UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934 FOR THE
QUARTERLY PERIOD ENDED
JULY 19, 2003
OR
[ ] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
Commission file number 1-10204
CPI Corp.
(Exact name of
registrant as specified in its charter)
| Delaware (State of Incorporation) |
43-1256674 (I.R.S. Employer Identification No.) | |
| 1706 Washington Ave., St. Louis,
Missouri (Address of principal executive offices) |
63103 (Zip Code) |
Registrant’s telephone number, including are code: (314) 231-1575
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 and [2] has been subject to such filing requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
[ X ] Yes [ ] No
As of August 25, 2003, the Registrant had 8,100,868 common shares outstanding.
| TABLE OF CONTENTS |
|---|
| PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Interim Condensed Consolidated Balance Sheets Interim Condensed Consolidated Statements of Operations Interim Condensed Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income (Loss) Interim Condensed Consolidated Statements of Cash Flows Notes to Interim Condensed Consolidated Financial Statements Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk Item 4. Disclosure Controls and Procedures PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K SIGNATURE EXHIBIT INDEX Computation of Per Share Earnings (Loss) Section 302 Certification of Chief Executive Officer Section 302 Certification of Chief Financial Officer Section 906 Certification of Chief Executive Officer Section 906 Certification of Chief Financial Officer |
CPI CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
12 Weeks and 24 Weeks Ended July 19, 2003
| Page
| ||
|---|---|---|
| PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Interim Condensed Consolidated Balance Sheets July 19, 2003 (Unaudited) and February 1, 2003 Interim Condensed Consolidated Statements of Operations (Unaudited) 12 and 24 Weeks Ended July 19, 2003 and July 20, 2002 Interim Condensed Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income (Loss) (Unaudited) 24 Weeks Ended July 19, 2003 Interim Condensed Consolidated Statements of Cash Flows (Unaudited) 24 Weeks Ended July 19, 2003 and July 20, 2002 Notes to Interim Condensed Consolidated Financial Statements (Unaudited) Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk Item 4. Disclosure Controls and Procedures PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signature Exhibit Index |
1 3 4 5 7 10 16 16 17 18 19 20 |
CPI CORP.
Interim Condensed
Consolidated Balance Sheets — Assets
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
| thousands |
July 19, 2003 (Unaudited) |
February 1, 2003
| ||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 43,985 | $ | 57,922 | ||||
| Accounts receivable: | ||||||||
| Due from licensor store | 9,001 | 7,888 | ||||||
| Other | 356 | 727 | ||||||
| Inventories | 12,144 | 11,767 | ||||||
| Prepaid expenses and other current assets | 6,849 | 6,499 | ||||||
| Refundable income taxes | 3,474 | 6,812 | ||||||
| Deferred tax assets | 4,834 | 4,907 | ||||||
| Total current assets | 80,643 | 96,522 | ||||||
| Property and equipment: | ||||||||
| Land | 2,803 | 2,803 | ||||||
| Building improvements | 26,553 | 26,554 | ||||||
| Leasehold improvements | 7,536 | 6,589 | ||||||
| Photographic, sales and manufacturing equipment | 196,655 | 188,836 | ||||||
| Total | 233,547 | 224,782 | ||||||
| Less accumulated depreciation and amortization | 185,590 | 177,280 | ||||||
| Property and equipment, net | 47,957 | 47,502 | ||||||
| Assets of business transferred under contractual arrangements: | ||||||||
| Preferred Security | 7,336 | 9,566 | ||||||
| Loan receivable | 4,181 | 475 | ||||||
| Assets of supplemental retirement plan: | ||||||||
| Cash surrender value of life insurance policies (net of borrowings | ||||||||
| of $1,596 at both July 19, 2003 and February 1, 2003) | 10,828 | 10,161 | ||||||
| Long-term investments held in Rabbi Trust | 2,146 | 3,600 | ||||||
| Other assets, net of amortization of $1,359 at both | ||||||||
| July 19, 2003 and February 1, 2003 | 12,767 | 11,464 | ||||||
| TOTAL ASSETS | $ | 165,858 | $ | 179,290 | ||||
See accompanying notes.
1
CPI CORP.
Interim Condensed
Consolidated Balance Sheets — Liabilities
| July 19, 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|
| thousands, except share and per share data |
(Unaudited) |
February 1, 2003 | ||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Current maturities of long-term debt | $ | 8,580 | $ | 8,580 | ||||
| Accounts payable | 11,460 | 10,114 | ||||||
| Accrued employment costs | 11,591 | 13,019 | ||||||
| Customer deposit liability | 28,137 | 27,072 | ||||||
| Sales taxes payable | 1,675 | 2,681 | ||||||
| Accrued advertising expenses | 3,048 | 1,232 | ||||||
| Accrued expenses and other liabilities | 3,634 | 3,792 | ||||||
| Total current liabilities | 68,125 | 66,490 | ||||||
| Long-term debt, less current maturities | 25,563 | 34,116 | ||||||
| Accrued pension obligations | 9,646 | 9,646 | ||||||
| Supplemental retirement plan obligations | 5,712 | 6,188 | ||||||
| Customer deposit liability | 4,514 | 5,934 | ||||||
| Other liabilities | 2,497 | 2,733 | ||||||
| Total Liabilities | 116,057 | 125,107 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Preferred stock,no par value. 1,000,000 shares authorized; no shares oustanding | -- | -- | ||||||
| Preferred stock, Series A, no par value, 200,000 shares authorized; | ||||||||
| no shares outstanding | -- | -- | ||||||
| Common stock, $.40 par value. 50,000,000 shares authorized; 18,339,171 and | ||||||||
| 18,288,006 shares issued at July 19, 2003 and February1, 2003, respectively | 7,336 | 7,315 | ||||||
| Additional paid in capital | 51,849 | 51,211 | ||||||
| Retained earnings | 228,206 | 234,022 | ||||||
| Accumulated other comprehensive loss | (9,933 | ) | (10,703 | ) | ||||
| 277,458 | 281,845 | |||||||
| Treasury stock at cost, 10,238,303 shares at July 19, 2003 and February 1, 2003 | (227,642 | ) | (227,642 | ) | ||||
| Unamortized deferred compensation- restricted stock | (15 | ) | (20 | ) | ||||
| Total stockholders' equity | 49,801 | 54,183 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 165,858 | $ | 179,290 | ||||
See accompanying notes.
2
CPI CORP.
Interim Condensed Consolidated
Statements of Operations
(Unaudited)
| 12 Weeks Ended |
24 Weeks Ended |
||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| July 19, | July 20, | July 19, | July 20, | ||||||||||||||
| thousands, except share and per share data |
2003 |
2002 |
2003 |
2002 | |||||||||||||
| Net sales | $ | 61,089 | $ | 57,314 | $ | 117,344 | $ | 117,157 | |||||||||
| Cost and expenses: | |||||||||||||||||
| Cost of sales (exclusive of depreciation and amortization | |||||||||||||||||
| expenses shown below) | 8,046 | 8,373 | 16,027 | 16,737 | |||||||||||||
| Selling, general and administrative expenses | 50,461 | 44,234 | 98,812 | 91,048 | |||||||||||||
| Depreciation and amortization | 3,801 | 4,811 | 7,825 | 10,080 | |||||||||||||
| 62,308 | 57,418 | 122,664 | 117,865 | ||||||||||||||
| Loss from operations | (1,219 | ) | (104 | ) | (5,320 | ) | (708 | ) | |||||||||
| Interest expense | 715 | 858 | 1,484 | 1,770 | |||||||||||||
| Interest income | 564 | 694 | 938 | 1,107 | |||||||||||||
| Other income, net | 26 | 24 | 78 | 42 | |||||||||||||
| Loss before income tax benefit | (1,344 | ) | (244 | ) | (5,788 | ) | (1,329 | ) | |||||||||
| Income tax benefit | (518 | ) | (101 | ) | (2,233 | ) | (527 | ) | |||||||||
| Net loss from continuing operations | $ | (826 | ) | $ | (143 | ) | $ | (3,555 | ) | $ | (802 | ) | |||||
| Net earnings from discontinued operations, net of income tax | |||||||||||||||||
| expense of $86 and $51, respectively | -- | 135 | -- | 80 | |||||||||||||
| NET LOSS | $ | (826 | ) | $ | (8 | ) | $ | (3,555 | ) | $ | (722 | ) | |||||
| EARNINGS PER COMMON SHARE | |||||||||||||||||
| Net loss per share from continuing operations - diluted | $ | (0.10 | ) | $ | (0.01 | ) | $ | (0.44 | ) | $ | (0.10 | ) | |||||
| Net earnings per share from discontinued operations - diluted | -- | 0.01 | -- | 0.01 | |||||||||||||
| Net loss per share - diluted | $ | (0.10 | ) | $ | (0.00 | ) | $ | (0.44 | ) | $ | (0.09 | ) | |||||
| Net loss per share from continuing operations - basic | $ | (0.10 | ) | $ | (0.01 | ) | $ | (0.44 | ) | $ | (0.10 | ) | |||||
| Net earnings per share from discontinued operations - basic | -- | 0.01 | -- | 0.01 | |||||||||||||
| Net loss per share - basic | $ | (0.10 | ) | $ | (0.00 | ) | $ | (0.44 | ) | $ | (0.09 | ) | |||||
| Dividends per share | $ | 0.14 | $ | 0.14 | $ | 0.28 | $ | 0.28 | |||||||||
| Weighted average number of common and common equivalent | |||||||||||||||||
| shares outstanding-diluted | 8,100,868 | 8,037,591 | 8,100,824 | 8,035,321 | |||||||||||||
| Weighted average number of common and common equivalent | |||||||||||||||||
| shares outstanding-basic | 8,100,868 | 8,037,591 | 8,100,824 | 8,035,321 | |||||||||||||
See accompanying notes.
3
CPI CORP.
Interim Condensed Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income (Loss)
(Unaudited)
| Twenty-four weeks ended July 19, 2003 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| thousands, except share and per share data | Common stock |
Additional paid-in capital |
Retained earnings |
Accumulated other comprehensive income (loss) |
Treasury stock at cost |
Deferred compensation- restricted stock |
Total | ||||||||||||||||
| Balance at February 1, 2003 | $ | 7,315 | $ | 51,211 | $ | 234,022 | ($10,703 | ) | ($227,642 | ) | ($20 | ) | $ | 54,183 | |||||||||
| Issuance of common stock to employee stock | |||||||||||||||||||||||
| plans and option exercises (51,165 shares) | 21 | 638 | -- | -- | -- | -- | 659 | ||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||
| Net loss | -- | -- | (3,555 | ) | -- | -- | -- | ||||||||||||||||
| Foreign currency translation | -- | -- | -- | 770 | -- | -- | |||||||||||||||||
| Comprehensive loss | -- | -- | -- | -- | -- | -- | (2,785 | ) | |||||||||||||||
| Dividends ($.28 per common share) | -- | -- | (2,261 | ) | -- | -- | -- | (2,261 | ) | ||||||||||||||
| Amortization of deferred compensation - | |||||||||||||||||||||||
| Restricted stock | -- | -- | -- | -- | -- | 5 | 5 | ||||||||||||||||
| Balance at July 19, 2003 | $ | 7,336 | $ | 51,849 | $ | 228,206 | ($ 9,933 | ) | ($227,642 | ) | ($15 | ) | $ | 49,801 | |||||||||
See accompanying notes.
4
CPI CORP.
Interim Condensed
Consolidated Statements of Cash Flows
(Unaudited)
| 24 Weeks Ended |
||||||||
|---|---|---|---|---|---|---|---|---|
| thousands |
July 19, 2003 |
July 20, 2002 | ||||||
| Reconciliation of net loss to cash flows provided by | ||||||||
| (used in) operating activities: | ||||||||
| Net loss from continuing operations | $ | (3,555 | ) | $ | (802 | ) | ||
| Adjustments for items not requiring cash: | ||||||||
| Depreciation and amortization | 7,825 | 10,080 | ||||||
| Loss on disposition of property, plant and equipment | 108 | 383 | ||||||
| Deferred income taxes | (1,480 | ) | 51 | |||||
| Customer deposit liability | (315 | ) | 1,027 | |||||
| Post-closing adjustment on preferred security | -- | 147 | ||||||
| Accrued interest on preferred security | (270 | ) | (390 | ) | ||||
| Other | (867 | ) | (3,795 | ) | ||||
| Decrease (increase) in current assets: | ||||||||
| Receivables and inventories | (1,120 | ) | (3,916 | ) | ||||
| Refundable income taxes | 3,338 | (544 | ) | |||||
| Prepaid expenses and other current assets | (185 | ) | (791 | ) | ||||
| Increase (decrease) in current liabilities: | ||||||||
| Accounts payable, accrued expenses and | ||||||||
| other liabilities | 572 | (2,388 | ) | |||||
| Cash flows from continuing operations | 4,051 | (938 | ) | |||||
| Cash flows from discontinued operations | -- | 80 | ||||||
| Cash flows provided by (used in) operating activities | $ | 4,051 | $ | (858 | ) | |||
See accompanying notes.
5
CPI CORP.
Interim Condensed Consolidated Statements of Cash Flows (...continued)
(Unaudited)
| 24 Weeks Ended |
||||||||
|---|---|---|---|---|---|---|---|---|
| thousands |
July 19, 2003 |
July 20, 2002 | ||||||
| Cash flows provided by (used in) operating activities | $ | 4,051 | $ | (858 | ) | |||
| Cash flows provided by (used in) financing activities: | ||||||||
| Repayment of long-term obligations | (8,580 | ) | (8,580 | ) | ||||
| Issuance of common stock to employee stock plans | ||||||||
| and option exercises | 659 | 1,324 | ||||||
| Cash dividends | (2,261 | ) | (2,245 | ) | ||||
| Cash flows used in financing activities: | (10,182 | ) | (9,501 | ) | ||||
| Cash flows provided by (used in) investing activities: | ||||||||
| Additions to property and equipment | (8,382 | ) | (4,910 | ) | ||||
| Redemption of Preferred Security | 2,500 | 353 | ||||||
| Changes in loan receivable: | ||||||||
| Borrowings | (27,331 | ) | (19,047 | ) | ||||
| Repayments | 23,625 | 17,447 | ||||||
| Purchase of investment securities in Rabbi Trust | (819 | ) | (698 | ) | ||||
| Proceeds from sale of investment securities in Rabbi Trust | 2,273 | 2,093 | ||||||
| Cash flows used in investing activities: | (8,134 | ) | (4,762 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | 328 | 138 | ||||||
| Net decrease in cash and cash equivalents | (13,937 | ) | (14,983 | ) | ||||
| Cash and cash equivalents at beginning of period | 57,922 | 46,555 | ||||||
| Cash and cash equivalents at end of period | $ | 43,985 | $ | 31,572 | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | 1,605 | $ | 1,920 | ||||
| Income taxes paid | $ | 337 | $ | 358 | ||||
See accompanying notes.
6
CPI CORP.
Notes to Interim
Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS AND INTERIM CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
The Company operates 1,024 professional portrait studios as of July 19, 2003 throughout the United States, Canada and Puerto Rico under license agreements with Sears, Roebuck and Co. (“Sears”). On August 14, 2003, the Company announced the execution of an amendment to its agreement with Sears eliminating the existing exclusivity provision from that agreement. In return for the removal of the exclusivity provision, the Company, upon certain conditions, has agreed to provide Sears with certain contingent commission adjustments through 2008, the remaining term of the current agreement. (See Note 5 for further information.) The Company opened its first Mexican studio in Chihuahua, Mexico in late February 2003. That studio is located in City Club, a wholesale club launched by Soriana, owner of a leading Mexican chain of hypermarkets. During the second quarter of 2003, the Company opened three additional studios in Mexico, one in a City Club location and two studios in Soriana hypermarkets. In the first quarter of 2003, the Company also launched its mobile photography operations under the name Everyday Expressions ® offering mobile photography services to childcare centers in four metropolitan markets. By the end of the second quarter of 2003, the Company was offering mobile photography services to childcare centers and youth sports associations in twenty-seven markets throughout the United States. In addition, the Company operates searsphotos.com, an on-line photofinishing service as well as a vehicle for the Company’s customers to archive, share portraits via email and order additional portraits and products.
The Interim Condensed Consolidated Balance Sheets as of July 19, 2003, the related Interim Condensed Consolidated Statements of Operations for the 12 and 24 weeks ended July 19, 2003 and July 20, 2002, the Interim Condensed Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income (Loss) for the 24 weeks ended July 19, 2003 and the Interim Condensed Consolidated Statements of Cash Flows for the 24 weeks ended July 19, 2003 and July 20, 2002, are unaudited. The interim financial statements reflect all adjustments (consisting only of normal recurring accruals), which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the CPI Corp. 2002 Annual Report on Form 10-K for its fiscal year ended February 1, 2003. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
Certain reclassifications have been made to the 2002 financial statements to conform with the current year presentation.
NOTE 2 — CONTINGENCIES
Contingent Lease Obligations
In July 2001, the Company announced the completion of the sale of its Prints Plus Wall Decor segment (“Prints Plus”), which included the ongoing guarantee of certain operating real estate leases of Prints Plus. As of July 19, 2003, the maximum future obligation to the Company under these guarantees is $12.8 million before any negotiation with landlords or subleasing. Based on scheduled lease payments, the maximum future obligations will decrease an additional $2.6 million by the end of fiscal 2003, then by $4.7 million in 2004 and approximately $4.8 million over the next three years. To recognize the risk associated with these leases, a $1.0 million reserve was established in 2001. The $1.0 million reserve was established assuming an
7
average of seventy-five days of lease payments for each of the fifty-six leases then guaranteed by the Company. The seventy-five day estimate was based upon the Company’s historical experiences in settling lease obligations resulting from early terminations of leases, taking into account the nature of prime mall space represented by the guaranteed leases. The Company has recognized no losses to date related to their obligations under these guarantees. At July 19, 2003, the Company had made no further allowances for defaults under these operating leases as, in the opinion of management, Prints Plus is meeting the performance standards established under the operating leases.
Prints Plus Financial Covenants
In conjunction with the above-mentioned transaction, the Company received an $11.0 Preferred Security (“Preferred Security”) and provided Prints Plus with a $6.4 million revolving credit facility. The agreements governing both instruments contain certain operating and financial covenants. During the second quarter of 2003, Prints Plus failed to achieve the minimum EBITDA covenant included in the revolving credit facility, as amended, requiring Prints Plus to maintain EBITDA for any consecutive four quarters of not less than $3.0 million. As of July 19, 2003, the Company provided Prints Plus with a waiver on the violation of this covenant.
In assessing the recoverability of its recorded investment in the Preferred Security and the revolving credit facility, the Company reviews whether events or changes in circumstances indicate that the carrying value of the preferred security and the amount advanced under the revolving line of credit may not be recoverable. This review includes an analysis of the current operating performance of Prints Plus, including the amounts of free cash flow being generated providing for interest and debt service as well as their compliance with all the performance standards included within the covenants of the Preferred Security and revolving line of credit. Based on this review, no valuation allowance is deemed necessary at July 19, 2003.
Income Tax Receivable
Included in Other Assets in the accompanying consolidated balance sheets is a $2.3 million receivable representing refund claims related to amended Federal income tax returns filed by the Company for earlier tax years. In early April 2003, the Company received a written denial of the refund claims from the Internal Revenue Service. After consultation with tax counsel, the Company continues to believe in the merits of its claims and intends to pursue additional remedies, including litigating the matter in court, in order to collect the amount of the recorded claims. As of February 1, 2003, the amount was reclassified from current assets to long-term assets as it is not likely that the matter will be resolved within one year of the date of the current balance sheet.
Standby Letters of Credit
As of July 19, 2003, the Company had outstanding standby letters of credit in the principal amount of $7.3 million primarily used in conjunction with the Company’s self insurance programs.
Litigation
The Company is a defendant in various lawsuits arising in the ordinary course of business. It is the opinion of management that the ultimate liability, if any, resulting from such lawsuits will not materially affect the consolidated financial position or results of operations of the Company.
8
NOTE 3 — RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement No. 149, “Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities”. This Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. This standard is primarily effective for transactions occurring after June 30, 2003. In May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Statement affects the accounting for certain obligations that a reporting entity can or must settle by issuing its own equity shares. It is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the Company’s third quarter of fiscal 2003. The Company does not expect the adoption of these standards to have a material effect on the Company’s financial position, results of operations or cash flows.
NOTE 4 — STOCKHOLDERS’ EQUITY
Dividend Payments
On June 3, 2003, the Company announced that its Board of Directors approved a 14% increase in the annual dividend rate paid on the Company’s common stock from $.56 per share to $.64 per share effective with the third quarter 2003 dividend payment.
Share Repurchase Program
On June 3, 2003, the Board of Directors authorized the Company to repurchase up to 5% of its common shares on the open market from time to time, depending on market conditions. As of July 19, 2003, the Company has yet to repurchase any shares under the recently announced authorization.
NOTE 5 — SUBSEQUENT EVENT
On August 14, 2003, the Company announced the execution of an amendment to its agreement with Sears eliminating the existing exclusivity provision from that agreement. In return for the removal of the exclusivity provision, the Company, upon certain conditions, has agreed to provide Sears with certain commission adjustments (the “Contingent Payments”) through 2008, the remaining term of the current agreement. The elimination of the exclusivity provision frees the Company to explore growth opportunities previously precluded under the exclusivity provisions of the agreement.
The Contingent Payments are triggered only if the Company operates more than twenty-four non-Sears portrait studios and the rate of growth in total contractual commissions paid to Sears by the Company under the pre-existing agreement does not exceed Sears’ same-store revenue growth rate by specified percentages, up to a maximum of 2%. If both of the above mentioned conditions occur, the Contingent Payments are determined by a formula included in the amendment to the agreement, however, in no event shall such payments exceed $2.5 million annually or $7.5 million cumulatively over the remaining five-year term of the agreement.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide the reader of the financial statements with a narrative on the Company’s results of operations, financial position and liquidity, significant accounting policies and critical estimates, and the future impact of accounting standards that have been issued but are not yet effective. Management’s Discussion and Analysis is presented in the following sections: General; Results of Operations; Liquidity, Capital Resources and Financial Condition; and Accounting Pronouncements and Policies. It is useful to read Management’s Discussion and Analysis in conjunction with the consolidated financial statements and related notes thereto contained elsewhere in this document.
GENERAL
CPI Corp.‘s (“CPI” or the “Company”) fiscal year ends the first Saturday of February. Accordingly, fiscal year 2002 ended February 1, 2003 and consisted of 52 weeks. Both the second fiscal quarters of 2003 and 2002, which consisted of twelve weeks, and the first fiscal halves of 2003 and 2002, which consisted of twenty-four weeks, ended July 19, 2003 and July 20, 2002, respectively. Throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” reference to 2002 will mean the fiscal year ended February 1, 2003 and reference to second quarter 2003 and second quarter 2002 or first half 2003 and first half 2002 will mean the second fiscal quarter or first fiscal half of 2003 and 2002, respectively.
The Company operates 1,024 professional portrait studios as of July 19, 2003 throughout the United States, Canada and Puerto Rico under license agreements with Sears, Roebuck and Co. (“Sears”). On August 14, 2003, the Company announced the execution of an amendment to its agreement with Sears eliminating the existing exclusivity provision from that agreement. As more fully described in Note 5 to the Interim Condensed Consolidated Financial Statements, in return for the removal of the exclusivity provision, the Company, upon certain conditions, has agreed to provide Sears with certain contingent commission adjustments through 2008, the remaining term of the current agreement. The elimination of the exclusivity provision frees the Company to explore growth opportunities previously precluded under the exclusivity provisions of the agreement. The Company opened its first Mexican studio in Chihuahua, Mexico in late February 2003. That studio is located in City Club, a wholesale club launched by Soriana, owner of a leading Mexican chain of hypermarkets. During the second quarter of 2003, the Company opened three additional studios in Mexico, one in a City Club location and two studios in Soriana hypermarkets. The Company currently plans to open a minimum of eleven additional studios by the end of its fiscal year. In the first quarter of 2003, the Company also launched its mobile photography operations under the name Everyday Expressions ® offering mobile photography services to childcare centers in four metropolitan markets. By the end of the second quarter of 2003, the Company was offering mobile photography services to childcare centers and youth sports associations in twenty-seven markets throughout the United States. In addition, the Company operates searsphotos.com, an on-line photofinishing service as well as a vehicle for the Company’s customers to archive, share portraits via email and order additional portraits and other products.
10
RESULTS OF OPERATIONS
The following table sets forth certain operating information for each period and should be viewed in conjunction with the consolidated financial statements and notes included in Item 1 of this Form 10-Q.
| 12 Weeks Ended |
24 Weeks Ended |
|||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| July 19, 2003 |
July 20, 2002 |
Change Increase (Decrease) |
July 19, 2003 |
July 20, 2002 |
Change Increase (Decrease) | |||||||||||||||
| Studio sittings: | ||||||||||||||||||||
| Custom | 582,860 | 568,070 | 2.6% | 1,104,079 | 1,145,746 | -3.6% | ||||||||||||||
| Package | 324,118 | 360,772 | -10.2% | 688,654 | 797,543 | -13.7% | ||||||||||||||
| 906,978 | 928,842 | -2.4% | 1,792,733 | 1,943,289 | -7.7% | |||||||||||||||
| Studio average sales per customer sitting: |
||||||||||||||||||||
| Custom | $ 77.69 | $ 71.48 | 8.7% | $ 76.93 | $ 70.15 | 9.7% | ||||||||||||||
| Package | $ 47.18 | $ 45.96 | 2.7% | $ 45.84 | $ 45.81 | 0.1% | ||||||||||||||
| Overall | $ 66.78 | $ 61.56 | 8.5% | $ 64.99 | $ 60.16 | 8.0% | ||||||||||||||
12 weeks ended July 19, 2003 compared to 12 weeks ended July 20, 2002
Net sales were $61.1 million in the second quarter of 2003 compared with $57.3 million in the second quarter of 2002.
| Net sales for the second quarter of 2003 increased $3.8 million or 7% to $61.1 million from the $57.3 million reported in the second quarter of 2002. The increase in reported sales in the second quarter is a result of the timing of Easter in 2003. As Easter was near the end of the Company’s first quarter of 2003, this resulted in the delivery of Easter portraits to customers after the end of the Company’s first quarter and, accordingly, the deferral of the recognition of the related sales. This increased amount of deferred revenue was recognized as revenue in the Company’s 2003 second quarter as the related portraits were delivered to customers. |
| During the second quarter of 2003, sittings were 907,000, a decrease of 2% from the 929,000 sittings generated in 2002. Excluding the positive impact of the late 2003 Easter on the second quarter of 2003, sittings declined 4% versus the reported 2% decline. The average sale per customer sitting in the second quarter of 2003 was $66.78 or 8% higher than the $61.56 realized in the second quarter of 2002. The decrease in sittings is primarily attributable to the continuing impact of increases in the number of competitors’ locations and the effects of competitors with lower price package offers. The increase in average sales per customer sitting resulted from: |
| o | The continuing strong sales performance related to the Company’s March 2003 domestic-wide rollout of digitally enhanced products referred to as Portrait Creations ®. |
| o | The ongoing positive effect of the Company’s decision made late in the second quarter of 2002 to begin selling customer proof sheets which had previously been provided free of charge as part of the custom offer. |
| o | The Company’s continuing success in converting more of its customers to the higher value custom offer. |
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Costs and expenses were $62.3 million for the 12 weeks ended July 19, 2003, an increase of $4.9 million from the $57.4 million reported for the comparable prior year period.
| Losses from operations for the second quarter of 2003 were $1.2 million compared to a $104,000 loss recorded in the comparable quarter of the prior year. The increased level of operating losses was attributable to a $6.3 million increase in selling, general and administrative expenses only partially offset by the $3.8 million increase in reported sales, a $327,000 decline in cost of sales, primarily resulting from reduced levels of sittings, and a $1.0 million decline in depreciation expense. The increase in selling, general and administrative expenses was primarily attributable to increases in studio employment costs and advertising expenses of $1.0 million and $1.1 million, respectively, as well as $1.2 million in costs associated with the commencement of the mobile photography and Mexican studio operations and $1.0 million in expenses relating to costs that were inventoried in the first quarter of 2003 and recognized as expenses in the second quarter at the time the related portraits were delivered to the customers. An additional $1.9 million increase in costs related to various other selling, general and administrative expenses including studio supplies and maintenance, telephone expense, employee insurance, pension expense and administrative salaries. |
| The increase in studio employment costs was largely attributable to annual wage rate increases and increased hours to support the continuing strong sales of the Company’s new digitally enhanced Portrait Creations ® product introduced in the first quarter of 2003 coupled with additional coverage hours in certain higher volume studios. The increased advertising expenses were planned accelerated timing changes and related to Hispanic television, market research and creative development. Favorable advertising expense comparisons to the prior year are expected in the second half of 2003 as the overall advertising budget for 2003 is comparable to the total advertising spending in 2002. The decrease in depreciation expense resulted from certain assets becoming fully depreciated beginning in the second quarter of 2002. |
Interest expense decreased $143,000 for the second quarter of 2003 to $715,000 from $858,000 recorded in the second quarter of 2002. The reduction in interest expense is primarily a result of a scheduled principal payment made in June 2003 to reduce the outstanding balance of the Senior Notes. The principal due on these notes at the end of the second quarter was $34.1 million down from $42.7 million at the end of the second quarter of 2002.
Interest income was $564,000 in the second quarter of 2003, as compared to $694,000 recorded in the second quarter of 2002. The decrease in interest income is principally due to the impact of declining interest rates earned on cash balances exceeding the increase resulting from larger average cash balances during the second quarter of 2003.
Income tax benefit as a percentage of income before taxes was 38.6% for the second quarter of 2003 and 41.3% for the comparable period in 2002.
Net losses were $826,000 and $8,000 for the second quarter of 2003 and 2002, respectively. As noted above, despite higher reported sales, the Company’s results of operations for the second quarter of 2003 were negatively impacted by increased expenses incurred in anticipation of higher planned sales levels and the continuing costs, in advance of meaningful sales, associated with the Company’s new ventures, mobile photography and Mexican studio operations.
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24 weeks ended July 19, 2003 compared to weeks ended July 20, 2002
Net sales were $117.3 million in the first half of 2003 compared with $117.2 million in the first half of 2002.
| Total net sales for the first half of 2003 were $117.3 million, an increase of $100,000 from the $117.2 million recorded in 2002, as an 8% increase in average sales per customer sitting from $60.16 to $64.99 offset an 8% decrease in sittings from 1,943,000 to 1,793,000. The decrease in sittings is primarily attributable to continuing impact of increases in the number of competitors’ locations and the effects of competitors with lower price package offers. The increase in average sales per customer sitting resulted from : |
| o | The continuing strong sales performance related to the Company’s March 2003 domestic-wide rollout of digitally enhanced products referred to as Portrait Creations ®. |
| o | The ongoing positive effect of the Company’s decision made late in the second quarter of 2002 to begin selling customer proof sheets which had previously been provided free of charge as part of the custom offer. |
| o | The Company’s continuing success in converting more of its customers to the higher value custom offer. |
Costs and expenses were $122.7 million for the 24 weeks ended July 19, 2003, an increase of $4.8 million from the $117.9 million reported for the comparable prior year period.
| Losses from operations for the first half of 2003 were $5.3 million compared to a $708,000 loss in the comparable first half of the prior year. The increased level of losses was attributable to the $7.8 million increase in selling, general and administrative expenses only partially offset by the $100,000 increase in reported sales, a $700,000 decline in cost of sales, primarily resulting from reduced sitting levels, and a $2.3 million decline in depreciation expense. The increase in selling, general and administrative expenses was primarily attributable to increases in studio employment costs and the planned accelerated timing of advertising expenses of $2.5 million and $2.0 million, respectively, as well as $1.9 million in costs associated with the commencement of the mobile photography and Mexican studio operations. An additional $1.2 million increase in costs related to various other selling, general and administrative expenses including pension expense and administrative salaries. |
| The increase in studio employment expenses was largely attributable to annual wage rate increases and increased hours to support the studio-wide rollout of digitally enhanced products in the first quarter of 2003 coupled with additional coverage hours in certain higher volume studios. The increased advertising expenses were planned timing charges and related to Easter television advertising and the introduction of digitally enhanced products, Hispanic television, market research and creative development. Favorable advertising expense comparisons to the prior year are expected in the second half of 2003 as the overall advertising budget for 2003 is comparable to the total advertising spending in 2002. The decrease in depreciation expense resulted from certain assets becoming fully depreciated beginning in the second quarter of 2002. |
Interest expense decreased $286,000 for the first half of 2003 to $1.5 million from $1.8 million recorded in the first half of 2002. The reduction in interest expense is primarily a result of a scheduled principal payment made in June 2003 to reduce the outstanding balance of the Senior Notes. The principal due on these notes at the end of the first half was $34.1 million down from $42.7 million at the end of the first half of 2002.
Interest income was $938,000 in the first half of 2003, as compared to $1.1 million recorded in the first half of 2002. The decrease in interest income is principally due to the impact of declining interest rates earned on cash balances exceeding the increase resulting from larger average cash balances during the first half of 2003.
Income tax benefit as a percentage of income before taxes was 38.6% for the first half of 2003 and 39.7% for the comparable period in 2002.
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Net losses for the 24-week first half ended July 19, 2003 of $3.6 million compared to a net loss of $722,000 for the comparable first half in fiscal 2002. The reported net loss for the first half of 2003 was largely attributable to reported sales being comparable to the prior year period while costs were generally incurred at a level consistent with a higher planned level of sales which did not materialize. In addition, costs comparisons to the prior year first half were negatively impacted by costs, in advance of meaningful sales, approximating $2.0 million incurred in connection with the commencement of the Company’s new ventures in mobile photography and Mexican studio operations in the first half of 2003.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Analysis of Financial Condition
As of July 19, 2003, the Company’s current assets exceeded current liabilities by $12.5 million.
Net cash provided by operating activities in the first half of 2003 increased $4.9 million to $4.1 million from $858,000 used in operating activities in second quarter of 2002. The increase was primarily due to the receipt of income tax refunds in the first half of 2003 and the payouts of supplemental retirement plan benefits and deferred compensation for retired executives and directors in the prior year. Offsetting the increases are additional losses from operations in the first half of 2003 as compared to the first half of fiscal 2002, reduced depreciation expense in the first half of 2003 and increases in outstanding receivables resulting from a change in settlement methods with Sears in the second quarter of 2002.
Net cash used in financing activities in the first half of 2003 increased $681,000 to $10.2 million from the $9.5 million used in the first half of 2002. The increase resulted primarily from lower levels of common stock issuance relating to option exercises in the first half of 2003.
Net cash used in investing activities totaled $8.1 million in the first half of 2003 compared to $4.8 million in the first half of 2002. The $3.3 million increase was due principally to higher capital expenditures and the seasonal increases in the loan receivable due from Prints Plus partially offset by the proceeds from a redemption of the preferred security by Prints Plus in the first quarter of 2003 that was funded by a draw on the loan receivable.
Liquidity and Capital Resources
Cash flows from operations and cash and cash equivalents on hand represent the Company’s expected source of funds in fiscal year 2003 for planned capital expenditures of approximately $21.0 million, scheduled principal payments on long-term debt of $8.6 million, normal business operations and dividends to shareholders and potential share repurchases. With the exception of standby letters of credit used to support the Company’s self-insurance programs, the Company does not use off-balance sheet arrangements to finance business activities.
On June 3, 2003, the Company announced that its Board of Directors approved a 14% increase in the annual dividend rate paid on the Company’s common stock from $.56 per share to $.64 per share effective with the next regularly scheduled quarterly dividend. In addition, the Board authorized management to repurchase up to 5% of the Company’s common shares on the open market from time to time, depending on market conditions.
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ACCOUNTING PRONOUNCEMENTS AND POLICIES
Recently Issued Accounting Standards
In April 2003, the FASB issued Statement No. 149, “Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities”. This Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. This standard is primarily effective for transactions occurring after June 30, 2003. In May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Statement affects the accounting for certain obligations that a reporting entity can or must settle by issuing its own equity shares. It is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the Company’s third quarter of fiscal 2003. The Company does not expect the adoption of these standards to have a material effect on the Company’s financial position, results of operations or cash flows.
Significant Accounting Policies and Critical Estimates
The Company’s significant accounting policies are discussed in the Notes to the Consolidated Financial Statements that are included in the Company’s 2002 Annual Report on Form 10-K that is filed with the Securities and Exchange Commission. In most cases, the accounting policies utilized by the Company are the only ones permissible under U.S. Generally Accepted Accounting Principles for businesses in our industry. However, the application of certain of these policies requires significant judgments or a complex estimation process that can affect the results of operations and financial position of the Company, as well as the related footnote disclosures. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable. If actual amounts are ultimately different from previous estimates, the revisions are included in the Company’s results of operations for the period in which the actual amounts become known. The accounting policies and estimates that can have a significant impact on the operating results, financial position and footnote disclosures of the Company are described in the Management Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2002 Annual Report on Form 10-K.
Cautionary Statement Regarding Forward-Looking Information
The statements contained in this report, and in particular in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Act of 1995, and involve risks and uncertainties. Management wishes to caution the reader that these forward-looking statements, such as the Company’s outlook for portrait studios, future cash requirements, compliance with debt covenants, valuation allowances, 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 condition of Prints Plus Inc., 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 its Form 10-K for the year ended February 1, 2003.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to the Company’s operations result primarily from changes in interest rates and 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 its Canadian and Mexican operations and are also minimal, as these operations constitute 7.0% of the Company’s total assets and 6.7% of the Company’s total sales.
Item 4. Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the “Act”) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period reported. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
In the quarter ended July 19, 2003, the Company did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls. In addition, since the date of this evaluation to the filing date of this Quarterly Report, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held in St. Louis, Missouri on Thursday, June 5, 2003. The following items were voted on and the results are listed below.
| 1. | The following individuals were elected to the Company’s Board of Directors: |
| Name
|
Shares For |
Shares Withheld | |||
|---|---|---|---|---|---|
| Edmond S. Abrain James R. Clifford Joanne S. Griffin Lee M. Liberman J. David Pierson Nicholas L.Reding Martin Sneider Virginia V. Weldon |
7,137,971 7,137,945 7,138,113 7,137,198 7,111,820 7,137,164 7,137,242 7,138,029 |
56,560 56,586 56,418 57,333 82,711 57,367 57,289 56,502 |
| 2. | The Board of Directors’ appointment of KPMG, LLP to audit the Company’s financial statements for the 2003 fiscal year: |
| For |
Against |
Abstain | |||
|---|---|---|---|---|---|
| 7,168,744 | 17,400 | 8,387 |
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
An Exhibit Index has been filed as part of this Report on Page E-1.
b. Reports on Form 8-K.
| On May 5, 2003, CPI Corp. filed an 8-K Current Report on the issuance of a press release dated May 5, 2003 announcing that it had extended the deadline for filing its Annual Report on Form 10-K for its fiscal year ended February 1, 2003. |
| On May 9, 2003, CPI Corp. filed an 8-K Current Report on the issuance of a press release dated May 8, 2003 announcing the declaration of a second quarter cash dividend. |
| On May 20, 2003, CPI Corp. filed an 8-K Current Report on the issuance of a press release dated May 16, 2003 announcing that it had filed amendments on prior year Form 10-K and Form 10-Q filings and that it had filed its Form 10-K for 2002. |
| On June 5, 2003, CPI Corp. filed an 8-K Current Report on the issuance of a press release dated June 3, 2003 announcing first quarter fiscal year 2003 results, a share repurchase authorization and a dividend increase. |
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CPI CORP.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CPI Corp. (Registrant) | ||
|---|---|---|
| By: | /s/ Gary W. Douglass
| |
| Gary W. Douglass Executive Vice President, Finance and Chief Financial Officer (Principal Financial Officer) |
| By: | /s/ Kimberly A. LaBelle
| |
|
Kimberly A. LaBelle Vice President, Corporate Controller (Principal Accounting Officer) |
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CPI CORP.
E-1
EXHIBIT INDEX
| Exhibit No.
|
||
|---|---|---|
| 10.68 10.69 11.1 11.2 31.1 31.2 32.1 32.2 |
$15 Million Revolving Credit Agreement with Commerce Bank Seventh Amendment to Sears License Agreement Computation of Per Share Earnings - Diluted - for the 12 and 24 weeks ended July 19, 2003 and July 20, 2002. Computation of Per Share Earnings - Basic - for the 12 and 24 weeks ended July 19, 2003 and July 20, 2002. Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |
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