UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405
[X] Annual Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act of 1934
For the fiscal year ended February 5, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the transition period from to
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COMMISSION FILE NUMBER 1-10204
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CPI CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 43-1256674
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) 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
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Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK $.40 PAR VALUE NEW YORK STOCK EXCHANGE
- --------------------------- -----------------------
Title of each class Name of each exchange
on which registered
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. [X]
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
April 6, 2000 ($22.50 per share): $171,858,825.
As of April 6, 2000, 8,091,046 shares of the common stock, $0.40
par value, of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held June 1, 2000 are incorporated by
reference into Part III of this Report.
<PAGE>
PAGE NUMBERS REFER TO PAPER DOCUMENT
<TABLE>
TABLE OF CONTENTS
<S> <C> <C>
PART I
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Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Results of Votes of Security Holders 12
PART II
- -------
Item 5. Market for Registrant's common stock and
Related Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 26
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 66
PART III
- --------
Item 10. Directors, Executive Officers, Promoters,
and Control Persons of the Registrant 67
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial
Owners and Management 67
Item 13. Certain Relationships and Related
Transactions 67
PART IV
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Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 68
Signatures 73
</TABLE>
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PART I
ITEM I. BUSINESS
THE COMPANY
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CPI Corp. is a holding company engaged, through its
subsidiaries, in the development and marketing of 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 is now a leader in the
professional portrait photography of pre-school children. Unless
the context otherwise requires, references herein to "the
Company" or "CPI Corp." mean CPI Corp., its consolidated
subsidiaries and their predecessor companies.
CPI Corp. is the exclusive operator of all Sears Portrait
Studios in the United States, Canada and Puerto Rico, operating
1,027 locations as of February 5, 2000, and is materially
dependent upon the continued goodwill of Sears, Roebuck and
Company ("Sears") and the integrity of the Sears name in the
retail marketplace. The Company believes its relations with
Sears are excellent and that they have been beneficial to both
companies. See "RELATIONSHIP WITH SEARS" later in this section
for a more detailed discussion.
The Company provides its customers with a professional
portrait studio experience and offers a variety of products
tailored to maximize customer satisfaction. Portraits range from
wallet size to 16" by 20", with the availability of Portrait
Creations(R), greeting cards and passport photos. The Company
also provides photo accessories, such as picture frames and photo
albums, and services that include the Portrait Preview System(R)
and Smile Savers Plan(R).
The executive offices of CPI Corp. 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
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Wall Decor... On April 7, 2000, the Company announced it is
in the process of completing the negotiation of a definitive
agreement to sell its Wall Decor segment, a business operated by
the Company since 1993 under the name of Prints Plus, Inc.
("Prints Plus"). Prints Plus is a retail chain with 156 locations
as of February 5, 2000, which markets posters, prints and custom
framing services. As a result of the decision to exit this
business, in fiscal year 1999, a loss of $10.1 million before
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taxes was recorded to recognize anticipated losses and related
expenses in connection with the sale. The Company has also
classified the Wall Decor segment as a discontinued operation and
has reclassified the prior years' financial statements to reflect
this change.
Photofinishing... In addition, in 1982, the Company started
a photofinishing business and continued operations until October
1996. The following is a listing of the Company's business
activities in the photofinishing business:
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.
Electronic Publishing... From 1988 until 1996, the Company
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. The
Company classified the Electronic Publishing operation as a
discontinued operation in fiscal year 1995 and reclassified the
prior years' financial statements to reflect this change.
Further financial information on continuing and discontinued
operations of the Company is in Part II, Item 7. "MANAGEMENTS'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS", and Part II, Item 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA".
COMPANY STRATEGY
- ----------------
The Company's business objectives are to increase market
share and profitability through the following initiatives:
1) CREATE AN ENGAGING AND INVITING EXPERIENCE. The Company
believes that a key to success in the retail portrait photography
market is to create as inviting an environment as possible.
Therefore, the Company offers spacious studios and trains
employees to provide a positive experience for customers.
a) Employee Training... In early 1999, the Company
introduced a new studio training plan to improve customer
service. The plan, the Independent Study Program ("ISP"), offers
employees training through a series of three modules covering
portrait quality, photographic skills and studio operations. In
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the portrait quality segment, employees capture digital images on
disks and send them to headquarters for grading and feedback,
while the other segments are conducted in-studio by specially
trained senior studio managers.
b) Studio Remodeling... To enhance the total portrait
experience, the Company has significantly improved the function-
ality and ambiance of studios, increasing their size and install-
ing new custom fixtures and furniture. The new decor features
rich, vibrant colors, bold graphics and dramatic lighting.
The Company's remodeled studios have increased in average
size from approximately 800 to 1,400 square feet, providing space
for additional camera rooms and larger waiting areas. The
typical remodeled studio consists of two or more camera rooms, a
portrait viewing and sales area with a point-of-sale computer and
a reception area. In addition, the Company has expanded its
selection of backgrounds and props.
c) Technology Platform... The Company, in order to
provide a better portrait studio environment, has been working on
a new software platform, Store Automated System ("SAS"), that
will ultimately integrate all studio activities. The Company
believes that this new technology platform will simplify the user
interface of in-store systems, streamline the workflow in the
studio environment, provide better tools for studio associates to
run the business, improve data integrity and provide a flexible,
scalable platform to develop future products.
2) USE SOPHISTICATED, TARGETED MARKETING. The Company
designs the portrait photography marketing efforts to optimize
the productivity of marketing expenditures:
a) Smile Savers Plan(R)... A customer loyalty program
by which customers pay a single enrollment fee for unlimited
sittings over a 2-year period rather than paying a sitting fee
for each studio visit.
b) Growing Family Network... In April 1998, the Company
joined a limited number of participants in a new direct marketing
program designed to target new mothers with a series of
promotional contacts.
c) Customer Database... The Company has established
and continues to build an exclusive database of over 12 million
customers. The Company can use the database to focus direct mail
campaigns and better understand customers' buying patterns.
3) BUILD OUR CUSTOMER FOCUS. The Company fosters a culture
that is focused on meeting the needs of portrait photography
customers. The Company is able to alter its products and service
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offerings to maximize its customers' satisfaction and purchases.
a) Provide competitive pricing... The price a customer
pays is the sum of two components: a sitting or session fee and
a charge for the portraits purchased in one of two ways: package
or custom selections. A customer purchasing a package receives
a specified assortment of single pose portraits for a fixed
price. Package customers may also purchase additional portraits.
A customer purchasing a custom selection of portraits purchases
individual portrait sheets featuring a range of poses and
portrait sizes and pays based on the number of sheets purchased.
b) Introduction of new products and services... Using
selected studios as test facilities, the Company experiments with
marketing and operating programs in an actual retail environment.
Three resulting programs include: (1) Portrait Preview System(R),
which provides the customer the flexibility to select her
favorite expression and poses of her child and an instant full-
color proof sheet, which she may take home on the day of her
visit; (2) Portrait Creations(R), which uses digital imaging
capabilities to offer customers the choice of three poses from
the same sitting in a unifying theme such as a personal event, a
holiday or an activity, which can be taken home immediately; and
(3) Smile Savers Plan(R), a customer loyalty program.
4) BUILD STRATEGIC ALLIANCES. Working closely with a
variety of strategic partners, the Company is able to leverage
partners' state-of-the-art technology, which can quickly and
efficiently be adapted and applied to marketing and customer
service initiatives. This strategy enabled the Company to apply
new technology-based concepts to develop SAS.
RELATIONSHIP WITH SEARS
- -----------------------
The Company has enjoyed a strong 40-year relationship with
Sears, as evidenced by having been awarded the prestigious
"Partners in Progress" award thirteen times since the inception
of the award seventeen years ago. In 1995, Sears also bestowed
on the Company the first "Partners in Progress" award ever
accorded a licensee in Canada. In 1994 and 1998, Sears honored
the Company with the first "Chairman's Award" ever given to a
Sears licensed business in recognition of significant product
innovations. In 1996, the Company was the sole recipient of the
newly created Sears "Golden Opportunities" award for the most
responsive handling of customer complaints of all its licensees.
As a Sears licensee, the Company enjoys the benefits of
using the Sears name, access to prime retail locations, Sears'
daily cashiering and bookkeeping system, store security services
and customers' ability to use their Sears credit cards to
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purchase products or services, for which Sears bears all credit
and authorization risk.
As of February 5, 2000, the Company operated 847 full-line
Sears Portrait Studios in the United States and, except in
connection with store closings, has never had Sears terminate the
operation of any portrait studio under any license agreement.
On November 10, 1999, Sears extended the Company's license
agreements to act as portrait photography licensee for Sears
stores in the United States and Puerto Rico through December 31,
2008. These agreements provide for the Company to pay Sears a
license fee of 15% of total annual net sales for studios located
in Sears stores. Net sales are defined as gross sales less
customer returns, allowances and sales taxes. The Company
provides all studio furniture, equipment, fixtures, leasehold
improvements and advertising. The Company is responsible for
hiring, training and compensating Company employees and must
indemnify Sears against claims arising from the operation of the
Sears Portrait Studios business.
As of February 5, 2000, the Company also operated 65 free-
standing studios in the United States that operate under the
Sears name in retail malls that are without a Sears store. In
addition to mall rent, the Company pays Sears a license fee of
7.5% of total annual net sales per studio in these locations.
The Company provides all studio furniture, equipment, fixtures,
leasehold improvements and advertising. The Company is also
responsible for hiring, training and compensating Company
employees. These studios benefit from inclusion in advertising
that promotes Sears department store studios in the market. The
license agreement with Sears for these remote studios was amended
on November 10, 1999, extending the term to December 31, 2008.
As of February 5, 2000, all 115 Canadian studios operate
under a 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 total annual
net sales. Pursuant to the license agreement, the Company
provides all studio furniture, equipment, fixtures, leasehold
improvements, advertising and is responsible for hiring, training
and compensating Company employees.
INDUSTRY
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The Company operates within the professional portrait
photography industry, specializing in pre-school children's
portraits, and also targets other significant market segments,
including school age children, adults and various other groups
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including family, weddings and business.
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.
SEASONALITY
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In the professional portrait photography business, sales are
seasonal, with the largest volume occurring in the twelve-week
fourth quarter, which includes the Thanksgiving and Christmas
seasons. The Christmas season accounts for a high percentage of
Sears Portrait Studio sales and earnings, and the fourth fiscal
quarter (mid November through early February) typically produces
a large percentage of annual sales and earnings.
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 materials to conduct
its businesses. The Company believes its relationships with
suppliers are good.
INTELLECTUAL PROPERTY
- ---------------------
The Company owns numerous registered service marks and
trademarks, including Portrait Creations(R) and Smile Savers
Plan(R), which have been registered with the United States Patent
and Trademark Office. The Company's rights to these trademarks
will continue as long as the Company complies with the usage,
renewal filing and other legal requirements relating to the
renewal of trademarks.
ENVIRONMENTAL
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The Company's operations are subject to normal environmental
protection regulations. Compliance with federal, state and local
provisions which have been enacted or adopted regulating the
discharge of materials into the environment or otherwise relating
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to the protection of the environment, is not expected to have a
material effect upon the capital expenditures, earnings or
competitive position of the Company. 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.
EMPLOYEES
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At February 5, 2000, the Company had approximately 6,800
employees, of which approximately 4,200 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.
9
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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 270,000 Administration and Owned
Photoprocessing
St. Louis, Missouri 155,000 Parking Lots Owned
St. Louis, Missouri 57,574 Warehousing Leased(1)
St. Louis, Missouri 14,340 Printing Leased(2)
St. Louis, Missouri 20,150 Warehousing 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
<FN>
(1) Lease term expires on June 30, 2002.
(2) Lease term expires on November 30, 2001.
(3) Lease term expires on April 30, 2001.
(4) Lease term expires on July 15, 2001.
</FN>
</TABLE>
As of February 5, 2000, the Company operated 847 portrait
studios in Sears stores in the United States pursuant to the
license agreements with Sears, 115 studios in Canada under a
separate license agreement with Sears Canada, Inc. and 65 Sears
Portrait Studios in shopping centers without Sears stores, which
are generally leased for at least three years with some having
renewal options. See Part I, Item 1. "BUSINESS, RELATIONSHIP
WITH SEARS" for more information on the Sears license agreements.
The Company believes that the facilities used in its
operations are in satisfactory condition and adequate for its
present and anticipated future operations.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit filed on October 12,
1999 in New York Supreme Court, County of New York, concerning a
terminated 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"). ASCP Affiliates asserted that the Company
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 on the
Company's financial position and, citing those grounds,
terminated the Merger Agreement. ASCP Affiliates also asserted
that they 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 an action seeking a declaration that they
were entitled to terminate and demanding reimbursement from the
Company for expenses incurred in connection with the Merger
Agreement, not to exceed $6.0 million.
The Company filed its answer and a counter claim to the
above described lawsuit on October 18, 1999 in New York against
ASCP Affiliates asserting they were in willful breach of their
obligations under the Merger Agreement. The Company further
asserted ASCP Affiliates willfully failed to use their reasonable
best efforts to complete the financing for the transaction and
that they reneged on their obligation to use bridge financing
available. The Company's counter claim seeks damages for the
willful breach of the Merger Agreement by ASCP Affiliates and
also asserts claims in an amount not to exceed $80.0 million,
together with attorneys fees and costs, from American Securities
Capital Partners L.P. under its guarantee of its affiliates'
performance of obligations under the Merger Agreement.
While acknowledging the uncertainties of litigation,
management believes that these matters will be resolved without a
material negative effect on the Company's consolidated financial
position or results of operations. Accordingly, the Company has
not recorded any amounts related to this litigation in the
accompanying consolidated financial statements.
The Company is also a defendant in certain lawsuits arising
in the ordinary course of business, none of which is expected to
have a material impact. 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.
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ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
No matters were submitted to stockholders for a vote during
the fourth quarter of fiscal year 1999.
12
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) Price Range of Common Stock and Dividends
Since April 17, 1989, the Company's common stock has been
traded on the New York Stock Exchange under the symbol CPY.
The following tables set forth the high and low sales prices
of the common stock reported by the New York Stock Exchange
and the dividend declared for each full quarterly period
during the Company's last two fiscal years.
<TABLE>
<CAPTION>
FISCAL YEAR 1999
(ending Feb. 5, 2000) HIGH LOW DIVIDEND
--------------------- -------- -------- --------
<S> <C> <C> <C>
First Quarter $ 29.00 $ 21.19 $ 0.14
Second Quarter 34.88 26.31 0.14
Third Quarter 34.56 20.00 0.14
Fourth Quarter 26.38 17.69 0.14
FISCAL YEAR 1998
(ending Feb. 6, 1999)
---------------------
First Quarter $ 27.44 $ 23.18 $ 0.14
Second Quarter 27.38 22.75 0.14
Third Quarter 25.75 18.12 0.14
Fourth Quarter 27.44 20.44 0.14
</TABLE>
(b) Shareholders of Record
As of April 6, 2000, the market price of the Registrant's
common stock was $22.50 per share with 8,091,046 shares
outstanding and 1,948 holders of record.
(c) Dividends
The Company intends, from time to time, to pay cash dividends
on its common stock, as its Board of Directors deems
appropriate, after consideration of the Company's operating
results, financial condition, cash requirements, general
business conditions and such other factors as the Board of
Directors deems relevant.
(d) There were no sales or issuances of the Company's equity
shares that were not registered under the Securities Act.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
FINANCIAL HIGHLIGHTS (1) (in millions of dollars)
- --------------------
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
INCOME DATA
Net sales $319.1 $325.5 $303.7 $404.4 $467.9
Income from cont. operations 6.7 28.4 29.2 17.1 26.3
Net interest expense (2) 1.7 0.9 2.0 3.8 4.6
Other income (expense) (3) (4) (0.1) 5.3 2.2 0.5 0.6
Gain (loss) on sale of interest
in Photofinishing segment (5) - - (4.2) 6.2 -
Interest in joint venture (5) - - (3.3) (0.5) -
Income taxes 1.7 11.5 8.6 7.2 8.0
Net earnings from continuing
operations 3.2 21.3 13.3 12.3 14.2
<FN>
(1) In 1999, the Company has classified the Wall Decor segment as a discontinued operation
and has reclassified the prior years' consolidated financial statements to reflect
this change. In addition, for more detailed financial information see Part II,
Item 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS".
(2) In 1998 and 1997, $2.8 million and $1.1 million, respectively, in interest income for
amortization was recognized from the Promissory Note.
(3) In 1999, 1998 and 1997, the Company recognized $3.2 million, $5.0 million and $1.8
million, respectively, in other income from the Noncompete Agreement.
(4) In 1999, the Company, recognized $3.5 million in other expense for costs related to
the termination of the Merger Agreement.
(5) 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. 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.
</FN>
</TABLE>
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<TABLE>
FINANCIAL HIGHLIGHTS (1)
- --------------------
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
PER SHARE
Net earnings from continuing
operations - diluted (2) $ 0.32 $ 2.08 $ 1.12 $ 0.91 $ 1.02
Net earnings from continuing
operations - basic (2) 0.33 2.14 1.14 0.92 1.03
Dividends 0.56 0.56 0.56 0.56 0.56
Avg. shares outstanding
(millions of shares)-diluted 10.0 10.2 11.8 13.5 14.0
Avg. shares outstanding
(millions of shares)-basic 9.7 9.9 11.6 13.4 13.9
<FN>
(1) In 1999, the Company has classified the Wall Decor segment as a discontinued operation
and has reclassified the prior years' consolidated financial statements to reflect
this change. In addition, for more detailed financial information see Part II,
Item 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS".
(2) The Company recorded the repurchase of 1,166,650 shares of common stock for $28.2
million in 1999, 252,214 shares of common stock for $5.4 million in January 1998,
2,059,499 shares of common stock for $47.7 million in 1997, and 2,250,000 shares of
common stock for $43.6 million in November 1997.
</FN>
</TABLE>
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<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (1) (in millions of dollars)
- --------------------
<CAPTION>
1999 1998 1997 1996 1995
<C> <C> <C> <C> <C>
BALANCE SHEET
Cash and cash equivalents (2) $ 49.5 $ 76.0 $ 15.3 $ 21.9 $ 8.3
Current assets 81.5 113.7 94.4 63.7 72.8
Net fixed assets 84.9 111.1 124.7 130.8 167.9
Net assets of discontinued
operation 23.2 - - - -
Total assets 199.3 234.7 228.8 246.7 300.5
Current liabilities 42.1 36.7 47.4 50.8 64.0
Long-term debt, less current
maturities 59.6 59.6 59.5 44.9 54.8
Stockholders' equity 81.3 116.5 102.1 139.5 174.2
<FN>
(1) In 1999, the Company has classified the Wall Decor segment as a discontinued operation
and has reclassified the prior years' consolidated financial statements to reflect
this change. In addition, for more detailed financial information see Part II,
Item 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS".
(2) The Promissory Note from Kodak of $43.9 million was paid January 4, 1999, which
resulted in the increased cash balance in 1998.
</FN>
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS - OVERVIEW
- -----------------------------------------------
SAFE HARBOR STATEMENTS UNDER PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
The statements contained in this report, and in particular
in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section 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, 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 and the condition and strategic planning of Sears
fluctuations in operating results, the attractions and retention
of qualified personnel and other risks as may be described in the
Company's filings with the Securities and Exchange Commission,
including this Form 10-K for the year ended February 5, 2000.
FISCAL YEARS
The Company's fiscal year ends the first Saturday of
February. Accordingly, fiscal years 1999 and 1998 ended February
5, 2000 and February 6, 1999, respectively, and consisted of 52
weeks. Fiscal year 1997 ended February 7, 1998 and consisted of
53 weeks. Throughout "Management's Discussion and Analysis of
Financial Condition and Results of Operation," reference to 1999,
1998 or 1997 will mean the fiscal year ended February 5, 2000,
February 6, 1999 and February 7, 1998, respectively.
DISCONTINUED OPERATIONS
On April 7, 2000, the Company announced it is in the process
of completing the negotiation of a definitive agreement to sell
its Wall Decor segment, a business operated by the Company since
1993 under the name Prints Plus. As a result of the decision to
exit this business, in 1999, a loss of $10.1 million before taxes
was recorded to recognize anticipated losses and related expenses
in connection with the sale. The Company has also classified the
Wall Decor segment as a discontinued operation and has reclassified
the prior years' financial statements to reflect this change.
17
<PAGE>
TERMINATED 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 has terminated the Merger Agreement. ASCP
Affiliates also asserted that they 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
an action seeking a declaration that they were entitled to
terminate and demanding reimbursement from the Company for
expenses incurred in connection with the Merger Agreement, not to
exceed $6.0 million. The Company has made no provisions for
these expenses in the accompanying consolidated financial
statements.
The Company filed its answer and a counter claim to the
above described lawsuit on October 18, 1999 in New York against
the ASCP Affiliates asserting that the ASCP Affiliates were in
willful breach of their obligations under the 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 American Securities Capital
Partners L.P. under its guarantee of its affiliates performance
of obligations under the Merger Agreement.
As a result of these events, the Company has recognized $3.5
million in 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 1999 related to claims
against the Company by ASCP Affiliates and the Company's counter
claim against these entities.
18
<PAGE>
JOINT VENTURE
In October 1996, the Company announced it had completed a
photofinishing joint venture with Eastman Kodak Company ("Kodak")
whereby Kodak purchased new shares of a former subsidiary, Fox
Photo, Inc. ("Fox"), constituting 51% of the outstanding common
stock of Fox for a cash purchase price of $56.1 million. In
October 1997, the Company further announced the termination of the
photofinishing joint venture. Pursuant to the termination, Kodak
purchased the remaining 49% of Fox that it did not already own for
a purchase price of $53.9 million that was paid as follows: $10.0
million in cash in consideration of the Company's agreement not to
compete with Fox for two years (the "Noncompete Agreement") and
$43.9 million in the form of a note that matured and was paid on
January 4, 1999 (the "Promissory Note").
Due to the non-interest bearing nature of the Promissory
Note, a discount of $3.9 million was established and was amortized
into income until the maturity of the Promissory Note. During
1998 and 1997, $2.8 million and $1.1 million, respectively, in
amortization related to the Promissory Note was recognized.
The Noncompete Agreement with Kodak resulted in recording
$3.2 million, $5.0 million and $1.8 million in 1999, 1998 and
1997, respectively, as a component of other income.
YEAR 2000 ISSUE
The Year 2000 ("Y2K") issue was primarily the result of
computer software and hardware possibly recognizing the two digit
year "00" as 1900 rather than 2000. The Company did not
experience any major computer or computer applications failure and
estimated costs spent in replacing older systems due in part to
Y2K compliance issues were $250,000 and $3.4 million in 1999 and
1998, respectively, for administrative operating and data-base
systems, and $555,000 in 1999 for new or upgraded laboratory,
telephone and physical plant systems. Other computer systems were
installed in the last several years but were the result of on-
going long-range planning and developments, not Y2K issues.
STOCK REPURCHASE
Prior to 1999, the Company's Board of Directors had
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. On
December 13, 1999, the Company's Board of Directors increased this
authorization by 1,000,000 shares. Under these authorizations,
during 1999 and 1998, the Company purchased 1,166,650 and 252,214
19
<PAGE>
shares of stock for $28.2 million and $5.4 million, respectively,
at an average stock price of $24.21 and $21.25, respectively.
Acquired shares are held as treasury stock and will be available
for general corporate purposes.
In addition, the Company has also engaged in another
transaction involving the repurchase of stock during the reporting
periods covered by this Annual Report. In 1997, the Company
completed a 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. To finance the tender offer, the Company used the
proceeds from the $10.0 million two-year Noncompete Agreement
and other working capital and cash from operations.
The weighted average shares outstanding have been adjusted to
reflect the changes in shares outstanding resulting from the
repurchase of the Company's common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS - RESULTS OF OPERATIONS
- ------------------------------------------------------------
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Net Sales
- ---------
Net sales for Portrait Studios decreased from $325.5 million
for 1998 to $319.1 million, or 2.0%, for 1999. The decrease in
net sales resulted from lower average sales per customer and a
minor reduction in the numbers of customer portrait sittings. The
Smile Savers Plan(R), which was expanded to all locations in 1999,
was the primary contributing factor in the lower average sale per
customer as enrollment fees had a dampening influence on customer
purchases of other products and services. The Smile Savers Plan(R)
is designed to increase repeat visits, resulting in increased
portrait purchases, and develop long-term customer loyalty by
allowing customers to pay a one-time fee for unlimited customer
visits for a two-year period and resulted in $10.8 million in
revenue being deferred in 1999. Ultimately, the Company believes
the Smile Savers Plan(R) will increase sales due to increased
repeat customer visits and as initial deferred sales are largely
neutralized by the amortization of deferred sales balances.
Income From Continuing Operations
- ---------------------------------
Income from continuing operations decreased from $28.4
million in 1998 to $6.7 million, or 76.3%, in 1999. This decrease
is due to a slight decrease in sales and due to costs and expenses
increasing from $297.2 million in 1998 to $312.4, or 5.1%, in
1999 as a result of higher selling, general and administrative
expenses.
20
<PAGE>
Specifically, Sears Portrait Studio employment costs have
increased $9.8 million in 1999 from 1998 due to higher wage rates
resulting from a tight labor market, a new training program for
studio employees introduced in 1999--the Independent Study Program
("ISP"), and increased labor hours in the studios 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.
Income from continuing operations was also negatively
affected by an additional expense of $2.6 million before taxes in
1999, which resulted from the abandonment and write-off of old
software and computer hardware, done in connection with the
Company's completion of its Y2K conversions, redirection of its
photo archiving initiatives and completion of the first phase of
the SAS installation. This negative impact was partially offset
by decreased advertising expenses of $1.6 million in 1999.
At the end of 1999, the Company also instituted a profit
improvement program designed to decrease advertising expenditures,
field employment hours and certain administrative support costs in
fiscal year 2000. However, this initiative resulted in additional
expenses for severance and early retirement costs of $1.0 million
in 1999 and consequently decreasing income from continuing
operations compared to 1998.
Interest Expense, Interest Income, Other Expense and Other Income
- -----------------------------------------------------------------
Interest expense was relatively unchanged from 1998 to 1999.
The decrease in interest income from $3.7 million in 1998 to $3.1
million, or 15.3%, in 1999 resulted from a decrease in interest
income of $2.8 million associated with the recognition in 1998 of
amortization related to the discount on the Promissory Note which
was not recognized in 1999 being partially offset by an increase
of $2.2 million in investment interest income due to greater cash
and cash equivalent balances in 1999 compared to 1998.
In 1999, the Company recognized $3.5 million in other
expenses not recognized in 1998 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
1999 related to claims against the Company by ASCP Affiliates and
the Company's counter claim against these entities.
21
<PAGE>
The decrease in other income from $5.3 million in 1998 to
$3.4 million, or 36.5%, in 1999 resulted from the inclusion in
1998 of $5.0 million for the amortization of the two-year
Noncompete Agreement compared to the $3.2 million recognized in
1999.
Income Tax Expense
- ------------------
Provision for income taxes decreased from $11.5 million in
1998 to $1.7 million, or 85.0%, in 1999 as a result of decreased
earnings.
Net Earnings (Loss)
- -------------------
Net earnings decreased from $21.9 million in 1998 to a net
loss of $3.2 million in 1999 due to the various factors previously
noted and the inclusion of $6.4 million (net of tax benefit) in
net losses related to the discontinued Wall Decor operations.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Net Sales
- ---------
Net sales for Portrait Studios increased from $303.7 million
for 1997 to $325.5 million, or 7.2% for 1998. The increase in net
sales resulted from higher average sales per customer, which was
due in part to a price increase, and from continued favorable
customer response to new programs, partially offset by only 52
weeks of sales reported in 1998 compared to 53 weeks in 1997. Net
sales in the 53rd week of fiscal year 1997 represented $3.8
million, or 1.3% of net sales in 1997. If net sales were reported
on a comparable 52-weeks basis for 1998 and 1997, sales would have
increased 8.6% year-over-year.
Income From Continuing Operations
- ---------------------------------
Income from continuing operations decreased from $29.2
million in 1997 to $28.4 million, or 2.8% in 1998. This decrease
is due to costs and expenses increasing from $274.5 million in
1997, which had 53 weeks, to $297.2 million, or 8.3%, in 1998,
which had 52 weeks, as a result of higher selling, general and
administrative expenses being offset slightly by lower costs of
sales. Portrait Studios had higher commission expenses due to
higher sales, higher other expenses due to increased system and
product development, and higher employment costs due to necessary
wage increases in a tight labor market and increased labor hours
as Portrait Studios moved toward improved customer service.
22
<PAGE>
Interest Expense, Interest Income and Other Income
- --------------------------------------------------
The increase in interest income from $2.5 million in 1997 to
$3.7 million in 1998 resulted from the recognition of $1.1 million
in amortization in 1997 related to the discount on the Promissory
Note compared to the $2.8 million recognized in 1998. The
increase in other income from $2.2 million in 1997 to $5.3 million
in 1998 resulted from the inclusion in 1997 of $1.8 million for
the amortization of the two-year Noncompete Agreement compared to
the $5.0 million recognized in 1998. Interest expense was
relatively unchanged from 1997 to 1998.
Income Tax Expense
- ------------------
Provision for income taxes increased from $8.6 million in
1997 to $11.5 million in 1998 as a result of increased earnings
and the effect of the differences in the investment basis in Fox
Photo, Inc. for financial and Federal income tax reporting
purposes in 1997.
Net Earnings
- ------------
Net earnings increased from $13.3 million in 1997 to $21.3
million, or 60.1%, in 1998. This increase is due to the various
factors previously noted and the inclusion in 1997 of the $4.2
million loss on sale of the remaining 49% interest in Fox Photo,
Inc. and the inclusion in 1997 of the $3.3 million loss recorded
for CPI's interest in Fox Photo, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL CONDITION
- ----------------------------------------------------------
ASSETS
In 1999, total assets decreased 15.1% from 1998 due
principally to a decrease in cash and cash equivalents, which
resulted from the repurchase of $28.2 million of the Company's
common stock, and to a decrease in the assets of the discontinued
Wall Decor operation, which reflected the $10.1 million in
anticipated losses and related expenses associated with the sale.
LIABILITIES
In 1999, total liabilities were relatively unchanged from
1998 as increases in accrued deferred revenues, which resulted
from the new Smile Savers Plan(R), were offset by decreases in
accrued employment costs and deferred income taxes, which resulted
from lower earnings.
23
<PAGE>
STOCKHOLDERS' EQUITY
Stockholders' equity was down 30.3% in 1999 from 1998 due
mainly to the repurchase of $28.2 million of the Company's common
stock, the distribution of $5.4 million in dividends and the
recording of a $3.2 million net loss for 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CASH FLOWS
- -------------------------------------------------
During the period 1997 through 1999, the Company generated
$109.5 million in internal funds from operations. Cash flow
provided by investing activities during this three-year period
amounted to $3.1 million including capital expenditures of $54.8
million, which were offset by the $43.9 million proceeds received
from the Kodak Promissory Note, $10.0 million proceeds received
from the two-year Noncompete Agreement and $4.0 million advance
payment from the joint venture. Financing activities during this
time included the repurchase of $81.3 million in treasury stock
and the payment of $17.6 million in dividends. The net result of
these transactions was a $27.6 million increase in cash and cash
equivalents during the three-year period.
Planned capital expenditures for fiscal year 2000 are
expected to be approximately $18.5 million. Included in fiscal
year 2000 capital spending plans are the addition and remodeling
of stores in the Portrait Studios operation and equipment upgrades
and enhancements in the Company's information systems.
Through operating cash flows and existing cash and cash
equivalents, 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. In addition, even though the Company has no plans
to borrow under its existing $40.0 million revolving credit
agreement, the Company will be renegotiating this agreement prior
to the June 16, 2000 expiration date.
24
<PAGE>
OUTLOOK FOR 2000
- ----------------
For fiscal year 2000, the Company anticipates studio
employment costs to level off and possibly be reduced as no
significant training or software introductions are planned. In
addition, the Company expects the Smile Savers Plan(R) customer
loyalty program to generate repeat visits, allowing the Company to
reduce advertising expenditures.
The Company also anticipates the unique events which occurred
in 1999:
--the write-off of old software and computer hardware in
connection with technology changes,
--the provision for severance and early retirement costs
associated with the new profit improvement plan introduced
late in 1999 and
--the increases in deferred revenues associated with the
Smile Savers Plan(R) program in 1999,
will not be repeated in fiscal year 2000.
As decreased employee costs and lower advertising expenses
resulting from the profit improvement program are realized and the
many unusual events which occurred in 1999 are not repeated, the
Company expects the Portrait Studio operation in fiscal year 2000
to return to more normal profit levels.
25
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market risks relating to the Company's operations result
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 interest rates is minimal. The Company's exposure to changes
in foreign exchange rates relates to the Canadian operations,
which is minimal as these operations constitute 6.1% of the
Company's total assets and 6.9% of the Company's total sales.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Index to Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
- - Independent Auditors' Report 28
- - Consolidated Balance Sheets as of
February 5, 2000 and February 6, 1999 29-30
- - Consolidated Statements of Operations
for the fiscal years ended February 5, 2000,
February 6, 1999 and February 7, 1998 31-32
- - Consolidated Statements of Changes in
Stockholders' Equity for the fiscal years
ended February 5, 2000, February 6, 1999 and
February 7, 1998 33-35
- - Consolidated Statements of Cash Flows for the
fiscal years ended February 5, 2000,
February 6, 1999 and February 7, 1998 36-37
- - Notes to Consolidated Financial Statements 38-65
</TABLE>
The Company's fiscal year ends the first Saturday of
February. Accordingly, fiscal years 1999 and 1998 ended February
5, 2000 and February 6, 1999, respectively, and consisted of 52
weeks. Fiscal year 1997 ended February 7, 1998 and consisted of
53 weeks. Throughout the "Financial Statements and Supplemental
Data" section, reference to 1999, 1998 or 1997 will mean the
fiscal year ended February 5, 2000, February 6, 1999 and
February 7, 1998, respectively.
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
CPI CORP.:
We have audited the consolidated financial statements of CPI Corp.
and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule
as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards required 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 as of February 5, 2000 and
February 6, 1999, and the results of their operations and their
cash flows for each of the fiscal years in the three-year period
ended February 5, 2000, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial
statement schedule when considered in relation to the basic
consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth
therein.
KPMG LLP
/s/ KPMG LLP
St. Louis, Missouri
April 6, 2000
28
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS - ASSETS
(in thousands of dollars except share and per share amounts)
<CAPTION>
February 5, February 6,
2000 1999
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 49,546 $ 76,000
Receivables, less allowance of
$287 and $302, respectively 9,895 10,374
Inventories 11,641 19,071
Prepaid expenses and other
current assets 5,949 8,194
Deferred tax assets 4,433 32
--------- ---------
Total current assets 81,464 113,671
--------- ---------
Net property and equipment 84,923 111,148
Net assets of discontinued operations 23,177 -
Other assets, net of amortization of
$1,282 and $1,244, respectively 9,699 9,874
--------- ---------
Total assets $ 199,263 $ 234,693
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
29
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS-LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands of dollars except share and per share amounts)
<CAPTION>
February 5, February 6,
2000 1999
<S> <C> <C>
Current liabilities:
Accounts payable $ 10,669 $ 9,641
Accrued employment costs 8,638 14,256
Accrued deferred revenue 7,569 880
Sales taxes payable 2,615 2,461
Accrued advertising expense 1,259 2,054
Accrued expenses and other liabilities 6,433 4,644
Income taxes 4,911 2,720
---------- ----------
Total current liabilities 42,094 36,656
---------- ----------
Long-term debt 59,637 59,559
Other liabilities 10,469 13,178
Long-term deferred revenue 4,471 386
Deferred income taxes 1,335 8,398
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; 17,791,450 and
17,730,100 shares outstanding at Feb.5,
2000 and Feb. 6, 1999, respectively 7,117 7,092
Additional paid-in capital 42,804 41,605
Retained earnings 233,739 242,409
Accumulated other comprehensive income (2,945) (3,363)
---------- ----------
280,715 287,743
Treasury stock at cost, 9,030,911 and
7,864,261 shares at Feb. 5, 2000
and Feb. 6, 1999, respectively (199,426) (171,184)
Unamortized deferred compensation-
restricted stock (32) (43)
---------- ----------
Total stockholders' equity 81,257 116,516
---------- ----------
Total liabilities and stockholders'
equity $ 199,263 $ 234,693
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
30
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of dollars
except share and per share amounts) Fifty-two weeks ended Feb. 5,
2000 and Feb. 6, 1999 and fifty-three weeks ended Feb. 7, 1998
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net sales $319,135 $325,547 $303,666
Costs and expenses:
Cost of sales (exclusive of
depreciation expense shown below 39,937 39,850 39,582
Selling, administrative
and general expenses 245,736 232,387 209,391
Depreciation 24,862 23,769 23,367
Amortization 1,865 1,183 2,164
--------- --------- ---------
312,400 297,189 274,504
--------- --------- ---------
Income from operations 6,735 28,358 29,162
Interest expense 4,813 4,627 4,470
Interest income 3,120 3,684 2,447
Other expense 3,500 - -
Interest in joint venture - - (3,304)
Loss on sale of interest in
Photofinishing segment - - (4,189)
Other income 3,376 5,317 2,193
--------- --------- ---------
Earnings before income tax expense 4,918 32,732 21,839
Income tax expense 1,721 11,456 8,553
--------- --------- ---------
Net earnings from
continuing operations 3,197 21,276 13,286
--------- --------- ---------
Discontinued operations:
Income (loss) from operations net
of income tax expense (benefit)
of $86, $360 and ($369),
respectively 160 668 (573)
Loss on disposal, net of
tax benefit of $3,548 (6,589) - -
--------- --------- ---------
Net earnings (loss) from
discontinued operations (6,429) 668 (573)
--------- --------- ---------
Net earnings (loss) $ (3,232) $ 21,944 $ 12,713
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
31
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued) (in thousands of
dollars except share and per share amounts) Fifty-two weeks ended
Feb. 5, 2000 and Feb. 6, 1999 and fifty-three weeks ended Feb. 7,
1998
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net earnings from continuing
operations - diluted $ 0.32 $ 2.08 $ 1.12
Net earnings (loss) from dis-
continued operations-diluted (0.64) 0.07 (0.05)
----------- ----------- ----------
Net earnings (loss)-diluted $ (0.32) $ 2.15 $ 1.07
=========== =========== ==========
Net earnings from continuing
operations - basic $ 0.33 $ 2.14 $ 1.14
Net earnings (loss) from dis-
continued operations-basic (0.66) 0.07 (0.05)
----------- ----------- -----------
Net earnings (loss)-basic $ (0.33) $ 2.21 $ 1.09
=========== =========== ===========
Weighted average number of
common and common equivalent
shares outstanding-diluted 10,009,518 10,216,975 11,871,013
========== ========== ==========
Weighted average number of
common and common equivalent
shares outstanding-basic 9,669,504 9,934,993 11,647,307
========== ========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
32
<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
<CAPTION>
Accum Deferred
Add'l other Treasury comp'n
Common paid-in Retained comp'h stock restr'td
stock capital earnings income at cost stock Total
------ ------- --------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Feb.1, 1997 $6,896 $33,283 $219,905 $(1,860) $(118,136) $ (563) $ 139,525
------ ------- --------- -------- ---------- -------- ----------
Issuance of common stock
(260,264 shares) 103 4,331 - - - (15) 4,419
Comprehensive income
Net earnings - - 12,713 - - -
Foreign currency
translation - - - (891) - -
Comprehensive income - - - - - - 11,822
Dividends ($0.56 per
common share) - - (6,586) - - - (6,586)
Purchase of treasury
stock, at cost - - - - (47,653) - (47,653)
Amortization of deferred
compensation-
restricted stock - - - - - 565 565
------ ------- --------- -------- ---------- -------- ----------
Balance at Feb. 7, 1998 $6,999 $37,614 $226,032 $(2,751) $(165,789) $ (13) $ 102,092
------ ------- --------- -------- ---------- -------- ----------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
33
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
(in thousands of dollars except share and per share amounts)
Fifty-two weeks ended February 6, 1999
<CAPTION>
Accum Deferred
Add'l other Treasury comp'n
Common paid-in Retained comp'h stock restr'td
stock capital earnings income at cost stock Total
------ ------- --------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Feb. 7, 1998 $6,999 $37,614 $226,032 $(2,751) $(165,789) $ (13) $ 102,092
------ ------- --------- -------- ---------- -------- ----------
Issuance of common stock
(230,963 shares) 93 3,991 - - - (53) 4,031
Comprehensive income
Net earnings - - 21,944 - - -
Foreign currency
translation - - - (612) - -
Comprehensive income - - - - - - 21,332
Dividends ($0.56 per
common share) - - (5,567) - - - (5,567)
Purchase of treasury
stock, at cost - - - - (5,395) - (5,395)
Amortization of deferred
compensation-
restricted stock - - - - - 23 23
------ ------- --------- -------- ---------- -------- ----------
Balance at Feb. 6, 1999 $7,092 $41,605 $242,409 $(3,363) $(171,184) $ (43) $ 116,516
------ ------- --------- -------- ---------- -------- ----------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
34
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
(in thousands of dollars except share and per share amounts)
Fifty-two weeks ended February 5, 2000
<CAPTION>
Accum Deferred
Add'l other Treasury comp'n
Common paid-in Retained comp'h stock restr'td
stock capital earnings income at cost stock Total
------ ------- --------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Feb. 6, 1999 $7,092 $41,605 $242,409 $(3,363) $(171,184) $ (43) $ 116,516
------ ------- --------- -------- ---------- -------- ----------
Issuance of common stock
(61,350 shares) 25 1,199 - - - (15) 1,209
Comprehensive income
Net loss - - (3,232) - - -
Foreign currency
translation - - - 418 - -
Comprehensive income - - - - - - (2,814)
Dividends ($0.56 per
common share) - - (5,438) - - - (5,438)
Purchase of treasury
stock, at cost - - - - (28,242) - (28,242)
Amortization of deferred
compensation-
restricted stock - - - - - 26 26
------ ------- --------- -------- ---------- -------- ----------
Balance at Feb. 5, 2000 $7,117 $42,804 $233,739 $(2,945) $(199,426) $ (32) $ 81,257
====== ======= ========= ======== ========== ======== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
35
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Fifty-two weeks ended February 5, 2000 and February 6, 1999 and
fifty-three weeks ended February 7, 1998
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows provided by
operating activities $ 30,304 $ 38,014 $ 41,157
--------- --------- ---------
Cash flows used in financing
activities:
Proceeds from issuance of
long-term debt - - 60,646
Repayment of long-term
obligations - - (56,273)
Issuance of common stock to
employee stock plans 1,224 4,084 4,434
Cash dividends (5,438) (5,567) (6,586)
Purchase of treasury stock (28,242) (5,395) (47,653)
--------- --------- ---------
Cash flows used in
financing activities (32,456) (6,878) (45,432)
--------- --------- ---------
Cash flows provided by (used
in) investing activities:
Additions to property and
equipment (24,549) (14,072) (16,153)
Proceeds from note receivable - 43,900 -
Noncompete agreement - - 10,000
Advance payment from venture - - 4,000
--------- --------- ---------
Cash flows provided by
(used in) investing
activities (24,549) 29,828 (2,153)
--------- --------- ---------
Effect of exchange rate changes
on cash and cash equivalents 247 (256) (203)
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents (26,454) 60,708 (6,631)
Cash and cash equivalents at
beginning of year 76,000 15,292 21,923
--------- --------- ---------
Cash and cash equivalents at
end of year $ 49,546 $ 76,000 $ 15,292
========= ========= =========
Supplemental cash flow
information:
Interest paid $ 4,476 $ 4,481 $ 5,024
========= ========= =========
Income taxes paid $ 7,342 $ 12,350 $ 8,790
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
36
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars) Fifty-two weeks ended February 5, 2000
and February 6, 1999 and fifty-three weeks ended February 7, 1998
RECONCILIATION OF NET EARNINGS TO CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net earnings from continuing
operations $ 3,197 $21,276 $13,286
Adjustments for items not
requiring cash:
Depreciation and amortization 26,727 24,952 25,531
Deferred income taxes (11,468) 6,129 (4,000)
Deferred revenue 3,437 386 -
Interest in joint venture - - 3,304
Gain on sale of interest
in Photofinishing segment - - 4,189
Amortization of noncompete
agreement (3,228) (5,000) (1,772)
Amortization of discount on
note receivable - (2,815) (1,051)
Other 725 (900) (3,932)
Decrease (increase) in current
assets:
Receivables and inventories (116) (498) 1,848
Prepaid expenses and other
current assets (878) 77 848
Increase (decrease) in current
liabilities:
Accounts payable, accrued
expenses and other liabilities 7,008 (3,397) (631)
Income taxes 5,744 (6,309) 3,866
-------- -------- --------
Cash flows from continuing
operations 31,148 33,901 41,486
Cash flows from discontinued
operations (844) 4,113 (329)
-------- -------- --------
Cash flows provided by operating
activities $30,304 $38,014 $41,157
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF 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 partner-
ships, in developing and marketing consumer services and related
products through a network of centrally-managed, small retail
locations. The Company operates professional portrait studios
under the name "Sears Portrait Studios" throughout the United
States, Canada and Puerto Rico. 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 trans-
lated 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 AND CASH EQUIVALENTS
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 maturities
of three months or less at date of acquisition. These highly
liquid investments consist of master notes, commercial paper,
treasury bills, bankers acceptances, term deposits, government
agency notes, repurchase agreements, money market funds, auction
rate securities and government money market funds. Investment
interest income for 1999, 1998 and 1997 was $3.1 million, $894,000
and $1.2 million, respectively.
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.
38
<PAGE>
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>
INTANGIBLE ASSETS
Intangible assets acquired through acquisitions were
accounted for by the purchase method of accounting and include the
excess of cost over fair-value of net assets acquired. This
excess of cost over fair-value of net assets acquired is being
amortized on a straight-line basis over periods ranging from five
to thirty 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to
conform with the 1999 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.
39
<PAGE>
STOCK-BASED COMPENSATION PLANS
The Company records compensation expense for its stock-
based employee compensation plans in accordance with the
intrinsic-value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees."
Intrinsic value is the amount by which the market price of the
underlying stock exceeds the exercise price of the stock option or
award on the measurement date, generally the date of grant. No
compensation expense is recognized for the Company's stock option
plan.
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. Smile
Savers Plan(R) revenue is recognized partially at the time of the
initial photographic session when it is received, and the
remainder is recognized over the life of the customer's program.
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.
COMPREHENSIVE INCOME
In 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement requires the separate
reporting of components of comprehensive income, as defined. As
a result, the Company reports foregin currency translation
adjustments required under SFAS No. 52 "Foreign Currency
Translations" as a component of comprehensive income within
stockholders' equity. Prior year amounts have been reclassified
to conform to the 1998 presentation.
EARNINGS PER COMMON SHARE
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.
40
<PAGE>
2. DISCONTINUED OPERATIONS AND SUPPLEMENTAL CASH FLOW INFORMATION
On April 7, 2000, the Company announced it is in the
process of completing the negotiation of a definitive agreement to
sell its Wall Decor segment, a business operated by the Company
since 1993 under the name of Prints Plus, Inc. (Prints Plus). As
a result of the decision to exit this business, in fiscal 1999, a
loss of $10.1 million before taxes was recorded to recognize
anticipated losses and related expenses in connection with the
sale. The Company has classified the Wall Decor segment as a
discontinued operation and has reclassified the prior years'
financial statements to reflect this change.
Net sales of the discontinued operation for 1999, 1998
and 1997 were $63.7 million, $64.0 million and $63.0 million,
respectively.
The components of the net assets of discontinued
operations are:
<TABLE>
<CAPTION>
Feb. 5, 2000
------------
<S> <C>
Current assets $ 13,003
Property and equipment 15,731
Liabilities 5,557
---------
Net assets from
discontinued operations $ 23,177
=========
</TABLE>
41
<PAGE>
<TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION FROM DISCONTINUED OPERATIONS
(in thousands of dollars)
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Earnings (loss) from discontinued
operations, net of income tax
expense (benefit) of $86, $360
and ($369), respectively $ 160 $ 668 $ (573)
Net loss on disposal, net of
tax benefit of $3,548 (6,589) - -
Adjustments for items not
requiring cash:
Depreciation and amortization 4,869 4,798 4,447
Other 63 30 (27)
Decrease (increase) in current
assets:
Cash and cash equivalents (1,661) - -
Receivables and inventories (958) 762 1,101
Prepaid expenses and other
current assets (212) (131) 117
Assets in excess of consideration
received 7,911 - -
Estimated net operating loss and
reserve for costs associated
with sale of Prints Plus 2,226 - -
Increase (decrease) in current
liabilities:
Accounts payable, accrued
expenses and other liabilities (514) (1,095) 202
Deferred tax benefit (3,548) - -
Capital expenditures (2,591) (919) (5,596)
-------- -------- --------
Cash flows from discontinued
operations $ (844) $ 4,113 $ (329)
======== ======== ========
</TABLE>
42
<PAGE>
3. JOINT VENTURE
In October 1996, the Company announced it had entered
into a photofinishing joint venture with Eastman Kodak Company
("Kodak") whereby Kodak purchased new shares of a former
subsidiary, Fox Photo, Inc. ("Fox"), constituting 51% of the
outstanding common stock of Fox for a cash purchase price of $56.1
million. In October 1997, the Company further announced the
termination of the photofinishing joint venture. Pursuant to the
termination, Kodak purchased the remaining 49% of Fox that it did
not already own for a purchase price of $53.9 million that was
paid as follows: $10.0 million in cash in consideration of the
Company's agreement not to compete with Fox for two years (the
"Noncompete Agreement") and $43.9 million in the form of a note
that matured and was paid on January 4, 1999 (the "Promissory
Note").
Due to the non-interest bearing nature of the Promissory
Note, a discount of $3.9 million was established and was amortized
into income until the maturity of the Promissory Note. During
1998 and 1997, $2.8 million and $1.1 million, respectively, in
amortization related to the Promissory Note was recognized.
The Noncompete Agreement with Kodak resulted in recording
$3.2 million, $5.0 million and $1.8 million in 1999, 1998 and
1997, respectively, as a component of other income.
4. PROPERTY AND EQUIPMENT
<TABLE>
PROPERTY AND EQUIPMENT (in thousands of dollars)
<CAPTION>
Feb. 5, 2000 Feb. 6, 1999
<S> <C> <C>
Land and land improvements $ 2,803 $ 2,803
Building improvements 26,733 26,595
Leasehold improvements 13,297 29,558
Furniture and fixtures 66,936 76,085
Machinery and equipment 116,388 119,569
-------- --------
226,157 254,610
Less accumulated depreciation 141,234 143,462
-------- --------
Net property and equipment $ 84,923 $111,148
======== ========
</TABLE>
43
<PAGE>
<TABLE>
MINIMUM RENTAL PAYMENTS* (in thousands of dollars)
<CAPTION>
Fiscal Year
<S> <C>
2000 $ 2,367
2001 1,349
2002 663
2003 203
2004 27
-------
$ 4,609
=======
<FN>
* Under operating leases with initial terms in excess of one
year at February 5, 2000.
</FN>
</TABLE>
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 2004. The leases generally provide for the lessee to pay
maintenance, insurance, taxes and certain other operating costs of
the leased property. In addition to the minimum rental
commitments, certain of these operating leases provide for
contingent rentals based on a percentage of revenues in excess of
specified amounts.
Rental expense during 1999, 1998 and 1997 on all
operating leases was $4.9 million, $4.6 million and $5.3 million,
respectively.
5. CREDIT AGREEMENTS AND OUTSTANDING DEBT
The Company has a $60.0 million Senior Note Agreement
(the "Note Agreement") privately placed with two major insurance
companies. The 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 in 2001. 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.
The Company also has a $40.0 million revolving credit
agreement (the "Revolving Agreement") with two domestic banks.
The Revolving Agreement, which will expire on June 16, 2000, has
a variable interest rate charged at either LIBOR or federal funds,
44
<PAGE>
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 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 Note Agreement. There were no
borrowings outstanding at February 5, 2000 or February 6, 1999
under the Revolving Agreement.
As of February 5, 2000, the Company had outstanding
letters of credit for the principal amount of $3.5 million.
<TABLE>
DEBT OBLIGATIONS OUTSTANDING (in thousands of dollars)
<CAPTION>
Feb. 5, 2000 Feb. 6, 1999
<S> <C> <C>
Senior notes, net of unamortized
issuance costs $ 59,630 $ 59,545
Notes payable 7 14
-------- --------
$ 59,637 $ 59,559
======== ========
</TABLE>
<TABLE>
AGGREGATE LONG-TERM DEBT MATURITIES AS OF FEBRUARY 5, 2000
(in thousands of dollars)
<CAPTION>
Fiscal Year
<S> <C>
2001 $ 8,580
2002 8,580
2003 8,580
2004 8,580
2005 8,580
Thereafter 17,107
---------
60,007
Unamortized issuance costs (370)
---------
$ 59,637
=========
</TABLE>
45
<PAGE>
6. ADVERTISING
The Company expenses costs involved in 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
1999 and 1998 was $1.4 million and $700,000, respectively.
Advertising expense for 1999, 1998 and 1997 was $42.0 million,
$43.6 million and $41.9 million, respectively.
7. INCOME TAX
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 5, 2000, 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
$11.7 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 $584,000 may be payable if such earnings were
distributed.
<TABLE>
EARNINGS BEFORE INCOME TAXES BY U.S. AND CANADIAN SOURCES
(in thousands of dollars)
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
U.S. $ (2,723) $ 33,929 $ 20,720
Canada (2,250) (170) 177
--------- --------- ---------
$ (4,973) $ 33,759 $ 20,897
========= ========= =========
</TABLE>
46
<PAGE>
<TABLE>
COMPONENTS OF INCOME TAXES (in thousands of dollars)
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $ 8,096 $ 5,202 $10,926
State and local 1,262 831 1,424
Canada 369 (347) (166)
-------- -------- --------
9,727 5,686 12,184
Deferred (11,468) 6,129 (4,000)
-------- -------- --------
$(1,741) $11,815 $ 8,184
======== ======== ========
</TABLE>
<TABLE>
RECONCILIATION BETWEEN INCOME TAXES (in thousands of dollars)
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Taxes at U.S. federal
corporate statutory rate $(1,741) $11,815 $ 7,314
State and local income
taxes, net of federal tax
benefit 467 699 1,043
Stock options (217) (606) (519)
Other (250) (93) 346
-------- -------- --------
$(1,741) $11,815 $ 8,184
======== ======== ========
</TABLE>
47
<PAGE>
<TABLE>
SOURCES OF TAX EFFECTS
(in thousands of dollars)
<CAPTION>
February 5, February 6,
2000 1999
<S> <C> <C>
Deferred tax assets:
Deferred compensation and other
employee benefits $ 1,470 $ 1,442
Expense accruals 2,820 933
Allowance for doubtful accounts 89 177
Reserve for discontinued operations 4,044 376
Noncompete amortization - 1,435
Net operating loss carryforward 1,240 -
Deferred revenue 3,510 339
-------- --------
Total deferred tax assets 13,173 4,702
-------- --------
Deferred tax liabilities:
Property and equipment (7,644) (8,491)
Revenue recognition (1,733) (2,990)
Employee pension plan (611) (1,163)
Other (87) (424)
-------- --------
Total deferred tax liabilities (10,075) (13,068)
-------- --------
Net deferred tax liabilities $ 3,098 $(8,366)
======== ========
Current deferred income taxes $ 4,433 $ 32
======== ========
Long-term deferred income taxes $(1,335) $(8,398)
======== ========
</TABLE>
The Company's net operating loss carryforward totals $2.3
million, which will expire in 2007.
48
<PAGE>
8. 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 later of the hire date or
January 1, 1995 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 marketable
equity securities fund, guaranteed interest contracts, cash
equivalents, immediate participation guarantee contracts and
government bonds.
The following provides a reconciliation of benefit
obligations, plan assets, and funded status of the plan.
<TABLE>
NET PERIODIC PENSION BENEFIT COSTS (in thousands of dollars)
<CAPTION>
Pension Benefits
-------------------------
1999 1998 1997
<S> <C> <C> <C>
Service cost $ 1,207 $ 1,112 $ 729
Interest cost 1,896 1,809 1,459
Expected return on plan assets (2,513) (2,301) (4,109)
Amortization of transition obligation 3 3 3
Amortization of prior service cost 307 400 143
Amortization of net (gain) or loss - - 2,350
-------- -------- --------
Net periodic pension expense $ 900 $ 1,023 $ 575
======== ======== ========
</TABLE>
<TABLE>
ASSUMPTIONS ON FUNDED STATUS
<CAPTION>
December December December
31, 1999 31, 1998 31, 1997
<S> <C> <C> <C>
Discount rate (weighted average) 7.5% 7.0% 7.0%
Expected return on plan assets 9.0% 9.0% 8.0%
Rate of compensation increase 4.75% 4.5% 4.5%
</TABLE>
49
<PAGE>
<TABLE>
RECONCILIATION OF BENEFIT OBLIGATIONS, PLAN ASSETS, AND FUNDED
STATUS (in thousands of dollars)
<CAPTION>
1999 1998
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 27,848 $ 23,403
--------- ---------
Service cost 1,208 1,112
Interest cost 1,896 1,809
Actuarial (gains) or losses (2,050) 263
Benefits paid (2,502) (1,560)
Plan amendments - 2,821
--------- ---------
Benefit obligation at end of year $ 26,400 $ 27,848
========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
of year $ 28,723 $ 25,815
--------- ---------
Actual return on plan assets 4,388 3,768
Employer contributions - 700
Benefits paid (2,502) (1,560)
--------- ---------
Fair value of assets at end of year $ 30,609 $ 28,723
========= =========
CHANGE IN FUNDED STATUS OF THE PLAN
Funded status of the plan $ 4,209 $ 875
--------- ---------
Unrecognized transition obligation 6 9
Unrecognized prior service costs 2,458 2,765
Unrecognized net (gain) or loss (4,989) (1,065)
--------- ---------
Prepaid benefit cost* $ 1,684 $ 2,584
========= =========
<FN>
* Prepaid benefit costs are included as a component of prepaid
expenses and other current assets.
</FN>
</TABLE>
9. SUPPLEMENTARY RETIREMENT BENEFIT PLAN
The Company sponsors a non-contributory defined benefit
plan providing supplementary retirement benefits for certain key
executives which was enhanced in 1997 and became effective
February 8, 1998. The cost of providing these benefits will be
accrued over the remaining expected service lives of the active
plan participants. For 1999, expenses amounted to $1.0 million
50
<PAGE>
consisted of $600,000 in interest costs, $345,000 in amortization
of unrecognized transition obligations and $98,000 in service
costs.
<TABLE>
PLAN STATUS (in thousands of dollars)
<CAPTION>
February 5, February 6,
2000 1999
<S> <C> <C>
Present value of accumulated post-
retirement benefit obligations $ 8,588 $ 8,571
Unrecognized transition obligation (2,338) (2,683)
---------- -----------
Accrued post-retirement benefit
obligation $ 6,250 $ 5,888
========== ===========
</TABLE>
The discount rate used in determining the accumulative
post-retirement benefit obligation was 7.5% for February 5,
2000 and 7% for February 6, 1999.
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 $6.8
million and $5.4 million at February 5, 2000 and February 6, 1999,
respectively. 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.
10. EMPLOYEE STOCK PLANS
Expenses recognized for 1999, 1998 and 1997 with respect
to these plans were $0.7 million, $0.9 million and $1.7 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 1999,
585 restricted shares were issued and vest over a three-year
period.
Of the grants issued, no shares were forfeited in 1999,
1998 or 1997. As of February 5, 2000, 54,757 shares are reserved
for issuance under this plan. Expenses related to the restricted
stock plan are accrued every four weeks, based on the fair market
value of the Company's common stock on the grant date.
51
<PAGE>
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
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 has 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 27,720, 23,151 and 25,576 shares to
satisfy its obligations under the plan for 1999, 1998 and 1997,
respectively.
STOCK-BONUS PLAN
Under the Company's stock-bonus plan, shares of the
Company's common stock are reserved for issuance to key salaried
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 1999, 1998 and 1997, 2,195, 4,090 and
4,334 shares, respectively, were distributed under this plan. As
of February 5, 2000, 90,926 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.
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 1994 and 1993. A total of
1,000,000 shares has been authorized for issuance. As of February
5, 2000, 196,506 options at an exercise price of $15.50 for 1994
salary reduction and 184,220 options at an exercise price of
$18.38 for 1993 salary reduction have been awarded and remain
unexercised. For 1999, 1998 and 1997, this plan was not offered.
Options granted are exercisable after three years and expire at
the end of eight years.
52
<PAGE>
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% and not 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 1999, 1998 and 1997, 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 1999, 1998 and
1997, certain key executives elected to participate in this plan.
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. Under the plan, 137,450 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 873,296 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 5, 2000,
there were 338,883 shares reserved for issuance under this plan.
53
<PAGE>
<TABLE>
TOTAL OUTSTANDING OPTIONS -- YEAR-END 1999
<CAPTION>
Number of Per Share Weighted Weighted
Shares Option Price Life* Average Price
--------- ------------- -------- -------------
<S> <C> <C> <C> <C>
317,536 $13.88-$18.88 2.43 $16.51
328,210 $21.06-$27.13 5.40 $25.64
365,000 $30.00-$35.00 3.50 $32.50
---------
Total 1,010,746
=========
<FN>
* Weighted average remaining contractual life in years
</FN>
</TABLE>
<TABLE>
TOTAL EXERCISABLE OPTIONS -- YEAR-END 1999
<CAPTION>
Number of Per Share Weighted
Shares Option Price Price*
--------- ------------- --------
<S> <C> <C> <C>
354,633 $13.88-$27.13 $ 17.54
365,000 $30.00-$35.00 $ 32.50
---------
Total 719,633
=========
<FN>
* Weighted average exercise price in dollars
</FN>
</TABLE>
54
<PAGE>
<TABLE>
OPTIONS AWARDED UNDER THE STOCK OPTION PLAN - 1999
<CAPTION>
Number Weighted
of Average
Shares Price
--------- --------
<S> <C> <C>
Outstanding at beginning of year 973,109 $ 24.82
Granted 75,369 27.12
Cancelled (2,313) 25.94
Exercised (35,419) 17.39
--------- --------
At end of year:
Total outstanding 1,010,746 $ 25.25
========= ========
Total exercisable 719,633 $ 25.13
========= ========
</TABLE>
<TABLE>
OPTIONS AWARDED UNDER THE STOCK OPTION PLAN - 1998
<CAPTION>
Number Weighted
of Average
Shares Price
---------- --------
<S> <C> <C>
Outstanding at beginning of year 887,408 $ 24.40
Granted 252,138 25.27
Cancelled (57,500) 35.00
Exercised (108,937) 17.10
---------- --------
At end of year:
Total outstanding 973,109 $ 24.82
========== ========
Total exercisable 708,292 $ 24.77
========== ========
</TABLE>
55
<PAGE>
<TABLE>
OPTIONS AWARDED UNDER THE STOCK OPTION PLAN - 1997
<CAPTION>
Number Weighted
of Average
Shares Price
---------- --------
<S> <C> <C>
Outstanding at beginning of year 1,247,305 $ 23.56
Granted 9,961 18.77
Cancelled (188,043) 25.53
Exercised (181,815) 17.18
---------- --------
At end of year:
Total outstanding 887,408 $ 24.40
========== ========
Total exercisable 439,393 $ 32.29
========== ========
</TABLE>
The weighted-average fair value of options granted under
the stock-option plan for 1999, 1998 and 1997 is $21.41, $18.28
and $11.70, respectively, and used the Black-Scholes option-
pricing model with the following weighted average assumptions used
for the grants:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Expected life in years 5 4 4.3
Interest rate 6.0% 6.0% 6.0%
Volatility 43.0% 31.0% 27.0%
Dividend yield 2.1%-3.9% 2.2%-3.9% 2.6%-3.9%
</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
1999, 1998 and 1997 consistent with the provisions of SFAS No.
123, the Company's net earnings and earnings per common share
would have been:
56
<PAGE>
<TABLE>
EARNINGS AND EARNINGS PER SHARE
(in thousands of dollars except per share amounts)
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net earnings (loss):
as reported $(3,232) $21,944 $12,713
======== ======= =======
pro forma $(3,544) $21,765 $12,709
======== ======= =======
Diluted earnings (loss) per common
share:
as reported $ (0.32) $ 2.15 $ 1.07
======== ======= =======
pro forma $ (0.35) $ 2.13 $ 1.07
======== ======= =======
Basic earnings (loss) per common
share:
as reported $ (0.33) $ 2.21 $ 1.09
======== ======= =======
pro forma $ (0.37) $ 2.19 $ 1.09
======== ======= =======
</TABLE>
57
<PAGE>
11. INDUSTRY SEGMENT INFORMATION
The Company operates a professional portrait photography
business through fixed location studios. Substantially all of the
Company's Portrait Studio business operates under Sears, Roebuck
and Co. ("Sears") license agreements that expire on December 31,
2008. Except in connection with store closings, 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 agreements to materially reduce the scope of
the Company's business with Sears.
<TABLE>
GEOGRAPHIC FINANCIAL INFORMATION
(in thousands of dollars)
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
NET SALES*:
United States $297,206 $304,022 $281,344
Canada 21,929 21,525 22,322
-------- -------- --------
$319,135 $325,547 $303,666
======== ======== ========
LONG-LIVED ASSETS:
United States $ 90,615 $117,241 $129,211
Canada 4,007 3,781 5,144
-------- -------- --------
$ 94,622 $121,022 $134,355
======== ======== ========
<FN>
* Net sales are attributed to countries based on location.
</FN>
</TABLE>
58
<PAGE>
<TABLE>
SELECTED INDUSTRY SEGMENT INFORMATION
(in thousands of dollars)
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
NET SALES
Portrait Studio $319,135 $325,547 $303,666
========= ========= =========
INCOME FROM OPERATIONS
Portrait Studio operating
earnings $ 21,244 $ 44,276 $ 44,597
Corporate expenses (14,509) (15,918) (15,435)
--------- --------- ---------
$ 6,735 $ 28,358 $ 29,162
========= ========= =========
SEGMENT ASSETS
Portrait Studio $ 98,188 $ 99,868 $107,770
Wall Decor - 37,505 42,589
Corporate cash and cash
equivalents 49,546 74,552 13,360
Corporate other 28,352 22,768 65,042
Net assets of discontinued
operations* 23,177 - -
--------- --------- ---------
$199,263 $234,693 $228,761
========= ========= =========
DEPRECIATION AND AMORTIZATION
Portrait Studio $ 23,885 $ 21,923 $ 22,048
Corporate 2,842 3,029 3,483
--------- --------- ---------
$ 26,727 $ 24,952 $ 25,531
========= ========= =========
CAPITAL EXPENDITURES
Portrait Studio $ 23,130 $ 13,231 $ 13,939
Corporate 2,314 1,158 2,676
Disposals (895) (317) (462)
--------- --------- ---------
$ 24,549 $ 14,072 $ 16,153
========= ========= =========
<FN>
* See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, 2.
DISCONTINUED OPERATIONS AND SUPPLEMENTAL CASH FLOW INFORMATION"
for more information.
</FN>
</TABLE>
59
<PAGE>
12. STOCK REPURCHASE PLAN
Prior to 1999, the Company's Board of Directors had
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. On
December 13, 1999, the Company's Board of Directors increased
this authorization by 1,000,000 shares. Acquired shares are
held as treasury stock and will be available for general
corporate purposes. As of February 5, 2000, the Company had
purchased 4,781,696 shares of stock for $109.3 million at an
average stock price of $22.86.
On November 12, 1996, the Company announced the
completion of 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 51% of Fox's common stock to Eastman Kodak Company to
finance the tender offer.
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 and
other working capital and cash from operations to finance the
tender offer.
13. 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 non-
negotiated efforts, as defined in the Rights Plan, to gain control
of the Company. The rights issued expired on May 11, 1999, unless
redeemed earlier. (See Note 17, "SUBSEQUENT EVENTS," to the
consolidated financial statements.)
14. 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.
60
<PAGE>
CASH AND CASH EQUIVALENTS, RECEIVABLES, ACCOUNTS PAYABLE AND
ACCRUED EXPENSES
The carrying amounts approximate fair value at
February 5, 2000 and February 6, 1999 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 5, 2000, the carrying value and
estimated fair market value of the Company's debt was $59.6
million and $61.1 million, respectively. On February 6, 1999, the
carrying value and estimated fair market value of the Company's
debt was $59.6 million and $64.3 million, respectively.
15. CONTINGENCIES
The Company is a defendant in a lawsuit filed on October
12, 1999 in New York Supreme Court, County of New York,
concerning a terminated 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"). ASCP Affiliates
asserted that the Company 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 on the Company's financial position and, citing
those grounds, terminated the Merger Agreement. ASCP Affiliates
also asserted that they 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 an action seeking a
declaration that they were entitled to terminate and demanding
reimbursement from the Company for expenses incurred in
connection with the Merger Agreement, not to exceed $6.0
million.
The Company filed its answer and a counter claim to the
above described lawsuit on October 18, 1999 in New York against
ASCP Affiliates asserting they were in willful breach of their
obligations under the Merger Agreement. The Company further
asserted ASCP Affiliates willfully failed to use their
reasonable best efforts to complete the financing for the
transaction and that they reneged on their obligation to use
bridge financing available. The Company's counter claim seeks
damages for the willful breach of the Merger Agreement by ASCP
Affiliates and also asserts claims in an amount not to exceed
$80.0 million, together with attorneys fees and costs, from
American Securities Capital Partners L.P. under its guarantee of
61
<PAGE>
its affiliates' performance of obligations under the Merger
Agreement.
While acknowledging the uncertainties of litigation,
management believes that these matters will be resolved without
a material negative effect on the Company's consolidated
financial position or results of operations. Accordingly, the
Company has not recorded any amounts related to this litigation
in the accompanying consolidated financial statements.
The Company is also a defendant in certain lawsuits arising
in the ordinary course of business, none of which is expected to
have a material impact. 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.
62
<PAGE>
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended:
(in thousands of dollars except share
and per share amounts)
May 1, July 24, Nov. 13, Feb. 5,
1999 1999 1999 2000
(12 wks) (12 wks) (16 wks) (12 wks)
----------------------------------------
<S> <C> <C> <C> <C>
FISCAL YEAR 1999
Net sales $ 65,074 $ 58,482 $ 97,596 $ 97,983
Gross margin 56,567 50,265 85,001 87,365
Net earnings (loss) from
continuing operations 706 (321) (2,663) 5,475
Net earnings (loss) from
discontinued operations (632) (638) (680) (4,479)
Net earnings (loss) 74 (959) (3,343) 996
- ----------------------------------------------------------------
Net earnings (loss) per
share from continuing
operations-diluted $ 0.07 $ (0.03) $ (0.27) $ 0.60
Net earnings (loss) per
share from discontinued
operations-diluted (0.06) (0.06) (0.07) (0.49)
Net earnings (loss) per
share - diluted 0.01 (0.10) (0.34) 0.11
- ----------------------------------------------------------------
Net earnings (loss) per
share continuing
operations - basic $ 0.07 $ (0.03) $ (0.27) $ 0.61
Net earnings (loss) per
share from discontinued
operations - basic (0.06) (0.06) (0.07) (0.50)
Net earnings (loss) per
share - basic 0.01 (0.10) (0.34) 0.11
- ----------------------------------------------------------------
Weighted average number
of common and common
equivalent shares-
diluted (in thousands) 10,161 9,917 9,838 9,196
Weighted average number
of common and common
equivalent shares-
basic (in thousands) 9,899 9,917 9,838 8,968
- ----------------------------------------------------------------
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended:
(in thousands of dollars except share
and per share amounts)
May 2, July 25, Nov. 14, Feb. 6,
1998 1998 1998 1999
(12 wks) (12 wks) (16 wks) (12 wks)
----------------------------------------
<S> <C> <C> <C> <C>
FISCAL YEAR 1998
Net sales $ 60,145 $ 58,330 $106,171 $ 100,901
Gross margin 51,911 51,411 93,115 89,260
Net earnings (loss) from
continuing operations 53 2,086 6,484 12,653
Net earnings (loss) from
discontinued operations (559) (699) (433) 2,359
Net earnings (loss) (506) 1,387 6,051 15,012
- ----------------------------------------------------------------
Net earnings (loss) per
share from continuing
operations - diluted $ 0.01 $ 0.20 $ 0.64 $ 1.25
Net earnings (loss) per
share from discontinued
operations - diluted (0.06) (0.07) (0.04) 0.23
Net earnings (loss) per
share - diluted (0.05) 0.13 0.59 1.48
- ----------------------------------------------------------------
Net earnings (loss) per
share from continuing
operations - basic $ 0.01 $ 0.21 $ 0.65 $ 1.29
Net earnings (loss) per
share from discontinued
operations - basic (0.06) (0.07) (0.04) 0.24
Net earnings (loss) per
share - basic (0.05) 0.14 0.61 1.53
- ----------------------------------------------------------------
Weighted average number
of common and common
equivalent shares-
diluted (in thousands) 9,914 10,323 10,200 10,120
Weighted average number
of common and common
equivalent shares-
basic (in thousands) 9,914 10,015 9,961 9,841
- ----------------------------------------------------------------
</TABLE>
64
<PAGE>
17. SUBSEQUENT EVENT
Shareholders Rights Plan... On March 13, 2000, the
Board of Directors renewed its Shareholders Rights Plan ("Rights
Plan"). Under the Rights Plan, after the close of business on
March 23, 2000, each stockholder of CPI Corp. common stock,
received a dividend distribution of one right (a "Right") for
each share of Company common stock held. Each Right entitles
stockholders to buy one one-hundredth of a share of Series A
Participating Preferred Stock of the Company at an exercise
price of $96.00. Each preferred share fraction is designed to
be equivalent in voting and dividend rights to one share of
common stock.
The Rights will be exercisable and will trade
separately from the shares of common stock only if a person or
group, with certain exceptions, acquires beneficial ownership of
20% or more of the shares of common stock or commences a tender
or exchange offer that would result in such person or group
beneficially owning 20% or more of the shares of common stock.
Prior to this time, the Rights will not trade separately from
the common stock. The Company may redeem the Rights at $.001
per Right at any time prior to the occurrence of one of these
events. All Rights expire on March 13, 2010.
Each Right will entitle its holder to purchase, at the
Right's then-current exercise price, common stock of CPI Corp.
having a value of twice the Right's exercise price. This
amounts to the right to buy common stock of the Company at half
price. Rights owned by the party triggering the exercise of
Rights will not be exercisable.
In addition, if, after any person has become a 20%-or-
more stockholder, the Company is involved in a merger or other
business combination transaction with another person in which
its shares of common stock are exchanged or converted, or sells
50% or more of its assets or earning power to another person,
each Right will entitle its holder to purchase, at the Right's
then-current exercise price, shares of common stock of such
other person having a value of twice the Right's exercise price.
Stock Repurchase Plan... On April 7, 2000, the
Company's Board of Directors authorized the purchase of up to
500,000 additional shares of its outstanding common stock
through purchases at management's direction from time to time at
acceptable market prices. Acquired shares will be held as
treasury stock and will be available for general corporate
purposes.
65
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
66
<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 2000 Proxy Statement, to be dated within 120
days of the end of the Registrant's fiscal year 1999, is
incorporated herein by reference and will be delivered to
stockholders in connection with the Annual Shareholders
meeting to be held on June 1, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item will be contained in
the Registrant's 2000 Proxy Statement, to be dated within 120
days of the end of the Registrant's fiscal year 1999, is
incorporated herein by reference and will be delivered to
stockholders in connection with the Annual Shareholders
meeting to be held on June 1, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required under this Item will be contained in
the Registrant's 2000 Proxy Statement, to be dated within 120
days of the end of the Registrant's fiscal year 1999, is
incorporated herein by reference and will be delivered to
stockholders in connection with the Annual Shareholders
meeting to be held on June 1, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
67
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents Filed as Part of Form 10-K
<TABLE>
<CAPTION>
PAGES
-----
<C> <C>
1. FINANCIAL STATEMENTS
- Independent Auditors' Report 28
- Consolidated Balance Sheets as of
February 5, 2000 and February 6, 1999 29-30
- Consolidated Statements of Operations for
the fiscal years ended February 5, 2000,
February 6, 1999 and February 7, 1998 31-32
- Consolidated Statements of Changes in
Stockholders' Equity for the fiscal years
ended February 5, 2000, February 6, 1999
and February 7, 1998 33-35
- Consolidated Statements of Cash Flows for
the fiscal years ended February 5, 2000,
February 6, 1999 and February 7, 1998 36-37
- Notes to Consolidated Financial Statements 38-65
2. FINANCIAL STATEMENT SCHEDULES
- Schedule II (Valuation and Qualifying Accounts) 75
</TABLE>
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.
68
<PAGE>
3. Exhibits
The exhibits listed below, with their corresponding filing
date and registration or Commission file numbers where
applicable, are incorporated by reference as exhibits required
by Item 601 of Regulation S-K:
<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
(3.4) Amendment to Bylaws Form 8-K dated 8/03/95 0-11227
dated 8/3/95
(3.5) Amendment to Bylaws Annual Report 5/02/97 1-10204
on Form 10-K
dated 4/3/97
(3.6) Amendment to Bylaws Annual Report 5/04/94 1-10204
on Form 10-K
dated 4/6/94
(4.1) Articles of Annual Report 4/30/90 1-10204
Incorporation and on Form 10-K
Bylaws dated 4/27/90
(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
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- -------------------------- ------------- ------- -----------
<S> <C> <C> <C>
(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
(10.1) Employment Contract Annual Report 5/6/98 1-10204
Alyn V. Essman * on Form 10-K,
dated 4/9/98
(10.2) Employment Contract Annual Report 5/6/98 1-10204
Russell H. Isaak * on Form 10-K
dated 4/9/98
(10.3) Employment Contract Annual Report 5/6/98 1-10204
Patrick J. Morris * on Form 10-K
dated 4/9/98
(10.4) Employment Contract Annual Report 5/6/98 1-10204
Barry C. Arthur * on Form 10-K
dated 4/9/98
(10.5) Employment Contract Annual Report 5/6/98 1-10204
Fran Scheper * on Form 10-K
dated 4/9/98
(10.6) CPI Corp. 1981 Stock Annual Report 5/5/93 1-10204
Bonus Plan (As on Form 10-K,
Amended and Restated dated 4/30/93
on 2/3/91)
(10.7) Deferred Compensa- Annual Report 5/1/92 1-10204
tion and Stock on Form 10-K,
Appreciation 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 Compensa- Annual Report 5/1/92 1-10204
tion and Retirement on Form 10-K,
Plan for Non- dated 4/24/92
Management Directors
<FN> * Employment contract is automatically renewed and extended
for one year unless terminated by the Board of Directors
or the employee.
</FN>
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- -------------------------- ------------- -------- ------------
<S> <C> <C> <C>
(10.10) CPI Corp. Stock Form S-8 7/28/92 33-50082
Option 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
(10.13) CPI Voluntary Stock Form D 3/31/93 -
Option Plan
(10.24) $40 Million Form 10-Q 12/8/97 1-10204
Revolving Credit
Agreement
(10.25) $17 Million Form 10-Q 8/29/97 1-10204
Revolving Credit
Note with Mercantile
Bank National
Association
(10.26) $13 Million Form 10-Q 8/29/97 1-10204
Revolving Credit
Note with Harris
Trust and Savings
(10.27) $10 Million Form 10-Q 8/29/97 1-10204
Revolving Credit
Note with The
Sumitomo Bank,Limited
(10.28) License Agreement Annual Report 5/5/99 1-10204
Sears,Roebuck & Co. on Form 10-K
dated 4/8/99
(10.29) License Agreement Annual Report 5/5/99 1-10204
Sears,Roebuck & Co. on Form 10-K
(Off Mall) dated 4/8/99
(10.30) License Agreement Annual Report 5/5/99 1-10204
Sears,Roebuck De on Form 10-K
Puerto Rico, Inc. dated 4/8/99
(10.31) License Agreement Annual Report 5/5/99 1-10204
Sears Canada, Inc. on Form 10-K
dated 4/8/99
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- -------------------------- ------------- -------- ------------
<S> <C> <C> <C>
(10.32) CPI Corp. 1998 Annual Report 5/5/99 1-10204
Employee Profit on Form 10-K
Sharing Plan & dated 4/8/99
Trust
(10.33) First Amendment Annual Report 5/5/99 1-10204
to CPI Corp. on Form 10-K
Employee Profit dated 4/8/99
Sharing Plan &
Trust
(10.34) Second Amendment Form 10-Q 12/18/99 1-10204
to License Agreement 12/3/99
Sears, Roebuck & Co.
(10.35) Second Amendment Form 10-Q 12/18/99 1-10204
to License Agreement 12/3/99
Sears, Roebuck & Co.
(Off Mall)
</TABLE>
The following exhibits are included in this 10-K Annual Report:
<TABLE>
<S> <C>
(10.36) Material Contract: Employment Contract for
Jane E. Nelson
(11.1) Computation of Earnings Per Share - Diluted
(11.2) Computation of Earnings Per Share - Basic
(13.0) 1999 Annual Report to Shareholders
(21.0) Subsidiaries of the Registrant
(23.0) Independent Auditor's Consent
(27.0) Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
- On December 3, 1999, CPI Corp. reported the issuance of
a press release on December 2, 1999 announcing
expectations of a disappointing third quarter.
- On December 15, 1999, CPI Corp. reported the issuance of
a press release on December 13, 1999 announcing third
quarter results.
72
<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 6, 2000
- ----------------------- Chief Executive Officer
(Alyn V. Essman) and Director (Principal
Executive Officer)
/s/ Milford Bohm Director April 6, 2000
- -----------------------
(Milford Bohm)
/s/ Lee Liberman Director April 6, 2000
- -----------------------
(Lee Liberman)
/s/ Nicholas L. Reding Director April 6, 2000
- -----------------------
(Nicholas L. Reding)
/s/ Martin Sneider Director April 6, 2000
- -----------------------
(Martin Sneider)
</TABLE>
73
<PAGE>
SIGNATURES OF DIRECTORS AND PRINCIPAL OFFICERS (Continued)
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------- ------------------------ -------------
<S> <C> <C>
/s/ Robert L. Virgil Director April 6, 2000
- -----------------------
(Robert L. Virgil)
/s/ Russell Isaak President and Director April 6, 2000
- -----------------------
(Russell Isaak)
/s/ Patrick J. Morris Senior Executive Vice April 6, 2000
- ----------------------- President and Director
(Patrick J. Morris)
/s/ Barry C. Arthur Vice President and April 6, 2000
- ----------------------- Treasurer (Principal
(Barry C. Arthur) Financial and
Accounting Officer)
</TABLE>
74
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
CPI CORP. CONSOLIDATED ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES
FISCAL YEARS ENDED FEBRUARY 5, 2000, FEBRUARY 6, 1999
AND FEBRUARY 7, 1998 (in thousands of dollars)
<TABLE>
<CAPTION>
FEBRUARY 5, FEBRUARY 6, FEBRUARY 7,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning
of year $ 302 $ 291 $ 382
=========== =========== ===========
Balance at end
of year $ 287 $ 302 $ 291
=========== =========== ===========
</TABLE>
The majority of receivable amounts at year ending February 5,
2000, February 6, 1999 and February 7, 1998, respectively are
due from portrait studio customers for amounts collected or to
be collected, for which the Company assumes all credit risks.
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.
75
EXHIBIT (10.36)
Employment Contract - Jane E. Nelson
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated February 6, 2000, between CONSUMER
PROGRAMS INCORPORATED, a Missouri corporation (the
"Corporation"), and Jane E. Nelson (the "Executive").
WHEREAS, the Corporation currently employs the Executive in
the capacity of Secretary and General Counsel 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.
<PAGE>
(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
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
<PAGE>
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 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
<PAGE>
number of Years of Service Executive has completed, determined
as follows:
<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 Secretary and General Counsel 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
<PAGE>
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.
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
<PAGE>
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 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
<PAGE>
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 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 later of (i) the
month in which Executive would have reached age sixty-five (65)
or (ii) 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
<PAGE>
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 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
<PAGE>
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.
(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.
<PAGE>
(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 employment terminates by reason of the Corporation's
termination of this Agreement pursuant to subsection 6(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
<PAGE>
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.
(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
<PAGE>
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
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.
<PAGE>
(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 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
<PAGE>
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 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
<PAGE>
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(a)(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
<PAGE>
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 Affiliates.
<PAGE>
(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 for any
cause whatsoever shall be deemed to have been made or conceived
<PAGE>
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 June 1, 1990. 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:
Jane E. Nelson
1101 Webster Crossing Court
St. Louis, MO 63119
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
--------------------------------
Russell H. Isaak, President
BY: /S/ Jane E. Nelson
--------------------------------
Jane E. Nelson
EXHIBIT (11.1)
<TABLE>
CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE--DILUTED
FISCAL YEARS ENDED FEBRUARY 5, 2000, FEBRUARY 6, 1999
AND FEBRUARY 7, 1998 (in thousands except per share amounts)
<CAPTION>
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Common shares outstanding
at beginning of
fiscal period 17,730 17,499 17,239
Shares issued during
the period-weighted average 50 144 166
Shares issuable under
employee stock plans -
weighted average 39 39 38
Dilutive effect of exercise
of certain stock options 302 243 186
Less: Treasury stock -
weighted average (8,111) (7,708) (5,758)
--------- --------- ---------
Weighted average number
of common and common
equivalent shares 10,010 10,217 11,871
========= ========= =========
Net earnings (loss)
applicable to common shares:
From continuing
operations $ 3,197 $ 21,276 $ 13,286
From discontinued
operations (6,429) 668 (573)
--------- --------- ---------
Net earnings (loss) $ (3,232) $ 21,944 $ 12,713
--------- --------- ---------
Earnings (loss) per common
share:
From continuing
operations $ 0.32 $ 2.08 $ 1.12
From discontinued
operations (0.64) 0.07 (0.05)
--------- --------- ---------
Net earnings (loss) $ (0.32) $ 2.15 $ 1.07
========= ========= =========
</TABLE>
<PAGE>
Options to purchase 182,500 and 182,500 shares of common stock
at $30.00 and $35.00 per share, respectively, were outstanding
during 1999 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 1998.
EXHIBIT (11.2)
<TABLE>
CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE--BASIC
FISCAL YEARS ENDED FEBRUARY 5, 2000, FEBRUARY 6, 1999
AND FEBRUARY 5, 1998 (in thousands except per share amounts)
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Common shares outstanding
at beginning of
fiscal period 17,730 17,499 17,239
Shares issued during
the period -
weighted average 50 144 166
Less: Treasury stock -
weighted average (8,111) (7,708) (5,758)
--------- --------- ---------
Weighted average number
of common and common
equivalent shares 9,669 9,935 11,647
========= ========= =========
Net earnings (loss)
applicable to common shares:
From continuing
operations $ 3,197 $ 21,276 $ 13,286
From discontinued
operations (6,429) 668 (573)
--------- --------- ---------
Net earnings (loss) $ (3,232) $ 21,944 $ 12,713
--------- --------- ---------
Earnings (loss) per common
share:
From continuing
operations $ 0.33 $ 2.14 $ 1.14
From discontinued
operations (0.66) 0.07 (0.05)
--------- --------- ---------
Net earnings (loss) $ (0.33) $ 2.21 $ 1.09
========= ========= =========
</TABLE>
EXHIBIT (13.0)
This Form 10-K Annual Report without exhibits
was distributed to shareholders with the
following Report to Our Shareholders and
listing of Directors of CPI Corp., Officers
of CPI Corp. and Investor Information.
<PAGE>
CPI CORP.
A REPORT TO OUR SHAREHOLDERS:
Though we are not pleased with the results of 1999, we view
them as a bump in the road on a long journey to transform our
company. As can be seen from the numbers, several loosely
related events combined to create the growth interruption that
we believe will disappear into the horizon as we look forward to
a strong year 2000.
To recite some of the events affecting earnings in 1999:
We installed, chainwide, the first phase of our
internally developed Store Automation System. The mechanics
of installation and the training of 5,000 people were a
massive effort causing a loss of focus that, although
impossible to quantify, impeded revenue growth.
Our studio employment expenses grew approximately $10
million over 1998 as a result of four major efforts:
-- TRAINING COSTS ASSOCIATED WITH THE STORE AUTOMATION
SYSTEM (SAS)
This effort started with the preparation of over 130
of our key field managers to be SAS trainers. They
then trained studio employees to use the system, in
many cases outside normal studio opening hours.
-- TRAINING COSTS ASSOCIATED WITH THE INDEPENDENT
STUDY PROGRAMS
This major new learning program consists of a three
-phase, 21-lesson program, which provides an
opportunity for each of our 4,000 core employees to
master all aspects of portrait photography, customer
relationships and sales. This program, which
significantly increases the skill level and confidence
of our employees, should improve effectiveness in
2000, but its effect on 1999 was increased cost and
diversion of attention.
-- HIRING BETTER PEOPLE AND UPGRADING THE ONES WE HAVE
We decided early in 1999 to upgrade the pay structure
for studio employees in order to attract and keep the
caliber of employee that can assimilate and master the
skills required to be an effective and understanding
photographer. This kind of employee will assure
maximum customer satisfaction.
-- EARLIER SEASONAL RECRUITING
We experienced better than expected pre-season hiring.
Because of the tight labor market in 1999, we wanted
to assure the availability of well-trained, highly
motivated employees for the seasonal peak so we
started a broad-based, aggressive recruiting program
<PAGE>
in July and August to hire 4,000 seasonal employees.
Our efforts worked--perhaps too well. We had most
seasonal employees hired by early September and had to
carry the extra payroll for eight weeks.
We introduced a major new customer loyalty program
called the Smile Savers Plan(R) in 1999. This program
allowed us to maintain our market position and should
contribute substantially to customer loyalty if it tracks
test results. This loyalty program should also add to
sitting and revenue growth in the future. However, the
nature of the Smile Savers Plan(R) program is that the
benefits are spread over several years, while the costs are
expensed immediately. At the end of 1999, approximately $12
million of gross revenues remained to be amortized over the
next 1.6 years--the remaining weighted average life of the
enrollment. Though these deferred revenues will be replaced
by deferrals of new enrollment fees through 2000, the net
effect of amortization will offset the new deferrals
relieving year 2000 of the substantial negative effect that
we experienced last year.
Beyond the operating issues, the aborted transaction
with American Securities cost about $3.5 million, the
severance cost of a modest restructuring at the end of the
year cost $1.0 million and the abandonment of old software
and computer hardware which were replaced by the Y2K con-
versions, the redirection of our archiving initiatives and
our SAS installations required write-offs of $2.6 million.
Finally, in our continuing effort to concentrate closely on
the core photography business, we are in the process of selling
the Wall Decor business. As a result of our decision to exit
this business, in fiscal 1999, we provided $10.1 million before
taxes to recognize anticipated losses on the sale. The Wall
Decor segment has been treated as a discontinued operation in
fiscal 1999.
With most of these activities behind us and a clearer
focus, we can look forward to a much friendlier cost
relationship going forward. Having no significant software or
training introductions planned for 2000, we expect that the
employment increases will abate. In fact, despite our increased
pay structure, we plan an actual reduction in field employment
expenses this year, and the administrative restructuring is
expected to yield immediate cost reductions. Finally, we expect
the loyalty programs to pay dividends in terms of repeat visits,
allowing us to reduce advertising expenditures. Now, with the
ability to turn our attention fully to efficient operations
instead of new program installations, we should accomplish
further logistical and infrastructure savings. The sum total of
<PAGE>
these budgeted improvements amounts to more than $10 million.
We feel confident that the investment and development work
of the last seven years has positioned our company to grow in
new directions and new markets heretofore unexplored by CPI. Our
experimental digital studios have shown impressive progress this
year. Though they are, as yet, unprofitable we see revenue
levels that are sufficient to justify expansion as soon as some
of the technology hurdles are overcome. Though 2000 will not be
the year for full development, we will continue to work on these
programs in prototypical form to assure successful
implementation as soon as the supporting technology is available
from manufacturers.
After the aborted transaction, we also resumed our efforts
to re-deploy surplus capital through the stock purchase program.
We completed the original authorization and another subsequent
authorization for a total of 1.9 million shares repurchased
through March 1, 2000. The Board of Directors has also
authorized the repurchase of an additional 500,000 as of April
6, 2000. The reduction in shares outstanding relieves us from
the obligation to manage idle cash and provides additional
leverage in earnings per share for future years. We possess
adequate cash to support capital expenditures for maintenance as
well as future growth in the form of technology to support our
development efforts and to continue our business transformation.
In summary, we are enthusiastic about our opportunities for
this year and for the visible planning horizons. The year 1999
was one to remember, but the future years should be ones to
enjoy.
April 6, 2000
BY: /s/ Alyn V. Essman
----------------------
CPI Chairman and Chief
Executive Officer
<PAGE>
DIRECTORS OF CPI CORP.
- ----------------------
Milford Bohm (1) (3)
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.
Lee Liberman (2)(4)
Chairman Emeritus, Laclede Gas Company
Patrick J. Morris
Senior Executive Vice President, CPI Corp.
Nicholas L. Reding (2)(4)
Chairman of the Board of the Nidus Center for Scientific
Enterprise
Martin Sneider (1)(2)(3)
Adjunct Professor of Retailing, Washington University
Robert L. Virgil (1)(3)(4)
Principal, Edward Jones
(1) Member of the Audit Committee of the Board of Directors
(2) Member of the Compensation Committee of the Board of
Directors
(3) Member of the Finance and Investment Committee of the Board
of Directors
(4) Member of the Nominating and Governance Committee of the
Board of Directors
OFFICERS OF CPI CORP.
- ---------------------
Alyn V. Essman
Chairman, Chief Executive Officer
Russell Isaak
President
Patrick J. Morris
Senior Executive Vice President
Barry Arthur
Executive Vice President, Finance-Chief Financial Officer
Jane E. Nelson
Secretary and General Counsel
Fran Scheper
Executive Vice President, Human Resources
<PAGE>
INVESTOR INFORMATION
- --------------------
Stock Transfer, Registrar, Dividend Reinvestment and Right Agent
Harris Trust & Savings Bank
111 West Monroe, P.O. Box 755
Chicago, IL 60690-0755,
(800) 441-9673
Annual Meeting/Corporate Headquarters
The annual meeting of stockholders will convene at 10:00 a.m.,
Thursday, June 1, 2000 at the Corporate Headquarters, 1706
Washington Avenue, St. Louis, MO 63103-1717.
Independent Auditors
KPMG LLP, St. Louis, MO
Automatic Dividend Reinvestment Plan
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 Corp Headquarters.
At the Company
Alyn V. Essman, Chairman
CPI Corp., 1706 Washington Avenue, St. Louis, MO 63103-1717
(314) 231-1575 Extension 3240
[email protected]
At the Financial Relations Board, Inc.
George Zagoudis, Partner and Account Division Manager
John Hancock Center
875 N. Michigan Avenue, Chicago, IL 60611
Direct Line: (312) 640-6663
[email protected]
Mark Muehlfelt
Market Intelligence Executive
Direct Line: (312) 640-6767
[email protected]
For Information on the Internet:
CPI Corp.:
www.cpicorp.com
Sears Portrait Studios:
www.searsportrait.com
EXHIBIT (21.0)
<TABLE>
SUBSIDIARIES OF THE REGISTRANT AS OF APRIL 6, 2000
<CAPTION>
STATE/PROVINCE COUNTRY
-------------- -------------
<S> <C> <C>
CPI Corp. 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
myportraits.com, Inc. 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>
EXHIBIT (23.0)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
CPI Corp.:
We consent to incorporation by reference in the
registration statements Nos. 33-50082 and 002-86403 on Forms S-8
of CPI Corp. of our report dated April 6, 2000, relating to the
consolidated balance sheets of CPI Corp. and subsidiaries as of
February 5, 2000 and February 6, 1999 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 5, 2000, and the related
schedule, which report appears in the 1999 annual report on Form
10-K of CPI Corp.
/s/ KPMG LLP
- -------------------------
KPMG LLP
St. Louis, Missouri
April 6, 2000
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-05-2000
<PERIOD-END> FEB-05-2000
<CASH> 475
<SECURITIES> 49,071
<RECEIVABLES> 10,182
<ALLOWANCES> 287
<INVENTORY> 11,641
<CURRENT-ASSETS> 81,464
<PP&E> 226,157
<DEPRECIATION> 141,234
<TOTAL-ASSETS> 199,263
<CURRENT-LIABILITIES> 42,094
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0
0
<COMMON> 7,117
<OTHER-SE> 74,140
<TOTAL-LIABILITY-AND-EQUITY> 199,263
<SALES> 319,135
<TOTAL-REVENUES> 319,135
<CGS> 39,937
<TOTAL-COSTS> 312,400
<OTHER-EXPENSES> 3,500
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<NET-INCOME> (3,232)
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