UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 13, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File No. 1-10204
CPI CORP.
(Exact Name of Registrant as Specified In Its Charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
43-1256674
(I.R.S. Employer Identification No.)
1706 WASHINGTON AVENUE, ST. LOUIS, MISSOURI 63103-1790
(Address of principal executive offices) (zip code)
(314) 231-1575
(Registrant's telephone number, including area code)
NO CHANGE
-------------------------------------
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant has (1) filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
As of December 23, 1999 there were 9,040,439 shares of the
Registrant's common stock outstanding. This quarterly report on
Form 10-Q contains 45 pages, of which this is page 1.
<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSES OF RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND CASH FLOW
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
2
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(in thousands of dollars except share and per share amounts)
Sixteen weeks ended November 13, 1999 and November 14, 1998
<CAPTION>
Sixteen Weeks Ended
------------------------
Nov. 13, Nov. 14,
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 115,563 $ 124,005
Costs and expenses:
Cost of sales (exclusive of
depreciation expense shown below) 17,399 17,314
Selling, administrative and
general expenses 91,334 89,480
Depreciation 9,151 8,867
Amortization 269 320
----------- -----------
118,153 115,981
----------- -----------
Income (loss) from operations (2,590) 8,024
Interest expense 1,605 1,415
Interest income 1,033 1,104
Other expense 3,000 -
Other income 1,019 1,596
----------- -----------
Earnings (loss) before income taxes (5,143) 9,309
Income tax expense (benefit) (1,800) 3,258
----------- -----------
Net earnings (loss) $ (3,343) $ 6,051
=========== ===========
Net earnings (loss) per share-diluted $ (0.34) $ 0.59
=========== ===========
Weighted average number of common
and common equivalent shares
outstanding - diluted 9,837,970 10,200,465
=========== ===========
Net earnings (loss) per share-basic $ (0.34) $ 0.61
=========== ===========
Weighted average number of common
and common equivalent shares
outstanding - basic 9,837,970 9,960,810
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(in thousands of dollars except share and per share amounts)
Forty weeks ended November 13, 1999 and November 14, 1998
<CAPTION>
Forty Weeks Ended
------------------------
Nov. 13, Nov. 14,
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 264,454 $ 268,356
Costs and expenses:
Cost of sales (exclusive of
depreciation expense shown below) 40,810 39,404
Selling, administrative and
general expenses 205,775 198,407
Depreciation 22,777 22,136
Amortization 680 986
----------- -----------
270,042 260,933
----------- -----------
Income (loss) from operations (5,588) 7,423
Interest expense 3,720 3,557
Interest income 2,441 2,734
Other expense 3,000 -
Other income 3,361 4,065
----------- -----------
Earnings (loss) before income taxes (6,506) 10,665
Income tax expense (benefit) (2,277) 3,733
----------- -----------
Net earnings (loss) $ (4,229) $ 6,932
=========== ===========
Net earnings (loss) per share-diluted $ (0.43) $ 0.68
=========== ===========
Weighted average number of common
and common equivalent shares
outstanding - diluted 9,880,046 10,246,209
=========== ===========
Net earnings (loss) per share-basic $ (0.43) $ 0.70
=========== ===========
Weighted average number of common
and common equivalent shares
outstanding - basic 9,880,046 9,963,052
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS - ASSETS
(UNAUDITED) (in thousands of dollars)
<CAPTION>
Nov. 13, Nov. 14, Feb. 6,
1999 1998 1999
-------- -------- -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 48,333 $ 10,247 $ 76,000
Receivables, less
allowance of $505, $491
and $302, respectively 20,969 22,734 10,374
Notes receivable - 43,461 -
Inventories 22,721 20,990 19,071
Prepaid expenses and
other current assets 11,034 9,239 8,194
Refundable income taxes 6,868 - -
Deferred tax assets 32 142 32
-------- -------- ----------
Total current assets 109,957 106,813 113,671
-------- -------- ----------
Net property and equipment 112,397 113,183 111,148
Other assets, net of
amortization of $1,274,
$1,235 and $1,244,
respectively 7,659 8,905 9,874
-------- -------- ----------
Total assets $230,013 $228,901 $ 234,693
======== ======== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS -
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands of dollars)
<CAPTION>
Nov. 13, Nov. 14, Feb. 6,
1999 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 22,113 $ 18,797 $ 9,641
Accrued employment costs 10,469 10,456 14,256
Sales tax payable 3,365 3,405 2,461
Accrued advertising
expense 5,297 6,223 2,054
Accrued expenses and
other liabilities 9,420 9,551 4,644
Income taxes - 2,218 2,720
---------- ---------- ----------
Total current
liabilities 50,664 50,650 35,776
---------- ---------- ----------
Long-term obligations,
less current maturities 59,624 59,547 59,559
Other liabilities 17,989 12,951 14,444
Deferred income taxes 8,406 3,905 8,398
---------- ---------- ----------
Total liabilities $ 136,683 $ 127,053 $ 118,177
---------- ---------- ----------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS -
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands of dollars) (continued)
<CAPTION>
Nov. 13, Nov. 14, Feb. 6,
1999 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Stockholders' equity:
Preferred stock, no par
value, 1,000,000 shares
authorized; no shares
issued and outstanding - - -
Preferred stock, Series
A, no par value - -
Common stock, $0.40 par
value, 50,000,000
shares authorized;
17,786,056, 17,693,990
and 17,730,100 shares
outstanding at Nov. 13,
1999, Nov. 14, 1998
and Feb. 6, 1999,
respectively 7,114 7,078 7,092
Additional paid-in
capital 42,710 40,975 41,605
Retained earnings 234,022 228,774 242,409
Accumulated other
comprehensive income (3,134) (3,747) (3,363)
----------- ------------ -----------
280,712 273,080 287,743
Treasury stock at cost,
8,517,561, 7,864,261
and 7,864,261 shares
at Nov. 13, 1999, Nov.
14, 1998 and Feb. 6,
1999, respectively (187,344) (171,184) (171,184)
Unamortized deferred
compensation-restricted
stock (38) (48) (43)
----------- ------------ -----------
Total stockholders'
equity 93,330 101,848 116,516
----------- ------------ -----------
Total liabilities and
stockholders' equity $ 230,013 $ 228,901 $ 234,693
=========== ============ ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE> 7
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (in thousands of dollars)
Forty weeks ended November 13, 1999 and November 14, 1998
<CAPTION>
40 Weeks Ended
-------------------
Nov. 13, Nov. 14,
1999 1998
--------- --------
<S> <C> <C>
Cash flows provided by operating activities $15,428 $12,245
Cash flows used in financing activities:
Issuance of common stock to
employee stock plans 1,127 3,439
Cash dividends (4,158) (4,190)
Purchase of treasury stock (16,160) (5,395)
-------- --------
Cash flows used in financing activities (19,191) (6,146)
-------- --------
Cash flows used in investing activities:
Additions to property and equipment (24,025) (10,601)
Issuance of restricted stock (15) (53)
-------- --------
Cash flows used in investing activities (24,040) (10,654)
-------- --------
Effect of exchange rate changes on
cash and cash equivalents 136 (490)
-------- --------
Net decrease in cash and cash equivalents (27,667) (5,045)
Cash and cash equivalents at
beginning of year 76,000 15,292
-------- --------
Cash and cash equivalents at end of period $48,333 $10,247
======== ========
Supplemental cash flow information:
Interest paid $ 2,238 $ 2,241
======== ========
Income taxes paid $ 7,467 $ 9,329
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
RECONCILIATION OF NET EARNINGS TO CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES (UNAUDITED) (in thousands of dollars)
Forty weeks ended November 13, 1999 and November 14, 1998
<CAPTION>
40 Weeks Ended
-------------------
Nov. 14, Nov. 14,
1999 1998
--------- --------
<S> <C> <C>
Reconciliation of net earnings to cash flows
provided by (used in) operating activities:
Net earnings (loss) $(4,229) $ 6,932
Adjustments for items not requiring cash:
Depreciation and amortization 23,457 23,123
Deferred income taxes 7 1,513
Deferred revenue 7,640 -
Amortization of noncompete agreement (3,228) (3,846)
Amortization of discount on note
receivable - (2,376)
Other 845 (1,194)
Decrease (increase) in current assets:
Receivables and inventories (14,245) (14,015)
Refundable income taxes (6,868) -
Prepaid expenses and other current assets (2,840) (1,099)
Increase (decrease) in current liabilities:
Accounts payable, accrued expenses
and other liabilities 17,608 10,003
Income taxes (2,719) (6,796)
-------- --------
Cash flows provided by (used in)
operating activities $15,428 $12,245
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY - COMMON STOCK, ADDITIONAL PAID-IN
CAPITAL AND RETAINED EARNINGS (UNAUDITED) (in thousands of
dollars except share and per share amounts) Fifty-two weeks
ended February 6, 1999 and Forty weeks ended November 13, 1999
<CAPTION>
Add'l
Common Paid-In Retained
Stock Capital Earnings
------- -------- ---------
<S> <C> <C> <C>
Balance at February 7, 1998 $6,999 $37,614 $226,032
Issuance of common stock (230,963) 93 3,991 -
Comprehensive income:
Net earnings - - 21,944
Foreign currency translation - - -
Comprehensive income - - -
Dividends ($0.56 per common share) - - (5,567)
Purchase of treasury stock, at cost - - -
Amortization of deferred
compensation-restricted stock - - -
------- -------- ---------
Balance at February 6, 1999 $7,092 $41,605 $242,409
Issuance of common stock (55,956) 22 1,105 -
Comprehensive income:
Net loss - - (4,229)
Foreign currency translation - - -
Comprehensive income - - -
Dividends ($0.42 per common share) - - (4,158)
Purchase of treasury stock, at cost - - -
Amortization of deferred
compensation-restricted stock - - -
------- -------- ---------
Balance at November 13, 1999 $7,114 $42,710 $234,022
======= ======== =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CPI CORP. INTERIM CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -
ACCUMULATED OTHER COMPREHENSIVE INCOME AND TREASURY STOCK AT
COST (UNAUDITED) (in thousands of dollars except share and per
share amounts) Fifty-two weeks ended February 6, 1999 and Forty
weeks ended November 13, 1999
<CAPTION>
Accumulated
Other Treasury
Comprehensive Stock
Income At Cost
------------- -----------
<S> <C> <C>
Balance at February 7, 1998 $ (2,751) $ (165,789)
Issuance of common stock (230,963) - -
Comprehensive income:
Net earnings -
Foreign currency translation (612)
Comprehensive income - -
Dividends ($0.56 per common share) - -
Purchase of treasury stock, at cost - (5,395)
Amortization of deferred
compensation-restricted stock - -
----------- ----------
Balance at February 6, 1999 $ (3,363) $(171,184)
Issuance of common stock (55,956) - -
Comprehensive income:
Net loss -
Foreign currency translation 229
Comprehensive income - -
Dividends ($0.42 per common share) - -
Purchase of treasury stock, at cost - (16,160)
Amortization of deferred
compensation-restricted stock - -
----------- ----------
Balance at November 13, 1999 $ (3,134) $(187,344)
=========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
11
<PAGE>
<TABLE>
CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY - DEFERRED COMPENSATION-RESTRICTED STOCK
AND TOTAL (UNAUDITED) (in thousands of dollars except share and per
share amounts) Fifty-two weeks ended February 6, 1999 and Forty
weeks ended November 13, 1999
<CAPTION>
Deferred
Compensation-
Restricted
Stock Total
------------- ----------
<S> <C> <C>
Balance at February 7, 1998 $ (13) $ 102,092
Issuance of common stock (230,963) (53) 4,031
Comprehensive income:
Net earnings -
Foreign currency translation -
Comprehensive income - 21,332
Dividends ($0.56 per common share) - (5,567)
Purchase of treasury stock, at cost - (5,395)
Amortization of deferred
compensation-restricted stock 23 23
----------- -----------
Balance at February 6, 1999 $ (43) $ 116,516
Issuance of common stock (55,956) (15) 1,112
Comprehensive income:
Net loss -
Foreign currency translation -
Comprehensive income - (4,000)
Dividends ($0.42 per common share) - (4,158)
Purchase of treasury stock, at cost - (16,160)
Amortization of deferred
compensation-restricted stock 20 20
----------- -----------
Balance at November 13, 1999 $ (38) $ 93,330
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
12
<PAGE>
CPI CORP. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments necessary for a fair presentation of the Company's
financial position as of November 13, 1999, November 14, 1998,
and February 6, 1999 and the results of its operations and
changes in its cash flows for the 40 weeks ended November 13,
1999 and November 14, 1998. These financial statements should
be read in conjunction with the financial statements and the
notes included in the Company's annual report on Form 10-K for
its fiscal year ended February 6, 1999.
2. On June 15, 1999, the Company announced that it had entered
into a definitive merger agreement under which entities
controlled by affiliates of American Securities Capital
Partners, L.P. (collectively, "ASCP Affiliates") and the
Company's management were to acquire the Company for $37.00
per share in cash (the "Merger Agreement"). The Board of
Directors of the Company unanimously approved the agreement
and the merger.
On October 12, 1999, the Company announced it received a notice
from ASCP Affiliates asserting that CPI had experienced or been
affected by an event, change, effect or development that
individually or in the aggregate had or would reasonably be
expected to have a material adverse effect under the Merger
Agreement and was terminating the Merger Agreement. ASCP
Affiliates reserved the right to assert any other grounds for
termination of the Merger Agreement, including the fact that one
or more of the conditions to the financing could not be met.
ASCP Affiliates filed a claim pursuant to the Merger Agreement,
demanding reimbursement from the Company for expenses incurred
in connection with the Merger Agreement. The Company has made
no provisions for these expenses in the accompanying
consolidated financial statements.
On October 18, 1999, CPI announced that it filed a counter claim
against ASCP Affiliates asserting they were in willful breach of
their obligations under the Merger Agreement. CPI Corp. further
asserted ASCP Affiliates willfully failed to use their
reasonable best efforts to complete the transaction, including
failing to complete the financing for the transaction and that
they reneged on their obligation to use bridge financing
available. CPI's counter claim seeks damages for the willful
breach of the Merger Agreement by ASCP Affiliates and also
asserts claims in an amount up to $80 million, together with
attorney's fees and costs, from ASCP Affiliates under its
guarantee of their performance of obligations under the Merger
Agreement.
13
<PAGE>
3. As part of the Company's disposition of its remaining shares
of Fox Photo, Inc. ("Fox") to Eastman Kodak Company in October
1997, the Company entered into a two-year Noncompetition and
Nonsolicitation Agreement (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 is being amortized into income
over the two-year period of the agreement.
During the third quarters of 1999 and 1998 amortization
relating to the two-year Noncompete Agreement was $920,000
and $1.5 million, respectively and the first three quarters of
1999 and 1998, amortization relating to the two-year
Noncompete Agreement was $3.2 million and $3.8 million,
respectively.
4. The Company is engaged in developing and marketing products
and services for consumers in the United States and Canada
through a network of centrally managed retail locations in
two business segments: Portrait Studios and Wall Decor.
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.
14
<PAGE>
<TABLE>
SELECTED INDUSTRY SEGMENT INFORMATION (in thousands of dollars)
<CAPTION>
Sixteen Weeks Ended Forty Weeks Ended
------------------- -----------------------
Nov. 13, Nov. 14, Nov. 13, Nov. 14,
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES:
Portrait Studio $ 97,596 $106,171 $ 221,152 $ 224,646
Wall Decor 17,967 17,834 43,302 43,710
--------- --------- ---------- ----------
$115,563 $124,005 $ 264,454 $ 268,356
========= ========= ========== ==========
OPERATING EARNINGS
(Loss):
Portrait Studio $ 3,038 $ 13,577 $ 7,715 $ 20,099
Wall Decor (1,045) (674) (3,006) (2,620)
--------- --------- ---------- ----------
$ 1,993 $ 12,903 $ 4,709 $ 17,479
========= ========= ========== ==========
IDENTIFIABLE ASSETS:
Portrait Studio $ 115,793 $ 112,734
Wall Decor 37,175 40,155
Corporate cash and
marketable sec. 46,936 8,995
Corporate other 30,109 67,017
---------- ----------
$ 230,013 $ 228,901
========== ==========
</TABLE>
15
<PAGE>
<TABLE>
GEOGRAPHIC FINANCIAL INFORMATION
- --------------------------------
<CAPTION>
Sixteen Weeks Ended Forty Weeks Ended
------------------- -----------------------
Nov. 13, Nov. 14, Nov. 13, Nov. 14,
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES:
United States $108,705 $116,985 $ 250,271 $ 254,220
Canada 6,858 7,020 14,183 14,136
--------- --------- ---------- ----------
$115,563 $124,005 $ 264,454 $ 268,356
========= ========= ========== ==========
LONG-LIVED ASSETS:
United States $ 115,948 $ 118,242
Canada 4,108 3,846
---------- ----------
$ 120,056 $ 122,088
========== ==========
</TABLE>
5. The Shareholders Rights Plan, which entitled holders of common
stock to purchase one one-hundredth of a share of
participating preferred stock in the Company under certain
conditions, expired on May 11, 1999. As of that date, Series
A no par value preferred stock listed on the Company's balance
sheet at February 6, 1999, no longer existed.
6. The Company recognized $3.0 million other expenses for costs
related to the termination of the Merger Agreement, which
included legal, travel, accounting and other expenses the
Company incurred during the merger process and legal and
related expenses incurred through the third quarter of 1999
related to claims against the Company by ASCP Affiliates, and
the Company's counter claim against these entities.
7. On December 13, 1999, the Company's Board of Directors
authorized the purchase of up to one million additional
shares of its outstanding common stock through purchases
at management's direction from time to time at acceptable
market prices. Acquired shares are held as treasury stock,
and will be available for general corporate purposes.
16
<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 1998 ended February 6, 1999
and consisted of 52 weeks. The third fiscal quarter of 1999 and
1998 consisted of sixteen weeks and ended November 13, 1999 and
November 14, 1998, respectively. Throughout the MANAGEMENT'S
DISCUSSION AND ANALYSIS and NOTES TO THE INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS, reference to 1998 will mean the
fiscal year-end 1998 and reference to third quarter 1999 and third
quarter 1998 will mean the third fiscal quarter of 1999 and 1998,
respectively.
DEFINITIVE MERGER AGREEMENT
On June 15, 1999, the Company announced that it entered into a
definitive merger agreement under which entities controlled by
affiliates of American Securities Capital Partners, L.P.
(collectively, "ASCP Affiliates") and the Company's management were
to acquire the Company for $37.00 per share in cash (the "Merger
Agreement"). The Board of Directors of the Company unanimously
approved the agreement and the merger.
On October 12, 1999, the Company announced that it received a
notice from ASCP Affiliates asserting that CPI had experienced or
been affected by an event, change, effect or development that
individually or in the aggregate had or would reasonably be
expected to have a material adverse effect under the Merger
Agreement and is terminating the Merger Agreement. ASCP Affiliates
reserved the right to assert any other grounds for termination of
the Merger Agreement, including the fact that one or more of the
conditions to the financing could not be met. In addition, ASCP
Affiliates filed a claim pursuant to the Merger Agreement demanding
reimbursement from the Company for expenses incurred in connection
with the Merger Agreement. The Company has made no provisions for
these expenses in the accompanying consolidated financial
statements.
On October 18, 1999, CPI announced that it filed a counter claim
against the ASCP Affiliates asserting that the ASCP Affiliates were
in willful breach of their obligations under the June 15, 1999
Merger Agreement. CPI asserts that the ASCP Affiliates willfully
failed to use their reasonable best efforts to complete the
transaction, including failing to complete the financing for the
transaction and that they reneged on their obligation to use bridge
financing available. CPI's counter claim seeks damages for the
willful breach of the Merger Agreement by ASCP Affiliates and also
asserts a claim in an amount up to $80 million, together with
attorney's fees and costs, from ASCP Affiliates under its guarantee
of their performance of obligations under the Merger Agreement.
17
<PAGE>
NONCOMPETE AGREEMENT
As part of the Company's disposition of its remaining shares of Fox
Photo, Inc. ("Fox") to Eastman Kodak Company in October 1997, the
Company entered a two-year Noncompetition and Nonsolicitation
Agreement (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 a $10.0 million cash
consideration for entering into the Noncompete Agreement which has
been amortized into income over the two-year period of the
agreement. Amortization relating to the two-year Noncompete
Agreement, which expired in October 1999, was $920,000 and
$1,538,000 for the third quarter of 1999 and 1998, and $3.2 million
and $3.8 million for the first three quarters of 1999 and 1998,
respectively.
YEAR 2000 ISSUE
The Year 2000 (Y2K) issue is primarily the result of computer
software and hardware using two digits rather than four to define
the applicable year. For example, the year "00" may be recognized
as 1900 rather than 2000 and may result in computers and computer
applications failing or creating erroneous results.
In reviewing Y2K issues, the Company has identified four areas of
primary concern:
1.) the administrative offices and laboratories located
in St. Louis, Missouri; Las Vegas, Nevada; Thomaston,
Connecticut and Mississauga, Ontario (Canada)
(referred to as "Home Office");
2.) the individual locations of the Portrait Studio segment,
which operate under the name "Sears Portrait Studios,"
(referred to as "SPS Field");
3.) the administrative support office and individual
locations of the Wall Decor segment, which operate
under the name "Prints Plus" (referred to as "Prints
Plus") and
4.) third party vendors or suppliers.
Home Office
- -----------
Due in part to Y2K issues in older systems, fully-compliant Y2K
basic operating and data-base systems were put in place in the Home
Office by the end of the first quarter of 1998. In addition, new
financial systems were substantially replaced by the end of 1998.
In late May and early June 1999, all basic operating, data-base and
financial systems were tested to ensure Y2K compliance. No
significant problems were identified through this testing. For the
first three quarters of 1999, $220,000 was spent, and in fourth
quarter 1999 the Company expects $60,000 will be spent to complete
the final changes to all Home Office basic operating, data-base and
financial systems.
18
<PAGE>
All laboratory, telephone and physical plant systems and equipment
as well as all personal computers in the Home Office have also been
tested for Y2K issues. New or upgraded systems and equipment have
been obtained and installed at a cost of $555,000.
SPS Field
- ----------
In 1996, as part of the Company's on-going long-range planning and
development process, the Company began the process of updating the
point-of-sale system used in the SPS Field operations. Development
of the new system, which included Y2K compliance, continued through
1997. By the end of August 1999, the new software and related
hardware for the point-of-sale system was installed in
substantially all the SPS Field locations. At the same time the
new point-of-sale system was rolled-out, upgraded Y2K compliant
software used in the sales stations and camera rooms of the SPS
Field locations was installed at negligible cost. Testing of the
new point-of-sale system and other software and hardware in the SPS
Field locations was completed in September 1999 to ensure Y2K
compliance.
Prints Plus
- -----------
Although the hardware used to operate the point-of-sale system
utilized by Prints Plus locations was Y2K compliant, the software
used was not and was rewritten. The new point-of-sale system
software has been installed in all stores. In addition, the
upgrading of all financial and merchandise distribution systems
utilized by Prints Plus has been completed. Total cost of $460,000
was spent for Y2K compliance for all of Prints Plus.
Third Party
- -----------
The Company has material relationships with several large companies
providing goods and services to the Portrait Studio and Wall Decor
segments:
--Sears, Roebuck and Company, the licensor of Sears
Portrait Studios, the Company's primary line of business;
--Eastman Kodak Company, a provider of photographic film and
paper, dye sublimation paper and related equipment and
supplies;
--Sony Corporation, a provider of dye sublimation paper and
related equipment and supplies;
--MCI, a telecommunications company which provides communi-
cation links between the Company and its remote locations
as well as telephone services in the Home Office;
19
<PAGE>
--United Parcel Services, Roadway Package Services and
Airborne Express Services, companies which handle the
transportation of finished products to and from the Home
Office and individual locations;
--Mercantile Bank N.A. of St. Louis and Harris Trust and
Savings Bank, financial institutions which provide credit
facilities and other banking services;
--Prudential Insurance Company and the Guardian Insurance
Company, holders of the Company's senior debt.
All of these companies have published material and the Company has
received written correspondence indicating their awareness of the
Y2K issue and the steps they are taking to remedy the problem.
However, none of the third party vendors or suppliers clearly state
they are Y2K compliant. Regardless of this lack of representation,
the Company does not anticipate service interruptions from its
major third party suppliers and vendors. However, the Company
believes the most reasonably likely worst case Y2K scenario for it
would be a failure of its third party vendors which would
necessitate switching to other back-up suppliers or vendors and/or
switching to manual, paper-based systems.
Contingency Plans
- -----------------
Taking the previous information into consideration, the Company has
developed contingency plans for possible Y2K compliance problems.
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, readiness, expectant costs and
contingency planning regarding Year 2000 issues, future cash
requirements and capital expenditures, are only predictions or
expectations; actual events or results may differ materially as a
result of risks facing the Company. Such risks include, but are
not limited to 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, changes in the Company's
relationship with Sears, Roebuck & Company and the condition and
strategic planning of Sears, Roebuck & Company, fluctuations in
operating results, the attraction and retention of qualified
personnel 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 6, 1999.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS-RESULTS OF OPERATIONS
- ----------------------------------------------------------
<TABLE>
NET SALES (in thousands of dollars)
Sixteen weeks Ended November 13, 1999 and November 14, 1998
<CAPTION>
Sixteen Weeks Ended
-------------------
Nov. 13, Nov. 14, Amount
1999 1998 Change
--------- --------- --------
<S> <C> <C> <C>
Portrait Studios $ 97,596 $106,171 $(8,575)
Wall Decor 17,967 17,834 133
--------- --------- --------
Total net sales $115,563 $124,005 $(8,442)
========= ========= ========
</TABLE>
<TABLE>
NET SALES (in thousands of dollars)
Forty weeks Ended November 13, 1999 and November 14, 1998
<CAPTION>
Forty Weeks Ended
-----------------
Nov. 13, Nov. 14, Amount
1999 1998 Change
--------- --------- --------
<S> <C> <C> <C>
Portrait Studios $221,152 $224,646 $(3,494)
Wall Decor 43,302 43,710 (408)
--------- --------- --------
Total net sales $264,454 $268,356 $(3,902)
========= ========= ========
</TABLE>
NET SALES
Total net sales for the third quarter of 1999 declined 6.8% to
$115.6 million when compared to $124.0 million in the third
quarter of 1998. The entire sales decline is attributed to the
Portrait Studio segment. Wall Decor recorded a slight sales
increase. Total net sales for the first three quarters declined
1.5% to $264.5 million from $268.4 million last year, primarily
due to lower sales in the Portrait Studio segment.
Portrait Studios third quarter 1999 net sales declined 8.1% to
$97.6 million from $106.2 million recorded last year. Factors
contributing to the Portrait Studio sales decline in the third
quarter 1999 were a lower average sales per customer and a
reduction in numbers of customer portrait sittings.
21
<PAGE>
The Smile Savers Plan, which was expanded to all locations in the
second quarter of 1999, was the primary contributing factor in the
lower average sale per customer as enrollment fees amounting to
$11.9 million during the quarter, of which approximately 50% are
deferred revenues, had a dampening influence on customer purchases
of other products and services. The Smile Savers Plan is designed
to increase repeat visits and develop long-term customer loyalty by
allowing customers to pay a one-time fee for unlimited customer
visits for a two-year period. Ultimately, management believes that
the Smile Savers Plan will increase sales due to increased repeat
customer visits and as initial deferred sales are largely
neutralized by the amortization of deferred sales balances.
For the forty weeks ended November 13, 1999, Portrait Studio net
sales declined 1.6% to $221.2 million from $224.6 million last year
due primarily to reduced sales in the third quarter.
Wall Decor net sales were relatively unchanged both for the third
fiscal quarter and the forty weeks ended November 13, 1999 from
last year levels.
<TABLE>
SELECTED FINANCIAL DATA (in thousands of dollars)
Sixteen weeks Ended November 13, 1999 and November 14, 1998
<CAPTION>
Sixteen Weeks Ended
-------------------
Nov. 13, Nov. 14, Amount
1999 1998 Change
--------- --------- ---------
<S> <C> <C> <C>
Operating earnings (loss):
Portrait Studios $ 3,038 $ 13,577 $(10,539)
Wall Decor (1,045) (674) (371)
--------- --------- ---------
Total operating earnings 1,993 12,903 (10,910)
General corporate expenses 4,583 4,879 296
Interest expense 1,605 1,415 (190)
Interest income 1,033 1,104 (71)
Other expenses 3,000 - (3,000)
Other income 1,019 1,596 (577)
--------- --------- ---------
Earnings (loss) before
income taxes $ (5,143) $ 9,309 $(14,452)
========== ========= =========
</TABLE>
22
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA (in thousands of dollars)
Forty weeks Ended November 13, 1999 and November 14, 1998
<CAPTION>
Forty Weeks Ended
-----------------------
Nov. 13, Nov. 14, Amount
1999 1998 Change
--------- --------- --------
<S> <C> <C> <C>
Operating earnings (loss):
Portrait Studios $ 7,715 $ 20,099 $(12,384)
Wall Decor (3,006) (2,620) (386)
--------- --------- ---------
Total operating earnings 4,709 17,479 (12,770)
General corporate expenses 10,297 10,056 (241)
Interest expense 3,720 3,557 (163)
Interest income 2,441 2,734 (293)
Other expense 3,000 - (3,000)
Other income 3,361 4,065 (704)
--------- --------- ---------
Earnings (loss) before
income taxes $ (6,506) $ 10,665 $(17,171)
========== ========= =========
</TABLE>
OPERATING EARNINGS
Operating earnings declined sharply in the third quarter of 1999 to
$2.0 million from $12.9 million in last year's third quarter. The
primary factors contributing to the decline were the sales
shortfall in the Portrait Studio segment coupled with planned
increases in studio employment costs. The Wall Decor operation
contributed to the third quarter decline in operating earnings due
primarily to lower gross profit margins.
Operating earnings were $4.7 million and $17.5 million for the
forty weeks ended November 13, 1999 and November 14, 1998,
respectively. The operating earnings decline is primarily due to
the third quarter sales decline, increased studio employment costs
and lower third quarter gross profit margins in the Wall Decor
operation. Portrait Studio employment costs increased $3.6 million
and $9.5 million for the third quarter of 1999 and the first three
quarters of 1999, respectively. Studio employment cost increases
resulted from higher wage rates due to the tight labor market, the
Company's new compensation program and increased labor hours
resulting from more intense customer servicing, training on the new
Store Automation System ("SAS") and increased training for seasonal
employees to enhance the skill levels of these employees during
peak demand periods. The Company introduced a new studio
employment compensation program called Independent Study Programs
("ISP") which rewards certain studio employees with increased wage
23
<PAGE>
rates in exchange for learning and enhancing job skills. SAS
installation was completed in the third quarter of 1999 along with
initial training on the system.
Operating earnings for Portrait Studios were also negatively
affected by the write-off of $517,000 in remaining book value for
the replacement of an older point-of-sales system and were
positively affected by decreased advertising expenses of $1.4
million for the third quarter and first three quarters of 1999,
respectively.
Management believes fourth quarter sales will be more in line with
last year than the sharp decline experienced in the third quarter,
however, profits will probably be below last year levels due to
higher expense levels.
NET EARNINGS (LOSS) AND EARNINGS PER SHARE
Net losses before income taxes were $5.1 million and $6.5 million
for the third quarter and first three quarters of 1999,
respectively, compared to the third quarter and first three
quarters of 1998 net earnings before taxes of $9.3 million and
$10.7 million, respectively. The decrease in earnings for both
periods of time is due to the decrease in operating earnings
previously discussed, a slight increase in net interest expense, a
special $3.0 million charge related to the termination of the
Merger Agreement (primarily legal, travel, accounting and other
expenses the Company incurred during the merger process and legal
and related expenses incurred through the third quarter of 1999
resulting from claims against the Company by ASCP Affiliates, and
the Company's counter claim against these entities) and a reduction
in the amount amortized into income for the two-year Kodak non-
compete agreement which expired in the third quarter of 1999.
Corporate expenses were slightly higher for the first three
quarters of 1999 due to higher employee medical costs but were
lower during the third quarter of 1999 due primarily to a reduction
in accrued bonuses.
Diluted losses per share were $0.34 for the third quarter of 1999
compared to earnings per share of $0.59 for the third quarter of
1998. Diluted losses per share were $0.43 for the first three
quarters of 1999 compared to earnings per share of $0.68 for the
first three quarters of 1998. Both quarterly and year-to-date
changes reflect the decrease in net earnings and a reduction in
the number of weighted average shares outstanding.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL CONDITION AND
- ----------------------------------------------------------------
CASH FLOW
- ---------
Total assets decreased 2.0% in third quarter 1999 from year-end
1998 as decreases in cash and cash equivalents were offset by
seasonal increases in inventories and receivables, refundable
income taxes and a slight increase in property, plant and
equipment. The decline in cash and cash equivalents reflects the
purchase of 653,300 shares of CPI Corp. common stock for $16.2
million through the stock repurchase program.
Total liabilities increased 15.7% in the third quarter of 1999
reflecting seasonal increases in accounts payable and accrued
expenses and a $7.6 million increase in deferred sales resulting
from the Smile Savers Program which is partially offset by $3.2
million amortization of the Kodak non-compete agreement into
income.
Stockholders' equity decreased 19.9% in the third quarter 1999
from year-end reflecting treasury stock repurchases, net losses and
payment of cash dividends to shareholders.
On December 13, 1999, the Company's Board of Directors authorized
the purchase of up to one million additional shares of it's
outstanding common stock.
With its strong cash and cash equivalents position. the Company
believes it has sufficient liquidity to meet planned capital
expenditures, normal working capital requirements and dividends to
shareholders.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
Market risks relating to the Company's operations results primarily
from changes in interest rates and changes in foreign exchange
rates. The Company's debt obligations have primarily fixed
interest rates, therefore, the Company's exposure to changes in
foreign exchange rates relates to the Canadian operations, which is
minimal as these operations constitute less than 6% of the
Company's total assets, and less than 6% of the Company's total
sales.
25
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 18, 1999, CPI Corp. announced the filing of a
claim against American Securities Capital Partners, L.P.
and its affiliates SPS International Holdings, Inc., and
SPS Acquisition, Inc. (collectively, "ASCP Affiliates)
asserting that the ASCP Affiliates were in willful breach
of their obligations under the June 15, 1999 Merger
Agreement. CPI seeks damages for the willful breach of
the Merger Agreement by ASCP Affiliates and also asserts
claims in an amount up to $80 million together with
attorney's fees and costs. ASCP Affiliates claim demanded
reimbursement from the Company for expenses incurred in
connection with the Merger Agreement.
ITEM 5. OTHER ITEMS
On August 4, 1999, CPI Corp. issued an 8-K reporting that
CPI Corp. entered into agreements (the "First Amendments")
to amend its three license agreements with Sears, Roebuck
and Company which extended the agreements to a ten-year
period. Additionally, these First Amendments also
included a covenant by the Company not to compete in the
portrait business in the United States, Canada or Puerto
Rico during the term of the license agreements. This
amendment was contingent on successful completion of the
June 15, 1999 Merger Agreement with SPS International
Holdings, Inc. and SPS Acquisition, Inc. and CPI Corp.
Since the Merger has been terminated, the amendment
to the license agreement will become null and void on
December 31, 1999, in accordance with terms in the
amendment.
On December 20, 1999, CPI Corp. entered into agreements
(the "Second Amendments") to amend two license agreements
with Sears, Roebuck and Company which extended the
agreements to a ten-year period. Additionally, these
Second Amendments also included a covenant by the Company
not to compete in the portrait studio business in the
United States during the tern of the License Agreements
and Licensee may not assign, transfer, sublicense or
convey any of its rights or obligations under this
Agreement in whole or in part, without Sears' prior
written consent.
26
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
The following exhibits are being filed as part of
this Report:
Exhibit 5.1 - Second Amendment to License Agreement
Sears, Roebuck and Co.
Exhibit 5.2 - Second Amendment to License Agreement
Sears, Roebuck and Co. (Off-Premise)
Exhibit 11.1 - Computation of Earnings per Common
Share - Diluted
Sixteen Weeks ended November 13, 1999
and November 14, 1998
Exhibit 11.2 - Computation of Earnings per Common
Share - Diluted
Forty Weeks ended November 13, 1999
and November 14, 1998
Exhibit 11.3 - Computation of Earnings per Common
Share - Basic
Sixteen Weeks ended November 13, 1999
and November 14, 1998
Exhibit 11.4 - Computation of Earnings per Common
Share - Basic
Forty Weeks ended November 13, 1999
and November 14, 1998
Exhibit 27.1 - Financial Data Schedule
b) REPORTS ON FORM 8-K
- On August 4, 1999, CPI Corp. issued an Item 5 -
Other Event reporting that CPI Corp. entered
into agreements (the "First Amendments") to amend
its three license agreements with Sears, Roebuck
and Company. In addition, these First Amendments
also include a covenant by the Company not to
compete in the portrait photography business in
the United States, Canada or Puerto Rico during the
term of the license agreements.
- On August 25, 1999, CPI Corp. reported the issuance
of a press release on August 25, 1999 announcing
second quarter results.
- On October 7, 1999, CPI Corp. reported the issuance
of a press release announcing that it had provided
American Securities Capital Partners, L.P. with
current financial information in connection with
it's finance arrangements for the acquisition of
CPI Corp.
27
<PAGE>
- On October 12, 1999, CPI Corp. reported the issuance
of a press release announcing the termination of the
Agreement and Plan of Merger dated June 15, 1999 by
and among SPS International Holdings, Inc., SPS
Acquisition, Inc. and CPI Corp.
- On October 14, 1999, CPI Corp. reported the issuance
of a press release dated October 13, 1999 announcing
that CPI Corp. was resuming stock repurchases in the
open market.
- On October 19, 1999, CPI Corp. reported the issuance
of a press release dated October 18, 1999 announcing
the filing of a claim against American Securities
Capital Partners, L.P. ("ASCP") and its affiliates
SPS International Holdings, Inc. and SPS
Acquisition, Inc.
- On October 22, 1999, CPI Corp. reported the issuance
of a press release dated October 21, 1999 announcing
that it had cancelled the special meeting of its
stockholders which was scheduled for 10 a.m. on
Tuesday, October 26, 1999.
28
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CPI Corp.
(Registrant)
By: /s/ Barry Arthur
---------------------------
Barry Arthur
Authorized Officer and
Principal Financial Officer
Dated: December 23, 1999
29
<PAGE>
<TABLE>
<CAPTION>
CPI CORP.
EXHIBIT INDEX
<S> <C>
Exhibit 5.1 - Second Amendment to License Agreement 31-35
Sears, Roebuck and Co.
Exhibit 5.2 - Second Amendment to License Agreement 36-40
Sears, Roebuck and Co. (Off-Premise)
Exhibit 11.1 - Computation of Earnings per Common 41
Share - Diluted
Sixteen Weeks Ended November 13, 1999
and November 14, 1998
Exhibit 11.2 - Computation of Earnings per Common 42
Share - Diluted
Forty Weeks Ended November 13, 1999
and November 14, 1998
Exhibit 11.3 - Computation of Earnings per Common 43
Share - Basic
Sixteen Weeks Ended November 13, 1999
and November 14, 1998
Exhibit 11.4 - Computation of Earnings per Common 44
Share - Basic
Forty Weeks Ended November 13, 1999
and November 14, 1998
Exhibit 27.1 - Financial Data Schedule
</TABLE>
30
EXHIBIT 5.1
SECOND AMENDMENT TO LICENSE AGREEMENT
THIS SECOND AMENDMENT TO LICENSE AGREEMENT ("Second
Amendment") is made as of November 10, 1999, by and between SEARS,
ROEBUCK AND CO., a New York corporation ("Sears") and CONSUMER
PROGRAMS INCORPORATED, a Missouri corporation, ("Licensee")
WHEREAS, Sears and Licensee are parties to that certain
License Agreement (Off Premise) dated as of January 1, 1999, (the
"License Agreement"); and
WHEREAS, the License Agreement is the latest and current in a
series of agreements under which Sears and Licensee have enjoyed a
long and mutually beneficial relationship; and
WHEREAS, Sears and Licensee agreed to amend the License
Agreement pursuant to the First Amendment to License Agreement
dated June 11, 1999 (the "First Amendment"); and
WHEREAS, it appears that the First Amendment will become null
and void on December 31, 1999, in accordance with its terms; and
WHEREAS, Sears and Licensee still desire to amend the License
Agreement to strenghten their mutual commitment to continue their
cooperative relationship;
NOW THEREFORE, in consideration of the mutual covenants set
forth herein, Sears and Licensee hereby agree to amend the License
Agreement as follows:
1. Article III of the License Agreement shall be amended
in its entirety to read as follows:
The term of this Agreement ("Term") shall be for
a ten (10) year period beginning on January 1,
1999, and ending at the close of business on
December 31, 2008, unless sooner terminated under
any provisions of this Agreement.
2. Article V of the License Agreement shall be amended by
adding a new Section 5.11 to read as follows:
31
<PAGE>
5.11 EXCLUSIVE RELATIONSHIP
Except for the three (3) "Mainstreet Portrait"
businesses currently owned and operated by
Licensee's affiliate, Licensee agrees that during
the term of this Agreement, neither Licensee,
CPI Corp., nor any of their respective affiliates
controlling, controlled by, or under common control
with Licensee or CPI Corp., shall perform or license
the services or have any direct or indirect,
controlling or non-controlling interest as a
disclosed or beneficial owner, investor, partner,
director, officer, employee, manager, consultant,
representative, or agent, or in any other capacity,
in any business offering or selling professional
portrait photography studio services and related
portrait products in the United States, Puerto Rico
or Canada ("Competitive Business"), which is:
(1) located in any specialty store, department
store, discount store or other similar
retail format;
(2) located within twenty (20) miles of a
Licensed Business licensed under this
Agreement or under the License Agreement
between Licensee and Sears for Licensed
Businesses located on the premises of Sears
stores ("On Premise Agreement"); or
(3) offered or promoted through the following
media:
(a) World Wide Web sites available to the
public over the Internet;
(b) Secured Internet sites or Intranet sites;
(c) other interactive media for use in the
Licensed Businesses; and
(d) in electronic processing, data interchange
and other communications done or made in
connection with any commercial transaction
consummated through the Internet or
Intranet.
If, during the term of this Agreement, Sears develops Competitive
Businesses in any territory or country outside of the United
States, Puerto Rico or Canada and Licensee has no professional
portrait businesses located within that country or territory at the
32
<PAGE>
time of this development, Licensee shall no longer have the right
to develop Competitive Businesses in that country or territory
throughout the remainder of the term of this Agreement in
accordance with Section 5.11. Licensee and Sears agree to use
reasonable efforts to discuss their respective global strategies
with each other as they develop.
3. Section 9.4 shall be deleted in its entirety and the
following substituted in its place:
9.4 REPORTS
If requested by Sears, Licensee shall provide to Sears
reports of sales and income and Sears commissions paid
in the manner and form prescribed by Sears, together
with any other information Sears may require for its
records or auditing purposes. If requested by Sears,
Licensee shall promptly submit its financial report to
Sears after the close of Licensee's fiscal year. Such
report shall be audited by a certified public
accountant. Such report shall include, but shall not
be limited to, Licensee's profit and loss statement
for such fiscal year and balance sheet at the end of
such fiscal year, and shall be prepared in accordance
with generally accepted accounting principles. If
Licensee is a publicly held corporation, this
requirement may be fulfilled by submission of
Licensee's Annual Report on Form 10-K. Sears shall
not disclose any such information that is not
available to the public to any third parties without
Licensee's prior consent.
4. Section 14.1 of the License Agreement is hereby
deleted in its entirety.
5. Section 14.2 of the License Agreement is hereby
amended by revising clause (b) to read:
(b) there is a Change in Control (as defined in
Section 15.1 below) with respect to Licensee
to which Sears has not consented;
6. Article XIV of the License Agreement shall be amended
by adding a new Section 14.5 to read as follows:
14.5 COVENANT NOT TO COMPETE
Except for the three (3) Mainstreet Portrait
businesses currently owned and operated by
Licensee's affiliate, upon:
33
<PAGE>
(1) termination of this Agreement by Sears in
accordance with its terms and conditions, or
(2) termination of this Agreement by Licensee
without cause,
Licensee and its affiliates agree, that for a
period of two (2) years commencing on the
effective date of termination, neither Licensee,
CPI Corp., nor any of their affiliates
controlling, controlled by or under common
control with Licensee or CPI Corp., will
perform or license the services or have any
direct or indirect interest as a disclosed or
beneficial owner, employee, investor, partner,
director, officer, employee, consultant,
representative, or agent or in any other capacity
in any Competitive Business:
(a) operating within ten (10) miles of any
Licensed Business licensed under this
Agreement or the On-Premises Agreement;
or
(b) offered or promoted through the following
media:
(i) World Wide Web sites available to
the public over the Internet;
(ii) Secured Internet sites or Intranet
sites;
(iii) other interactive media for use in
the Licensed Businesses; and
(iv) in electronic processing, data
interchange and other communications
done or made in connection with any
commercial transaction consummated
through the Internet or Intranet.
7. Section 15.1 of the Agreement shall be amended in its
entirety to read as follows:
15.1 ASSIGNMENT BY LICENSEE
Notwithstanding any other provision in this
Agreement, Licensee may not assign, transfer,
sublicense or convey any of its rights or
obligations under this Agreement in whole or in
34
<PAGE>
part, without Sears' prior written consent. Any
Change in Control of Licensee shall constitute an
assignment of this Agreement, for which Sears' prior
written consent is required. Any attempted
assignment, transfer, sublicense, conveyance or
Change in Control without Sears' prior written
consent is void.
For purposes of this Agreement, a "CHANGE IN CONTROL"
means an asset sale, merger, consolidation, or any
other transaction or arrangement the effect of which
is that fifty percent (50%) or more of the total
voting power entitled to vote in the election of
Licensee's board of directors is held by a person
or persons other than the shareholders of Licensee,
who, individually or as a group, held fifty percent
(50%) or more of such voting power immediately prior
to such event.
8. Sears and Licensee hereby affirm the License Agreement
as amended by this Second Amendment. This Second
Amendment replaces and supersedes the First Amendment
in its entirety.
IN WITNESS WHEREOF, the parties have caused their authorized
representatives to execute and deliver this Second Amendment as of
the date first written above.
SEARS, ROEBUCK AND CO. CONSUMER PROGRAMS INCORPORATED
By: /s/ James R. Clifford By: /s/ Russ Isaak
----------------------- -------------------------
Its: President and Chief Its: President
Operating Officer -------------------------
Full-Line Stores
-----------------------
EXHIBIT 5.2
SECOND AMENDMENT TO LICENSE AGREEMENT
THIS SECOND AMENDMENT TO LICENSE AGREEMENT ("Second
Amendment") is mad as of November 10, 1999, by and between
SEARS, ROEBUCK AND CO., a New York corporation ("Sears") and
CONSUMER PROGRAMS INCORPORATED, a Missouri corporation,
("Licensee").
WHEREAS, Sears and Licensee are parties to that certain
License Agreement, dated as of January 1, 1999, (the "License
Agreement"); and
WHEREAS, the License Agreement is the latest and current
in a series of agreements under which Sears and Licensee have
enjoyed a long and mutually beneficial relationship; and
WHEREAS, Sears and Licensee agreed to amend the License
Agreement pursuant to the First Amendment to License Agreement
dated June 11, 1999 (the "First Amendment"); and
WHEREAS, it appears that the First Amendment will become
null and void on December 31, 1999, in accordance with its
terms; and
WHEREAS, Sears and Licensee still desire to amend the
License Agreement to strenghten their mutual commitment to
continue their cooperative relationship;
NOW THEREFORE, in consideration of the mutual covenants
set forth herein, Sears and Licensee hereby agree to amend the
License Agreement as follows:
1. Article III of the License Agreement shall be amended
in its entirety to read as follows:
The term of this Agreement ("Term") shall be for
a ten (10) year period beginning on January 1,
1999, and ending at the close of business on
December 31, 2008, unless sooner terminated under
any provisions of this Agreement.
36
<PAGE>
2. Article V of the License Agreement shall be amended by
adding a new Section 5.18 to read as follows:
5.18 EXCLUSIVE RELATIONSHIP
Except for the three (3) "Mainstreet Portrait"
businesses currently owned and operated by
Licensee's affiliate, Licensee agrees that during
the term of this Agreement, neither Licensee,
CPI Corp., nor any of their respective affiliates
controlling, controlled by, or under common
control with Licensee or CPI Corp., shall perform
or license the services or have any direct or
indirect, controlling or non-controlling interest
as a disclosed or beneficial owner, investor,
partner, director, officer, employee, manager,
consultant, representative, or agent, or in any
other capacity, in any business offering or
selling professional portrait photography studio
services and related portrait products in the
United States, Puerto Rico or Canada
("Competitive Business"), which is:
(1) located in any specialty store, department
store, discount store or other similar
retail format;
(2) located within twenty (20) miles of a
Licensed Business licensed under this
Agreement or under the Off-Premises License
Agreement between Licensee and Sears of even
date with this Agreement; or
(3) offered or promoted through the following
media:
(a) World Wide Web sites available to the
public over the Internet;
(b) Secured Internet sites or Intranet
sites;
(c) other interactive media for use in the
Licensed Businesses; and
(d) in electronic processing, data
interchange and other communications
done or made in connection with any
commercial transaction consummated
through the Internet or Intranet.
37
<PAGE>
If, during the term of this Agreement, Sears develops
Competitive Businesses in any territory or country outside of
the United States, Puerto Rico or Canada and Licensee has no
professional portrait studio businesses located within that
country or territory at the time of this development, Licensee
shall no longer have the right to develop Competitive
Businesses in that country or territory throughout the
remainder of the term of this Agreement in accordance with
Section 5.18. Licensee and Sears agree to use reasonable
efforts to discuss their respective global strategies with each
other as they develop.
3. Section 9.5 shall be deleted in its entirety and the
following substituted in its place:
9.5 REPORTS
If requested by Sears, Licensee shall provide to Sears
reports of sales and income and Sears commissions paid
in the manner and form prescribed by Sears, together
with any other information Sears may require for its
records or auditing purposes. If requested by Sears,
Licensee shall promptly submit its financial report to
Sears after the close of Licensee's fiscal year. Such
report shall be audited by a certified public
accountant. Such report shall include, but shall not
be limited to, Licensee's profit and loss statement
for such fiscal year and balance sheet at the end of
such fiscal year, and shall be prepared in accordance
with generally accepted accounting principles. If
Licensee is a publicly held corporation, this
requirement may be fulfilled by submission of
Licensee's Annual Report on Form 10-K. Sears shall
not disclose any such information that is not
available to the public to any third parties without
Licensee's prior consent.
4. Section 14.1 of the License Agreement is hereby
deleted in its entirety.
5. Section 14.2 of the License Agreement is hereby
amended by revising clause (b) to read:
(b) there is a Change in Control (as defined
in SECTION 15.1 below) with respect to
Licensee to which Sears has not consented;
6. Article XIV of the License Agreement shall be amended
by adding a new Section 14.7 to read as follows:
38
<PAGE>
14.7 COVENANT NOT TO COMPETE
Except for the three (3) Mainstreet Portrait
businesses currently owned and operated by
Licensee's affiliate, upon:
(1) termination of this Agreement by Sears in
accordance with its terms and conditions, or
(2) termination of this Agreement by Licensee
without cause,
Licensee and its affiliates agree, that for a
period of two (2) years commencing on the
effective date of termination, neither Licensee,
CPI Corp., nor any of their affiliates
controlling, controlled by or under common
control with Licensee or CPI Corp., will
perform or license the services or have any
direct or indirect interest as a disclosed or
beneficial owner, employee, investor, partner,
director, officer, employee, consultant,
representative, or agent or in any other capacity
in any Competitive Business:
(a) operating within ten (10) miles of any
Licensed Business licensed under this
Agreement or the Off-Premises Agreement;
or
(b) offered or promoted through the
following media:
(i) World Wide Web sites available to
the public over the Internet;
(ii) Secured Internet sites or Intranet
sites;
(iii) other interactive media for use in
the Licensed Businesses; and
(iv) in electronic processing, data
interchange and other
communications done or made in
connection with any commercial
transaction consummated through
the Internet or Intranet.
7. Section 15.1 of the Agreement shall be amended in its
entirety to read as follows:
39
<PAGE>
15.1 ASSIGNMENT BY LICENSEE
Notwithstanding any other provision in this
Agreement, Licensee may not assign, transfer,
sublicense or convey any of its rights or
obligations under this Agreement in whole or
part, without Sears' prior written consent. Any
Change in Control of Licensee shall constitute an
assignment of this Agreement, for which Sears'
prior written consent is reguired. Any attempted
assignment, transfer, sublicense, conveyance or
Change in Control without Sears' prior written
consent is void.
For purposes of this Agreement, a "CHANGE IN
CONTROL" means an asset sale, merger,
consolidation, or any other transaction or
arrangement the effect of which is that fifty
percent (50%) or more of the total voting power
entitled to vote in the election of Licensee's
board of directors is held by a person or persons
other than the shareholders of Licensee, who,
individually or as a group, held fifty percent
(50%) or more of such voting power immediately
prior to such event.
8. Sears and Licensee hereby affirm the License Agreement
as amended by this Second Amendment. This Second
Amendment replaces and supersedes the First Amendment
in its entirety.
IN WITNESS WHEREOF, the parties have executed and delivered
this First Amendment to the License Agreement as if the date
first written above.
SEARS, ROEBUCK AND CO. CONSUMER PROGRAMS INCORPORATED
By: /s/ James R. Clifford By: /s/ Russ Isaak
----------------------- -------------------------
Its: President and Chief Its: President
Operating Officer -------------------------
Full-Line Stores
-----------------------
EXHIBIT 11.1
<TABLE>
CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE - DILUTED
(in thousands of dollars or shares except per share amounts)
Sixteen Weeks Ended November 13, 1999 and November 14, 1998
<CAPTION>
Sixteen Weeks Ended
----------------------
Nov. 13, Nov. 14,
1999 1998
--------- ---------
<S> <C> <C>
Diluted:
Net earnings (loss) applicable to
common shares $ (3,343) $ 6,051
========= =========
Shares:
Weighted average number of
common shares outstanding 17,784 17,677
Shares issuable under employee
stock plans - weighted average -* 41
Dilutive effect of exercise of
certain stock options -* 198
Less: Treasury stock-weighted average (7,946) (7,716)
--------- ---------
Weighted average number of common and
common equivalent shares outstanding 9,838 10,200
========= =========
Net earnings (loss) per common and
common equivalent shares $ (0.34) $ 0.59
========= =========
<FN>
* The dilutive effect of stock options in the amount of 368,912
shares and 40,967 shares issuable under employee stock plans
were not considered as the effect is antidilutive.
</FN>
</TABLE>
41
EXHIBIT 11.2
<TABLE>
CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE - DILUTED
(in thousands of dollars or shares except per share amounts)
Forty Weeks Ended November 13, 1999 and November 14, 1998
<CAPTION>
Forty Weeks Ended
----------------------
Nov. 13, Nov. 14,
1999 1998
--------- ---------
<S> <C> <C>
Diluted:
Net earnings (loss) applicable to
common shares $ (4,229) $ 6,932
========= =========
Shares:
Weighted average number of
common shares outstanding 17,777 17,624
Shares issuable under employee
stock plans - weighted average -** 37
Dilutive effect of exercise of
certain stock options -** 246
Less: Treasury stock-weighted average (7,897) (7,661)
--------- ---------
Weighted average number of common and
common equivalent shares outstanding 9,880 10,246
========= =========
Net earnings (loss) per common and
common equivalent shares $ (0.43) $ 0.68
========= =========
<FN>
** The dilutive effect of stock options in the amount of
336,687 shares and 36,853 shares issuable under employee
stock plans were not considered as the effect is
antidilutive.
</FN>
</TABLE>
42
EXHIBIT 11.3
<TABLE>
CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE - BASIC
(in thousands of dollars or shares except per share amounts)
Sixteen Weeks Ended November 13, 1999 and November 14, 1998
<CAPTION>
Sixteen Weeks Ended
----------------------
Nov. 13, Nov. 14,
1999 1998
--------- ---------
<S> <C> <C>
Basic:
Net earnings (loss) applicable to
common shares $ (3,343) $ 6,051
========= =========
Shares:
Weighted average number of
common shares outstanding 17,784 17,677
Less: Treasury stock - weighted
average (7,946) (7,716)
--------- ---------
Weighted average number of common
and common equivalent shares
outstanding 9,838 9,961
========= =========
Net earnings (loss) per common and
common equivalent shares $ (0.34) $ 0.61
========= =========
</TABLE>
43
EXHIBIT 11.4
<TABLE>
CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE - BASIC
(in thousands of dollars or shares except per share amounts)
Forty Weeks Ended November 13, 1999 and November 14, 1998
<CAPTION>
Forty Weeks Ended
----------------------
Nov. 13, Nov. 14,
1999 1998
--------- ---------
<S> <C> <C>
Basic:
Net earnings (loss) applicable to
common shares $ (4,229) $ 6,932
========= =========
Shares:
Weighted average number of
common shares outstanding 17,777 17,624
Less: Treasury stock - weighted
average (7,897) (7,661)
--------- ---------
Weighted average number of common
and common equivalent shares
outstanding 9,880 9,963
========= =========
Net earnings (loss) per common and
common equivalent shares $ (0.43) $ 0.70
========= =========
</TABLE>
44
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<FISCAL-YEAR-END> FEB-05-2000
<PERIOD-START> FEB-06-1999
<PERIOD-END> NOV-13-1999
<PERIOD-TYPE> 9-MOS
<CASH> 248
<SECURITIES> 48,085
<RECEIVABLES> 21,474
<ALLOWANCES> 505
<INVENTORY> 22,721
<CURRENT-ASSETS> 109,957
<PP&E> 268,927
<DEPRECIATION> (156,530)
<TOTAL-ASSETS> 230,013
<CURRENT-LIABILITIES> 50,664
<BONDS> 0
0
0
<COMMON> 7,114
<OTHER-SE> 86,216
<TOTAL-LIABILITY-AND-EQUITY> 230,013
<SALES> 264,454
<TOTAL-REVENUES> 264,454
<CGS> 40,810
<TOTAL-COSTS> 270,042
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,720
<INCOME-PRETAX> (6,506)
<INCOME-TAX> (2,277)
<INCOME-CONTINUING> (4,229)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,229)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.43)
<PAGE>
</TABLE>