>
0 0%
1 10%
2 20%
3 30%
4 40%
5 50%
6 60%
7 70%
8 80%
9 90%
10 100%
</TABLE>
Notwithstanding anything herein to the contrary, if Executive's
employment with the Corporation terminates following a Change of
Control, unless such termination is for Cause, for purposes of
Subsections 5(g), 5(h), and 5(i) of this Agreement Executive shall
be deemed to have completed ten (10) Years of Service and his or
her Vesting Percentage shall be deemed to be 100%.
(l) "Year of Service" shall mean any Fiscal Year during
which the Executive has worked for the Corporation at least one
thousand (1,000) hours, including Fiscal Years prior to the
effective date of this Agreement.
2. EMPLOYMENT. The Corporation hereby employs and engages the
services of the Executive as one of its key executives initially in
the position of PRESIDENT of the Corporation for the Term of
Employment set forth in Section 3. The Executive agrees to serve
the Corporation for the Term of Employment as provided herein.
3. TERM OF EMPLOYMENT. The Executive's Term of Employment
shall be a period commencing on the date hereof and ending one (1)
year thereafter; provided, however, that upon the expiration of the
aforesaid period (the "Expiration Date") and upon each anniversary
of the Expiration Date, the Term of Employment shall automatically
be extended for an additional one (1) year period unless Executive
or the Corporation notifies the other in writing at least sixty
(60) days prior to the commencement of such one (1) year period of
an intention to terminate this Agreement. Notwithstanding anything
herein to the contrary, the Term of Employment shall terminate upon
Executive's death or Permanent Disability as set forth in
subsection 6(a) hereof or upon the Corporation's termination of
Executive's employment for Cause pursuant to subsection 6(b)
hereof.
<PAGE>
4. POSITION AND DUTIES.
(a) Prior to a Change of Control, during the Term of
Employment, the Executive shall serve the Corporation in such
capacity as the Corporation may determine. After a Change of
Control, during the Term of Employment, the Executive's position,
authority and responsibilities, the type of work he or she is asked
to perform, and the status and stature of the people with whom he
or she is asked to work, shall be comparable to that existing with
respect to the Executive as of the date immediately prior to the
Change of Control, and after a Change of Control the Executive's
services shall be performed at the location where the Executive was
employed as of the date immediately prior to the Change of Control,
or at such other location as may be mutually agreed between the
Corporation and the Executive.
(b) The Executive agrees to devote his or her full business
time during normal business hours to the business and affairs of
the Corporation (except as otherwise provided herein) and to use
his or her best efforts to promote the interests of the Corporation
and its Affiliated Companies and to perform faithfully and
efficiently the responsibilities assigned to him or her in
accordance with the terms of this Agreement to the extent necessary
to discharge such responsibilities, except for (i) service on
corporate, civic or charitable boards or committees not
significantly interfering with the performance of such
responsibilities and (ii) periods of vacation and sick leave to
which he or she is entitled. It is expressly understood and agreed
that the Executive's continuing service on any boards and
committees with which he or she shall be connected, as a member or
otherwise, as of the date hereof, or any such service approved by
the Corporation during the Term of Employment, shall not be deemed
to interfere with the performance of the Executive's services to
the Corporation pursuant to this subparagraph 4(b).
5. COMPENSATION AND OTHER CONDITIONS OF EMPLOYMENT.
(a) BASE SALARY. During the Term of Employment, the
Executive shall receive an annual base salary (the "Base Salary"),
in equal installments payable weekly or at such other intervals as
salary is normally paid by the Corporation to its employees, at an
annual rate established by the Corporation and any Affiliated
Companies as of the date hereof. The Base Salary shall be reviewed
at least once each year and may be increased at any time and from
time to time by action of the Board of Directors of CPI Corp., any
committee thereof or any individual having authority to take such
action, in accordance with the Corporation's regular practices.
Any increase in the Base Salary shall not serve to limit or reduce
any other obligation of the Corporation hereunder, and after such
increase the Base Salary shall not be reduced from such increased
level.
(b) ANNUAL BONUS. After a Change of Control, in addition
<PAGE>
to the Base Salary, the Executive shall be awarded for each Fiscal
Year during the Term of Employment an annual bonus (the "Annual
Bonus") (pursuant to any bonus plan or program of the Corporation,
any incentive plan or program of the Corporation, or otherwise) in
cash at least equal to the highest bonus paid or payable to the
Executive in respect of any of the Fiscal Years during the three
Fiscal Years immediately prior to the date of the Change of
Control. Prior to a Change of Control, the amount of the
Executive's Annual Bonus shall be determined in accordance with the
Corporation's regular practice.
(c) OTHER COMPENSATION PLANS. After a Change of Control,
in addition to the Base Salary and Annual Bonus payable as
hereinabove provided, during the Term of Employment, the Executive
shall be entitled to participate in all other compensation plans
and programs, including, without limitation, savings plans, stock
option plans, and retirement plans of the Corporation and its
Affiliated Companies (collectively, the "Savings Plans"), on a
basis at least equivalent to that provided by the Corporation and
its Affiliated Companies to the Executive under such programs
immediately prior to the date of the Change of Control. Prior to
a Change of Control, the Executive's entitlement to participate in
the Savings Plans shall be determined in accordance with the
Corporation's regular practice. Prior to a Change of Control,
nothing herein shall be construed to prevent the Corporation from
amending or altering any such plans in accordance with the terms
thereof. All agreements between the Corporation and the Executive
existing on the date hereof providing for special pension,
retirement or similar benefits are continued by this Agreement.
(d) BENEFIT PLANS. After a Change of Control, during the
Term of Employment, the Executive, his or her spouse, or his or her
dependents, as the case may be, shall be entitled to receive all
amounts which he or she, his or her spouse or his or her dependents
are or would have been entitled to receive as benefits under all
other benefit plans of the Corporation and its Affiliated
Companies, including, without limitation, medical, dental,
disability, group life, accidental death and travel accident
insurance plans and programs (collectively, the "Benefit Plans") on
a basis at least as favorable to the Executive as on the date
immediately prior to the date of the Change of Control. Prior to
a Change of Control, the Executive's and such other persons'
entitlement to participate in the Benefit Plans shall be determined
in accordance with the Corporation's regular practice.
(e) EXPENSES. During the Term of Employment, the Executive
shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by the Executive in accordance with
the regular policies and procedures of the Corporation.
(f) OFFICE AND SUPPORT STAFF. After a Change of Control
the Executive shall be entitled to an office or offices of a size
<PAGE>
and with furnishings and other appointments, and to secretarial and
other assistance, at least equal to those provided to the Executive
as of the date immediately prior to the date of the Change of
Control.
(g) DEATH BENEFITS. In the event of Executive's death
after completion of at least ten (10) Years of Service, unless (1)
Executive's employment with the Corporation was terminated for
Cause or (2) Executive (or his or her Beneficiary) is entitled to
receive Supplemental Retirement Benefits pursuant to subsection
5(i), the Corporation shall pay to Executive's Beneficiary an
annual death benefit equal to forty percent (40%) (but not to
exceed $150,000) of the highest annual Base Salary paid to
Executive from and after fiscal year 1997 (as defined in subsection
5(a) hereof) for the Fiscal Year of his or her termination of
employment with the Corporation, payable in equal monthly
installments, commencing with the month following the month of
Executive's death and ending with the two-hundred fortieth (240th)
month following the month of Executive's death. In the event that
Executive dies before age 65 but has not completed at least ten
(10) Years of Service with the Corporation, death benefits shall be
reduced to an amount equal to the benefits determined under the
preceding sentence multiplied by the Vesting Percentage applicable
to Executive.
(h) DISABILITY BENEFITS. In the event of Executive's
Permanent Disability prior to attaining age 65 and prior to
termination of employment with the Corporation, unless Executive's
employment with the Corporation was terminated for Cause, the
Corporation shall pay Executive annual disability benefits equal to
forty percent (40%) (but not to exceed $150,000) of the highest
annual Base Salary paid to Executive from and after fiscal year
1997 for the Fiscal Year in which the Executive terminated
employment with the Corporation, payable in equal monthly
installments, commencing with the month following the month in
which Executive terminated employment as a result of Permanent
Disability and ending on the earlier of (i) the month in which
Executive reaches age 65 or (ii) the month of his or her death. In
the event that at the time of Permanent Disability Executive has
not completed at least ten (10) Years of Service, the disability
benefits shall be reduced to an amount equal to the benefits
determined under the preceding sentence multiplied by the Vesting
Percentage applicable to Executive. Disability benefits pursuant
to this subsection (h) shall be reduced by any amounts paid to
Executive under the Corporation's long-term disability insurance
policy, but shall not be reduced for any payments received by
Executive from Social Security or from any disability insurance
coverage individually owned by Executive.
(i) SUPPLEMENTAL RETIREMENT BENEFITS.
(1) In the event of Executive's Retirement after
<PAGE>
completion of at least ten (10) Years of Service, unless
Executive's employment with the Corporation was terminated for
Cause, the Corporation shall pay Executive retirement benefits for
twenty (20) years in an annual amount equal to forty percent (40%)
(but not to exceed $150,000) of the highest annual Base Salary paid
to Executive from and after fiscal year 1997 for the Fiscal Year of
his or her Retirement ("Supplemental Retirement Benefits"). In the
event of Executive's Retirement before completion of ten (10) Years
of Service, Corporation shall pay Executive retirement benefits on
the same terms as set forth in the preceding sentence except that
retirement benefits shall be reduced to an amount equal to
Supplemental Retirement Benefits multiplied by the Vesting
Percentage.
(2) Supplemental Retirement Benefits shall be payable
in two hundred forty (240) equal monthly installments commencing
with the month following the later of (i) the month of Executive's
Retirement or (ii) the month during which Executive reaches age
sixty-five (65). If Executive dies prior to the end of the two
hundred forty (240) month period during which Supplemental
Retirement Benefits are payable, Supplemental Retirement Benefits
shall be payable during the remainder of such 240-month period to
his or her Beneficiary.
(3) Notwithstanding anything herein to the contrary, in
the event of Executive's termination of employment with the
Corporation prior to attaining age 65 as a result of Permanent
Disability, if Executive attains age 65 and his or her employment
with the Corporation was not terminated for Cause, the Corporation
shall pay to Executive the Supplemental Retirement Benefits set
forth in this Subsection 5(i) in accordance with Executive's
Vesting Percentage, commencing as of the month following the month
in which Executive attains age 65; provided, however, that any
Supplemental Retirement Benefits paid pursuant to this sentence
shall be reduced by any amounts paid to Executive under the
Corporation's long-term disability insurance policy (but shall not
be reduced for any payments received by Executive from Social
Security or from any disability insurance coverage individually
owned by Executive) for the same period.
(j) SURVIVABILITY OF DEATH AND SUPPLEMENTAL RETIREMENT
BENEFITS. In the event of Executive's Retirement or death,
Executive's entitlement to death benefits pursuant to
Subsection 5(g) hereof and Supplemental Retirement Benefits
pursuant to Subsection 5(i) hereof shall survive the Term of
Employment and Executive or his or her Beneficiary shall be
entitled to such death benefits and Supplemental Retirement
Benefits based on the same terms and conditions as would have been
applicable had his or her death or Retirement, as the case may be,
occurred during the Term of Employment.
6. TERMINATION OF EMPLOYMENT.
<PAGE>
(a) DEATH OR PERMANENT DISABILITY. Except for the
obligations of the Corporation set forth in this Subsection 6(a),
this Agreement shall terminate automatically upon the Executive's
death or Permanent Disability. In the event of such termination,
the Corporation shall pay to the Executive's Beneficiary or, in the
event of Permanent Disability, the Executive or his or her legal
representative, all benefits and Base Salary accrued through the
date of termination, including, without limitation, amounts payable
under any plan referred to in Subsection 5(d) plus any benefits to
which Executive may be entitled pursuant to Subsection 5(g),
Subsection 5(h) or Subsection 5(i) hereof.
(b) CAUSE. The Corporation may terminate the Executive's
employment for Cause. If the Executive's employment is terminated
for Cause, the Corporation shall pay the Executive his or her full
accrued Base Salary through the effective date of the termination
of his or her employment (which shall be no earlier than the date
of receipt of notice thereof) at the rate in effect at the time of
such termination, and the Corporation shall have no further
obligations to the Executive under this Agreement.
(c) NOTIFICATION PRIOR TO ONE YEAR EXTENSION. Either
Executive or the Corporation may terminate this Agreement by
notifying the other party in writing of an intention to do so at
least sixty (60) days prior to the commencement of a one-year
extension period described in Section 3 hereof.
(d) PAYMENTS FOR INVOLUNTARY TERMINATION WITHOUT CAUSE.
(1) If prior to a Change of Control (i) the Corporation
terminates Executive's employment (other than for Cause pursuant to
subsection 6(b) hereof), or (ii) the Executive's employment
terminates by reason of the Corporation's termination of this
Agreement pursuant to subsection 6(c)hereof, the Corporation shall
pay Executive following such involuntary termination his or her
full accrued Base Salary through the date of termination of
employment plus an amount equal to fifty percent (50%) of
Executive's Base Salary for the fiscal year in which termination
occurs, payable in twenty-six (26) equal weekly installments or at
such other intervals as salary is normally paid by the Corporation
to its employees. The payment pursuant to this Subsection 6(d)(1)
and any payments to which Executive may be entitled pursuant to
Subsections 5(g), 5(h), and 5(i) shall be in full discharge of any
claims, actions, demands or damages of every nature and description
which Executive might have or might assert against the Corporation
or any Affiliated Company in connection with or arising from the
termination of Executive's employment or the termination of this
Agreement.
(2) If following a Change of Control (i) the
Corporation terminates Executive's employment (other than for Cause
pursuant to Subsection 6(b) hereof), or (ii) the Executive's
<PAGE>
employment terminates by reason of the Corporation's termination of
this Agreement pursuant to subsection (c) hereof, the Corporation
shall, at the time of such involuntary termination, make a lump sum
cash payment to Executive equal to 200% of his or her Base Salary
for the Fiscal Year of termination. In addition to the payment
pursuant to this Subsection 6(d)(2) and any payments to which
Executive may be entitled pursuant to Subsections 5(g), 5(h) and
5(i), Executive shall be entitled to all remedies available under
this Agreement or at law in respect of any damages suffered by
Executive as a result of an involuntary termination of employment
without Cause.
7. GROSS-UP FOR PARACHUTE TAX.
(a) GENERAL. In the event that following a Change of
Control Executive becomes entitled to any payments (whether
pursuant to this Employment Agreement or any other plan,
arrangement or agreement) from the Corporation in the nature of
compensation ("Parachute Payments") that in the opinion of a
certified public accounting firm (selected in the manner set forth
in Subsection 7(b)) or that under the provisions of a notice of
assessment from the Internal Revenue Service causes imposition of
the tax under Section 4999 of the Code or any similar tax that may
hereafter be imposed (the "Excise Tax"), the Corporation shall pay
Executive, at the time specified in Subsection 7(d), the Gross-Up
Payment (as determined in accordance with Subsection 7(c)).
(b) SELECTION OF C.P.A. Within fifteen (15) days after any
termination of Executive's employment following a Change of
Control, the majority of the Continuing Directors as of the date
immediately prior to the Change of Control shall select a certified
public accounting firm (the "C.P.A.") to determine the amount, if
any, of the Excise Tax and the amount, if any, of the Gross-Up
Payments.
(c) AMOUNT OF GROSS-UP PAYMENTS.
(1) The Gross-Up Payments shall be in an amount such
that the net amount retained by Executive with respect to the
Parachute Payments and Gross-Up Payments, after deduction of any
Excise Tax to which the Parachute Payments may be subject and any
federal, state, and local income taxes and Excise Tax upon the
Gross-Up Payments, shall be equal to the gross amount of the
Parachute Payments.
(2) For purposes of determining the amount of the
Gross-Up Payments, Executive shall be deemed to pay federal income
taxes at the applicable rate of federal income taxation for the
calendar year in which the Gross-Up Payment is to be made and state
and local income taxes at the applicable rate of taxation for the
calendar year in which the Gross-Up Payment is to be made.
<PAGE>
(3) In the event that the Excise Tax is subsequently
determined to exceed the amount taken into account at the time the
Gross-Up Payment is made pursuant to Subsection 7(d)(1) hereof
(including any excess attributable to any Parachute Payments the
existence or amount of which could not be accurately determined at
the time of the Gross-Up Payment), the Corporation shall make an
additional Gross-Up Payment in respect of such excess (plus any
interest and addition to tax payable with respect to such excess)
within fifteen (15) days after the amount of such excess is
determined by the C.P.A. or by the Internal Revenue Service (the
"IRS") in a notice of assessment.
(d) TIMING OF GROSS-UP PAYMENTS. Gross-Up Payments other
than Gross-Up Payments pursuant to Subsection 7(c)(3) shall be paid
not later than forty-five (45) days following payment of any
Parachute Payments to which the Gross-Up Payments are attributable;
provided, however, that if the amount of such Gross-Up Payment or
portion thereof cannot be finally determined on or before such day,
the Corporation shall pay to Executive on such day an estimate, as
determined in good faith by the Corporation, of the minimum amount
of such payments and shall pay the remainder of such payments
(together with interest at the applicable federal rate provided in
Section l274(d) of the Code) as soon as the amount thereof can be
determined by the C.P.A., but in no event later than forty-five
(45) days after payment of such Parachute Payments.
(e) CORPORATION'S RIGHT TO DESIGNATE TAX REPRESENTATIVE;
ASSIGNMENT OF REFUND PROCEEDS. If the IRS proposes an assessment
of the Excise Tax against Executive or proposes an additional
assessment of Excise Tax in excess of the amount previously
reported by Executive:
(1) Executive shall within five (5) days after receipt
from the IRS of notice of the proposed Excise Tax assessment notify
the Corporation in writing and furnish the Corporation with copies
of all correspondence from the IRS relating to the proposed Excise
Tax assessment.
(2) The Corporation shall be authorized to designate an
attorney and/or accountant (the "Tax Representative") to serve as
Executive's exclusive representative with respect to all
proceedings with the IRS relating to the proposed Excise Tax
assessment, including but not limited to negotiating a settlement
or compromise of the proposed Excise Tax assessment, filing a claim
for refund with respect thereto, and seeking judicial review of any
disallowance of a claim for refund. Executive hereby agrees to
execute an appropriate power of attorney authorizing the Tax
Representative to represent Executive with respect to the Excise
Taxes. Executive further agrees to take any other appropriate
actions reasonably requested by the Tax Representative in
connection therewith; provided, however, that the Corporation shall
reimburse Executive for any expenses incurred by Executive as a
<PAGE>
result of compliance with such requests.
(3) If the Tax Representative files a claim for refund
of Excise Taxes with respect to which the Corporation has made a
Gross-Up Payment and such refund claim is allowed by the IRS or by
the final judgment of a court of competent jurisdiction, Executive
shall endorse the refund check payable to the Corporation and shall
send the refund check to the Corporation not later than five (5)
days after receipt from the IRS.
(4) If the Corporation designates a Tax Representative,
the Corporation shall pay all of his or her professional fees and
expenses and hold Executive harmless from any claims in connection
therewith. The Tax Representative shall keep Executive timely
informed of all significant developments in the Excise Tax matter
and shall send to Executive copies of all correspondence relating
thereto.
(5) Notwithstanding anything herein to the contrary, if
the Corporation is in material breach of any of its obligations
pursuant to this Agreement, the Corporation's rights pursuant to
this Subsection 7(e) shall be extinguished and Executive shall have
the right to revoke any power of attorney executed pursuant to this
Subsection 7(e).
8. NO OBLIGATION TO MITIGATE DAMAGES. The Executive shall not
be obligated to mitigate any damages by seeking other employment or
otherwise, and no amount payable hereunder and no benefit or
service credit for benefits shall be reduced in the event that the
Executive shall accept alternative employment.
9. BENEFITS PAYABLE ONLY FROM CORPORATE ASSETS.
(a) NO TRUST. Nothing contained in this Agreement, and no
action taken pursuant to its provisions by either party hereto
shall create, or be construed to create, a trust of any kind, or a
fiduciary relationship between the Corporation and the Executive or
his or her Beneficiary.
(b) EXECUTIVE'S STATUS AS UNSECURED GENERAL CREDITOR. The
payment of any benefits hereunder to the Executive or his or her
Beneficiary shall be made from assets which shall continue, for all
purposes, to be a part of the general assets of the Corporation; no
person shall have or acquire any interest in such assets by virtue
of the provisions of this Agreement. To the extent that the
Executive or his or her Beneficiary acquires a right to receive
payments from the Corporation under the provisions hereof, such
right shall be no greater than the right of any unsecured general
creditor of the Corporation.
(c) RECOVERY OF COST OF PROVIDING BENEFITS. In the event
that, in its discretion, the Corporation purchases an insurance
<PAGE>
policy insuring the life of the Executive to enable the Corporation
to recover, in whole or in part, the cost of providing any benefits
hereunder, neither the Executive nor his or her Beneficiary under
this Agreement shall have or acquire any rights whatsoever
therein. The Corporation shall be the sole owner and beneficiary
of any such policy and, as such, shall possess and may exercise all
incidents of ownership therein.
10. DETERMINATION OF BENEFITS AND CLAIMS PROCEDURE. The
Corporation shall make all determinations as to rights to benefits
under this Agreement. Subject to and in compliance with the
specific procedures contained in the applicable regulations
promulgated under the Employee Retirement Income Security Act of
1974, as amended: (i) any decision by the Corporation denying a
claim for benefits under this Agreement by the Executive or his or
her Beneficiary shall be stated in writing by the Corporation and
delivered or mailed to the claimant; (ii)each such notice shall set
forth the specific reasons for the denial, written to the best of
the Corporation's ability in a manner that may be understood
without legal or actuarial counsel; and (iii)the Corporation shall
afford a reasonable opportunity to the claimant whose claim for
benefits has been denied for a review of the decision denying such
claim.
11. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation
in any benefit, bonus, incentive or other plan or program provided
by the Corporation or any Affiliated Companies and for which the
Executive may qualify, nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any other
agreements with the Corporation or any Affiliated Companies.
Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan or program of the
Corporation or any Affiliated Companies shall be payable in
accordance with the terms of such plan or program.
12. FULL SETTLEMENT. After a Change of Control, the
Corporation's obligation to make the payments provided for herein
and otherwise to perform its obligations hereunder shall not be
affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the
Corporation may have against the Executive or others. Unless it is
finally determined by a court of competent jurisdiction after all
available appeals that the Corporation has validly terminated the
Executive's employment for Cause, the Corporation agrees to pay, to
the full extent permitted by law, all legal fees and expenses which
the Executive may reasonably incur as a result of any contest
(regardless of the outcome thereof) by the Corporation or others of
the validity or enforceability of, or liability under, any
provision of this Agreement or any guarantee of performance
thereof, plus, in each case, interest compounded quarterly, on the
total unpaid amount determined be payable hereunder, such interest
<PAGE>
to be calculated on the basis of the prime commercial lending rate
announced by Mercantile Bank, N.A. in effect from time to time, for
the period commencing on the date of such contest and ending on
the date on which the Corporation shall pay such amount.
13. COVENANTS.
(a) NON-COMPETITION.
(1) Executive recognizes that during the course of
Executive's employment with the Corporation, Executive has been and
will be instructed about and become acquainted with confidential
information of the Corporation, including, without limitation,
customer lists, methods of sales, the existence and contents and
terms of this Agreement, methods of sales procurement, sales
procurement techniques, sales procedures and equipment/supply
information, equipment and supply acquisition procedures and
processes and sources, customer evaluation procedures, customer
maintenance and supply maintenance procedures and corresponding
information relating to persons, firms and corporations which are
or may become customers of the Corporation and, further, companies
from which the Corporation obtains various products and supplies
for sale, resale and distribution to customers of the Corporation.
This confidential information further includes, but is not limited
to, customer identity, supplier identity and terms, purchase terms,
sales techniques, purchase conditions and rates, customer needs,
billing procedures and processes, contacts and customer
information. Further, Executive agrees and acknowledges that the
development and assemblage and maintenance of the customer base of
the Corporation has taken extraordinary time, money, resources,
training, and effort by the Corporation and its employees.
(2) Executive agrees that he or she will not during the
Term of Employment and for a period of two (2) years following
cessation of his or her employment at the Corporation ("Restricted
Period"), for any cause or reason, directly or indirectly:
(A) engage in any business in competition with the
Corporation and its Affiliates or supply and sell to present
customers, former customers and prospects of the Corporation and
its Affiliates; or
(B) own, manage, operate, control, advise, be
employed by, consult, or materially participate in, or be
materially involved in any manner with the ownership, management,
operation or control of, individually or through any other entity
or device, any business that competes with the business then
conducted by the Corporation or any Affiliate; provided, however,
that mere ownership as an investor of not more than five percent
(5%) of the securities of a corporation or other business
enterprise shall not in and of itself be deemed to violate this
Section 13(b)(2)(B).
<PAGE>
(b) NONDISCLOSURE OF CONFIDENTIAL INFORMATION.
(1) Executive will not, except as authorized by the
Corporation in writing, during or at any time after the termination
of Executive's employment with the Corporation, directly or
indirectly, use for himself or herself or others, or disclose,
communicate, divulge, furnish to, or convey to any other person,
firm, or corporation, any secret or confidential information,
knowledge or data of the Corporation or that of third parties
obtained by Executive during the period of his or her employment
with the Corporation. Such information, knowledge or data
includes, without limitation, the following:
(A) Secret or confidential matters of a technical
nature such as, but not limited to, methods, know-how,
formulations, compositions, processes, discoveries, machines,
inventions, computer programs, and similar items or research
projects involving such items,
(B) Secret or confidential matters of a business
nature such as, but not limited to, marketing policies or
strategies, information about costs, price lists, purchasing and
purchasing policies, profits, market, sales or lists of customers,
customer history information, and
(C) Secret or confidential matters pertaining to
future developments such as, but not limited to, research and
development or future marketing or merchandising.
(2) Executive, upon termination of his or her
employment with the Corporation, or at any other time upon the
Corporation's request, shall deliver promptly to the Corporation
all manuals, letters, notes, notebooks, reports, formulations,
computer programs and similar items, memoranda, lists of customers,
customer history information and all other materials and copies
thereof relating in any way to the Corporation's business and in
any way obtained by Executive during the term of employment with
the Corporation which are in his or her possession or under his or
her control; and Executive will not make or retain any copies of
any of the foregoing and will so represent to the Corporation upon
termination of his or her employment.
(c) INDUCEMENT.
(1) Executive agrees that during the Term of
Employment and during the Restricted Period, Executive shall not
use any confidential information for the purposes of inducing or
attempting to induce any present, former, or prospective customer
of the Corporation or its Affiliates to become a customer of
Executive or any person, firm, or corporation, or business
association with which Executive is affiliated in any capacity
with respect to the markets supplied by the Corporation or its
<PAGE>
Affiliates.
(2) Executive agrees that during the Term of
Employment and during the Restricted Period, Executive shall not
directly or indirectly solicit for employment or employ any of the
Corporation's employees to work for Executive or any business
association with which/whom Executive is affiliated, or to work for
any other company in the markets supplied by the Corporation or its
Affiliates.
(d) INTEREST OF PARTIES. Executive agrees that the
duration of the limitations set forth in this Section 13 are
reasonable under the circumstances, considering Executive's
position with the Corporation and other relevant factors, and that
this will not constitute a serious handicap to Executive in
securing future employment.
(e) DISCLOSURE TO CORPORATION. Executive shall
promptly communicate and disclose to the Corporation all
information, observations and data obtained by Executive in the
course of Executive's employment. All written materials, records
and documents made by Executive or coming into Executive's
possession during the Term of Employment concerning any inventions,
products, processes or equipment, manufactured, used, developed,
investigated or considered by the Corporation or any Affiliated
Companies shall be the property of the Corporation, and upon
termination of the Term of Employment, or upon request of the
Corporation during the Term of Employment, Executive shall
promptly deliver the same to the Corporation.
Executive agrees to render to the Corporation such reports of the
activities of the business undertaken by Executive or conducted
under Executive's direction during the Term of Employment as the
Corporation may reasonably request.
(f) INVENTIONS.
(1) Executive shall promptly communicate and
disclose in writing to the Corporation all those inventions and
developments whether patentable or not, as well as patents and
patent applications (hereinafter collectively called "Inventions"),
made, conceived, developed or purchased by Executive, or under
which Executive acquires the right to grant licenses or to become
licensed, alone or jointly with others, during the Term of
Employment, which have arisen or may arise out of Executive's
employment, or relate to any matters pertaining to, applicable to,
or useful in connection with, the business or affairs of the
Corporation or any Affiliated Companies. All of Executive's right,
title and interest in, to and under all such inventions, licenses
and rights to grant licenses shall be the sole property of the
Corporation. Any such inventions disclosed to anyone by Executive
within one (1) year after the termination of the Term of Employment
<PAGE>
for any cause whatsoever shall be deemed to have been made or
conceived by Executive during the Term of Employment.
(2) As to all such inventions, Executive shall,
upon request of the Corporation, during the Term of Employment or
thereafter:
(A) Execute all documents which the
Corporation shall deem necessary or proper
to enable it to establish title to such
inventions, or other rights, and to enable
it to file and prosecute applications for
letters patent of the United States and any
foreign country; and
(B) Do all things (including the giving
of evidence in suits and other proceedings)
which the Corporation shall deem necessary
or proper to obtain, maintain or to assert
patents for any and all such inventions or
to assert its rights in any inventions not
patented.
All expenses incident to any action required by the Corporation or
taken on its behalf pursuant to the provisions of this paragraph
shall be borne by the Corporation including without limitation a
reasonable payment for Executive's time and expenses involved in
case he or she is not then in its employ.
(g) LITIGATION. Executive agrees that during the
Term of Employment or thereafter, Executive shall do all things,
including the giving of evidence in suits and other proceedings,
which the Corporation shall deem necessary or proper to obtain,
maintain or assert rights accruing to the Corporation during the
Term of Employment and in connection with which Executive has
knowledge, information or expertise. All reasonable expenses
incurred by Executive during the Term of Employment or thereafter
in fulfilling the duties set forth in this Section, shall be
reimbursed by the Corporation to the full extent legally
appropriate including, without limitation, a reasonable payment for
Executive's time in the event this Agreement has terminated prior
to the time Executive renders such assistance, advice and counsel.
14. EQUITY. The parties hereto agree that the services to be
rendered by Executive are special, unique and of an extraordinary
character. In the event of the breach by Executive of any of the
provisions of this Agreement, the Corporation, in addition and as
a supplement to such other rights and remedies as may exist in its
favor, may apply to any court of law or equity having jurisdiction
to enforce the specific performance of this Agreement, and/or may
apply for injunctive relief against any act which would violate any
of the provisions of this Agreement.
<PAGE>
15. EFFECT ON PRIOR AGREEMENTS. This Agreement shall supersede
and replace any and all prior employment agreements entered into
between Executive and the Corporation or any Affiliated Company,
including but not limited to that certain Employment Agreement
dated February 5, 1995. This Agreement contains the entire
understanding of the parties hereto with respect to the subject
matter hereof.
16. NO ASSIGNMENT.
(a) This Agreement is personal to the Executive and without
the prior written consent of the Corporation shall not be
assignable by the Executive other than by will or the laws of
descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by the Executive's legal
representatives and Beneficiary.
(b) This Agreement shall inure to the benefit of and be
binding upon the Corporation and its successors. The Corporation
shall require any successor to all or substantially all of the
business and/or assets of the Corporation, whether direct or
indirect, by purchase, merger, consolidation, acquisition of stock,
or otherwise, by an agreement in form and substance satisfactory to
the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent as the
Corporation would be required to perform if no such succession had
taken place.
17. SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision or clause were omitted.
18. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Missouri, without
reference to principles of conflict of laws. The captions of this
Agreement are not part of the provisions hereof and shall have no
force or effect. This Agreement may not be amended or modified
other than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) In the event that litigation is required to enforce any
provision of this Agreement, subject to the provisions of Section
12 hereof, the prevailing party shall be entitled to reasonable
attorneys fees.
(c) All notices and other communications hereunder shall be
in writing and shall be given by hand delivery to the other party
or by registered or certified mail, return receipt requested,
<PAGE>
postage prepaid, addressed as follows:
IF TO THE EXECUTIVE:
Russell Isaak
14538 Crossway Court
Chesterfield, MO 63017
IF TO THE CORPORATION:
Consumer Programs, Incorporated
1706 Washington Avenue
St. Louis, Missouri 63103
Attention: Alyn V. Essman, Chairman of the Board
and Chief Executive
Officer
or to such other address as either party shall have furnished to
the other in writing in accordance herewith. Notice and
communications shall be effective when actually received by the
addressee.
(d) This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter hereof.
(e) The Corporation may withhold from any amounts payable
under this Agreement such federal, state or local taxes <PAGE>
as shall be required to be withheld pursuant to any applicable law
or regulation.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement in duplicate, all as of the day and year first above
written.
CONSUMER PROGRAMS INCORPORATED
BY: /s/ Alyn V. Essman
------------------------------
Chairman of the Board and
Chief Executive Officer
BY: /s/ Russell Isaak
------------------------------
Russell Isaak
EXHIBIT (10.3)
Employment Contract - Patrick J. Morris
27
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated February 8, 1998, between CONSUMER PROGRAMS
INCORPORATED, a Missouri corporation (the "Corporation"), and
Patrick J. Morris (the "Executive").
WHEREAS, the Corporation currently employs the Executive in
the capacity of Senior Executive Vice President and President,
Portrait Studio Division, and the Executive is one of the key
executives of the Corporation;
WHEREAS, there is much competition for the type of business
performed by the Corporation in the locales in which the
Corporation operates, and the Corporation and Executive acknowledge
that the Corporation is active in the product markets in which it
competes;
WHEREAS, Executive, during his or her employment, has been and
will be entrusted with confidential information;
WHEREAS, Executive and the Corporation recognize and
acknowledge that, to ensure the continued growth and stability of
the Corporation, it is necessary to obtain an agreement from
Executive not to compete with the Corporation and not to disclose
confidential information of the Corporation; and
WHEREAS, the Corporation desires that the Executive continue
in the employ of the Corporation as a result of his or her
experience with the Corporation and his or her potential for making
future contributions to the Corporation, and the Executive is
willing to make a commitment to remain in such employ upon the
terms and subject to the conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises
contained herein and other good and valuable consideration, the
parties hereto hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement:
(a) "Affiliated Companies" shall mean any corporation (or
other business entity) controlling, controlled by or under common
control with the Corporation.
(b) "Beneficiary" shall mean the person designated in
writing by the Executive as his or her beneficiary under this
Agreement, or in the absence of such designation, his or her
estate.
(c) Cause shall mean:
(1) prior to a Change of Control, (i) conduct or
activity of the Executive materially detrimental to the
<PAGE>
Corporation's reputation or business (including financial)
operations; (ii) gross or habitual neglect or breach of duty or
misconduct of the Executive in discharging the duties of his or her
position; or (iii) prolonged absence by the Executive from
his or her duties (other than on account of illness or disability)
without the consent of the Corporation.
(2) after a Change of Control, (i) an act or acts of
dishonesty on the Executive's part which are intended to result in
his or her substantial personal enrichment at the expense of the
Corporation; (ii) any material violation by the Executive of his or
her obligations and covenants pursuant to this Agreement which is
demonstrably willful and deliberate on the Executive's part and
which results in material injury to the Corporation; or (iii) the
conviction of Executive of a felony or of a crime involving moral
turpitude.
(d) A "Change of Control" shall mean a change in control of
a nature that would be required to be reported in response to Item
1(a) of the Current Report on Form 8-K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended ("Exchange Act") or would have been
required to be so reported but for the fact that such event had
been "previously reported" as that term is defined in Rule 12b-2 of
Regulation 12B of the Exchange Act unless the transactions that
give rise to the change in control are approved or ratified by a
majority of the members of the Incumbent Board of CPI Corp. who are
not employees of the Corporation; provided that, without
limitation, notwithstanding anything herein to the contrary, such
a change in control shall be deemed to have occurred if (a) any
Person is or becomes the beneficial owner (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of
CPI Corp. representing 40% or more of the combined voting power of
CPI Corp.'s then outstanding securities ordinarily (apart from
rights accruing under special circumstances) having the right to
vote at elections of directors ("Voting Securities"), (b)
individuals who constitute the Board of CPI Corp. on the date
hereof (the "Incumbent Board") cease for any reason to constitute
at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election, or
nomination for election by CPI Corp.'s shareholders, was approved
by a vote of at least three-quarters of the directors comprising
the Incumbent Board (either by a specific vote or by approval of
the proxy statement of CPI Corp. in which such person is named as
a nominee for director, without objection to such nomination) shall
be, for purposes of this clause (b), considered as though such
person were a member of the Incumbent Board, or (c) approval by the
stockholders of CPI Corp. of a reorganization, merger or
consolidation, in each case, with respect to which persons who were
the stockholders of CPI Corp. immediately prior to such
reorganization, merger or consolidation do not, immediately
thereafter, own, directly or indirectly, more than 50% of the
<PAGE>
combined voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's then
outstanding voting securities, or a liquidation or dissolution of
CPI Corp. or of the sale of all or substantially all of the assets
of CPI Corp. For purposes of this Agreement, the term "Person"
shall mean and include any individual, corporation, partnership,
group, association or other "person," as such term is used in
Section 14(d) of the Exchange Act, other than CPI Corp., the
Corporation or an Affiliated Company or any employee benefit
plan(s) sponsored or maintained by the Corporation or any
Affiliated Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as
may be amended from time to time.
(f) "Continuing Directors" shall have the meaning set forth
in Paragraph 3(G) of Article Ten of CPI Corp.'s Certificate of
Incorporation.
(g) "Fiscal Year" shall mean the Fiscal Year of the
Corporation.
(h) "Permanent Disability" shall mean the inability of
Executive to perform the services contemplated by Section 4 hereof
for a period of at least one hundred eighty (180) consecutive
calendar days or for thirty-five (35) weeks (whether or not
consecutive) in any twelve (12) month period on account of any
sickness, injury or other infirmity or disability.
(i) "Retirement" shall mean the Executive's voluntary or
involuntary termination of employment with the Corporation except
for termination on account of (A) Cause as defined in Subsection
6(b) hereof, (B) death or (C) Permanent Disability before attaining
age sixty-five (65).
(j) "Term of Employment" shall have the meaning set forth
in Section 3 hereof.
(k) "Vesting Percentage" shall mean the percentage of
Supplemental Retirement Benefits, death benefits, and disability
benefits in which Executive has a nonforfeitable interest (except
in the event of termination for Cause) based upon the number of
Years of Service Executive has completed, determined as follows:
<PAGE>
<TABLE>
<CAPTION>
COMPLETED YEARS VESTING
OF SERVICE PERCENTAGE
--------------- ----------
<S> <C> <C>
0 0%
1 10%
2 20%
3 30%
4 40%
5 50%
6 60%
7 70%
8 80%
9 90%
10 100%
</TABLE>
Notwithstanding anything herein to the contrary, if Executive's
employment with the Corporation terminates following a Change of
Control, unless such termination is for Cause, for purposes of
Subsections 5(g), 5(h), and 5(i) of this Agreement Executive shall
be deemed to have completed ten (10) Years of Service and his or
her Vesting Percentage shall be deemed to be 100%.
(l) "Year of Service" shall mean any Fiscal Year during
which the Executive has worked for the Corporation at least one
thousand (1,000) hours, including Fiscal Years prior to the
effective date of this Agreement.
2. EMPLOYMENT. The Corporation hereby employs and engages the
services of the Executive as one of its key executives initially in
the position of SENIOR EXECUTIVE VICE PRESIDENT AND PRESIDENT,
PORTRAIT STUDIO DIVISION of the Corporation for the Term of
Employment set forth in Section 3. The Executive agrees to serve
the Corporation for the Term of Employment as provided herein.
3. TERM OF EMPLOYMENT. The Executive's Term of Employment
shall be a period commencing on the date hereof and ending one (1)
year thereafter; provided, however, that upon the expiration of the
aforesaid period (the "Expiration Date") and upon each anniversary
of the Expiration Date, the Term of Employment shall automatically
be extended for an additional one (1) year period unless Executive
or the Corporation notifies the other in writing at least sixty
(60) days prior to the commencement of such one (1) year period of
an intention to terminate this Agreement. Notwithstanding anything
herein to the contrary, the Term of Employment shall terminate upon
Executive's death or Permanent Disability as set forth in
subsection 6(a) hereof or upon the Corporation's termination of
Executive's employment for Cause pursuant to subsection 6(b)
hereof.
<PAGE>
4. POSITION AND DUTIES.
(a) Prior to a Change of Control, during the Term of
Employment, the Executive shall serve the Corporation in such
capacity as the Corporation may determine. After a Change of
Control, during the Term of Employment, the Executive's position,
authority and responsibilities, the type of work he or she is asked
to perform, and the status and stature of the people with whom he
or she is asked to work, shall be comparable to that existing with
respect to the Executive as of the date immediately prior to the
Change of Control, and after a Change of Control the Executive's
services shall be performed at the location where the Executive was
employed as of the date immediately prior to the Change of Control,
or at such other location as may be mutually agreed between the
Corporation and the Executive.
(b) The Executive agrees to devote his or her full business
time during normal business hours to the business and affairs of
the Corporation (except as otherwise provided herein) and to use
his or her best efforts to promote the interests of the Corporation
and its Affiliated Companies and to perform faithfully and
efficiently the responsibilities assigned to him or her in
accordance with the terms of this Agreement to the extent necessary
to discharge such responsibilities, except for (i) service on
corporate, civic or charitable boards or committees not
significantly interfering with the performance of such
responsibilities and (ii) periods of vacation and sick leave to
which he or she is entitled. It is expressly understood and agreed
that the Executive's continuing service on any boards and
committees with which he or she shall be connected, as a member or
otherwise, as of the date hereof, or any such service approved by
the Corporation during the Term of Employment, shall not be deemed
to interfere with the performance of the Executive's services to
the Corporation pursuant to this subparagraph 4(b).
5. COMPENSATION AND OTHER CONDITIONS OF EMPLOYMENT.
(a) BASE SALARY. During the Term of Employment, the
Executive shall receive an annual base salary (the "Base Salary"),
in equal installments payable weekly or at such other intervals as
salary is normally paid by the Corporation to its employees, at an
annual rate established by the Corporation and any Affiliated
Companies as of the date hereof. The Base Salary shall be reviewed
at least once each year and may be increased at any time and from
time to time by action of the Board of Directors of CPI Corp., any
committee thereof or any individual having authority to take such
action, in accordance with the Corporation's regular practices.
Any increase in the Base Salary shall not serve to limit or reduce
any other obligation of the Corporation hereunder, and after such
increase the Base Salary shall not be reduced from such increased
level.
(b) ANNUAL BONUS. After a Change of Control, in addition
<PAGE>
to the Base Salary, the Executive shall be awarded for each Fiscal
Year during the Term of Employment an annual bonus (the "Annual
Bonus") (pursuant to any bonus plan or program of the Corporation,
any incentive plan or program of the Corporation, or otherwise) in
cash at least equal to the highest bonus paid or payable to the
Executive in respect of any of the Fiscal Years during the three
Fiscal Years immediately prior to the date of the Change of
Control. Prior to a Change of Control, the amount of the
Executive's Annual Bonus shall be determined in accordance with the
Corporation's regular practice.
(c) OTHER COMPENSATION PLANS. After a Change of Control,
in addition to the Base Salary and Annual Bonus payable as
hereinabove provided, during the Term of Employment, the Executive
shall be entitled to participate in all other compensation plans
and programs, including, without limitation, savings plans, stock
option plans, and retirement plans of the Corporation and its
Affiliated Companies (collectively, the "Savings Plans"), on a
basis at least equivalent to that provided by the Corporation and
its Affiliated Companies to the Executive under such programs
immediately prior to the date of the Change of Control. Prior to
a Change of Control, the Executive's entitlement to participate in
the Savings Plans shall be determined in accordance with the
Corporation's regular practice. Prior to a Change of Control,
nothing herein shall be construed to prevent the Corporation from
amending or altering any such plans in accordance with the terms
thereof. All agreements between the Corporation and the Executive
existing on the date hereof providing for special pension,
retirement or similar benefits are continued by this Agreement.
(d) BENEFIT PLANS. After a Change of Control, during the
Term of Employment, the Executive, his or her spouse, or his or her
dependents, as the case may be, shall be entitled to receive all
amounts which he or she, his or her spouse or his or her dependents
are or would have been entitled to receive as benefits under all
other benefit plans of the Corporation and its Affiliated
Companies, including, without limitation, medical, dental,
disability, group life, accidental death and travel accident
insurance plans and programs (collectively, the "Benefit Plans") on
a basis at least as favorable to the Executive as on the date
immediately prior to the date of the Change of Control. Prior to
a Change of Control, the Executive's and such other persons'
entitlement to participate in the Benefit Plans shall be determined
in accordance with the Corporation's regular practice.
(e) EXPENSES. During the Term of Employment, the Executive
shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by the Executive in accordance with
the regular policies and procedures of the Corporation.
(f) OFFICE AND SUPPORT STAFF. After a Change of Control
the Executive shall be entitled to an office or offices of a size
<PAGE>
and with furnishings and other appointments, and to secretarial and
other assistance, at least equal to those provided to the Executive
as of the date immediately prior to the date of the Change of
Control.
(g) DEATH BENEFITS. In the event of Executive's death
after completion of at least ten (10) Years of Service, unless (1)
Executive's employment with the Corporation was terminated for
Cause or (2) Executive (or his or her Beneficiary) is entitled to
receive Supplemental Retirement Benefits pursuant to subsection
5(i), the Corporation shall pay to Executive's Beneficiary an
annual death benefit equal to forty percent (40%) (but not to
exceed $150,000) of the highest annual Base Salary paid to
Executive from and after fiscal year 1997 (as defined in subsection
5(a) hereof) for the Fiscal Year of his or her termination of
employment with the Corporation, payable in equal monthly
installments, commencing with the month following the month of
Executive's death and ending with the two-hundred fortieth (240th)
month following the month of Executive's death. In the event that
Executive dies before age 65 but has not completed at least ten
(10) Years of Service with the Corporation, death benefits shall be
reduced to an amount equal to the benefits determined under the
preceding sentence multiplied by the Vesting Percentage applicable
to Executive.
(h) DISABILITY BENEFITS. In the event of Executive's
Permanent Disability prior to attaining age 65 and prior to
termination of employment with the Corporation, unless Executive's
employment with the Corporation was terminated for Cause, the
Corporation shall pay Executive annual disability benefits equal to
forty percent (40%) (but not to exceed $150,000) of the highest
annual Base Salary paid to Executive from and after fiscal year
1997 for the Fiscal Year in which the Executive terminated
employment with the Corporation, payable in equal monthly
installments, commencing with the month following the month in
which Executive terminated employment as a result of Permanent
Disability and ending on the earlier of (i) the month in which
Executive reaches age 65 or (ii) the month of his or her death. In
the event that at the time of Permanent Disability Executive has
not completed at least ten (10) Years of Service, the disability
benefits shall be reduced to an amount equal to the benefits
determined under the preceding sentence multiplied by the Vesting
Percentage applicable to Executive. Disability benefits pursuant
to this subsection (h) shall be reduced by any amounts paid to
Executive under the Corporation's long-term disability insurance
policy, but shall not be reduced for any payments received by
Executive from Social Security or from any disability insurance
coverage individually owned by Executive.
(i) SUPPLEMENTAL RETIREMENT BENEFITS.
(1) In the event of Executive's Retirement after
<PAGE>
completion of at least ten (10) Years of Service, unless
Executive's employment with the Corporation was terminated for
Cause, the Corporation shall pay Executive retirement benefits for
twenty (20) years in an annual amount equal to forty percent (40%)
(but not to exceed $150,000) of the highest annual Base Salary paid
to Executive from and after fiscal year 1997 for the Fiscal Year of
his or her Retirement ("Supplemental Retirement Benefits"). In the
event of Executive's Retirement before completion of ten (10) Years
of Service, Corporation shall pay Executive retirement benefits on
the same terms as set forth in the preceding sentence except that
retirement benefits shall be reduced to an amount equal to
Supplemental Retirement Benefits multiplied by the Vesting
Percentage.
(2) Supplemental Retirement Benefits shall be payable
in two hundred forty (240) equal monthly installments commencing
with the month following the later of (i) the month of Executive's
Retirement or (ii) the month during which Executive reaches age
sixty-five (65). If Executive dies prior to the end of the two
hundred forty (240) month period during which Supplemental
Retirement Benefits are payable, Supplemental Retirement Benefits
shall be payable during the remainder of such 240-month period to
his or her Beneficiary.
(3) Notwithstanding anything herein to the contrary, in
the event of Executive's termination of employment with the
Corporation prior to attaining age 65 as a result of Permanent
Disability, if Executive attains age 65 and his or her employment
with the Corporation was not terminated for Cause, the Corporation
shall pay to Executive the Supplemental Retirement Benefits set
forth in this Subsection 5(i) in accordance with Executive's
Vesting Percentage, commencing as of the month following the month
in which Executive attains age 65; provided, however, that any
Supplemental Retirement Benefits paid pursuant to this sentence
shall be reduced by any amounts paid to Executive under the
Corporation's long-term disability insurance policy (but shall not
be reduced for any payments received by Executive from Social
Security or from any disability insurance coverage individually
owned by Executive) for the same period.
(j) SURVIVABILITY OF DEATH AND SUPPLEMENTAL RETIREMENT
BENEFITS. In the event of Executive's Retirement or death,
Executive's entitlement to death benefits pursuant to
Subsection 5(g) hereof and Supplemental Retirement Benefits
pursuant to Subsection 5(i) hereof shall survive the Term of
Employment and Executive or his or her Beneficiary shall be
entitled to such death benefits and Supplemental Retirement
Benefits based on the same terms and conditions as would have been
applicable had his or her death or Retirement, as the case may be,
occurred during the Term of Employment.
6. TERMINATION OF EMPLOYMENT.
<PAGE>
(a) DEATH OR PERMANENT DISABILITY. Except for the
obligations of the Corporation set forth in this Subsection 6(a),
this Agreement shall terminate automatically upon the Executive's
death or Permanent Disability. In the event of such termination,
the Corporation shall pay to the Executive's Beneficiary or, in the
event of Permanent Disability, the Executive or his or her legal
representative, all benefits and Base Salary accrued through the
date of termination, including, without limitation, amounts payable
under any plan referred to in Subsection 5(d) plus any benefits to
which Executive may be entitled pursuant to Subsection 5(g),
Subsection 5(h) or Subsection 5(i) hereof.
(b) CAUSE. The Corporation may terminate the Executive's
employment for Cause. If the Executive's employment is terminated
for Cause, the Corporation shall pay the Executive his or her full
accrued Base Salary through the effective date of the termination
of his or her employment (which shall be no earlier than the date
of receipt of notice thereof) at the rate in effect at the time of
such termination, and the Corporation shall have no further
obligations to the Executive under this Agreement.
(c) NOTIFICATION PRIOR TO ONE YEAR EXTENSION. Either
Executive or the Corporation may terminate this Agreement by
notifying the other party in writing of an intention to do so at
least sixty (60) days prior to the commencement of a one-year
extension period described in Section 3 hereof.
(d) PAYMENTS FOR INVOLUNTARY TERMINATION WITHOUT CAUSE.
(1) If prior to a Change of Control (i) the Corporation
terminates Executive's employment (other than for Cause pursuant to
subsection 6(b) hereof), or (ii) the Executive's employment
terminates by reason of the Corporation's termination of this
Agreement pursuant to subsection 6(c)hereof, the Corporation shall
pay Executive following such involuntary termination his or her
full accrued Base Salary through the date of termination of
employment plus an amount equal to fifty percent (50%) of
Executive's Base Salary for the fiscal year in which termination
occurs, payable in twenty-six (26) equal weekly installments or at
such other intervals as salary is normally paid by the Corporation
to its employees. The payment pursuant to this Subsection 6(d)(1)
and any payments to which Executive may be entitled pursuant to
Subsections 5(g), 5(h), and 5(i) shall be in full discharge of any
claims, actions, demands or damages of every nature and description
which Executive might have or might assert against the Corporation
or any Affiliated Company in connection with or arising from the
termination of Executive's employment or the termination of this
Agreement.
(2) If following a Change of Control (i) the
Corporation terminates Executive's employment (other than for Cause
pursuant to Subsection 6(b) hereof), or (ii) the Executive's
<PAGE>
employment terminates by reason of the Corporation's termination of
this Agreement pursuant to subsection (c) hereof, the Corporation
shall, at the time of such involuntary termination, make a lump sum
cash payment to Executive equal to 200% of his or her Base Salary
for the Fiscal Year of termination. In addition to the payment
pursuant to this Subsection 6(d)(2) and any payments to which
Executive may be entitled pursuant to Subsections 5(g), 5(h) and
5(i), Executive shall be entitled to all remedies available under
this Agreement or at law in respect of any damages suffered by
Executive as a result of an involuntary termination of employment
without Cause.
7. GROSS-UP FOR PARACHUTE TAX.
(a) GENERAL. In the event that following a Change of
Control Executive becomes entitled to any payments (whether
pursuant to this Employment Agreement or any other plan,
arrangement or agreement) from the Corporation in the nature of
compensation ("Parachute Payments") that in the opinion of a
certified public accounting firm (selected in the manner set forth
in Subsection 7(b)) or that under the provisions of a notice of
assessment from the Internal Revenue Service causes imposition of
the tax under Section 4999 of the Code or any similar tax that may
hereafter be imposed (the "Excise Tax"), the Corporation shall pay
Executive, at the time specified in Subsection 7(d), the Gross-Up
Payment (as determined in accordance with Subsection 7(c)).
(b) SELECTION OF C.P.A. Within fifteen (15) days after any
termination of Executive's employment following a Change of
Control, the majority of the Continuing Directors as of the date
immediately prior to the Change of Control shall select a certified
public accounting firm (the "C.P.A.") to determine the amount, if
any, of the Excise Tax and the amount, if any, of the Gross-Up
Payments.
(c) AMOUNT OF GROSS-UP PAYMENTS.
(1) The Gross-Up Payments shall be in an amount such
that the net amount retained by Executive with respect to
the Parachute Payments and Gross-Up Payments, after deduction of
any Excise Tax to which the Parachute Payments may be subject and
any federal, state, and local income taxes and Excise Tax upon the
Gross-Up Payments, shall be equal to the gross amount of the
Parachute Payments.
(2) For purposes of determining the amount of the
Gross-Up Payments, Executive shall be deemed to pay federal income
taxes at the applicable rate of federal income taxation for the
calendar year in which the Gross-Up Payment is to be made and state
and local income taxes at the applicable rate of taxation for the
calendar year in which the Gross-Up Payment is to be made.
<PAGE>
(3) In the event that the Excise Tax is subsequently
determined to exceed the amount taken into account at the time the
Gross-Up Payment is made pursuant to Subsection 7(d)(1) hereof
(including any excess attributable to any Parachute Payments the
existence or amount of which could not be accurately determined at
the time of the Gross-Up Payment), the Corporation shall make an
additional Gross-Up Payment in respect of such excess (plus any
interest and addition to tax payable with respect to such excess)
within fifteen (15) days after the amount of such excess is
determined by the C.P.A. or by the Internal Revenue Service (the
"IRS") in a notice of assessment.
(d) TIMING OF GROSS-UP PAYMENTS. Gross-Up Payments other
than Gross-Up Payments pursuant to Subsection 7(c)(3) shall be paid
not later than forty-five (45) days following payment of any
Parachute Payments to which the Gross-Up Payments are attributable;
provided, however, that if the amount of such Gross-Up Payment or
portion thereof cannot be finally determined on or before such day,
the Corporation shall pay to Executive on such day an estimate, as
determined in good faith by the Corporation, of the minimum amount
of such payments and shall pay the remainder of such payments
(together with interest at the applicable federal rate provided in
Section l274(d) of the Code) as soon as the amount thereof can be
determined by the C.P.A., but in no event later than forty-five
(45) days after payment of such Parachute Payments.
(e) CORPORATION'S RIGHT TO DESIGNATE TAX REPRESENTATIVE;
ASSIGNMENT OF REFUND PROCEEDS. If the IRS proposes an assessment
of the Excise Tax against Executive or proposes an additional
assessment of Excise Tax in excess of the amount previously
reported by Executive:
(1) Executive shall within five (5) days after receipt
from the IRS of notice of the proposed Excise Tax assessment notify
the Corporation in writing and furnish the Corporation with copies
of all correspondence from the IRS relating to the proposed Excise
Tax assessment.
(2) The Corporation shall be authorized to designate an
attorney and/or accountant (the "Tax Representative") to serve as
Executive's exclusive representative with respect to all
proceedings with the IRS relating to the proposed Excise Tax
assessment, including but not limited to negotiating a settlement
or compromise of the proposed Excise Tax assessment, filing a claim
for refund with respect thereto, and seeking judicial review of any
disallowance of a claim for refund. Executive hereby agrees to
execute an appropriate power of attorney authorizing the Tax
Representative to represent Executive with respect to the Excise
Taxes. Executive further agrees to take any other appropriate
actions reasonably requested by the Tax Representative in
connection therewith; provided, however, that the Corporation shall
reimburse Executive for any expenses incurred by Executive as a
<PAGE>
result of compliance with such requests.
(3) If the Tax Representative files a claim for refund
of Excise Taxes with respect to which the Corporation has made a
Gross-Up Payment and such refund claim is allowed by the IRS or by
the final judgment of a court of competent jurisdiction, Executive
shall endorse the refund check payable to the Corporation and shall
send the refund check to the Corporation not later than five (5)
days after receipt from the IRS.
(4) If the Corporation designates a Tax Representative,
the Corporation shall pay all of his or her professional fees and
expenses and hold Executive harmless from any claims in connection
therewith. The Tax Representative shall keep Executive timely
informed of all significant developments in the Excise Tax matter
and shall send to Executive copies of all correspondence relating
thereto.
(5) Notwithstanding anything herein to the contrary, if
the Corporation is in material breach of any of its obligations
pursuant to this Agreement, the Corporation's rights pursuant to
this Subsection 7(e) shall be extinguished and Executive shall have
the right to revoke any power of attorney executed pursuant to this
Subsection 7(e).
8. NO OBLIGATION TO MITIGATE DAMAGES. The Executive shall not
be obligated to mitigate any damages by seeking other employment or
otherwise, and no amount payable hereunder and no benefit or
service credit for benefits shall be reduced in the event that the
Executive shall accept alternative employment.
9. BENEFITS PAYABLE ONLY FROM CORPORATE ASSETS.
(a) NO TRUST. Nothing contained in this Agreement, and no
action taken pursuant to its provisions by either party hereto
shall create, or be construed to create, a trust of any kind, or a
fiduciary relationship between the Corporation and the Executive or
his or her Beneficiary.
(b) EXECUTIVE'S STATUS AS UNSECURED GENERAL CREDITOR. The
payment of any benefits hereunder to the Executive or his or her
Beneficiary shall be made from assets which shall continue, for all
purposes, to be a part of the general assets of the Corporation; no
person shall have or acquire any interest in such assets by virtue
of the provisions of this Agreement. To the extent that the
Executive or his or her Beneficiary acquires a right to receive
payments from the Corporation under the provisions hereof, such
right shall be no greater than the right of any unsecured general
creditor of the Corporation.
(c) RECOVERY OF COST OF PROVIDING BENEFITS. In the event
that, in its discretion, the Corporation purchases an insurance
<PAGE>
policy insuring the life of the Executive to enable the Corporation
to recover, in whole or in part, the cost of providing any benefits
hereunder, neither the Executive nor his or her Beneficiary under
this Agreement shall have or acquire any rights whatsoever
therein. The Corporation shall be the sole owner and beneficiary
of any such policy and, as such, shall possess and may exercise all
incidents of ownership therein.
10. DETERMINATION OF BENEFITS AND CLAIMS PROCEDURE. The
Corporation shall make all determinations as to rights to benefits
under this Agreement. Subject to and in compliance with the
specific procedures contained in the applicable regulations
promulgated under the Employee Retirement Income Security Act of
1974, as amended: (i) any decision by the Corporation denying a
claim for benefits under this Agreement by the Executive or his or
her Beneficiary shall be stated in writing by the Corporation and
delivered or mailed to the claimant; (ii)each such notice shall set
forth the specific reasons for the denial, written to the best of
the Corporation's ability in a manner that may be understood
without legal or actuarial counsel; and (iii)the Corporation shall
afford a reasonable opportunity to the claimant whose claim for
benefits has been denied for a review of the decision denying such
claim.
11. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation
in any benefit, bonus, incentive or other plan or program provided
by the Corporation or any Affiliated Companies and for which the
Executive may qualify, nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any other
agreements with the Corporation or any Affiliated Companies.
Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan or program of the
Corporation or any Affiliated Companies shall be payable in
accordance with the terms of such plan or program.
12. FULL SETTLEMENT. After a Change of Control, the
Corporation's obligation to make the payments provided for herein
and otherwise to perform its obligations hereunder shall not be
affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the
Corporation may have against the Executive or others. Unless it is
finally determined by a court of competent jurisdiction after all
available appeals that the Corporation has validly terminated the
Executive's employment for Cause, the Corporation agrees to pay, to
the full extent permitted by law, all legal fees and expenses which
the Executive may reasonably incur as a result of any contest
(regardless of the outcome thereof) by the Corporation or others of
the validity or enforceability of, or liability under, any
provision of this Agreement or any guarantee of performance
thereof, plus, in each case, interest compounded quarterly, on the
total unpaid amount determined be payable hereunder, such interest
<PAGE>
to be calculated on the basis of the prime commercial lending rate
announced by Mercantile Bank, N.A. in effect from time to time, for
the period commencing on the date of such contest and ending on
the date on which the Corporation shall pay such amount.
13. COVENANTS.
(a) NON-COMPETITION.
(1) Executive recognizes that during the course of
Executive's employment with the Corporation, Executive has been and
will be instructed about and become acquainted with confidential
information of the Corporation, including, without limitation,
customer lists, methods of sales, the existence and contents and
terms of this Agreement, methods of sales procurement, sales
procurement techniques, sales procedures and equipment/supply
information, equipment and supply acquisition procedures and
processes and sources, customer evaluation procedures, customer
maintenance and supply maintenance procedures and corresponding
information relating to persons, firms and corporations which are
or may become customers of the Corporation and, further, companies
from which the Corporation obtains various products and supplies
for sale, resale and distribution to customers of the Corporation.
This confidential information further includes, but is not limited
to, customer identity, supplier identity and terms, purchase terms,
sales techniques, purchase conditions and rates, customer needs,
billing procedures and processes, contacts and customer
information. Further, Executive agrees and acknowledges that the
development and assemblage and maintenance of the customer base of
the Corporation has taken extraordinary time, money, resources,
training, and effort by the Corporation and its employees.
(2) Executive agrees that he or she will not during the
Term of Employment and for a period of two (2) years following
cessation of his or her employment at the Corporation ("Restricted
Period"), for any cause or reason, directly or indirectly:
(A) engage in any business in competition with the
Corporation and its Affiliates or supply and sell to present
customers, former customers and prospects of the Corporation and
its Affiliates; or
(B) own, manage, operate, control, advise, be
employed by, consult, or materially participate in, or be
materially involved in any manner with the ownership, management,
operation or control of, individually or through any other entity
or device, any business that competes with the business then
conducted by the Corporation or any Affiliate; provided, however,
that mere ownership as an investor of not more than five percent
(5%) of the securities of a corporation or other business
enterprise shall not in and of itself be deemed to violate this
Section 13(b)(2)(B).
<PAGE>
(b) NONDISCLOSURE OF CONFIDENTIAL INFORMATION.
(1) Executive will not, except as authorized by the
Corporation in writing, during or at any time after the termination
of Executive's employment with the Corporation, directly or
indirectly, use for himself or herself or others, or disclose,
communicate, divulge, furnish to, or convey to any other person,
firm, or corporation, any secret or confidential information,
knowledge or data of the Corporation or that of third parties
obtained by Executive during the period of his or her employment
with the Corporation. Such information, knowledge or data
includes, without limitation, the following:
(A) Secret or confidential matters of a technical
nature such as, but not limited to, methods, know-how,
formulations, compositions, processes, discoveries, machines,
inventions, computer programs, and similar items or research
projects involving such items,
(B) Secret or confidential matters of a business
nature such as, but not limited to, marketing policies or
strategies, information about costs, price lists, purchasing and
purchasing policies, profits, market, sales or lists of customers,
customer history information, and
(C) Secret or confidential matters pertaining to
future developments such as, but not limited to, research and
development or future marketing or merchandising.
(2) Executive, upon termination of his or her
employment with the Corporation, or at any other time upon the
Corporation's request, shall deliver promptly to the Corporation
all manuals, letters, notes, notebooks, reports, formulations,
computer programs and similar items, memoranda, lists of customers,
customer history information and all other materials and copies
thereof relating in any way to the Corporation's business and in
any way obtained by Executive during the term of employment with
the Corporation which are in his or her possession or under his or
her control; and Executive will not make or retain any copies of
any of the foregoing and will so represent to the Corporation upon
termination of his or her employment.
(c) INDUCEMENT.
(1) Executive agrees that during the Term of
Employment and during the Restricted Period, Executive shall not
use any confidential information for the purposes of inducing or
attempting to induce any present, former, or prospective customer
of the Corporation or its Affiliates to become a customer of
Executive or any person, firm, or corporation, or business
association with which Executive is affiliated in any capacity with
respect to the markets supplied by the Corporation or its
<PAGE>
Affiliates.
(2) Executive agrees that during the Term of
Employment and during the Restricted Period, Executive shall not
directly or indirectly solicit for employment or employ any of the
Corporation's employees to work for Executive or any business
association with which/whom Executive is affiliated, or to work for
any other company in the markets supplied by the Corporation or its
Affiliates.
(d) INTEREST OF PARTIES. Executive agrees that the
duration of the limitations set forth in this Section 13 are
reasonable under the circumstances, considering Executive's
position with the Corporation and other relevant factors, and that
this will not constitute a serious handicap to Executive in
securing future employment.
(e) DISCLOSURE TO CORPORATION. Executive shall
promptly communicate and disclose to the Corporation all
information, observations and data obtained by Executive in the
course of Executive's employment. All written materials, records
and documents made by Executive or coming into Executive's
possession during the Term of Employment concerning any inventions,
products, processes or equipment, manufactured, used, developed,
investigated or considered by the Corporation or any Affiliated
Companies shall be the property of the Corporation, and upon
termination of the Term of Employment, or upon request of the
Corporation during the Term of Employment, Executive shall
promptly deliver the same to the Corporation.
Executive agrees to render to the Corporation such reports of the
activities of the business undertaken by Executive or conducted
under Executive's direction during the Term of Employment as the
Corporation may reasonably request.
(f) INVENTIONS.
(1) Executive shall promptly communicate and
disclose in writing to the Corporation all those inventions and
developments whether patentable or not, as well as patents and
patent applications (hereinafter collectively called "Inventions"),
made, conceived, developed or purchased by Executive, or under
which Executive acquires the right to grant licenses or to become
licensed, alone or jointly with others, during the Term of
Employment, which have arisen or may arise out of Executive's
employment, or relate to any matters pertaining to, applicable to,
or useful in connection with, the business or affairs of the
Corporation or any Affiliated Companies. All of Executive's right,
title and interest in, to and under all such inventions, licenses
and rights to grant licenses shall be the sole property of the
Corporation. Any such inventions disclosed to anyone by Executive
within one (1) year after the termination of the Term of Employment
<PAGE>
for any cause whatsoever shall be deemed to have been made or
conceived by Executive during the Term of Employment.
(2) As to all such inventions, Executive shall,
upon request of the Corporation, during the Term of Employment or
thereafter:
(A) Execute all documents which the
Corporation shall deem necessary or proper
to enable it to establish title to such
inventions, or other rights, and to enable
it to file and prosecute applications for
letters patent of the United States and any
foreign country; and
(B) Do all things (including the giving
of evidence in suits and other proceedings)
which the Corporation shall deem necessary
or proper to obtain, maintain or to assert
patents for any and all such inventions or
to assert its rights in any inventions not
patented.
All expenses incident to any action required by the Corporation or
taken on its behalf pursuant to the provisions of this paragraph
shall be borne by the Corporation including without limitation a
reasonable payment for Executive's time and expenses involved in
case he or she is not then in its employ.
(g) LITIGATION. Executive agrees that during the
Term of Employment or thereafter, Executive shall do all things,
including the giving of evidence in suits and other proceedings,
which the Corporation shall deem necessary or proper to obtain,
maintain or assert rights accruing to the Corporation during the
Term of Employment and in connection with which Executive has
knowledge, information or expertise. All reasonable expenses
incurred by Executive during the Term of Employment or thereafter
in fulfilling the duties set forth in this Section, shall be
reimbursed by the Corporation to the full extent legally
appropriate including, without limitation, a reasonable payment for
Executive's time in the event this Agreement has terminated prior
to the time Executive renders such assistance, advice and counsel.
14. EQUITY. The parties hereto agree that the services to be
rendered by Executive are special, unique and of an extraordinary
character. In the event of the breach by Executive of any of the
provisions of this Agreement, the Corporation, in addition and as
a supplement to such other rights and remedies as may exist in its
favor, may apply to any court of law or equity having jurisdiction
to enforce the specific performance of this Agreement, and/or may
apply for injunctive relief against any act which would violate any
of the provisions of this Agreement.
<PAGE>
15. EFFECT ON PRIOR AGREEMENTS. This Agreement shall supersede
and replace any and all prior employment agreements entered into
between Executive and the Corporation or any Affiliated Company,
including but not limited to that certain Employment Agreement
dated February 5, 1995. This Agreement contains the entire
understanding of the parties hereto with respect to the subject
matter hereof.
16. NO ASSIGNMENT.
(a) This Agreement is personal to the Executive and without
the prior written consent of the Corporation shall not be
assignable by the Executive other than by will or the laws of
descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by the Executive's legal
representatives and Beneficiary.
(b) This Agreement shall inure to the benefit of and be
binding upon the Corporation and its successors. The Corporation
shall require any successor to all or substantially all of the
business and/or assets of the Corporation, whether direct or
indirect, by purchase, merger, consolidation, acquisition of stock,
or otherwise, by an agreement in form and substance satisfactory to
the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent as the
Corporation would be required to perform if no such succession had
taken place.
17. SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision or clause were omitted.
18. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Missouri, without
reference to principles of conflict of laws. The captions of this
Agreement are not part of the provisions hereof and shall have no
force or effect. This Agreement may not be amended or modified
other than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) In the event that litigation is required to enforce any
provision of this Agreement, subject to the provisions of Section
12 hereof, the prevailing party shall be entitled to reasonable
attorneys fees.
(c) All notices and other communications hereunder shall be
in writing and shall be given by hand delivery to the other party
or by registered or certified mail, return receipt requested,
<PAGE>
postage prepaid, addressed as follows:
IF TO THE EXECUTIVE:
Patrick J. Morris
26 Country Life Acres
St. Louis, Missouri 63131
IF TO THE CORPORATION:
Consumer Programs, Incorporated
1706 Washington Avenue
St. Louis, Missouri 63103
Attention: Russ Isaak, President
or to such other address as either party shall have furnished to
the other in writing in accordance herewith. Notice and
communications shall be effective when actually received by the
addressee.
(d) This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter hereof.
(e) The Corporation may withhold from any amounts payable
under this Agreement such federal, state or local taxes as shall be
required to be withheld pursuant to any applicable law or
regulation.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement in duplicate, all as of the day and year first above
written.
CONSUMER PROGRAMS INCORPORATED
BY: /s/ Russell Isaak
------------------------------
President
BY: /s/ Patrick J. Morris
------------------------------
Patrick J. Morris
EXHIBIT (10.4)
Employment Contract - Barry C. Arthur
28
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated February 8, 1998, between CONSUMER PROGRAMS
INCORPORATED, a Missouri corporation (the "Corporation"), and Barry
Arthur (the "Executive").
WHEREAS, the Corporation currently employs the Executive in
the capacity of Executive Vice President, Finance-Chief Financial
Officer, and the Executive is one of the key executives of the
Corporation;
WHEREAS, there is much competition for the type of business
performed by the Corporation in the locales in which the
Corporation operates, and the Corporation and Executive acknowledge
that the Corporation is active in the product markets in which it
competes;
WHEREAS, Executive, during his or her employment, has been and
will be entrusted with confidential information;
WHEREAS, Executive and the Corporation recognize and
acknowledge that, to ensure the continued growth and stability of
the Corporation, it is necessary to obtain an agreement from
Executive not to compete with the Corporation and not to disclose
confidential information of the Corporation; and
WHEREAS, the Corporation desires that the Executive continue
in the employ of the Corporation as a result of his or her
experience with the Corporation and his or her potential for making
future contributions to the Corporation, and the Executive is
willing to make a commitment to remain in such employ upon the
terms and subject to the conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises
contained herein and other good and valuable consideration, the
parties hereto hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement:
(a) "Affiliated Companies" shall mean any corporation (or
other business entity) controlling, controlled by or under common
control with the Corporation.
(b) "Beneficiary" shall mean the person designated in
writing by the Executive as his or her beneficiary under this
Agreement, or in the absence of such designation, his or her
estate.
(c) Cause shall mean:
(1) prior to a Change of Control, (i) conduct or
activity of the Executive materially detrimental to the
<PAGE>
Corporation's reputation or business (including financial)
operations; (ii) gross or habitual neglect or breach of duty or
misconduct of the Executive in discharging the duties of his or her
position; or (iii) prolonged absence by the Executive from
his or her duties (other than on account of illness or disability)
without the consent of the Corporation.
(2) after a Change of Control, (i) an act or acts of
dishonesty on the Executive's part which are intended to result in
his or her substantial personal enrichment at the expense of the
Corporation; (ii) any material violation by the Executive of his or
her obligations and covenants pursuant to this Agreement which is
demonstrably willful and deliberate on the Executive's part and
which results in material injury to the Corporation; or (iii) the
conviction of Executive of a felony or of a crime involving moral
turpitude.
(d) A "Change of Control" shall mean a change in control of
a nature that would be required to be reported in response to Item
1(a) of the Current Report on Form 8-K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended ("Exchange Act") or would have been
required to be so reported but for the fact that such event had
been "previously reported" as that term is defined in Rule 12b-2 of
Regulation 12B of the Exchange Act unless the transactions that
give rise to the change in control are approved or ratified by a
majority of the members of the Incumbent Board of CPI Corp. who are
not employees of the Corporation; provided that, without
limitation, notwithstanding anything herein to the contrary, such
a change in control shall be deemed to have occurred if (a) any
Person is or becomes the beneficial owner (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of
CPI Corp. representing 40% or more of the combined voting power of
CPI Corp.'s then outstanding securities ordinarily (apart from
rights accruing under special circumstances) having the right to
vote at elections of directors ("Voting Securities"), (b)
individuals who constitute the Board of CPI Corp. on the date
hereof (the "Incumbent Board") cease for any reason to constitute
at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election, or
nomination for election by CPI Corp.'s shareholders, was approved
by a vote of at least three-quarters of the directors comprising
the Incumbent Board (either by a specific vote or by approval of
the proxy statement of CPI Corp. in which such person is named as
a nominee for director, without objection to such nomination) shall
be, for purposes of this clause (b), considered as though such
person were a member of the Incumbent Board, or (c) approval by the
stockholders of CPI Corp. of a reorganization, merger or
consolidation, in each case, with respect to which persons who were
the stockholders of CPI Corp. immediately prior to such
reorganization, merger or consolidation do not, immediately
thereafter, own, directly or indirectly, more than 50% of the
<PAGE>
combined voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's then
outstanding voting securities, or a liquidation or dissolution of
CPI Corp. or of the sale of all or substantially all of the assets
of CPI Corp. For purposes of this Agreement, the term "Person"
shall mean and include any individual, corporation, partnership,
group, association or other "person," as such term is used in
Section 14(d) of the Exchange Act, other than CPI Corp., the
Corporation or an Affiliated Company or any employee benefit
plan(s) sponsored or maintained by the Corporation or any
Affiliated Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as
may be amended from time to time.
(f) "Continuing Directors" shall have the meaning set forth
in Paragraph 3(G) of Article Ten of CPI Corp.'s Certificate of
Incorporation.
(g) "Fiscal Year" shall mean the Fiscal Year of the
Corporation.
(h) "Permanent Disability" shall mean the inability of
Executive to perform the services contemplated by Section 4 hereof
for a period of at least one hundred eighty (180) consecutive
calendar days or for thirty-five (35) weeks (whether or not
consecutive) in any twelve (12) month period on account of any
sickness, injury or other infirmity or disability.
(i) "Retirement" shall mean the Executive's voluntary or
involuntary termination of employment with the Corporation except
for termination on account of (A) Cause as defined in Subsection
6(b) hereof, (B) death or (C) Permanent Disability before attaining
age sixty-five (65).
(j) "Term of Employment" shall have the meaning set forth
in Section 3 hereof.
(k) "Vesting Percentage" shall mean the percentage of
Supplemental Retirement Benefits, death benefits, and disability
benefits in which Executive has a nonforfeitable interest (except
in the event of termination for Cause) based upon the number of
Years of Service Executive has completed, determined as follows:
<PAGE>
<TABLE>
<CAPTION>
COMPLETED YEARS VESTING
OF SERVICE PERCENTAGE
--------------- ----------
<S> <C> <C>
0 0%
1 10%
2 20%
3 30%
4 40%
5 50%
6 60%
7 70%
8 80%
9 90%
10 100%
</TABLE>
Notwithstanding anything herein to the contrary, if Executive's
employment with the Corporation terminates following a Change of
Control, unless such termination is for Cause, for purposes of
Subsections 5(g), 5(h), and 5(i) of this Agreement Executive shall
be deemed to have completed ten (10) Years of Service and his or
her Vesting Percentage shall be deemed to be 100%.
(l) "Year of Service" shall mean any Fiscal Year during
which the Executive has worked for the Corporation at least one
thousand (1,000) hours, including Fiscal Years prior to the
effective date of this Agreement.
2. EMPLOYMENT. The Corporation hereby employs and engages the
services of the Executive as one of its key executives initially in
the position of EXECUTIVE VICE PRESIDENT, FINANCE-CHIEF FINANCIAL
OFFICER of the Corporation for the Term of Employment set forth in
Section 3. The Executive agrees to serve the Corporation for the
Term of Employment as provided herein.
3. TERM OF EMPLOYMENT. The Executive's Term of Employment
shall be a period commencing on the date hereof and ending one (1)
year thereafter; provided, however, that upon the expiration of the
aforesaid period (the "Expiration Date") and upon each anniversary
of the Expiration Date, the Term of Employment shall automatically
be extended for an additional one (1) year period unless Executive
or the Corporation notifies the other in writing at least sixty
(60) days prior to the commencement of such one (1) year period of
an intention to terminate this Agreement. Notwithstanding anything
herein to the contrary, the Term of Employment shall terminate upon
Executive's death or Permanent Disability as set forth in
subsection 6(a) hereof or upon the Corporation's termination of
Executive's employment for Cause pursuant to subsection 6(b)
hereof.
<PAGE>
4. POSITION AND DUTIES.
(a) Prior to a Change of Control, during the Term of
Employment, the Executive shall serve the Corporation in such
capacity as the Corporation may determine. After a Change of
Control, during the Term of Employment, the Executive's position,
authority and responsibilities, the type of work he or she is asked
to perform, and the status and stature of the people with whom he
or she is asked to work, shall be comparable to that existing with
respect to the Executive as of the date immediately prior to the
Change of Control, and after a Change of Control the Executive's
services shall be performed at the location where the Executive was
employed as of the date immediately prior to the Change of Control,
or at such other location as may be mutually agreed between the
Corporation and the Executive.
(b) The Executive agrees to devote his or her full business
time during normal business hours to the business and affairs of
the Corporation (except as otherwise provided herein) and to use
his or her best efforts to promote the interests of the Corporation
and its Affiliated Companies and to perform faithfully and
efficiently the responsibilities assigned to him or her in
accordance with the terms of this Agreement to the extent necessary
to discharge such responsibilities, except for (i) service on
corporate, civic or charitable boards or committees not
significantly interfering with the performance of such
responsibilities and (ii) periods of vacation and sick leave to
which he or she is entitled. It is expressly understood and agreed
that the Executive's continuing service on any boards and
committees with which he or she shall be connected, as a member or
otherwise, as of the date hereof, or any such service approved by
the Corporation during the Term of Employment, shall not be deemed
to interfere with the performance of the Executive's services to
the Corporation pursuant to this subparagraph 4(b).
5. COMPENSATION AND OTHER CONDITIONS OF EMPLOYMENT.
(a) BASE SALARY. During the Term of Employment, the
Executive shall receive an annual base salary (the "Base Salary"),
in equal installments payable weekly or at such other intervals as
salary is normally paid by the Corporation to its employees, at an
annual rate established by the Corporation and any Affiliated
Companies as of the date hereof. The Base Salary shall be reviewed
at least once each year and may be increased at any time and from
time to time by action of the Board of Directors of CPI Corp., any
committee thereof or any individual having authority to take such
action, in accordance with the Corporation's regular practices.
Any increase in the Base Salary shall not serve to limit or reduce
any other obligation of the Corporation hereunder, and after such
increase the Base Salary shall not be reduced from such increased
level.
<PAGE>
(b) ANNUAL BONUS. After a Change of Control, in addition
to the Base Salary, the Executive shall be awarded for each Fiscal
Year during the Term of Employment an annual bonus (the "Annual
Bonus") (pursuant to any bonus plan or program of the Corporation,
any incentive plan or program of the Corporation, or otherwise) in
cash at least equal to the highest bonus paid or payable to the
Executive in respect of any of the Fiscal Years during the three
Fiscal Years immediately prior to the date of the Change of
Control. Prior to a Change of Control, the amount of the
Executive's Annual Bonus shall be determined in accordance with the
Corporation's regular practice.
(c) OTHER COMPENSATION PLANS. After a Change of Control,
in addition to the Base Salary and Annual Bonus payable as
hereinabove provided, during the Term of Employment, the Executive
shall be entitled to participate in all other compensation plans
and programs, including, without limitation, savings plans, stock
option plans, and retirement plans of the Corporation and its
Affiliated Companies (collectively, the "Savings Plans"), on a
basis at least equivalent to that provided by the Corporation and
its Affiliated Companies to the Executive under such programs
immediately prior to the date of the Change of Control. Prior to
a Change of Control, the Executive's entitlement to participate in
the Savings Plans shall be determined in accordance with the
Corporation's regular practice. Prior to a Change of Control,
nothing herein shall be construed to prevent the Corporation from
amending or altering any such plans in accordance with the terms
thereof. All agreements between the Corporation and the Executive
existing on the date hereof providing for special pension,
retirement or similar benefits are continued by this Agreement.
(d) BENEFIT PLANS. After a Change of Control, during the
Term of Employment, the Executive, his or her spouse, or his or her
dependents, as the case may be, shall be entitled to receive all
amounts which he or she, his or her spouse or his or her dependents
are or would have been entitled to receive as benefits under all
other benefit plans of the Corporation and its Affiliated
Companies, including, without limitation, medical, dental,
disability, group life, accidental death and travel accident
insurance plans and programs (collectively, the "Benefit Plans") on
a basis at least as favorable to the Executive as on the date
immediately prior to the date of the Change of Control. Prior to
a Change of Control, the Executive's and such other persons'
entitlement to participate in the Benefit Plans shall be determined
in accordance with the Corporation's regular practice.
(e) EXPENSES. During the Term of Employment, the Executive
shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by the Executive in accordance with
the regular policies and procedures of the Corporation.
(f) OFFICE AND SUPPORT STAFF. After a Change of Control
<PAGE>
the Executive shall be entitled to an office or offices of a size
and with furnishings and other appointments, and to secretarial and
other assistance, at least equal to those provided to the Executive
as of the date immediately prior to the date of the Change of
Control.
(g) DEATH BENEFITS. In the event of Executive's death
after completion of at least ten (10) Years of Service, unless (1)
Executive's employment with the Corporation was terminated for
Cause or (2) Executive (or his or her Beneficiary) is entitled to
receive Supplemental Retirement Benefits pursuant to subsection
5(i), the Corporation shall pay to Executive's Beneficiary an
annual death benefit equal to forty percent (40%) (but not to
exceed $150,000) of the highest annual Base Salary paid to
Executive from and after fiscal year 1997 (as defined in subsection
5(a) hereof) for the Fiscal Year of his or her termination of
employment with the Corporation, payable in equal monthly
installments, commencing with the month following the month of
Executive's death and ending with the two-hundred fortieth (240th)
month following the month of Executive's death. In the event that
Executive dies before age 65 but has not completed at least ten
(10) Years of Service with the Corporation, death benefits shall be
reduced to an amount equal to the benefits determined under the
preceding sentence multiplied by the Vesting Percentage applicable
to Executive.
(h) DISABILITY BENEFITS. In the event of Executive's
Permanent Disability prior to attaining age 65 and prior to
termination of employment with the Corporation, unless Executive's
employment with the Corporation was terminated for Cause, the
Corporation shall pay Executive annual disability benefits equal to
forty percent (40%) (but not to exceed $150,000) of the highest
annual Base Salary paid to Executive from and after fiscal year
1997 for the Fiscal Year in which the Executive terminated
employment with the Corporation, payable in equal monthly
installments, commencing with the month following the month in
which Executive terminated employment as a result of Permanent
Disability and ending on the earlier of (i) the month in which
Executive reaches age 65 or (ii) the month of his or her death. In
the event that at the time of Permanent Disability Executive has
not completed at least ten (10) Years of Service, the disability
benefits shall be reduced to an amount equal to the benefits
determined under the preceding sentence multiplied by the Vesting
Percentage applicable to Executive. Disability benefits pursuant
to this subsection (h) shall be reduced by any amounts paid to
Executive under the Corporation's long-term disability insurance
policy, but shall not be reduced for any payments received by
Executive from Social Security or from any disability insurance
coverage individually owned by Executive.
(i) SUPPLEMENTAL RETIREMENT BENEFITS.
<PAGE>
(1) In the event of Executive's Retirement after
completion of at least ten (10) Years of Service, unless
Executive's employment with the Corporation was terminated for
Cause, the Corporation shall pay Executive retirement benefits for
twenty (20) years in an annual amount equal to forty percent (40%)
(but not to exceed $150,000) of the highest annual Base Salary paid
to Executive from and after fiscal year 1997 for the Fiscal Year of
his or her Retirement ("Supplemental Retirement Benefits"). In the
event of Executive's Retirement before completion of ten (10) Years
of Service, Corporation shall pay Executive retirement benefits on
the same terms as set forth in the preceding sentence except that
retirement benefits shall be reduced to an amount equal to
Supplemental Retirement Benefits multiplied by the Vesting
Percentage.
(2) Supplemental Retirement Benefits shall be payable
in two hundred forty (240) equal monthly installments commencing
with the month following the later of (i) the month of Executive's
Retirement or (ii) the month during which Executive reaches age
sixty-five (65). If Executive dies prior to the end of the two
hundred forty (240) month period during which Supplemental
Retirement Benefits are payable, Supplemental Retirement Benefits
shall be payable during the remainder of such 240-month period to
his or her Beneficiary.
(3) Notwithstanding anything herein to the contrary, in
the event of Executive's termination of employment with the
Corporation prior to attaining age 65 as a result of Permanent
Disability, if Executive attains age 65 and his or her employment
with the Corporation was not terminated for Cause, the Corporation
shall pay to Executive the Supplemental Retirement Benefits set
forth in this Subsection 5(i) in accordance with Executive's
Vesting Percentage, commencing as of the month following the month
in which Executive attains age 65; provided, however, that any
Supplemental Retirement Benefits paid pursuant to this sentence
shall be reduced by any amounts paid to Executive under the
Corporation's long-term disability insurance policy (but shall not
be reduced for any payments received by Executive from Social
Security or from any disability insurance coverage individually
owned by Executive) for the same period.
(j) SURVIVABILITY OF DEATH AND SUPPLEMENTAL RETIREMENT
BENEFITS. In the event of Executive's Retirement or death,
Executive's entitlement to death benefits pursuant to
Subsection 5(g) hereof and Supplemental Retirement Benefits
pursuant to Subsection 5(i) hereof shall survive the Term of
Employment and Executive or his or her Beneficiary shall be
entitled to such death benefits and Supplemental Retirement
Benefits based on the same terms and conditions as would have been
applicable had his or her death or Retirement, as the case may be,
occurred during the Term of Employment.
<PAGE>
6. TERMINATION OF EMPLOYMENT.
(a) DEATH OR PERMANENT DISABILITY. Except for the
obligations of the Corporation set forth in this Subsection 6(a),
this Agreement shall terminate automatically upon the Executive's
death or Permanent Disability. In the event of such termination,
the Corporation shall pay to the Executive's Beneficiary or, in the
event of Permanent Disability, the Executive or his or her legal
representative, all benefits and Base Salary accrued through the
date of termination, including, without limitation, amounts payable
under any plan referred to in Subsection 5(d) plus any benefits to
which Executive may be entitled pursuant to Subsection 5(g),
Subsection 5(h) or Subsection 5(i) hereof.
(b) CAUSE. The Corporation may terminate the Executive's
employment for Cause. If the Executive's employment is terminated
for Cause, the Corporation shall pay the Executive his or her full
accrued Base Salary through the effective date of the termination
of his or her employment (which shall be no earlier than the date
of receipt of notice thereof) at the rate in effect at the time of
such termination, and the Corporation shall have no further
obligations to the Executive under this Agreement.
(c) NOTIFICATION PRIOR TO ONE YEAR EXTENSION. Either
Executive or the Corporation may terminate this Agreement by
notifying the other party in writing of an intention to do so at
least sixty (60) days prior to the commencement of a one-year
extension period described in Section 3 hereof.
(d) PAYMENTS FOR INVOLUNTARY TERMINATION WITHOUT CAUSE.
(1) If prior to a Change of Control (i) the Corporation
terminates Executive's employment (other than for Cause pursuant to
subsection 6(b) hereof), or (ii) the Executive's employment
terminates by reason of the Corporation's termination of this
Agreement pursuant to subsection 6(c)hereof, the Corporation shall
pay Executive following such involuntary termination his or her
full accrued Base Salary through the date of termination of
employment plus an amount equal to fifty percent (50%) of
Executive's Base Salary for the fiscal year in which termination
occurs, payable in twenty-six (26) equal weekly installments or at
such other intervals as salary is normally paid by the Corporation
to its employees. The payment pursuant to this Subsection 6(d)(1)
and any payments to which Executive may be entitled pursuant to
Subsections 5(g), 5(h), and 5(i) shall be in full discharge of any
claims, actions, demands or damages of every nature and description
which Executive might have or might assert against the Corporation
or any Affiliated Company in connection with or arising from the
termination of Executive's employment or the termination of this
Agreement.
(2) If following a Change of Control (i) the
<PAGE>
Corporation terminates Executive's employment (other than for Cause
pursuant to Subsection 6(b) hereof), or (ii) the Executive's
employment terminates by reason of the Corporation's termination of
this Agreement pursuant to subsection (c) hereof, the Corporation
shall, at the time of such involuntary termination, make a lump sum
cash payment to Executive equal to 200% of his or her Base Salary
for the Fiscal Year of termination. In addition to the payment
pursuant to this Subsection 6(d)(2) and any payments to which
Executive may be entitled pursuant to Subsections 5(g), 5(h) and
5(i), Executive shall be entitled to all remedies available under
this Agreement or at law in respect of any damages suffered by
Executive as a result of an involuntary termination of employment
without Cause.
7. GROSS-UP FOR PARACHUTE TAX.
(a) GENERAL. In the event that following a Change of
Control Executive becomes entitled to any payments (whether
pursuant to this Employment Agreement or any other plan,
arrangement or agreement) from the Corporation in the nature of
compensation ("Parachute Payments") that in the opinion of a
certified public accounting firm (selected in the manner set forth
in Subsection 7(b)) or that under the provisions of a notice of
assessment from the Internal Revenue Service causes imposition of
the tax under Section 4999 of the Code or any similar tax that may
hereafter be imposed (the "Excise Tax"), the Corporation shall pay
Executive, at the time specified in Subsection 7(d), the Gross-Up
Payment (as determined in accordance with Subsection 7(c)).
(b) SELECTION OF C.P.A. Within fifteen (15) days after any
termination of Executive's employment following a Change of
Control, the majority of the Continuing Directors as of the date
immediately prior to the Change of Control shall select a certified
public accounting firm (the "C.P.A.") to determine the amount, if
any, of the Excise Tax and the amount, if any, of the Gross-Up
Payments.
(c) AMOUNT OF GROSS-UP PAYMENTS.
(1) The Gross-Up Payments shall be in an amount such
that the net amount retained by Executive with respect to the
Parachute Payments and Gross-Up Payments, after deduction of any
Excise Tax to which the Parachute Payments may be subject and any
federal, state, and local income taxes and Excise Tax upon the
Gross-Up Payments, shall be equal to the gross amount of the
Parachute Payments.
(2) For purposes of determining the amount of the
Gross-Up Payments, Executive shall be deemed to pay federal income
taxes at the applicable rate of federal income taxation for the
calendar year in which the Gross-Up Payment is to be made and state
and local income taxes at the applicable rate of taxation for the
<PAGE>
calendar year in which the Gross-Up Payment is to be made.
(3) In the event that the Excise Tax is subsequently
determined to exceed the amount taken into account at the time the
Gross-Up Payment is made pursuant to Subsection 7(d)(1) hereof
(including any excess attributable to any Parachute Payments the
existence or amount of which could not be accurately determined at
the time of the Gross-Up Payment), the Corporation shall make an
additional Gross-Up Payment in respect of such excess (plus any
interest and addition to tax payable with respect to such excess)
within fifteen (15) days after the amount of such excess is
determined by the C.P.A. or by the Internal Revenue Service (the
"IRS") in a notice of assessment.
(d) TIMING OF GROSS-UP PAYMENTS. Gross-Up Payments other
than Gross-Up Payments pursuant to Subsection 7(c)(3) shall be paid
not later than forty-five (45) days following payment of any
Parachute Payments to which the Gross-Up Payments are attributable;
provided, however, that if the amount of such Gross-Up Payment or
portion thereof cannot be finally determined on or before such day,
the Corporation shall pay to Executive on such day an estimate, as
determined in good faith by the Corporation, of the minimum amount
of such payments and shall pay the remainder of such payments
(together with interest at the applicable federal rate provided in
Section l274(d) of the Code) as soon as the amount thereof can be
determined by the C.P.A., but in no event later than forty-five
(45) days after payment of such Parachute Payments.
(e) CORPORATION'S RIGHT TO DESIGNATE TAX REPRESENTATIVE;
ASSIGNMENT OF REFUND PROCEEDS. If the IRS proposes an assessment
of the Excise Tax against Executive or proposes an additional
assessment of Excise Tax in excess of the amount previously
reported by Executive:
(1) Executive shall within five (5) days after receipt
from the IRS of notice of the proposed Excise Tax assessment notify
the Corporation in writing and furnish the Corporation with copies
of all correspondence from the IRS relating to the proposed Excise
Tax assessment.
(2) The Corporation shall be authorized to designate an
attorney and/or accountant (the "Tax Representative") to serve as
Executive's exclusive representative with respect to all
proceedings with the IRS relating to the proposed Excise Tax
assessment, including but not limited to negotiating a settlement
or compromise of the proposed Excise Tax assessment, filing a claim
for refund with respect thereto, and seeking judicial review of any
disallowance of a claim for refund. Executive hereby agrees to
execute an appropriate power of attorney authorizing the Tax
Representative to represent Executive with respect to the Excise
Taxes. Executive further agrees to take any other appropriate
actions reasonably requested by the Tax Representative in
<PAGE>
connection therewith; provided, however, that the Corporation shall
reimburse Executive for any expenses incurred by Executive as a
result of compliance with such requests.
(3) If the Tax Representative files a claim for refund
of Excise Taxes with respect to which the Corporation has made a
Gross-Up Payment and such refund claim is allowed by the IRS or by
the final judgment of a court of competent jurisdiction, Executive
shall endorse the refund check payable to the Corporation and shall
send the refund check to the Corporation not later than five (5)
days after receipt from the IRS.
(4) If the Corporation designates a Tax Representative,
the Corporation shall pay all of his or her professional fees and
expenses and hold Executive harmless from any claims in connection
therewith. The Tax Representative shall keep Executive timely
informed of all significant developments in the Excise Tax matter
and shall send to Executive copies of all correspondence relating
thereto.
(5) Notwithstanding anything herein to the contrary, if
the Corporation is in material breach of any of its obligations
pursuant to this Agreement, the Corporation's rights pursuant to
this Subsection 7(e) shall be extinguished and Executive shall have
the right to revoke any power of attorney executed pursuant to this
Subsection 7(e).
8. NO OBLIGATION TO MITIGATE DAMAGES. The Executive shall not
be obligated to mitigate any damages by seeking other employment or
otherwise, and no amount payable hereunder and no benefit or
service credit for benefits shall be reduced in the event that the
Executive shall accept alternative employment.
9. BENEFITS PAYABLE ONLY FROM CORPORATE ASSETS.
(a) NO TRUST. Nothing contained in this Agreement, and no
action taken pursuant to its provisions by either party
hereto shall create, or be construed to create, a trust of any
kind, or a fiduciary relationship between the Corporation and the
Executive or his or her Beneficiary.
(b) EXECUTIVE'S STATUS AS UNSECURED GENERAL CREDITOR. The
payment of any benefits hereunder to the Executive or his or her
Beneficiary shall be made from assets which shall continue, for all
purposes, to be a part of the general assets of the Corporation; no
person shall have or acquire any interest in such assets by virtue
of the provisions of this Agreement. To the extent that the
Executive or his or her Beneficiary acquires a right to receive
payments from the Corporation under the provisions hereof, such
right shall be no greater than the right of any unsecured general
creditor of the Corporation.
<PAGE>
(c) RECOVERY OF COST OF PROVIDING BENEFITS. In the event
that, in its discretion, the Corporation purchases an insurance
policy insuring the life of the Executive to enable the Corporation
to recover, in whole or in part, the cost of providing any benefits
hereunder, neither the Executive nor his or her Beneficiary under
this Agreement shall have or acquire any rights whatsoever
therein. The Corporation shall be the sole owner and beneficiary
of any such policy and, as such, shall possess and may exercise all
incidents of ownership therein.
10. DETERMINATION OF BENEFITS AND CLAIMS PROCEDURE. The
Corporation shall make all determinations as to rights to benefits
under this Agreement. Subject to and in compliance with the
specific procedures contained in the applicable regulations
promulgated under the Employee Retirement Income Security Act of
1974, as amended: (i) any decision by the Corporation denying a
claim for benefits under this Agreement by the Executive or his or
her Beneficiary shall be stated in writing by the Corporation and
delivered or mailed to the claimant; (ii)each such notice shall set
forth the specific reasons for the denial, written to the best of
the Corporation's ability in a manner that may be understood
without legal or actuarial counsel; and (iii)the Corporation shall
afford a reasonable opportunity to the claimant whose claim for
benefits has been denied for a review of the decision denying such
claim.
11. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation
in any benefit, bonus, incentive or other plan or program provided
by the Corporation or any Affiliated Companies and for which the
Executive may qualify, nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any other
agreements with the Corporation or any Affiliated Companies.
Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan or program of the
Corporation or any Affiliated Companies shall be payable in
accordance with the terms of such plan or program.
12. FULL SETTLEMENT. After a Change of Control, the
Corporation's obligation to make the payments provided for herein
and otherwise to perform its obligations hereunder shall not be
affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the
Corporation may have against the Executive or others. Unless it is
finally determined by a court of competent jurisdiction after all
available appeals that the Corporation has validly terminated the
Executive's employment for Cause, the Corporation agrees to pay, to
the full extent permitted by law, all legal fees and expenses which
the Executive may reasonably incur as a result of any contest
(regardless of the outcome thereof) by the Corporation or others of
the validity or enforceability of, or liability under, any
provision of this Agreement or any guarantee of performance
<PAGE>
thereof, plus, in each case, interest compounded quarterly, on the
total unpaid amount determined be payable hereunder, such interest
to be calculated on the basis of the prime commercial lending rate
announced by Mercantile Bank, N.A. in effect from time to time, for
the period commencing on the date of such contest and ending on
the date on which the Corporation shall pay such amount.
13. COVENANTS.
(a) NON-COMPETITION.
(1) Executive recognizes that during the course of
Executive's employment with the Corporation, Executive has been and
will be instructed about and become acquainted with confidential
information of the Corporation, including, without limitation,
customer lists, methods of sales, the existence and contents and
terms of this Agreement, methods of sales procurement, sales
procurement techniques, sales procedures and equipment/supply
information, equipment and supply acquisition procedures and
processes and sources, customer evaluation procedures, customer
maintenance and supply maintenance procedures and corresponding
information relating to persons, firms and corporations which are
or may become customers of the Corporation and, further, companies
from which the Corporation obtains various products and supplies
for sale, resale and distribution to customers of the Corporation.
This confidential information further includes, but is not limited
to, customer identity, supplier identity and terms, purchase terms,
sales techniques, purchase conditions and rates, customer needs,
billing procedures and processes, contacts and customer
information. Further, Executive agrees and acknowledges that the
development and assemblage and maintenance of the customer base of
the Corporation has taken extraordinary time, money, resources,
training, and effort by the Corporation and its employees.
(2) Executive agrees that he or she will not during the
Term of Employment and for a period of two (2) years following
cessation of his or her employment at the Corporation ("Restricted
Period"), for any cause or reason, directly or indirectly:
(A) engage in any business in competition with the
Corporation and its Affiliates or supply and sell to present
customers, former customers and prospects of the Corporation and
its Affiliates; or
(B) own, manage, operate, control, advise, be
employed by, consult, or materially participate in, or be
materially involved in any manner with the ownership, management,
operation or control of, individually or through any other entity
or device, any business that competes with the business then
conducted by the Corporation or any Affiliate; provided, however,
that mere ownership as an investor of not more than five percent
(5%) of the securities of a corporation or other business
<PAGE>
enterprise shall not in and of itself be deemed to violate this
Section 13(b)(2)(B).
(b) NONDISCLOSURE OF CONFIDENTIAL INFORMATION.
(1) Executive will not, except as authorized by the
Corporation in writing, during or at any time after the termination
of Executive's employment with the Corporation, directly or
indirectly, use for himself or herself or others, or disclose,
communicate, divulge, furnish to, or convey to any other person,
firm, or corporation, any secret or confidential information,
knowledge or data of the Corporation or that of third parties
obtained by Executive during the period of his or her employment
with the Corporation. Such information, knowledge or data
includes, without limitation, the following:
(A) Secret or confidential matters of a technical
nature such as, but not limited to, methods, know-how,
formulations, compositions, processes, discoveries, machines,
inventions, computer programs, and similar items or research
projects involving such items,
(B) Secret or confidential matters of a business
nature such as, but not limited to, marketing policies or
strategies, information about costs, price lists, purchasing and
purchasing policies, profits, market, sales or lists of customers,
customer history information, and
(C) Secret or confidential matters pertaining to
future developments such as, but not limited to, research and
development or future marketing or merchandising.
(2) Executive, upon termination of his or her
employment with the Corporation, or at any other time upon the
Corporation's request, shall deliver promptly to the Corporation
all manuals, letters, notes, notebooks, reports, formulations,
computer programs and similar items, memoranda, lists of customers,
customer history information and all other materials and copies
thereof relating in any way to the Corporation's business and in
any way obtained by Executive during the term of employment with
the Corporation which are in his or her possession or under his or
her control; and Executive will not make or retain any copies of
any of the foregoing and will so represent to the Corporation upon
termination of his or her employment.
(c) INDUCEMENT.
(1) Executive agrees that during the Term of
Employment and during the Restricted Period, Executive shall not
use any confidential information for the purposes of inducing or
attempting to induce any present, former, or prospective customer
of the Corporation or its Affiliates to become a customer of
<PAGE>
Executive or any person, firm, or corporation, or business
association with which Executive is affiliated in any capacity with
respect to the markets supplied by the Corporation or its
Affiliates.
(2) Executive agrees that during the Term of
Employment and during the Restricted Period, Executive shall not
directly or indirectly solicit for employment or employ any of the
Corporation's employees to work for Executive or any business
association with which/whom Executive is affiliated, or to work for
any other company in the markets supplied by the Corporation or its
Affiliates.
(d) INTEREST OF PARTIES. Executive agrees that the
duration of the limitations set forth in this Section 13 are
reasonable under the circumstances, considering Executive's
position with the Corporation and other relevant factors, and that
this will not constitute a serious handicap to Executive in
securing future employment.
(e) DISCLOSURE TO CORPORATION. Executive shall
promptly communicate and disclose to the Corporation all
information, observations and data obtained by Executive in the
course of Executive's employment. All written materials, records
and documents made by Executive or coming into Executive's
possession during the Term of Employment concerning any inventions,
products, processes or equipment, manufactured, used, developed,
investigated or considered by the Corporation or any Affiliated
Companies shall be the property of the Corporation, and upon
termination of the Term of Employment, or upon request of the
Corporation during the Term of Employment, Executive shall
promptly deliver the same to the Corporation.
Executive agrees to render to the Corporation such reports of the
activities of the business undertaken by Executive or conducted
under Executive's direction during the Term of Employment as the
Corporation may reasonably request.
(f) INVENTIONS.
(1) Executive shall promptly communicate and
disclose in writing to the Corporation all those inventions and
developments whether patentable or not, as well as patents and
patent applications (hereinafter collectively called "Inventions"),
made, conceived, developed or purchased by Executive, or under
which Executive acquires the right to grant licenses or to become
licensed, alone or jointly with others, during the Term of
Employment, which have arisen or may arise out of Executive's
employment, or relate to any matters pertaining to, applicable to,
or useful in connection with, the business or affairs of the
Corporation or any Affiliated Companies. All of Executive's right,
title and interest in, to and under all such inventions, licenses
<PAGE>
and rights to grant licenses shall be the sole property of the
Corporation. Any such inventions disclosed to anyone by Executive
within one (1) year after the termination of the Term of Employment
for any cause whatsoever shall be deemed to have been made or
conceived by Executive during the Term of Employment.
(2) As to all such inventions, Executive shall,
upon request of the Corporation, during the Term of Employment or
thereafter:
(A) Execute all documents which the
Corporation shall deem necessary or proper
to enable it to establish title to such
inventions, or other rights, and to enable
it to file and prosecute applications for
letters patent of the United States and any
foreign country; and
(B) Do all things (including the giving
of evidence in suits and other proceedings)
which the Corporation shall deem necessary
or proper to obtain, maintain or to assert
patents for any and all such inventions or
to assert its rights in any inventions not
patented.
All expenses incident to any action required by the Corporation or
taken on its behalf pursuant to the provisions of this paragraph
shall be borne by the Corporation including without limitation a
reasonable payment for Executive's time and expenses involved in
case he or she is not then in its employ.
(g) LITIGATION. Executive agrees that during the
Term of Employment or thereafter, Executive shall do all things,
including the giving of evidence in suits and other proceedings,
which the Corporation shall deem necessary or proper to obtain,
maintain or assert rights accruing to the Corporation during the
Term of Employment and in connection with which Executive has
knowledge, information or expertise. All reasonable expenses
incurred by Executive during the Term of Employment or thereafter
in fulfilling the duties set forth in this Section, shall be
reimbursed by the Corporation to the full extent legally
appropriate including, without limitation, a reasonable payment for
Executive's time in the event this Agreement has terminated prior
to the time Executive renders such assistance, advice and counsel.
14. EQUITY. The parties hereto agree that the services to be
rendered by Executive are special, unique and of an extraordinary
character. In the event of the breach by Executive of any of the
provisions of this Agreement, the Corporation, in addition and as
a supplement to such other rights and remedies as may exist in its
favor, may apply to any court of law or equity having jurisdiction
<PAGE>
to enforce the specific performance of this Agreement, and/or may
apply for injunctive relief against any act which would violate any
of the provisions of this Agreement.
15. EFFECT ON PRIOR AGREEMENTS. This Agreement shall supersede
and replace any and all prior employment agreements entered into
between Executive and the Corporation or any Affiliated Company,
including but not limited to that certain Employment Agreement
dated February 5, 1995. This Agreement contains the entire
understanding of the parties hereto with respect to the subject
matter hereof.
16. NO ASSIGNMENT.
(a) This Agreement is personal to the Executive and without
the prior written consent of the Corporation shall not be
assignable by the Executive other than by will or the laws of
descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by the Executive's legal
representatives and Beneficiary.
(b) This Agreement shall inure to the benefit of and be
binding upon the Corporation and its successors. The Corporation
shall require any successor to all or substantially all of the
business and/or assets of the Corporation, whether direct or
indirect, by purchase, merger, consolidation, acquisition of stock,
or otherwise, by an agreement in form and substance satisfactory to
the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent as the
Corporation would be required to perform if no such succession had
taken place.
17. SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision or clause were omitted.
18. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Missouri, without
reference to principles of conflict of laws. The captions of this
Agreement are not part of the provisions hereof and shall have no
force or effect. This Agreement may not be amended or modified
other than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) In the event that litigation is required to enforce any
provision of this Agreement, subject to the provisions of Section
12 hereof, the prevailing party shall be entitled to reasonable
attorneys fees.
<PAGE>
(c) All notices and other communications hereunder shall be
in writing and shall be given by hand delivery to the other party
or by registered or certified mail, return receipt requested,
postage prepaid, addressed as follows:
IF TO THE EXECUTIVE:
Barry Arthur
219 North Third Street
New Baden, Illinois 62265
IF TO THE CORPORATION:
Consumer Programs, Incorporated
1706 Washington Avenue
St. Louis, Missouri 63103
Attention: Russ Isaak, President
or to such other address as either party shall have furnished to
the other in writing in accordance herewith. Notice and
communications shall be effective when actually received by the
addressee.
(d) This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter hereof.
(e) The Corporation may withhold from any amounts payable
under this Agreement such federal, state or local taxes as shall be
required to be withheld pursuant to any applicable law or
regulation.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement in duplicate, all as of the day and year first above
written.
CONSUMER PROGRAMS INCORPORATED
BY: /s/ Russell Isaak
------------------------------
President
BY: /s/ Barry Arthur
------------------------------
Barry Arthur
EXHIBIT (10.5)
Employee Contract - Fran Scheper
29
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated February 8, 1998, between CONSUMER PROGRAMS
INCORPORATED, a Missouri corporation (the "Corporation"), and Fran
Scheper (the "Executive").
WHEREAS, the Corporation currently employs the Executive in
the capacity of Executive Vice President, Human Resources, and the
Executive is one of the key executives of the Corporation;
WHEREAS, there is much competition for the type of business
performed by the Corporation in the locales in which the
Corporation operates, and the Corporation and Executive acknowledge
that the Corporation is active in the product markets in which it
competes;
WHEREAS, Executive, during his or her employment, has been and
will be entrusted with confidential information;
WHEREAS, Executive and the Corporation recognize and
acknowledge that, to ensure the continued growth and stability of
the Corporation, it is necessary to obtain an agreement from
Executive not to compete with the Corporation and not to disclose
confidential information of the Corporation; and
WHEREAS, the Corporation desires that the Executive continue
in the employ of the Corporation as a result of his or her
experience with the Corporation and his or her potential for making
future contributions to the Corporation, and the Executive is
willing to make a commitment to remain in such employ upon the
terms and subject to the conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises
contained herein and other good and valuable consideration, the
parties hereto hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement:
(a) "Affiliated Companies" shall mean any corporation (or
other business entity) controlling, controlled by or under common
control with the Corporation.
(b) "Beneficiary" shall mean the person designated in
writing by the Executive as his or her beneficiary under this
Agreement, or in the absence of such designation, his or her
estate.
(c) Cause shall mean:
(1) prior to a Change of Control, (i) conduct or
activity of the Executive materially detrimental to the
Corporation's reputation or business (including financial)
<PAGE>
operations; (ii) gross or habitual neglect or breach of duty or
misconduct of the Executive in discharging the duties of his or her
position; or (iii) prolonged absence by the Executive from
his or her duties (other than on account of illness or disability)
without the consent of the Corporation.
(2) after a Change of Control, (i) an act or acts of
dishonesty on the Executive's part which are intended to result in
his or her substantial personal enrichment at the expense of the
Corporation; (ii) any material violation by the Executive of his or
her obligations and covenants pursuant to this Agreement which is
demonstrably willful and deliberate on the Executive's part and
which results in material injury to the Corporation; or (iii) the
conviction of Executive of a felony or of a crime involving moral
turpitude.
(d) A "Change of Control" shall mean a change in control of
a nature that would be required to be reported in response to Item
1(a) of the Current Report on Form 8-K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended ("Exchange Act") or would have been
required to be so reported but for the fact that such event had
been "previously reported" as that term is defined in Rule 12b-2 of
Regulation 12B of the Exchange Act unless the transactions that
give rise to the change in control are approved or ratified by a
majority of the members of the Incumbent Board of CPI Corp. who are
not employees of the Corporation; provided that, without
limitation, notwithstanding anything herein to the contrary, such
a change in control shall be deemed to have occurred if (a) any
Person is or becomes the beneficial owner (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of
CPI Corp. representing 40% or more of the combined voting power of
CPI Corp.'s then outstanding securities ordinarily (apart from
rights accruing under special circumstances) having the right to
vote at elections of directors ("Voting Securities"), (b)
individuals who constitute the Board of CPI Corp. on the date
hereof (the "Incumbent Board") cease for any reason to constitute
at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election, or
nomination for election by CPI Corp.'s shareholders, was approved
by a vote of at least three-quarters of the directors comprising
the Incumbent Board (either by a specific vote or by approval of
the proxy statement of CPI Corp. in which such person is named as
a nominee for director, without objection to such nomination) shall
be, for purposes of this clause (b), considered as though such
person were a member of the Incumbent Board, or (c) approval by the
stockholders of CPI Corp. of a reorganization, merger or
consolidation, in each case, with respect to which persons who were
the stockholders of CPI Corp. immediately prior to such
reorganization, merger or consolidation do not, immediately
thereafter, own, directly or indirectly, more than 50% of the
combined voting power entitled to vote generally in the election of
<PAGE>
directors of the reorganized, merged or consolidated company's then
outstanding voting securities, or a liquidation or dissolution of
CPI Corp. or of the sale of all or substantially all of the assets
of CPI Corp. For purposes of this Agreement, the term "Person"
shall mean and include any individual, corporation, partnership,
group, association or other "person," as such term is used in
Section 14(d) of the Exchange Act, other than CPI Corp., the
Corporation or an Affiliated Company or any employee benefit
plan(s) sponsored or maintained by the Corporation or any
Affiliated Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as
may be amended from time to time.
(f) "Continuing Directors" shall have the meaning set forth
in Paragraph 3(G) of Article Ten of CPI Corp.'s Certificate of
Incorporation.
(g) "Fiscal Year" shall mean the Fiscal Year of the
Corporation.
(h) "Permanent Disability" shall mean the inability of
Executive to perform the services contemplated by Section 4 hereof
for a period of at least one hundred eighty (180) consecutive
calendar days or for thirty-five (35) weeks (whether or not
consecutive) in any twelve (12) month period on account of any
sickness, injury or other infirmity or disability.
(i) "Retirement" shall mean the Executive's voluntary or
involuntary termination of employment with the Corporation except
for termination on account of (A) Cause as defined in Subsection
6(b) hereof, (B) death or (C) Permanent Disability before attaining
age sixty-five (65).
(j) "Term of Employment" shall have the meaning set forth
in Section 3 hereof.
(k) "Vesting Percentage" shall mean the percentage of
Supplemental Retirement Benefits, death benefits, and disability
benefits in which Executive has a nonforfeitable interest (except
in the event of termination for Cause) based upon the number of
Years of Service Executive has completed, determined as follows:
<PAGE>
<TABLE>
<CAPTION>
COMPLETED YEARS VESTING
OF SERVICE PERCENTAGE
--------------- ----------
<S> <C> <C>
0 0%
1 10%
2 20%
3 30%
4 40%
5 50%
6 60%
7 70%
8 80%
9 90%
10 100%
</TABLE>
Notwithstanding anything herein to the contrary, if Executive's
employment with the Corporation terminates following a Change of
Control, unless such termination is for Cause, for purposes of
Subsections 5(g), 5(h), and 5(i) of this Agreement Executive shall
be deemed to have completed ten (10) Years of Service and his or
her Vesting Percentage shall be deemed to be 100%.
(l) "Year of Service" shall mean any Fiscal Year during
which the Executive has worked for the Corporation at least one
thousand (1,000) hours, including Fiscal Years prior to the
effective date of this Agreement.
2. EMPLOYMENT. The Corporation hereby employs and engages the
services of the Executive as one of its key executives initially in
the position of EXECUTIVE VICE PRESIDENT, HUMAN RESOURCES of the
Corporation for the Term of Employment set forth in Section 3. The
Executive agrees to serve the Corporation for the Term of
Employment as provided herein.
3. TERM OF EMPLOYMENT. The Executive's Term of Employment
shall be a period commencing on the date hereof and ending one (1)
year thereafter; provided, however, that upon the expiration of the
aforesaid period (the "Expiration Date") and upon each anniversary
of the Expiration Date, the Term of Employment shall automatically
be extended for an additional one (1) year period unless Executive
or the Corporation notifies the other in writing at least sixty
(60) days prior to the commencement of such one (1) year period of
an intention to terminate this Agreement. Notwithstanding anything
herein to the contrary, the Term of Employment shall terminate upon
Executive's death or Permanent Disability as set forth in
subsection 6(a) hereof or upon the Corporation's termination of
Executive's employment for Cause pursuant to subsection 6(b)
hereof.
<PAGE>
4. POSITION AND DUTIES.
(a) Prior to a Change of Control, during the Term of
Employment, the Executive shall serve the Corporation in such
capacity as the Corporation may determine. After a Change of
Control, during the Term of Employment, the Executive's position,
authority and responsibilities, the type of work he or she is asked
to perform, and the status and stature of the people with whom he
or she is asked to work, shall be comparable to that existing with
respect to the Executive as of the date immediately prior to the
Change of Control, and after a Change of Control the Executive's
services shall be performed at the location where the Executive was
employed as of the date immediately prior to the Change of Control,
or at such other location as may be mutually agreed between the
Corporation and the Executive.
(b) The Executive agrees to devote his or her full business
time during normal business hours to the business and affairs of
the Corporation (except as otherwise provided herein) and to use
his or her best efforts to promote the interests of the Corporation
and its Affiliated Companies and to perform faithfully and
efficiently the responsibilities assigned to him or her in
accordance with the terms of this Agreement to the extent necessary
to discharge such responsibilities, except for (i) service on
corporate, civic or charitable boards or committees not
significantly interfering with the performance of such
responsibilities and (ii) periods of vacation and sick leave to
which he or she is entitled. It is expressly understood and agreed
that the Executive's continuing service on any boards and
committees with which he or she shall be connected, as a member or
otherwise, as of the date hereof, or any such service approved by
the Corporation during the Term of Employment, shall not be deemed
to interfere with the performance of the Executive's services to
the Corporation pursuant to this subparagraph 4(b).
5. COMPENSATION AND OTHER CONDITIONS OF EMPLOYMENT.
(a) BASE SALARY. During the Term of Employment, the
Executive shall receive an annual base salary (the "Base Salary"),
in equal installments payable weekly or at such other intervals as
salary is normally paid by the Corporation to its employees, at an
annual rate established by the Corporation and any Affiliated
Companies as of the date hereof. The Base Salary shall be reviewed
at least once each year and may be increased at any time and from
time to time by action of the Board of Directors of CPI Corp., any
committee thereof or any individual having authority to take such
action, in accordance with the Corporation's regular practices.
Any increase in the Base Salary shall not serve to limit or reduce
any other obligation of the Corporation hereunder, and after such
increase the Base Salary shall not be reduced from such increased
level.
<PAGE>
(b) ANNUAL BONUS. After a Change of Control, in addition
to the Base Salary, the Executive shall be awarded for each Fiscal
Year during the Term of Employment an annual bonus (the "Annual
Bonus") (pursuant to any bonus plan or program of the Corporation,
any incentive plan or program of the Corporation, or otherwise) in
cash at least equal to the highest bonus paid or payable to the
Executive in respect of any of the Fiscal Years during the three
Fiscal Years immediately prior to the date of the Change of
Control. Prior to a Change of Control, the amount of the
Executive's Annual Bonus shall be determined in accordance with the
Corporation's regular practice.
(c) OTHER COMPENSATION PLANS. After a Change of Control,
in addition to the Base Salary and Annual Bonus payable as
hereinabove provided, during the Term of Employment, the Executive
shall be entitled to participate in all other compensation plans
and programs, including, without limitation, savings plans, stock
option plans, and retirement plans of the Corporation and its
Affiliated Companies (collectively, the "Savings Plans"), on a
basis at least equivalent to that provided by the Corporation and
its Affiliated Companies to the Executive under such programs
immediately prior to the date of the Change of Control. Prior to
a Change of Control, the Executive's entitlement to participate in
the Savings Plans shall be determined in accordance with the
Corporation's regular practice. Prior to a Change of Control,
nothing herein shall be construed to prevent the Corporation from
amending or altering any such plans in accordance with the terms
thereof. All agreements between the Corporation and the Executive
existing on the date hereof providing for special pension,
retirement or similar benefits are continued by this Agreement.
(d) BENEFIT PLANS. After a Change of Control, during the
Term of Employment, the Executive, his or her spouse, or his or her
dependents, as the case may be, shall be entitled to receive all
amounts which he or she, his or her spouse or his or her dependents
are or would have been entitled to receive as benefits under all
other benefit plans of the Corporation and its Affiliated
Companies, including, without limitation, medical, dental,
disability, group life, accidental death and travel accident
insurance plans and programs (collectively, the "Benefit Plans") on
a basis at least as favorable to the Executive as on the date
immediately prior to the date of the Change of Control. Prior to
a Change of Control, the Executive's and such other persons'
entitlement to participate in the Benefit Plans shall be determined
in accordance with the Corporation's regular practice.
(e) EXPENSES. During the Term of Employment, the Executive
shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by the Executive in accordance with
the regular policies and procedures of the Corporation.
(f) OFFICE AND SUPPORT STAFF. After a Change of Control
<PAGE>
the Executive shall be entitled to an office or offices of a size
and with furnishings and other appointments, and to secretarial and
other assistance, at least equal to those provided to the Executive
as of the date immediately prior to the date of the Change of
Control.
(g) DEATH BENEFITS. In the event of Executive's death
after completion of at least ten (10) Years of Service, unless (1)
Executive's employment with the Corporation was terminated for
Cause or (2) Executive (or his or her Beneficiary) is entitled to
receive Supplemental Retirement Benefits pursuant to subsection
5(i), the Corporation shall pay to Executive's Beneficiary an
annual death benefit equal to forty percent (40%) (but not to
exceed $150,000) of the highest annual Base Salary paid to
Executive from and after fiscal year 1997 (as defined in subsection
5(a) hereof) for the Fiscal Year of his or her termination of
employment with the Corporation, payable in equal monthly
installments, commencing with the month following the month of
Executive's death and ending with the two-hundred fortieth (240th)
month following the month of Executive's death. In the event that
Executive dies before age 65 but has not completed at least ten
(10) Years of Service with the Corporation, death benefits shall be
reduced to an amount equal to the benefits determined under the
preceding sentence multiplied by the Vesting Percentage applicable
to Executive.
(h) DISABILITY BENEFITS. In the event of Executive's
Permanent Disability prior to attaining age 65 and prior to
termination of employment with the Corporation, unless Executive's
employment with the Corporation was terminated for Cause, the
Corporation shall pay Executive annual disability benefits equal to
forty percent (40%) (but not to exceed $150,000) of the highest
annual Base Salary paid to Executive from and after fiscal year
1997 for the Fiscal Year in which the Executive terminated
employment with the Corporation, payable in equal monthly
installments, commencing with the month following the month in
which Executive terminated employment as a result of Permanent
Disability and ending on the earlier of (i) the month in which
Executive reaches age 65 or (ii) the month of his or her death. In
the event that at the time of Permanent Disability Executive has
not completed at least ten (10) Years of Service, the disability
benefits shall be reduced to an amount equal to the benefits
determined under the preceding sentence multiplied by the Vesting
Percentage applicable to Executive. Disability benefits pursuant
to this subsection (h) shall be reduced by any amounts paid to
Executive under the Corporation's long-term disability insurance
policy, but shall not be reduced for any payments received by
Executive from Social Security or from any disability insurance
coverage individually owned by Executive.
(i) SUPPLEMENTAL RETIREMENT BENEFITS.
<PAGE>
(1) In the event of Executive's Retirement after
completion of at least ten (10) Years of Service, unless
Executive's employment with the Corporation was terminated for
Cause, the Corporation shall pay Executive retirement benefits for
twenty (20) years in an annual amount equal to forty percent (40%)
(but not to exceed $150,000) of the highest annual Base Salary paid
to Executive from and after fiscal year 1997 for the Fiscal Year of
his or her Retirement ("Supplemental Retirement Benefits"). In the
event of Executive's Retirement before completion of ten (10) Years
of Service, Corporation shall pay Executive retirement benefits on
the same terms as set forth in the preceding sentence except that
retirement benefits shall be reduced to an amount equal to
Supplemental Retirement Benefits multiplied by the Vesting
Percentage.
(2) Supplemental Retirement Benefits shall be payable
in two hundred forty (240) equal monthly installments commencing
with the month following the later of (i) the month of Executive's
Retirement or (ii) the month during which Executive reaches age
sixty-five (65). If Executive dies prior to the end of the two
hundred forty (240) month period during which Supplemental
Retirement Benefits are payable, Supplemental Retirement Benefits
shall be payable during the remainder of such 240-month period to
his or her Beneficiary.
(3) Notwithstanding anything herein to the contrary, in
the event of Executive's termination of employment with the
Corporation prior to attaining age 65 as a result of Permanent
Disability, if Executive attains age 65 and his or her employment
with the Corporation was not terminated for Cause, the Corporation
shall pay to Executive the Supplemental Retirement Benefits set
forth in this Subsection 5(i) in accordance with Executive's
Vesting Percentage, commencing as of the month following the month
in which Executive attains age 65; provided, however, that any
Supplemental Retirement Benefits paid pursuant to this sentence
shall be reduced by any amounts paid to Executive under the
Corporation's long-term disability insurance policy (but shall not
be reduced for any payments received by Executive from Social
Security or from any disability insurance coverage individually
owned by Executive) for the same period.
(j) SURVIVABILITY OF DEATH AND SUPPLEMENTAL RETIREMENT
BENEFITS. In the event of Executive's Retirement or death,
Executive's entitlement to death benefits pursuant to
Subsection 5(g) hereof and Supplemental Retirement Benefits
pursuant to Subsection 5(i) hereof shall survive the Term of
Employment and Executive or his or her Beneficiary shall be
entitled to such death benefits and Supplemental Retirement
Benefits based on the same terms and conditions as would have been
applicable had his or her death or Retirement, as the case may be,
occurred during the Term of Employment.
<PAGE>
6. TERMINATION OF EMPLOYMENT.
(a) DEATH OR PERMANENT DISABILITY. Except for the
obligations of the Corporation set forth in this Subsection 6(a),
this Agreement shall terminate automatically upon the Executive's
death or Permanent Disability. In the event of such termination,
the Corporation shall pay to the Executive's Beneficiary or, in the
event of Permanent Disability, the Executive or his or her legal
representative, all benefits and Base Salary accrued through the
date of termination, including, without limitation, amounts payable
under any plan referred to in Subsection 5(d) plus any benefits to
which Executive may be entitled pursuant to Subsection 5(g),
Subsection 5(h) or Subsection 5(i) hereof.
(b) CAUSE. The Corporation may terminate the Executive's
employment for Cause. If the Executive's employment is terminated
for Cause, the Corporation shall pay the Executive his or her full
accrued Base Salary through the effective date of the termination
of his or her employment (which shall be no earlier than the date
of receipt of notice thereof) at the rate in effect at the time of
such termination, and the Corporation shall have no further
obligations to the Executive under this Agreement.
(c) NOTIFICATION PRIOR TO ONE YEAR EXTENSION. Either
Executive or the Corporation may terminate this Agreement by
notifying the other party in writing of an intention to do so at
least sixty (60) days prior to the commencement of a one-year
extension period described in Section 3 hereof.
(d) PAYMENTS FOR INVOLUNTARY TERMINATION WITHOUT CAUSE.
(1) If prior to a Change of Control (i) the Corporation
terminates Executive's employment (other than for Cause pursuant to
subsection 6(b) hereof), or (ii) the Executive's employment
terminates by reason of the Corporation's termination of this
Agreement pursuant to subsection 6(c)hereof, the Corporation shall
pay Executive following such involuntary termination his or her
full accrued Base Salary through the date of termination of
employment plus an amount equal to fifty percent (50%) of
Executive's Base Salary for the fiscal year in which termination
occurs, payable in twenty-six (26) equal weekly installments or at
such other intervals as salary is normally paid by the Corporation
to its employees. The payment pursuant to this Subsection 6(d)(1)
and any payments to which Executive may be entitled pursuant to
Subsections 5(g), 5(h), and 5(i) shall be in full discharge of any
claims, actions, demands or damages of every nature and description
which Executive might have or might assert against the Corporation
or any Affiliated Company in connection with or arising from the
termination of Executive's employment or the termination of this
Agreement.
(2) If following a Change of Control (i) the
<PAGE>
Corporation terminates Executive's employment (other than for Cause
pursuant to Subsection 6(b) hereof), or (ii) the Executive's
employment terminates by reason of the Corporation's termination of
this Agreement pursuant to subsection (c) hereof, the Corporation
shall, at the time of such involuntary termination, make a lump sum
cash payment to Executive equal to 200% of his or her Base Salary
for the Fiscal Year of termination. In addition to the payment
pursuant to this Subsection 6(d)(2) and any payments to which
Executive may be entitled pursuant to Subsections 5(g), 5(h) and
5(i), Executive shall be entitled to all remedies available under
this Agreement or at law in respect of any damages suffered by
Executive as a result of an involuntary termination of employment
without Cause.
7. GROSS-UP FOR PARACHUTE TAX.
(a) GENERAL. In the event that following a Change of
Control Executive becomes entitled to any payments (whether
pursuant to this Employment Agreement or any other plan,
arrangement or agreement) from the Corporation in the nature of
compensation ("Parachute Payments") that in the opinion of a
certified public accounting firm (selected in the manner set forth
in Subsection 7(b)) or that under the provisions of a notice of
assessment from the Internal Revenue Service causes imposition of
the tax under Section 4999 of the Code or any similar tax that may
hereafter be imposed (the "Excise Tax"), the Corporation shall pay
Executive, at the time specified in Subsection 7(d), the Gross-Up
Payment (as determined in accordance with Subsection 7(c)).
(b) SELECTION OF C.P.A. Within fifteen (15) days after any
termination of Executive's employment following a Change of
Control, the majority of the Continuing Directors as of the date
immediately prior to the Change of Control shall select a certified
public accounting firm (the "C.P.A.") to determine the amount, if
any, of the Excise Tax and the amount, if any, of the Gross-Up
Payments.
(c) AMOUNT OF GROSS-UP PAYMENTS.
(1) The Gross-Up Payments shall be in an amount such
that the net amount retained by Executive with respect to
the Parachute Payments and Gross-Up Payments, after deduction of
any Excise Tax to which the Parachute Payments may be subject and
any federal, state, and local income taxes and Excise Tax upon the
Gross-Up Payments, shall be equal to the gross amount of the
Parachute Payments.
(2) For purposes of determining the amount of the
Gross-Up Payments, Executive shall be deemed to pay federal income
taxes at the applicable rate of federal income taxation for the
calendar year in which the Gross-Up Payment is to be made and state
and local income taxes at the applicable rate of taxation for the
<PAGE>
calendar year in which the Gross-Up Payment is to be made.
(3) In the event that the Excise Tax is subsequently
determined to exceed the amount taken into account at the time the
Gross-Up Payment is made pursuant to Subsection 7(d)(1) hereof
(including any excess attributable to any Parachute Payments the
existence or amount of which could not be accurately determined at
the time of the Gross-Up Payment), the Corporation shall make an
additional Gross-Up Payment in respect of such excess (plus any
interest and addition to tax payable with respect to such excess)
within fifteen (15) days after the amount of such excess is
determined by the C.P.A. or by the Internal Revenue Service (the
"IRS") in a notice of assessment.
(d) TIMING OF GROSS-UP PAYMENTS. Gross-Up Payments other
than Gross-Up Payments pursuant to Subsection 7(c)(3) shall be paid
not later than forty-five (45) days following payment of any
Parachute Payments to which the Gross-Up Payments are attributable;
provided, however, that if the amount of such Gross-Up Payment or
portion thereof cannot be finally determined on or before such day,
the Corporation shall pay to Executive on such day an estimate, as
determined in good faith by the Corporation, of the minimum amount
of such payments and shall pay the remainder of such payments
(together with interest at the applicable federal rate provided in
Section l274(d) of the Code) as soon as the amount thereof can be
determined by the C.P.A., but in no event later than forty-five
(45) days after payment of such Parachute Payments.
(e) CORPORATION'S RIGHT TO DESIGNATE TAX REPRESENTATIVE;
ASSIGNMENT OF REFUND PROCEEDS. If the IRS proposes an assessment
of the Excise Tax against Executive or proposes an additional
assessment of Excise Tax in excess of the amount previously
reported by Executive:
(1) Executive shall within five (5) days after receipt
from the IRS of notice of the proposed Excise Tax assessment notify
the Corporation in writing and furnish the Corporation with copies
of all correspondence from the IRS relating to the proposed Excise
Tax assessment.
(2) The Corporation shall be authorized to designate an
attorney and/or accountant (the "Tax Representative") to serve as
Executive's exclusive representative with respect to all
proceedings with the IRS relating to the proposed Excise Tax
assessment, including but not limited to negotiating a settlement
or compromise of the proposed Excise Tax assessment, filing a claim
for refund with respect thereto, and seeking judicial review of any
disallowance of a claim for refund. Executive hereby agrees to
execute an appropriate power of attorney authorizing the Tax
Representative to represent Executive with respect to the Excise
Taxes. Executive further agrees to take any other appropriate
actions reasonably requested by the Tax Representative in
<PAGE>
connection therewith; provided, however, that the Corporation shall
reimburse Executive for any expenses incurred by Executive as a
result of compliance with such requests.
(3) If the Tax Representative files a claim for refund
of Excise Taxes with respect to which the Corporation has made a
Gross-Up Payment and such refund claim is allowed by the IRS or by
the final judgment of a court of competent jurisdiction, Executive
shall endorse the refund check payable to the Corporation and shall
send the refund check to the Corporation not later than five (5)
days after receipt from the IRS.
(4) If the Corporation designates a Tax Representative,
the Corporation shall pay all of his or her professional fees and
expenses and hold Executive harmless from any claims in connection
therewith. The Tax Representative shall keep Executive timely
informed of all significant developments in the Excise Tax matter
and shall send to Executive copies of all correspondence relating
thereto.
(5) Notwithstanding anything herein to the contrary, if
the Corporation is in material breach of any of its obligations
pursuant to this Agreement, the Corporation's rights pursuant to
this Subsection 7(e) shall be extinguished and Executive shall have
the right to revoke any power of attorney executed pursuant to this
Subsection 7(e).
8. NO OBLIGATION TO MITIGATE DAMAGES. The Executive shall not
be obligated to mitigate any damages by seeking other employment or
otherwise, and no amount payable hereunder and no benefit or
service credit for benefits shall be reduced in the event that the
Executive shall accept alternative employment.
9. BENEFITS PAYABLE ONLY FROM CORPORATE ASSETS.
(a) NO TRUST. Nothing contained in this Agreement, and no
action taken pursuant to its provisions by either party
hereto shall create, or be construed to create, a trust of any
kind, or a fiduciary relationship between the Corporation and the
Executive or his or her Beneficiary.
(b) EXECUTIVE'S STATUS AS UNSECURED GENERAL CREDITOR. The
payment of any benefits hereunder to the Executive or his or her
Beneficiary shall be made from assets which shall continue, for all
purposes, to be a part of the general assets of the Corporation; no
person shall have or acquire any interest in such assets by virtue
of the provisions of this Agreement. To the extent that the
Executive or his or her Beneficiary acquires a right to receive
payments from the Corporation under the provisions hereof, such
right shall be no greater than the right of any unsecured general
creditor of the Corporation.
<PAGE>
(c) RECOVERY OF COST OF PROVIDING BENEFITS. In the event
that, in its discretion, the Corporation purchases an insurance
policy insuring the life of the Executive to enable the Corporation
to recover, in whole or in part, the cost of providing any benefits
hereunder, neither the Executive nor his or her Beneficiary under
this Agreement shall have or acquire any rights whatsoever
therein. The Corporation shall be the sole owner and beneficiary
of any such policy and, as such, shall possess and may exercise all
incidents of ownership therein.
10. DETERMINATION OF BENEFITS AND CLAIMS PROCEDURE. The
Corporation shall make all determinations as to rights to benefits
under this Agreement. Subject to and in compliance with the
specific procedures contained in the applicable regulations
promulgated under the Employee Retirement Income Security Act of
1974, as amended: (i) any decision by the Corporation denying a
claim for benefits under this Agreement by the Executive or his or
her Beneficiary shall be stated in writing by the Corporation and
delivered or mailed to the claimant; (ii)each such notice shall set
forth the specific reasons for the denial, written to the best of
the Corporation's ability in a manner that may be understood
without legal or actuarial counsel; and (iii)the Corporation shall
afford a reasonable opportunity to the claimant whose claim for
benefits has been denied for a review of the decision denying such
claim.
11. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation
in any benefit, bonus, incentive or other plan or program provided
by the Corporation or any Affiliated Companies and for which the
Executive may qualify, nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any other
agreements with the Corporation or any Affiliated Companies.
Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan or program of the
Corporation or any Affiliated Companies shall be payable in
accordance with the terms of such plan or program.
12. FULL SETTLEMENT. After a Change of Control, the
Corporation's obligation to make the payments provided for herein
and otherwise to perform its obligations hereunder shall not be
affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the
Corporation may have against the Executive or others. Unless it is
finally determined by a court of competent jurisdiction after all
available appeals that the Corporation has validly terminated the
Executive's employment for Cause, the Corporation agrees to pay, to
the full extent permitted by law, all legal fees and expenses which
the Executive may reasonably incur as a result of any contest
(regardless of the outcome thereof) by the Corporation or others of
the validity or enforceability of, or liability under, any
provision of this Agreement or any guarantee of performance
<PAGE>
thereof, plus, in each case, interest compounded quarterly, on the
total unpaid amount determined be payable hereunder, such interest
to be calculated on the basis of the prime commercial lending rate
announced by Mercantile Bank, N.A. in effect from time to time, for
the period commencing on the date of such contest and ending on
the date on which the Corporation shall pay such amount.
13. COVENANTS.
(a) NON-COMPETITION.
(1) Executive recognizes that during the course of
Executive's employment with the Corporation, Executive has been and
will be instructed about and become acquainted with confidential
information of the Corporation, including, without limitation,
customer lists, methods of sales, the existence and contents and
terms of this Agreement, methods of sales procurement, sales
procurement techniques, sales procedures and equipment/supply
information, equipment and supply acquisition procedures and
processes and sources, customer evaluation procedures, customer
maintenance and supply maintenance procedures and corresponding
information relating to persons, firms and corporations which are
or may become customers of the Corporation and, further, companies
from which the Corporation obtains various products and supplies
for sale, resale and distribution to customers of the Corporation.
This confidential information further includes, but is not limited
to, customer identity, supplier identity and terms, purchase terms,
sales techniques, purchase conditions and rates, customer needs,
billing procedures and processes, contacts and customer
information. Further, Executive agrees and acknowledges that the
development and assemblage and maintenance of the customer base of
the Corporation has taken extraordinary time, money, resources,
training, and effort by the Corporation and its employees.
(2) Executive agrees that he or she will not during the
Term of Employment and for a period of two (2) years following
cessation of his or her employment at the Corporation ("Restricted
Period"), for any cause or reason, directly or indirectly:
(A) engage in any business in competition with the
Corporation and its Affiliates or supply and sell to present
customers, former customers and prospects of the Corporation and
its Affiliates; or
(B) own, manage, operate, control, advise, be
employed by, consult, or materially participate in, or be
materially involved in any manner with the ownership, management,
operation or control of, individually or through any other entity
or device, any business that competes with the business then
conducted by the Corporation or any Affiliate; provided, however,
that mere ownership as an investor of not more than five percent
(5%) of the securities of a corporation or other business
<PAGE>
enterprise shall not in and of itself be deemed to violate this
Section 13(b)(2)(B).
(b) NONDISCLOSURE OF CONFIDENTIAL INFORMATION.
(1) Executive will not, except as authorized by the
Corporation in writing, during or at any time after the termination
of Executive's employment with the Corporation, directly or
indirectly, use for himself or herself or others, or disclose,
communicate, divulge, furnish to, or convey to any other person,
firm, or corporation, any secret or confidential information,
knowledge or data of the Corporation or that of third parties
obtained by Executive during the period of his or her employment
with the Corporation. Such information, knowledge or data
includes, without limitation, the following:
(A) Secret or confidential matters of a technical
nature such as, but not limited to, methods, know-how,
formulations, compositions, processes, discoveries, machines,
inventions, computer programs, and similar items or research
projects involving such items,
(B) Secret or confidential matters of a business
nature such as, but not limited to, marketing policies or
strategies, information about costs, price lists, purchasing and
purchasing policies, profits, market, sales or lists of customers,
customer history information, and
(C) Secret or confidential matters pertaining to
future developments such as, but not limited to, research and
development or future marketing or merchandising.
(2) Executive, upon termination of his or her
employment with the Corporation, or at any other time upon the
Corporation's request, shall deliver promptly to the Corporation
all manuals, letters, notes, notebooks, reports, formulations,
computer programs and similar items, memoranda, lists of customers,
customer history information and all other materials and copies
thereof relating in any way to the Corporation's business and in
any way obtained by Executive during the term of employment with
the Corporation which are in his or her possession or under his or
her control; and Executive will not make or retain any copies of
any of the foregoing and will so represent to the Corporation upon
termination of his or her employment.
(c) INDUCEMENT.
(1) Executive agrees that during the Term of
Employment and during the Restricted Period, Executive shall not
use any confidential information for the purposes of inducing or
attempting to induce any present, former, or prospective customer
of the Corporation or its Affiliates to become a customer of
<PAGE>
Executive or any person, firm, or corporation, or business
association with which Executive is affiliated in any capacity with
respect to the markets supplied by the Corporation or its
Affiliates.
(2) Executive agrees that during the Term of
Employment and during the Restricted Period, Executive shall not
directly or indirectly solicit for employment or employ any of the
Corporation's employees to work for Executive or any business
association with which/whom Executive is affiliated, or to work for
any other company in the markets supplied by the Corporation or its
Affiliates.
(d) INTEREST OF PARTIES. Executive agrees that the
duration of the limitations set forth in this Section 13 are
reasonable under the circumstances, considering Executive's
position with the Corporation and other relevant factors, and that
this will not constitute a serious handicap to Executive in
securing future employment.
(e) DISCLOSURE TO CORPORATION. Executive shall
promptly communicate and disclose to the Corporation all
information, observations and data obtained by Executive in the
course of Executive's employment. All written materials, records
and documents made by Executive or coming into Executive's
possession during the Term of Employment concerning any inventions,
products, processes or equipment, manufactured, used, developed,
investigated or considered by the Corporation or any Affiliated
Companies shall be the property of the Corporation, and upon
termination of the Term of Employment, or upon request of the
Corporation during the Term of Employment, Executive shall
promptly deliver the same to the Corporation.
Executive agrees to render to the Corporation such reports of the
activities of the business undertaken by Executive or conducted
under Executive's direction during the Term of Employment as the
Corporation may reasonably request.
(f) INVENTIONS.
(1) Executive shall promptly communicate and
disclose in writing to the Corporation all those inventions and
developments whether patentable or not, as well as patents and
patent applications (hereinafter collectively called "Inventions"),
made, conceived, developed or purchased by Executive, or under
which Executive acquires the right to grant licenses or to become
licensed, alone or jointly with others, during the Term of
Employment, which have arisen or may arise out of Executive's
employment, or relate to any matters pertaining to, applicable to,
or useful in connection with, the business or affairs of the
Corporation or any Affiliated Companies. All of Executive's right,
title and interest in, to and under all such inventions, licenses
<PAGE>
and rights to grant licenses shall be the sole property of the
Corporation. Any such inventions disclosed to anyone by Executive
within one (1) year after the termination of the Term of Employment
for any cause whatsoever shall be deemed to have been made or
conceived by Executive during the Term of Employment.
(2) As to all such inventions, Executive shall,
upon request of the Corporation, during the Term of Employment or
thereafter:
(A) Execute all documents which the
Corporation shall deem necessary or proper
to enable it to establish title to such
inventions, or other rights, and to enable
it to file and prosecute applications for
letters patent of the United States and any
foreign country; and
(B) Do all things (including the giving
of evidence in suits and other proceedings)
which the Corporation shall deem necessary
or proper to obtain, maintain or to assert
patents for any and all such inventions or
to assert its rights in any inventions not
patented.
All expenses incident to any action required by the Corporation or
taken on its behalf pursuant to the provisions of this paragraph
shall be borne by the Corporation including without limitation a
reasonable payment for Executive's time and expenses involved in
case he or she is not then in its employ.
(g) LITIGATION. Executive agrees that during the
Term of Employment or thereafter, Executive shall do all things,
including the giving of evidence in suits and other proceedings,
which the Corporation shall deem necessary or proper to obtain,
maintain or assert rights accruing to the Corporation during the
Term of Employment and in connection with which Executive has
knowledge, information or expertise. All reasonable expenses
incurred by Executive during the Term of Employment or thereafter
in fulfilling the duties set forth in this Section, shall be
reimbursed by the Corporation to the full extent legally
appropriate including, without limitation, a reasonable payment for
Executive's time in the event this Agreement has terminated prior
to the time Executive renders such assistance, advice and counsel.
14. EQUITY. The parties hereto agree that the services to be
rendered by Executive are special, unique and of an extraordinary
character. In the event of the breach by Executive of any of the
provisions of this Agreement, the Corporation, in addition and as
a supplement to such other rights and remedies as may exist in its
favor, may apply to any court of law or equity having jurisdiction
<PAGE>
to enforce the specific performance of this Agreement, and/or may
apply for injunctive relief against any act which would violate any
of the provisions of this Agreement.
15. EFFECT ON PRIOR AGREEMENTS. This Agreement shall supersede
and replace any and all prior employment agreements entered into
between Executive and the Corporation or any Affiliated Company,
including but not limited to that certain Employment Agreement
dated February 5, 1995. This Agreement contains the entire
understanding of the parties hereto with respect to the subject
matter hereof.
16. NO ASSIGNMENT.
(a) This Agreement is personal to the Executive and without
the prior written consent of the Corporation shall not be
assignable by the Executive other than by will or the laws of
descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by the Executive's legal
representatives and Beneficiary.
(b) This Agreement shall inure to the benefit of and be
binding upon the Corporation and its successors. The Corporation
shall require any successor to all or substantially all of the
business and/or assets of the Corporation, whether direct or
indirect, by purchase, merger, consolidation, acquisition of stock,
or otherwise, by an agreement in form and substance satisfactory to
the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent as the
Corporation would be required to perform if no such succession had
taken place.
17. SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision or clause were omitted.
18. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Missouri, without
reference to principles of conflict of laws. The captions of this
Agreement are not part of the provisions hereof and shall have no
force or effect. This Agreement may not be amended or modified
other than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) In the event that litigation is required to enforce any
provision of this Agreement, subject to the provisions of Section
12 hereof, the prevailing party shall be entitled to reasonable
attorneys fees.
<PAGE>
(c) All notices and other communications hereunder shall be
in writing and shall be given by hand delivery to the other party
or by registered or certified mail, return receipt requested,
postage prepaid, addressed as follows:
IF TO THE EXECUTIVE:
Fran Scheper
5915 Oakville Woods Place
St. Louis, Missouri 63129
IF TO THE CORPORATION:
Consumer Programs, Incorporated
1706 Washington Avenue
St. Louis, Missouri 63103
Attention: Russ Isaak, President
or to such other address as either party shall have furnished to
the other in writing in accordance herewith. Notice and
communications shall be effective when actually received by the
addressee.
(d) This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter hereof.
(e) The Corporation may withhold from any amounts payable
under this Agreement such federal, state or local taxes as shall be
required to be withheld pursuant to any applicable law or
regulation.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement in duplicate, all as of the day and year first above
written.
CONSUMER PROGRAMS INCORPORATED
BY: /s/ Russell Isaak
------------------------------
President
BY: /s/ Fran Scheper
------------------------------
Fran Scheper
EXHIBIT (11)
<TABLE>
CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE--DILUTED
FISCAL YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996
AND FEBRUARY 4, 1995 (in thousands except per share amounts)
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Common shares outstanding
at beginning of
fiscal period 17,239 17,169 17,124
Shares issued during
the period -
weighted average 166 60 44
Shares issuable under
employee stock plans -
weighted average 38 45 40
Dilutive effect of
exercise of certain
stock options 186 53 84
Less: Treasury stock -
weighted average (5,758) (3,809) (3,303)
-------- --------- --------
Weighted average number
of common and common
equivalent shares 11,871 13,518 13,989
======== ========= ========
Net earnings applicable
to common shares:
From continuing operations $12,713 $14,363 $17,659
From discontinued operations -- -- (3,326)
-------- --------- ---------
Net earnings $12,713 $14,363 $14,333
======== ========= =========
Earnings per common share:
From continuing operations $1.07 $1.06 $1.26
From discontinued operations -- -- (0.24)
--------- --------- ---------
Net earnings $1.07 $1.06 $1.02
========= ========= =========
</TABLE>
30
<PAGE>
Options to purchase 182,500 and 240,000 shares of common stock
at $30.00 and $35.00 per share, respectively, were outstanding
during 1997 but were not included in the computation of diluted
EPS because the options' exercise price was greater than the
average market price of the common shares. The options, which
expire on February 2, 2003 and February 2, 2004, respectively,
were still outstanding at the end of fiscal year 1997.
<TABLE>
CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE--BASIC
FISCAL YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996
AND FEBRUARY 4, 1995 (in thousands except per share amounts)
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Common shares outstanding
at beginning of
fiscal period 17,239 17,169 17,124
Shares issued during
the period -
weighted average 166 60 44
Less: Treasury stock -
weighted average (5,758) (3,809) (3,303)
-------- --------- --------
Weighted average number
of common and common
equivalent shares 11,647 13,420 13,865
======== ========= ========
Net earnings applicable
to common shares:
From continuing operations $12,713 $14,363 $17,659
From discontinued operations -- -- (3,326)
-------- --------- ---------
Net earnings $12,713 $14,363 $14,333
======== ========= =========
Earnings per common share:
From continuing operations $1.09 $1.07 $1.27
From discontinued operations -- -- (0.24)
--------- --------- --------
Net earnings $1.09 $1.07 $1.03
========= ========= ========
</TABLE>
31
EXHIBIT (13)
1997
ANNUAL REPORT TO SHAREHOLDERS
32
<PAGE>
(Front cover of Annual Report to Shareholders)
(Picture: on this page is one picture of a small girl holding
a stuffed animal with a bow.)
CPI CORP. 1997 REPORT TO SHAREHOLDERS
growing rewards
...to report from our actions of the past several years...
<PAGE>
(Inside Cover)
PAGE NUMBERS REFER TO PAPER DOCUMENT
<TABLE>
TABLE OF CONTENTS
PAGE
<S> <C>
At a glance/financial results 1
Chairman's letter to shareholders 2-5
Sears and CPI-a symbiotic pairing 6
Judicious application of resources 7
Financial section 8-39
Management's discussion and analysis-overview 8-12
Management's discussion and analysis-results
of operations 13-15
Management's discussion and analysis-financial
condition 16
Management's discussion and analysis-cash flows 17
Consolidated statements of earnings 18
Consolidated balance sheets 19
Consolidated statements of cash flows 20-21
Consolidated statements of changes in
stockholders equity 22
Notes to consolidated financial statements 23-36
Independent auditors' report 37
Selected quarterly financial data 38
Financial highlights 39
Directors and officers 40
Investor information 41
(/TABLE>
<PAGE>
1997 AT A GLANCE
- ----------------
Sales in CPI's primary business, Sears Portrait Studios, showed
moderate growth over the 1996 level. Operating earnings, however,
were substantially higher, mainly due to a significant increase in
the average sale, combined with lower manufacturing costs. The
division continued its program of enlarging and remodeling studios
and its development of new technology-based products and services.
CPI sold its remaining 49% interest in the Fox Photo, Inc. joint
venture to Eastman Kodak Company and entered into a 2-year
agreement not to compete in retail photofinishing. By ending its
involvement in that industry, the Company is better able to focus
on continuing development of its core portrait photography
business. CPI received an immediate cash payment of $10 million for
the non-compete agreement and a note for $43.9 million payable on
January 4, 1999 for its remaining interest in the joint venture.
The Company repurchased 2.0 million shares of common stock,
bringing the total repurchase since 1996 to 4.25 million
shares-almost one-third of the shares previously outstanding,
significantly increasing the proportionate value of continuing
shareholders' interest.
<PAGE>
</TABLE>
<TABLE>
FINANCIAL RESULTS (millions of dollars, except percents/per
share data, continuing operations only)
<CAPTION>
1997 1996 1996-1997 1992
(53 wks) (52 wks) % Change (53 wks)
-------- -------- --------- --------
<S> <C> <C> <C> <C>
sales
- ------
portrait studios $303.7 $289.8 4.8 % $264.4
photofinishing - 114.5 (100.0)% 169.2
wall decor 63.0 62.7 0.6 % -
total $366.7 $467.0 (21.5)% $433.6
- --------------------------------------------------------------
operating earnings
portrait studios $ 44.6 $ 35.7 25.1 % $ 47.9
photofinishing - 0.1 (100.0)% 9.6
wall decor (1.0) 3.2 (129.6)% -
total 43.6 39.0 11.9 % 57.5
net earnings,
continuing operations 12.7 14.4 (11.5)% 24.8
- --------------------------------------------------------------
average shares
outstanding*(millions) 11.8 13.5 (12.2)% 14.7
- --------------------------------------------------------------
per share*:
earnings, continuing
operations $ 1.07 $ 1.06 0.9 % $ 1.69
dividends 0.56 0.56 - 0.56
tangible book value 10.26 11.90 (13.8)% 7.33
price:
high $ 28.00 $ 21.13 $ 26.38
low 15.88 13.88 15.00
- --------------------------------------------------------------
<FN>
* assuming dilution
</FN>
</TABLE>
- 1 -
<PAGE>
A REPORT TO OUR SHAREHOLDERS:
Those of you who have followed our activities for very long will
see this 1997 report as a departure from the structured format of
prior reports. In one sense, the revised format could be regarded
as a metaphor for the dramatic changes we have effected in our
company.
For many years, we enjoyed a highly profitable business that was
the leader in its industry. We were preoccupied with driving
revenues, but without a clear understanding of customer motivation.
Early in this decade we realized that the old, much-copied model
could no longer be sustained. Our choice was either to harvest a
deteriorating business or to rebuild on a new platform. We chose
the latter. Our goal was to redirect efforts into the creation of
a radically different model. We worked on the process for five
years, accepting a reduction in profit margins of almost 50% from
historic highs, primarily because we were reinvesting heavily in
new business development. In the face of the profit erosion,
however, our cash flow remained fairly consistent, allowing us to
redirect our investment to the creation of a new paradigm.
<TABLE>
PORTRAIT STUDIO SEGMENT
<CAPTION>
Sales Profit
(in million $) Margin %
-------------- --------
<C> <C>
1997 $303.7 14.7
1996 289.8 12.3
1995 279.6 15.2
1994 276.4 13.9
1993 237.9 12.6
1992 264.4 18.3
1991 279.0 20.3
1990 279.1 23.7
1989 260.5 25.2
1988 241.2 26.2
</TABLE>
<PAGE>
<TABLE>
CPI CORP. - CONTINUING OPERATIONS (in million $)
<CAPTION>
Cash flow from Operating
operations earnings
-------------- ---------
<S> <C> <C>
1997 $ 46.8 $ 43.6
1996 53.8 39.0
1995 53.7 51.3
1994 40.4 48.5
1993 38.2 41.3
1992 36.9 57.6
1991 51.6 64.1
1990 50.0 69.7
1989 53.3 68.6
1988 42.5 63.7
</TABLE>
Caption on the above charts:
- - As CPI rebuilt its portrait studio business, studio profit
margins fell to half of historic highs due to heavy
investment in the business, made possible by the Company's
generally consistent cash flows.
- 2 -
(Pictures: on this page are two pictures captioned: "With
a CPI-produced training video, studio employees
are increasing their sensitivity to recognize and
allay the anxieties mothers often experience in
preparing their child for a portrait studio
experience." The top right hand picture is
of three women, two standing and one sitting.
The lower left hand picture is of a small
child.)
During the rebuilding process, our attention was diverted by
various activities that distracted us from what should have been
our primary focus. Though we would be reluctant to call it an
epiphany, we are no longer engaged in either the photofinishing or
copy service business. Our involvement in those industries did,
however, provide us the opportunity to explore the frontiers of
digital imaging, and as we applied the acquired technology to our
core business, we realized just how laden with opportunity is the
evolving business of portrait photography.
Searching for the right paradigm, we did a comprehensive survey of
our prime customer, the mother of preschool children. We talked to
thousands of such mothers, listening carefully to learn of their
experiences and feelings about having portraits made of their
<PAGE>
children, and how they value the memories evoked by the portraits.
They told us of the anxieties they experience in preparing their
child for a session at a portrait studio, followed by a suspenseful
three-week wait for the finished portraits, all the while wondering
if the result might be unsatisfactory. We learned of the great
importance a mother places on the photographer's ability to work
with her child, carefully taking the time needed to capture the
child's true personality.
Following that research, we are continuing to develop new concepts
to excite our customers. Applying technology is only part of the
process. Even more important is training our
- 3 -
(Pictures: on this page are three pictures captioned: "One new
product, "Portrait Creations," while exciting in its
own right,is even more so as symbolic of a virtual
galaxy of new imaging applications." Starting in
upper right hand and continuing counter-clockwise is
a picture of a two adults and a small child in a
portrait studio; a portrait of a small child holding
a rattle; and a picture of a "Portrait Creation.")
photographers to increase their sensitivity, to recognize and allay
the mothers' anxieties, and to strengthen the tripartite
mother/photographer/child relationship to capture the "essence" of
the child. New products are part of the solution. One such new
product, "Portrait Creations," while exciting in its own right, is
symbolic of a virtual galaxy of new imaging applications we are
developing through the combined efforts of our field studio
operations, marketing department and greatly expanded engineering
division.
Thus far, having spent almost $150 million in the overall
rebuilding process, we present unique advantages that assure our
customers an enjoyable, rewarding experience. As a result of a
total studio remodeling program-coordinated with Sears' $4 billion
store upgrade activity-our facilities are comfortable, inviting and
highly functional. We offer technology-based programs that provide
customers the highest quality imaging products in a relaxed,
friendly environment. Our photographers are trained to listen
carefully to their customers, to understand their anxieties and to
respond to their needs. To further increase the satisfaction level
of our customers, we have accelerated a controlled evolution in the
very culture of our total organization-field operations and
headquarters, alike. At every level, people are focusing on the
unique interests of those whom they serve, with headquarters staff
serving the field organization, and studio employees serving
customers.
- 4 -
<PAGE>
(Picture: on this page is a picture of Alyn V. Essman.)
We are confident that, having developed the new paradigm, we will
be able to deliver to all stakeholders a consistent, significantly
increased level of performance. Even though at this point such
results are yet to be realized, the direction is clear. The final
results will become apparent only as our programs evolve.
One final point should be made. The reorientation process has been
accomplished by building on our existing management structure.
Following new guidelines, our leadership is equipped to execute the
new paradigm. The innate talents of several members of our
visionary organization have been redeployed in order to achieve
customer-based solutions. As a result of their contributions, we
are now prepared to capitalize on a self-reinforcing model.
* We understand what customers like
* We have the tools to deliver what customers want
* We will build strong relationships by serving them
If we employ these capabilities properly-and we're confident we
can-the customer response will generate more business, which will
make for happier employees, who will deliver still higher levels of
service-all in an upward spiral of success driven by positive
feedback. It's now a matter of execution.
April 15, 1998
BY: /s/ Alyn V. Essman
--------------------
Alyn V. Essman
- 5 -
SEARS AND CPI-A SYMBIOTIC PAIRING
CPI is Sears' exclusive portrait service and one of its leading
licensed businesses, sharing an almost 40-year relationship that
has been beneficial to both companies. Throughout this long period,
CPI and Sears have worked together in creating the mass portrait
market, progressing from traveling photographers to permanent
studios, developing pre-printed full-color portrait packages, and
introducing services based on state-of-the-art technology such as
the Portrait Preview System(SM).
Through its relationship with CPI, Sears receives substantial
license fees without a major investment of its own capital or
management resources. Sears also benefits from CPI's considerable
advertising expenditures that promote the Sears brand. The
advertising is primarily targeted to women with young children, a
highly valued customer base for both companies.
As evidence of its ongoing contributions and importance to Sears,
<PAGE>
CPI has been awarded the prestigious "Partners in Progress" award
in twelve of the past fifteen years-most recently in 1997-and, in
1995, Sears bestowed on CPI the first "Partners in Progress" award
ever accorded a concessionaire in Canada. Still more noteworthy, in
1994 Sears honored CPI with the first "Chairman's Award" given to
a Sears licensed business in recognition of the significance of
CPI's ground-breaking, technology-based Portrait Preview marketing
program. Additionally, in 1996 CPI was the sole recipient of the
newly created Sears "Golden Opportunities" award for the most
responsive handling of customer complaints of all Sears' licensed
businesses.
Sears' support of CPI's studio remodeling program is of special
significance. Recognizing the importance of this endeavor, Sears in
1994 entered into a new 5-year licensing agreement with CPI,
coordinating the remodeling with their own previously announced $4
billion capital expenditure program in which the retailer is
upgrading and remerchandising its stores. Through early 1998, over
500 studios have been remodeled and enlarged, and the new design
has also been incorporated in newly opened stores. Sears has given
up valuable floor space in the process, anticipating higher sales
and resulting increases in license revenues due to the larger
format. An increase of almost 80% in the size of the average
remodeled studio has provided space for many additional camera
rooms, expanding the overall capacity. Remodeling of the remaining
U.S. locations will be completed in conjunction with the Sears
store-upgrade schedule.
The strength of the Sears/CPI partnership has been enhanced by the
companies' parallel attitudes regarding the clear need for fresh
customer-based programs carried out by carefully trained employees.
Following a thorough review of their customer attitudes and
motivations, Sears launched its "Softer Side of Sears" campaign
with results that are now near-legend. Having developed programs
based on research of its own customers, CPI believes it may well be
on the way to achieving results of a similar nature, though on an
admittedly reduced scale.
- 6 -
<PAGE>
(Pictures: on this page are two pictures captioned: "Although
the remodeled studio design now installed in over
500 Sears Portrait Studios has been enthusiastically
received by customers and employees alike, CPI is
testing a variety of new concepts in this evolving
prototype location, as a "next generation" facility
is being readied for introduction." One picture is
of a video monitor in the children's area. The
second picture is of the proposed "next generation"
Sears Portrait Studio facility.)
JUDICIOUS APPLICATION OF RESOURCES
Throughout the 5-year period from 1993 through 1997, CPI management
maintained a careful balance in its application of resources toward
the primary objective of rebuilding its core business,
supplementing ongoing cash flow from operations with prudent
borrowing appropriate to the Company's asset base. Having further
narrowed the focus on its portrait studio business with the sale of
the photofinishing division, CPI applied excess cash to the
repurchase of common stock, significantly increasing shareholder
value.
<TABLE>
CASH SOURCES, 1993-1997 (in million $)
<CAPTION>
<S> <C> <C>
FY '93 beginning balance $ 21.0
------
Cash flow-operations 232.9
Long-term senior debt 58.9
Joint venture sale 56.1*
2-year Kodak non-compete 10.0
Employee stock plans 9.0
-------
366.9
------
Total available cash $387.9
<FN>
* Does not include $43.9 million note receivable from Kodak,
due on January 4, 1999
</FN>
</TABLE>
<PAGE>
<TABLE>
APPLICATION OF CASH, 1993-1997 (in million $)
<CAPTION>
<S> <C> <C>
Capital expenditures $209.3
Stock repurchases 107.9
Dividends 38.0
Acquisitions 14.7
Other** 2.7
-------
Total applied 372.6
------
FY '97 ending balance $ 15.3
======
<FN>
** Exchange rate effect and restricted stock
</FN>
</TABLE>
- 7 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS-OVERVIEW
- ---------------------------------------------
FISCAL YEARS
CPI Corp.'s (the "Company's") fiscal year ends the first Saturday
of February. Accordingly, fiscal year 1997 ended February 7, 1998
and consisted of 53 weeks. Fiscal years 1996 and 1995 ended
February 1, 1997 and February 3, 1996, respectively, and each
consisted of 52 weeks. Throughout Management's Discussion and
Analysis and Notes to Consolidated Financial Statements,
reference to 1997, 1996 or 1995 will mean the fiscal year ended
February 7, 1998, February 1, 1997 and February 3, 1996,
respectively.
BUSINESS SEGMENTS
The Company has operations in two business segments: Portrait
Studios and Wall Decor. The Portrait Studios segment, which
functions as the exclusive operator of Sears Portrait Studios,
has 1,026 locations in the United States, Canada and Puerto
Rico. The Wall Decor segment, which operates under the name
Prints Plus and offers value-priced posters, prints, frames and
framing services, operates in 156 locations throughout the
United States.
Until October 4, 1996, when the Company entered into a joint
venture with Eastman Kodak Company ("Kodak"), the Company
operated a third business segment, Photofinishing, which
operated under the Fox Photo, CPI Photo Finish, and Proex
names. On October 2, 1997, the Company sold its remaining
interest in the Photofinishing joint venture to Kodak. (See
JOINT VENTURE for further discussion.)
JOINT VENTURE
On October 4, 1996, the Company sold 51% of the outstanding
shares of Fox Photo, Inc. ("Fox") to Kodak for $56.1 million in
cash, which resulted in a pre-tax gain of $6.2 million. On the
same date, the Company entered into collateral agreements with
Fox and Kodak, including agreements under which the Company
provided certain administrative services and management services
to Fox (the "Service Agreement" and the "Consulting Agreement").
The ownership of the joint venture was accounted for under the
equity method and was reflected as an investment in the Fox
joint venture.
In selling the 51% interest in Fox to Kodak, the Company
believed the joint venture would continue indefinitely based on
a shared vision of the potential opportunities to be realized
from combining the strengths of the two shareholders. While the
parties provided for an exit from the joint venture after the
end of 1998, the Company was focused on the long-term
development of the joint venture and considered those provisions
merely insurance against the then-unlikely risk that the joint
venture would not succeed. The original agreement did not
<PAGE>
contain a noncompete provision because neither party considered
it necessary at the time the agreement was negotiated.
Unexpectedly, within the first six months of operation, the
joint venture encountered a series of problems that severely
diminished the prospects of achieving its original vision.
These problems included significant deterioration in sales and
profits from projections in the first-year operating plan;
higher than expected costs in experimental markets; and the
divergence of shareholder philosophies, objectives and
strategies.
- 8 -
After struggling with these and other problems for several
months, the Company and Kodak concluded that joint ownership of Fox
was no longer tenable or desirable and the parties began to
negotiate the terms of dissolution of the joint venture. The
original termination provisions set forth in the October 1996
Shareholders Agreement were not the basis for the joint
venture's termination. The sale by the Company of its remaining 49%
interest in Fox was negotiated on an arms-length basis over three
to four months in the context of the changed circumstances and
relationships.
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 (the "Promissory Note") due on January 4, 1999 (the
"Disposition Transaction"). As a result of the sale, the Company
recorded a pre-tax loss of $4.2 million in 1997. Due to the non-
interest bearing nature of the Promissory Note, a
discount of $3.9 million was established and will be amortized into
income until the maturity of the Promissory Note. During 1997,
$1.1 million in amortization related to the Promissory
Note was recognized. On a prospective basis, $2.8 million in
amortization for the Promissory Note will be recognized in
fiscal year 1998.
In connection with the dissolution of the cooperative relation-ship
between the Company and Kodak, the Company and Kodak agreed that
the Company could pose a competitive threat to Fox. The Company
remained committed to further development and commercialization of
its proprietary technology, including the Photo Preview and Photo
Proof Systems that were featured in
joint venture test markets, as well as a store automation
system that was originally designed to meet Fox specifications.
The Company also possesses more than 50 years of retail management
experience and knowledge of the most successful and vulnerable Fox
markets and concepts.
Accordingly, as part of the Disposition Transaction, the Company
entered a two-year Noncompetition and Nonsolicitation Agreement
<PAGE>
(the "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 $10.0 million cash consideration for
entering into the Noncompete Agreement which will be amortized into
income over the two-year period of the agreement. For 1997,
amortization related to the two-year Noncompete Agreement was $1.8
million. Prospectively, in fiscal years 1998 and 1999, the
Company will recognize $5.0 million and $3.2 million, respectively,
in amortization for the two-year Noncompete Agreement.
In conjunction with the dissolution of the joint venture, the
Company and Fox also agreed to immediately terminate the Consulting
Agreement and terminate the Service Agreement no later than March
31, 1998.
- 9 -
PHOTOFINISHING STORE SALE
In June 1996, the Company announced the sale to Wolf Camera, Inc.
of 50 one-hour photofinishing stores located in Florida, Georgia,
Illinois and Tennessee for $1.9 million. The Company did not
recognize a material gain or loss on the sale of these assets.
DISCONTINUED OPERATIONS
In May 1996, the Company completed the sale of certain assets of
its Electronic Publishing operations for $4.8 million.
Additionally, the purchaser assumed certain liabilities of the
Electronic Publishing operation which aggregated approximately
$900,000. A provision of $3.8 million was made in 1995 to
reflect the discontinued business at its estimated realizable
value. The Company classified the Electronic Publishing
operation as a discontinued operation in 1995.
Net sales of the discontinued business for 1995 were $16.7
million. Net assets held for sale were $5.1 million at
February 3, 1996.
STOCK REPURCHASE
The Company has engaged in two transactions involving the
repurchase of stock during the reporting periods covered by this
Annual Report. In November 1996, the Company completed a Dutch
Auction tender offer by purchasing 2,250,000 shares of the
Company's common stock at $19.00 per share for $43.6 million.
The Company used the proceeds received in the formation of the
joint venture to finance the tender offer.
In addition, in January 1998, the Company completed another
Dutch Auction tender offer by purchasing 1,999,215 shares of the
Company's common stock at $23.00 per share for $46.5 million.
<PAGE>
To finance the tender offer, the Company used the proceeds
from:
-- the $10.0 million two-year Noncompete Agreement,
-- the repayment of a $4.0 million note held by the Company
from the joint venture, and
-- other working capital and cash from operations.
ENVIRONMENTAL MATTERS
The operations of the Company, like those of similar businesses,
are subject to various Federal, state and local laws and
regulations with respect to environmental matters, including air
and water quality, and other regulations intended to protect public
health and the environment. At present, the Company has not been
identified as a potentially responsible party under the
Comprehensive Environmental Responses, Compensation and
Liability Act and has not established any reserves or liabilities
relating to environmental matters.
- 10 -
YEAR 2000 COMPLIANCE
The Year 2000 issue is primarily the result of computer programs
being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that
have date-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations,
including, among other things, a temporary
inability to process transactions, prepare reports or engage in
similar normal business activities.
Based on an initial Year 2000 compliance review by Company
management in 1996 and as part of the Company's long-range planning
and development process, portions of existing software, including
Photography's point-of-sale and general ledger
systems, are in the process of being modified or replaced so
computer systems will properly utilize dates beyond December 31,
1999. Further review and assessments, including review and
assessments of the Wall Decor's point-of-sale and general ledger
systems, are planned for 1998. At present, based on best
estimates, which were derived utilizing numerous assumptions of
future events including the continued availability of certain
resources; the availability and cost of personnel trained in
this area; the ability to locate and correct all relevant
computer codes; third party modification plans and other
factors; management believes with planned modifications to existing
software and conversions to new software, the Year 2000 issue may
be effectively mitigated and, although there will be
costs associated with correcting the Year 2000 issue, management
does not believe the costs will have a material impact on the
Company's business, operations or financial condition.
<PAGE>
The Company is also in the process of reviewing those operations of
entities with which the Company interacts electronically to
determine the extent the Company is vulnerable to potential
third parties' failures to remedy their own Year 2000 issues.
At this time, although the Company believes Year 2000 issues
are being adequately addressed by third parties, the Company can
give no assurance the systems of other entities on which the
Company's systems rely will be remedied for the Year 2000 issue
on time or that a failure to remedy the problem by another
entity would not have a material adverse effect on the Company.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standard Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
130, REPORTING COMPREHENSIVE INCOME. This statement establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
All items that are required to be recognized under accounting
standards as components of comprehensive income must
be reported in a financial statement with the same prominence as
other financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 130 will result in the inclusion, in the consolidated
statement of earnings, of the periodic adjustments arising from the
translation into U.S. dollars of foreign currency financial
statements of non-U.S. entities. In accordance with the FASB's
Statement No. 52, FOREIGN CURRENCY TRANSLATION, such translation
adjustments are excluded from the consolidated statement of
earnings but are included in the consolidated balance sheets as
a component of stockholders' equity.
- 11 -
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This
statement establishes standards for reporting information about
operating segments as well as related disclosures about products
and services, geographic areas, and major customers. This
statement is effective for fiscal years beginning after December
15, 1997 and will result in additional disclosures in the Company's
footnotes.
In February 1998, the FASB issued SFAS No. 132, EMPLOYERS'
DISCLOSURES ABOUT PENSION AND OTHER POSTRETIREMENT BENEFITS.
This statement revises employers' disclosures about pension and
other postretirement benefit plans and is effective for fiscal
years beginning after December 15, 1997. Management is
currently assessing the effects of this statement on the
Company's financial statements.
<PAGE>
FORWARD LOOKING STATEMENTS
The statements contained in this report which are not historical
facts are forward-looking statements that involve risks and
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 only
predictions; actual events or results may differ materially as a
result of risks facing the Company. Such risks include, but are
not limited to customer demand for the Company's products and
services, the overall level of economic activity in the
Company's major markets, competitors' actions, manufacturing
interruptions, dependence on certain suppliers, fluctuations in
operating results, the attractions 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.
- 12 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS-RESULTS OF OPERATIONS
- ----------------------------------------------------------
<TABLE>
NET SALES (in thousands of dollars)
Fifty-three weeks ended 2/7/98 and fifty-two weeks ended 2/1/97
<CAPTION>
1997 versus 1996
favorable (unfavorable)
1997 amount percent 1996
change change
<S> <C> <C> <C> <C>
Portrait Studios $303,666 $ 13,826 4.8% $289,840
Wall Decor 63,035 359 0.6 62,676
Photofinishing - (114,518) (100.0) 114,518
-------- ---------- --------
Total net sales $366,701 $(100,333) (21.5)% $467,034
======== ========== ========
</TABLE>
<TABLE>
NET SALES (in thousands of dollars)
Fifty-two weeks ended 2/1/97 and 2/3/96
<CAPTION>
1996 versus 1995
favorable (unfavorable)
1996 amount percent 1995
change change
<S> <C> <C> <C> <C>
Portrait Studios $289,840 $ 10,322 3.7% $279,518
Wall Decor 62,676 3,951 6.7 58,725
Photofinishing 114,518 (73,890) (39.2) 188,408
-------- --------- --------
Total net sales $467,034 $(59,617) (11.3)% $526,651
======== ========= ========
</TABLE>
NET SALES
Portrait Studios sales were $303.7 million, $289.8 million and
$279.5 million for 1997, 1996 and 1995, respectively, increasing
4.8% in 1997 and 3.7% in 1996. Although customer volume
declined in 1997 from 1996, sales per customer increased due in
part to price increases and to continued favorable customer
response to new programs. In addition, in 1997 a 1.3% increase
in sales from 1996 is attributable to the inclusion of a 53rd
week. In 1996, Portrait Studios' customer volume and sales per
customer increased slightly when compared to 1995.
Wall Decor sales were $63.0 million, $62.7 million and $58.7
million for 1997, 1996 and 1995, respectively, increasing 0.6%
in 1997 and 6.7% in 1996. In 1997, the increase from 1996 in sales
resulted from the inclusion of a 53rd week. In 1996, the increase
in net sales over 1995 levels is due to the net opening
<PAGE>
of 12 locations during 1996. Actual same store sales decreased
4.0% and 2.9% in 1997 and 1996, respectively, due to decreased
transaction counts and average ticket prices.
The decreases in sales for the Photofinishing segment for 1997
and 1996 are due to the formation of the joint venture in
Ocotber 1996.
Total reported sales were $366.7 million for 1997, reflecting an
increase from 1996 in both Portrait Studios and Wall Decor
sales, in part due to the inclusion of a 53rd week of sales, offset
by the exclusion of sales for the Photofinishing segment
as a result of the formation of the joint venture in 1996. In
1996, sales decreased to $467.0 million from 1995 sales due to
the formation of the joint venture, which resulted in only 35 weeks
of Photofinishing sales being included in total 1996 sales compared
to 52 weeks of Photofinishing sales included in 1995. This sales
decrease was partially offset by increased sales in
the Portrait Studios and Wall Decor segments for 1996.
- 13 -
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA (in thousands of dollars)
Fifty-three weeks ended 2/7/98 and fifty-two weeks ended 2/1/97
<CAPTION>
1997 versus 1996
favorable (unfavorable)
1997 amount percent 1996
change change
<S> <C> <C> <C> <C>
Operating earnings:
Portrait Studios $ 44,597 $ 8,941 25.1% $ 35,656
Wall Decor (964) (4,216) (129.6) 3,252
Photofinishing - (82) (100.0) 82
--------- --------- --------
Total operating
earnings 43,633 4,643 11.9 38,990
General corporate
expenses 15,435 3,183 17.1 18,618
Interest in joint
venture loss (3,304) (2,819) (581.2) (485)
Gain (Loss) on sale
of interest in
Photofinishing
segment (4,189) (10,369) (167.8) 6,180
Interest expense 4,470 (192) (4.5) 4,278
Interest income 2,469 1,960 385.1 509
Other income 2,193 1,692 337.7 501
-------- -------- ---------
Earnings before
income taxes and
discontinued
operations $ 20,897 $ (1,902) (8.3)% $ 22,799
========= ========= =========
</TABLE>
<TABLE>
SELECTED FINANCIAL DATA (in thousands of dollars)
Fifty-two weeks ended 2/1/97 and 2/3/96
<CAPTION>
1996 versus 1995
favorable (unfavorable)
1996 amount percent 1995
change change
<S> <C> <C> <C> <C>
Operating earnings:
Portrait Studios $ 35,656 $ (6,956) (16.3)% $ 42,612
Wall Decor 3,252 (2,105) (39.3) 5,357
Photofinishing 82 (3,219) (97.5) 3,301
--------- --------- ---------
Total operating
earnings 38,990 (12,280) (24.0) 51,270
General corporate
expenses 18,618 980 5.0 19,598
Interest in joint
venture loss (485) (485) (100.0) -
Gain (Loss) on sale
of interest in
Photofinishing
segment 6,180 6,180 100.0 -
Interest expense 4,278 830 16.2 5,108
Interest income 509 (2) (0.3) 511
Other income 501 (62) (11.0) 563
--------- --------- ---------
Earnings before
income taxes and
discontinued
operations $ 22,799 $ (4,839) (17.5)% $ 27,638
========= ========= =========
</TABLE>
<PAGE>
OPERATING EARNINGS
Portrait Studios operating earnings were $44.6 million, $35.7
million and $42.6 million for 1997, 1996 and 1995, respectively.
In 1997, which had 53 weeks compared to 52 weeks in 1996, the 25.1%
increase in operating earnings was due primarily to increased sales
and reduced manufacturing costs resulting from the favorable
renegotiation of purchasing contracts, offset slightly by
increases in employment, due to increased training for newer
technologies, and advertising, due to increased television
network advertising and direct marketing. In 1996, the 16.3%
decrease in operating earnings was due primarily to increased
fixed charges and increased cost of sales resulting from the
costs associated with maintaining more sophisticated
technologies. For 1996, depreciation and amortization costs
increased $3.5 million over 1995. In addition, due to the
higher customer volume in 1996 and the increased service levels
associated with the development and maintenance of newer
technologies, employment costs were up $3.8 million in 1996
compared to 1995. These increases in 1996 were offset slightly
as advertising costs decreased $2.9 million compared to 1995
levels.
In the Wall Decor segment, operating losses were $964,000 in
1997, a 53 week year, compared to $3.3 million and $5.4 million
in operating earnings recorded for 1996 and 1995, respectively,
both 52 week years. The decrease in 1997 operating earnings is
attributed to decreased same-store sales and higher employment
and occupancy expenses. In 1996, the decrease in operating
earnings is attributable to decreased same-store sales.
Operating earnings for the Photofinishing segment for 1997,
1996 and 1995 are not comparable due to the formation of the joint
venture in October 1996.
NET EARNINGS
In analyzing earnings, the impact of the formation of the joint
venture in 1996 and its subsequent sale in 1997 must be
considered. In 1997, which had net earnings from continuing
operations of $12.7 million, the sale of the remaining 49%
interest in the joint venture resulted in a pre-tax loss of $4.2
million. In addition, net earnings were also affected by the
$1.8 million pre-tax recognition of amortization for the
two-year Noncompete Agreement and $1.1 million pre-tax
recognition of the discount on the Promissory Note. Income tax
expense for 1997 was also affected due to the differences in the
investment basis in the venture for financial and Federal income
tax reporting purposes. In 1996, which had net earnings from
continuing operations of $14.4 million, a pre-tax gain of $6.2
million for the original 51% sale of the Photofinishing business
was recorded.
- 14 -
<PAGE>
Other changes in net earnings from continuing operations in 1997
from 1996 are attributable to improved operating earnings; lower
corporate expenses, which resulted from the allocation of
administrative expenses to the joint venture under the Service
and Consulting Agreements; and higher interest income, which
resulted from the Company having higher levels of invested cash
throughout the year; partially offset by an increase in the loss
recorded for the Company's interest in the joint venture.
In 1996, net earnings from continuing operations were $14.4
million, a decrease of 18.7% from the $17.7 million in net earnings
from continuing operations recorded in 1995. Before
the consideration of the $3.9 million gain (net of taxes),
attributed to the formation of the joint venture, net earnings from
continuing operations declined 40.7% to $10.5 million in
1996 from 1995. This decline reflects decreased operating earnings
and a loss recorded for the Company's interest in the joint
venture, offset slightly by lower corporate expense,
which resulted from the allocation of administrative expenses to
the joint venture under the Service and Consulting Agreements in
the latter part of 1996, and lower net interest expense, due to
a portion of the proceeds of the sale of Fox common stock being
used to pay down existing lines of credit.
The effective income tax rates were 39.2%, 37.0% and 36.1% in 1997,
1996 and 1995, respectively. The increase in the 1997 effective
income tax rate was due to the differences in the investment basis
of the venture for financial and Federal income tax reporting
purposes. The increase in the 1996 effective
income tax rate from 1995's rate resulted primarily from the
loss of tax credits caused by the partial suspension of the
targeted job tax credits program.
EARNINGS PER SHARE
Effective with the end of 1997, the Company has adopted
Statement of Financial Accounting Standards No. 128, EARNINGS
PER SHARE, which required companies to present basic and diluted
earnings per share (EPS), instead of the primary and fully
diluted EPS which were previously required. All prior years'
EPS information presented in this annual report has been restated
to show basic and diluted EPS. Unless otherwise indicated, EPS
shall refer to diluted EPS in Management's Discussion and Analysis,
the financial statements and footnotes of the Company.
EPS from continuing operations was $1.07 for 1997 as compared to
EPS of $1.06 in 1996. The loss attributable to the sale of the
remaining 49% of the joint venture and related transactions
previously discussed in the Net Earnings discussion was $0.11
per share (assuming dilution) as compared to the $0.29 per share
(assuming dilution) gain attributable to the sale of the
original 51% interest in the Photofinishing business recorded
in 1996.
<PAGE>
In addition, EPS in 1997 was also affected by the repurchase of
2,250,000 shares of stock in November 1996 and 1,999,215 shares
of stock in January 1998, which resulted in a 12.2% decrease in the
weighted average number of common and common equivalent
shares outstanding for 1997 from 1996.
In 1996, EPS from continuing operations was $1.06, including
the $0.29 per share (assuming dilution) gain net of taxes
attributable to the joint venture formation, as compared
to the $1.26 EPS recorded in 1995. In addition, EPS in 1996
reflects a reduction in the number of shares outstanding as a
result of the stock repurchase of 2,250,000 shares in November
1996.
In 1995, EPS, including losses from discontinued operations of
$0.24, was $1.02.
- 15 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS-FINANCIAL CONDITION
- --------------------------------------------------------
ASSETS
In 1997, total assets decreased from 1996 due in part to the
sale of the remaining 49% interest in the joint venture; the
purchase of treasury stock, which resulted in decreased cash
and short-term investments; and the reduction of net property
and equipment, due to depreciation and amortization costs exceeding
additions. This decrease in assets was slightly offset by an
increase in other long-term assets and the recording of
the note receivable from Kodak.
LIABILITIES
In 1997, total liabilities increased to $126.7 million from
$107.2 million recorded in 1996 due to the restructuring of the
Company's financing arrangements and the inclusion of the two-
year Noncompete Agreement in the Company's other liabilities.
The two-year Noncompete Agreement will be amortized over the
life of the agreement, with $1.8 million in amortization
connected with the two-year Noncompete Agreement recognized in
1997. Prospectively, in fiscal years ending 1998 and 1999, the
Company will recognize $5.0 million and $3.2 million in
amortization for the two-year Noncompete Agreement,
respectively. As of the 1997 year-end, the balance of the two-year
Noncompete Agreement was $8.2 million.
In 1993, the Company entered into an agreement with two
insurance companies for the private placement of Senior Notes
in the amount of $60.0 million which had an effective interest rate
of 6.44%. The notes matured over a seven-year period with
an average maturity of 5.42 years and the first principal
payment to be completed in 1996. To modify the restrictive
covenants associated with the Senior Notes, in 1997, the Company
prepaid the remaining $55.0 million balance of the Senior Notes and
privately placed new Senior Notes in the amount of $60.0 million
(the "Note Agreement") with two insurance companies.
The new notes, issued pursuant to the new Note Agreement, mature
over a ten-year period with an average maturity of seven years
and with the first principal payment due on the fourth
anniversary of the agreement. Interest on the notes is payable
semi-annually at an average rate of 7.46%. The new Note
Agreement requires the Company to maintain certain financial ratios
and comply with certain restrictive covenants. The
Company incurred $591,000 in issuance costs in conjunction with the
private placement of the notes. Such costs are being amortized
ratably over the ten-year life of the notes.
Additionally, after evaluating projected cash requirements, in
1997, the Company terminated its existing $60.0 million
revolving credit agreement and entered into a new $40.0 million
revolving credit agreement (the "Credit Agreement") with three
domestic banks. The new Credit Agreement has substantially the
<PAGE>
same financial ratios and restrictive covenants as those set
forth in the new Note Agreement. There were no borrowings under
the new Credit Agreement in 1997.
STOCKHOLDERS' EQUITY
Stockholders' equity decreased in 1997 due mainly to the
purchase of 1,999,215 shares of the Company's common stock for
$46.5 million in January 1998 and the distribution of quarterly
dividends offset by the increase in retained earnings resulting
from the 1997 net earnings.
- 16 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS-CASH FLOWS
- -----------------------------------------------
During the period 1995 through 1997, the Company generated $154.3
million in internal funds from operations. Investing activities
during this three-year period amounted to $34.0 million including
capital expenditures of $105.3 million, which were offset by the
$10.0 million proceeds received from the two-year Noncompete
Agreement and the $56.1 million received from the original sale of
51% of Fox Photo, Inc. Financing activities during this time
included the repurchase of $91.3 million in treasury stock and the
payment of $21.8 million in dividends. The net result of these
transactions was a $6.1 million increase in cash and cash
equivalents during the three-year period.
Planned capital expenditures for fiscal year 1998 are expected to
be higher than 1997 levels. Included in fiscal year 1998 capital
spending plans are the addition and remodelling of stores in the
Portrait Studios segments and equipment upgrades and enhancements
in the Company's information systems.
With the sale in 1997 of the Company's remaining 49% interest in
the joint venture for a $43.9 million non-interest bearing
Promissory Note due in January 1999, the Company recognized a non-
cash event not reflected in the Statement of Cash Flows. Due to
the non-interest bearing nature of the Promissory Note, a discount
of $3.9 million was recognized and is being amortized over the life
of the Promissory Note. Specifically, for 1997, $1.1 million in
amortization related to the Promissory Note was recognized. On a
prospective basis, in fiscal year 1998, $2.8 million in
amortization for the Promissory Note will be recognized. As of the
end of 1997, the balance of the Promissory Note was $41.1 million.
Through the repayment of the Promissory Note, operating cash flows
and borrowings under the new Credit Agreement, the Company believes
it has sufficient liquidity over the course of the coming year to
meet cash requirements for operations, planned capital expenditures
and dividends to shareholders.
- 17 -
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of dollars except share and per share amounts)
Fifty-three weeks ended February 7, 1998 and fifty-two weeks
ended February 1, 1997 and February 3, 1996
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net sales $366,701 $467,034 $526,651
Costs and expenses:
Cost of sales (exclusive of
depreciation expense shown
below) 57,782 110,013 135,559
Selling, administrative and
general expenses 250,743 298,703 318,413
Depreciation 27,793 34,454 35,457
Amortization 2,185 3,492 5,550
--------- --------- ---------
338,503 446,662 494,979
--------- --------- ---------
Income from operations 28,198 20,372 31,672
Net interest expense 2,001 3,769 4,597
Interest in joint venture (3,304) (485) -
Gain (loss) on sale of interest
in Photofinishing segment (4,189) 6,180 -
Other income 2,193 501 563
--------- --------- ---------
Earnings before income taxes
and discontinued operations 20,897 22,799 27,638
Income tax expense 8,184 8,436 9,979
--------- --------- ---------
Net earnings from continuing
operations 12,713 14,363 17,659
--------- --------- ---------
Discontinued operations:
Losses from operations, net
of income tax benefit of
$507 - - (898)
Loss on disposal, net of tax
benefit of $1,372 - - (2,428)
--------- --------- ---------
Net losses from discontinued
operations - - (3,326)
--------- --------- ---------
Net earnings $ 12,713 $ 14,363 $ 14,333
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS ...(CONTINUED)
(in thousands of dollars except share and per share amounts)
Fifty-three weeks ended February 7, 1998 and fifty-two weeks
ended February 1, 1997 and February 3, 1996
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Diluted earnings per common
share:
Net earnings from
continuing operations $ 1.07 $ 1.06 $ 1.26
Net losses from
discontinued operations - - (0.24)
---------- ---------- ----------
Net earnings $ 1.07 $ 1.06 $ 1.02
========== ========== ==========
Weighted average number of
common and common
equivalent shares
outstanding - diluted 11,871,013 13,518,480 13,989,194
========== ========== ==========
Basic earnings per common
share:
Net earnings from
continuing operations $ 1.09 $ 1.07 $ 1.27
Net losses from
discontinued operations - - (0.24)
---------- ---------- ----------
Net earnings $ 1.09 $ 1.07 $ 1.03
========== ========== ==========
Weighted average number of
common and common
equivalent shares
outstanding - basic 11,647,307 13,419,740 13,864,727
========== ========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
- 18 -
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS - ASSETS
(in thousands of dollars except share and per share amounts)
<CAPTION>
February 7, February 1,
1998 1997
<S> <C> <C>
Current assets:
Cash $ 1,176 $ 5,226
Short-term investments 14,117 16,697
Receivables, less allowance of
$291 and $382, respectively 11,665 13,378
Notes receivable 41,085 -
Inventories 18,044 19,280
Prepaid expenses and other
current assets 8,139 9,104
Deferred income taxes, net 180 -
--------- ---------
Total current assets 94,406 63,685
--------- ---------
Net property and equipment 124,718 130,762
Investment in Fox joint venture - 48,105
Other assets:
Intangible assets, net 665 491
Other long-term assets 8,972 3,677
--------- ---------
Total assets $228,761 $246,720
========= =========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS-LIABILITIES AND STOCKHOLDERS'
EQUITY
(in thousands of dollars except share and per share amounts)
<CAPTION>
February 7, February 1,
1998 1997
<S> <C> <C>
Current liabilities:
Current maturities of long-term
obligations $ - $ 10,000
Accounts payable 13,565 15,263
Accrued expenses and other liabilities 24,863 21,394
Income taxes 9,014 3,926
Deferred income taxes, net - 264
--------- ---------
Total current liabilities 47,442 50,847
--------- ---------
Long-term obligations, less current
maturities 59,482 44,888
Other liabilities 17,314 5,473
Deferred income taxes, net 2,431 5,987
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;
17,499,137 and 17,238,873 shares
outstanding at February 7, 1998 and
February 1, 1997, respectively 6,999 6,896
Additional paid-in capital 37,614 33,283
Retained earnings 226,032 219,905
Cumulative foreign currency
translation adjustment (2,751) (1,860)
--------- ---------
267,894 258,224
Treasury stock at cost, 7,612,047 and
5,552,548 shares at February 7, 1998
and February 1, 1997, respectively (165,789) (118,136)
Unamortized deferred compensation-
restricted stock (13) (563)
--------- ---------
Total stockholders' equity 102,092 139,525
--------- ---------
Total liabilities and stockholders'
equity $228,761 $246,720
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
- 19 -
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Fifty-three weeks ended February 7, 1998 and fifty-two weeks
ended February 1, 1997 and February 3, 1996
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows provided by
operating activities $46,753 $53,840 $53,675
Cash flows used in financing
activities:
Proceeds (repayment) of
short-term borrowings - (2,875) (3,975)
Proceeds from issuance of
long-term debt 60,646 - -
Repayment of long-term
obligations (56,273) (5,000) (150)
Issuance of common stock to
employee stock plans 4,434 1,240 812
Cash dividends (6,586) (7,473) (7,758)
Purchase of treasury stock (47,653) (43,603) (2)
-------- -------- --------
Cash flows used in
financing activities (45,432) (57,711) (11,073)
-------- -------- --------
Cash flows provided by (used
in) investing activities:
Purchases of short-term
investments - - (10,134)
Proceeds from maturing of
short-term investments - - 15,270
Additions to property and
equipment (21,749) (34,728) (48,794)
Noncompete agreement 10,000 - -
Advance (to) payment from
venture 4,000 (4,000) -
Proceeds from sale of Fox
common stock - 56,100 -
-------- -------- --------
Cash flows provided by (used
in) investing activities (7,749) 17,372 (43,658)
-------- -------- --------
Effect of exchange rate changes
on cash and equivalents (203) 91 173
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents (6,631) 13,592 (883)
Cash and cash equivalents at
beginning of year 21,923 8,331 9,214
-------- -------- --------
Cash and cash equivalents at
end of year $15,292 $21,923 $ 8,331
======== ======== ========
Supplemental cash flow
information:
Interest paid $ 5,024 $ 4,468 $ 5,120
======== ======== ========
Income taxes paid $ 8,790 $ 9,366 $10,421
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
- 20 -
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars)
Fifty-three weeks ended February 7, 1998 and fifty-two weeks
ended February 1, 1997 and February 3, 1996
RECONCILIATION OF NET EARNINGS TO CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net earnings from continuing
operations $12,713 $14,363 $17,659
Adjustments for items not
requiring cash:
Depreciation and amortization 29,978 37,946 41,007
Deferred income taxes 4,000 3,351 1,187
Deferred compensation (773) (2) 1,129
Interest in joint venture 3,304 485 -
Gain (Loss) on sale of interest
in Photofinishing segment 4,189 (6,180) -
Amortization of noncompete
agreement (1,772) - -
Amortization of discount on
note receivable (1,051) - -
Other (3,186) (1,886) (1,812)
Decrease (increase) in current
assets:
Receivables and inventories 2,949 (509) 2,627
Deferred costs applicable to
unsold portraits - - 173
Assets held for resale - 5,055 -
Prepaid expenses and other
current assets 965 (631) (2,633)
Increase (decrease) in current
liabilities:
Accounts payable, accrued
expenses and other
liabilities (429) 5,566 (4,026)
Income taxes (3,866) (3,718) (2,124)
-------- -------- --------
Cash flows from continuing
operations 46,753 53,840 53,187
Cash flows from discontinued
operations - - 488
-------- -------- --------
Cash flows provided by
operating activities $46,753 $53,840 $53,675
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
- 21 -
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands of dollars except share and per share amounts)
Fifty-three weeks ended February 7, 1998 and fifty-two weeks
ended February 1, 1997 and February 3, 1996
<CAPTION>
Add'l
Common Paid-In Retained
Stock Capital Earnings
<S> <C> <C> <C>
------- -------- ---------
Balance at February 4, 1995 $6,849 $31,278 $206,440
------- -------- ---------
Issuance of common stock:
Profit sharing plan and trust
(40,459 shares) 16 707 -
Stock bonus plan (1,429 shares) 1 20 -
Employee stock plans
(3,915 shares) 2 66 -
Foreign currency translation - - -
Dividends ($0.56 per common
share) - - (7,758)
Net earnings - - 14,333
Purchase of treasury stock, at
cost - - -
Amortization of deferred
compensation-restricted stock - - -
------- -------- ---------
Balance at February 3, 1996 $6,868 $32,071 $213,015
------- -------- ---------
Issuance of common stock:
Profit sharing plan and trust
(40,725 shares) 16 754 -
Stock bonus plan (6,825 shares) 3 96 -
Employee stock plans
(21,921 shares) 9 362 -
Foreign currency translation - - -
Dividends ($0.56 per common
share) - - (7,473)
Net earnings - - 14,363
Purchase of treasury stock, at
cost - - -
Amortization of deferred
compensation-restricted stock - - -
------- -------- ---------
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
======= ======== =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Continued) (in thousands of dollars except share and per share
amounts) Fifty-three weeks ended February 7, 1998 and
fifty-two weeks ended February 1, 1997 and February 3, 1996
<CAPTION>
Cumulative
Foreign
Currency Treasury
Translation Stock
Adjustment At Cost
<S> <C> <C>
-------- ----------
Balance at February 4, 1995 $(2,279) $ (74,531)
-------- ----------
Issuance of common stock:
Profit sharing plan and trust
(40,459 shares) - -
Stock bonus plan (1,429 shares) - -
Employee stock plans (3,915 shares) - -
Foreign currency translation 170 -
Dividends ($0.56 per common share) - -
Net earnings - -
Purchase of treasury stock, at cost - (2)
Amortization of deferred
compensation-restricted stock - -
-------- ----------
Balance at February 3, 1996 $(2,109) $ (74,533)
-------- ----------
Issuance of common stock:
Profit sharing plan and trust
(40,725 shares) - -
Stock bonus plan (6,825 shares) - -
Employee stock plans (21,921 shares) - -
Foreign currency translation 249 -
Dividends ($0.56 per common share) - -
Net earnings - -
Purchase of treasury stock, at cost - (43,603)
Amortization of deferred
compensation-restricted stock - -
-------- ----------
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)
======== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Continued) (in thousands of dollars except share and per share
amounts) Fifty-three weeks ended February 7, 1998 and
fifty-two weeks ended February 1, 1997 and February 3, 1996
<CAPTION>
Deferred
Compensation-
Restricted
Stock Total
<S> <C> <C>
-------- ---------
Balance at February 4, 1995 $(1,757) $166,000
-------- ---------
Issuance of common stock:
Profit sharing plan and trust
(40,459 shares) - 723
Stock bonus plan (1,429 shares) - 21
Employee stock plans (3,915
shares) - 68
Foreign currency translation - 170
Dividends ($0.56 per common share) - (7,758)
Net earnings - 14,333
Purchase of treasury stock, at cost - (2)
Amortization of deferred
compensation-restricted stock 613 613
-------- --------
Balance at February 3, 1996 $(1,144) $174,168
-------- --------
Issuance of common stock:
Profit sharing plan and trust
(40,725 shares) - 770
Stock bonus plan (6,825 shares) - 99
Employee stock plans
(21,921 shares) - 371
Foreign currency translation - 249
Dividends ($0.56 per common share) - (7,473)
Net earnings - 14,363
Purchase of treasury stock, at cost - (43,603)
Amortization of deferred
compensation-restricted stock 581 581
-------- ---------
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
======== =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
- 22 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OF THE COMPANY AND PRINCIPLES OF CONSOLIDATION
CPI Corp. (the "Company") is a holding company engaged, through
its majority or wholly owned subsidiaries and partnerships, in
developing and marketing consumer services and related products
through a network of centrally-managed, small retail locations.
The Company operates throughout the United States, Canada and
Puerto Rico and has a Photography segment, which operates
professional portrait studios under the names "Sears Portrait
Studios" and "Mainstreet Portraits," and a Wall Decor segment,
which operates posters, prints and framing outlets under the
names "Prints Plus" and "Prints and Posters." Company
management has made a number of estimates and assumptions
related to the reporting of assets and liabilities in the
preparation of financial statements. Actual results could
differ from these estimates. All significant intercompany
transactions have been eliminated.
TRANSLATION OF FOREIGN CURRENCY
Assets and liabilities of foreign operations are translated into
U.S. dollars at the exchange rate in effect on the balance sheet
date, while equity accounts are translated at historical rates.
Income and expense accounts are translated at the average rates
in effect during each fiscal period. The Company recognizes
that its Canadian operating results are subject to variability
arising from foreign exchange rate movements. The Company does
not believe such risk is material to the results of operations
or the financial position of the Company and as such does not
engage in derivative activities in order to hedge against
foreign currency fluctuations.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For the purpose of reporting cash flows, cash and cash
equivalents consist primarily of cash on hand and highly liquid
investments with insignificant interest-rate risk and original
maturities of three months or less at date of acquisition.
Remaining short-term investments, which have original maturities
beyond three months but less than twelve months, consist of
short-term investments in master notes, commercial paper,
treasury bills, bankers acceptances, term deposits, government
agency notes, repurchase agreements, money market funds, and
government money market funds.
Investment interest income for 1997, 1996 and 1995 was $1.2
million, $417,000, and $505,000, respectively. Total interest
income for 1997, 1996 and 1995 was $2.5 million, $509,000, and
$511,000, respectively.
<PAGE>
INVENTORIES
Inventories in the Portrait Studio segment are comprised of raw
material inventories of film, paper, chemicals and portraits-in-
process, and are stated at the lower of cost or market, with cost
of the majority of inventories being determined by the first-in,
first-out (FIFO) method and the remainder by the last-in,
first-out (LIFO) method. Portraits-in-process include the cost
of film, laboratory labor, paper, processing chemicals and
supplies, and other items directly associated with the production
of portraits that have not been approved or committed to by the
customer and have not been recognized as sales.
Inventories in the Wall Decor segment are stated at weighted
average cost.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost when acquired.
Expenditures for improvements are capitalized, while normal
repair and maintenance are expensed as incurred. When
properties are disposed of, the related cost and accumulated
depreciation are removed from the accounts, and gains or losses
on the dispositions are reflected in results of operations.
Depreciation is computed principally using the straight-line
method over estimated service lives of the respective assets.
A summary of estimated useful lives is as follows:
<TABLE>
<S> <C>
Building improvements 15 to 19 years
Leasehold improvements 5 to 15 years
Furniture and fixtures 5 to 8 years
Machinery and equipment 3 to 10 years
</TABLE>
- 23 -
REVENUE RECOGNITION
Portrait Studio sales revenue is recognized at the time the
customer approves photographic proofs and makes a firm
commitment for a portrait order. Incremental costs of
production are accrued at the time sales revenue is recognized.
Appropriate reserves for cancelability are maintained by the
Company.
RETIREMENT PLAN
The Company has a noncontributory defined-benefit retirement
plan covering substantially all full-time employees. Pension
expense, which is funded as accrued, includes current costs and
amortization of prior service costs over a period of ten years.
INTANGIBLE ASSETS
Intangible assets acquired through acquisitions were accounted
<PAGE>
for by the purchase method of accounting and include the excess
of cost over fair-value of net assets acquired, favorable lease
rights, covenants not to compete and a signing bonus. The
excess of cost over fair value of net assets acquired and
favorable lease rights are being amortized on a straight-line
basis over periods ranging from five to forty years.
The Company analyzes excess of cost over fair-value of net assets
acquired periodically to determine whether any impairment has
occurred in the value of such assets. Based upon the anticipated
future income and cash flow from operations, in the opinion of
Company management, there has been no impairment.
EARNINGS PER COMMON SHARE AND OTHER SHARE INFORMATION
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE, on
February 7, 1998. This Statement requires companies to present
basic and diluted earnings per share (EPS), instead of the
primary and fully diluted EPS that is required under Accounting
Principles Board Opinions ("APB") No. 15, EARNINGS PER SHARE.
The new standard requires additional informational disclosures
and makes certain modifications to the currently applicable EPS
calculations defined in APB No. 15. The new standard also
requires restatement of EPS for all prior periods reported.
Basic earnings per common share are computed by dividing net
earnings by the sum total of the weighted average number of
shares of common stock outstanding. Diluted earnings per common
share are computed by dividing net earnings by the sum total of
the weighted average number of shares of common stock outstanding
plus contingently issuable shares under the employee stock plans.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
with the 1997 presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
A financial instrument is defined as cash or a contract that
both imposes on one entity a contractual obligation to deliver
cash or another financial instrument to a second entity and
conveys to that second entity a contractual right to receive
cash or another financial instrument from the first entity.
2. JOINT VENTURE
On October 4, 1996, the Company sold 51% of the outstanding
shares of Fox Photo, Inc. ("Fox") to Eastman Kodak Company
("Kodak") for $56.1 million in cash, which resulted in a pre-tax
gain of $6.2 million. On the same date, the Company entered into
collateral agreements with Fox and Kodak, including agreements
under which the Company provided certain administrative services
and management services to Fox (the "Service Agreement" and the
"Consulting Agreement"). The ownership of the joint venture was
accounted for under the equity method and was reflected as an
<PAGE>
investment in the Fox joint venture.
In selling the 51% interest in Fox to Kodak, the Company believed
the joint venture would continue indefinitely. While the parties
provided for an exit from the joint venture after the end of
1998, the Company was focused on the long-term development of the
joint venture. The original agreement did not contain a
noncompete provision.
- 24 -
Unexpectedly, the joint venture encountered a series of problems
that severely diminished the prospects of achieving its original
vision. These problems included significant deterioration in
sales and profits from the first-year operating plan; higher than
expected costs in experimental markets; and the divergence of
shareholder philosophies, objectives and strategies.
Accordingly, the Company and Kodak began to negotiate the terms
of dissolution of the joint venture. The final sale by the
Company of its remaining 49% interest in Fox was negotiated on
an arms-length basis over three to four months in the context of
the changed circumstances and relationships.
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 (the "Promissory Note") due on January 4, 1999
(the "Disposition Transaction"). As a result of the sale, the
Company recorded a pre-tax loss of $4.2 million in 1997. Due to
the non-interest bearing nature of the Promissory Note, a
discount of $3.9 million was established and will be amortized
into income until the maturity of the Promissory Note. During
1997, $1.1 million in amortization related to the Promissory Note
was recognized. On a prospective basis, $2.8 million in
amortization for the Promissory Note will be recognized in fiscal
year 1998.
Once the joint venture was dissolved, the issue of competitive
threat surfaced. The Company remained committed to further
development and commercialization of its proprietary technology,
including the Photo Preview and Photo Proof Systems, that were
featured in joint venture test markets, as well as a store
automation system. The Company also possessed knowledge of the
most successful and vulnerable Fox markets and concepts.
Accordingly, as part of the Disposition Transaction, the Company
entered a two-year Noncompetition and Nonsolicitation Agreement
(the "Noncompete Agreement") with Fox. The Company received a
$10.0 million cash consideration which will be amortized into
income over the life of the agreement. For 1997, amortization
was $1.8 million. Prospectively, the Company will recognize $5.0
million and $3.2 million in amortization, respectively, in fiscal
years 1998 and 1999.
<PAGE>
In conjunction with the dissolution of the joint venture, the
Company and Fox also agreed to immediately terminate the
Consulting Agreement and terminate the Service Agreement no later
than March 31, 1998.
The information below summarizes the unaudited pro forma results
of operation for 1997 and 1996, assuming the sale of the joint
venture at the beginning of 1996, and have been prepared for
comparative purposes only. The information does not purport to
be indicative of the results of operations which actually would
have resulted had the sale been in effect on the dates indicated,
or which may result in the future.
<TABLE>
PRO FORMA RESULTS
(in thousands of dollars except per share amounts)
<CAPTION>
1997 1996
<S> <C> <C>
Net sales $366,701 $352,516
======== ========
Net earnings $ 19,103 $ 14,645
======== ========
Net earnings:
Diluted $ 1.61 $ 1.24
======== ========
Basic $ 1.64 $ 1.25
======== ========
</TABLE>
- 25 -
3. PROPERTY AND EQUIPMENT
<TABLE>
PROPERTY AND EQUIPMENT (in thousands of dollars)
<CAPTION>
February 7, February 1,
1998 1997
<S> <C> <C>
Land and land improvements $ 2,803 $ 2,803
Building improvements 26,550 26,544
Leasehold improvements 30,082 26,857
Furniture and fixtures 66,743 63,293
Machinery and equipment 116,189 107,946
--------- ---------
242,367 227,443
Less accumulated depreciation 117,649 96,681
--------- ---------
Net property and equipment $124,718 $130,762
========= =========
</TABLE>
<PAGE>
<TABLE>
MINIMUM RENTAL PAYMENTS* (in thousands of dollars)
<CAPTION>
<S> <C>
FISCAL YEAR
1998 $ 16,716
1999 14,323
2000 12,018
2001 10,393
2002 8,505
Thereafter 22,649
---------
$ 84,604
=========
<FN>
* Under operating leases with initial terms in excess of one
year at February 7, 1998.
</FN>
</TABLE>
Rental expense during 1997, 1996 and 1995 on all operating
leases was $19.1 million, $27.8 million and $32.3 million,
respectively.
The Company leases various premises and equipment under
noncancellable operating lease agreements with initial terms
in excess of one year and expiring at various dates through
fiscal year 2008. Substantially all leases require the Company
to pay maintenance, insurance and taxes.
4. ADVERTISING
The Company expenses production costs of advertising the
first time the advertising takes place, except for direct-
response advertising, which is capitalized and amortized over
its expected period of future benefits.
Direct-response advertising consists of direct mail
advertisements that include coupons for the Company's products
and of certain broadcast costs. The capitalized costs of the
advertising are amortized over the expected period of future
benefits following the delivery of the direct mail in which it
appears.
Total advertising reported as a capitalized cost for direct-
response advertising and classified with other assets for 1997
and 1996 was $1.0 million and $1.6 million, respectively.
Advertising expense for 1997, 1996 and 1995 was $41.9 million,
$45.5 million and $52.3 million, respectively.
<PAGE>
5. INTANGIBLE ASSETS
<TABLE>
INTANGIBLE ASSETS AND RELATED AMORTIZATION
(in thousands of dollars)
<CAPTION>
Unamortized
Balance at Amortization
Feb. 7, 1998 1997 1996 1995
<S> <C> <C> <C> <C>
Excess of cost over fair
value of net assets
acquired $ 665 $ 3 $ 935 $1,467
Favorable lease rights - - 10 57
Covenants not to compete - - 250 990
Signing bonus - - - 1,111
-------- ------ ------ ------
$ 665 $ 3 $1,195 $3,625
======== ====== ====== ======
</TABLE>
Accumulated amortization of intangible assets was $18.8 million
at February 7, 1998 and February 1, 1997.
- 26 -
6. CREDIT AGREEMENTS AND OUTSTANDING DEBT
In 1993, the Company entered into an agreement for the private
placement of Senior Notes in the amount of $60.0 million which
had an effective interest rate of 6.44%. The notes matured over
a seven-year period with an average maturity of 5.42 years and
the first principal payment to be completed in 1996. In 1997,
the Company prepaid the remaining $55.0 million balance of the
Senior Notes and privately placed new Senior Notes in the amount
of $60.0 million (the "Note Agreement"). The new notes, issued
pursuant to the Note Agreement, mature over a ten-year period
with an average maturity of seven years and with the first
principal payment due on the fourth anniversary of the agreement.
Interest on the notes is payable semi-annually at an average
effective fixed rate of 7.46%. The Note Agreement requires the
Company maintain certain financial ratios and comply with certain
restrictive covenants. The Company incurred $591,000 in issuance
costs associated with the private placement of the notes. These
costs are being amortized ratably over the ten-year life of the
notes.
In 1995, the Company entered into a $60.0 million revolving
credit agreement (the "Credit Agreement") with three domestic
banks. The Credit Agreement, which was to expire on August 31,
1997, had interest charged at the lower of a quoted interest rate
or the banks' prime lending rate. A commitment fee of 0.1875%
per annum was payable on the unused portion of the Credit
Agreement. The Company had certain financial covenants in the
Credit Agreement. In June 1997, the Company terminated the
<PAGE>
Credit Agreement and entered into a new, $40.0 million revolving
credit agreement (the "Revolving Agreement") with three domestic
banks. The Revolving Agreement, which will expire on June 16,
2000, has a variable interest rate charged at either LIBOR of
federal funds, with an applicable margin added, or prime rate,
based on the Company's discretion. A commitment fee of 0.125% to
0.25% per annum (which is based on ratio of consolidated debt to
EBITDA) is payable on the unused portion of the Revolving
Agreement. The Company has substantially the same financial
covenants as those set forth in the Company's $60.0 million Note
Agreement.
As of February 7, 1998, the Company had outstanding letters of
credit for the principal amount of $4.0 million.
<TABLE>
DEBT OBLIGATIONS OUTSTANDING (in thousands of dollars)
<CAPTION>
February 7, February 1,
1998 1997
<S> <C> <C>
Senior notes, net of unamortized
issuance costs $ 59,461 $ 54,831
Revolving credit agreement - -
Notes payable and obligations
under capital leases 21 57
Less current maturities - 10,000
--------- ---------
$ 59,482 $ 44,888
========= =========
</TABLE>
<TABLE>
AGGREGATE LONG-TERM DEBT MATURITIES AS OF FEBRUARY 7, 1998
(in thousands of dollars)
<S> <C>
FISCAL YEAR
--
2001 $ 8,580
2002 8,580
2003 8,580
2004 8,580
2005 8,580
2006 8,580
2007 8,541
---------
60,021
Unamortized issuance costs (539)
---------
$ 59,482
=========
</TABLE>
<PAGE>
Interest expense for 1997, 1996 and 1995 was $4.5 million, $4.3
million and $5.1 million, respectively.
- 27 -
7. ACCRUED EXPENSES AND OTHER LIABILITIES
<TABLE>
ACCRUED EXPENSES AND OTHER LIABILITIES (in thousands of dollars)
<CAPTION>
February 7, February 1,
1998 1997
<S> <C> <C>
Accrued employment costs $ 14,087 $ 10,297
Sales taxes payable 3,093 2,556
Accrued advertising expense 2,541 3,064
Accrued license fees 927 1,015
Accrued interest 631 1,480
Other 3,584 2,982
--------- ---------
$ 24,863 $ 21,394
========= =========
</TABLE>
8. INCOME TAXES
<TABLE>
EARNINGS BEFORE INCOME TAXES BY U.S. AND CANADIAN SOURCES
(in thousands of dollars)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
U.S. $ 20,720 $ 23,597 $ 23,382
Canada 177 (798) (949)
--------- --------- ---------
$ 20,897 $ 22,799 $ 22,433
========= ========= =========
</TABLE>
<TABLE>
COMPONENTS OF INCOME TAXES (in thousands of dollars)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $10,926 $ 5,399 $ 8,336
State and local 1,424 1,010 594
Canada (166) (1,324) (645)
-------- -------- --------
12,184 5,085 8,285
Deferred (4,000) 3,351 (185)
-------- -------- --------
$ 8,184 $ 8,436 $ 8,100
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
RECONCILIATION BETWEEN INCOME TAXES (in thousands of dollars)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Taxes at U.S. federal
corporate statutory rate $ 7,314 $ 7,980 $ 7,852
State and local income
taxes, net of federal tax
benefit 1,043 849 461
Stock options (519) (25) -
Other 346 (368) (213)
-------- -------- --------
$ 8,184 $ 8,436 $ 8,100
======== ======== ========
</TABLE>
<TABLE>
SOURCES OF TAX EFFECTS (in thousands of dollars)
<CAPTION>
February 7, February 1,
1998 1997
<S> <C> <C>
Deferred tax assets:
Deferred compensation and other
employee benefits $ 1,527 $ 2,131
Expense accruals 1,464 1,385
Allowance for doubtful accounts 147 132
Net operating loss carryforward - 209
Reserve for discontinued operations 660 85
Non-compete amortization 3,311 832
Other 220 364
-------- --------
Total deferred tax assets 7,329 5,138
-------- --------
Deferred tax liabilities:
Property and equipment (8,112) (7,597)
Gain on interest in Photofinishing
segment - (2,287)
Employee pension plan (1,378) (1,420)
Other (90) (85)
-------- --------
Total deferred tax liabilities (9,580) (11,389)
-------- --------
Net deferred tax liabilities $(2,251) $(6,251)
======== ========
Current deferred income taxes $ (180) $ (264)
======== ========
Long-term deferred income taxes $(2,431) $(5,987)
======== ========
</TABLE>
- 28 -
<PAGE>
A valuation allowance would be provided on deferred tax assets
when it is more likely than not that some portion of the assets
will not be realized. The Company has not established a
valuation allowance as of February 7, 1998, due to management's
belief that all criteria for recognition have been met,
including the existence of a history of taxes paid sufficient
to support the realization of deferred tax assets.
United States income taxes have not been provided on $14.1
million of undistributed earnings of the Canadian subsidiary
because of the Company's intention to reinvest these earnings.
The determination of unrecognized deferred U.S. tax liability
for undistributed earnings of international subsidiaries is not
practicable. However, it is estimated that foreign withholding
taxes of $705,000 may be payable if such earnings were
distributed.
9. RETIREMENT PLAN
The Company maintains a qualified, noncontributory pension plan
that covers all full-time 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 earlier of the hire date or January 1, 1985 (if
January 1, 1985 precedes the hire date) to the retirement date.
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, a marketable
equity securities fund, guaranteed interest contracts, immediate
participation guarantee contracts and government bonds.
In 1996, the Company recognized a $295,000 curtailment gain in
conjunction with the sale of 51% of the Fox Photo, Inc. stock
in the formation of the Fox joint venture.
<TABLE>
NET PERIODIC PENSION EXPENSE OF THE DEFINED BENEFIT PLAN
(in thousands of dollars)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 729 $ 1,124 $ 962
Interest cost on projected
benefit obligation 1,459 1,432 1,261
Return on plan assets (4,109) (2,802) (3,298)
Net amortization and deferral 2,496 1,435 2,220
Curtailment - (295) -
-------- -------- --------
Net periodic pension expense $ 575 $ 894 $ 1,145
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
FUNDED STATUS OF DEFINED BENEFIT PLAN
(in thousands of dollars)
<CAPTION>
Dec. 31, Dec. 31,
1997 1996
<S> <C> <C>
Actuarial present value of
vested benefit obligation $ 20,718 $ 15,747
========= =========
Accumulated benefit obligation $ 21,330 $ 16,797
========= =========
Projected benefit obligation $(23,403) $(18,827)
Plan assets at fair value 25,815 22,635
--------- ---------
Plan assets in excess of
projected benefit obligations 2,412 3,808
Unrecognized net loss 139 (1,113)
Unrecognized prior service cost 344 487
Net transition obligation 12 15
--------- ---------
Prepaid pension cost recognized
in the consolidated balance
sheet $ 2,907 $ 3,197
========= =========
</TABLE>
<TABLE>
ASSUMPTIONS ON FUNDED STATUS
<CAPTION>
Dec. 31, Dec. 31, Dec. 31,
1997 1996 1995
<S> <C> <C> <C>
Discount rate in determining
benefit obligations 7.0% 8.0% 7.5%
Rate of increase in
compensation levels 4.5% 5.5% 5.0%
Expected long-term rate of
return on assets 8.0% 8.0% 8.0%
</TABLE>
- 29 -
10. SUPPLEMENTARY RETIREMENT BENEFIT PLAN
The Company sponsors a non-contributory defined benefit plan
providing supplementary retirement benefits for certain key
executives that has been enhanced in 1997 and will become
effective February 8, 1998. The cost of providing these benefits
will be accrued over the remaining expected service lives of the
active plan participants.
<PAGE>
<TABLE>
PLAN STATUS (in thousands of dollars)
<CAPTION>
February 7, 1998
<S> <C>
Present value of accumulated post-
retirement benefit obligations $ 8,264
Unrecognized transition obligation (2,840)
-----------
Accrued post-retirement benefit
obligation $ 5,424
===========
</TABLE>
The discount rate used in determining the accumulative post-
retirement benefit obligation as of February 7, 1998 was 7%.
The supplementary retirement benefit plan is funded out of the
general funds of the Company. However, the Company has purchased
life insurance policies on several active and retired key
executives with an aggregate cash surrender value of $4.5
million. Prior to 1997, the Company recorded the net liability
of the defined benefit plan and the cash surrender value of the
life insurance policies, the amount of which was not material.
11. EMPLOYEE STOCK PLANS
Expenses recognized for 1997, 1996 and 1995 with respect to
these plans were $1.7 million, $1.5 million and $2.2 million,
respectively.
RESTRICTED STOCK PLAN
In January 1988, the Company's Board of Directors adopted the
CPI Corp. Restricted Stock Plan with an effective date of
February 7, 1988. Under the plan, 250,000 shares of CPI Corp.
common stock are reserved for issuance to key employees. In
1997, 876 restricted shares were issued and vest over a three-
year period. Of the grants issued, no shares were forfeited in
1997, 1996 and 1995. As of February 7, 1998, 57,471 shares are
reserved for issuance under this plan. Expenses related to the
restricted stock plan are accrued periodically, based on the fair
market value of the Company's common stock on the grant date.
PROFIT-SHARING PLAN
Under the Company's profit-sharing plan, eligible employees may
elect to invest from 1% to 15% of their base compensation in a
trust fund, the assets of which are invested in securities
other than Company stock. Effective January 1, 1994, the
Company amended the Plan to set the Company match at 50% of the
employee's investment contributions, up to a maximum of 5% of
the employee's compensation, as long as the Company remains
<PAGE>
profitable. The Company's matching contributions are
made in shares of its common stock which vest 100% once an
employee has five years of service with the Company. The
difference between the market value of forfeited shares at the
dates of their original contribution and their market value at
the dates used to satisfy subsequent requirements have been
charged to expense, with a corresponding credit to additional
paid-in capital. Expenses related to the profit-sharing plan
are accrued in the year to which the awards relate, based on
the fair market value of the Company's common stock to be
issued, determined as of the date earned. The Company provided
25,576, 41,639 and 40,725 shares to satisfy its obligations
under the plan for 1997, 1996 and 1995, respectively.
STOCK-BONUS PLAN
Under the Company's stock-bonus plan, shares of the Company's
common stock are reserved for issuance to key employees, based
on attainment by the Company of predefined earnings levels
established annually. Each year, employees receive one-third of
the shares which were awarded in each of the previous three
years. For 1997, 1996 and 1995, 4,334, 6,825 and 1,429 shares,
respectively, were distributed under this plan. As of
February 7, 1998, 47,211 shares are reserved for issuance under
this plan. Expenses related to the stock-bonus plan are accrued
in the year to which the awards relate, based on the fair market
value of the Company's common stock to be issued, determined as
of the date earned.
- 30 -
STOCK-OPTION PLAN
The Company has a non-qualified stock-option plan, under which
certain officers and key employees may receive options to
acquire shares of the Company's common stock. Awards of stock
options and the terms and conditions of such awards are subject
to the discretion of the Stock Option Committee created under
the plan and consisting of members of the Compensation
Committee of the Board of Directors, all of whom are
disinterested directors. A total of 1,700,000 shares has been
authorized for issuance under the plan.
<PAGE>
<TABLE>
OPTIONS AWARDED UNDER THE STOCK OPTION PLAN - 1997
<CAPTION>
Number of Per Share
Shares Option Price
---------- -------------
<S> <C> <C>
Outstanding at beginning of year 767,305 $13.88-$21.75
480,000 30.00- 35.00
---------- -------------
Total outstanding at beginning
of year 1,247,305 13.88- 35.00
Granted 9,961 17.12- 25.50
Cancelled (188,043) 14.75- 30.00
Exercised (181,815) 13.88- 18.88
----------
At end of year:
Total outstanding 887,408 $13.88-$35.00
==========
Total exercisable 439,393
==========
</TABLE>
<TABLE>
OPTIONS AWARDED UNDER THE STOCK OPTION PLAN - 1996
<CAPTION>
Number of Per Share
Shares Option Price
---------- -------------
<S> <C> <C>
Outstanding at beginning of year 808,961 $13.88-$21.75
480,000 30.00- 35.00
---------- --------------
Total outstanding at beginning
of year 1,288,961 13.88- 35.00
Granted 13,704 14.38- 15.00
Cancelled (35,075) 14.75- 24.50
Exercised (20,285) 14.75- 18.88
----------
At end of year:
Total outstanding 1,247,305 $13.88-$35.00
==========
Total exercisable 452,695
==========
</TABLE>
<PAGE>
<TABLE>
OPTIONS AWARDED UNDER THE STOCK OPTION PLAN - 1995
<CAPTION>
Number of Per Share
Shares Option Price
---------- -------------
<S> <C> <C>
Outstanding at beginning of year 1,022,011 $13.88-$21.75
480,000 30.00- 35.00
---------- -------------
Total outstanding at beginning
of year 1,502,011 13.88- 35.00
Granted 100,139 14.75- 21.63
Cancelled (309,274) 14.75- 29.00
Exercised (3,915) 15.50- 17.75
----------
At end of year:
Total outstanding 1,288,961 $13.88-$35.00
==========
Total exercisable 391,454
==========
</TABLE>
- 31 -
Under the plan, 75,937 options granted become exercisable at a
rate of one-fourth a year commencing one year after award and
expiring from four to eight years after award. An additional
811,471 options granted under the plan are cliff-vested and
become exercisable from four to five years after award and
expire six to eight years after award. As of February 7, 1998,
there were 606,577 shares reserved for issuance under this plan.
<TABLE>
TOTAL OUTSTANDING OPTIONS -- YEAR-END 1997
<CAPTION>
Number of Per Share Weighted
Shares Option Price Life*
--------- ------------- --------
<S> <C> <C> <C>
458,739 $13.88-$18.88 4.41
6,169 $21.63-$25.50 6.14
422,500 $30.00-$35.00 5.57
--------
Total 887,408
========
<FN>
* Weighted average remaining contractual life in years
</FN>
</TABLE>
<PAGE>
<TABLE>
TOTAL EXERCISABLE OPTIONS -- YEAR-END 1997
<CAPTION>
Number of Per Share Weighted
Shares Option Price Price*
--------- ------------- --------
<S> <C> <C> <C>
16,893 $15.50-$21.63 $ 18.56
422,500 $30.00-$35.00 $ 32.84
---------
Total 439,393
=========
<FN>
* Weighted average exercise price in dollars
</FN>
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Had
compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards
in 1997, 1996 and 1995 consistent with the provisions of SFAS No.
123, the Company's net earnings and earnings per common share
would have been:
<TABLE>
EARNINGS AND EARNINGS PER SHARE
(in thousands of dollars except per share amounts)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net earnings:
As reported $12,713 $14,363 $14,333
======= ======= =======
Pro forma $12,709 $14,324 $14,303
Basic earnings per common share: ======= ======= =======
As reported $ 1.09 $ 1.07 $ 1.03
======= ======= =======
Pro forma $ 1.09 $ 1.07 $ 1.03
Diluted earnings per common share: ======= ======= =======
As reported $ 1.07 $ 1.06 $ 1.02
======= ======= =======
Pro forma $ 1.07 $ 1.06 $ 1.02
======== ======== =======
</TABLE>
- 32 -
The fair value of each option grant for 1997, 1996 and 1995 is
estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted average assumptions
used for the grants: expected volatility of 27.0%, risk-free
<PAGE>
interest rate of 6%, expected lives of four to five years,
and an expected dividend yield of between 2.6% and 3.9%.
VOLUNTARY STOCK-OPTION PLAN
The Company has a non-qualified voluntary stock-option plan,
under which certain key officers may receive options to acquire
shares of the Company's common stock in exchange for a
voluntary reduction in base salary. Options were granted as
participants elected, pursuant to their Stock Option Agreement,
to reduce their compensation for 1993 and 1994. A total of
1,000,000 shares has been authorized for issuance. As of
February 7, 1998, 230,684 options at an exercise price of
$18.38 for 1993 salary reduction and 240,247 options at an
exercise price of $15.50 for 1994 salary reduction have been
issued. For 1997, 1996 and 1995, this plan was not offered.
Options granted are exercisable after three years and expire at
the end of eight years.
DEFERRED COMPENSATION AND STOCK APPRECIATION RIGHTS PLAN
On February 1, 1986, the Company's Board of Directors approved
a Deferred Compensation and Stock Appreciation Rights Plan
designed to attract and retain certain key employees. Under
the Deferred Compensation Plan, as amended and restated, within
thirty days prior to the beginning of the fiscal year, eligible
employees may irrevocably elect by written notice to the
Company to defer the payment of a portion (not to exceed 50% or
less than $5,000 in the aggregate) of an incentive bonus. The
participant may choose to have payments made either in a lump
sum or in a specified number of annual installments, not to
exceed ten. For 1997, 1996 and 1995, certain key executives
elected to participate in this plan. All stock appreciation
rights previously granted under the Plan have expired.
KEY EXECUTIVE DEFERRED COMPENSATION PLAN
On April 6, 1995, the Board of Directors established a deferred
base salary plan for key executives which allows deferral of
base salary on substantially the same terms as bonus
compensation may be deferred under the Deferred Compensation
and Stock Appreciation Plan. On July 14, 1995, this plan was
amended and restated. Under this plan, a participant may elect
by written notice to the Company to defer up to 50% of his base
salary for the fiscal year, but not less than $5,000 in the
aggregate. Payment shall not commence earlier than six months
and one day after the initial year of deferral. The
participant may choose to have payments made either in a lump
sum or in a specified number of annual installments, not to
exceed ten. For 1997, 1996 and 1995, certain key executives
elected to participate in this plan.
12. INDUSTRY SEGMENT INFORMATION
The Company is engaged in developing and marketing products and
services for consumers in the United States and Canada through
<PAGE>
a network of centrally managed retail locations. The Company
operates in two business segments: Portrait Studios and Wall
Decor. In addition, the Company sold its interest in the Fox
joint venture to Kodak October 2, 1997. This joint venture
comprised of Fox Photo, CPI Photo Finish and Proex was entered
into October 4, 1996. Also, in May 1996, the Company sold its
Electronic Publishing segment (CopyMat and CopyUSA).
The Portrait Studios segment operates a professional portrait
photography business through fixed location studios. The Wall
Decor segment markets an assortment of custom print
reproductions and related accessories and provides custom
framing services. Sales and operating earnings segment
information is included in MANAGEMENT'S DISCUSSION AND
ANALYSIS-RESULTS OF OPERATIONS and is incorporated by
reference herein from pages 13 and 14 of this document.
Substantially all of the Company's Portrait Studio business
operates in the United States under a Sears, Roebuck and Co.
("Sears") license agreement that is terminable by either the
Company or Sears upon 90 days notice. Except in connection with
store closings,
- 33 -
Sears has never terminated the operations of any of the Company's
portrait studios. The Company's relationship with Sears is long-
standing, and management has no reason to believe that Sears
will exercise its rights under the agreement to materially
reduce the scope of the Company's business with Sears. For
1997, approximately 83% of net sales and substantially all
operating earnings (before deduction of general corporate
expenses, net interest income (expense), other income and income
tax expense) were derived from the Sears Portrait Studio
business.
<PAGE>
<TABLE>
SELECTED INDUSTRY SEGMENT INFORMATION (in thousands of dollars)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION:
Portrait Studio $ 22,048 $ 21,081 $ 17,553
Photofinishing - 9,494 16,231
Wall Decor 4,447 4,181 3,556
Corporate 3,483 3,190 3,668
Discontinued Electronic Publishing - - 1,820
-------- -------- --------
$ 29,978 $ 37,946 $ 42,828
======== ======== ========
IDENTIFIABLE ASSETS:
Portrait Studio $107,770 $115,591 $118,649
Photofinishing - - 113,983
Wall Decor 42,589 42,557 35,577
Corporate cash and marketable sec. 13,360 20,867 8,331
Corporate other 65,042 19,600 18,893
Discontinued Electronic Publishing - - 5,055
Investment in Fox Joint Venture - 48,105 -
-------- -------- --------
$228,761 $246,720 $300,488
======== ======== ========
CAPITAL EXPENDITURES:
Portrait Studio $ 13,939 $ 17,820 $ 24,817
Photofinishing - 9,098 14,732
Wall Decor 5,717 9,085 9,627
Corporate 2,676 1,050 1,005
Discontinued Electronic Publishing - - 472
-------- -------- --------
$ 22,332 $ 37,053 $ 50,653
======== ======== ========
</TABLE>
13. STOCK REPURCHASE PLAN
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. Acquired shares are held as
treasury stock and will be available for general corporate
purposes. As of February 7, 1998, the Company had purchased
3,362,832 shares of stock for $75.7 million at an average stock
price of $22.51.
On November 12, 1996, the Company announced the completion a
"Dutch Auction" tender offer. The Company, as authorized by
the Board of Directors, purchased 2,250,000 shares of the
Company's common stock at $19.00 per share. The total cost
incurred was $43.6 million. The Company used the proceeds from
the sale of Fox's common stock to finance the tender offer.
<PAGE>
On January 7, 1998, the Company, as authorized by the Board of
Directors, completed a second "Dutch Auction" tender offer by
purchasing 1,999,215 shares of the Company's common stock at
$23.00 per share for $46.5 million. The Company used the
proceeds from: the $10.0 million two-year Noncompete Agreement;
the repayment of a $4 million note held by the Company from the
joint venture; and other working capital and cash from operations
to finance the tender offer.
- 34 -
14. SHAREHOLDER RIGHTS PLAN
The Board of Directors of the Company established a
Shareholders Rights Plan ("Rights Plan") through the declaration
of a dividend distribution of one preferred stock purchase
right for each outstanding share of common stock. The Rights
Plan entitles holders of common stock to purchase one
one-hundredth of a share of Series A Participating Preferred
Stock in the Company, or an acquirer of the Company, in the
event of certain hostile efforts, as defined in the Rights
Plan, to gain control of the Company. The rights issued expire
on May 11, 1999, unless redeemed earlier. In addition, the
rights will be exercisable if any person or group (other than
certain entities affiliated with the Company) becomes the
beneficial owner of 15% or more of the Company's common stock.
On August 3, 1995, the Board of Directors adopted an amendment
to the Rights Plan to clarify that no person would be deemed an
"Acquiring Person" as defined in the Rights Plan if that person
acquired beneficial ownership of 15% or more of the Company's
stock solely as a result of the Company's repurchase of stock,
provided that the person did not subsequently acquire
additional shares.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
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 judgement
and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, RECEIVABLES,
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The carrying amounts approximate fair value at February 7, 1998
and February 1, 1997 due to the short maturity of these
financial instruments.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
The fair value of the Company's debt is estimated based on
quoted market prices for similar debt issues with the same
remaining maturities. On February 7, 1998, the carrying value
and estimated fair market value of the Company's debt was $59.5
<PAGE>
million and $63.0 million, respectively. On February 1, 1997,
the carrying value and estimated fair market value of the
Company's debt was $54.9 million and $53.7 million,
respectively.
16. CONTINGENCIES
The Company is a defendant in various lawsuits arising in the
natural course of business. It is the opinion of management
that the ultimate liability, if any, resulting from the
resolution of such lawsuits will not have a material effect on
the consolidated financial position or the results of
operations of the Company.
17. DISCONTINUED OPERATIONS AND SUPPLEMENTAL CASH FLOW
INFORMATION
On April 4, 1996, the Company announced its intention to sell
certain assets of its Electronic Publishing operations. On May
3, 1996, the Company completed the transaction for $4.8 million.
Additionally, the purchaser assumed certain liabilities of the
Electronic Publishing operation which aggregate approximately
$900,000. A provision of $3.8 million was made in 1995 to
reflect the discontinued business at its estimated realizable
value. The Company classified the Electronic Publishing
operation as a discontinued operation and reclassified the
prior years' financial statements to reflect this transaction.
Net sales of the discontinued business for 1995 were $16.7
million. Net assets held for sale were $5.1 million at
February 3, 1996.
- 35 -
<PAGE>
<TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION FROM DISCONTINUED OPERATIONS
(in thousands of dollars)
<CAPTION>
1995
<S> <C>
Losses from discontinued operations, net of income
tax benefit of $507 $ (898)
Net loss on disposal, net of tax benefit of $1,372 (2,428)
Adjustments for items not requiring cash:
Depreciation and amortization 1,821
Decrease (increase) in current assets:
Receivables and inventories 19
Prepaid expenses and other current assets 520
Reserve for closing 3,800
Increase (decrease) in current liabilities:
Accounts payable, accrued expenses and other
liabilities (502)
Deferred tax benefit (1,372)
Capital expenditures (472)
--------
Cash flows from discontinued operations $ 488
========
</TABLE>
- 36 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CPI CORP.:
We have audited the accompanying consolidated balance sheets of
CPI Corp. and subsidiaries as of February 7, 1998 and February
1, 1997, and the related consolidated statements of earnings,
changes in stockholders' equity and cash flows for each of the
fiscal years in the three-year period ended February 7, 1998.
These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
financial position of CPI Corp. and subsidiaries at February 7,
1998 and February 1, 1997, and the results of their operations
and their cash flows for each of the fiscal years in the
three-year period ended February 7, 1998, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
April 9, 1998
- 37 -
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (unaudited)
The Company's photography business is seasonal, with the largest
sales volume during the third and fourth quarters, the period
preceding and including the Thanksgiving and Christmas seasons.
In October 1996, the Company recorded a $6.2 million gain before
taxes on the sale of its interest in the Photofinishing segment
and the formation of a joint venture. The Company also recorded
the repurchase of 2,250,000 shares of common stock for $43.6
million in November 1996.
In addition, in October 1997, the Company recorded a $4.2 million
loss before taxes on the sale of its interest in the joint
venture formed in October 1996. The Company also recorded the
repurchase of 1,999,215 shares of common stock for $46.5 million
in January 1998.
The tables presented set forth selected financial data for the
quarters of the Company's fiscal years ended February 7, 1998 and
February 1, 1997. Although this information is unaudited, in the
opinion of the Company, it reflects all adjustments (consisting
only of normal recurring adjustments) necessary for a fair
presentation of the results of operations for such periods.
Since April 17, 1989, the Company's common stock has been traded
on the New York Stock Exchange under the symbol CPY. The
adjacent tables also set forth the high and low sales price of
the common stock reported by the New York Stock Exchange during
the Company's last two fiscal years.
<PAGE>
<TABLE>
SELECTED QUARTERLY FINANCIAL DATA - F.Y. 1997 (UNAUDITED)
<CAPTION>
Quarter Ended:
(in thousands except per share amounts)
---------------------------------------
Apr. 26, July 19 Nov. 8, Feb. 7,
1997 1997 1997 1998
(12 wks) (12 wks) (16 wks) (12 wks)
<S> <C> <C> <C> <C>
Fiscal Year 1997
Net sales from operations $ 70,174 $ 68,494 $108,156 $119,877
Earnings (loss) from
continuing operations
before income taxes (3,827) 2,198 (433) 22,960
Net earnings (loss) (2,411) 1,385 (725) 14,465
- -----------------------------------------------------------------
Earnings (loss) per
common share-diluted $ (0.20) $ 0.12 $ (0.06) $ 1.26
Earnings (loss) per
common share-basic (0.21) 0.12 (0.06) 1.29
- -----------------------------------------------------------------
Weighted average number
of common and common
equivalent shares-
diluted 11,835 11,921 12,205 11,448
Weighted average number
of common and common
equivalent shares-
basic 11,726 11,762 11,871 11,194
- -----------------------------------------------------------------
Dividends $ 0.14 $ 0.14 $ 0.14 $ 0.14
- -----------------------------------------------------------------
Stock Price and Volume
High $ 19.50 $ 22.13 $ 28.00 $ 25.19
Low $ 15.88 $ 16.00 $ 19.50 $ 17.25
Volume (in thousands
of shares) 1,378 1,463 3,063 3,124
</TABLE>
<PAGE>
<TABLE>
SELECTED QUARTERLY FINANCIAL DATA - F.Y. 1996 (UNAUDITED)
<CAPTION>
Quarter Ended:
(in thousands except per share amounts)
---------------------------------------
Apr. 27, July 20, Nov. 9, Feb. 1,
1996 1996 1996 1997
(12 wks) (12 wks) (16 wks) (12 wks)
<S> <C> <C> <C> <C>
Fiscal Year 1996
Net sales from operations $104,668 $105,440 $145,435 $111,491
Earnings (loss) from
continuing operations
before income taxes (3,366) (1,291) 8,007 19,449
Net earnings (loss) (2,120) (813) 5,044 12,253
- -----------------------------------------------------------------
Earnings (loss) per
common share-diluted $ (0.15) $ (0.06) $ 0.36 $ 1.03
Earnings (loss) per
common share-basic (0.15) (0.06) 0.36 1.04
- -----------------------------------------------------------------
Weighted average number
of common and common
equivalent shares-
diluted 13,963 14,001 14,066 11,861
Weighted average number
of common and common
equivalent shares-
basic 13,914 13,919 13,934 11,740
- -----------------------------------------------------------------
Dividends $ 0.14 $ 0.14 $ 0.14 $ 0.14
- -----------------------------------------------------------------
Stock Price and Volume
High $ 16.88 $ 18.25 $ 21.13 $ 18.50
Low $ 14.63 $ 14.75 $ 13.88 $ 16.38
Volume (in thousands
of shares) 3,302 9,046 5,149 1,445
</TABLE>
- 38 -
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- --------------------
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Per Share:
Earnings-diluted $ 1.07 $ 1.06 $ 1.26
Earnings-basic 1.09 1.07 1.27
Avg. shares outstanding (millions/
shares)-diluted 11.8 13.5 14.0
Avg. shares outstanding (millions/
shares)-basic 11.6 13.4 13.9
Dividends 0.56 0.56 0.56
Prices: high 28.00 21.13 22.13
low 15.88 13.88 14.25
P/E range: high 26.17 19.93 21.70
low 14.84 13.09 13.97
Dividend yield 2.55% 3.20% 3.08%
- ----------------------------------------------------------------
Income Data (million $):
Net sales $366.7 $467.0 $526.7
Income from operations 28.2 20.4 31.7
Net interest and other income
(expense) 0.2 (3.3) (4.1)
Gain (loss) on sale of interest in
Photofinishing segment (4.2) 6.2 -
Interest in joint venture (3.3) (0.5) -
Income taxes 8.2 8.4 10.0
Accounting change - - -
Net earnings from continuing
operations 12.7 14.4 17.6
- ----------------------------------------------------------------
Balance Sheet (million $):
Current assets $ 94.4 $ 63.7 $ 72.8
Cash and equivalents 15.3 21.9 8.3
Net fixed assets 124.7 130.8 167.9
Total assets 228.8 246.7 300.5
Employed assets 213.5 224.8 292.2
Current liabilities 47.4 50.8 64.0
Long-term debt 59.5 44.9 54.8
Stockholders' equity 102.1 139.5 174.2
Employed equity 86.8 117.6 165.9
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
- --------------------
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash Flow Data (million $):
From operations $ 46.8 $ 53.8 $ 53.7
From (used for) investments (7.7) 17.4 (43.7)
From (used for) financing (45.4) (57.7) (11.1)
Effect of exchange rate changes (0.2) 0.1 0.2
Change in cash and cash equivalents (6.6) 13.6 (0.9)
Capital expenditures
(excluding acquisitions) 21.7 34.7 48.8
Acquisitions - - -
- ----------------------------------------------------------------
Ratio Analysis:
Net margin (1) 3.5 3.1 3.4
Asset turnover (2)* 1.49x 1.55x 1.75x
Return on assets (3)* 5.17% 4.78% 5.88%
Financial leverage (4)* 1.77x 1.73x 1.81x
Return on equity (5)* 9.15% 8.25% 10.64%
Retention rate (6) 0.482 0.480 0.459
Implied growth rate (7) 4.41% 3.96% 4.88%
<FN>
* Beginning fiscal year
(1) Net margin: Net earnings/net sales
(2) Asset turnover: Net sales/total assets (beginning)
(3) Return on assets: Net margin x asset turnover
(4) Financial leverage: Total assets (beginning)/stockholders'
equity (beginning)
(5) Return on equity: Return on assets x financial leverage
(6) Retention rate: Net earnings less dividends on common
stock/net earnings
(7) Implied growth rate: Return on equity x retention rate
</FN>
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- --------------------
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Per Share:
Earnings-diluted $ 1.18 $ 1.03 $ 1.69
Earnings-basic 1.18 1.03 1.69
Avg. shares outstanding (millions/
shares)-diluted 14.1 14.7 14.7
Avg. shares outstanding (millions/
shares)-basic 14.1 14.6 14.6
Dividends 0.56 0.56 0.56
Prices: high 21.88 20.75 26.38
low 13.88 13.88 15.00
P/E range: high 20.83 23.06 17.13
low 13.21 15.42 9.74
Dividend yield 3.13% 3.23% 2.71%
- ----------------------------------------------------------------
Income Data (million $):
Net sales $517.5 $460.0 $433.8
Income from operations 30.3 22.0 38.5
Net interest and other income
(expense) (3.9) (0.3) 1.6
Gain (loss) on sale of interest in
Photofinishing segment - - -
Interest in joint venture - - -
Income taxes 9.8 8.7 15.3
Accounting change - 2.1 -
Net earnings from continuing
operations 16.6 15.1 24.8
- ----------------------------------------------------------------
Balance Sheet (million $):
Current assets $ 82.0 $127.8 $ 73.2
Cash and equivalents 9.2 36.1 21.0
Net fixed assets 159.1 114.3 97.6
Total assets 300.5 305.8 237.8
Employed assets 291.3 269.7 216.8
Current liabilities 69.8 65.2 56.8
Long-term debt 59.7 59.8 0.3
Stockholders' equity 166.0 175.5 171.9
Employed equity 156.8 139.4 151.0
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
- --------------------
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Cash Flow Data (million $):
From operations $ 40.4 $ 38.2 $ 36.9
From (used for) investments (51.7) (73.9) (34.4)
From (used for) financing (15.3) 51.6 (10.2)
Effect of exchange rate changes (0.3) (0.8) (1.3)
Change in cash and cash equivalents (26.9) 15.1 (9.0)
Capital expenditures
(excluding acquisitions) 75.1 28.9 12.0
Acquisitions - 14.7 23.9
- ----------------------------------------------------------------
Ratio Analysis:
Net margin (1) 3.2 3.3 5.7
Asset turnover (2)* 1.69x 1.93x 1.82x
Return on assets (3)* 5.44% 6.36% 10.39%
Financial leverage (4)* 1.74x 1.38x 1.49x
Return on equity (5)* 9.47% 8.78% 15.47%
Retention rate (6) 0.465 0.381 0.637
Implied growth rate (7) 4.40% 3.35% 9.86%
<FN>
* Beginning fiscal year
(1) Net margin: Net earnings/net sales
(2) Asset turnover: Net sales/total assets (beginning)
(3) Return on assets: Net margin x asset turnover
(4) Financial leverage: Total assets (beginning)/stockholders'
equity (beginning)
(5) Return on equity: Return on assets x financial leverage
(6) Retention rate: Net earnings less dividends on common
stock/net earnings
(7) Implied growth rate: Return on equity x retention rate
</FN>
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- --------------------
<CAPTION>
1991 1990 1989
<S> <C> <C> <C>
Per Share:
Earnings-diluted $ 1.97 $ 2.28 $ 2.15
Earnings-basic 1.97 2.29 2.17
Avg. shares outstanding (millions/
shares)-diluted 15.1 15.4 15.7
Avg. shares outstanding (millions/
shares)-basic 15.1 15.3 15.6
Dividends 0.56 0.50 0.42
Prices: high 34.75 32.88 33.88
low 21.88 24.25 21.00
P/E range: high 19.31 15.01 18.51
low 12.15 11.07 11.48
Dividend yield 1.98% 1.75% 1.53%
- ----------------------------------------------------------------
Income Data (million $):
Net sales $400.4 $360.7 $336.9
Income from operations 43.4 49.3 47.3
Net interest and other income
(expense) 4.0 6.4 5.5
Gain (loss) on sale of interest in
Photofinishing segment - - -
Interest in joint venture - - -
Income taxes 17.7 20.7 19.0
Accounting change - - -
Net earnings from continuing
operations 29.7 35.0 33.8
- ----------------------------------------------------------------
Balance Sheet (million $):
Current assets $ 83.6 $130.2 $106.4
Cash and equivalents 30.0 84.5 68.7
Net fixed assets 97.7 80.7 81.4
Total assets 238.9 218.7 196.5
Employed assets 208.9 134.2 127.8
Current liabilities 67.0 51.4 47.8
Long-term debt 0.6 0.5 0.3
Stockholders' equity 160.3 151.7 133.1
Employed equity 130.3 67.3 64.4
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
- --------------------
<CAPTION>
1991 1990 1989
<S> <C> <C> <C>
Cash Flow Data (million $):
From operations $ 51.6 $ 50.0 $ 53.3
From (used for) investments (87.2) (19.2) (15.0)
From (used for) financing (18.7) (15.3) (32.1)
Effect of exchange rate changes (0.2) 0.3 -
Change in cash and cash equivalents (54.5) 15.8 6.2
Capital expenditures
(excluding acquisitions) 19.8 15.1 18.5
Acquisitions 70.2 1.2 0.8
- ----------------------------------------------------------------
Ratio Analysis:
Net margin (1) 7.4 9.7 10.0
Asset turnover (2)* 1.83x 1.84x 1.71x
Return on assets (3)* 13.59% 17.83% 17.17%
Financial leverage (4)* 1.44x 1.48x 1.44x
Return on equity (5)* 19.57% 26.39% 24.72%
Retention rate (6) 0.689 0.773 0.771
Implied growth rate (7) 13.48% 20.40% 19.06%
<FN>
* Beginning fiscal year
(1) Net margin: Net earnings/net sales
(2) Asset turnover: Net sales/total assets (beginning)
(3) Return on assets: Net margin x asset turnover
(4) Financial leverage: Total assets (beginning)/stockholders'
equity (beginning)
(5) Return on equity: Return on assets x financial leverage
(6) Retention rate: Net earnings less dividends on common
stock/net earnings
(7) Implied growth rate: Return on equity x retention rate
</FN>
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- --------------------
<CAPTION>
1988 1987
<S> <C> <C>
Per Share:
Earnings-diluted $ 1.95 $ 1.54
Earnings-basic 1.96 1.55
Avg. shares outstanding (millions/
shares)-diluted 16.7 16.7
Avg. shares outstanding (millions/
shares)-basic 16.6 16.6
Dividends 0.25 0.165
Prices: high 22.25 27.75
low 17.25 12.75
P/E range: high 12.29 19.01
low 9.53 8.73
Dividend yield 1.27% 0.81%
- -----------------------------------------------------------
Income Data (million $):
Net sales $310.5 $283.2
Income from operations 48.1 43.0
Net interest and other income
(expense) 5.7 3.2
Gain (loss) on sale of interest in
Photofinishing segment - -
Interest in joint venture - -
Income taxes 21.2 20.4
Accounting change -
Net earnings from continuing
operations 32.6 25.8
- -----------------------------------------------------------
Balance Sheet (million $):
Current assets $104.5 $ 90.5
Cash and equivalents 62.5 53.1
Net fixed assets 78.0 68.8
Total assets 197.0 168.7
Employed assets 134.5 115.6
Current liabilities 47.3 39.9
Long-term debt 0.5 0.2
Stockholders' equity 136.6 116.7
Employed equity 74.1 63.7
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
- --------------------
<CAPTION>
1988 1987
<S> <C> <C>
Cash Flow Data (million $):
From operations $ 42.5 $ 47.4
From (used for) investments (23.7) (23.3)
From (used for) financing (9.7) (0.7)
Effect of exchange rate changes 0.4 0.1
Change in cash and cash equivalents 9.5 23.5
Capital expenditures
(excluding acquisitions) 12.1 13.6
Acquisitions 11.0 3.2
- ----------------------------------------------------------
Ratio Analysis:
Net margin (1) 10.5 9.1
Asset turnover (2)* 1.84x 2.03x
Return on assets (3)* 19.30% 18.47%
Financial leverage (4)* 1.44x 1.49x
Return on equity (5)* 27.79% 27.52%
Retention rate (6) 0.863 0.888
Implied growth rate (7) 23.99% 24.44%
<FN>
* Beginning fiscal year
(1) Net margin: Net earnings/net sales
(2) Asset turnover: Net sales/total assets (beginning)
(3) Return on assets: Net margin x asset turnover
(4) Financial leverage: Total assets (beginning)/stockholders'
equity (beginning)
(5) Return on equity: Return on assets x financial leverage
(6) Retention rate: Net earnings less dividends on common
stock/net earnings
(7) Implied growth rate: Return on equity x retention rate
</FN>
</TABLE>
<PAGE>
DIRECTORS AND OFFICERS
- ----------------------
Milford Bohm*
Retired founder and Chairman Emeritus, CPI Corp.
Alyn V. Essman
Chairman of the Board and Chief Executive Officer, CPI Corp.
Russell Isaak
President, CPI Corp.
Mary Ann Krey*
Chief Executive Officer, Krey Distributing Co.
Lee Liberman
Chairman Emeritus, Laclede Gas Company
Patrick J. Morris
Senior Executive Vice President, CPI Corp.
Nicholas L. Reding
Vice Chairman, Monsanto Company
Martin Sneider
Former President, Edison Brothers Stores, Inc.
Robert L. Virgil*
Principal, Edward Jones
* Member of the Audit Committee of the Board of Directors
<PAGE>
DIRECTORS AND OFFICERS (continued)
- ----------------------
Chairman, Chief Executive Officer
Alyn V. Essman
President
Russell Isaak
Senior Executive Vice President
Patrick J. Morris
Secretary and General Counsel
Jane E. Nelson
Corporate Officers
Barry Arthur -Executive Vice President, Finance-Chief
Financial Officer
Edmund J. Chase -Executive Vice President, Strategic
Development
William F. Cronin -Executive Vice President, Marketing
Fran Scheper -Executive Vice President, Human Resources
Richard Tarpley -Executive Vice President, Manufacturing
Division Presidents
Theodore R. Upland III -Prints Plus
Patrick J. Morris -Sears Portrait Studios and Canadian
Operations
- 40 -
<PAGE>
NOTICE TO SHAREHOLDERS
- ----------------------
Beginning with the first quarter of Fiscal Year 1996, we have not
published a formal quarterly earnings report, thereby saving your
Company tens of thousands of dollars. Instead, we offer the
option of three formats with which you can receive quarterly
earnings information on a more timely basis than with the
previous reports.
The scheduled release dates are: 1st quarter-June 2, 1998; 2nd
quarter-August 25, 1998; 3rd quarter-December 15, 1998.
Your options - on an ongoing basis as long as you remain a
shareholder - are:
1. You can access the news release on the Internet via the CPI
Corp. home page address: http://www.cpicorp.com
2. We can automatically E-Mail to you following the media
release.
3. We can mail you a printed copy of the quarterly news release
within 7 working days after its release to the news media.
Please indicate your choice of formats 2 or 3 by completing the
information in the appropriate spaces below:
E-Mail Transmission
Name __________________________________________________________
E-Mail Address ________________________________________________
Printed Copy of News Release
Name __________________________________________________________
Address ___________________City ________ State _____ Zip _____
Please Mail This Form To:
CPI Corp., Shareholder Relations,
1706 Washington Ave., St. Louis, MO 63103-1717
<PAGE>
INVESTOR INFORMATION
- --------------------
MOST RECENT RESEARCH REPORTS
Smith Barney, Inc., November 19, 1997
Value Line, February 27, 1998
STOCK TRANSFER, REGISTRAR, DIVIDEND REINVESTMENT AND RIGHTS
AGENT
Harris Trust & Savings Bank, 111 West Monroe, P. O. Box 755,
Chicago, IL 60690-0755, (800) 441-9673
10-K REPORT
Single copies of the Company's Form 10-K, filed with the
Securities and Exchange Commission, are available at no charge
to shareholders upon written request. The Form 10-K is also
available on the Internet at www.sec.gov\cgi-bin\srch-edgar.
ANNUAL MEETING/CORPORATE HEADQUARTERS
The annual meeting of stockholders will convene at 10:00 a.m.,
Thursday, June 11, 1998 at the Corporate Headquarters, 1706
Washington Avenue, St. Louis, MO 63103-1717.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, St. Louis, MO
AUTOMATIC DIVIDEND REINVESTMENT
The automatic dividend reinvestment plan is a convenient way
for stockholders to increase their investment in the Company,
with all brokerage commissions and service charges paid by CPI
Corp. Cash contributions in the amount of $10 to $10,000 per
quarter can also be made toward the purchase of additional
shares. For a plan description, enrollment card or other
information, write or call the Shareholder Service Department
at CPI Corporate Headquarters.
AT THE COMPANY
Alyn V. Essman
Chairman
CPI Corp., 1706 Washington Avenue, St. Louis, MO 63103-1717
(314) 231-1575, Extension 3240
AT THE FINANCIAL RELATIONS BOARD, INC.
John Hancock Center, 875 N. Michigan Avenue, Chicago, IL 60611
George Zagoudis
Partner and Account Division Manager
Direct line: (312) 640-6663
Suzy Lynde
Vice President and Market Intelligence Executive
Direct line: (312) 640-6772
<PAGE>
INVESTOR INFORMATION (continued)
- --------------------
FOR INFORMATION ON THE INTERNET
CPI Corp.: http://www.cpicorp.com
CPI Human Resources: http://www.cpicorp.com/jobs
Sears Portrait Studio: http://www.searsportrait.com
George Zagoudis at the Financial Relations Board, Inc.:
[email protected]
- 41 -
<PAGE>
(Back cover of CPI Corp. 1997 Report to Shareholders)
VISIT CPI CORP. ON THE INTERNET
(Picture of CPI Corp. Headquarters website)
CPI Corp. Headquarters
http://www.cpicorp.com
(Picture of CPI Human Resources website)
CPI Human Resources
http://www.cpicorp.com/jobs
(Picture of Sears Portrait Studio website)
Sears Portrait Studios
http://www.searsportrait.com
CPI Corp., 1706 Washington Avenue, St. Louis,
Missouri 63103-1717
314 231 1575
EXHIBIT (21)
<TABLE>
SUBSIDIARIES OF THE REGISTRANT AS OF APRIL 9, 1998
<CAPTION>
STATE/PROVINCE COUNTRY
-------------- ------------
<S> <C> <C>
CPI Corp. Delaware United States
Consumer Programs Holding, Inc. Delaware United States
Consumer Programs, Incorporated Missouri United States
d/b/a Sears Portrait Studios
CPI Images L.L.C. Missouri United States
d/b/a Sears Portrait Studios
d/b/a Mainstreet Portraits
CPI Management Services L.L.C. Missouri United States
CPI Properties L.L.C. Missouri United States
Consumer Programs Partner,Inc. Delaware United States
CPI Research and Development, Inc. Delaware United States
CPI Prints Plus, Inc. Delaware United States
Ridgedale Prints Plus, Inc. Minnesota United States
d/b/a Prints Plus
Prints Plus, Inc. California United States
d/b/a Prints Plus
d/b/a Prints & Posters
CPI Technology Corp. Missouri United States
CPI Corp. Canada Ontario Canada
d/b/a Sears Portrait Studios
</TABLE>
33
EXHIBIT (23)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
CPI Corp.:
We consent to incorporation by reference in the registration
statement No. 33-50082 on Form S-8 of CPI Corp. of our report
dated April 9, 1998, relating to the consolidated balance sheets
of CPI Corp. and subsidiaries as of February 7, 1998 and February
1, 1997 and the related consolidated statements of earnings,
changes in stockholders' equity and cash flows for each of the
fiscal years in the three-year period ended February 7, 1998, and
all related schedules, which report appears in the 1997 annual
report on Form 10-K of CPI Corp.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG PEAT MARWICK LLP
St. Louis, Missouri
April 9, 1998
34
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-07-1998
<PERIOD-END> FEB-07-1998
<CASH> 1,176
<SECURITIES> 14,117
<RECEIVABLES> 11,956
<ALLOWANCES> 291
<INVENTORY> 18,044
<CURRENT-ASSETS> 94,406
<PP&E> 242,367
<DEPRECIATION> 117,649
<TOTAL-ASSETS> 228,761
<CURRENT-LIABILITIES> 47,442
<BONDS> 0
0
0
<COMMON> 6,999
<OTHER-SE> 95,093
<TOTAL-LIABILITY-AND-EQUITY> 228,761
<SALES> 366,701
<TOTAL-REVENUES> 366,701
<CGS> 57,782
<TOTAL-COSTS> 338,503
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,470
<INCOME-PRETAX> 20,897
<INCOME-TAX> 8,184
<INCOME-CONTINUING> 12,713
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,713
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.07
</TABLE>
