As filed with the Securities and Exchange Commission on
August 6, 2010
Registration No. 333-167865
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 1
TO
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
PORTRAIT INNOVATIONS HOLDING
COMPANY
(Exact name of registrant as
specified in its charter)
|
|
|
|
|
Delaware
(State or other jurisdiction
of
incorporation or organization)
|
|
7200
(Primary Standard
Industrial
Classification Code Number)
|
|
26-4495553
(I.R.S. Employer
Identification Number)
|
2016 Ayrsley Town Boulevard, Suite 200
Charlotte, North Carolina 28273
(704) 499-9300
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
John Grosso
President and Chief Executive Officer
Portrait Innovations Holding Company
2016 Ayrsley Town Boulevard, Suite 200
Charlotte, North Carolina 28273
(704) 499-9300
(704) 499-9301 (facsimile)
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
|
|
|
Stephen M. Lynch
Patrick S. Bryant
Robinson, Bradshaw & Hinson, P.A.
101 North Tryon Street, Suite 1900
Charlotte, North Carolina 28246
(704) 377-2536
(704) 378-4000 (facsimile)
|
|
Deanna L. Kirkpatrick, Esq.
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
(212) 450-4800 (facsimile)
|
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check
the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
|
|
|
|
Large
accelerated
filer o
|
Accelerated
filer o
|
Non-accelerated
filer þ
|
Smaller reporting
company o
|
(Do not check if a smaller
reporting company)
CALCULATION
OF REGISTRATION FEE
|
|
|
|
|
|
|
|
|
|
Proposed Maximum
|
|
|
Amount of
|
Title of Each Class of
|
|
|
Aggregate Offering
|
|
|
Registration
|
Securities to be Registered
|
|
|
Price(1)(2)
|
|
|
Fee(3)
|
Common Stock, $0.01 par value per share
|
|
|
$75,000,000
|
|
|
$5,348.00
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes shares that the underwriters have the option to
purchase. See Underwriting.
|
|
(2)
|
Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(o) under the Securities Act.
|
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information
in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
|
SUBJECT TO COMPLETION, DATED
AUGUST 6, 2010
PROSPECTUS
Shares
PORTRAIT INNOVATIONS HOLDING
COMPANY
Common Stock
This is an initial public offering
of shares
of common stock of Portrait Innovations Holding Company.
Portrait Innovations Holding Company is
offering shares
of common stock and the selling stockholders identified in this
prospectus are
offering shares
of common stock. We will not receive any proceeds from the sale
of the shares by the selling stockholders. The estimated initial
public offering price is between $
and $ per share.
Prior to this offering, there has been no public market for our
common stock. We have applied for listing of our common stock on
the NASDAQ Global Market under the symbol PTRT.
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
Total
|
|
|
Initial public offering price
|
|
$
|
|
|
|
$
|
|
|
Underwriting discounts and commissions
|
|
$
|
|
|
|
$
|
|
|
Proceeds to Portrait Innovations, before expenses
|
|
$
|
|
|
|
$
|
|
|
Proceeds to the selling stockholders, before expenses
|
|
$
|
|
|
|
$
|
|
|
Certain of the selling stockholders have granted the
underwriters an option for a period of 30 days to purchase
up
to
additional shares of common stock on the same terms and
conditions set forth above to cover over-allotments, if any.
Investing in our common stock involves a high
degree of risk. See Risk Factors beginning on
page 8.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed on the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
|
|
J.P.
Morgan |
Wells Fargo Securities |
The underwriters expect to deliver the shares of common stock to
purchasers
on ,
2010.
,
2010
TABLE OF
CONTENTS
|
|
|
|
|
|
|
|
1
|
|
|
|
|
8
|
|
|
|
|
25
|
|
|
|
|
27
|
|
|
|
|
28
|
|
|
|
|
29
|
|
|
|
|
30
|
|
|
|
|
32
|
|
|
|
|
35
|
|
|
|
|
55
|
|
|
|
|
70
|
|
|
|
|
76
|
|
|
|
|
85
|
|
|
|
|
87
|
|
|
|
|
89
|
|
|
|
|
93
|
|
|
|
|
95
|
|
|
|
|
97
|
|
|
|
|
100
|
|
|
|
|
101
|
|
|
|
|
101
|
|
|
|
|
101
|
|
|
|
|
F-1
|
|
EX-23.1 |
We have not authorized anyone to provide any information
other than that contained in this prospectus or in any free
writing prospectus prepared by or on behalf of us or to which we
have referred you. We take no responsibility for, and can
provide no assurance as to the reliability of, any other
information that others may give you. The company, the selling
stockholders and the underwriters are offering to sell, and
seeking offers to buy, shares of common stock only in
jurisdictions where offers and sales are permitted. You should
assume that the information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of common
stock. Our business, results of operations, financial condition
and prospects may have changed since that date.
The name Portrait Innovations is a registered
trademark of our operating subsidiary, Portrait Innovations,
Inc. This prospectus also includes other registered and
unregistered trademarks and service marks of Portrait
Innovations, Inc. Solely for convenience, our trademarks and
tradenames referred to in this prospectus are without
the®
or
tm
symbol, as applicable, but such references are not intended to
indicate, in any way, that we will not assert, to the fullest
extent under applicable law, our rights to these trademarks and
tradenames. Other brand names or trademarks appearing in this
prospectus are the property of their respective owners.
Certain market and industry data and forecasts used throughout
this prospectus were obtained from market research, consultant
surveys, publicly available information and industry
publications and surveys. These sources generally state that the
information they contain has been obtained from sources believed
to be reliable, but that the accuracy and completeness of such
information is not guaranteed. Although we believe that each
source is reliable as of its respective date, we have not
independently verified any of the data from third-party sources,
nor have we ascertained the assumptions relied upon therein. As
a result, neither we nor the underwriters can assure you of the
accuracy or completeness of the data.
PROSPECTUS
SUMMARY
This summary highlights selected information contained in
greater detail elsewhere in this prospectus and does not contain
all of the information that you should consider before investing
in our common stock. You should carefully read the following
summary together with the more detailed information appearing
elsewhere in this prospectus regarding us and our common stock
being sold in this offering, including Risk Factors
and the financial statements and the related notes, before
making an investment decision.
In this prospectus, except where the context otherwise
requires, Portrait Innovations, our
company, we, us, and
our refer to Portrait Innovations Holding Company, a
Delaware corporation, and, where appropriate, its subsidiary and
predecessor corporation. Prior to our formation of a holding
company structure in 2008, we conducted our business through
Portrait Innovations, Inc., a Delaware corporation which now
operates as a wholly-owned subsidiary of Portrait Innovations
Holding Company.
Our fiscal year is the 52- or 53-week period ending on the
Sunday nearest January 31. Fiscal 2009 ended on
January 31, 2010, fiscal 2008 ended on February 1,
2009, and fiscal 2007 ended on February 3, 2008. Fiscal
2007 was a 53-week year.
Our
Company
We are a fast-growing retail operator of free-standing portrait
studios under the Portrait Innovations brand name. We provide
our customers with high-quality portraits typically within an
hour and a half of entering our studio by integrating
sophisticated professional photography techniques with
state-of-the-art,
on-site
digital imaging and printing technologies. We have opened an
average of 30 new studios per year for the past five years, and
as of May 2, 2010, we operated 181 studios across
39 states.
We believe that our customers value the importance of capturing
cherished family and personal memories, events and milestones,
but have limited options available to purchase high-quality,
professional portraits at affordable prices in a convenient,
efficient manner. We believe that we offer a differentiated
studio experience that meets these consumer needs. We believe
our customers recognize and appreciate this differentiated
approach, which engenders loyalty and repeat business.
We have developed a business strategy and operating model that
we believe creates a superior studio experience and is difficult
to replicate. Key elements of our strategy include:
|
|
|
|
|
Convenient, attractive locations. We locate
our free-standing studios in high-visibility, high-traffic,
open-air lifestyle and power centers with easy parking and
access. Our studios are designed to be warm and inviting, and
feature large camera rooms, portrait viewing stations and
dressing rooms, as well as spacious reception areas with
comfortable couches and childrens play areas.
|
|
|
|
Interactive, professional photography
session. Our highly trained studio managers and
associates use professional handheld digital cameras and
interact with our customers to capture candid expressions and
emotions, creating high-quality and artistically appealing
portraits. Our sophisticated camera rooms feature
auto-adjusting, computerized lighting and background systems,
which enhance the variety, quality and consistency of our images
and enable us to complete photography sessions quickly and
efficiently.
|
|
|
|
Efficient, proprietary portrait selection
process. Immediately following the photography
session, we utilize our proprietary software and processes to
allow our customers to quickly and easily review their image
choices, select their favorite poses and create personal,
one-of-a-kind
portraits using a variety of special effects. With guidance from
our well-trained studio associates, our customers can customize
a portrait collection tailored to their tastes and budgets. Our
average customer purchase has been more than $100 in each fiscal
year since our inception.
|
|
|
|
High-quality, in-studio portrait
production. Each of our studios features a
Fujifilm
Frontiertm
printer system and uses professional-quality, silver halide
Crystal
Archivetm
portrait paper, which together
|
1
|
|
|
|
|
produce vivid colors and image stability. Ordered portraits are
printed
on-site and
typically are ready within 15 minutes after a customer selects a
portrait collection.
|
Under the leadership of our President and Chief Executive
Officer, John Grosso, we have grown net sales from
$43.0 million in fiscal 2006 to $111.0 million in
fiscal 2009, representing a compound annual growth rate (CAGR)
of 37.2%. Over the same period we have grown net income from
$1.3 million to $2.5 million and EBITDA from
$7.0 million to $16.5 million, representing a CAGR of
24.4% and 33.1%, respectively. We have achieved positive
comparable studio sales growth in every year since opening our
first studio in 2002. We believe our business performs well
through economic cycles, including the recent economic downturn,
as demonstrated by our comparable studio sales increases of
11.3% in fiscal 2008 and 6.9% in fiscal 2009. Comparable studio
sales increased 8.7% for the first quarter of fiscal 2010.
Our
Competitive Strengths
We believe the following strengths differentiate us from our
competitors and are important to our success:
|
|
|
|
|
Compelling customer experience and value
proposition. We provide our customers
high-quality portraits, typically within an hour and a half of
entering our studio, in a pleasant and convenient studio
environment. We believe that our proprietary systems and
software and
on-site,
state-of-the-art
digital imaging and printing technology allow us to offer a wide
variety of portrait collections at compelling price points to a
high volume of customers.
|
|
|
|
Customer-focused real estate strategy. We
locate our free-standing portrait studios in high-visibility,
high-traffic, open-air lifestyle and power centers that we
believe have become the preferred shopping destinations for
U.S. consumers due to their accessibility and convenience.
In contrast, our primary competitors typically locate their
studios within enclosed malls or other host retailers.
|
|
|
|
Disciplined operating philosophy with scalable
processes. We have developed and documented
detailed and standardized systems, procedures and processes that
we believe have allowed us to rapidly grow our studio base while
maintaining consistently high-quality customer service and
in-studio execution.
|
|
|
|
Performance-based culture with emphasis on
training. We believe our customer-focused and
performance-based culture allows us to attract and retain
motivated, high-achieving employees who share our vision for
success. The majority of our associates are college-educated and
start their employment at our central training facility, where
they attend a comprehensive two-week training program that
focuses on developing professional portrait techniques and
personalizing the customer experience while maximizing sales
productivity. Our associates also receive ongoing evaluation and
training to enhance their skills.
|
|
|
|
Attractive and consistent studio
economics. Our studio model has consistently
delivered strong unit economics across a variety of geographic
locations. Our studios require minimal inventory investment and
typically generate positive cash flow within one year of
opening. For new studios, we target a pre-tax, cumulative cash
payback on our net investment within three years.
|
|
|
|
Experienced management team with a proven track
record. We have assembled a management team that
has over 100 combined years of experience in the retail
photography industry. Our co-founders, John Grosso, President
and Chief Executive Officer, and John Davis, Executive Vice
President and Chief Development Officer, have each spent more
than 30 years in the photography industry.
|
Our
Growth Strategies
We plan to execute several strategies to drive revenue and
operating income growth, including:
|
|
|
|
|
Accelerating the expansion of our studio
base. We intend to accelerate the expansion of
our studio base in new and existing markets. Based on our
operating experience, we believe the U.S. market can
|
2
|
|
|
|
|
support over 850 Portrait Innovations studios. We intend to open
approximately 30 new studios in fiscal 2010 and increase our
studio base by approximately 20% annually thereafter.
|
|
|
|
|
|
Increasing sales productivity. We seek to
maximize our comparable studio sales by maintaining consistent
studio-level execution and generating increased customer
traffic. We plan to continue to implement a variety of
initiatives to enhance sales productivity in our studios, which
we believe already generate the highest average studio sales
volume of any major chain in the portrait industry.
|
|
|
|
Growing our national brand awareness. We
believe our Portrait Innovations brand will continue to gain
awareness as we accelerate our studio openings and expand our
geographic footprint. We plan to continue to support the brand
through a broad mix of media, and we also believe we will
continue to benefit from
word-of-mouth
and grass roots marketing.
|
|
|
|
Investing in and developing technology. We
intend to remain at the forefront of digital image capture and
printing technology, which we believe will further differentiate
us from our competitors. We also plan to continue to develop
business systems and methodologies intended to improve business
processes, create and deliver innovative product offerings, and
capture and analyze information to better manage our business.
|
|
|
|
Improving our operating margins. We believe
that our initiatives to improve sales productivity will result
in increased studio-level contribution margins. In addition, we
believe we will achieve higher levels of profitability by
leveraging corporate and other overhead costs against a growing
revenue base as our studio location footprint expands.
|
Our
Market
We operate within the large and highly fragmented
U.S. professional portrait market which serves a broad
range of consumers who purchase professional portraits to
capture cherished memories and commemorate life milestones. The
professional market is distinguished by photographers trained in
advanced techniques who utilize sophisticated camera, lighting
and printing systems to produce high-quality and artistically
appealing portraits. According to Photofinishing News, Inc., the
U.S. professional portrait market totaled $8.8 billion
in sales in 2008 and has grown modestly over the past several
years. Competition within this market includes large studio
chains operating in national retail hosts, other free-standing
portrait studio chains, national school and church photographers
and a large number of small, independent companies and
individual photographers.
As a result of their many years of experience in the
professional portrait industry, our co-founders,
Messrs. Grosso and Davis, and other senior officers and key
employees, designed our business model and strategy to respond
to and take advantage of certain trends that have been
transforming the U.S. professional portrait market and
significantly altering its competitive landscape. These trends
include the proliferation of digital technology in personal
photography, changes in consumer shopping preferences and the
increasing importance of key demographic groups.
We believe that, based on net sales, Portrait Innovations is the
fastest growing of the major studio chains in the professional
portrait market.
Corporate
Information
Portrait Innovations, Inc., our subsidiary, was incorporated in
North Carolina in 2000 and re-incorporated in Delaware in 2002.
In 2008, we completed a holding company formation transaction
and Portrait Innovations, Inc. became the wholly-owned
subsidiary of Portrait Innovations Holding Company, a Delaware
corporation incorporated in 2008.
Our principal executive offices are located at 2016 Ayrsley Town
Boulevard, Suite 200, Charlotte, North Carolina 28273.
Our telephone number is
(704) 499-9300
and our website address is www.portraitinnovations.com. The
information contained on our website is not incorporated into
and does not form a part of this prospectus.
3
The
Offering
|
|
|
Common stock offered by us |
|
shares |
|
Common stock offered by the selling stockholders |
|
shares |
|
Total common stock offered |
|
shares |
|
Common stock to be outstanding after the offering |
|
shares |
|
Over-allotment shares |
|
shares
from certain selling stockholders. |
|
Use of proceeds |
|
We intend to use the net proceeds from this offering to repay
debt under our revolving credit facility and to pay accrued and
unpaid dividends on our outstanding preferred stock, which were
approximately $8.0 million and $3.0 million,
respectively, as of May 2, 2010, and the remainder to fund
studio expansion and for other general corporate purposes. |
|
|
|
We will not receive any proceeds from the sale of shares by the
selling stockholders, including upon exercise, if any, of the
underwriters over-allotment option. We estimate that our
net proceeds from this offering will be approximately
$ million, based on an assumed
initial public offering price of
$ per share (the mid-point of the
price range set forth on the cover page of this prospectus) and
after deducting the underwriting discounts and commissions and
our estimated offering costs of
$ million. See Use of
Proceeds. |
|
Dividend policy |
|
We do not anticipate declaring or paying cash dividends on our
common stock for the foreseeable future. See Dividend
Policy. |
|
Proposed NASDAQ Global Market symbol |
|
PTRT |
|
Risk factors |
|
See Risk Factors and other information included in
this prospectus for a discussion of factors you should carefully
consider before deciding to invest in shares of our common stock. |
|
|
|
Conflicts of interest |
|
An affiliate of Wells Fargo Securities, LLC, one of the
underwriters, is the lender under our revolving credit facility
and may receive more than five percent of the net proceeds of
this offering. Thus, Wells Fargo Securities, LLC has a
conflict of interest as defined in Rule 2720 of
the Conduct Rules of the Financial Industry Regulatory
Authority, Inc. and, accordingly, J.P. Morgan Securities
Inc. is acting as the qualified independent
underwriter. See Conflicts of Interest. |
The number of shares of our common stock to be outstanding after
this offering is based
on shares
outstanding as
of ,
2010, after giving effect to the conversion of all of our
convertible preferred stock into common stock upon the
completion of this offering, and excludes:
|
|
|
|
|
shares
of common stock issuable upon the exercise of outstanding stock
options with a weighted average exercise price of
$ per share; and
|
|
|
|
an aggregate
of
additional shares of common stock reserved for future issuance
under our stock option plans as
of ,
2010.
|
4
Unless the context otherwise requires or we specifically state
otherwise, all information in this prospectus:
|
|
|
|
|
assumes an initial public offering price of
$ per share of common stock, the
mid-point of the range set forth on the cover page of this
prospectus; and
|
|
|
|
gives effect to the conversion of all outstanding shares of our
convertible preferred stock into shares of our common stock
subject to and upon the completion of this offering.
|
Share numbers presented in this prospectus do not give effect to
the
for stock
split that will be effected prior to the completion of this
offering.
5
Summary
Consolidated Financial Information and Operating Data
The following table presents summary historical consolidated
financial information and operating data for the periods
indicated. You should read the following summary consolidated
financial information and operating data in conjunction with our
audited and unaudited financial statements, including the notes
thereto, and Managements Discussion and Analysis of
Financial Condition and Results of Operations included
elsewhere in this prospectus. We have derived the consolidated
statement of income data for the years ended February 3,
2008, February 1, 2009 and January 31, 2010, and the
consolidated balance sheet data as of February 1, 2009 and
January 31, 2010 from our audited consolidated financial
statements included elsewhere in this prospectus. We have
derived the consolidated statement of income data for the fiscal
quarters ended May 3, 2009 and May 2, 2010 and the
consolidated balance sheet data as of May 2, 2010 from our
unaudited condensed consolidated financial statements included
elsewhere in this prospectus. We have derived the consolidated
balance sheet data as of February 3, 2008 and May 3,
2009 from our audited and unaudited financial statements,
respectively, not included in this prospectus. Our historical
results for any prior period are not necessarily indicative of
results to be expected in any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended(1)
|
|
|
Fiscal Quarter Ended
|
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
May 3,
|
|
|
May 2,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(Dollars in thousands, except per share, per studio and per
square foot data)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Statement of income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
73,203
|
|
|
$
|
97,402
|
|
|
$
|
111,009
|
|
|
$
|
25,566
|
|
|
$
|
29,867
|
|
Cost of goods sold (exclusive of depreciation and amortization
shown below)
|
|
|
18,433
|
|
|
|
24,422
|
|
|
|
28,663
|
|
|
|
6,424
|
|
|
|
7,418
|
|
Selling, general and administrative expenses
|
|
|
44,409
|
|
|
|
58,559
|
|
|
|
65,863
|
|
|
|
15,563
|
|
|
|
18,232
|
|
Depreciation and amortization expense
|
|
|
7,247
|
|
|
|
10,643
|
|
|
|
12,208
|
|
|
|
2,924
|
|
|
|
3,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,114
|
|
|
|
3,778
|
|
|
|
4,275
|
|
|
|
655
|
|
|
|
1,130
|
|
Interest expense, net
|
|
|
1,459
|
|
|
|
1,257
|
|
|
|
497
|
|
|
|
137
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,655
|
|
|
|
2,521
|
|
|
|
3,778
|
|
|
|
518
|
|
|
|
1,077
|
|
Provision (benefit) for income taxes
|
|
|
(1,454
|
)
|
|
|
1,234
|
|
|
|
1,244
|
|
|
|
194
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,109
|
|
|
$
|
1,287
|
|
|
$
|
2,534
|
|
|
$
|
324
|
|
|
$
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,944,759
|
|
|
|
3,879,927
|
|
|
|
4,164,487
|
|
|
|
4,155,609
|
|
|
|
4,235,984
|
|
Diluted
|
|
|
7,092,963
|
|
|
|
3,879,927
|
|
|
|
8,544,890
|
|
|
|
4,155,609
|
|
|
|
8,637,076
|
|
Net income (loss) per common share(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
(0.29
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
(0.29
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable studio sales increase(3)
|
|
|
21.6%
|
|
|
|
11.3%
|
|
|
|
6.9%
|
|
|
|
11.2%
|
|
|
|
8.7%
|
|
Number of studios (at period end)
|
|
|
120
|
|
|
|
150
|
|
|
|
170
|
|
|
|
155
|
|
|
|
181
|
|
Total square footage (at period end)
|
|
|
261,568
|
|
|
|
334,547
|
|
|
|
387,172
|
|
|
|
346,826
|
|
|
|
414,061
|
|
Average square footage per studio (at period end)(4)
|
|
|
2,180
|
|
|
|
2,230
|
|
|
|
2,277
|
|
|
|
2,238
|
|
|
|
2,288
|
|
Net sales per average number of studios(5)
|
|
$
|
732,000
|
|
|
$
|
695,000
|
|
|
$
|
692,000
|
|
|
$
|
168,000
|
|
|
$
|
169,000
|
|
Net sales per average square foot(6)
|
|
$
|
339
|
|
|
$
|
315
|
|
|
$
|
307
|
|
|
$
|
75
|
|
|
$
|
74
|
|
Capital expenditures
|
|
$
|
26,514
|
|
|
$
|
15,292
|
|
|
$
|
11,709
|
|
|
$
|
2,420
|
|
|
$
|
4,012
|
|
EBITDA(7)
|
|
$
|
10,361
|
|
|
$
|
14,421
|
|
|
$
|
16,483
|
|
|
$
|
3,579
|
|
|
$
|
4,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,060
|
|
|
$
|
5,951
|
|
|
$
|
1,987
|
|
|
$
|
2,031
|
|
|
$
|
78
|
|
Working capital
|
|
|
(3,797
|
)
|
|
|
(4,130
|
)
|
|
|
(12,333
|
)
|
|
|
(5,463
|
)
|
|
|
(9,691
|
)
|
Total assets
|
|
|
56,845
|
|
|
|
61,062
|
|
|
|
57,761
|
|
|
|
57,414
|
|
|
|
59,174
|
|
Total debt
|
|
|
13,950
|
|
|
|
13,950
|
|
|
|
4,950
|
|
|
|
13,950
|
|
|
|
7,950
|
|
Redeemable preferred stock(8)
|
|
|
28,414
|
|
|
|
26,393
|
|
|
|
26,433
|
|
|
|
24,638
|
|
|
|
27,031
|
|
Total stockholders equity (deficit)
|
|
|
(3,978
|
)
|
|
|
(401
|
)
|
|
|
198
|
|
|
|
(572
|
)
|
|
|
695
|
|
6
|
|
|
(1) |
|
Our fiscal year is the 52- or 53-week period ending on the
Sunday nearest January 31. Fiscal years ended
February 1, 2009 and January 31, 2010 were 52-week
years. The fiscal year ended February 3, 2008 was a 53-week
year, and the 53rd week accounted for approximately $1,045,000
in net sales. |
|
(2) |
|
Net income (loss) per common share reflects dividends accrued
on, and net income allocated to, our preferred stock. See
Note 15 of notes to our consolidated financial statements
and Note 12 of notes to our unaudited condensed
consolidated financial statements included elsewhere in this
prospectus. |
|
(3) |
|
Comparable studio sales increase reflects sales for studios
beginning on the first day of the 53rd week after opening.
Comparable studio sales increase for the fiscal year ended
February 3, 2008 was adjusted by excluding the 53rd week. |
|
(4) |
|
Average square footage per studio is calculated by dividing
total square footage at period end by the number of studios at
period end. |
|
(5) |
|
Net sales per average number of studios was calculated by
dividing net sales for the trailing
12-month
period by the average number of studios open during such
trailing
12-month
period. Net sales per average number of studios for the fiscal
year ended February 3, 2008 was adjusted to exclude the net
sales effects of the 53rd week. |
|
(6) |
|
Net sales per average square foot was calculated by dividing net
sales for the trailing
12-month
period by the average square footage for those studios open
during such trailing
12-month
period. Net sales per average total square foot for the fiscal
year ended February 3, 2008 was adjusted to exclude the net
sales effects of the 53rd week. |
|
(7) |
|
EBITDA is defined as net income (loss) before
interest expense (net of interest income), provision for income
taxes and depreciation and amortization expense. EBITDA does not
represent, and should not be considered as, an alternative to
net income or cash flows from operating activities, each as
determined in accordance with generally accepted accounting
principles in the United States (GAAP). We have
presented EBITDA because we consider it an important
supplemental measure of our performance and believe it is
frequently used by analysts, investors and other interested
parties in the evaluation of retail companies. Management uses
EBITDA as a measurement tool for evaluating our actual operating
performance compared to budget and prior periods and in
evaluating performance for incentive compensation purposes.
Other companies may calculate EBITDA differently than we do.
EBITDA is not a measure of performance under GAAP and should not
be considered as a substitute for net income prepared in
accordance with GAAP. EBITDA has limitations as an analytical
tool, and you should not consider it in isolation or as a
substitute for analysis of our results as reported under GAAP. |
The following table sets forth the reconciliation of net income
to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Fiscal Quarter Ended
|
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
May 3,
|
|
|
May 2,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
Net income
|
|
$
|
3,109
|
|
|
$
|
1,287
|
|
|
$
|
2,534
|
|
|
$
|
324
|
|
|
$
|
664
|
|
Provision (benefit) for income taxes
|
|
|
(1,454
|
)
|
|
|
1,234
|
|
|
|
1,244
|
|
|
|
194
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,655
|
|
|
|
2,521
|
|
|
|
3,778
|
|
|
|
518
|
|
|
|
1,077
|
|
Depreciation and amortization expense
|
|
|
7,247
|
|
|
|
10,643
|
|
|
|
12,208
|
|
|
|
2,924
|
|
|
|
3,087
|
|
Interest expense, net
|
|
|
1,459
|
|
|
|
1,257
|
|
|
|
497
|
|
|
|
137
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
10,361
|
|
|
$
|
14,421
|
|
|
$
|
16,483
|
|
|
$
|
3,579
|
|
|
$
|
4,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) |
|
The holders of all of the outstanding shares of preferred stock
have agreed to convert such preferred stock into common stock
subject to, and upon the completion of, this offering. |
7
RISK
FACTORS
An investment in our common stock involves a number of risks.
You should carefully consider the following risk factors in
addition to the other information contained in this prospectus
before investing in our common stock. If any of the following
risks or uncertainties occurs, our business, results of
operations and financial condition could be materially and
adversely affected. As a result, the trading price of our common
stock could decline and you may lose all or a part of your
investment in our common stock.
Risks
related to our business and industry
Our
business is highly dependent on our ability to anticipate and
appropriately respond to the trends and preferences that drive
our customers behavior and purchasing
habits.
Our business is subject to changing consumer trends and
preferences. The professional portrait market has been and
continues to be affected by shifts in consumer preferences and
expectations regarding convenience, speed, quality, value and
preferred shopping venue, and our failure to accurately predict
or respond to evolving consumer trends could negatively affect
consumers opinions of us as a choice for portraits. The
success of our business model depends upon a number of factors,
including our ability to continue to refine and innovate our
portrait experience and product offerings, price our products
competitively and differentiate our product offerings and
portrait experience from those of our competitors. If we are
unsuccessful on any of these fronts, our business, results of
operations, financial condition and prospects could be adversely
affected.
In addition, changing customer preferences in favor of
preserving and sharing photographic images in electronic, rather
than printed, form could erode our market share and overall
demand for our products. If such changes reduce consumer demand
for our product offerings, we could be forced to significantly
adapt or abandon our business model. We also believe the
proliferation of amateur digital photography is making customers
more discerning, demanding and self-reliant, particularly given
the abundance of high-quality and easy-to-use technology now
available at accessible price points, which may adversely affect
overall activity in the professional portrait market.
Our
business, sales and growth prospects depend upon our ability to
continue to provide our customers a high-quality, differentiated
portrait experience.
A critical component of our strategy is providing a
high-quality, differentiated portrait experience to our
customers. Accordingly, our ability to consistently and
effectively deliver this experience for new and repeat customers
across our existing and expanding studio base is important to
our reputation and our ability to attract and retain customers.
As a result, we need to continue to invest substantial capital
resources in technology, studio development and employee
recruiting and training. If we do not make such investments or
fail to provide a high-quality, differentiated portrait
experience to our customers, we may lose studio traffic,
revenues, market share and suffer harm to our reputation and
brand, which could have a material adverse effect on our
business, results of operations and financial condition.
Since our business is highly dependent on customer satisfaction
and providing a differentiated portrait experience, any
significant increase in average waiting time will directly
impact customer satisfaction. Average waiting times may increase
for a variety of reasons, including the failure to adhere to
scheduled appointment times, overbooking, the
longer-than-expected
duration of any particular portrait session and the higher
customer volume we experience during busy holiday periods.
Furthermore, if our studio associates and managers fail to
provide a satisfactory experience to our customers, those
customers may not return and our reputation and brand may be
harmed. If we are unable to address customer service issues
adequately, our business and results of operations could be
materially adversely affected.
We may
not be able to sustain comparable studio sales
growth.
We may not be able to sustain or improve upon the levels of
comparable studio sales that we have experienced in the recent
past. A variety of factors, many of which are beyond our
control, affect our comparable studio sales and could cause our
quarterly and annual operating results to fluctuate
significantly.
8
We define comparable studio sales to include sales for each of
our studios beginning in its 53rd week of operations.
Comparable studio sales may be affected by a number of factors,
including but not limited to:
|
|
|
|
|
the rate at which sales in our new studios increase during their
first years of operation;
|
|
|
|
customer trends and preferences, and our ability to anticipate
and effectively respond to changes in such trends and
preferences;
|
|
|
|
pricing of our products;
|
|
|
|
cannibalization of existing studio sales by new studio openings;
|
|
|
|
the number and timing of studios we may open, close, renovate,
relocate or expand;
|
|
|
|
the timing of the release of new product offerings and
promotional events;
|
|
|
|
changes in our product mix;
|
|
|
|
changes in the overall economy; and
|
|
|
|
weather conditions.
|
Accordingly, our comparable studio sales results for any one
fiscal period are not necessarily indicative of the comparable
studio sales results to be expected for any other period, and
our comparable studio sales for any particular future period may
decrease. In addition, many retail operators have been unable to
sustain high levels of comparable store sales growth during and
after periods of substantial expansion. These factors may cause
our comparable studio sales results to be materially lower than
in recent periods and materially lower than our expectations,
which could reduce our sales and profitability and limit our
ability to finance our growth strategy. If our future comparable
studio sales decline or fail to meet market expectations, the
price of our common stock could also decline.
Our
growth strategy depends upon our ability to successfully manage
our business on a substantially larger scale by opening and
operating a significant number of new studios each year in a
timely and cost-effective manner without diminishing the sales
and negatively affecting the performance of our existing studio
base. We may not be able to open new studios as planned and any
new studios we do open may not achieve our targeted
profitability.
We intend to pursue an aggressive growth strategy of opening new
studios for the foreseeable future. As a result, our future
operating results will depend largely upon our ability to
successfully open and operate a significant number of new
studios each year in a timely and cost-effective manner and to
profitably and effectively manage a significantly larger
business.
Our ability to successfully execute our growth strategy depends
on many factors including, among others, our ability to:
|
|
|
|
|
identify and satisfy the preferences of our customers in new
geographic areas and markets;
|
|
|
|
address competitive, marketing, distribution and other
challenges encountered in connection with expansion into new
geographic areas and markets;
|
|
|
|
identify desirable studio locations, the availability of which
is largely outside of our control;
|
|
|
|
negotiate acceptable lease terms and desired tenant allowances;
|
|
|
|
ensure completion of a new studio build-out, which depends in
part on the financial resources of the contractors we retain,
timely compliance with local building codes and our ability to
timely obtain any required governmental approvals, licenses and
permits;
|
|
|
|
generate sufficient cash flows from operations or obtain the
necessary capital to fund expansion on acceptable terms;
|
|
|
|
hire, train and retain an expanded workforce of studio
associates, managers and support personnel;
|
9
|
|
|
|
|
successfully integrate new studios into our existing control
structure and operations, including information systems
integration; and
|
|
|
|
achieve targeted profitability for new studios.
|
In addition, as the number of our studios increases, we may face
risks associated with market saturation of our product
offerings. To the extent our new studio openings are in markets
where we have existing studios, we may experience reduced net
sales in existing studios in those markets. There is no
assurance that any newly opened studios will be received as well
as, or achieve net sales or profitability levels comparable to
those of, our existing studios in the time periods estimated by
us, or at all. If our studios fail to achieve, or are unable to
sustain, acceptable net sales and profitability levels, or incur
significant losses, our business and results of operations may
be materially harmed and we may incur significant costs
associated with closing those studios.
Our current expansion plans are only estimates. The actual
number of new studios we open each year and our cash payback on
investment period could differ significantly from our targets.
For example, we significantly decreased the number of studio
openings in 2009 as a result of the economic downturn. In
addition, while we believe the U.S. market can support over
850 Portrait Innovations studios, this estimate is not based on
an identification of specific, future locations and other
factors that we consider in opening a new studio. Any failure to
successfully open and operate new studios in the numbers, within
the time frames and at the costs estimated by us could have a
material adverse effect on our business, results of operations,
financial condition and prospects and result in a decline in the
price of our common stock. Furthermore, our failure to
effectively address challenges such as these could also
significantly divert the time and resources of our senior
management.
If we
fail to keep pace with or adapt to changes that continue to take
place in digital imaging, printing and software application
technologies, or if such changes reduce consumer demand for our
product offerings, our business, results of operations and
financial condition could be adversely affected.
We believe that a key to our success to date has been our
ability to invest in
state-of-the-art
digital imaging and printing technologies and customized
software applications and systems that we believe enable us to
deliver a differentiated customer experience at compelling price
points. If we are unable to keep pace with changes in these
technologies or invest in software applications and systems that
further our business objectives, our business, results of
operations, financial condition and competitive position could
be adversely affected. Advances in these areas have required and
could continue to require us to make significant capital
expenditures, which could adversely affect our profitability. In
addition, evolving technology could enable customers or small
operators to capture images and produce portraits that are
comparable to the quality of our portraiture at a significantly
lower cost, which could force us to significantly adapt or
abandon our business model.
The
loss of our key senior management, particularly Mr. John
Grosso or Mr. John Davis, or the failure to attract
additional senior management, could have a material adverse
effect on our business.
Our success depends to a significant extent on the continued
services of our senior management team, particularly
Mr. John Grosso and Mr. John Davis, who co-founded our
business and developed our overall business and operating
strategy and whose experience and knowledge of our business and
industry would be difficult to replace. We do not have
employment agreements or non-compete agreements with
Mr. Grosso or Mr. Davis, and do not have agreements
that provide for employment other than on an at will
basis with any of our other senior executive officers. We do not
maintain key person life insurance for any of our senior
executives other than Mr. John Grosso.
In addition, the performance of our stock price may also affect
our ability to attract and retain our key employees. Our senior
executive officers hold a significant amount of our common
stock, are vested in a substantial amount of stock options and
will continue to become vested in additional stock options.
These senior executive officers may be more likely to monetize
their holdings and leave us if the trading price of our common
stock significantly exceeds their investment in any shares they
own or the exercise price of any
10
options they hold. They also may be more likely to leave us if
the trading price of our common stock drops significantly below
the exercise price of the options they hold.
Our inability to retain our key management and attract new
senior management could adversely affect our ability to operate
our business and execute our growth strategy, which could have a
material adverse effect on our business, results of operations
and financial condition.
Increased
competition in the U.S. professional portrait market could
adversely impact our business, results of operations and
financial condition, as well as our future growth
strategy.
The U.S. professional portrait market in which we operate
is highly competitive. We believe the most important competitive
factors in our market include service, innovation, technology,
quality, convenience, value, price and package variety. Our
failure to deliver on any of these measures would adversely
affect our competitive position.
Advances in technology and changing consumer preferences may
enable current or new competitors to innovate and more cheaply
develop similar or new products or software platforms to compete
with our business or develop a similar business model. If
competitors with significantly greater resources than ours
decide to replicate or develop a similar business model, they
may be able to quickly gain recognition and acceptance of their
products through marketing and promotion.
Because of the competitive pressures in our industry, it may be
difficult for us to increase profitability on a sustained basis
by raising our prices. Our ability to increase profitability
over the longer term will largely depend on our ability to open
new studios, increase customer traffic in existing studios and
manage operating costs effectively. Furthermore, there can be no
assurance that we will not be forced to engage in price-cutting
initiatives to respond to competitive and consumer pressures.
Our
failure to build and maintain a strong brand image and generate
studio traffic through our marketing activities could harm our
business, results of operations, financial condition and growth
prospects.
We believe our success in our existing markets, as well as our
prospects for growing our business in new markets, is dependent
on our ability to build and maintain strong brand image and
awareness. We believe a number of channels support our brand
awareness, from
word-of-mouth
and grass roots marketing, such as our participation in local
charity and public service events in markets where we operate
studios, to more focused marketing efforts, such as
participation in target-specific online social networking sites,
an interactive website, seasonal
e-mail
communications, targeted customer-specific direct mail, as well
as advertising through newspapers and magazines, and selective
television advertising. Our success depends in part on our
ability to generate positive customer feedback for dissemination
through
word-of-mouth
and primary online channels where consumers seek and share
information regarding products and services, as well as our
ability to connect with customers through our marketing
campaigns. If our marketing efforts and selected methods of
advertising fail to keep pace with continuing changes in
consumer preferences or if customers provide negative feedback
on our products and services through
word-of-mouth
and online channels, we may be unsuccessful in our efforts to
attract and retain customers, which could have a material
adverse effect on our business, results of operations and
financial condition.
Economic
or other conditions that would reduce the availability or
attractiveness of the locations where we operate studios or seek
to open new studios, increase our leasing or construction costs
or otherwise impair our real estate expansion strategy could
adversely affect our business, results of operations and growth
prospects.
We intend to grow our studio base by continuing to seek
attractive locations in our target markets that are located in
open-air lifestyle or power centers in high traffic areas with
easy access and
drive-up
parking. The recent economic downturn, coupled with tightened
credit markets, has slowed the pace of commercial real estate
development generally, including the types of retail centers in
which we seek to locate new studios. These conditions have also
led to the closure of substantial amounts of retail space
nationwide. The
11
continuation or worsening of conditions that would limit the
availability of attractive retail space could adversely affect
our growth plans. Conversely, as a tenant of substantial amounts
of retail space, we are subject to economic risks that would
increase our occupancy costs, such as rent increases due to a
reduced supply of retail space, increased demand for such space,
or other factors. The success of our studio locations also
partly depends on our ability to establish and maintain good
relationships with developers and operators of the centers where
we have studios and seek to lease our studios. If our
relationships with these parties become strained, it could
affect our ability to renew existing leases, secure new leases
or obtain lease terms or tenant allowances we deem favorable or
necessary. Any reputational damage resulting from conflicts with
a particular developer or operator could also impair our ability
to negotiate future leases with other developers or operators.
Our studio sales are derived in part from the volume of traffic
generated by anchor stores and other destination retailers in
the centers where our studios are located. General or regional
economic downturns, increases in fuel prices, increased
competition or changes in demographics or consumer shopping
preferences could all adversely affect actual or projected
customer traffic to these centers, which in turn could affect
the ability or willingness of other desirable tenants to secure
leases or maintain stores in these centers. To the extent any
anchor stores or other destination retailers close stores,
default on pre-opening commitments or otherwise change plans in
a manner that reduces customer traffic to the centers in which
we have located or have committed to locate our studios, the
business and revenues of our studios could be materially and
adversely affected.
In addition, the raw materials we use to build and remodel our
studios are subject to availability constraints and price
volatility caused by weather, supply conditions, government
regulations, general economic conditions and other unpredictable
factors. Increases in the demand for, or the price of, these raw
materials could increase the startup costs of building new
studios and hurt our profitability. Any such changes could have
a material adverse effect on our business, results of operations
and financial condition.
Changing
economic conditions, declines in consumer confidence and
spending and other drivers of customer demand for our products
could materially and adversely affect our business, results of
operations, financial condition and future growth
plans.
Demand for our products is driven by trends that affect consumer
confidence, discretionary spending and disposable income, which
have been materially and adversely affected by the recent
economic downturn, including greater levels of unemployment,
declining wages, volatile energy and food costs, higher levels
of consumer debt, declines in home values and in the value of
consumers investments and savings, restrictions on the
availability of credit and other adverse economic conditions. To
the extent any of these negative trends continue, re-emerge or
worsen, demand for our products could decrease, which in turn
could reduce our net sales, income from operations, operating
cash flows and net income and adversely affect our future studio
expansion plans. Additionally, adverse changes in economic
factors that affect our operating expenses, such as increases in
interest rates, prices of the commodities we purchase to operate
our studios and build and equip new studios, rent and utility
expenses and labor and employment costs may increase operating
expenses and thereby adversely affect our operating results and
growth plans.
In addition, our sales are highly dependent on economic
conditions and discretionary spending in the local markets in
which we operate. Local economic conditions that affect
discretionary spending include, among other things, unemployment
trends, the housing market, consumer credit availability and
debt levels. A deterioration in economic conditions in any of
our local markets could result in a decline in our sales and
profitability.
12
Our
business is highly seasonal and we typically generate a
significant portion of our net sales and net income for the
fiscal year during our fourth fiscal quarter, which includes the
November/December holiday period. Accordingly, results for our
fourth fiscal quarter are not indicative of results to be
expected for the full fiscal year. Historical results for our
other fiscal quarters have and are likely to continue to reflect
significantly lower sales and either net losses or nominal net
income. In addition, because of our significant dependence on
fourth quarter performance, we are particularly vulnerable to
conditions that would adversely affect customer traffic,
shopping patterns and holiday spending during this
period.
Our business is highly seasonal. Our fourth quarter, which
includes the holiday season from early November through the end
of December, typically accounts for and is expected to continue
to account for a high percentage of our annual net sales and
income from operations. Our fourth fiscal quarters in fiscal
2008 and 2009 accounted for approximately 36.5% and 37.1%,
respectively, of our net sales in those fiscal years and more
than 100% of our total income from operations and net income in
each of those fiscal years because of offsetting losses incurred
in certain other quarters, particularly the third fiscal
quarter. See Managements Discussion and Analysis of
Financial Condition and Results of Operations
Quarterly results and seasonality, for information
regarding our seasonality and quarterly financial results for
fiscal 2008 and 2009.
Our operations in general, and particularly during our important
fourth quarter period, can be adversely affected by any factors
that reduce consumer and holiday spending, including those
listed above under Changing economic
conditions, declines in consumer confidence and spending and
other drivers of customer demand for our products could
materially and adversely affect our business, results of
operations, financial condition and future growth plans,
and other factors such as inclement weather conditions, which
are unpredictable but to which our studios are generally more
susceptible during the winter months. A decrease in net sales
and income from operations during our fourth quarter would
materially adversely affect our results of operations for the
fiscal year.
The
ultimate resolution of an outstanding tax matter regarding a
benefit we previously provided our employees could differ
materially from our expectations, which could cause us to incur
and recognize cash costs that materially differ from our
estimates and related accruals reflected in our consolidated
financial statements. In addition, our efforts to remediate this
matter could continue to increase our labor and other
administrative costs and adversely affect our employee
relations.
We previously maintained an employee benefit arrangement
intended to subsidize, on a tax-free basis, the cost of health
insurance purchased by our employees. We recently determined
that benefits we paid under this arrangement constituted taxable
wage compensation, with respect to which we were obligated to
withhold income and other employment taxes, instead of tax-free
payments as we had intended. We have voluntarily contacted the
Internal Revenue Service (the Service) in an effort
to discharge all federal tax liabilities related to this matter.
Our audited consolidated statements of income included in this
prospectus for fiscal years ending after January 28, 2007,
the periods for which we believe our liability is not
extinguished under the applicable statute of limitations,
account for our estimate of the additional labor cost related to
the withholding amounts that we did not collect, as well as
related tax effects attributable to reduced pre-tax income for
these periods. Our consolidated balance sheets included in this
prospectus include accrued liabilities for our estimates of the
amounts that may be required to satisfy this liability. See
Note 14 of the notes to our audited consolidated financial
statements appearing elsewhere in this prospectus.
Our estimates and accrued liabilities with respect to this
matter are based on various assumptions, including assumed rates
of withholding, our ability to deduct payments made to the
Service with respect to this matter, our lack of further
obligation or liability with respect to a portion of these
subsidy payments that we reported to certain employees as
taxable income on Form 1099 (rather than taxable wages
Form W-2),
the manner and extent to which the Service will require us to
issue corrected wage statements and the waiver of penalties and
interest in light of our voluntary reporting of this matter. If
one or more of these assumptions materially differ from those
relied upon by the Service in calculating our tax liability, the
amount or our actual liability could differ materially from the
estimates recorded in our financial statements, which in turn
would materially affect our reported results of operations in
the period or periods in which the change in our estimate
13
becomes probable and can be estimated. The ultimate amount and
timing of the cash payment required to resolve this matter is
uncertain. See Managements Discussion and Analysis
of Financial Condition and Results of Operations
Contingencies for a discussion of this matter and the key
assumptions on which our estimates are based.
In our ongoing efforts to investigate and resolve this matter,
we have and may continue to incur additional expenses for legal,
tax and other professional advisors. This matter also may
continue to require additional management time and attention,
which could divert our focus from operational and other business
matters. We are unable to predict the additional time and effort
that may be required to resolve this matter, and these or other
uncertainties could adversely affect our expenses, business,
results of operations and financial condition.
As a result of this matter, as well as the prospective impact of
the recently enacted federal healthcare reform legislation, we
are considering alternative approaches to providing some type of
health-related benefit to our employees. As an interim measure,
we have increased the wage rate of our current employees to
permit them to continue to receive approximately the same
after-tax wage rate that they received prior to our change in
practice to withhold taxes on this intended benefit payment.
This increase is slightly more than our average wage rate
reflected in our labor costs for fiscal 2009. If we decide to
address the issue on a long-term basis by offering a health
benefit plan in lieu of providing the cash payments we have
previously provided and the interim make-whole wage increase,
our employee relations could be adversely affected, particularly
with respect to those employees who elected not to use our
former subsidy payment to purchase health insurance. Despite our
efforts to manage the impact of this issue on our employees, our
employee relations could be adversely affected to the extent
that our employees may be, or perceive that they are, prejudiced
by the income tax, benefits, or wage rate impact of our approach
to resolving the tax issue and implementing a substitute benefit.
We
have identified a material weakness related to our internal
control in the past, and there can be no assurance that material
weaknesses will not be identified in the future.
In connection with our discovery of the noncompliance described
above with respect to the structure and administration of our
intended health premium subsidy program, we identified a
material weakness in our internal control over financial
reporting and were required to restate previously issued
financial statements. This material weakness related to the
inadequacy of internal controls to monitor compliance with tax
regulations regarding an employee benefit plan, as described
above. In addition, our efforts to remediate this matter could
continue to increase our labor and other administrative costs
and adversely affect our employee relations. Although we
believe we have remediated this material weakness, we cannot
assure you that other material weaknesses will not occur or be
discovered in the future. As a public company, we will be
required to implement more rigorous procedures and testing of
our internal controls, which will increase the cost and
complexity of our compliance efforts and could result in the
identification of additional material weaknesses or other
matters requiring remediation.
Maintaining
and improving our financial controls and the requirements of
being a public company will increase our costs and may create
compliance risks, strain our resources, divert managements
attention and affect our ability to attract and retain qualified
board members.
We have never operated as a public company. As a public company,
we will be subject to the reporting requirements of the
Securities Exchange Act of 1934, or the Exchange Act, the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and The
NASDAQ Stock Market rules. The requirements of these rules and
regulations will significantly increase our legal and financial
compliance costs, including costs associated with the hiring of
additional personnel, making some activities more difficult,
time-consuming or costly, and may also place undue strain on our
personnel, systems and resources. Other than Mr. Bailey,
our Chief Financial Officer, Vice President of Finance and
Investor Relations, none of our senior accounting or finance
staff has had prior experience with or responsibility for such
compliance matters for a public company. If we fail to assemble
appropriate compliance policies or personnel or otherwise fail
to satisfy these requirements in a
14
timely matter, such failure could result in regulatory
sanctions, penalties, stockholder lawsuits and could adversely
affect our reputation, stock price or financial condition.
The Exchange Act requires, among other things, that we file
annual, quarterly and current reports with respect to our
business, results of operations and financial condition, in
addition to certain other events and circumstances. The
Sarbanes-Oxley Act requires, among other things, that we
maintain effective disclosure controls and procedures and
internal control over financial reporting. As discussed above,
we have previously identified a material weakness in our
internal control over financial reporting relating to the tax
treatment of a benefit we previously provided to our employees
and have had to restate previously issued financial statements.
Ensuring that we have adequate internal financial and accounting
controls and procedures in place is a costly and time-consuming
effort that must be re-evaluated frequently. Section 404 of
the Sarbanes-Oxley Act will require annual assessments of the
effectiveness of our internal control over financial reporting
by our management and a report by our independent registered
public accounting firm auditing our effectiveness of internal
control over financial reporting beginning with fiscal year 2011
under current rules of the Securities and Exchange Commission,
or SEC. Both we and our independent registered public accounting
firm will be testing our internal controls in connection with
the Section 404 requirements and, as part of that
documentation and testing, we could identify material
weaknesses, significant deficiencies or other areas for further
attention or improvement. Implementing any appropriate changes
to our internal controls may require specific compliance
training for our directors, officers and employees, require the
hiring of additional finance, accounting, legal and other
personnel, entail substantial costs to modify our existing
accounting systems, and take a significant period of time to
complete. Such changes may not, however, be effective in
maintaining the adequacy of our internal controls, and any
failure to maintain that adequacy, or consequent inability to
produce accurate financial statements on a timely basis, could
increase our operating costs and materially impair our ability
to operate our business. Moreover, effective internal controls
are necessary for us to produce reliable financial reports and
are important to help prevent fraud. As a result, our failure to
satisfy the requirements of Section 404 on a timely basis
could result in the loss of investor confidence in the
reliability of our financial statements, which in turn could
cause the market value of our common stock to decline.
Various rules and regulations applicable to public companies
make it more difficult and more expensive for us to maintain
directors and officers liability insurance, and we
may be required to accept reduced coverage or incur
substantially higher costs to maintain coverage. If we are
unable to maintain adequate directors and officers
insurance, our ability to recruit and retain qualified officers
and directors, especially those directors who may be deemed
independent for purposes of The NASDAQ Stock Market rules and
the Exchange Act rules, will be significantly curtailed.
Although we expect that our appointment of two new directors
effective upon consummation of this offering will enable us to
satisfy the initial listing rules of The NASDAQ Stock Market
regarding the composition of our Board of Directors and its key
committees, under applicable phase-in rules we will need to
appoint at least one other independent director within one year
of the commencement of the listing of our common stock on NASDAQ
in order to be fully compliant with these requirements. If we
should fail to recruit and retain such an additional director on
a timely basis or otherwise fail to maintain a Board of
Directors composed of persons who enable us to meet these
requirements, our common stock could be delisted from The NASDAQ
Stock Market, which would likely have a material adverse effect
on the liquidity and trading price of our common stock.
Our
failure to attract and retain an increasing number of qualified
studio managers, associates and part-time employees, especially
in light of our growth strategy, could adversely affect our
business and growth prospects.
Our business model and future growth are highly dependent on our
ability to attract, promote, retain and motivate qualified,
well-educated studio associates and managers who understand,
appreciate and effectively represent our corporate culture and
are able to establish credibility with our customers. If we are
unable to hire and retain such studio personnel, our ability to
open new studios may be impaired, the performance of our
existing and new studios could be materially adversely affected
and our brand image may be negatively impacted. We are also
dependent upon part-time personnel to adequately staff our
studios, particularly during peak periods such as the
November/December holiday season. There is no assurance that
sufficient sources of
15
qualified full-time and part-time personnel will be available if
and when needed to meet our demands. Any such failure to meet
our staffing needs or any material increases in our employee
turnover rates could have a material adverse effect on our
business, results of operations and financial condition.
Failures
or interruptions of, or a breach in security relating to, our
information systems could adversely affect us.
We rely heavily on communications and information systems to
conduct our business operations and support our process-driven
approach. All of our studios are connected to our corporate
headquarters through our virtual private network. We also rely
on numerous internet-based systems to operate and manage our
business. Any failure, interruption or breach in security of
these systems, including any failure of our
back-up
systems, could harm or disrupt our ability to operate and
centrally manage our business. In addition, any occurrence of or
perception that we have made an unauthorized disclosure of
confidential customer information, such as personally
identifiable information, payment information or portraits,
could adversely affect our standing with customers and expose us
to the risk of litigation and liability. Any such occurrences
could result in reputational damage or loss of business or
goodwill and could adversely affect our business, results of
operations and financial condition.
We
depend on key vendors and suppliers to provide us with the
equipment, materials and services we need to operate our
business. Any events that would impair these relationships or
hinder our ability to continue sourcing these items at
competitive prices could increase our operating costs, decrease
our operating efficiencies and otherwise adversely affect our
business, results of operations and financial
condition.
We rely on key vendors and suppliers to provide the equipment,
materials and services necessary for our business operations,
including our photographic and printing supplies and equipment
and other technical equipment for our studios, as well as
construction and studio installation services for the
development and outfit of our new studios. In particular, we
purchase all of our photographic paper, processing chemistry and
photographic printers from Fujifilm North America Corporation
(Fuji) and have related supply and maintenance
contracts with Fuji that govern the terms of our purchases from
Fuji and the support, service, maintenance and repair on the
equipment we purchase. Our supply contract with Fuji expires in
January 2011. In addition, we use a single firm to coordinate
the installation of furniture, fixtures and equipment in our new
studios. The occurrence of any events that would disrupt or
impair our ability to continue obtaining these needed goods or
services from our vendors on a timely basis, or any material
increase in the cost of these goods and services, could disrupt
our operations, increase our operating costs and harm our
competitive position. Numerous contingencies beyond our control,
including deterioration in any of our key vendors
financial condition, their failure to perform as we expect,
their failure to follow our vendor guidelines or comply with
applicable laws and regulations in performing on our behalf,
could expose us to operational, competitive and legal risks that
may harm our business.
We are
required to make substantial lease payments under our operating
leases and any failure to make these lease payments when due
would likely have a material adverse effect on our business and
growth plans.
We do not own any of our studios or our corporate facilities but
instead we lease all of these facilities under operating leases.
Payments under these operating leases have historically been one
of our largest expenses. For example, our total rent expense in
fiscal 2009 was $11.7 million, or 10.6% of our net sales.
As of January 31, 2010, we were a party to operating leases
requiring future minimum lease payments aggregating
approximately $58.6 million through fiscal 2014. We expect
that we will also lease our new studio locations, which will
further increase our operating lease expenses and commitments.
We depend on cash flow from operations to pay our lease
expenses. If our business does not generate sufficient cash flow
from operations, and sufficient funds are not otherwise
available to us from borrowings under bank loans or from other
sources, we may not be able to service our operating leases,
grow our
16
business, respond to competitive challenges or fund our other
liquidity and capital needs, which would have a material adverse
effect on our business, results of operations and financial
condition.
We
currently have indebtedness and may also incur additional
indebtedness in the future, and such indebtedness could
adversely affect our financial health and harm our ability to
react to changes to our business and opportunities. Any future
indebtedness may contain covenants that further limit our
business activities.
As of May 2, 2010, we had approximately $8.0 million
of indebtedness outstanding under our revolving credit facility.
We may also incur additional indebtedness in the future for any
number of reasons, including, among others, to finance our
operations and growth strategy, upgrade our business systems or
technology, respond to competitive conditions in our industry,
pursue strategic business ventures, to settle contingent tax
liabilities or other reasons. Any increase in the amount of our
indebtedness could require us to divert funds identified for
other purposes to debt servicing and impair our liquidity
position. If we cannot generate sufficient cash flow from
operations to service such debt, we may need to refinance such
debt, dispose of assets or issue equity to obtain necessary
funds. We do not know whether we would be able to take any of
such actions on a timely basis, on terms satisfactory to us or
at all.
In addition, any indebtedness that we incur in the future may
limit our flexibility and ability to execute our business
strategy by imposing conditions that, among other things:
|
|
|
|
|
require us to use a substantial portion of our cash flow from
operations to pay interest and principal on our debt, which
would reduce the funds available to us for working capital,
capital expenditures and other general corporate purposes;
|
|
|
|
limit our ability to pay future dividends or our flexibility to
take actions we might be otherwise inclined to take or conclude
are in the best interest of our company and stockholders;
|
|
|
|
limit our ability to obtain additional financing for working
capital, capital expenditures, expansion plans and other
investments, which may limit our ability to implement our
business strategy;
|
|
|
|
result in higher interest expense if interest rates increase on
any floating rate borrowings;
|
|
|
|
heighten our vulnerability to downturns in our business,
industry or in the general economy and limit our flexibility in
planning for or reacting to changes in our business and
industry; or
|
|
|
|
limit our ability to make capital expenditures or prevent us
from taking advantage of business opportunities as they arise or
successfully carrying out our plans to expand our studio base
and product offerings.
|
We cannot assure you that our business will generate sufficient
cash flow from operations or that future borrowings will be
available to us in amounts sufficient to enable us to make
payments on our indebtedness or to fund our operations, which
could have a material adverse effect on our business, results of
operations and financial condition.
We may
be unable to adequately protect our intellectual property rights
or avoid infringing the intellectual property rights of third
parties, and the intellectual property rights we have may not be
a meaningful barrier to competition.
We rely primarily on trademark, copyright and trade secret laws,
confidentiality procedures and contractual provisions to protect
our proprietary interests in our business and software. Despite
our efforts, we can give no assurance that our intellectual
property rights are adequate to prevent others from developing
software platforms or using brands that are substantially
similar to our own and upon which we rely to provide a
differentiated and recognized portrait experience. Competitors
may adopt brand names similar to our trademark PORTRAIT
INNOVATIONS, and owners of similar registered trademarks
may bring trade name or trademark infringement claims against
us. Further, policing our proprietary rights is difficult and
may not always be effective, and most of our efforts to protect
our intellectual property rights, including the registration of
our trademark, have been limited to the U.S. Thus, we can
provide no assurance that others do
17
not have superior rights to use our intellectual property in
other countries. Others may assert claims that our trademarks or
copyrights in our proprietary software or materials are invalid
or infringe upon their intellectual property rights. If such
disputes were to occur, we may not be able to resolve them to
our satisfaction. In addition, the laws of certain countries may
not protect proprietary rights to the same extent as do the laws
of the U.S. Our inability to protect or maintain exclusive
use of our intellectual property could adversely affect our
business operations.
Unauthorized parties may copy aspects of our software or obtain
and use information that we hold as trade secrets and regard as
proprietary. In addition, in the course of seeking patent
protection, we were required to publicly disclose information
related to our software sufficient to enable others with
ordinary skill in the relevant technology area to
practice our invention. Third parties may be able to legally
circumvent our proprietary rights by independently developing
software that is substantially similar to our own, and our
disclosure could assist such development.
We have issued patents and pending patent applications related
to certain aspects of our proprietary software. Valid patents
may not issue from our pending applications, and our issued
patents, along with any claims in our pending applications that
are allowed, may be challenged, invalidated or circumvented, or
may not be sufficiently broad to foreclose potential competitors
from developing similar new technologies. Additionally, our
issued foreign patents would not provide us any protection in
the U.S. and vice versa. Furthermore, costly and time
consuming litigation could be necessary to enforce and determine
the scope of our patents.
In addition, in its recent decision in Bilski v. Kappos,
the Supreme Court of the United States reemphasized that
abstract ideas are not patentable as business methods, but that
business methods may be patentable processes if they otherwise
satisfy the requirements of the U.S. Patent Act such
methods are novel, nonobvious and fully and particularly
described. The continued emphasis on the unpatentability of
abstract ideas could result in at least some of our existing
patents being rendered invalid and unenforceable or could result
in the denial of one or more of our pending patent applications.
Changes
in laws and regulations that currently or prospectively apply to
our business, as well as changes in our employee benefits
practices, could adversely affect our cost of operations,
employee relations and profitability.
Our business is subject to numerous federal and state laws and
regulations that govern, among things other than environmental
and health and safety matters as discussed below, tax and
employment matters. From time to time, changes are proposed to
these laws and regulations that, if enacted, could materially
increase our cost of operations. For example, the recently
enacted federal healthcare reform legislation could
significantly increase our employee costs by requiring us either
to provide health insurance coverage to our employees or to pay
certain penalties for electing not to provide such coverage.
Because these new requirements are broad, complex, subject to
certain phase-in rules and may be challenged by legal actions in
the coming months and years, it is difficult to predict the
ultimate impact that this legislation will have on our business
and operating costs. We cannot assure you that this legislation
or any alternative version that may ultimately be implemented
will not materially increase our operating costs. This
legislation could also adversely affect our employee relations
and ability to compete for new employees if our response to this
legislation is considered less favorable than the responses or
health benefits offered by employers with whom we compete for
talent. In addition, for the reasons discussed above in
The ultimate resolution of an outstanding tax
matter regarding a benefit we previously provided our employees
could differ materially from our expectations, which could cause
us to incur and recognize cash costs that materially differ from
our estimates and related accruals reflected in our consolidated
financial statements. In addition, our efforts to remediate this
matter could continue to increase our labor and other
administrative costs and adversely affect our employee
relations, we are currently reevaluating the type and
structure of health-related benefits we provide, and our
ultimate resolution of these matters could also increase our
labor costs or adversely affect our employee relations. Other
possible regulatory initiatives that would mandate minimum
levels of employee benefits, including those regarding leaves of
absence, paid time off or overtime pay, or that would increase
business taxes or otherwise increase our cost of complying with
applicable laws and regulations, could adversely affect our
operating costs. In addition, changes in interpretations of
existing laws and regulations could materially increase our
costs of compliance.
18
Our
activities, particularly those relating to the handling, storage
and disposal of our photographic processing chemicals, are
subject to environmental, health and safety laws and regulation
by governmental authorities in the United States, and our
failure to comply with those regulations or obtain or maintain
necessary permits could adversely affect our business, financial
condition and studio openings and operations.
Among other things, environmental laws and regulations address
the generation, handling, storage, transportation, treatment and
disposal of waste materials, and the health and safety of our
employees. These laws generally require us to obtain and
maintain various licenses and permits, and our failure to
maintain these permits for our existing studios or timely obtain
them for new studios could delay or prevent us from operating
existing studios or opening new studios. We are also potentially
subject to strict, joint and several liability for investigating
and remediating any spills and other releases of hazardous
substances at our current or former properties or third-party
waste disposal sites. Most environmental laws provide for
substantial fines and potential criminal sanctions for
violations. In addition, the federal Occupational Safety and
Health Administration, or OSHA, and similar state regulations,
require that we maintain information about hazardous materials
used or produced in our operations and that we provide this
information to employees, state and local governmental
authorities, and local residents. Environmental, health and
safety laws and regulations are complex, change frequently and
have tended to become stricter over time. Some of these laws and
regulations are subject to varying and conflicting
interpretations. We can give no assurance that violations of, or
liability under, such laws, regulations, permits or licenses
will not be identified or occur in the future, or that such laws
and regulations will not change in a manner that could impose
material costs on us.
As we
continue to grow our business and expand our operations, we face
increasing risk of involvement in litigation or regulatory
proceedings that could distract management from our business
activities and result in significant liability or damage to our
business, results of operations, financial condition and brand
image.
As we expand our operations, we increasingly face the risk of
litigation and other claims against us. Litigation and other
claims arise in the ordinary course of our business and may
include, among other things, employee claims, commercial
disputes, intellectual property issues, product-oriented
allegations, environmental claims and compliance issues and
personal injury claims. These cases frequently raise complex
factual and legal issues, which are subject to risks and
uncertainties and could divert significant management time.
Litigation and other claims against us could result in
unexpected material expenses and liability, as well as adversely
affect our business, results of operations, financial condition
and reputation.
We may
be subject to unionization, work stoppages, slowdowns or
increased labor costs, especially if the Employee Free Choice
Act is adopted.
Currently, none of our employees is represented by a union.
However, our employees have the right at any time under the
National Labor Relations Act to form or affiliate with a union.
If some or all of our workforce were to become unionized and the
terms of the collective bargaining agreement were significantly
different from our current compensation arrangements, it could
increase our costs and adversely impact our profitability. A
federal legislative initiative known as the Employee Free Choice
Act, which could make it easier for workers to obtain union
representation and increase the penalties employers may incur if
they engage in labor practices in violation of the National
Labor Relations Act, was passed by the United States House of
Representatives in 2007, and revised versions of this proposed
legislation were reintroduced in 2009 and are currently under
consideration in both the United States House and Senate.
President Obama and leaders of Congress have made public
statements in support of this bill. Accordingly, this bill or a
variation of it could be enacted in the future, and the
enactment of this bill could have an adverse impact on our
employee relations, business and financial condition.
19
A
significant increase in piracy of our photographs could
materially adversely affect our business, results of operations
and financial condition.
Although we retain legal ownership of all the images we capture
and print, including those we sell to our customers, we must
rely on copyright laws and encryption software used in
connection with our digital images to protect our proprietary
rights in our photographs. Despite our efforts to prevent
unauthorized reproduction of our photographs, our encryption
software could be circumvented to allow high-resolution
reproduction of the digital images we provide on CD with many of
our portrait collections or our printed photographs could be
copied. In practice, we recognize that unauthorized reproduction
of photographs occurs within our industry and that our ability
to prevent piracy and enforce our proprietary rights in our
photographs is limited. A significant increase in the frequency
of unauthorized reproduction of our photographs could materially
adversely affect our business, results of operations and
financial condition.
Risks
related to this offering
Concentration
of ownership among our existing executive officers, directors
and principal stockholders may prevent new investors from
influencing significant corporate decisions.
Upon consummation of this offering our executive officers,
directors and current principal stockholders will own, in the
aggregate, approximately % of our
outstanding common stock and will own options that will enable
them to own, in the aggregate,
approximately % of our outstanding
common stock. As a result, these stockholders will be able to
exercise control over all matters requiring stockholder
approval, including the election of directors, amendments of our
amended and restated certificate of incorporation, amendments to
our bylaws and approval of significant corporate transactions
and will have significant control over our management and
policies. We currently expect that, upon the consummation of
this offering, two of the six members of our Board of Directors
will be principals of Southeastern Private Investment
Fund IV, LLC and Emergo Alpha Fund Limited. These
stockholders will collectively
control % of our outstanding common
stock upon consummation of this offering, and can take actions
that have the effect of delaying or preventing a change in
control of us or discouraging others from making tender offers
for our shares, which could prevent stockholders from receiving
a premium for their shares. These actions may be taken even if
other stockholders oppose them. The concentration of voting
power between Southeastern Private Investment Fund IV, LLC
and Emergo Alpha Fund Limited may have an adverse effect on
the price of our common stock. The interests of these
stockholders may not be consistent with your interests as a
stockholder. After the
lock-up
period expires, these stockholders would be able to transfer
control of our company to a third-party by transferring their
common stock, which would not require the approval of our Board
of Directors or our other stockholders. See
Future sales of our common stock, or the
perception in the public markets that these sales may occur, may
depress our stock price.
In addition, our amended and restated certificate of
incorporation will provide that the provisions of
Section 203 of the Delaware General Corporation Law, or the
DGCL, that relate to business combinations with interested
stockholders will apply to us. Section 203 of the DGCL
prohibits a publicly held Delaware corporation from engaging in
a business combination transaction with an interested
stockholder for a period of three years after the interested
stockholder became such unless the transaction fits within an
applicable exemption, such as board approval of the business
combination or the transaction which resulted in such
stockholder becoming an interested stockholder. Therefore,
Southeastern Private Investment Fund IV, LLC and Emergo
Alpha Fund Limited will not be deemed interested
stockholders by virtue of these exemptions. The provisions
of Section 203 of the DGCL may delay, prevent or deter a
merger, acquisition, tender offer or other transaction that
might otherwise result in our stockholders receiving a premium
over the market price of their common stock.
Our
stock price may be volatile and you may be unable to resell your
shares at or above the offering price or at all.
Prior to this offering, there has been no public market for our
common stock. The initial public offering price for our common
stock will be determined through negotiations between us and the
representatives of the
20
underwriters and market conditions, and may not be indicative of
the market price of our common stock after this offering. If you
purchase shares of our common stock, you may not be able to
resell those shares at or above the initial public offering
price. We cannot predict the extent to which investor interest
in our company will lead to the development of an active trading
market on The NASDAQ Global Market or how liquid that market
might become. An active public market for our common stock may
not develop or be sustained after the offering. If an active
public market does not develop or is not sustained, it may be
difficult for you to sell your shares of common stock at a price
that is attractive to you, or at all.
After this offering, the market price for our common stock is
likely to be volatile, in part because our shares have not been
traded publicly. In addition, the market price of our common
stock may fluctuate significantly in response to a number of
factors, including our results of operations and financial
performance (including changes in comparable studio sales),
changes in our business and financial condition, the success of
our expansion plans and certain other factors, most of which we
cannot control, including:
|
|
|
|
|
market conditions or trends in our industry or the economy as a
whole and, in particular, in the retail sales environment;
|
|
|
|
announcements by us or our competitors of new product offerings
or significant acquisitions;
|
|
|
|
actions by competitors or other landlords or tenants in retail
centers where we operate;
|
|
|
|
weather conditions, particularly during the holiday shopping
period;
|
|
|
|
changes in operating performance and stock market valuations of
our industry competitors or other companies in the retail sector;
|
|
|
|
the publics response to press releases or other public
announcements by us or third parties, including our filings with
the SEC and announcements relating to litigation;
|
|
|
|
any financial projections we may provide to the public, any
changes in these projections or our failure to meet these
projections;
|
|
|
|
changes in key personnel;
|
|
|
|
changes in financial estimates or ratings by any securities
analysts who follow our common stock, our failure to meet these
estimates or failure of those analysts to initiate or maintain
coverage of our common stock;
|
|
|
|
the development and sustainability of an active trading market
for our common stock;
|
|
|
|
future sales of our common stock by our officers, directors and
significant stockholders;
|
|
|
|
changes in accounting principles; and
|
|
|
|
other events or factors, including those resulting from war,
acts of terrorism, natural disasters or responses to these
events.
|
In addition, the stock markets, and in particular The NASDAQ
Global Market, have experienced extreme price and volume
fluctuations that have affected and continue to affect the
market prices of equity securities of many retail companies. In
the past, stockholders have instituted securities class action
litigation following periods of market volatility. If we were
involved in securities litigation, we could incur substantial
costs and our resources and the attention of management could be
diverted from our business.
Future
sales of our common stock, or the perception in the public
markets that these sales may occur, may depress our stock
price.
Sales of substantial amounts of our common stock in the public
market after this offering, or the perception that these sales
could occur, could adversely affect the price of our common
stock and could impair our ability to raise capital through the
sale of additional shares. Upon completion of this offering, we
will
have shares
of common stock outstanding. The shares of common stock offered
in this offering will be freely tradable without restriction
under the Securities Act of 1933, as amended, or the Securities
Act,
21
except for any shares of our common stock that may be held or
acquired by our directors, executive officers and other
affiliates, as that term is defined in the Securities Act, which
will be restricted securities under the Securities Act.
Restricted securities may not be sold in the public market
unless the sale is registered under the Securities Act or an
exemption from registration is available.
We, our directors and executive officers and certain of our
significant stockholders have entered into lock up agreements
with the underwriters prior to the commencement of this offering
pursuant to which we and each of these persons or entities for a
period of 180 days after the date of this prospectus, may
not, subject to limited exceptions, without the prior written
consent of J.P. Morgan Securities Inc. and Wells Fargo
Securities, LLC, offer, pledge, announce the intention to sell,
grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any shares of
our common stock (including, without limitation, common stock
which may be deemed to be beneficially owned by such directors,
executive officers, managers and members in accordance with the
rules and regulations of the SEC and securities which may be
issued upon exercise of a stock option or warrant) or enter into
any swap or other agreement that transfers, in whole or in part,
any of the economic consequences of ownership of the common
stock. J.P. Morgan Securities Inc. and Wells Fargo
Securities, LLC may, in their sole discretion, waive these
restrictions at any time without notice. See
Underwriting.
After 180 days from the date of this prospectus, subject to
certain extensions, all of our shares of common stock
outstanding as of the date of this prospectus held by
stockholders who have agreed to the restrictions described in
the preceding paragraph may be sold in the public market,
subject to applicable volume and other limitations imposed under
federal securities laws. See Shares Eligible for Future
Sale for a more detailed description of the restrictions
on selling shares of our common stock after this offering.
After this offering, holders of
approximately shares
of our common stock will have the right to require us to
register the sales of their shares under the Securities Act,
under the terms of an agreement between us and the holders of
these securities. See Description of Capital
Stock Registration rights for a more detailed
description of these rights.
In the future, we may also issue our securities in connection
with investments or acquisitions. The amount of shares of our
common stock issued in connection with an investment or
acquisition could constitute a material portion of our
then-outstanding shares of our common stock.
If
securities or industry analysts do not publish research or
publish inaccurate or unfavorable research about our business,
our stock price and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. We do not currently have and
may never obtain research coverage by securities and industry
analysts. If no securities or industry analysts commence
coverage of our company, the trading price for our common stock
could be negatively affected. If we obtain securities or
industry analyst coverage and if one or more of the analysts who
covers us downgrades our common stock or publishes inaccurate or
unfavorable research about our business, our stock price could
decline. If one or more of these analysts ceases coverage of us
or fails to publish reports on us regularly, demand for our
common stock could decrease, which could cause our stock price
and trading volume to decline.
Our
management will have broad discretion over the use of the
proceeds we receive in this offering and might not apply the
proceeds in ways that increase the value of your
investment.
Our management will have broad discretion to use the net
proceeds to us from this offering, and you will be relying on
the judgment of our management regarding the application of
these proceeds. Our management might not apply the net proceeds
from this offering in ways that increase the value of your
investment. Other than the repayment of debt outstanding under
our revolving credit facility and payment of all accrued and
unpaid dividends on our preferred stock, we expect to use the
balance of the net proceeds to us from this offering for working
capital and other general corporate purposes, including our
expansion strategy and the costs of operating as a public
company. Until we use the remaining net proceeds to us from this
offering, we plan to invest them, and these investments may not
yield a favorable rate of return. If we do not invest or
22
apply the net proceeds from this offering in ways that enhance
stockholder value, we may fail to achieve expected financial
results, which could cause our stock price to decline.
We do
not expect to pay any cash dividends for the foreseeable
future.
The continued operation and expansion of our business will
require substantial funding. Accordingly, we do not anticipate
that we will pay any cash dividends on shares of our common
stock for the foreseeable future. Any determination to pay
dividends in the future will be at the discretion of our Board
of Directors and will depend upon results of operations,
financial condition, contractual restrictions, restrictions
imposed by applicable law and other factors our Board of
Directors deems relevant. Our ability to pay cash dividends on
our common stock is limited by the covenants of our revolving
credit facility and may be further restricted by the terms of
any of our future indebtedness or preferred securities.
Accordingly, if you purchase shares in this offering,
realization of a gain on your investment will depend on the
appreciation of the price of our common stock, which may never
occur. Investors seeking cash dividends in the foreseeable
future should not purchase our common stock.
Anti-takeover
provisions in our charter documents and Delaware law might
discourage or delay acquisition attempts for us that you might
consider favorable.
Our amended and restated certificate of incorporation and
amended and restated bylaws will contain provisions that may
make the acquisition of our company more difficult without the
approval of our Board of Directors. These provisions:
|
|
|
|
|
authorize the issuance of undesignated preferred stock, the
terms of which may be established and the shares of which may be
issued without stockholder approval, and which may include super
voting, special approval, dividend, or other rights or
preferences superior to the rights of the holders of common
stock;
|
|
|
|
prohibit stockholder action by written consent, which requires
all stockholder actions to be taken at a meeting of our
stockholders;
|
|
|
|
prohibit stockholders from calling special meetings, which may
delay stockholder action until the next regularly scheduled
annual meeting of the stockholders;
|
|
|
|
provide that the Board of Directors is expressly authorized to
make, alter, or repeal our amended and restated bylaws;
|
|
|
|
provide that only our Board of Directors is authorized to fill
vacancies on our board, which prevents our stockholders from
being able to fill vacancies on our Board of Directors;
|
|
|
|
provide that a supermajority of at least two-thirds of the votes
entitled to be cast by holders of our capital stock entitled to
vote is required to approve amendments to our bylaws and to
certain provisions of our amended and restated certificate of
incorporation; and
|
|
|
|
establish advance notice requirements for nominations for
elections to our Board of Directors or for proposing matters
that can be acted upon by stockholders at stockholder meetings.
|
These anti-takeover provisions and other provisions under
Delaware law could discourage, delay or prevent a transaction
involving a change in control of our company, even if doing so
would benefit our stockholders. These provisions could also
discourage proxy contests and make it more difficult for you and
other stockholders to elect directors of your choosing and to
cause us to take other corporate actions you desire. See
Description of Capital Stock Anti-takeover
effects of our certificate of incorporation and bylaws and
Delaware law for more information regarding these
provisions.
23
If you
purchase shares of common stock sold in this offering, you will
incur immediate and substantial dilution.
If you purchase shares of common stock in this offering, you
will incur immediate and substantial dilution in the amount of
$ per share because the initial
public offering price of $ is
substantially higher than the pro forma net tangible book value
per share of our outstanding common stock. This dilution is due
in large part to the fact that our earlier investors paid
substantially less than the initial public offering price when
they purchased their shares. In addition, you may also
experience additional dilution upon future equity issuances or
the exercise of stock options to purchase common stock granted
to our employees and directors under our stock option and equity
incentive plans. See Dilution.
24
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements that reflect
our views about future events and financial performance.
Forward-looking statements typically are identified by words
such as may, will, should,
anticipate, estimate,
expect, plan, believe,
predict, potential, intend,
continue and similar expressions, although some
forward-looking statements are expressed differently. These
forward-looking statements are based on current expectations,
estimates, forecasts and projections about our business and our
industry, as well as managements beliefs and assumptions.
Forward-looking statements are subject to known and unknown
risks, uncertainties and other factors, including those set
forth in Risk Factors, that could cause actual
results to differ materially from those projected. You are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this prospectus.
You should consider carefully the statements under Risk
Factors and in other sections of this prospectus, which
address additional factors that could cause our actual results
to differ materially from those set forth in or implied by the
forward-looking statements.
We believe that the risks and uncertainties include, but are not
limited to, the factors discussed under the heading Risk
Factors, such as the following:
|
|
|
|
|
our ability to anticipate and respond to trends that drive our
customers behavior and purchasing habits and provide our
customers a differentiated portrait experience;
|
|
|
|
our ability to sustain comparable studio sales growth;
|
|
|
|
our ability to grow our business as planned and manage it on a
substantially larger scale;
|
|
|
|
the changing technologies of digital imaging, printing and
software application and their potential effect on demand for
our product offerings;
|
|
|
|
retention of our key senior management, particularly
Mr. John Grosso and Mr. John Davis;
|
|
|
|
our ability to compete effectively;
|
|
|
|
the strength of our brand image;
|
|
|
|
economic or other conditions that would reduce the availability
or attractiveness of existing and new studio locations or cause
declines in consumer confidence and spending;
|
|
|
|
the seasonality of our business;
|
|
|
|
resolution of an outstanding tax matter related to a former
employee benefit arrangement;
|
|
|
|
our ability to adequately address, remediate and prevent the
future occurrence of material weaknesses in our internal control
structure;
|
|
|
|
compliance risks and costs associated with public company
regulation;
|
|
|
|
our ability to attract and retain new management personnel and
qualified employees;
|
|
|
|
the security of our information systems;
|
|
|
|
our dependence on key vendors and suppliers;
|
|
|
|
our ability to service our substantial operating lease
obligations;
|
|
|
|
our ability to access credit on favorable terms and service our
debt;
|
|
|
|
limitations on our business activities that may be imposed by
our indebtedness;
|
|
|
|
our ability to protect and realize the value of our intellectual
property rights and avoid infringing the intellectual property
rights of third parties;
|
|
|
|
compliance with environmental and other government regulations;
|
|
|
|
changes in applicable laws and regulations;
|
25
|
|
|
|
|
our ability to manage and defend litigation matters asserted
against us;
|
|
|
|
work stoppages, slowdowns or increased labor costs; and
|
|
|
|
increases in piracy of our photographs.
|
Although we believe the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, level of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of any of these
forward-looking statements. We are under no duty to update any
of these forward-looking statements after the date of this
prospectus to conform our prior statements to actual results or
revised expectations. If we do update one or more
forward-looking statements, no inference should be drawn that we
will make additional updates with respect to those or other
forward-looking statements.
26
USE OF
PROCEEDS
We estimate that the net proceeds of the sale of the common
stock that we are offering will be approximately
$ million, assuming an
initial public offering price of $
per share, which is the
mid-point of
the range listed on the cover page of this prospectus, and after
deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
We will not receive any of the proceeds from the sale of shares
of common stock by the selling stockholders, including upon the
exercise, if any, of the underwriters over-allotment
option.
We intend to use the net proceeds of the sale of the shares we
are offering:
|
|
|
|
|
to repay outstanding indebtedness under our revolving credit
facility, which was approximately $8.0 million as of
May 2, 2010;
|
|
|
|
to pay accrued and unpaid dividends on our outstanding preferred
stock held by Southeastern Private Investment Fund IV, LLC
and Emergo Alpha Fund Limited, which were approximately
$3.0 million as of May 2, 2010, which preferred stock
is being converted into common stock subject to, and upon the
completion of, this offering; and
|
|
|
|
to fund studio expansion and for other general corporate
purposes.
|
Our revolving credit facility matures on February 1, 2012
and bears interest at a floating rate, which was 2.78% as of
May 2, 2010. In the past year, we applied the borrowings
under our revolving credit facility to repay and replace a prior
loan facility with our lender, for working capital and for other
general corporate purposes.
Prior to the application of the net proceeds for these purposes,
we intend to invest the net proceeds in short-term, interest
bearing, investment-grade instruments, bank certificates of
deposit and other interest-bearing bank deposits or direct or
guaranteed obligations of the United States government.
27
DIVIDEND
POLICY
We do not expect to pay dividends on our common stock in the
foreseeable future. We anticipate that we will retain future
earnings, if any, to support our operations and to finance the
growth and development of our business. In addition, because we
are a holding company whose primary asset is the equity interest
in our subsidiary, our ability to pay dividends to our
stockholders in the future will depend upon the receipt of
distributions from our subsidiary. Our ability to pay cash
dividends on our common stock is limited by the covenants of our
revolving credit facility and may be further restricted by the
terms of any of our future debt or preferred securities.
28
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of May 2, 2010:
|
|
|
|
|
on an actual basis;
|
|
|
|
on a pro forma basis after giving effect to the conversion of
all outstanding shares of our convertible preferred stock into
an aggregate of 4,154,258 shares of our common stock, which
will occur subject to, and upon the completion of, this
offering; and
|
|
|
|
on a pro forma as adjusted basis to give further effect to the
issuance and sale by us
of shares
of our common stock in this offering at an assumed initial
public offering price of $ per
share, which is the mid-point of the price range set forth on
the cover page of this prospectus, and the application of the
net proceeds of the offering, after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us.
|
You should read this table together with Use of
Proceeds, Managements Discussion and Analysis
of Financial Condition and Results of Operations,
Description of Capital Stock and our consolidated
financial statements and related notes thereto included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 2, 2010
|
|
|
|
|
|
|
|
|
|
Pro Forma as
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
Adjusted(1)
|
|
|
|
(In thousands, except share data)
|
|
|
|
(Unaudited)
|
|
|
Cash and cash equivalents
|
|
$
|
78
|
|
|
$
|
78
|
|
|
$
|
|
|
Obligations under capital leases, including current portion
|
|
|
22
|
|
|
|
22
|
|
|
|
|
|
Long-term debt
|
|
|
7,950
|
|
|
|
7,950
|
|
|
|
|
|
10% Series A cumulative convertible preferred stock,
$0.01 par value, liquidation value $1.67 per share
|
|
|
3,379
|
|
|
|
|
|
|
|
|
|
10% Series B cumulative convertible preferred stock,
$0.01 par value, liquidation value $8.92 per share
|
|
|
23,652
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value: 15,000,000 shares
authorized, actual; 4,356,446 shares issued and
outstanding, actual; 8,510,704 shares issued and
outstanding, pro forma
and; shares
issued and outstanding, pro forma as adjusted
|
|
|
44
|
|
|
|
85
|
|
|
|
|
|
Additional paid-in capital
|
|
|
173
|
|
|
|
27,163
|
|
|
|
|
|
Accumulated deficit
|
|
|
478
|
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
695
|
|
|
|
27,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
35,698
|
|
|
$
|
35,698
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share,
which is the mid-point of the price range listed on the cover
page of this prospectus, would increase (decrease) the pro forma
as adjusted amount of each of cash, cash equivalents, additional
paid-in capital, total stockholders equity and total
capitalization by approximately
$ million, assuming that the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting
underwriting discounts and commissions and estimated offering
expenses payable by us. |
The above table does not include:
|
|
|
|
|
542,000 shares of common stock issuable upon the exercise
of outstanding stock options with a weighted average exercise
price of $7.96 per share; and
|
|
|
|
an aggregate of 194,000 additional shares of common stock
reserved for future issuance under our stock option plans as of
May 2, 2010.
|
29
DILUTION
If you invest in our common stock, your ownership interest will
be diluted to the extent of the difference between the initial
public offering price per share of our common stock and the net
tangible book value per share of common stock upon completion of
this offering. Dilution results from the fact that the per share
offering price of our common stock is substantially in excess of
the book value per share attributable to the shares of our
common stock held by existing equity holders.
Our historical net tangible book value as of May 2, 2010
was $27.6 million or $6.35 per share of our common stock.
Our historical net tangible book value per share represents the
amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding.
Our pro forma net tangible book value as of May 2, 2010 was
approximately $27.6 million, or $3.25 per share of our
common stock. Pro forma net tangible book value per share
represents the amount of our tangible assets less total
liabilities, divided by the total number of shares of common
stock outstanding after giving effect to the conversion of all
outstanding shares of our convertible preferred stock into an
aggregate of 4,154,258 shares of common stock upon the
closing of this offering.
After giving effect to the issuance and sale by us
of shares
of common stock in this offering at an assumed initial public
offering price of $ per share,
which is the mid-point of the price range listed on the cover
page of this prospectus, less underwriting discounts and
commissions and estimated offering expenses payable by us, our
pro forma as adjusted net tangible book value as of May 2,
2010 would have been
$ million, or
$ per share. This represents an
immediate increase in pro forma net tangible book value per
share of $ to existing
stockholders and immediate dilution of
$ in
pro forma net tangible book value per share to new investors
purchasing common stock in this offering. Dilution per share to
new investors is determined by subtracting pro forma as adjusted
net tangible book value per share after this offering from the
initial public offering price per share paid by new investors.
The following table illustrates this dilution on a per share
basis:
|
|
|
|
|
Assumed initial public offering price per share of common stock
|
|
$
|
|
|
Pro forma net tangible book value per share as of May 2,
2010
|
|
|
|
|
Increase per share attributable to new investors
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
this offering
|
|
|
|
|
Dilution per share to new investors
|
|
$
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share,
which is the mid-point of the price range listed on the cover
page of this prospectus, would increase (decrease) our pro forma
as adjusted net tangible book value per share by
$ and the dilution per share to
the new investors by $ , in each
case assuming the number of shares offered, as set forth on the
cover page of this prospectus, remains the same and after
deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
If any shares are issued upon exercise of outstanding options
you will experience further dilution.
The following table summarizes, as of May 2, 2010, the
differences between the average price per share paid by our
existing stockholders and by new investors purchasing shares of
common stock in this offering at an assumed initial public
offering price of $ per share,
which is the mid-point of the range listed on the cover page of
this prospectus, before deducting estimated underwriting
discounts and commissions and offering costs payable by us:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
Existing stockholders
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share,
which is the mid-point of the price range listed on the cover
page of this prospectus, would increase (decrease) total
consideration paid by new investors by
$ million, total
consideration paid by all stockholders by
$ and the average price per
share paid by all stockholders by
$ , in each case assuming the
number of shares offered, as set forth on the cover page of this
prospectus, remains the same and after deducting underwriting
discounts and commissions and estimated offering expenses
payable by us.
The discussion and tables above are based on the number of
shares of common stock outstanding as of May 2, 2010 after
giving effect to the conversion of all outstanding shares of our
convertible preferred stock into 4,154,258 shares of common
stock upon the closing of this offering and excludes:
|
|
|
|
|
542,000 shares of common stock issuable upon the exercise
of outstanding stock options with a weighted average exercise
price of $7.96 per share; and
|
|
|
|
an aggregate of 194,000 additional shares of common stock
reserved for future issuance under our stock option plans as of
May 2, 2010.
|
If all of our outstanding options had been exercised as of
May 2, 2010, assuming the treasury stock method, our pro
forma net tangible book value as of May 2, 2010 would have
been approximately $ million
or $ per share of our common
stock, and the pro forma net tangible book value after giving
effect to this offering would have been
$ per share, representing dilution
in our pro forma net tangible book value per share to new
investors of $ .
31
SELECTED
CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
The selected consolidated financial information and operating
data below should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our audited and
unaudited financial statements and notes thereto included
elsewhere in this prospectus. We have derived the consolidated
statements of income data for the years ended February 3,
2008, February 1, 2009 and January 31, 2010 and the
consolidated balance sheet data as of February 1, 2009 and
January 31, 2010 from our audited consolidated financial
statements included elsewhere in this prospectus. We have
derived the consolidated statement of income data for the years
ended January 29, 2006 and January 28, 2007 and
consolidated balance sheet data as of January 29, 2006,
January 28, 2007 and February 3, 2008 from our audited
consolidated financial statements not included in this
prospectus. We have derived the consolidated statements of
income data for the fiscal quarters ended May 3, 2009 and
May 2, 2010 and the consolidated balance sheet data as of
May 2, 2010 from our unaudited condensed consolidated
financial statements included elsewhere in this prospectus. We
have derived the consolidated balance sheet data as of
May 3, 2009 from our unaudited condensed consolidated
financial statements not included in this prospectus. Our
historical results for any prior period are not necessarily
indicative of results to be expected in any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended(1)
|
|
|
Fiscal Quarter Ended
|
|
|
|
January 29,
|
|
|
January 28,
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
May 3,
|
|
|
May 2,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(Dollars in thousands, except per share, per studio and per
square foot data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Statement of income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
21,634
|
|
|
$
|
43,024
|
|
|
$
|
73,203
|
|
|
$
|
97,402
|
|
|
$
|
111,009
|
|
|
$
|
25,566
|
|
|
$
|
29,867
|
|
Cost of goods sold (exclusive of depreciation and amortization
shown below)
|
|
|
4,747
|
|
|
|
9,652
|
|
|
|
18,433
|
|
|
|
24,422
|
|
|
|
28,663
|
|
|
|
6,424
|
|
|
|
7,418
|
|
Selling, general and administrative expenses
|
|
|
15,039
|
|
|
|
26,343
|
|
|
|
44,409
|
|
|
|
58,559
|
|
|
|
65,863
|
|
|
|
15,563
|
|
|
|
18,232
|
|
Depreciation and amortization expense
|
|
|
2,431
|
|
|
|
4,255
|
|
|
|
7,247
|
|
|
|
10,643
|
|
|
|
12,208
|
|
|
|
2,924
|
|
|
|
3,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(583
|
)
|
|
|
2,774
|
|
|
|
3,114
|
|
|
|
3,778
|
|
|
|
4,275
|
|
|
|
655
|
|
|
|
1,130
|
|
Interest expense, net
|
|
|
1,333
|
|
|
|
1,389
|
|
|
|
1,459
|
|
|
|
1,257
|
|
|
|
497
|
|
|
|
137
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(1,916
|
)
|
|
|
1,385
|
|
|
|
1,655
|
|
|
|
2,521
|
|
|
|
3,778
|
|
|
|
518
|
|
|
|
1,077
|
|
Provision (benefit) for income taxes
|
|
|
|
|
|
|
61
|
|
|
|
(1,454
|
)
|
|
|
1,234
|
|
|
|
1,244
|
|
|
|
194
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,916
|
)
|
|
$
|
1,324
|
|
|
$
|
3,109
|
|
|
$
|
1,287
|
|
|
$
|
2,534
|
|
|
$
|
324
|
|
|
$
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,943,300
|
|
|
|
2,943,300
|
|
|
|
2,944,759
|
|
|
|
3,879,927
|
|
|
|
4,164,487
|
|
|
|
4,155,609
|
|
|
|
4,235,984
|
|
Diluted
|
|
|
2,943,300
|
|
|
|
6,181,139
|
|
|
|
7,092,963
|
|
|
|
3,879,927
|
|
|
|
8,544,890
|
|
|
|
4,155,609
|
|
|
|
8,637,076
|
|
Net income (loss) per common share(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.75
|
)
|
|
$
|
0.00
|
|
|
$
|
0.12
|
|
|
$
|
(0.29
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
(0.75
|
)
|
|
$
|
0.00
|
|
|
$
|
0.12
|
|
|
$
|
(0.29
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable studio sales increase(3)
|
|
|
39.8%
|
|
|
|
37.3%
|
|
|
|
21.6%
|
|
|
|
11.3%
|
|
|
|
6.9%
|
|
|
|
11.2%
|
|
|
|
8.7%
|
|
Number of studios (at period end)
|
|
|
48
|
|
|
|
78
|
|
|
|
120
|
|
|
|
150
|
|
|
|
170
|
|
|
|
155
|
|
|
|
181
|
|
Total square footage (at period end)
|
|
|
100,774
|
|
|
|
165,023
|
|
|
|
261,568
|
|
|
|
334,547
|
|
|
|
387,172
|
|
|
|
346,826
|
|
|
|
414,061
|
|
Average square footage per studio (at period end)(4)
|
|
|
2,099
|
|
|
|
2,116
|
|
|
|
2,180
|
|
|
|
2,230
|
|
|
|
2,277
|
|
|
|
2,238
|
|
|
|
2,288
|
|
Net sales per average number of studios(5)
|
|
$
|
610,000
|
|
|
$
|
722,000
|
|
|
$
|
732,000
|
|
|
$
|
695,000
|
|
|
$
|
692,000
|
|
|
$
|
168,000
|
|
|
$
|
169,000
|
|
Net sales per average square foot(6)
|
|
$
|
294
|
|
|
$
|
345
|
|
|
$
|
339
|
|
|
$
|
315
|
|
|
$
|
307
|
|
|
$
|
75
|
|
|
$
|
74
|
|
Capital expenditures
|
|
$
|
10,894
|
|
|
$
|
14,788
|
|
|
$
|
26,514
|
|
|
$
|
15,292
|
|
|
$
|
11,709
|
|
|
$
|
2,420
|
|
|
$
|
4,012
|
|
EBITDA(7)
|
|
$
|
1,848
|
|
|
$
|
7,029
|
|
|
$
|
10,361
|
|
|
$
|
14,421
|
|
|
$
|
16,483
|
|
|
$
|
3,579
|
|
|
$
|
4,217
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended(1)
|
|
|
Fiscal Quarter Ended
|
|
|
|
January 29,
|
|
|
January 28,
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
May 3,
|
|
|
May 2,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Balance sheet data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,111
|
|
|
$
|
6,835
|
|
|
$
|
5,060
|
|
|
$
|
5,591
|
|
|
$
|
1,987
|
|
|
$
|
2,031
|
|
|
$
|
78
|
|
Working capital
|
|
|
(2,132
|
)
|
|
|
1,560
|
|
|
|
(3,797
|
)
|
|
|
(4,130
|
)
|
|
|
(12,333
|
)
|
|
|
(5,463
|
)
|
|
|
(9,691
|
)
|
Total assets
|
|
|
21,121
|
|
|
|
37,171
|
|
|
|
56,845
|
|
|
|
61,062
|
|
|
|
57,761
|
|
|
|
57,414
|
|
|
|
59,174
|
|
Total debt
|
|
|
15,950
|
|
|
|
13,950
|
|
|
|
13,950
|
|
|
|
13,950
|
|
|
|
4,950
|
|
|
|
13,950
|
|
|
|
7,950
|
|
Redeemable preferred stock(8)
|
|
|
3,846
|
|
|
|
16,158
|
|
|
|
28,414
|
|
|
|
26,393
|
|
|
|
26,433
|
|
|
|
24,638
|
|
|
|
27,031
|
|
Total stockholders equity (deficit)
|
|
|
(5,215
|
)
|
|
|
(5,047
|
)
|
|
|
(3,978
|
)
|
|
|
(401
|
)
|
|
|
198
|
|
|
|
(572
|
)
|
|
|
695
|
|
|
|
|
(1) |
|
Our fiscal year is the 52- or 53-week period ending on the
Sunday nearest January 31. Fiscal years ended
January 29, 2006, January 28, 2007, February 1,
2009 and January 31, 2010 were 52-week years and the fiscal
year ended February 3, 2008 was a 53-week year, and the
53rd week accounted for approximately $1,045,000 in net sales. |
|
(2) |
|
Net income (loss) per common share reflects dividends accrued
on, and net income allocated to, our preferred stock. See
Note 15 of notes to our consolidated financial statements
and Note 12 of notes to our unaudited condensed
consolidated financial statements included elsewhere in this
prospectus. |
|
(3) |
|
Comparable studio sales increase reflects sales for studios
beginning on the first day of the 53rd week after opening.
Comparable studio sales increase for the fiscal year ended
February 3, 2008 was adjusted to exclude the 53rd week. |
|
(4) |
|
Average square footage per studio is calculated by dividing
total square footage at period end by the number of studios at
period end. |
|
(5) |
|
Net sales per average number of studios was calculated by
dividing net sales for the trailing
12-month
period by the average number of studios open during such
trailing
12-month
period. Net sales per average number of studios for the fiscal
year ended February 3, 2008 was adjusted to exclude the net
sales effects of the 53rd week. |
|
(6) |
|
Net sales per average square foot was calculated by dividing net
sales for the trailing
12-month
period by the average square footage for those studios open
during such trailing
12-month
period. Net sales per average total square foot for the fiscal
year ended February 3, 2008 was adjusted to exclude the net
sales effects of the 53rd week. |
|
(7) |
|
EBITDA is defined as net income (loss) before
interest expense (net of interest income), provision for income
taxes and depreciation and amortization expense. EBITDA does not
represent, and should not be considered as, an alternative to
net income or cash flows from operating activities, each as
determined in accordance with GAAP. We have presented EBITDA
because we consider it an important supplemental measure of our
performance and believe it is frequently used by analysts,
investors and other interested parties in the evaluation of
retail companies. Management uses EBITDA as a measurement tool
for evaluating our actual operating performance compared to
budget and prior periods and in evaluating performance for
incentive compensation purposes. Other companies may calculate
EBITDA differently than we do. EBITDA is not a measure of
performance under GAAP and should not be considered as a
substitute for net income prepared in accordance with GAAP.
EBITDA has limitations as an analytical tool, and you should not
consider it in isolation or as a substitute for analysis of our
results as reported under GAAP. |
33
The following table sets forth the reconciliation of net income
(loss) to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Fiscal Quarter Ended
|
|
|
|
January 29,
|
|
|
January 28,
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
May 3,
|
|
|
May 2,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
Net income (loss)
|
|
$
|
(1,916
|
)
|
|
$
|
1,324
|
|
|
$
|
3,109
|
|
|
$
|
1,287
|
|
|
$
|
2,534
|
|
|
$
|
324
|
|
|
$
|
664
|
|
Provision (benefit) for income taxes
|
|
|
|
|
|
|
61
|
|
|
|
(1,454
|
)
|
|
|
1,234
|
|
|
|
1,244
|
|
|
|
194
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(1,916
|
)
|
|
|
1,385
|
|
|
|
1,655
|
|
|
|
2,521
|
|
|
|
3,778
|
|
|
|
518
|
|
|
|
1,077
|
|
Depreciation and amortization expense
|
|
|
2,431
|
|
|
|
4,255
|
|
|
|
7,247
|
|
|
|
10,643
|
|
|
|
12,208
|
|
|
|
2,924
|
|
|
|
3,087
|
|
Interest expense, net
|
|
|
1,333
|
|
|
|
1,389
|
|
|
|
1,459
|
|
|
|
1,257
|
|
|
|
497
|
|
|
|
137
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
1,848
|
|
|
$
|
7,029
|
|
|
$
|
10,361
|
|
|
$
|
14,421
|
|
|
$
|
16,483
|
|
|
$
|
3,579
|
|
|
$
|
4,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) |
|
The holders of all of the outstanding shares of preferred stock
have agreed to convert such preferred stock into common stock
subject to, and upon the completion of, this offering. |
34
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations should be read in
conjunction with the historical financial statements and notes
thereto included elsewhere in this prospectus. The discussion in
this section contains forward-looking statements that are based
on our current expectations. These forward-looking statements
contained herein include, without limitation, statements
regarding industry outlook, our expectations and estimates
concerning our future performance, cost of goods sold, selling
and advertising expenses, general and administrative expenses,
depreciation and amortization, income from operations, studio
square footage expansion, net sales, comparable studio sales,
liquidity and capital resources and other non-historical
statements. These forward-looking statements are subject to
numerous risks and uncertainties, including, but not limited to,
the risks and uncertainties described in Risk
Factors and Forward-looking Statements, which
we urge you to carefully review. Actual results may differ
materially from those contained in or implied by any
forward-looking statements.
We operate on a fiscal calendar used by many companies in the
retail industry that results in a given fiscal year consisting
of a 52- or 53-week period ending on the Sunday nearest the
January month end. For example, references to fiscal
2009 refer to the fiscal year ended January 31, 2010
and references to fiscal 2008 refer to the fiscal
year ended February 1, 2009.
Overview
We are a fast-growing retail operator of free-standing portrait
studios under the Portrait Innovations brand name. We provide
our customers with high-quality portraits typically within an
hour and a half of entering our studio by integrating
sophisticated photography techniques with
state-of-the-art,
on-site
digital imaging and printing technologies. We locate our
free-standing studios in high-visibility, high-traffic, open-air
lifestyle and power centers that we believe have become the
preferred shopping destination for U.S. consumers due to
accessibility and convenience. As of May 2, 2010, we
operated 181 studios across 39 states.
Under the leadership of our President and Chief Executive
Officer, John Grosso, we have grown net sales from
$43.0 million for fiscal 2006 to $111.0 million for
fiscal 2009, representing a compound annual growth rate of
37.2%. Over the same period we have grown net income from
$1.3 million to $2.5 million and our EBITDA from
$7.0 million to $16.5 million. We have achieved
positive comparable studio sales in every year since opening our
first studio in 2002. We believe our business performs well
through economic cycles, including the recent economic downturn,
demonstrated by our comparable studio sales increases over prior
periods of 11.3% in fiscal 2008 and 6.9% in fiscal 2009.
Comparable studio sales increased 8.7% for the first quarter of
fiscal 2010.
We intend to accelerate the expansion of our studio base in new
and existing markets. Based on our operating experience, we
believe the U.S. market can support over 850 Portrait
Innovations studios. During the past five fiscal years, we have
opened an average of 30 new studio locations per year. We intend
to open approximately 30 new studios in fiscal 2010 and increase
our studio base by approximately 20% annually thereafter.
Our sales are primarily derived from photographic portraits that
we produce
on-site only
after our customers have ordered them. Unlike typical specialty
retailers, we do not purchase retail merchandise in advance of
knowing specific customer demand. As a result, our inventory
costs, which principally consist of photographic paper and
chemicals used in the printing process, are relatively low and
we are not subject to the ongoing risks of planning and
purchasing inventory in advance of sales.
Our average investment for the studios we opened during fiscal
2009 was $365,000, which includes the cost of our digital
imaging and display equipment, studio fixtures net of landlord
contributions, and initial inventory investment of approximately
$5,000. For new studios, we target a pre-tax cumulative cash
payback on our net investment within three years. New studios
typically experience rapid sales growth in their first four
years of operation as they gain recognition in their markets and
new and repeat customer traffic increases. Based upon historical
operating performance, we expect new studios to generate
approximately $400,000 in
35
sales in their first year of operation. We expect mature studios
to generate approximately $1 million in annual sales.
We seek to increase our net sales through increases in
comparable studio sales, as well as by opening new studios. We
seek to maximize our comparable studio sales by maintaining
consistent studio-level execution and generating increased
customer traffic. We plan to continue to implement a variety of
initiatives to enhance sales productivity in our studios, which
we believe already generate the highest average studio sales
volume of any major chain in the portrait industry. These
initiatives include: testing and, as appropriate, adding new
portrait collections and products to better satisfy our
customers varied tastes and budgets; implementing new
digital imaging technologies to further differentiate the
quality, speed and value of our portrait experience; and
marketing to select target customers to enhance customer traffic
during non-holiday periods. We plan to continue to support the
Portrait Innovations brand through a broad mix of media,
including participation in target-specific online social
networking sites, informative and seasonal
e-mail
communications to our existing customer database, newspapers,
magazines, targeted customer-specific direct mail and selective
television advertising. As we increase our geographic footprint,
we plan to move from regional to national advertising campaigns,
which we anticipate will provide further cost efficiencies. In
addition, we believe we will achieve higher levels of
profitability by leveraging corporate and other overhead costs
against a growing revenue base.
While we believe our growth strategy offers significant
opportunities, it also presents significant risks and challenges
including, among others, the risk that we may not be able to
open new studios in accordance with our growth plans, keep pace
with or adapt to changes in digital imaging, printing and
software applications technologies, build and maintain a strong
brand image and hire and train qualified associates and studio
managers, any or all of which could result in lower sales volume
and profitability. In addition, our growth plans will require
additional funds for capital expenditures for new studios and
related infrastructure investments and we may be unable to raise
capital for these investments when needed. For a more complete
discussion of the risks and uncertainties associated with our
business, see Risk Factors.
Basis of
presentation and key trends
Net
sales
Net sales primarily consists of gross portrait sales net of any
returns, which have historically been insignificant. Net sales
also includes proceeds from the sale of silver recovered from
our printing process, although this has historically been
immaterial.
Cost
of goods sold
Cost of goods sold includes printing costs, occupancy costs,
studio supplies, credit card transaction fees and related
miscellaneous costs, and does not include our studio-level
payroll and benefits expense and depreciation and amortization
expense. Printing costs include the cost of raw materials and
equipment repair and maintenance costs. Occupancy costs include
rent, common area maintenance, real and personal property taxes,
insurance, utilities and studio repair and maintenance costs.
Studio supply costs include seasonal props and backgrounds,
photography supplies, freight and other miscellaneous supplies.
The components of our cost of goods sold may not be comparable
to those of other competitors and retailers.
Our cost of goods sold is higher in quarters in which customer
volumes are higher, particularly during the holiday season,
because cost of goods sold generally increases as net sales
increase. However, during the higher volume quarters and
particularly during the holiday season, cost of goods sold as a
percentage of net sales substantially declines relative to the
lower volume quarters and non-holiday seasons because
substantial components of our cost of goods, including our
occupancy costs, are relatively fixed. In addition, cost of
goods sold as a percentage of net sales is affected by the
number of new studios that we open, and the time of year in
which they are opened, because we begin to incur significant
expenses that are included in cost of goods sold upon the
opening of new studios, such as occupancy costs, and initial net
sales from new studios are lower than levels expected for mature
studios.
36
Selling,
general and administrative expenses
Selling, general and administrative expenses include studio and
corporate payroll and benefit expenses, pre-opening expenses of
new studios, share-based compensation expense, marketing and
advertising costs, studio recruiting and training costs, costs
of accounting and legal services, information technology
expenses, travel costs and expenses related to our corporate
facilities. The components of our selling, general and
administrative expenses may not be comparable to those of other
competitors and retailers. We expect that our selling, general
and administrative expenses will increase in future periods due
to our continuing studio growth and in part to additional legal,
accounting, insurance and other expenses we expect to incur as a
result of being a public company. Among other things, we expect
that compliance with the Exchange Act and the Sarbanes-Oxley
Act, and related rules and regulations, will result in
significant legal and accounting costs. Over time, we anticipate
that our selling, general and administrative expenses as a
percentage of our net sales will begin to decline as we are able
to leverage corporate and other overhead costs against a growing
revenue base.
Depreciation
and amortization
The primary components of our depreciation and amortization
expenses are deprecation of studio leasehold improvements and
deprecation of studio furniture and equipment. Historically, our
depreciation expense has been higher than other specialty
retailers and competitors because of the higher capital
requirements of our business and the shorter lease terms used
early in our operating history over which our studio leasehold
improvements are depreciated. Our capital requirements are
higher than other specialty retailers due to the cost of the
printers, cameras and other photographic equipment in each of
our studios.
Our studios typically generate rapidly increasing sales during
their first four years of operation. As a result, our
depreciation expense, which is relatively fixed, is
significantly higher as a percentage of sales for newer studios
compared with studios open for four years or more.
Based on our current studio growth expectations, we anticipate
that we will have an increasing number of mature studios and an
increasing percentage of studios with longer lease terms
relative to the shorter lease terms used early in our operating
history. As a result, we anticipate that our overall
depreciation expense as a percentage of net sales will decline.
Interest
income and interest expense
Interest income includes interest earned on our cash balances
and certificate of deposit investments. Interest expense
includes interest costs associated with our revolving credit
facility and amortization of financing costs. We anticipate that
interest expense will decrease and interest income will increase
in the near term following the completion of the offering,
reflecting our application of the net proceeds of this offering
to repay outstanding indebtedness and the interim investment of
a portion of net proceeds as described in Use of
Proceeds.
Provision
for income taxes
Our provision for income taxes depends on the statutory tax
rates of the United States and the states where we operate our
studios. Several factors have contributed to our historical
effective tax rate being significantly different than our
anticipated long-term effective tax rate. In fiscal 2007, our
effective tax rate of (87.9)% was significantly affected by the
reversal of allowances on certain deferred tax assets, including
tax assets related to our net operating loss carry-forwards, as
a result of our companys continued profitability in fiscal
2007 compared to loss periods earlier in our operating history.
In fiscal 2008, we established a valuation allowance against
certain state deferred tax assets due to uncertainty related to
the realization of state deferred tax assets, and as a result
our effective tax rate was 48.9%. In fiscal 2009, we reduced
this valuation allowance because management concluded certain
state deferred tax assets would be realized due to our
profitability in those states, and as a result our effective tax
rate was 32.9% for fiscal 2009. For fiscal 2010, we estimate
that our effective tax rate will be approximately 38% to 39%,
which we expect would be a more typical rate going forward.
37
Key
performance indicators and statistics
In evaluating the performance of our business, we consider a
variety of financial and other performance measures. In addition
to the financial measures described above, we also use
comparable studio sales, non-comparable studio sales, sales per
studio and EBITDA in evaluating how our business is performing.
Comparable
studio sales and non-comparable studio sales
Net sales consists of comparable studio sales and non-comparable
studio sales. Comparable studio sales measures the change in
year-over-year
sales for our studios that have been open for 53 weeks or
more. A studio is included in comparable studio sales beginning
in its 53rd week of operation. Comparable studio sales also
includes sales in existing studios that have been remodeled or
relocated for the period in which they are open in the current
year and the comparable period in the prior year. Because there
may be variations in the way in which some of our competitors
and other retailers calculate comparable or same
store sales, information in this prospectus regarding our
comparable studio sales may not be comparable to similar data
made available by other competitors or retailers. Measuring
comparable studio sales allows us to evaluate how our core
studio base is performing. Various factors that affect
comparable studio sales include:
|
|
|
|
|
the location of new studios relative to existing studios;
|
|
|
|
the proportion of new studios relative to mature studios;
|
|
|
|
consumer preferences, buying trends and overall economic
conditions;
|
|
|
|
our ability to anticipate and respond effectively to changing
customer preferences for portrait products and services;
|
|
|
|
competition;
|
|
|
|
pricing;
|
|
|
|
the level of customer service that we provide in our studios;
|
|
|
|
the effectiveness of our marketing and advertising efforts;
|
|
|
|
the timing of new studio openings relative to significant
holiday events;
|
|
|
|
our ability to source raw materials and produce portraits
efficiently; and
|
|
|
|
the number of studios we may open, close, renovate, relocate or
expand.
|
Opening new studios is an important and significant part of our
growth strategy. As we continue to open new studios, we expect
that our new studios will achieve rapidly increasing sales and
robust comparable studio sales growth in their first four years
of operation before moderating to more mature growth rates
thereafter. Comparable studio sales represents only one metric
we use for assessing the success of our growth strategy, as
comparable studio sales do not reflect the performance of
studios open less than 52 weeks.
Non-comparable studio sales consists of net portrait sales not
included in comparable studio sales.
Sales
per studio
Based upon historical operating performance, our current target
annual average sales for mature studios is approximately
$1 million. For any given period, our overall average sales
per studio is in part impacted by the number and timing of new
studio openings.
EBITDA
EBITDA is defined as net income (loss) before
interest expense (net of interest income), provision for income
taxes and depreciation and amortization expense. Although EBITDA
is not a financial measure under GAAP, we use it as a
measurement tool for evaluating our actual operating performance
compared to our budget and prior periods.
38
Results
of operations
The following tables summarize, for the periods indicated, our
net sales and certain key operating data and components of our
results of operations as a percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Fiscal Quarter Ended
|
|
|
February 3,
|
|
February 1,
|
|
January 31,
|
|
May 3,
|
|
May 2,
|
|
|
2008(1)
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
|
(Dollars in thousands)
|
|
|
(Unaudited)
|
|
Net sales
|
|
$
|
73,203
|
|
|
$
|
97,402
|
|
|
$
|
111,009
|
|
|
$
|
25,566
|
|
|
$
|
29,867
|
|
Number of studios open (at period end)
|
|
|
120
|
|
|
|
150
|
|
|
|
170
|
|
|
|
155
|
|
|
|
181
|
|
Comparable studio sales increase(2)
|
|
|
21.6%
|
|
|
|
11.3%
|
|
|
|
6.9%
|
|
|
|
11.2%
|
|
|
|
8.7%
|
|
Net sales per average number of studios(3)
|
|
$
|
732,000
|
|
|
$
|
695,000
|
|
|
$
|
692,000
|
|
|
$
|
168,000
|
|
|
$
|
169,000
|
|
EBITDA(4)
|
|
$
|
10,361
|
|
|
$
|
14,421
|
|
|
$
|
16,483
|
|
|
$
|
3,579
|
|
|
$
|
4,217
|
|
|
|
|
(1) |
|
Fiscal 2007, ending February 3, 2008, was a 53-week year. |
|
(2) |
|
Comparable studio sales increase reflects sales for studios
beginning on the first day of the 53rd week after opening.
Comparable studio sales increase for the fiscal year ended
February 3, 2008 was adjusted by excluding the 53rd week. |
|
(3) |
|
Net sales per average number of studios was calculated by
dividing net sales for the trailing
12-month
period by the average number of studios open during such
trailing
12-month
period. Net sales per average number of studios for the fiscal
year ended February 3, 2008 was adjusted to exclude the net
sales effects of the 53rd week. |
|
(4) |
|
EBITDA is defined as net income (loss) before
interest expense (net of interest income), provision for income
taxes and depreciation and amortization expense. EBITDA does not
represent, and should not be considered as, an alternative to
net income or cash flows from operating activities, each as
determined in accordance with GAAP. Other companies may
calculate EBITDA differently than we do. EBITDA is not a measure
of performance under GAAP and should not be considered as a
substitute for net income prepared in accordance with GAAP.
EBITDA has limitations as an analytical tool, and you should not
consider it in isolation or as a substitute for analysis of our
results as reported under GAAP. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Fiscal Quarter Ended
|
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
May 3,
|
|
|
May 2,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold (exclusive of depreciation and amortization)
|
|
|
25.2
|
|
|
|
25.1
|
|
|
|
25.8
|
|
|
|
25.1
|
|
|
|
24.9
|
|
Selling, general and administrative expenses
|
|
|
60.6
|
|
|
|
60.1
|
|
|
|
59.3
|
|
|
|
60.9
|
|
|
|
61.0
|
|
Depreciation and amortization expense
|
|
|
9.9
|
|
|
|
10.9
|
|
|
|
11.0
|
|
|
|
11.4
|
|
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4.3
|
|
|
|
3.9
|
|
|
|
3.9
|
|
|
|
2.6
|
|
|
|
3.8
|
|
Interest income
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2.2
|
|
|
|
1.3
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2.3
|
|
|
|
2.6
|
|
|
|
3.4
|
|
|
|
2.0
|
|
|
|
3.6
|
|
Provision (benefit) for income taxes
|
|
|
(2.0
|
)
|
|
|
1.3
|
|
|
|
1.1
|
|
|
|
0.7
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4.3
|
%
|
|
|
1.3
|
%
|
|
|
2.3
|
%
|
|
|
1.3
|
%
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
First
quarter fiscal 2010 compared to first quarter fiscal
2009
Net
sales
Net sales increased 16.8%, or $4.3 million, to
$29.9 million in first quarter fiscal 2010 from
$25.6 million in first quarter fiscal 2009. Comparable
studio sales increased by $2.2 million, or 8.7%, and
non-comparable studio sales contributed $2.1 million. The
increase in comparable studio sales was due primarily to an
increase of approximately 7.6% in the number of customer
transactions. This increase is due primarily to our studios
becoming more established in their markets, resulting in
increased awareness of our brand. We also experienced an
increase of approximately 1.0% in the average dollar value of
customer transactions. Our modest increase in average dollar
volume reflects improved in-studio execution.
We opened 11 studios in first quarter fiscal 2010, compared to
five studios in first quarter fiscal 2009. We operated 181
studios as of May 2, 2010.
Cost of
goods sold
Cost of goods sold increased 15.5%, or $994,000, in first
quarter fiscal 2010 to $7.4 million from $6.4 million
in first quarter fiscal 2009. Cost of goods sold increased
primarily due to a $731,000 increase in occupancy costs related
to the operation of 26 more studios and a $177,000 increase in
printing costs related to a 15.0% increase in total customer
transactions.
As a percentage of net sales, cost of goods sold decreased to
24.9% in first quarter fiscal 2010 from 25.1% in first quarter
fiscal 2009. The decrease was principally due to a small
decrease in printing costs as a percentage of net sales due to
the higher customer purchase average and a small decrease in
credit card transaction fees as a percentage of net sales due to
lower pricing from our credit card vendor, partially offset by
an increase in occupancy costs as a percentage of net sales due
to the opening of 11 new studios in the first quarter of 2010
compared to the five studios opened in the first quarter of 2009.
Selling,
general and administrative expenses
Selling, general and administrative expenses increased 17.1%, or
$2.7 million, to $18.2 million in first quarter fiscal
2010 from $15.6 million in first quarter fiscal 2009,
primarily resulting from a $2.2 million increase in studio
labor costs and advertising costs resulting from the operation
of 26 more studios in the first quarter fiscal 2010 compared to
first quarter fiscal 2009. General and administrative expenses
increased $0.5 million in first quarter fiscal 2010
compared to first quarter fiscal 2009, primarily due to
increased labor costs for additional staffing to support our
growing company and increased accounting and legal costs
associated with preparing to become a public company.
As a percentage of net sales, selling, general and
administrative expenses were 61.0% in first quarter fiscal 2010
compared to 60.9% in first quarter fiscal 2009. When comparing
the components, studio labor costs as a percentage of net sales
decreased due to leveraging labor costs over an increasing sales
base, advertising costs as a percentage of net sales increased
due to the opening of 11 new studios in the first quarter of
2010 compared to the five new studios opened in the first
quarter of 2009, and general and administrative expenses as a
percentage of net sales increased due to increased accounting
and legal costs associated with preparing to become a public
company.
EBITDA
EBITDA increased 17.8%, or $638,000, to $4.2 million in
first quarter fiscal 2010 from $3.6 million in first
quarter fiscal 2009. EBITDA as a percentage of net sales was
14.1% in first quarter fiscal 2010 compared to 14.0% in first
quarter fiscal 2009.
40
Depreciation
and amortization expense
Depreciation and amortization expense increased 5.6%, or
$163,000, to $3.1 million in first quarter fiscal 2010 from
$2.9 million in first quarter fiscal 2009. The increase in
first quarter fiscal 2010 was principally attributable to the
incremental depreciation related to the 11 new studios opened
first quarter fiscal 2010 as well as the full year depreciation
for the 15 new studios opened in fiscal 2009 after May 3,
2009. Depreciation and amortization expense as a percentage of
net sales decreased to 10.3% in first quarter fiscal 2010 from
11.4% in first quarter fiscal 2009 due to the increasing sales
base in our mature studios and an increasing number of studios
with longer lease terms relative to the shorter lease terms used
early in our operating history. In addition, our older studios
have lower depreciation expense as the original leasehold
improvement investments continue to be depreciated.
Interest
expense, net
Interest expense, net decreased by $84,000 to $53,000 in first
quarter fiscal 2010 due primarily to lower borrowing levels in
first quarter fiscal 2010 as the result of increased cash flow
from operations.
Provision
for income taxes
Our effective tax rate was 38.3% in first quarter fiscal 2010
compared to 37.5% in first quarter fiscal 2009. The higher
effective income tax rate in first quarter fiscal 2010 was
primarily the result of an increase in the applicable state
effective tax rate.
Net
income
Due to the factors described above, net income increased 104.9%,
or $340,000, to $664,000 in first quarter fiscal 2010 from
$324,000 in first quarter fiscal 2009.
Fiscal
2009 compared to fiscal 2008
Net
sales
Net sales increased 14.0%, or $13.6 million, to
$111.0 million in fiscal 2009 from $97.4 million in
fiscal 2008, despite a difficult economic environment in both
2008 and 2009. Comparable studio sales increased by
$6.7 million, or 6.9%, and non-comparable studio sales
contributed $6.9 million. The increase in comparable studio
sales was due primarily to an increase of approximately 8.3% in
the number of customer transactions. This increase is due
primarily to our studios becoming more established in their
markets, resulting in increased awareness of our brand. The
increase in the number of customer transactions was partially
offset by a decrease of approximately 1.3% in the average dollar
value of customer transactions, due to the difficult economic
environment which continued into 2009.
We opened 20 studios in fiscal 2009, compared to 30 studios in
fiscal 2008. We operated 170 studios as of January 31, 2010.
Cost of
goods sold
Cost of goods sold increased 17.4%, or $4.2 million, in
fiscal 2009 to $28.7 million from $24.4 million in
fiscal 2008. Cost of goods sold increased primarily due to a
$2.1 million increase in occupancy costs and a
$0.9 million increase in studio supplies related to the
operation of 20 more studios, as well as a $1.0 million
increase in printing costs and a $0.2 million increase in
credit card transaction fees and miscellaneous costs related to
a 15.6% increase in total customer transactions.
As a percentage of net sales, cost of goods sold increased to
25.8% in fiscal 2009 from 25.1% in fiscal 2008. The increase in
cost of goods sold as a percentage of net sales was principally
due to an increase in the cost of studio supplies as a
percentage of net sales due to the purchase of several new
seasonal props.
41
Selling,
general and administrative expenses
Selling, general and administrative expenses increased 12.5%, or
$7.3 million, to $65.9 million in fiscal 2009 from
$58.6 million in fiscal 2008. Studio labor costs and
advertising costs increased $6.8 million, primarily
resulting from the operation of more studios in fiscal 2009
compared to fiscal 2008. General and administrative expenses
increased $0.5 million in 2009 compared to 2008 primarily
due to an increase in corporate labor costs for additional
staffing to support our growing company and an increase in
corporate rent expense associated with the expansion of our
corporate headquarters.
As a percentage of net sales, selling, general and
administrative expenses were 59.3% in fiscal 2009 compared to
60.1% in fiscal 2008, primarily due to the continued benefits of
leveraging corporate general and administrative expenses over an
increasing sales base. As a percentage of net sales, total
studio labor costs and advertising costs were relatively flat.
EBITDA
EBITDA increased 14.3%, or $2.1 million, to
$16.5 million in fiscal 2009 from $14.4 million in
fiscal 2008. EBITDA as a percentage of net sales was 14.8% in
both fiscal 2009 and fiscal 2008.
Depreciation
and amortization expense
Depreciation and amortization expense increased 14.7%, or
$1.6 million, to $12.2 million in fiscal 2009 from
$10.6 million in fiscal 2008. The increase in fiscal 2009
was principally attributable to the incremental depreciation
related to the 20 new studios opened in fiscal 2009 as well as
the full year of depreciation for the 30 new studios opened in
fiscal 2008. Depreciation and amortization expense as a
percentage of net sales was essentially the same in both periods.
Interest
expense, net
Interest expense, net decreased by $760,000 to $497,000 in
fiscal 2009 due primarily to the reduction in amortization of
financing costs, lower average interest rate on borrowed funds
and reduced weighted average borrowings due to fewer studio
openings and increased cash flows from operations.
Provision
for income taxes
Our effective tax rate decreased to 32.9% in fiscal 2009 from
48.9% in fiscal 2008 due primarily to the reversal of the
deferred tax asset valuation allowance. In fiscal 2008, we
established a valuation allowance against certain state deferred
tax assets due to uncertainty related to the realization of
state deferred tax assets, and as a result our effective tax
rate was 48.9%. In fiscal 2009, we reduced this valuation
allowance because management concluded certain state deferred
tax assets would be realized due to our profitability in those
states, and as a result our effective tax rate was 32.9% for
fiscal 2009.
Net
income
Due to the factors described above, net income increased 96.9%,
or $1.2 million, to $2.5 million in fiscal 2009 from
$1.3 million in fiscal 2008.
Fiscal
2008 compared to fiscal 2007
Net
sales
Net sales increased 33.1%, or $24.2 million, to
$97.4 million in fiscal 2008 from $73.2 million in
fiscal 2007, despite a difficult economic environment in 2008.
Comparable studio sales increased by $8.2 million, or
11.3%, and non-comparable studio sales contributed
$16.0 million. The increase in comparable studio sales was
due primarily to an increase of approximately 13.0% in the
number of customer transactions. This increase is due primarily
to our studios becoming more established in their markets,
resulting in increased awareness of our brand. The increase in
the number of customer transactions was partially offset by a
1.4%
42
decrease in the average dollar value of customer transactions,
due to the difficult economic environment in 2008.
We opened 30 studios in fiscal 2008, compared to 42 studios in
fiscal 2007. We operated 150 studios as of February 1, 2009.
Cost of
goods sold
Cost of goods sold increased 32.5%, or $6.0 million, in
fiscal 2008 to $24.4 million from $18.4 million in
fiscal 2007. Cost of goods sold increased primarily due to a
$3.4 million increase in occupancy costs and a
$0.2 million increase in studio supplies related to the
operation of 30 more studios, as well as a $1.7 million
increase in printing costs and a $0.7 million increase in credit
card transaction fees and miscellaneous costs related to a 27.0%
increase in total customer transactions.
As a percentage of net sales, cost of goods sold decreased to
25.1% in fiscal 2008 from 25.2% in fiscal 2007. When comparing
the components, studio supplies as a percentage of net sales
decreased due to increased efficiencies in our purchasing
programs as a result of our increased size and purchasing
leverage, offset by an increase in occupancy costs as a
percentage of net sales due to a higher number of newer studios.
Selling,
general and administrative expenses
Selling, general and administrative expenses increased 31.9%, or
$14.2 million, to $58.6 million in fiscal 2008 from
$44.4 million in fiscal 2007.
Studio labor costs increased by $10.4 million in fiscal
2008 compared to fiscal 2007, and advertising costs increased by
$3.2 million, in each case primarily due to the operation
of more studios in fiscal 2008 compared to fiscal 2007. General
and administrative expenses increased $0.5 million in
fiscal 2008 compared to fiscal 2007 primarily due to increased
corporate labor costs and accounting and auditing costs to
support our growth.
As a percentage of net sales, selling, general and
administrative expenses decreased to 60.1% in fiscal 2008 from
60.6% in fiscal 2007, primarily due to the continued benefits of
leveraging corporate general and administrative expenses over an
increasing sales base.
EBITDA
EBITDA increased 39.2%, or $4.1 million to
$14.4 million from $10.4 million in fiscal 2008.
EBITDA as a percentage of net sales increased to 14.8% in fiscal
2008 compared to 14.2% in fiscal 2007.
Depreciation
and amortization expense
Depreciation and amortization expense increased 46.9%, or
$3.4 million, to $10.6 million in fiscal 2008 from
$7.2 million in fiscal 2007. As a percentage of net sales,
depreciation and amortization expense increased from 9.9% in
fiscal 2007 to 10.9% in fiscal 2008. The increase in fiscal 2008
of depreciation and amortization expense, including as a
percentage of net sales, was principally attributable to the
incremental depreciation related to the 30 new studios opened in
fiscal 2008, as well as the full year of depreciation for the 42
new studios opened in fiscal 2007.
Interest
expense, net
Interest expense, net decreased by $202,000 to $1.3 million
in fiscal 2008 from $1.5 million in fiscal 2007 due
primarily to the lower average interest rate.
Provision
for income taxes
In fiscal 2007, our effective tax rate of (87.9)% was
significantly affected by the reversal of allowances on certain
deferred tax assets, including tax assets related to our net
operating loss carry-forwards, as a result of our companys
continued profitability in fiscal 2007 compared to loss periods
earlier in our operating
43
history. In fiscal 2008, we established a valuation allowance
against certain state deferred tax assets due to uncertainty
related to the realization of state deferred tax assets, and as
a result our effective tax rate was 48.9%.
Net
income
Due principally to the differences in our effective tax rate in
fiscal 2008 compared to fiscal 2007, net income decreased
(58.6%), or $1.8 million, to $1.3 million in fiscal
2008 from $3.1 million in fiscal 2007.
Quarterly
results and seasonality
Our business is seasonal and as a result, our net sales
fluctuate from quarter to quarter. Net sales are typically
highest in our fourth fiscal quarter. Our most productive sales
months are November and December, during the important holiday
season. We also incur significant additional costs and expenses
during the fourth fiscal quarter due to increased staffing
levels and increased marketing efforts.
The following table sets forth certain unaudited statement of
operations data and certain operating data for the previous nine
fiscal quarters. This unaudited quarterly information has been
prepared on the same basis as our annual audited consolidated
financial statements appearing elsewhere in this prospectus, and
includes all adjustments, consisting only of normal recurring
adjustments, that we consider necessary to present fairly the
financial information for the fiscal quarters presented.
The unaudited quarterly data should be read in conjunction with
our unaudited and audited consolidated financial statements and
the related notes thereto appearing elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
May 4,
|
|
August 3,
|
|
November 2,
|
|
February 1,
|
|
May 3,
|
|
August 2,
|
|
November 1,
|
|
January 31,
|
|
May 2,
|
|
|
2008
|
|
2008
|
|
2008
|
|
2009
|
|
2009
|
|
2009
|
|
2009
|
|
2010
|
|
2010
|
|
|
(Dollars in thousands, except per share data)
|
|
|
(Unaudited)
|
|
Net sales
|
|
$
|
20,933
|
|
|
$
|
20,830
|
|
|
$
|
20,086
|
|
|
$
|
35,553
|
|
|
$
|
25,566
|
|
|
$
|
23,002
|
|
|
$
|
21,277
|
|
|
$
|
41,164
|
|
|
$
|
29,867
|
|
Income (loss) from operations
|
|
|
199
|
|
|
|
(137
|
)
|
|
|
(1,361
|
)
|
|
|
5,077
|
|
|
|
655
|
|
|
|
(204
|
)
|
|
|
(1,954
|
)
|
|
|
5,778
|
|
|
|
1,130
|
|
Net income (loss)
|
|
|
(73
|
)
|
|
|
(254
|
)
|
|
|
(960
|
)
|
|
|
2,574
|
|
|
|
324
|
|
|
|
(231
|
)
|
|
|
(1,327
|
)
|
|
|
3,768
|
|
|
|
664
|
|
Net income (loss) per common share, basic
|
|
|
(0.22
|
)
|
|
|
(0.21
|
)
|
|
|
(0.38
|
)
|
|
|
0.24
|
|
|
|
(0.07
|
)
|
|
|
(0.20
|
)
|
|
|
(0.46
|
)
|
|
|
0.38
|
|
|
|
0.01
|
|
Net income (loss) per common share, diluted
|
|
|
(0.22
|
)
|
|
|
(0.21
|
)
|
|
|
(0.38
|
)
|
|
|
0.23
|
|
|
|
(0.07
|
)
|
|
|
(0.20
|
)
|
|
|
(0.46
|
)
|
|
|
0.37
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(1)
|
|
$
|
2,475
|
|
|
$
|
2,543
|
|
|
$
|
1,424
|
|
|
$
|
7,979
|
|
|
$
|
3,579
|
|
|
$
|
2,767
|
|
|
$
|
1,096
|
|
|
$
|
9,041
|
|
|
$
|
4,217
|
|
Comparable studio sales increase(2)
|
|
|
17.4%
|
|
|
|
14.8%
|
|
|
|
7.3%
|
|
|
|
8.7%
|
|
|
|
11.2%
|
|
|
|
3.4%
|
|
|
|
1.5%
|
|
|
|
9.3%
|
|
|
|
8.7%
|
|
Number of studios (at period end)
|
|
|
135
|
|
|
|
141
|
|
|
|
148
|
|
|
|
150
|
|
|
|
155
|
|
|
|
160
|
|
|
|
167
|
|
|
|
170
|
|
|
|
181
|
|
|
|
|
(1) |
|
EBITDA is defined as net income (loss) before
interest expense (net of interest income), provision for income
taxes and depreciation and amortization expense. EBITDA does not
represent, and should not be considered as, an alternative to
net income or cash flows from operating activities, each as
determined in accordance with GAAP. Other companies may
calculate EBITDA differently than we do. EBITDA is not a measure
of performance under GAAP and should not be considered as a
substitute for net income prepared in accordance with GAAP.
EBITDA has limitations as an analytical tool, and you should not
consider it in isolation or as a substitute for analysis of our
results as reported under GAAP. |
44
The following table sets forth the reconciliation from net
income (loss) to EBITDA for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
|
May 4,
|
|
|
August 3,
|
|
|
November 2,
|
|
|
February 1,
|
|
|
May 3,
|
|
|
August 2,
|
|
|
November 1,
|
|
|
January 31,
|
|
|
May 2,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
Net income (loss)
|
|
$
|
(73
|
)
|
|
$
|
(254
|
)
|
|
$
|
(960
|
)
|
|
$
|
2,574
|
|
|
$
|
324
|
|
|
$
|
(231
|
)
|
|
$
|
(1,327
|
)
|
|
$
|
3,768
|
|
|
$
|
664
|
|
Provision (benefit) for income taxes
|
|
|
(33
|
)
|
|
|
(197
|
)
|
|
|
(776
|
)
|
|
|
2,240
|
|
|
|
194
|
|
|
|
(106
|
)
|
|
|
(753
|
)
|
|
|
1,909
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(106
|
)
|
|
|
(451
|
)
|
|
|
(1,736
|
)
|
|
|
4,814
|
|
|
|
518
|
|
|
|
(337
|
)
|
|
|
(2,080
|
)
|
|
|
5,677
|
|
|
|
1,077
|
|
Depreciation and amortization expense
|
|
|
2,277
|
|
|
|
2,680
|
|
|
|
2,785
|
|
|
|
2,901
|
|
|
|
2,924
|
|
|
|
2,972
|
|
|
|
3,049
|
|
|
|
3,263
|
|
|
|
3,087
|
|
Interest expense, net
|
|
|
304
|
|
|
|
314
|
|
|
|
375
|
|
|
|
264
|
|
|
|
137
|
|
|
|
132
|
|
|
|
127
|
|
|
|
101
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
2,475
|
|
|
$
|
2,543
|
|
|
$
|
1,424
|
|
|
$
|
7,979
|
|
|
$
|
3,579
|
|
|
$
|
2,767
|
|
|
$
|
1,096
|
|
|
$
|
9,041
|
|
|
$
|
4,217
|
|
|
|
|
(2) |
|
Comparable studio sales increase reflects sales for studios
beginning on the first day of the 53rd week after opening. |
Liquidity
and capital resources
Our primary sources of liquidity have historically been cash
flows from operations, borrowings under our revolving credit
facility and the proceeds from the issuance of our preferred
stock. Our primary cash needs are for capital expenditures in
connection with opening new studios. Cash is also required for
investment in information technology and funding normal working
capital requirements. The most significant components of our
working capital are cash and cash equivalents, accounts
receivable, prepaid expenses, accounts payable and deferred rent
included in accrued and other current liabilities.
Our working capital position significantly benefits from the
minimal inventory requirements of our business, which consist
primarily of photographic paper and processing chemicals. In
addition, we generally collect cash from sales to customers the
same day or, in the case of credit or debit card transactions,
within several days of the related sale, and we have up to
60 days to pay for our inventory.
Revolving
credit facility
Our operating subsidiary, Portrait Innovations, Inc., has a
revolving credit facility with a bank lender for up to
$17 million, which amount increases to $20 million on
August 4, 2010. Borrowings under the revolving credit
agreement are not subject to a borrowing base limitation. At
May 2, 2010, loans in the aggregate principal amount of
$8.0 million were outstanding under this facility and the
remaining $9.0 million was available for borrowing at that
date. The revolving credit facility matures on February 1,
2012 and bears interest at an annual rate of LIBOR plus a
margin, ranging from 2.50% to 3.00% based on the ratio of our
funded debt to EBITDA (as defined in the credit agreement). At
May 2, 2010, the interest rate was 2.78%. The applicable
margin is adjusted quarterly based on a calculation of the ratio
of funded debt to EBITDA for the trailing four quarters. An
unused commitment fee based on the difference between the amount
of the facility and outstanding borrowings will begin to accrue
under the facility once we receive additional aggregate equity
investments of $10 million or more. The unused commitment
fee is at an annual rate of 0.375%.
The revolving credit facility contains financial covenants,
which among other things, require us to maintain a minimum
EBITDA level, a maximum ratio of adjusted funded debt to EBITDA
plus rent expense and a minimum fixed charge coverage ratio. In
addition, the revolving credit agreement includes customary
negative covenants, including a covenant restricting our ability
to pay dividends (other than dividends of no more than $625,000
per quarter in fiscal 2009 and 2010) and certain limitations on
our capital expenditures. We were in compliance with all
covenants under our revolving credit facility as of May 2,
2010. The revolving credit facility is secured by a pledge of
all of our accounts, equipment, inventory and other personal
45
property, including general intangible assets, as well as
100 percent of the stock of our operating subsidiary,
Portrait Innovations, Inc. Although certain affiliates of our
principal stockholders provided limited guarantees of the
revolving credit facility, those guarantees were terminated in
March 2010. See Certain Relationships and Related Party
Transactions Guarantees of indebtedness.
We expect that anticipated cash flows from operations, funds
available from our revolving credit facility and the net
proceeds to us from this offering will be sufficient to provide
funds necessary to finance our operations and anticipated growth
for the foreseeable future. Changes in our operating plans,
lower than anticipated net sales, increased expenses or
unforeseen events may require us to seek additional debt or
equity financing. Additional financing, if available, could
impose additional cash payment obligations and additional
covenants and operating restrictions.
Cash
flow
A summary of operating, investing and financing activities are
shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Fiscal Quarter Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
May 3,
|
|
|
May 2,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Provided (used) by operating activities
|
|
$
|
15,287
|
|
|
$
|
16,738
|
|
|
$
|
19,408
|
|
|
$
|
969
|
|
|
$
|
(1,194
|
)
|
Used for investing activities
|
|
|
(26,514
|
)
|
|
|
(15,288
|
)
|
|
|
(11,682
|
)
|
|
|
(2,412
|
)
|
|
|
(4,010
|
)
|
Provided (used) for financing activities
|
|
|
9,452
|
|
|
|
(559
|
)
|
|
|
(11,690
|
)
|
|
|
(2,477
|
)
|
|
|
3,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
(1,775
|
)
|
|
$
|
891
|
|
|
$
|
(3,964
|
)
|
|
$
|
(3,920
|
)
|
|
$
|
(1,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
Operating activities consist primarily of net income adjusted
for non-cash items, including depreciation and amortization,
deferred taxes, the effect of working capital changes and tenant
allowances received from landlords.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Fiscal Quarter Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
May 3,
|
|
|
May 2,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Net income
|
|
$
|
3,109
|
|
|
$
|
1,287
|
|
|
$
|
2,534
|
|
|
$
|
324
|
|
|
$
|
664
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,247
|
|
|
|
10,643
|
|
|
|
12,208
|
|
|
|
2,924
|
|
|
|
3,087
|
|
Amortization of debt financing costs
|
|
|
588
|
|
|
|
511
|
|
|
|
128
|
|
|
|
37
|
|
|
|
26
|
|
Deferred income taxes
|
|
|
(1,720
|
)
|
|
|
1,026
|
|
|
|
(840
|
)
|
|
|
(123
|
)
|
|
|
(410
|
)
|
Share-based compensation
|
|
|
211
|
|
|
|
269
|
|
|
|
335
|
|
|
|
63
|
|
|
|
116
|
|
Loss on disposal of equipment
|
|
|
251
|
|
|
|
224
|
|
|
|
119
|
|
|
|
10
|
|
|
|
7
|
|
Changes in working capital
|
|
|
3,745
|
|
|
|
1,721
|
|
|
|
4,210
|
|
|
|
(2,396
|
)
|
|
|
(4,853
|
)
|
Other
|
|
|
1,856
|
|
|
|
1,057
|
|
|
|
714
|
|
|
|
130
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities
|
|
$
|
15,287
|
|
|
$
|
16,738
|
|
|
$
|
19,408
|
|
|
$
|
969
|
|
|
$
|
(1,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities decreased
$2.2 million to ($1.2 million) in first quarter fiscal
2010 compared to cash provided by operating activities of
$969,000 in first quarter fiscal 2009. The $2.2 million
decrease was principally due to federal and state income tax
payments of $1.95 million after fully utilizing our net
loss carry forwards.
46
Net cash provided by operating activities increased
$2.7 million, to $19.4 million, in fiscal 2009
compared to cash provided by operating activities of
$16.7 million in fiscal 2008. The $2.7 million
increase was due to a net decrease in our working capital
requirements and the growth in net income as we expanded our
store base, offset in part by a net reduction in non-cash items.
Net cash provided by operating activities increased
$1.4 million, to $16.7 million, in fiscal 2008
compared to cash provided by operating activities of
$15.3 million in fiscal 2007. The $1.4 million
increase was due to a net increase in non-cash items, offset by
a decrease in net income, an increase in working capital
requirements and less receipts of tenant allowances due to
opening only 30 studios compared to 42 in the prior year.
Investing
activities
Investing activities consist primarily of capital expenditures
for new, remodeled and relocated studios, as well as investment
in information technology and our corporate headquarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Fiscal Quarter Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
May 3,
|
|
|
May 2,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Capital expenditures
|
|
$
|
(26,514
|
)
|
|
$
|
(15,292
|
)
|
|
$
|
(11,709
|
)
|
|
$
|
(2,420
|
)
|
|
$
|
(4,012
|
)
|
Proceeds received from disposal of equipment
|
|
|
|
|
|
|
4
|
|
|
|
27
|
|
|
|
8
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(26,514
|
)
|
|
$
|
(15,288
|
)
|
|
$
|
(11,682
|
)
|
|
$
|
(2,412
|
)
|
|
$
|
(4,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for the opening of new, remodeled and
relocated studios were $4.0 million and $2.4 million
in first quarter fiscal 2010 and first quarter fiscal 2009,
respectively, and $24.5 million, $14.9 million and
$11.1 million in fiscal 2007, 2008 and 2009, respectively.
These capital expenditures are not presented net of tenant
allowances and also reflect payment timing differences related
to studio leasehold improvements. The remaining capital
expenditures in each period were primarily for investment in the
headquarters facility expansion and information technology.
Management anticipates that capital expenditures in fiscal 2010
will be approximately $15.0 million, the majority of which
will be for 30 new studios and 15 renovations, three expansions
and two relocations of existing studios and maintenance capital.
47
Financing
activities
Financing activities consist principally of borrowings and
payments on our outstanding credit facility, issuance of
preferred stock and the payment of dividends thereon, and
payments on capital lease obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Fiscal Quarter Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
May 3,
|
|
|
May 2,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Principal payments on capital lease obligations
|
|
$
|
(553
|
)
|
|
$
|
(533
|
)
|
|
$
|
(375
|
)
|
|
$
|
(124
|
)
|
|
$
|
(20
|
)
|
Proceeds from borrowings
|
|
|
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Repayment of debt
|
|
|
|
|
|
|
(7,000
|
)
|
|
|
(9,000
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of preferred stock
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock options exercised
|
|
|
5
|
|
|
|
|
|
|
|
41
|
|
|
|
41
|
|
|
|
|
|
Share-based compensation tax benefits
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
315
|
|
Cash dividends paid
|
|
|
|
|
|
|
|
|
|
|
(2,353
|
)
|
|
|
(2,353
|
)
|
|
|
|
|
Debt financing costs
|
|
|
|
|
|
|
(26
|
)
|
|
|
(85
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided for financing activities
|
|
$
|
9,452
|
|
|
$
|
(559
|
)
|
|
$
|
(11,690
|
)
|
|
$
|
(2,477
|
)
|
|
$
|
3,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2007, we received $10.0 million from the issuance
of preferred stock securities to partially fund the 42 studios
built that year. In fiscal 2008, we used bank funding to
partially fund the 30 studios built that year. In the fourth
quarter of fiscal 2009, we paid down $9.0 million under our
revolving credit facility. Proceeds from $3.0 million in
borrowings in first quarter fiscal 2010 were used to fund
operating expenses and for capital expenditures related to new
studio locations.
Off-balance
sheet arrangements
We are not a party to any off-balance sheet arrangements.
Contractual
obligations
We lease our studios, corporate offices and warehouse space
under operating leases, and certain equipment under capital
leases, with various expiration dates through fiscal 2020. Our
studio leases signed after 2008 generally have initial lease
terms of 10 years and include renewal options providing for
one additional five-year term. Studio leases signed before 2009
generally have initial terms of five, seven or 10 years,
and those leases with renewal options typically have one or two
five-year renewal options. For certain locations, we receive
cash tenant allowances and we report these amounts as deferred
rent, which is amortized on a straight-line basis as a reduction
of rent expense over the term of the lease, including any lease
renewal periods deemed to be probable. Approximately 50% of our
leases for studio space include provisions for contingent rent,
which is payable only if our sales at that location exceed, on
average, $1.3 million or more in a year.
48
The following table summarizes our contractual arrangements as
of January 31, 2010 and the timing and effect that such
commitments are expected to have on our liquidity and cash flows
in future periods. The table below excludes variable expenses
related to contingent rent, common area maintenance, insurance
and real estate taxes and also excludes obligations incurred
subsequent to January 31, 2010. See Liquidity
and Capital Resources. The table below includes
obligations for executed agreements for which we do not yet have
the right to control the use of the property as of
January 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Obligations
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
Including
|
|
|
Long-Term
|
|
Fiscal Year
|
|
Total
|
|
|
Obligations
|
|
|
Interest
|
|
|
Debt(1)
|
|
|
|
(In thousands)
|
|
|
2010
|
|
$
|
13,763
|
|
|
$
|
13,737
|
|
|
$
|
26
|
|
|
|
|
|
2011
|
|
|
17,973
|
|
|
|
13,015
|
|
|
|
8
|
|
|
$
|
4,950
|
|
2012
|
|
|
11,936
|
|
|
|
11,929
|
|
|
|
7
|
|
|
|
|
|
2013
|
|
|
10,436
|
|
|
|
10,431
|
|
|
|
5
|
|
|
|
|
|
2014
|
|
|
9,530
|
|
|
|
9,530
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
24,352
|
|
|
|
24,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,990
|
|
|
$
|
82,994
|
|
|
$
|
46
|
|
|
$
|
4,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-term debt represents amounts outstanding under our
revolving credit facility as of January 31, 2010, for which
interest payments are not included in the table above.
Outstanding borrowings bear interest at LIBOR plus an applicable
margin, which ranges from 2.50% to 3.00%, and the applicable
margin is set quarterly based on a ratio of our funded debt to
EBITDA for the trailing four quarters. At January 31, 2010,
the interest rate on our borrowings was 2.73%. As further
described under Liquidity and Capital
Resources, as of May 2, 2010, amounts outstanding
under our revolving credit facility totaled $8.0 million
and the maturity date was February 1, 2012. |
Operating
Leases
As of May 2, 2010, we leased the properties for all of our
181 studios as well as our corporate headquarters. Our leases
have initial terms of five, seven and 10 years, with
multiple options to renew. We do not believe that any individual
studio property is material to our financial condition or
results of operation.
Most lease agreements contain construction allowances, rent
holidays, rent escalation clauses
and/or
contingent rent provisions. For purposes of recognizing
construction allowances and minimum rental expenses on a
straight-line basis over the terms of the leases, we use the
date of initial possession to begin amortization, which is
generally when we enter the space and begin the pre-opening
construction process, approximately nine weeks prior to opening
the studio to the public.
For construction allowances and rent holidays, we record a
deferred rent liability in the consolidated balance sheets and
amortize the deferred rent on a straight line basis over the
terms of the leases as reductions to rent expense on the
consolidated statements of income. The current portion of our
deferred rent liability is recorded in Current portion of
deferred rent and the non-current portion is recorded in
Other liabilities on our consolidated balance sheets.
For scheduled rent escalation clauses during the lease terms or
for rental payments commencing at a date other than the date of
initial occupancy, we record minimum rental expenses on a
straight-line basis over the terms of the leases on the
consolidated statements of income.
Certain leases provide for contingent rents, which are
determined as a percentage of gross sales in excess of specified
levels. We record a contingent rent liability in Accrued
and other liabilities on the consolidated balance sheets
and the corresponding rent expense when specified levels have
been achieved or when management determines that achieving the
specified levels during the fiscal year is probable. Due to high
breakpoints, contingent rents are immaterial to the consolidated
balance sheets and statements of income.
49
Contingencies
Tax
matter regarding former employee benefit
arrangement
We previously maintained an employee benefit arrangement
intended to subsidize, on a tax-free basis, the cost of health
insurance purchased by our employees. We recently determined
that benefits we paid under this arrangement constituted taxable
wage compensation, with respect to which we were obligated to
withhold income and other employment taxes, instead of tax-free
payments as we had intended. We have voluntarily contacted the
Internal Revenue Service (the Service) in an effort
to discharge all federal tax liabilities related to this matter.
Our audited consolidated statements of income included in this
prospectus for fiscal years ending after January 28, 2007,
the periods for which we believe our liability is not
extinguished under the applicable statute of limitations,
account for our estimate of the additional labor cost related to
the withholding amounts that we failed to collect, as well as
related tax effects attributable to reduced pre-tax income for
these periods. Our consolidated balance sheets included in this
prospectus include accrued liabilities for our estimates of the
amount that may be required to satisfy this liability. See
Note 14 of the notes to our audited consolidated financial
statements appearing elsewhere in this prospectus.
We developed our liability estimates as reflected in our
unaudited consolidated balance sheets in conjunction with
analysis and advice from legal and tax advisors and based on
assumptions that we believe are reasonable under the
circumstances. Key assumptions on which our estimate is based
include the following: (1) assumed rates of applicable tax
withholding; (2) our ability to deduct payments made to the
Service in order to satisfy this liability; (3) our lack of
further obligation or liability with respect to a portion of
these subsidy payments that we reported to certain employees as
taxable income on Form 1099 (rather than taxable wages
Form W-2);
(4) the manner and extent to which the Service will require
us to issue corrected wage statements; and (5) the waiver
of penalties and interest in light of our voluntary reporting of
this matter. If one or more of these assumptions materially
differ from those relied upon by the Service in calculating our
tax liability, the amount of our actual liability could differ
materially from the amount of our accrued liability. Any such
material adjustment to our accrued liability would in turn
materially affect our reported results of operations in the
period in which the adjustment is made. We are currently
uncertain as to the periods in which cash payments to resolve
this matter will be required.
Depending on the amount of time required to reach a final
resolution of this matter, we may also record interim
adjustments to our accrued liability in one or more periods
prior to final resolution if and to the extent a change in our
estimate becomes probable and can be estimated based on the
course of our discussions of this matter with the Service. Any
such changes to the recorded liability would affect our reported
results of operations in the periods in which such adjustments
are made.
Our estimated tax liability for this matter does not include
related administrative fees and expenses, primarily for legal,
tax and other professional advisors, which are recorded as
incurred. In light of the uncertainties regarding the additional
time and effort required to resolve this matter, we may continue
to incur fees in connection with this matter until it is
ultimately resolved.
For a further discussion of risks and uncertainties related to
this matter, see Risk Factors The ultimate
resolution of an outstanding tax matter regarding a benefit we
previously provided our employees could differ materially from
our expectations, which could cause us to incur and recognize
cash costs that materially differ from our estimates and related
accruals reflected in our consolidated financial statements. In
addition, our efforts to remediate this matter could continue to
increase our labor and other administrative costs and adversely
affect our employee relations, We have
identified a material weakness related to our internal control
in the past, and there can be no assurance that material
weaknesses will not be identified in the future and
Maintaining and improving our financial
controls and the requirements of being a public company will
increase our costs and may create compliance risks, strain our
resources, divert managements attention and affect our
ability to attract and retain qualified board members.
50
Impact of
inflation
Although we do not believe that inflation has had a material
impact on our financial position or results of operations to
date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin
and selling, general and administrative expenses as a percentage
of net sales if our prices or average sales per customer do not
increase with these increased costs. In addition, inflation
could materially increase the interest rate on our debt.
Recent
accounting pronouncements
In June 2009, the Financial Accounting Standards Board
(FASB) established authoritative U.S. GAAP,
codifying and superseding all pre-existing accounting standards
and literature. This newly codified U.S. GAAP is effective
for financial statements issued for interim and annual periods
ending after September 15, 2009. We have adopted the
guidance without any impact on our consolidated financial
statements.
In May 2009, the FASB issued authoritative guidance included in
Accounting Standards Codification (ASC) Topic 855
Subsequent Events, which establishes general
standards of accounting for and disclosure of events that occur
after the balance sheet date, but before financial statements
are issued or are available to be issued. Specifically, this
guidance provides (i) the period after the balance sheet
date during which management of a reporting entity should
evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements;
(ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance
sheet date in its financial statements; and (iii) the
disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. This
guidance is effective for interim or annual financial periods
ending after June 15, 2009, and is to be applied
prospectively. We adopted this guidance in the second quarter of
2009. The adoption of this guidance did not have a material
effect on our consolidated financial position, results of
operations or cash flows. Subsequent events have been evaluated
for recognition and disclosure through June 29, 2010.
Critical
accounting policies
Managements discussion and analysis of financial condition
and results of operations is based upon our consolidated
financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of these financial statements requires
estimates and judgments that affect the reported amounts of our
assets, liabilities, net sales and expenses. Management bases
estimates on historical experience and other assumptions it
believes to be reasonable given the circumstances and evaluates
these estimates on an ongoing basis. Actual results may differ
from these estimates under different assumptions or conditions.
We believe that the following critical accounting policies
involve a higher degree of judgment and complexity. See
Note 1 of the notes to our audited consolidated financial
statements included elsewhere in this prospectus for a complete
discussion of our significant accounting policies. The following
reflect the significant estimates and judgments used in the
preparation of our consolidated financial statements.
Long-lived
assets
We account for impairment of our long-lived assets in accordance
with FASB ASC Topic No. 360. We are exposed to potential
impairment if the book value of our assets exceeds their
expected future cash flows. The major components of our
long-lived assets are studio fixtures, equipment and leasehold
improvements. Assets are reviewed at the lowest level for which
cash flows can be identified, which is the studio level. We
review long-lived tangible assets whenever events or
circumstances indicate these assets might not be recoverable
based on undiscounted future cash flows. Significant estimates
are used in determining future operating results of each studio
over its remaining lease term. If such assets are considered to
be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. We have not recorded an impairment
charge in any of the periods presented in the accompanying
consolidated financial statements.
51
Share-based
compensation
We account for share-based compensation using the fair value
method in accordance with the FASBs authoritative
provisions of ASC Topic 718, Compensation
Stock Compensation. Under the fair value recognition
provisions of ASC Topic 718, share-based compensation cost is
measured at the grant date based on the fair value of the award
and is recognized as expense over the vesting period. Changes in
the stock price subsequent to the grant date have no effect on
the value of an award at the grant date.
We estimate the grant date fair value of stock option awards
using the Black-Scholes option pricing model. Determining the
fair value of stock-based awards at the grant date requires
considerable judgment, including estimating the risk-free
interest rate, expected dividend yield, expected volatility and
weighted average expected term. For fiscal year 2009 and the
thirteen weeks ended May 3, 2009 and May 2, 2010,
respectively, the fair value of stock options granted was
estimated at the grant date using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Fiscal Year Ended
|
|
Weeks Ended
|
|
|
January 31
|
|
May 3,
|
|
May 2,
|
|
|
2010
|
|
2009
|
|
2010
|
|
Risk-free interest rate
|
|
3.0%
|
|
2.7%
|
|
|
Expected dividend yield
|
|
|
|
|
|
|
Expected volatility
|
|
45%-60.0%
|
|
60%
|
|
|
Weighted average expected term
|
|
6.5 years
|
|
6.5 years
|
|
|
For the thirteen weeks ended May 2, 2010, no stock option
awards were granted.
The risk-free interest rate was based on the U.S. Treasury
rate for a term consistent with the expected term of the option
in effect at the time of grant. The expected dividend yield was
based on our expectation of not paying dividends on our common
stock for the foreseeable future. The expected volatility was
estimated by calculating an implied volatility using the
historical volatility of similar, actively traded companies.
The weighted average expected term of an option is calculated
using the simplified method using the vesting term of five years
and the contractual terms of 10 years. The simplified
method was chosen as a means to determine our holding period as
we currently have very limited historical option exercise
experience.
The weighted-average grant date fair value per share of stock
options granted to employees during fiscal year 2009, and the
thirteen weeks ended May 3, 2009, was $8.68 and $5.42,
respectively.
Share-based compensation expense for fiscal years ended
February 3, 2008, February 1, 2009, January 31,
2010, the thirteen weeks ended May 3, 2009 and May 2,
2010 was $211,000, $269,000, $335,000, $63,000 and $116,000,
respectively.
If factors change and we employ different assumptions,
stock-based compensation expense may differ significantly from
what we have recorded in the past. As a result of our
application of fair value recognition requirements, we expect
stock-based compensation expense to increase significantly over
the next several years.
The following table sets forth all stock option grants for the
12 month period beginning May 4, 2009 through
May 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Fair
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Value per
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price per
|
|
|
Share at
|
|
|
Value per
|
|
Grant Date
|
|
Granted
|
|
|
Share
|
|
|
Grant Date
|
|
|
Share
|
|
|
Q2:2009
|
|
|
18,250
|
|
|
$
|
8.92
|
|
|
$
|
9.07
|
|
|
$
|
0.15
|
|
Q3:2009
|
|
|
3,750
|
|
|
$
|
8.92
|
|
|
$
|
9.07
|
|
|
$
|
0.15
|
|
Q4:2009
|
|
|
58,848
|
|
|
$
|
8.92
|
|
|
$
|
17.53
|
|
|
$
|
8.61
|
|
Q1:2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
For the thirteen weeks ended May 2, 2010, no stock option
awards were granted.
The fair value of our common stock at the time of option grants
is determined by our Board of Directors based on all known facts
and circumstances, including valuations prepared by a nationally
recognized independent third-party appraisal firm. Given the
absence of an active market, a valuation of our common stock was
done retrospectively on an annual basis by a third party. The
valuation is dependent upon objective and subjective factors,
including:
|
|
|
|
|
stage of development and growth of our net sales, both
enterprise and same store, and number of stores;
|
|
|
|
|
|
budgets and forecasts of our financial performance, including
our historical success in meeting those budgets;
|
|
|
|
|
|
comparative benchmarking of our financial results with
comparable public companies;
|
|
|
|
|
|
material events that could result in increased valuation of our
common stock;
|
|
|
|
|
|
material risks affecting our business; and
|
|
|
|
|
|
the lack of marketability of our common stock.
|
Our common stock valuations utilized methodologies consistent
with the recommendations of the American Institute of Certified
Public Accountants, or AICPA, Audit and Accounting Practice Aid
Series, Valuation of Privately-Held Company Equity Securities
Issued as Compensation. In light of advancements in our stage of
development and growth, we determined it was appropriate to
value our common stock based on the relative likelihood of
occurrence that we would continue to operate as a private
company or complete an initial public offering.
The first step in the valuation process involved estimating the
enterprise value of the Company using the market multiple method
and income method valuation approaches.
In the market approach, we developed a list of comparable
companies and EBITDA capitalization multiples based on those
comparable companies historical and pro forma financial
statements and stock prices. We then applied these multiples to
our historical and projected financial performance to determine
our estimated enterprise value.
In the income approach, we performed discounted cash flow
analyses based on the projected free cash flow available to
capital providers, the estimated terminal value and the
estimated weighted average cost of capital.
The second step in the valuation process involves allocating the
Companys estimated enterprise value to each of the
Companys securities using an option-based methodology.
This methodology is based on the Black-Scholes option pricing
model.
There are significant judgments and estimates inherent in the
determination of the fair values. These judgments and estimates
include determinations of the appropriate valuation methods and,
when utilizing a market-based approach, the selection and
weighting of appropriate market comparables and valuation
multiples. For these and other reasons, the assessed fair values
used to compute share-based compensation expense for financial
reporting purposes may not reflect the fair values that would
result from the application of other valuation methods,
including accepted valuation methods, assumptions and inputs for
tax purposes.
Income
Taxes
We utilize the asset and liability method to account for income
taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that
includes the enactment date.
53
We adopted the provision on accounting for uncertainty in income
taxes as prescribed by FASB ASC Subtopic
740-10 at
the beginning of fiscal 2008. This standard clarifies the
accounting for uncertainty in income taxes by prescribing a
minimum recognition threshold for a tax position taken or
expected to be taken in a tax return that is required to be met
before being recognized in the financial statements. This
standard also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
Significant management judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities
and valuation allowances, all of which are based on numerous
factors that are subject to audit by the Internal Revenue
Service and tax authorities in the various jurisdictions in
which we do business.
Quantitative
and qualitative disclosures about market risk
We are subject to market risk related to changes in prevailing
interest rates. Our revolving credit facility accrues interest
at LIBOR plus an applicable margin, which ranges from 2.50% to
3.00%, and the applicable margin is set quarterly based on a
ratio of our funded debt to EBITDA for the trailing four
quarters. At May 2, 2010, the interest rate on our
borrowings was 2.78%. Based on average outstanding borrowings
during fiscal 2009 of $13.0 million, a 50 basis point
increase in LIBOR would have increased our annual interest
expense by approximately $65,000. We do not use hedging
instruments to manage our interest rate risk.
54
BUSINESS
Our
company
We are a fast-growing retail operator of free-standing portrait
studios under the Portrait Innovations brand name. We provide
our customers with high-quality portraits typically within an
hour and a half of entering our studio by integrating
sophisticated professional photography techniques with
state-of-the-art,
on-site
digital imaging and printing technologies. We have opened an
average of 30 new studios per year for the past five years, and
as of May 2, 2010, we operated 181 studios across
39 states.
We believe that our customers value the importance of capturing
cherished family and personal memories, events and milestones,
but have limited options available to purchase high-quality,
professional portraits at affordable prices in a convenient,
efficient manner. We believe that we offer a differentiated
studio experience that meets these consumer needs. We believe
our customers recognize and appreciate this differentiated
approach, which engenders loyalty and repeat business.
We have developed a business strategy and operating model that
we believe creates a superior studio experience and is difficult
to replicate. Key elements of our strategy include:
|
|
|
|
|
Convenient, attractive locations. We locate
our free-standing studios in high-visibility, high-traffic,
open-air lifestyle and power centers with easy parking and
access. Our studios are designed to be warm and inviting, and
feature large camera rooms, portrait viewing stations and
dressing rooms, as well as spacious reception areas with
comfortable couches and childrens play areas.
|
|
|
|
Interactive, professional photography
session. Our highly trained studio managers and
associates use professional handheld digital cameras that
provide them with the freedom to move and interact with our
customers to capture candid expressions and emotions. Our
sophisticated camera rooms feature auto-adjusting computerized
lighting and background systems, which enhance the variety and
quality of our images and enable us to complete photography
sessions quickly and efficiently. During a typical session, our
studio associates photograph dozens of images incorporating a
wide range of poses and backgrounds.
|
|
|
|
Efficient, proprietary portrait selection
process. Immediately following the photography
session, we utilize our proprietary software and processes to
allow our customers to quickly and easily review their image
choices, select their favorite poses and create personal,
one-of-a-kind
portraits using a variety of special effects. We display all of
the photographed images on our large, flat-panel monitors and
our associates guide customers through the selection process,
helping them choose a customized portrait collection from our
wide variety of portrait collections and price points. Our
average customer purchase is more than $100.
|
|
|
|
High quality, in-studio portrait
production. Each studio features a Fujifilm
Frontiertm
printer system and uses professional-quality, silver halide
Crystal
Archivetm
portrait paper, which together produce vivid colors and image
stability. We believe the combination of our laser printer
system and portrait paper allows us to offer the highest quality
portraits currently available. Ordered portraits are printed
on-site and
typically are ready within 15 minutes after a customer selects a
portrait collection.
|
Under the leadership of our President and Chief Executive
Officer, John Grosso, we have grown our net sales from
$43.0 million in fiscal 2006 to $111.0 million in
fiscal 2009, representing a compound annual growth rate of
37.2%. Over the same period we have grown net income from
$1.3 million to $2.5 million and EBITDA from
$7.0 million to $16.5 million. We have achieved
positive comparable studio sales growth in every year since
opening our first studio in 2002. We believe our business
performs well through economic cycles, including the recent
economic downturn, demonstrated by our comparable studio sales
increases over prior periods of 11.3% in fiscal 2008 and 6.9% in
fiscal 2009. Comparable studio sales increased 8.7% in first
quarter fiscal 2010.
55
Our
competitive strengths
We believe the following strengths differentiate us from our
competitors and are important to our success:
|
|
|
|
|
Compelling customer experience and value
proposition. We provide our customers
high-quality portraits, typically within an hour and a half of
entering our studio, in a pleasant and convenient studio
environment. We believe that our proprietary systems and
software and
on-site,
state-of-the-art
digital imaging and printing technology allow us to offer a wide
variety of portrait collections at compelling price points to a
high volume of customers. We believe that our record of positive
comparable studio sales growth and average customer purchase of
over $100 validates our compelling value proposition.
|
|
|
|
Customer-focused real estate strategy. We
locate our free-standing portrait studios in high-visibility,
high-traffic, open-air lifestyle and power centers that we
believe have become the preferred shopping destinations for
U.S. consumers due to their accessibility and convenience.
In contrast, our primary competitors typically locate their
studios within enclosed malls or other host retailers. We apply
demanding criteria to the selection of our retail sites and
utilize demographic and psychographic mapping software
applications designed to optimize the financial performance of
our new studios.
|
|
|
|
Disciplined operating philosophy with scalable
processes. We have developed and documented
detailed and standardized systems, procedures and processes that
we believe have allowed us to rapidly grow our studio base while
maintaining consistently high-quality customer service and
in-studio execution. Through our management information systems,
we measure and monitor, on a real-time basis, the performance of
our studios and our associates, which allows us to make
appropriate and timely adjustments.
|
|
|
|
Performance-based culture with emphasis on
training. We believe our customer-focused and
performance-based culture allows us to attract motivated,
high-achieving employees who share our vision for success. All
of our associates, the majority of whom are college-educated,
attend a comprehensive two-week training program at our central
training facility, which focuses on developing professional
portrait techniques and personalizing the customer experience
while maximizing sales productivity. We reward excellence by
offering our associates and managers opportunities to
participate in performance-based incentive programs and the
ability to seek professional advancement internally. We believe
that our focus on employee training and development is a key
contributor to our success.
|
|
|
|
Attractive and consistent studio
economics. Our studio model has consistently
delivered strong unit economics across a variety of geographic
locations. Our average investment for the studios we opened
during fiscal 2009 was $365,000, which includes the cost of our
digital imaging and display equipment, studio fixtures, net of
landlord contributions, and initial inventory investment of
approximately $5,000. Our studios typically generate positive
cash flow within one year of opening. Our studios typically
demonstrate rapid increases in sales and profitability in their
first four years of operations. Based upon historical operating
performance, our target annual average sales for mature studios
is approximately $1 million. For new studios, we target a
pre-tax, cumulative cash payback on our net investment within
three years.
|
|
|
|
Experienced management team with a proven track
record. We have assembled a management team that
has over 100 combined years of experience in the retail
photography industry. Our co-founders, John Grosso, President
and Chief Executive Officer, and John Davis, Executive Vice
President and Chief Development Officer, have each spent more
than 30 years in the photography industry.
|
Our
growth strategies
We plan to execute several strategies to drive revenue and
operating income growth, including:
|
|
|
|
|
Accelerating the expansion of our studio
base. We intend to accelerate the expansion of
our studio base in new and existing markets. Based on our
operating experience, we believe the U.S. market can
support over 850 Portrait Innovations studios. During the past
five fiscal years, we have opened an average of 30 new studio
locations per year. We intend to open approximately 30 new
studios in fiscal
|
56
|
|
|
|
|
2010 and increase our studio base by approximately 20% annually
thereafter. Prior to founding Portrait Innovations, our
President and Chief Executive Officer was responsible for
opening more than 1,775 portrait studios over an
11-year
period, as part of the turnaround he led at one of the largest
players in the portrait industry. We believe the experience of
our management team, combined with our established corporate
infrastructure and our proven and scalable, process-focused
operating model will allow us to successfully accelerate the
expansion of our studio base.
|
|
|
|
|
|
Increasing sales productivity. We seek to
maximize our comparable studio sales by maintaining consistent
studio-level execution and generating increased customer
traffic. We plan to continue to implement a variety of
initiatives to enhance sales productivity in our studios, which
we believe already generate the highest average studio sales
volume of any major chain in the portrait industry. We test and,
as appropriate, add new portrait collections and other product
offerings to better satisfy the varied tastes and budgets of our
customers. We also continue to test and evaluate new digital
image capture and display technologies to further differentiate
the quality, speed and value of our portrait experience. To
drive traffic during non-holiday periods when our studios
typically have incremental capacity, we intend to continue
focused marketing programs targeted to specific customer groups,
including new mothers, business professionals, sports teams and
brides. In addition, we plan to focus on enhancing sales
productivity and consistency across our studio base by tailoring
our ongoing training processes and methodologies to each
studios performance and sharing best practices across our
studio base.
|
|
|
|
Growing our national brand awareness. We
believe our Portrait Innovations brand will continue to gain
awareness as we accelerate our studio openings and expand our
geographic footprint. We plan to continue to support the brand
through a broad mix of media, including participation in
target-specific online social networking sites, informative and
seasonal
e-mail
communications to our existing customer database, newspapers,
magazines, targeted customer-specific direct mail, and selective
television advertising. As we increase our geographic footprint,
we plan to move from regional to national advertising campaigns,
which we believe will provide further cost efficiencies. We also
believe we will continue to benefit from
word-of-mouth
and grass roots marketing, such as our participation in local
charity and public service events in markets where we operate
studios.
|
|
|
|
Investing in and developing technology. We
intend to remain at the forefront of digital image capture and
printing technology, which we believe will further differentiate
us from our competitors. We also plan to continue to develop
business systems and methodologies intended to improve business
processes, create and deliver innovative product offerings, and
capture and analyze information to better manage our business.
We intend to further upgrade our information technology
infrastructure to be more efficient and scalable, utilizing the
latest in database, network, and application design technology.
We are also identifying ways to further automate our business
processes by leveraging
off-the-shelf
software where appropriate and developing proprietary software
where it may provide a competitive advantage.
|
|
|
|
Improving our operating margins. We believe
that our initiatives to improve sales productivity in both new
and mature studios will result in increased studio-level
contribution margins. In addition, we believe we will achieve
higher levels of profitability by leveraging corporate and other
overhead costs against a growing revenue base as our studio
location footprint expands.
|
Our
market
We operate within the large and fragmented
U.S. professional portrait market which serves a broad
range of consumers who purchase professional portraits to
capture cherished memories and commemorate life milestones. The
professional market is distinguished by photographers trained in
advanced techniques who utilize sophisticated camera, lighting
and printing systems to produce high-quality and artistically
appealing portraits. Professional portrait photographers
typically own all of the images they capture. According to
Photofinishing News, Inc., the U.S. professional portrait
market totaled $8.8 billion in sales in 2008 and has grown
modestly over the past several years. Important customer
segments for studio operators within the professional portrait
market include individuals, such as babies, preschoolers,
school-age children and adults,
57
as well as groups, such as families, wedding parties, sports and
dance teams and other organizations. Other segments in this
market include conventions, events, cruise ships, glamour,
passport, and executive portraits.
As a result of their many years of experience in the
professional portrait industry, our co-founders,
Messrs. Grosso and Davis, and other senior officers and key
employees designed our business model and strategy to respond to
and take advantage of certain trends that have been transforming
the U.S. professional portrait market and significantly
altering its competitive landscape. These trends include the
proliferation of digital technology in personal photography,
changes in consumer shopping preferences and the increasing
importance of key demographic groups. Our founders developed our
business model and operating strategies to address these trends,
with the goal of delivering the best customer experience in the
U.S. professional portrait market. We believe our success
at capturing share in this market is directly attributable to
our differentiated studio experience.
Advances
in digital technology
Over the last several years, advances in digital technology have
led to an increase in the number of digital cameras, smart
phones, and other personal digital devices with cameras. The
proliferation of these devices, combined with advancing personal
computer and internet-based technology, has dramatically changed
the way consumers capture, display and share photographic
images. Certain sectors of the photography market, such as
traditional film and film-based picture processing, have seen a
significant decline in sales even though the number of images
captured has grown substantially. According to the Photo
Marketing Association (PMA), between 2002 and 2008,
the number of digital cameras sold increased from
9.4 million to 27.7 million while the number of
digital images captured increased from 3.5 billion to
25.3 billion. We believe the increase in digital image
capture reflects a continuing enthusiasm for photography and an
enduring interest in preserving special memories and events.
According to a 2008 PMA study, the percentage of households that
purchased portraits was higher among those households owning
digital cameras than those not owning digital cameras.
We believe that many consumers understand and continue to value
the distinction between personal snapshots and professional
portraits with high artistic content. We create professional
portraits that require photographic training and sophisticated
lighting, camera, background and printing systems, and as a
result, are difficult to replicate at home. We believe our
performance reflects the market opportunity to provide consumers
high-quality, affordable professional portraits.
Changing
consumer preferences
We believe that consumers increasingly value convenience, speed,
selection and quality when they shop, and as a result, are
shopping less in enclosed malls and prefer the accessibility and
more intimate shopping experience offered by open-air lifestyle
and power centers. We believe that the number of lifestyle and
power centers in the United States has increased significantly
over the past decade to more than 11,000 in 2009. According to
the International Council of Shopping Centers, consumers shop at
lifestyle centers primarily for convenience, quality and
selection of the tenant mix and ambience. We locate our
free-standing portrait studios in these high-visibility,
high-traffic, open-air lifestyle and power centers, whereas our
primary competitors operate studios within large host retailers
including department stores and mass merchants, as well as in
enclosed regional malls.
We also believe consumers appreciate and increasingly expect
products and services immediately. We strive to meet these
expectations by completing the typical portrait session within
an hour and a half, which includes the production of the
finished portraits typically within 15 minutes after the
customer selects a portrait collection. While select competitors
offer limited
on-site
digital printing, generally at premium prices, the majority of
our competitors continue to utilize off-site printing labs,
which often require one to two weeks for delivery of finished
portraits.
In addition, we believe consumers have become increasingly
sophisticated and discerning in demanding higher resolution,
less pixelated and more vibrant printed portraits from
professional portrait providers. We utilize a combination of
processes to enhance the quality of our portraits, including
sophisticated professional
58
photography techniques and
state-of-the-art
digital imaging and printing technology. Our experienced
professional photographers use untethered, hand-held cameras
that free them to move and interact with our customers being
photographed. Our sophisticated camera rooms feature
auto-adjusting, computerized, multi-light and background
systems, and our printing process combines a laser printing
system and professional-quality portrait paper that we believe
allows us to offer the highest quality portraits currently
available. Our investment in training and technology contributes
to our product quality and helps distinguish our portraits from
those produced by other professional and amateur photographers.
We believe that our real estate strategy, process-driven studio
experience and
state-of-the-art
technology allow us to provide our customers with the level of
convenience and quality they have increasingly come to expect.
Demographic
trends
We believe that the size and stability of the professional
portrait market will continue to be supported by the forecasted
growth of our targeted customer base. One of our primary
customer groups is families who seek to commemorate
coming-of-age
milestones for their children and grandchildren and to
memorialize family reunions or gatherings. According to a widely
recognized demographer, there were 33.5 million mothers
with children under the age of 18 in the U.S. in 2009 and
this group is expected to grow to 34.0 million by 2015.
Additionally, there were 68.0 million grandparents in the
U.S. in 2009 and this number is expected to increase to
over 77.1 million by 2015. We believe that mothers and
grandparents value the importance of capturing important
milestones and memories and are key decision makers in the
purchase of professional portraits.
We have designed our studios, which feature dressing rooms,
spacious reception areas with couches, childrens play
areas and large camera rooms, to comfortably accommodate and
better meet the needs of families with children,
multi-generational families and other groups.
Competition
The professional portrait market is large and highly fragmented.
Our competition within this market includes large studio chains
operating in national retail hosts, other mall-based portrait
studio chains, national school and church photographers and a
large number of small, independent companies and individual
professional photographers. We believe that, based on net sales,
Portrait Innovations is the fastest growing of the major studio
chains in the professional portrait market.
Large studio chains include: CPI Corporation, operating in Sears
and Wal-Mart; Lifetouch Inc, operating in J.C. Penney and
Target; Olan Mills, principally operating in K-Mart; and Picture
People, operating primarily in enclosed regional malls. Other
nationwide competitors primarily focus on the school photography
and church directory segments.
We believe the most important competitive factors in our
industry include service, innovation, technology, quality,
convenience, value, price and portrait collection variety and
that we compete favorably in our markets based on these factors.
See Our competitive strengths.
Our
studio experience
We believe that our customers value the importance of capturing
cherished family and personal memories, events and milestones,
but have limited options available to purchase high-quality,
professional portraits at affordable prices in a convenient,
efficient manner. We believe that we offer a differentiated
studio experience that meets these consumer needs. We believe
our customers recognize and appreciate this differentiated
approach, which engenders loyalty and repeat business.
Our free-standing studios are located in high-visibility,
high-traffic, open-air lifestyle and power centers that offer
easy access and adjacent parking. We choose these locations to
enable our customers, particularly parents with small children,
strollers and changes of clothing, to easily find and enter our
studios. We believe that our highly accessible studios
differentiate us from many of our competitors that locate their
studios in enclosed malls or inside host retail stores, which
can be inconvenient for customers to find and access.
59
We have a consistent interior design across our entire studio
base that is intended to be warm and inviting, with an open,
spacious floor plan that we believe facilitates an efficient and
engaging portrait experience. Our bright, colorful studios
feature comfortable waiting areas with tables, chairs and sofas
and a childrens play area with a
Lego®
table and blocks. We display large portraits to engage our
customers and allow them to visualize various portrait options.
Private changing rooms enable our customers to change outfits as
desired during the portrait session, which provides them with a
greater variety of portrait selections. We believe the openness
of our studios provides a transparent view of the studio
experience for new customers, as well as the opportunity for
customers to pre-select poses, props and backgrounds.
Because the portrait process is a high-touch, personalized
experience, we seek to hire studio associates with strong
interpersonal skills and a desire to work with families and
children. Our studio associates are carefully trained and
expected to exemplify a high standard of professionalism in
their appearance and customer interaction. In order to provide
personalized service, each of our customers typically works with
the same studio associate from the time they enter our studio
until the time they leave. All of our studio associates and
managers are trained in every aspect of the portrait process. We
believe that this approach not only provides a high level of
customer service, but also allows us to better create and sell
highly customized products that better meet our customers
needs.
Our core philosophy is that every customer should be treated as
an honored guest with the highest level of respect and courtesy.
We expect each of our employees to serve as customer service
advocates, and we empower our studio associates, within the
framework of our corporate policies and objectives, to ensure
that our customers are fully satisfied with their studio
experience. We believe that by decentralizing our approach to
customer service, we are able to offer a more personalized
experience and to foster a successful professional relationship
between our customers and associates.
We have developed a highly structured approach to the portrait
process that we believe allows us to provide our customers with
high-quality, customized portrait collections that meet their
tastes and budgets quickly and efficiently.
|
|
1)
|
The
photography session
|
Our experienced professional photographers use untethered,
hand-held cameras, freeing them, similar to professional fashion
photographers, to move and interact with children and adults
being photographed. We believe the combination of our
photographers experience, unrestricted freedom and our
professional lighting system produces candid expressions, real
smiles, and portraits with personality that do not look posed or
staged.
|
|
2)
|
View
and select your favorites
|
Immediately following the photography session, customers view
and select their favorite poses from all of the images taken,
typically 36 or more. The portraits are displayed on large,
plasma, flat-panel monitors so that customers can interact with
our associates to digitally edit, enhance, crop or zoom in to
see important details. Our associates use our software to guide
customers through an easy portrait selection process. We believe
our customers ability to participate directly in creating,
enhancing and selecting their images promotes a personal
connection and furthers their interest in preserving these
memories through the purchase of portraits.
|
|
3)
|
Creating
your portraits
|
Our customers direct our associates to digitally enhance their
favorite poses, which can be done instantly and seamlessly with
our software. By adding custom special effects, we help our
customers create personalized and unique portraits. Customers
can choose from a variety of portrait sizes, in full-color,
black and white, splash of color or sepia tones.
Prices are interactively displayed for customers on our
flat-panel plasma monitors as they select the quantity and sizes
of portraits they wish to purchase.
60
|
|
4)
|
Your
portraits are ready
|
Customer portraits are produced to their personal
specifications,
on-site,
with our high capacity,
state-of-the-art,
Fujifilm
Frontiertm
Laser Printing System. Portraits typically are available within
15 minutes after the customer selects a portrait collection.
We believe that our customers appreciate and value our
differentiated portrait studio experience and that these
differences have significantly contributed to our success to
date.
Our
portraits and other products
We sell photographic portraits in five industry-standard sheet
sizes, including 10x13, 8x10, two 5x7s, four
31/2x5s,
and eight wallets. We also sell selected ancillary products,
such as calendars and greeting cards, that incorporate our
photographed images. We generate substantially all of our
revenue from the sale of images printed on photographic paper.
We print our portraits on Fujis highest quality Crystal
Archivetm
professional photographic paper.
We believe the artistic quality of each image is an important
driver of our customers purchasing decisions. We have made
and continue to make substantial investments in training our
studio associates in professional photography techniques,
computer software, cameras, lenses, lighting, backgrounds, props
and other photographic equipment in an effort to enhance our
product. Our image editing software enables our employees to
quickly and simply add many special effects to our portraits.
These effects, which can be modified in a variety of sizes,
shapes and colors, include:
|
|
|
|
|
soft oval cameos, custom vignettes, artistic borders and edges
and calendars;
|
|
|
|
full-color, black and white, splash of color or
sepia tones;
|
|
|
|
multi-image collages and double exposures on a single portrait
sheet; and
|
|
|
|
a wide variety of personalized greeting cards for various
occasions.
|
Our pricing philosophy is to offer our products at the lowest
price possible while maintaining our high quality standards.
Unlike many of our competitors, we do not charge additional fees
for club membership, sitting fees or additional subjects. We
also include in our standard pricing the convenience of printing
and delivery of portraits to our customers at the conclusion of
the photography session.
Portraits may be purchased individually, but are most often
purchased in economically priced collections to suit each
customers needs and budget. Our collection pricing starts
at $9.95 for a portrait collection that includes 10 portrait
sheets and six greeting cards, but in each fiscal year since our
inception, our average customer purchase has exceeded $100.
Currently, customers who purchase our three-pose or larger
collections receive a bonus CD containing all of the images
captured during the photography session, even those the customer
did not purchase, in both high- and low-resolution formats. The
full-size high-resolution images are encrypted, and we use those
files to produce additional portraits if the customer later
requests additional portraits not included in the initial
collection. The low-resolution images are intended for personal
home use and internet sharing.
Our
studios
As of May 2, 2010, we operated 181 studios in
39 states across the U.S. Studio locations average
approximately 2,300 square feet in size and feature a floor
plan that is designed to be spacious, warm and inviting. We
believe our strategy of placing our studios in free-standing
locations, as opposed to relying on host retailers or enclosed
shopping malls, gives us several competitive advantages,
including lower and relatively fixed occupancy costs and
enhanced customer convenience.
61
The following table reflects our studio count by state as of
May 2, 2010.
|
|
|
|
|
|
|
|
|
|
|
State
|
|
Studios
|
|
|
State
|
|
Studios
|
|
|
Alabama
|
|
|
6
|
|
|
Missouri
|
|
|
5
|
|
Arizona
|
|
|
3
|
|
|
Nebraska
|
|
|
3
|
|
Arkansas
|
|
|
2
|
|
|
Nevada
|
|
|
2
|
|
Colorado
|
|
|
5
|
|
|
New Jersey
|
|
|
3
|
|
Connecticut
|
|
|
1
|
|
|
New Mexico
|
|
|
1
|
|
Delaware
|
|
|
1
|
|
|
New York
|
|
|
1
|
|
Florida
|
|
|
8
|
|
|
North Carolina
|
|
|
11
|
|
Georgia
|
|
|
9
|
|
|
Ohio
|
|
|
12
|
|
Idaho
|
|
|
1
|
|
|
Oklahoma
|
|
|
2
|
|
Illinois
|
|
|
9
|
|
|
Oregon
|
|
|
2
|
|
Indiana
|
|
|
8
|
|
|
Pennsylvania
|
|
|
10
|
|
Iowa
|
|
|
6
|
|
|
South Carolina
|
|
|
3
|
|
Kansas
|
|
|
4
|
|
|
South Dakota
|
|
|
1
|
|
Kentucky
|
|
|
3
|
|
|
Tennessee
|
|
|
8
|
|
Louisiana
|
|
|
4
|
|
|
Texas
|
|
|
20
|
|
Maryland
|
|
|
2
|
|
|
Utah
|
|
|
1
|
|
Massachusetts
|
|
|
1
|
|
|
Virginia
|
|
|
7
|
|
Michigan
|
|
|
7
|
|
|
Washington
|
|
|
1
|
|
Minnesota
|
|
|
2
|
|
|
Wisconsin
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Mississippi
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
Studio
expansion and development
Based on our operating experience, we believe the
U.S. market can support over 850 Portrait Innovations
studios. During the past five fiscal years, we have opened an
average of 30 new studio locations per year. We intend to open
approximately 30 new studios in fiscal 2010 and increase our
studio base by approximately 20% annually thereafter.
We apply demanding criteria to our studio site selection,
utilizing demographic and psychographic mapping and commercial
real estate database applications to select locations in key
market areas. When considering new sites, we analyze total
population, population by age group, median and average family
income, and post-secondary education levels for the population
within a five- and
ten-mile
radius of the potential studio site. We locate our studios in
open-air lifestyle or power centers in high-traffic areas with
easy access and
drive-up
parking.
We lease all of our studios. Lease terms typically range from
five to 10 years, and provide us the option to renew for
one or two additional terms of five years. We seek space for our
studios that can be upfitted to our standardized specifications
to provide for consistency in the appearance and functionality
of our studios. We further maintain uniformity by furnishing
each studio with identical furniture, fixtures and equipment. We
follow a regimented studio construction and installation
protocol that enables us to open our studios within nine weeks
after commencing construction, on average.
Technology
Imaging
and printing technology
We utilize
state-of-the-art
digital imaging technology to produce our portraits. Our
professional-quality cameras, automated lighting and background
systems, image-selection software and in-studio printing systems
62
allow us to complete a high volume of customer sittings and
deliver a wide variety of high-quality professional portraits to
our customers typically within an hour and a half of entering
our studio. We believe that our investment in these technologies
contributes to our product quality and helps distinguish our
portraits from those produced by other professional and amateur
photographers.
Specific aspects of our technology include:
|
|
|
|
|
Cameras and Lenses. Our cameras are hand-held
by our associates, as opposed to being mounted on a tripod or
tethered to any light-control or data-transfer cords or cables.
This setup provides our photographers complete freedom of
movement to quickly capture expressions at preferred camera
angles.
|
Our associates use 12.3 megapixel Fujifilm FinePix S5 Pro
professional digital SLR cameras built on a Nikon body. The
cameras sensor has a high
signal-to-noise
ratio and quadrupled dynamic range to generate more brilliant
and life-like colors and outstanding image quality. The camera
has a durable shutter unit designed to operate for up to
approximately 100,000 cycles.
We are in the process of transitioning to Nikons new D300S
professional camera, which we believe will provide an even
higher level of quality and durability than we experienced with
the Fujifilm FinePix S5 Pro camera. The camera features a
shutter that has been durability tested for 150,000 cycles, a
durable magnesium alloy body, the ability to record up to seven
frames per second, an integrated dust reduction system, long
battery life, superb sensor quality and other features that we
value.
We use Nikon lenses with all of our cameras because we believe
they provide a quality advantage over competing brands. We
believe the Nikon lenses, coupled with our cameras, create
exceptionally sharp, crisp images.
|
|
|
|
|
Camera Rooms, Lighting and Backgrounds. Our
camera rooms incorporate design and technology features intended
to increase efficiency, volume and portrait quality. Our camera
rooms are uniform in all major aspects of design and dimension
to promote consistent execution across all of our studios. We
also believe that the design and functionality of our camera
rooms increase photographer productivity, reduce customer
fatigue, permit a wider variety of posing and background options
and provide consistent portrait quality. Each studio features
two or three spacious camera rooms that can accommodate groups
of up to 40 people.
|
Each camera room contains nine independently controlled
Photogenic 500 watt-second
PowerLighttm
1250 DR digital strobe units designed to provide consistent
lighting effects that can be quickly and accurately changed to
achieve a wide array of lighting styles. We believe our lighting
system significantly enhances the quality of our portraits
compared to that of our competitors and amateurs. Our studio
associates control all lighting from a computer console and can
change between precisely preconfigured light styles in a matter
of seconds. The lights are modified with a variety of diffusers,
louvers and grates that control light projection and artistic
effect. All lights are automatically triggered in unison upon
click of the camera shutter to deliver a pre-set amount of light
required to achieve the desired result.
Each camera room has the capacity for 12 backgrounds. Eight of
the available backgrounds are customized scenic or solid-color,
which are motorized for speed and durability. Additional
adjustable muslin backdrops are available on sliding rails.
These backgrounds and other camera room props are typically
changed throughout the year for seasonal themes and periodic
updates. For the November-December holiday season, one of the
camera rooms in each of our studios features a specially
designed Christmas set, with a fully decorated tree. We redesign
this set every holiday season so that our customers have variety
from year to year.
|
|
|
|
|
Image Viewing and Selection. Immediately
following the photography session, all images are downloaded to
our presentation and selling software. The images are displayed
on a 42-inch
flat-panel monitor for clarity and impact, allowing our
associates to use our software to guide customers through
|
63
|
|
|
|
|
an easy portrait selection process. The software enables
customers, working with our associates, to review and select
their portrait collection. During this process, the software
automatically calculates and displays the price of the portrait
collection being reviewed by the customer. Once customers
confirm their custom order, the software transmits the order for
printing and prints a receipt. The integration of image viewing
and selection software with our printing system fully automates
the task of converting the customers selection into
high-quality finished portrait sheets. This software is also
integrated with our
point-of-sale
software to provide data regarding the session to our corporate
management information systems.
|
|
|
|
|
|
Printers. Each studio location is equipped
with a Fujifilm
Frontiertm
digital printer. This printer exposes traditional silver-halide,
Crystal
Archivetm
professional portrait paper with a proprietary laser system and
then processes the images in a developer solution, bleach/fix
bath and four rinse tanks. These printers produce prints with a
resolution of 300 dots per inch and can handle a variety of
paper sizes up to 12 inches in width, which enables us to
produce our portrait sheets and ancillary products, such as
greeting cards and calendars, on the same printer.
|
Management
information systems
Our information technology systems support our detailed,
process-driven business strategy. All of our studios are
connected to our corporate headquarters through our virtual
private network. Through this network, our management has
real-time access to various measures of studio activity,
including number of booked appointments, customer check-in, wait
and check-out times, individual and aggregate sales volume and
associate productivity measures. These systems, coupled with our
standardized processes, enable our corporate and regional
managers to proactively manage customer service, associate
productivity and equipment maintenance on a real-time basis. Our
central data system is protected against disruption and data
loss by our offsite disaster recovery system. In addition, our
studios are capable of operating independently in the event of
loss or damage to our company-wide network, and have
on-site
redundancies for all key information systems.
We continually seek ways to upgrade our application delivery
platform to be more efficient and scalable utilizing the latest
in database, network, and application design technology. We
recently converted to a virtualized server environment, upgraded
our systems architecture and began implementing more web-based
applications. We expect that this new system will provide us an
improved integrated, streamlined platform, significantly enhance
our data storage capacity and eliminate unnecessary duplication.
These improvements are intended to improve business processes,
create and deliver innovative product offerings, and capture and
analyze information to better manage our business. We are
examining ways to further automate our business processes by
leveraging
off-the-shelf
software where it is practical and developing software where
there may be a competitive advantage.
Development
and support
We have an in-house staff of seven senior information technology
professionals with expertise in software development, database
management, hardware and networking, all of whom are located at
our corporate headquarters. We create and maintain many of our
business software applications in-house, including our
proprietary Managing Attitude Photography and Sales (MAPS)
program for evaluating various aspects of a photo session and
related employee performance measures.
We also have an in-house help-desk to support our studio
associates and managers in addressing technical and other
troubleshooting issues. This staff is available 24 hours a
day, seven days a week.
Staffing
and operations
Our studios are generally open six days a week from 9:00 am to
6:00 pm Tuesday through Sunday, with special extended hours
during busy holiday periods. Portrait appointments are booked by
in-studio associates during business hours and by our
centralized call center operators on Mondays and during busy
holiday seasons.
64
A studio is overseen by a studio manager, with a studio
associate staff that, based on customer traffic levels, consists
of five to 10 full-time associates and two to four
part-time associates, all of whom are compensated on an hourly
basis, with incentive bonus compensation based on performance.
To provide a personalized, seamless experience for customers, a
studio associate is responsible for all aspects of a
customers portrait experience, including customer service,
photography, sales and portrait printing. In addition to their
leadership, training and oversight functions, our managers are
also responsible for working directly with customers.
Recruiting
Our success is dependent in part on our ability to attract,
train, retain and motivate talented employees at all levels of
the organization. We seek to attract dedicated studio associates
by offering performance-based incentives, providing fast-track
promotional opportunities and empowering them with the
flexibility to make studio-level operating decisions within the
framework of our corporate policies and objectives. We typically
source new hires from a variety of online job search portals
including
CareerBuilder.com®,
Monster.com®
and
Taleo.com®.
We apply demanding criteria in our new hire selection and
generally hire ambitious, sales-oriented applicants, and a
majority of our studio associates are college-educated.
Training
All of our associates hired for new studios attend a mandatory,
rigorous two-week training program at our central training
facility in Charlotte, North Carolina, during which they learn
photographic techniques and methods to optimize the customer
experience and sales productivity. We provide each studio
associate with documented materials and manuals that delineate
conduct standards, customer service protocols, behavioral
expectations and photography and sales operating procedures. Our
training program is a combination of comprehensive classroom
education and discussion and in-studio, hands-on training.
Following this training program, our associates receive ongoing
training from the manager of their studio and through our
proprietary MAPS program to evaluate and improve the quality of
their photographic work and sales techniques.
Associate
development
Our associates are important to our studio expansion strategy,
and all of our studio managers began their careers with us as
studio associates. After a minimum of three months of employment
with us, studio associates who have satisfied specified
performance standards are eligible to apply for a studio manager
position. This self-initiated management development program,
which we refer to as FastTrack, allows us to screen and identify
high-potential studio managers in a comprehensive and rigorous
manner. Those associates who are promoted to managers return to
our corporate development and training center to participate in
a one-week management training program.
Studio
management
Our vice president of operations is responsible for all of our
studio operations. We manage our studio base on a
region-by-region
basis, and our total studio base is currently organized into
nine geographic regions. Each region is supervised by a regional
manager who monitors studio operations and meets regularly with
studio managers to review studio performance. Each Monday, our
vice president of operations leads a regional managers
conference call to review and discuss the prior weeks
management reports and operating results, and to establish the
current weeks operating objectives.
Our studio and regional managers meet three times per year for
our national studio managers meeting. We provide ongoing
management training and share best practices. These meetings
allow us to acknowledge and recognize top performers and reward
and thank our studio and regional managers for achieving and
exceeding company objectives.
65
Performance-based
incentive programs
We employ a performance-based incentive program to motivate our
employees. Our studio associates and managers earn hourly wages
and are eligible to participate in our annual bonus program. We
believe that our compensation program and benefits compare
favorably with other specialty retailers and competitors in our
industry.
At the beginning of our fiscal year, we provide each of our
studios with a detailed studio budget, which is based on
analysis of the studios performance in the previous year,
our estimates for projected future performance and various other
factors. Based on the level of annual net sales by a particular
studio, relative to its budget, the studios associates and
manager earn into our annual bonus plan. Each of our studio
associates can access their individual performance and their
studios performance on a real-time basis via our
point-of-sale
software. We believe this transparency fosters a collaborative
yet competitive environment. Importantly, our annual bonus is
not paid until April of the following fiscal year, at which
point our employees are already working towards the bonus
targets for the next fiscal year.
In addition to cash incentive compensation, we have historically
awarded stock options upon an associates promotion to
studio manager and upon promotion of a studio manager to
regional manager. Options typically vest and become exercisable
in equal annual increments over a five-year period from the date
that they are awarded. In general, any unvested options are
forfeited if the manager resigns or is terminated, and, except
in limited circumstances, vested options expire if unexercised
within three months after termination of employment.
Marketing
and advertising
We employ a comprehensive marketing strategy in an effort to
increase brand awareness and drive traffic to our studios. In
partnership with a full-service, third-party advertising agency,
we design our marketing and advertising strategies to emphasize
the value-added features, benefits and advantages of our
portrait studio experience. We advertise through a variety of
media, including internet and online-based marketing, targeted
social networking sites, informative and seasonal
e-mail
communications to our existing customer database, traditional
print marketing through newspapers and magazines and targeted
customer-specific direct mail. In addition, we launched our
first regional prime time television advertising campaigns to
support 125 studios in the November-December 2009 holiday
season. We believe this campaign was effective, and we intend to
increase our use of television advertising in the future.
Because our business is highly seasonal, we launch specialized
advertising campaigns in connection with certain holidays,
including New Years, Valentines Day, Easter,
Mothers Day, Fathers Day, Halloween, Thanksgiving,
Chanukah and especially Christmas. We also intend to continue
focused marketing programs targeted to specific user groups,
including new mothers, business professionals, sports teams and
brides, to drive traffic during non-holiday periods when our
studios typically have incremental capacity. As we expand our
geographic footprint, we will be able to move from regional to
national advertising campaigns, which we believe will provide
cost efficiencies.
We support our new studio openings with focused, grand opening
advertising initiatives. These initiatives typically include
targeted direct mailings, newspaper and magazine campaigns,
promotional materials and gift certificates for local schools
and other community organizations, and in most cases a two-week,
prime time local television campaign.
In addition to traditional advertising methods, we believe we
will continue to benefit from
word-of-mouth
and grass roots marketing, such as our participation in local
charity and public service events in markets where we operate
studios. In particular, we believe that our consistent focus on
customer service has garnered us recognition and respect among
mothers groups and organizations and parent-focused media,
websites and blogs.
Our interactive website provides useful information to our
customers, including studio locations and contact information, a
description of our unique studio experience and examples of our
product offerings for different occasions. The website
highlights the experience customers may expect at our studios
and includes
66
an Inside the Portrait video highlighting our four-step
portrait process. We also provide portrait ideas on our website,
including multiple examples of portraits for babies, parents and
children, large families and groups, seasonal themes, sports and
activities, special occasions and business, along with examples
of different special effects such as black and white, sepia,
splash of color, vignettes, cameos, double
exposures, personalized cards and calendars. We utilize our
website to advertise our portrait collection specials. Our
website also contains a career portal advertising open associate
and corporate positions.
Customers
Our customers include families, particularly those with infants,
pre-school and school age children, adults and groups who desire
to capture a particular event or milestone. Families with
children are one of our largest customer groups and account for
a significant portion or our repeat business, as these families
seek to commemorate
coming-of-age
milestones for their children. We target customers and see
increases in customer traffic around the November-December
holiday season and other holidays, including New Years,
Valentines Day, Easter, Mothers Day, Fathers
Day and Halloween. Other important customer groups include
multigenerational families, brides, clubs, sports teams,
students and graduates and business professionals.
Vendors
We purchase all of our photographic paper, processing chemistry
and photographic printers from Fujifilm North America
Corporation. We believe that Fuji leads the industry with regard
to the quality and technology related to the printing of
professional photographic images. We have a supply agreement
with Fuji for photographic paper, chemistry and parts, which
expires in January 2011. We purchase printers from Fuji on a
purchase-order basis. In addition, under a separate maintenance
and service agreement, Fuji contracts with a third party to
provide
on-site
service at each of our locations.
We currently use one firm, Tallyns Professional
Photographic Supply of Peoria, Inc., to source selected
equipment, lighting systems and components, motorized background
systems, backgrounds, muslins, various studio props and
supplies. Tallyns also provides coordination and labor for
the installation and configuration of studio equipment in our
new and renovated studio locations.
We purchase our cameras, other equipment, supplies and services
from various other vendors and distributors.
While we value our relationship with these important vendors, we
believe that we could obtain replacement products and services
if they or any of their material vendors were unable to provide
these products and services to us.
Intellectual
property
We rely primarily on trademark, copyright and trade secret laws,
confidentiality procedures and contractual provisions to protect
our proprietary interests in our business and software. To help
protect the value of our brand, we have secured a federal
trademark registration in the U.S. for the mark PORTRAIT
INNOVATIONS and have registered the domain name
www.portraitinnovations.com.
In addition, we own two patents issued in the U.S., one in
Australia and one in South Korea related to the production and
selection of digital portraits from a minimum of 36 digital
images generated using at least four backgrounds and 12 poses.
Our first U.S. patent will expire in 2025 and the second
will expire in 2023. This patent family also includes a pending
continuation U.S. patent application and additional
applications pending in Brazil, Canada, Mexico and Japan.
We also have a pending U.S. non-provisional patent
application, and related patent applications pending in
Australia and Canada, which relate to certain aspects of our
MAPS program for evaluating various components of a photo
session and related employee performance measures.
Our patents and other intellectual property rights are subject
to various risks and may not provide us with adequate defensive
protection or sufficient competitive advantage. See Risk
Factors We may be unable to
67
adequately protect our intellectual property rights or avoid
infringing the intellectual property rights of third parties,
and the intellectual property rights we have may not be a
meaningful barrier to competition.
Governmental
regulation
Our operations are subject to regulation at the federal, state
and local level, including laws and regulations relating to
environmental matters such as the handling, transportation and
disposal of our nonhazardous and hazardous substances and
wastes, emissions and discharges of pollutants into the
environment, including discharges into air, surface water and
groundwater, and health and safety. Failure to comply with such
laws and regulations could result in costs for corrective
action, penalties or the imposition of other liabilities.
Our historical environmental compliance costs have generally
been limited to the maintenance of our various licenses and
permits and the routine disposal of chemicals used in our
printers, and have not had a material effect on our business,
financial condition or results of operations, and we do not
currently expect that such costs will have such a material
effect in the foreseeable future. However, any unknown or
unexpected violation of, or liability under, applicable
environmental regulations could have a material adverse effect
on our business, financial condition or results of operations.
Similarly, any changes in environmental laws, or the
interpretation thereof, or our use of new or different processes
or equipment could also cause us to incur unexpected material
capital and operating expenses to maintain compliance with
environmental laws and regulations.
Employees
As of May 2, 2010, we had 1,432 employees, including
316 part-time employees. Our studio associates and studio
managers are paid on an hourly basis and receive
performance-based incentive opportunities. None of our employees
is represented by a union, and we are not a party to any
collective bargaining or similar agreement. We consider our
relationships with our employees to be good.
Properties
We currently lease all of our studios, which numbered 181 and
were located in 39 states across the U.S. as of
May 2, 2010. Our studios average approximately
2,300 square feet. Our typical studio lease terms are from
five to 10 year terms, with one or two five-year
renewal options.
Most of our studio leases also include an exclusivity provision
that prohibits the landlord from leasing space in the center to
another portrait studio tenant during the term. We do not
believe that any individual studio property is material to our
financial condition or results of operations.
We also lease our corporate headquarters, which is located in
Charlotte, North Carolina. Our corporate headquarters consists
of approximately 26,000 square feet and includes a
corporate training center, corporate call center, warehousing
space and offices for our corporate executives and other
corporate personnel. The initial term of this lease expires in
2017.
Legal
proceedings
From time to time, we are involved in certain legal proceedings
in the ordinary course of our business. Although we cannot
accurately predict the amount of any liability that may
ultimately arise with respect to such matters, management
believes the amount of any liability with respect to existing
matters, either individually or in the aggregate, will not be
material.
We are also currently involved in certain tax matters and
proceedings. See Managements Discussion and Analysis
of Financial Condition and Results of Operations
Contingencies.
68
Corporate
information
Portrait Innovations, Inc., our subsidiary, was incorporated in
North Carolina in 2000 and re-incorporated in Delaware in 2002.
In 2008, we completed a holding company formation transaction
and Portrait Innovations, Inc. became the wholly-owned
subsidiary of Portrait Innovations Holding Company, a Delaware
corporation incorporated in 2008.
Our principal executive offices are located at 2016 Ayrsley Town
Boulevard, Suite 200, Charlotte, North Carolina 28273.
Our telephone number is
(704) 499-9300
and our website address is www.portraitinnovations.com. The
information contained on our website is not incorporated into
and does not form a part of this prospectus.
69
MANAGEMENT
Executive
officers and directors
The following table lists our executive officers and directors
as of June 1, 2010 and individuals who have agreed to join
our Board of Directors upon completion of this offering.
Effective upon completion of this offering, we intend to appoint
these individuals and one additional independent person to our
Board of Directors. In the biographical paragraphs that follow,
service with our operating subsidiary, Portrait Innovations,
Inc., prior to our holding company formation transaction in
2008, is reflected as service with us.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
John Grosso
|
|
|
64
|
|
|
President, Chief Executive Officer, Director
|
John M. Davis
|
|
|
59
|
|
|
Executive Vice President, Chief Development Officer, Secretary,
Director
|
William K. Bailey II
|
|
|
33
|
|
|
Chief Financial Officer, Vice President of Finance and Investor
Relations
|
Robert Venetucci
|
|
|
60
|
|
|
Executive Vice President and Chief Technology Officer
|
John J. Grosso, III
|
|
|
31
|
|
|
Vice President of Operations
|
Susan M. Tabler
|
|
|
61
|
|
|
Vice President of Finance, Treasurer
|
Thomas B. Henson
|
|
|
55
|
|
|
Director
|
Mike Balm
|
|
|
40
|
|
|
Director
|
Michael D. Evans
|
|
|
58
|
|
|
Director*
|
Robert G. Dinsmore, Jr.
|
|
|
65
|
|
|
Director*
|
|
|
|
* |
|
This individual has agreed to join the Board of Directors upon
the completion of this offering. |
John Grosso has served as our President and Chief
Executive Officer, and as a Director, since our founding in
2000. Prior to founding Portrait Innovations, Mr. Grosso
served from 1987 to 1999 as the president and chief executive
officer of PCA International, Inc., where he was responsible for
opening more than 1,775 portrait studios over an
11-year
period. Mr. Grosso is a graduate of George Washington
University.
John M. Davis has served as an Executive Vice President
since joining us in March 2001, and as a Director since August
2002. In addition, Mr. Davis served as Chief Technology
Officer from August 2002 until December 2009, when he became our
Chief Development Officer. Prior to joining us, Mr. Davis
served for eight months in 2000 as a vice president of Digital
Photography Innovations, Inc., a photofinisher for professional
digital photographers. Prior to 2000, Mr. Davis spent his
entire professional career with PCA International, Inc., most
recently as senior vice president of business development.
Mr. Davis is a graduate of the University of North Carolina
at Chapel Hill.
William K. Bailey II has served as our Chief
Financial Officer, Vice President of Finance and Investor
Relations since April 2010, after having joined us in January
2009 as Corporate Controller. From 2004 to 2008, Mr. Bailey
served as a Vice President of Wachovia Corporation, working in
the internal audit and the balance sheet analytics departments.
From 2003 until he joined Wachovia, Mr. Bailey served as
Manager of Financial Reporting for Lance, Inc., where he was
responsible for preparation of periodic SEC reports and related
accounting matters. From 2000 to 2003, Mr. Bailey worked as
a Senior Associate with KPMG LLP. Mr. Bailey is a Certified
Public Accountant in the State of North Carolina and is a CFA
charterholder. He is a graduate of The University of Tennessee.
Robert Venetucci has served as an Executive Vice
President and Chief Technology Officer since December 2009.
Prior to joining us, Mr. Venetucci served from 2004 to 2009
as a practice manager, project manager, and consultant for EMC
Corporation, a life sciences business consulting firm. Prior to
2004, Mr. Venetucci spent one year with Bristol-Myers
Squibb as a director in its program office, technical operations
information management, and 15 years with M.F.
Smith & Associates as a director of consulting.
Mr. Venetucci is a graduate of Cornell University.
70
John J. Grosso, III was our fourth employee, joining
us shortly after graduating from George Washington University in
2001. Mr. Grosso became our Vice President of Operations in
2003. Mr. Grosso has served in various other roles during
his tenure with us, including as studio manager of our first
studio opened in 2002 in Huntersville, North Carolina.
Susan M. Tabler has been our Vice President of Finance
since September 2003, and also served as our Chief Financial
Officer from September 2003 to April 2010. Ms. Tabler
joined us in October 2002 as our Assistant Vice President of
Finance. Prior to joining us, Ms. Tabler served from
1999-2002 as
the controller for Tailwind Sports, a national sports marketing
firm that managed a U.S. professional cycling team.
Ms. Tabler is a graduate of Keene State College of the
University of New Hampshire.
Thomas B. Henson has served as a Director since
2002. Effective upon completion of this offering, we
intend to appoint Mr. Henson to serve as Chairman of our
Board of Directors. Mr. Henson is the co-founder of
Henson-Tomlin Interests, LLC, an investment firm which
specializes in growth companies, management buyouts and special
situations, and has served as its president since 1999.
Mr. Henson is the manager of Southeastern Private
Investment Fund IV, LLC, one of our stockholders. Prior to
founding Henson-Tomlin Interests, LLC, Mr. Henson served as
an attorney with Robinson, Bradshaw & Hinson, P.A. in
Charlotte, North Carolina. Mr. Henson currently serves
as a director and a member of the executive committee of the
board of directors of Park Sterling Bank, and as an advisory
board member of the Washington & Lee University Law
Council. Mr. Henson is a graduate of Vanderbilt University
and Washington & Lee University School of Law.
Mike Balm has served as a Director since
2002. Since 1997, Dr. Balm has been the Chief
Executive Officer of the Emergo Group of Companies, a diverse,
global private investment group. In addition to serving as a
director for various U.S., Canadian and European holding
companies, Dr. Balm currently serves as a director of
Emergo Alpha Fund Limited, one of our stockholders.
Dr. Balm qualified as a Chartered Management Accountant
with the Chartered Institute of Management Accountants in the
United Kingdom, and subsequent to that, he completed his Masters
of Business Administration at the University of Manchester,
qualified as a Certified Public Accountant in the State of
Delaware and received his Doctorate of Business Administration
from the European University of Switzerland.
Michael D. Evans has been nominated, and has agreed to
serve, as a member of our Board of Directors upon completion of
this offering. Mr. Evans is an Executive Professor of
Finance at Winthrop University and has been a member of the
faculty at Winthrop University since 1990. Mr. Evans is a
Certified Public Accountant and a Certified Financial
Plannertm
Practitioner. He is a director and a member of the audit
committee of Park Sterling Bank. Mr. Evans formerly served
on the board of directors of the Charlotte, North Carolina
Chamber of Commerce, as the treasurer of the United Way for the
Central Carolinas and as chairman of the Charlotte-Mecklenburg
Public Broadcasting Authority. Mr. Evans received his
undergraduate and Master of Business Administration degrees from
Bradley University.
Robert G. Dinsmore, Jr. has been nominated, and has
agreed to serve, as a member of our Board of Directors upon
completion of this offering. Since January 2009,
Mr. Dinsmore has served as a special advisor on tax matters
to Bahnson Holdings, Inc., a specialty engineering,
manufacturing and mechanical contracting firm. Mr. Dinsmore
served in a similar advisory capacity for Zellweger Luwa AG, a
multi-national equipment manufacturer and air engineering
services company, from April 1999 to December 2008. In January
1999, Mr. Dinsmore retired from KPMG LLP where he spent
nearly 30 years as a Certified Public Accountant, and
served in various roles within the firm, including as the tax
partner in charge of the firms Charlotte, North Carolina
office. From 2001 to 2009, Mr. Dinsmore served as a
director of American Community Bancshares, Inc.
Mr. Dinsmore is a graduate of Bob Jones University.
Family
relationships
John J. Grosso, III is the son of John Grosso and the
nephew of Robert Venetucci.
71
Board
composition
Our Board of Directors currently consists of four members,
Messrs. Grosso, Davis, Henson and Balm, who were elected in
compliance with the provisions of the Investors Rights
Agreement among us, our founders and major stockholders.
Effective upon the completion of this offering, the parties to
the Investors Rights Agreement will amend that agreement to
terminate the provisions relating to the election of directors.
We intend to amend and restate our certificate of incorporation
and bylaws effective upon the completion of this offering. Our
amended and restated certificate of incorporation will provide
that our Board of Directors will consists of between three and
11 directors. Our amended and restated bylaws will provide
that the exact number of directors shall be determined from time
to time by resolution of a majority of our full Board of
Directors. Each of our directors holds office until a successor
has been elected and qualified or until his or her earlier
death, resignation or removal. Our Board of Directors intends,
upon the completion of this offering, to increase the size of
our Board to six and to appoint Mr. Evans and
Mr. Dinsmore as directors.
Although, as noted above, prior to the completion of this
offering, the composition of our Board of Directors will have
been determined by agreement between our founders and major
stockholders, our Board of Directors has considered whether, and
believes that, our directors and individuals that we expect to
appoint as directors upon the completion of this offering have
the experience, qualifications, attributes and skills, taken as
a whole, to enable the Board of Directors to satisfy its
oversight responsibilities effectively in light of our business
and structure. In this regard, the Board of Directors considered
primarily the information discussed in each directors
biography set forth above under Executive
officers and directors. In particular, with regard to
Mr. Grosso and Mr. Davis, the Board of Directors
considered the more than 30 years of experience each has in
the professional portrait market, and the extensive knowledge of
the professional portrait market gained through that experience.
With regard to Mr. Henson, in addition to the significant
interest and incentive he has to apply his skill and attributes
to advance our interest based on his position as the
representative of one of our major stockholders, the Board
considered his background in and knowledge of the business
issues, challenges and opportunities facing growth companies in
numerous industries, based on his extensive experience as an
investor in such companies, his knowledge of the professional
portrait market and the commercial real estate industry,
knowledge of legal matters and history of counseling a diverse
range of companies based on his prior experience as a practicing
attorney, and his experience as a board member of a financial
institution. With regard to Dr. Balm, in addition to the
significant interest and incentive Dr. Balm has to apply
his skill and attributes to advance our interest based on his
position as the representative of one of our major stockholders,
the Board considered his background in and knowledge of the
business issues, challenges and opportunities facing growth
companies in numerous industries, based on his extensive
experience as an investor in such companies, and his background
and experience in finance, accounting, and business matters and
his extensive educational background in accounting and business
administration. With regard to Mr. Evans, the Board
considered his background and experience in finance, accounting
and business matters as an executive professor of finance,
Certified Financial
Plannertm
Practitioner, director and audit committee member of a financial
institution, former director and officer of other organizations
and his extensive educational background in accounting and
business administration. With regard to Mr. Dinsmore, the
Board considered his nearly 30 years of experience working
with a variety of public companies while at KPMG, including,
specifically, his experience as the partner in charge of tax
services provided to a public company in the portrait industry.
Director
independence
Under Rules 5605 and 5615 of the NASDAQ Marketplace Rules,
a majority of a listed companys board of directors must be
independent within one year of listing. In addition, NASDAQ
Marketplace Rules require that, subject to specified exceptions,
each member of a listed companys audit, compensation and
nominating and corporate governance committees be independent
and that audit committee members also satisfy independence
criteria set forth in
Rule 10A-3
under the Exchange Act. Under Rule 5605(a)(2) of the NASDAQ
Marketplace Rules, a director will qualify as an
independent director only if, in the opinion of that
companys board of directors, that person does not have a
relationship that would interfere with the exercise of
independent judgment in carrying out the responsibilities of a
director.
72
Based upon information requested from and provided by each
director concerning his or her background, employment and
affiliations, including family relationships, our Board of
Directors has determined that none of Messrs. Balm,
Dinsmore, Evans and Henson has a relationship that would
interfere with the exercise of independent judgment in carrying
out the responsibilities of a director and that each of these
individuals would qualify as independent directors
as that term is defined under Rule 5605(a)(2) of the NASDAQ
Marketplace Rules. Accordingly, we anticipate that upon the
completion of this offering, four of the six members of our
Board of Directors would qualify as independent as
that term is defined under Rule 5605(a)(2) of the NASDAQ
Marketplace Rules. Our Board of Directors intends, upon the
completion of this offering, to appoint Mr. Evans and
Mr. Dinsmore as members of the Audit Committee of our Board
of Directors. Our Board of Directors also determined that
Mr. Evans and Mr. Dinsmore would satisfy the
independence standards for audit committees established by
Rule 10A-3
under the Exchange Act and the NASDAQ Marketplace Rules, as
applicable. In making these determinations, our Board of
Directors has considered and will consider the relationships
between each such director and us and all other facts and
circumstances our Board of Directors deemed or deems relevant in
determining such directors independence.
Under
Rule 10A-3
under the Exchange Act and NASDAQ Marketplace Rules, we will be
required to appoint a third member of the Audit Committee no
later than one year after the commencement of the listing of our
common stock on NASDAQ. Because of their affiliation with our
principal stockholders, neither Dr. Balm nor
Mr. Henson satisfy the independence standards for audit
committees established by
Rule 10A-3
under the Exchange Act and the NASDAQ Marketplace Rules.
Following the completion of this offering and within one year
after the commencement of the listing of our common stock on
NASDAQ, our Board of Directors intends to further increase the
size of our Board to seven and to appoint to our Board of
Directors and to the Audit Committee an individual who would
qualify as an independent director eligible to serve on the
Audit Committee.
Director
Compensation
In fiscal 2009, we did not pay our directors any compensation
for service as directors.
Prior to the completion of this offering, we intend to adopt a
director compensation plan to compensate our directors who are
not our employees. Under this policy, each such director will
receive an annual retainer of $35,000, paid in monthly
installments. In addition, the chairman of each the Audit
Committee, the Compensation Committee and the Nominating and
Corporate Governance Committee will receive an annual retainer
of $10,000, paid in monthly installments. Each non-employee
director first joining our Board of Directors after the
completion of this offering will, upon joining the board,
receive a grant of 3,000 options under the 2009 Amended and
Restated Portrait Innovations Holding Company Stock Option Plan
with an exercise price equal to the closing market price on the
date of grant. The options will vest and become exercisable in
equal annual increments over five years from the date they are
granted, however upon termination of service due to death,
disability or retirement, or, at the discretion of the
Compensation Committee, upon a change of control the
options will vest immediately. The options will expire on the
tenth anniversary of the date of grant, except that unvested
options will expire upon a directors termination of
service. We will reimburse the reasonable expenses our
non-employee directors incur in connection with attending board
and committee meetings.
Committees
of the Board of Directors
Upon the completion of this offering, our Board of Directors
will establish an Audit Committee, a Compensation Committee and
a Nominating and Corporate Governance Committee and will adopt
charters providing for the authority, powers and operation of
each such committee. The composition of the committees of the
Board of Directors will be determined at that time.
Audit Committee. We anticipate that the Audit
Committee will be comprised of Mr. Evans and
Mr. Dinsmore and, as discussed above, the additional
independent member of the Board of Directors to be appointed
within one year after the commencement of the listing of our
common stock on NASDAQ. We have determined that each of
Mr. Evans and Mr. Dinsmore would satisfy the financial
literacy requirements of the
73
NASDAQ Marketplace Rules and would qualify as an audit committee
financial expert under the rules and regulations of the SEC.
With respect to the additional independent member, we anticipate
that we will select an individual who would also satisfy the
financial literacy requirements of the NASDAQ Marketplace Rules.
The primary function of our Audit Committee will be to assist
our Board of Directors in monitoring our accounting and
financial reporting processes and the integrity of our financial
statements, the qualifications and independence of our
independent auditor, the performance of our internal auditor and
independent auditor, and our compliance with legal and
regulatory requirements. Our Audit Committees
responsibilities will include, among others:
|
|
|
|
|
selecting and overseeing our independent auditor;
|
|
|
|
reviewing the qualifications, performance and independence of
our independent auditor;
|
|
|
|
reviewing the scope of our audit and approving all audit and
non-audit services rendered by our independent auditor;
|
|
|
|
reviewing our annual and quarterly financial statements with our
management and independent auditor;
|
|
|
|
reviewing the integrity and adequacy of our financial reporting
processes;
|
|
|
|
reviewing and resolving any disagreements between our management
and our independent auditor in connection with our financial
reporting;
|
|
|
|
reviewing the scope of our internal audit and the results of our
internal audit examinations;
|
|
|
|
reviewing our policies and procedures for compliance with
applicable laws and regulations and discussing legal matters
that may have a material impact on our financial statements;
|
|
|
|
establishing procedures for the confidential, anonymous
submission by our employees of concerns regarding questionable
accounting or auditing matters and the treatment of complaints
received regarding such matters;
|
|
|
|
discussing our policies with respect to risk assessment and risk
management with our management;
|
|
|
|
reviewing and approving all related party transactions involving
us and our directors, executive officers or holders of more than
five percent of our voting securities; and
|
|
|
|
preparing a report that the SEC requires us to include in our
annual proxy statement.
|
Compensation Committee. We anticipate that the
Compensation Committee will be comprised of Mr. Henson and
two or more members of the Board of Directors who are
independent as that term is defined under
Rule 5605(a)(2) of the NASDAQ Marketplace Rules. The
primary function of our Compensation Committee will be to assist
our Board of Directors in determining the compensation paid to
our executive officers and directors, evaluating the performance
of our executive officers, overseeing our incentive,
compensation and benefit plans and policies, and reviewing our
executive succession planning. Our Compensation Committees
responsibilities will include, among others:
|
|
|
|
|
reviewing and approving the goals and objectives related to
compensation of our executive officers, evaluating the
performance of our executive officers under such objectives, and
recommending the amount and composition of the compensation of
each of our executive officers;
|
|
|
|
reviewing the fees and other compensation of our directors;
|
|
|
|
reviewing our overall compensation philosophy and strategy, and
evaluating our compensation policies and practices for all
employees as they relate to risk management policies;
|
|
|
|
reviewing, evaluating and administering our incentive,
compensation and benefit plans;
|
|
|
|
reviewing our management succession policies; and
|
|
|
|
preparing a report on executive compensation that the SEC
requires us to include in our annual proxy statement.
|
74
Each member of our Compensation Committee who qualifies as a
non-employee director under
Rule 16b-3
of the Exchange Act and an outside director under
Section 162(m) of the Internal Revenue Code will constitute
a separate committee to act as needed to secure exemptions under
these regulations for certain compensation decisions that must
be made by a committee composed solely of
non-employee directors or outside
directors.
Nominating and Corporate Governance
Committee. We anticipate that the Nominating and
Corporate Governance Committee will be comprised of
Dr. Balm and two or more members of the Board of Directors
who are independent as that term is defined under
Rule 5605(a)(2) of the NASDAQ Marketplace Rules. The
primary function of our Nominating and Corporate Governance
Committee will be to assist our Board of Directors in
recommending candidates for our Board of Directors, evaluating
the structure and governance of our Board of Directors and its
committees, reviewing our governance policies and procedures,
and overseeing the evaluation of our management and our Board of
Directors and its committees. Our Nominating and Corporate
Governance Committees responsibilities will include, among
others:
|
|
|
|
|
recommending criteria for the selection of candidates for our
Board of Directors;
|
|
|
|
identifying, evaluating and recommending candidates for our
Board of Directors, including evaluating persons suggested by
our stockholders;
|
|
|
|
evaluating the composition, size and governance of our Board of
Directors and its committees;
|
|
|
|
reviewing and recommending changes, as needed, to our corporate
governance guidelines and code of business conduct and
ethics; and
|
|
|
|
overseeing periodic evaluations of our Board of Directors and
its committees.
|
Code of
business conduct and ethics
Our Board of Directors has adopted a code of business conduct
and ethics that applies to all of our directors, officers and
other employees. Any waiver of the code for directors or
executive officers may be made only by our Board of Directors,
and will be promptly disclosed to our stockholders.
Corporate
governance guidelines
Our Board of Directors has adopted corporate governance
guidelines that serve as a flexible framework within which our
Board of Directors exercises its responsibilities to us and our
stockholders.
75
EXECUTIVE
COMPENSATION
Compensation
discussion and analysis
The purpose of this compensation discussion and analysis section
is to provide information about the material elements of
compensation that are paid, awarded to, or earned by, our named
executive officers listed in the fiscal 2009 summary
compensation table and the other compensation tables that follow
this section. For fiscal 2009, our named executive officers were:
|
|
|
|
|
John Grosso, President and Chief Executive Officer;
|
|
|
|
Susan M. Tabler, Vice President of Finance and former Chief
Financial Officer;
|
|
|
|
John M. Davis, Executive Vice President and Chief Development
Officer;
|
|
|
|
Robert Venetucci, Executive Vice President and Chief Technology
Officer; and
|
|
|
|
John J. Grosso, III, Vice President of Operations.
|
Historical
compensation decisions and changes going forward
Because we have been a closely held private company, our
compensation program has been reflective of our stage of
development. Historically, our Board of Directors has not
maintained a compensation committee, and compensation decisions
have been made following informal discussions between our
President and Chief Executive Officer and our Board of
Directors. For fiscal 2009, our President and Chief Executive
Officer was primarily responsible for establishing all of the
terms of compensation arrangements for our named executive
officers, including himself. On an annual basis, our Board of
Directors reviews and approves our overall executive
compensation program and reviewed the fiscal 2009 compensation
terms for our named executive officers that were established by
our President and Chief Executive Officer.
In connection with this offering, we are establishing a
Compensation Committee to review and approve the compensation of
named executive officers and oversee and administer our
executive compensation programs and policies. After completion
of this offering, we intend that our Compensation Committee will
determine the compensation programs and initiatives for our
named executive officers, with significant input from our
President and Chief Executive Officer.
Philosophy
and overview of compensation
The objectives of our named executive officer compensation
programs are to provide compensation opportunities that attract,
retain and motivate key executives. We compensate our named
executive officers in much the same way that we compensate all
of our employees. Our total compensation program for named
executive officers includes base salary, an annual cash bonus
based on both our financial performance and a subjective
evaluation of the named executive officers individual
performance, and stock options. Stock options are typically
awarded when the executive joins our company, with any
additional awards being based on a subjective evaluation of
performance or for retention purposes. We also offer our named
executive officers the same welfare benefits available to all of
our full-time employees. With the exception of stock option
grants, non-cash benefits have not been a material component of
our compensation structure.
We have designed our compensation programs to provide both long-
and short-term rewards for performance and incentives for our
executives to remain with our company. Our annual cash bonus to
named executive officers is paid if we achieve an established
EBITDA threshold for the fiscal year. For fiscal 2009, the
threshold for bonuses was EBITDA of not less than
$16 million, which we achieved. All annual cash bonus
payments to named executive officers and to our studio
associates, studio and regional managers and corporate personnel
are made in April following the completion of the audit of the
prior fiscal years financial statements. In addition to
offering a potential long-term reward for corporate performance,
our stock options are structured to encourage recipients to
remain with our company. Options typically vest in equal annual
increments over five years, any unvested options are generally
forfeited upon termination of employment and,
76
except in limited circumstances, vested options expire if not
exercised within three months after termination of employment.
With one exception, we do not have any employment agreements
with any of our employees, including our named executive
officers. In December 2009, we entered into an employment
agreement with Robert Venetucci, our Executive Vice President
and Chief Technology Officer, as an inducement for him to join
our company. A description of this agreement is set forth below
under Employment, severance and change of control
agreements. The company arrived at the amount and form of
compensation to be paid to Mr. Venetucci under his
employment agreement through arms length negotiations with
Mr. Venetucci. The companys negotiations with
Mr. Venetucci were informed by its knowledge of
Mr. Venetuccis prior work experience, its knowledge
of Mr. Venetuccis compensation from his prior
employer, and the companys sense of the type and amount of
compensation sufficient to induce Mr. Venetucci to leave
his prior employer to join the company. The particular mix of
compensation provided in Mr. Venetuccis agreement is
reflective of the companys historical compensation
philosophy that its senior executive officers should be treated
relatively equally in terms of salary level, bonus opportunity
and equity ownership opportunity.
We have not historically used compensation consultants to assist
us in designing our executive compensation programs, in setting
the level of compensation or for any other purpose.
Base
salary
We pay a salary to give each of our named executive officers a
base level of compensation. A base salary for each of our named
executive officers is determined annually. At the start of each
fiscal year, the President and Chief Executive Officer presents
the operating and financial budget and overall compensation plan
and bonus budgets for all employees and named executive officers
to our Board of Directors for approval. For fiscal 2009, our
President and Chief Executive Officer set the base salaries of
our named executive officers based on his subjective evaluation
of each named executive officer. Factors that he considered
included:
|
|
|
|
|
the duties and responsibilities of the named executive officer;
|
|
|
|
individual performance;
|
|
|
|
the historical base salary of the named executive officer during
his or her employment with us, including the amount and timing
of previous adjustments; and
|
|
|
|
the relationship of named executive officer pay to the base
salaries of our other officers and employees.
|
In fiscal 2009, we increased Messrs. John Grosso and
Daviss annual salary rate by 5% from their prior year
levels and increased the salaries of Ms. Tabler and
Mr. John J. Grosso, III by approximately 17% in
recognition of the increase in their respective responsibilities
stemming from our continued growth. Mr. Venetucci joined
our company in December 2009, and his salary was set at that
time.
We have set salary levels for our named executive officers for
fiscal 2010, with the amount of the adjustments to base salary
levels being substantially consistent with our past practice.
The current base salaries of our executive officers are as
follows: Mr. John Grosso ($172,187), Mr. Davis
($177,376), Mr. Bailey ($151,823), Mr. Venetucci
($217,195), Mr. John J. Grosso, III ($173,405) and
Ms. Tabler ($172,038).
Annual
cash bonus
We offer our named executive officers an annual cash bonus
opportunity to provide an incentive for their contribution to
our overall success. While we do not have a formal written bonus
plan for our named executive officers, it has been our practice
to pay bonuses if we achieve general profitability levels for
the year. In connection with our annual budgeting process,
management recommends, subject to board approval, an anticipated
aggregate bonus pool to cover bonuses to our named executive
officers, other corporate personnel and our regional managers
and a profitability target for the year. Our Board of Directors
reviews and approves the budgeted bonus pool and profitability
target.
77
Our President and Chief Executive Officer may adjust the size of
the budgeted bonus pool and the annual profitability target to
reflect unanticipated events such as disruptions to the retail
environment, unusual competitive activity or extraordinary
charges unrelated to
day-to-day
business operations. It has been our practice that any such
adjustments are made by our President and Chief Executive
Officer based on his subjective evaluation and are communicated
to the Board of Directors. In addition, at that time, our
President and Chief Executive Officer determines the allocation
of the bonus pool to our named executive officers, other
corporate personnel and regional managers. The allocation to our
named executive officers is based on a subjective evaluation by
the President and Chief Executive Officer of each
executives individual performance during the year, his or
her overall contribution to our success, the amount of bonus
payments awarded in prior years, and the amount of the bonus
relative to current salary. Bonus payments are typically made in
April of each year.
Consistent with our historical philosophy that our named
executive officers function as a team and should share bonus
compensation on a relatively equal basis to the extent we
achieve our profitability objectives, our bonus allocations for
fiscal 2009 to each named executive officer were the same
($47,250), except for Mr. Venetucci, who received a bonus
of $20,000 because he was employed with us for only part of the
fiscal year.
Stock
options
We have historically granted stock options to provide an
incentive for long-term performance and to create an incentive
for employees to remain with our company, and we have not
awarded other types of equity or long-term compensation. We have
granted stock options to a broad group of employees. Employees
receive grants of stock options upon being hired by the company
as, or receiving a promotion to, the positions of studio
manager, regional manager, executive officer and other key
positions. We have also made grants to named executive officers
and key personnel from time to time based on a subjective
evaluation of performance and for retention purposes. We have
not historically made annual or other periodic awards of stock
options to our named executive officers.
The granting of options to named executive officers furthers our
executive compensation objectives by:
|
|
|
|
|
aligning the interests of the named executive officer with the
interests of our stockholders by creating incentives for both
the short-term and long-term growth of our company;
|
|
|
|
creating the possibility of wealth accumulation that serves as a
compelling recruitment tool given our stage of development and
potential for growth; and
|
|
|
|
serving as a retention tool because options granted to our named
executive officers vest and become exercisable over a five-year
period, any unvested options are generally forfeited upon
termination of employment and, except in limited circumstances,
vested options expire if not exercised within three months after
termination of employment.
|
Our named executive officers and other key employees are
eligible for stock option grants under the 2009 Amended and
Restated Portrait Innovations Holding Company Stock Option Plan.
Option grants to named executive officers under this plan and
our prior stock option plan, under which most of our outstanding
stock options have been awarded, typically have the following
characteristics:
|
|
|
|
|
all options have an exercise price equal to the fair market
value of our common stock on the date of grant, which
determination is based on known facts and circumstances,
including valuations prepared by a nationally recognized
independent third-party appraisal firm;
|
|
|
|
only vested options may be exercised;
|
|
|
|
options vest in equal annual increments over five years from the
date they are granted, but are subject to immediate vesting upon
the occurrence of certain events, such as termination of
employment due to death, disability or retirement, or upon a
change of control, except that for options granted under the
2009 plan any vesting upon a change of control is subject to the
discretion of the Compensation Committee;
|
78
|
|
|
|
|
options are forfeited, to the extent unvested, upon termination
of employment except upon death, disability or retirement, and
forfeited fully if termination of employment is for
cause (as defined in the plan); and
|
|
|
|
options expire upon the earlier of 10 years after the date
of grant or three months after termination of employment (other
than termination of employment due to death, disability or
retirement, in which case the options may be exercised within
12 months thereafter).
|
Options awarded in fiscal 2009 were authorized by a committee of
the Board of Directors consisting of one member, Mr. John
Grosso, our President and Chief Executive Officer. Under our
stock option plans, that committee has discretion to determine
which individuals receive awards and the number of shares to be
subject to any award.
In fiscal 2009, we awarded options to Ms. Tabler, our Vice
President of Finance and then Chief Financial Officer, and to
Mr. Venetucci, our Executive Vice President and Chief
Technology Officer. We awarded stock options to Ms. Tabler
in order to increase her equity ownership stake to a level that
the Board of Directors determined to be appropriate, given her
position and her increasing responsibilities. We awarded stock
options to Mr. Venetucci as part of his agreed compensation
package and inducement to join our company. The remaining three
named executive officers, Mr. John Grosso, Mr. Davis
and Mr. John J. Grosso, received awards of stock options in
prior fiscal years, and each also owns a substantial number of
shares of our common stock. We did not grant additional stock
options to these three named executive officers in fiscal 2009,
because we determined that the existing amounts of common stock
and stock options held by these officers provided an appropriate
level of equity ownership and incentive for long-term
performance. The number of options awarded to our named
executive officers that were outstanding at the end of fiscal
2009 are set forth in the table under the caption
Outstanding equity awards at fiscal
2009 year-end appearing below.
Benefits
and perquisites
None of the named executive officers is eligible for special
perquisites or other benefits that are not available to all of
our full-time employees, except that Mr. Venetucci is
entitled to reimbursement for certain commuting expenses under
the terms of his employment agreement. We sponsor a 401(k) plan.
Employees are eligible to make contributions to the 401(k) plan,
but historically we have not made any matching or other
contributions and did not do so in fiscal 2009. In addition, in
fiscal 2009 we provided an allowance to our employees intended
to be used to fund individual healthcare insurance or pay for
other healthcare expenses at the discretion of the individual
employee.
79
Fiscal
2009 summary compensation table
The following summary compensation table sets forth information
concerning the cash and non-cash compensation during fiscal 2009
earned by, awarded to or paid to those persons who were, at
January 31, 2010, our Chief Executive Officer, Chief
Financial Officer and each of our other named executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
($)
|
|
($)
|
|
($)(1)
|
|
($)
|
|
John Grosso
|
|
|
2009
|
|
|
|
162,750
|
|
|
|
47,250
|
|
|
|
|
|
|
|
210,000
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Susan M. Tabler
|
|
|
2009
|
|
|
|
148,560
|
|
|
|
47,250
|
|
|
|
27,250
|
|
|
|
223,060
|
|
Chief Financial Officer and Vice President of Finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John M. Davis
|
|
|
2009
|
|
|
|
162,750
|
|
|
|
47,250
|
|
|
|
|
|
|
|
210,000
|
|
Executive Vice President and Chief Development Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Venetucci(2)
|
|
|
2009
|
|
|
|
27,125
|
|
|
|
20,000
|
|
|
|
468,400
|
|
|
|
515,525
|
|
Executive Vice President and Chief Technology Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John J. Grosso, III
|
|
|
2009
|
|
|
|
148,560
|
|
|
|
47,250
|
|
|
|
|
|
|
|
195,810
|
|
Vice President of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The reported value of these awards has been developed solely for
purposes of disclosure in accordance with the rules and
regulations of the SEC and is the grant date fair
value thereof under the Financial Accounting Standards
Boards Accounting Standards Codification Topic 718 for
financial reporting purposes, except that it does not reflect
any adjustments for risk of forfeiture. See Note 10 of the
notes to our audited consolidated financial Statements appearing
elsewhere in this prospectus for a discussion of the assumptions
used in determining grant date fair value of these awards.
Because the full grant date fair value of options awarded in
fiscal 2009 are reported in this table as compensation in that
year and this table does not reflect any compensation
attributable to stock options awarded in prior periods to other
executive officers, the option grants to Mr. Venetucci and
Ms. Tabler in fiscal 2009 significantly skew the total
compensation reported for them as compared to the total
compensation reported for our other named executive officers.
For a listing of the option awards to our named executive
officers that were outstanding at the end of fiscal 2009, see
the table under the caption Outstanding equity awards at
fiscal 2009 year-end appearing below. |
|
(2) |
|
Mr. Venetucci joined our company as Executive Vice
President and Chief Technology Officer on December 7, 2009. |
Fiscal
2009 grants of plan-based awards
The following table provides information about the plan-based
awards we made to our named executive officers in fiscal 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
Grant Date
|
|
|
|
|
Option Awards:
|
|
Exercise or
|
|
Fair Value
|
|
|
|
|
Number of Securities
|
|
Base Price of
|
|
of Stock and
|
|
|
|
|
Underlying Options
|
|
Option Awards
|
|
Option Awards
|
Name
|
|
Grant Date
|
|
#(1)
|
|
($/Sh)
|
|
($)
|
|
John Grosso
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Susan M. Tabler
|
|
|
02/05/2009
|
|
|
|
5,000
|
|
|
|
8.92
|
|
|
|
27,250
|
|
John M. Davis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Venetucci
|
|
|
12/07/2009
|
|
|
|
40,000
|
|
|
|
8.92
|
|
|
|
468,400
|
|
John J. Grosso, III
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock options awarded to Ms. Tabler were awarded under our
2004 stock option plan and stock options awarded to
Mr. Venetucci were awarded under our 2009 stock option plan. |
80
Outstanding
equity awards at fiscal 2009 year-end
The following table provides information about the equity awards
our named executive officers held as of the end of fiscal 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option awards(1)(2)
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
|
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Option
|
|
|
|
(#)
|
|
|
(#)
|
|
|
Price
|
|
|
Expiration
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
($)
|
|
|
Date
|
|
|
John Grosso
|
|
|
28,800
|
|
|
|
19,200
|
|
|
$
|
8.92
|
|
|
|
02/03/2016
|
|
Susan M. Tabler
|
|
|
4,526
|
|
|
|
|
|
|
|
1.667
|
|
|
|
05/01/2013
|
|
|
|
|
8,000
|
|
|
|
|
|
|
|
2.555
|
|
|
|
01/24/2015
|
|
|
|
|
4,000
|
|
|
|
1,000
|
|
|
|
3.04
|
|
|
|
12/20/2015
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
8.92
|
|
|
|
02/05/2019
|
|
John M. Davis
|
|
|
28,800
|
|
|
|
19,200
|
|
|
|
8.92
|
|
|
|
02/03/2016
|
|
Robert Venetucci
|
|
|
|
|
|
|
40,000
|
|
|
|
8.92
|
|
|
|
12/07/2019
|
|
John J. Grosso, III
|
|
|
28,800
|
|
|
|
19,200
|
|
|
|
8.92
|
|
|
|
02/03/2016
|
|
|
|
|
(1) |
|
Each option award vests in five equal installments beginning on
the first anniversary of the grant date. The grant date of an
option award is the date ten years prior to the reported option
expiration date. |
|
(2) |
|
All of the option awards included in this table were awarded
under our 2004 stock option plan, except for those awarded to
Mr. Venetucci, which were awarded under our 2009 stock
option plan. |
Fiscal
2009 option exercises
The following table provides information about option exercises
by our named executive officers in fiscal 2009.
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
Number of Shares
|
|
|
Value Realized
|
|
Name
|
|
Acquired on Exercise (#)
|
|
|
on Exercise ($)(1)
|
|
|
John Grosso
|
|
|
|
|
|
|
|
|
Susan M. Tabler
|
|
|
7,474
|
|
|
$
|
87,543
|
|
John M. Davis
|
|
|
|
|
|
|
|
|
Robert Venetucci
|
|
|
|
|
|
|
|
|
John J. Grosso, III
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
There was no public trading of our common stock on the date of
exercise. Accordingly, the value appearing in this column is
calculated based on the aggregate difference between the
exercise price of the option and the last determination of fair
market value of our common stock by our Board of Directors based
on all known facts and circumstances, including valuations
prepared by a nationally recognized independent third-party
appraisal firm. See Note 10 of the notes to our audited
consolidated financial statements appearing elsewhere in this
prospectus for a discussion of the determination of fair market
value of our common stock in connection with the awarding of
stock options in fiscal 2009. |
Employment,
severance and change of control agreements
We do not have any employment agreements with our named
executive officers, except for an agreement entered into in
December 2009 with Mr. Venetucci, our Executive Vice
President and Chief Technology Officer. Our employment agreement
with Mr. Venetucci has an initial term of three years and
automatically renews for successive one-year terms unless
Mr. Venetuccis employment is terminated. Although our
agreement with Mr. Venetucci has a stated term, the
agreement specifically provides that Mr. Venetucci is an
at-will employee. We may terminate Mr. Venetuccis
employment, or he may terminate his employment, at
81
any time. The agreement provides for an initial base salary of
$162,750, and the opportunity to earn an annual bonus of up to
30% of base salary if certain unspecified performance goals are
achieved. Under the agreement, Mr. Venetucci received
options to purchase 40,000 shares of our common stock at an
exercise price of $8.92 per share, subject to vesting at a rate
of 20% per year. In addition, we pay Mr. Venetuccis
travel expenses for one roundtrip each week between his home in
New Jersey and our headquarters in Charlotte, North Carolina. If
Mr. Venetucci is terminated without cause, he is entitled
to salary continuation for a period of six months, and if the
termination occurs after July 31 of a particular year, he is
eligible for an annual bonus for the year of termination on a
prorated basis. Receipt of such payments is conditioned upon
execution of a general release of claims and compliance with
non-competition, non-solicitation and confidentiality covenants
for a period of two years following termination.
Potential
payments upon termination or change in control
If Mr. Venetuccis employment had been terminated
without cause by us as of January 31, 2010,
Mr. Venetucci would have been entitled to an aggregate
payment of approximately $101,375, representing six months of
salary continuation, $81,375, and for services performed in
fiscal 2009, a discretionary bonus prorated for his service in
fiscal 2009. For fiscal 2009, Mr. Venetucci received a
bonus of $20,000.
Under our 2004 option plan, unvested options vest upon a change
of control. Under our 2009 option plan, unvested options vest
upon a change of control, subject to the discretion of the
Compensation Committee. Under both plans, a change of control
occurs if (i) any person who was not a stockholder as of
the effective date of the plan becomes the direct or indirect
beneficial owner of more than 50% of our voting securities,
(ii) the members of our Board of Directors as of the
effective date of the plan cease to constitute a majority of our
Board or (iii) we liquidate, dissolve or sell substantially
all of our assets. In addition, under the 2009 plan, a change of
control occurs on the date any other event or action takes place
that out Board of Directors determines should constitute a
change of control.
The following table sets forth the number of options held by our
named executive officers at January 31, 2010 that are
subject to vesting upon a change of control and the value
attributable to such accelerated vesting based on the difference
between the weighted average exercise price of the options and
the mid-point of the range of initial public offering prices of
our stock listed on the cover page of this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Value at Mid-point
|
|
|
|
Unvested
|
|
|
Weighted Average
|
|
|
of Offering
|
|
Name
|
|
Shares
|
|
|
Exercise Price
|
|
|
Price Range
|
|
|
John Grosso
|
|
|
19,200
|
|
|
$
|
8.92
|
|
|
|
|
|
Susan M. Tabler
|
|
|
6,000
|
|
|
|
7.94
|
|
|
|
|
|
John M. Davis
|
|
|
19,200
|
|
|
|
8.92
|
|
|
|
|
|
Robert Venetucci
|
|
|
40,000
|
|
|
|
8.92
|
|
|
|
|
|
John J. Grosso, III
|
|
|
19,200
|
|
|
|
8.92
|
|
|
|
|
|
Stock
option plans
We have two stock option plans pursuant to which we have granted
options: the 2004 Portrait Innovations, Inc. Stock Option Plan,
which we assumed and adopted in connection with our holding
company reorganization transaction, and the 2009 Amended and
Restated Portrait Innovations Holding Company Stock Option Plan.
At this time, we grant options only under the 2009 plan, and no
further options will be granted under the 2004 plan.
2009
Plan
Shares available. 240,000 shares of our
common stock may be subject to awards under the 2009 plan,
subject to adjustment in the event of any stock dividend, stock
split, extraordinary cash dividend, recapitalization,
reorganization, merger, consolidation,
split-up,
spin-off, sale of assets or subsidiaries, combination or
exchange of shares, or other similar event. Only shares actually
delivered on an unrestricted basis with respect to an option
will be counted against the maximum share limitation. Thus, if
any award is
82
cancelled, forfeited, or terminates or expires unexercised, or
if shares are tendered or withheld from an award to pay the
option price or satisfy a tax withholding obligation, such
shares may again be issued under the 2009 plan. The number of
shares subject to options granted to any one person in one
calendar year cannot exceed 75,000.
Eligibility. All of our officers, employees
and non-employee directors, and all of the officers and
employees of any of our affiliates, are eligible for awards
under the plan. As of May 2, 2010, approximately
1,434 people are eligible for awards under the plan.
Administration. The 2009 plan is to be
administered by a committee consisting of two or more members of
our Board of Directors. Although prior to this offering, the
2009 plan has been administered by a committee consisting of
Mr. Henson and Dr. Balm, following consummation of
this offering, we intend for our Compensation Committee to
administer the 2009 plan. The Compensation Committee will have
the authority to interpret the 2009 plan and make all
determinations necessary or desirable for the administration of
the plan. The Compensation Committee will also have discretion
to select participants and determine the form, amount and timing
of each award to such persons, the exercise price or base price
associated with the award, the time and conditions of exercise
or settlement of the award and all other terms and conditions of
an award. Pursuant to an authorizing provision in the 2009 plan,
our Board of Directors has also appointed Mr. John Grosso,
our President and Chief Executive Officer, as the sole member of
a committee for the limited purpose of making option grants to
our non-executive officers.
Amendment and Termination. In general, our
Board of Directors may amend, alter, suspend, discontinue or
terminate the 2009 plan or any portion of the plan. However, any
such action that adversely affects the rights of an option
holder in any outstanding options, requires such holders
consent. In addition, any increase in the total number of shares
available for options under the plan, except for certain
automatic adjustments, requires stockholder approval.
Stockholder approval is also required to the extent any proposed
amendment would require stockholder approval under applicable
laws, regulations or stock exchange rules. Our Compensation
Committee has the authority under the 2009 plan to amend or
waive any conditions or rights under any award agreement
provided that such action does not materially adversely affect
the rights of the option holder.
Form of awards. Awards under the plan will be
in the form of options not intended to qualify as
incentive stock options under Section 422 of
the Internal Revenue Code, with the following terms:
|
|
|
|
|
all options must have an exercise price at least equal to the
fair market value of our common stock on the date of grant;
|
|
|
|
except as may be otherwise provided with respect to a particular
option award, options generally:
|
|
|
|
|
|
vest in equal annual increments over five years from the date
they are granted, but are subject to immediate vesting upon the
occurrence of certain events, such as termination of service due
to death, disability or retirement, or, at the discretion of the
Compensation Committee, upon a change of control (as defined in
the 2009 plan);
|
|
|
|
are forfeited, to the extent unvested, upon termination of
service except upon death, disability or retirement, and
forfeited fully if termination of service is for
cause (as defined in the plan); and
|
|
|
|
expire upon the earlier of 10 years after the date of grant
or three months after termination of service (other than
termination of service due to death, disability or retirement,
in which case the options may be exercised within 12 months
thereafter).
|
2004
Plan
The terms of stock options granted under the 2004 plan are
materially consistent with the terms of awards under the 2009
plan described above, except that options granted under the 2004
plan provide for mandatory, as opposed to discretionary,
accelerated vesting upon a change of control (as defined in the
2004 plan). Although there will be no future grants of options
under the 2004 plan, we have reserved 496,000 shares under
the 2004 plan for future issuance upon the exercise of
outstanding options that were previously granted under the 2004
plan.
83
We intend to file with the SEC a registration statement on
Form S-8
covering the shares of our common stock issuable under these
plans.
Section 162(m)
Section 162(m) of the Internal Revenue Code limits publicly
held companies to an annual deduction for federal income tax
purposes of $1.0 million for compensation paid to their
chief executive officer and the three other highest compensated
executive officers (other than the chief financial officer)
determined at the end of each year. Under a special rule that
applies to corporations that become public through an initial
public offering, subject to certain conditions, this limitation
in Section 162(m) generally will not apply to compensation
that is paid under our stock option plan described in this
Management section before the first meeting of our
stockholders in 2014 at which directors will be elected.
Performance based compensation that meets certain requirements,
including stockholder approval, is excluded from this limitation
under Section 162(m). In general, compensation qualifies as
performance-based compensation under Section 162(m) if
(1) it is conditioned on the achievement of one or more
pre-established, objective performance goals, (2) such goal
or goals are established by a committee of the board of
directors consisting solely of two or more outside
directors (the independent director
committee), (3) the material terms of the performance
goals under which the compensation is payable are disclosed to,
and subsequently approved by, the corporations
stockholders prior to payment and (4) the independent
director committee certifies prior to payment that such goals
and any other material terms were in fact satisfied. Although
awards granted under the plans described above are temporarily
exempt from the limitations of Section 162(m), the
Compensation Committee will consider the future impact of
Section 162(m), along with other relevant considerations,
in designing and administering our compensation plans. However,
compensation actions may not always qualify for tax
deductibility under Section 162(m) or other favorable tax
treatment to us.
Limitation
on liability and indemnification matters
Our amended and restated certificate of incorporation will
contain provisions that limit the liability of our directors for
monetary damages to the fullest extent permitted by Delaware
law. Consequently, our directors will not be personally liable
to us or our stockholders for monetary damages for any breach of
fiduciary duties as directors, except liability for the
following:
|
|
|
|
|
any breach of their duty of loyalty to our company or our
stockholders;
|
|
|
|
acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
|
|
|
|
unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware
General Corporation Law; and
|
|
|
|
any transaction from which the director derived an improper
personal benefit.
|
Our amended and restated bylaws will provide that we are
required to indemnify our directors and officers and may
indemnify our employees and other agents to the fullest extent
permitted by Delaware law. Our bylaws also will provide that we
must advance expenses incurred by a director or officer in
advance of the final disposition of any action or proceeding,
and permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out
of his or her actions in that capacity, regardless of whether
our bylaws would otherwise permit indemnification. We also
maintain directors and officers liability insurance
on behalf of any person who is or was a director, officer,
employee or agent of our company or was serving at our request
as a director, officer, employee or agent of another corporation
or other entity.
84
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since January 29, 2007, we have engaged in the following
transactions with our directors and executive officers and
holders of more than 5% of our voting securities and affiliates
of our directors, executive officers and 5% stockholders.
Stock
issuances
Although the stock issuances described herein occurred prior to
our holding company reorganization transaction, the share
numbers provided give effect to that transaction.
On April 2, 2007, we issued and sold 224,215 shares of
our series B convertible preferred stock to each of
Southeastern Private Investment Fund IV, LLC and Emergomed
Limited for a purchase price of $2 million. On June 1,
2007, we issued and sold 112,107.5 shares of our
series B convertible preferred stock to each of
Southeastern Private Investment Fund IV, LLC and Emergomed
Limited for a purchase price of $1 million. Emergomed
Limited subsequently transferred its shares to Emergo Alpha
Fund Limited, its affiliate and our current stockholder.
Our series B convertible preferred stock is convertible
into our common stock at any time after issuance of such shares
and prior to any redemption of such shares. The conversion price
is $8.92 per share. Dividends on the series B preferred
stock accrue in arrears at a rate of 10% annually, without
compounding, on the original issue price of such preferred stock
from the date of issuance to and including the earlier of the
date (i) a liquidation event occurs, (ii) such stock
is converted into common stock, (iii) such stock is
redeemed, or (iv) of the seventh anniversary of the
issuance of such stock. The holders of series B preferred
stock are entitled to one vote for each whole share of common
stock into which the preferred stock would be converted. In the
event of our voluntary or involuntary liquidation, each holder
of series B preferred stock is entitled, after payment of
our debts and other liabilities, to be paid the greater of
(i) an amount equal to $8.92 per share, plus all accrued or
declared, but unpaid dividends on such stock, and (ii) the
amount such holder would receive on an as-converted basis. At
any time after the earlier of January 31, 2013 or the
occurrence of certain triggering events, the series B
preferred stock is redeemable at the election of holders of at
least 50% of the series B preferred stock at a redemption
price equal to the series B liquidation value.
In satisfaction of dividends on our series A and
series B convertible preferred stock accrued as of
February 3, 2008 in an aggregate amount of $4,413,971.70,
we issued 601,524 shares of common stock to Southeastern
Private Investment Fund IV, LLC and 600,894 shares of
common stock to Emergo Alpha Fund Limited.
As of May 2, 2010, accrued but unpaid dividends on our
outstanding preferred stock were approximately
$3.0 million. All of our preferred stock is being converted
into common stock subject to, and upon the completion of, this
offering.
Corporate
headquarters lease
Thomas B. Henson, one of our directors and the manager of
Southeastern Private Investment Fund IV, LLC, one of our
stockholders, is a minority owner and former manager of Ayrsley
Theater Development Company, LLC, the entity from which we lease
our corporate headquarters. Tomlin Family Trust No. 3,
an affiliate of Southeastern Private Investment Fund IV,
LLC, one of our principal stockholders, is also a minority owner
of Ayrsley Theater Development Company, LLC. Mr. Henson is
the trustee of Tomlin Family Trust No. 3.
This lease is on a triple net basis. Rent paid was $263,000,
$347,000 and $461,000 for fiscal 2007, 2008 and 2009,
respectively, and is expected to be approximately $499,000 for
fiscal 2010. We believe the terms of the lease are no less
favorable to us than those that we could have obtained from an
unaffiliated third party.
Guarantees
of indebtedness
Our $20,000,000 revolving credit facility with a bank lender was
jointly guaranteed by Tomlin Family Trust II and Tomlin
Family Trust No. 3 in the principal amount of up to
$2,500,000. Thomas B. Henson, one of our directors, is the
trustee of each of Tomlin Family Trust II and Tomlin Family
Trust No. 3. Our line of credit was also guaranteed by
Emergo Alpha Fund Limited in the principal amount of up to
$2,500,000. Emergo Alpha Fund Limited is one of our
principal stockholders and is beneficially owned by Alfred H.
Balm, who is the father of Mike Balm, one of our directors. Mike
Balm also is a director of Emergo Alpha
85
Fund Limited. Both guaranties were released by the bank on
March 18, 2010 and have no continuing force or effect.
Tomlin Family Trust No. 3 pledged a cash collateral
account with a balance of $2,000,000 to the bank lender to
secure our revolving credit facility. Alfred H. Balm posted a
letter of credit in favor of the bank lender in the amount of
$2,000,000 to secure our revolving credit facility. The cash
collateral account was released by the bank on March 19,
2009 and the letter of credit expired on October 31, 2009.
Investors
Rights Agreement
In connection with our holding company reorganization in 2008,
we entered into an Investors Rights Agreement (the
Investors Rights Agreement) with Southeastern
Private Investment Fund IV, LLC, Emergo Alpha
Fund Limited, John Grosso, John M. Davis, Thomas B. Henson
and certain of our common stockholders that, among other things:
|
|
|
|
|
limits the stockholders ability to transfer their stock,
except for certain permitted transfers;
|
|
|
|
provides for rights of first refusal with respect to transfers
by stockholders other than to permitted transferees;
|
|
|
|
provides the stockholders with preemptive rights if our company
proposes to issue any new securities; and
|
|
|
|
provides for co-sale rights in the event of any proposed sale
involving more than five percent of then-outstanding common
stock.
|
The agreement also provides that, in any election of directors,
the stockholders must vote the shares they own or control to
elect four directors, with two designated by holders of common
stock and two designated by holders of preferred stock.
The Investors Rights Agreement also provides for certain
registration rights, including demand registration rights. For a
more detailed description of these registration rights, see
Description of Capital Stock Registration
rights.
Effective upon the completion of this offering, the
Investors Rights Agreement will be amended and restated
(as so amended and restated, the Amended and Restated
Investors Rights Agreement) to eliminate all of the
rights and obligations described above, except for the
registration rights. For a description of these registration
rights, see Description of Capital Stock
Registration rights.
Procedures
for related party transactions
Our Board of Directors has adopted a written code of business
conduct and ethics for our company. The code was not in effect
when we entered into the related party transactions discussed
above. Under the code, our employees, officers and directors are
prohibited from entering into any conflict of interest
transaction, unless approved by our Board of Directors. In
addition, they must report any actual or potential conflict of
interest, including related party transactions, as provided in
the code. Pursuant to its charter, our audit committee is
required to approve any related party transactions. In approving
or rejecting such proposed transactions, the audit committee
intends to consider the relevant facts and circumstances,
including the material terms of the transactions, risks,
benefits, costs, availability of other comparable services or
products and, if applicable, the impact on a directors
independence.
86
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table presents as of June 1, 2010 information
regarding the beneficial ownership of shares of our common stock
for:
|
|
|
|
|
each person known to us to be the beneficial owner of more than
5% of our outstanding shares of common stock;
|
|
|
|
each of our named executive officers;
|
|
|
|
each of our directors;
|
|
|
|
all of our executive officers and directors as a group; and
|
|
|
|
each selling stockholder.
|
Beneficial ownership is determined in accordance with the rules
of the SEC. These rules generally attribute beneficial ownership
of securities to persons who possess sole or shared voting power
or investment power with respect to such securities. Shares of
common stock subject to options currently exercisable or
exercisable within 60 days of June 1, 2010 are deemed
outstanding and beneficially owned by the person holding such
options for purposes of computing the number of shares and
percentage beneficially owned by such person, but are not deemed
outstanding for purposes of computing the percentage
beneficially owned by any other person. Except as indicated in
the footnotes below, we believe, based on the information
furnished to us, that all persons listed in the table below have
sole voting and investment power with respect to their shares,
subject to applicable community property laws.
This table lists applicable percentage ownership before the
offering based on 8,510,704 shares of common stock
outstanding as of June 1, 2010, after giving effect to the
conversion of our outstanding convertible preferred stock into
4,154,258 shares of common stock subject to, and upon the
completion of, this offering. For purposes of the applicable
percentage ownership after the offering, we have further assumed
that shares
of common stock will be outstanding upon completion of this
offering and no exercise of the underwriters
over-allotment option.
For additional information about the selling stockholders and
their relationships with us, see Certain Relationships and
Related Party Transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Shares
|
|
|
|
Beneficially Owned
|
|
|
Number of
|
|
|
Beneficially Owned
|
|
|
|
Before the Offering
|
|
|
Shares
|
|
|
After the Offering(1)
|
|
Beneficial Owner
|
|
Number
|
|
|
Percentage
|
|
|
Being Offered
|
|
|
Number
|
|
|
Percentage
|
|
|
Five percent stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeastern Private Investment Fund IV, LLC(2)
2131 Ayrsley Town Boulevard, Suite 300
Charlotte, North Carolina 28273
|
|
|
3,470,503
|
|
|
|
40.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Emergo Alpha Fund Limited(3)
2, Prodromou & Demetrakopoulou str.
1090 Nicosia, Cyprus
|
|
|
3,341,173
|
|
|
|
39.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Named executive officers and directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Grosso(4)
|
|
|
348,600
|
|
|
|
4.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
William K. Bailey II(5)
|
|
|
3,000
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
John M. Davis(6)
|
|
|
342,600
|
|
|
|
4.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Venetucci
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
John J. Grosso, III(7)
|
|
|
342,600
|
|
|
|
4.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Susan M. Tabler(8)
|
|
|
17,526
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas B. Henson(9)
|
|
|
3,640,751
|
|
|
|
42.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Mike Balm(10)
|
|
|
3,341,173
|
|
|
|
39.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael D. Evans**
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert G. Dinsmore, Jr.**
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group
(10 people)
|
|
|
8,037,250
|
|
|
|
92.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
* |
|
Indicates less than 1%. |
|
** |
|
Director nominee. |
|
(1) |
|
Assumes no exercise of the underwriters over-allotment
option to
purchase shares
from Southeastern Private Investment Fund IV,
LLC, shares
from Emergo Alpha
Fund Limited, shares
from John Grosso
and shares
from John M. Davis. See Underwriting. |
|
(2) |
|
Includes 3,470,503 shares owned of record by Southeastern
Private Investment Fund IV, LLC. Voting and investment
power is held by Thomas B. Henson, manager of Southeastern
Private Investment Fund IV, LLC and one of our directors.
Mr. Henson disclaims beneficial ownership of 3,220,503 of
the shares of common stock owned of record by Southeastern
Private Investment Fund, LLC. |
|
(3) |
|
Includes 3,341,173 shares of common stock owned of record
by Emergo Alpha Fund Limited. Emergo Alpha
Fund Limited is owned by Emergo Cyprus Ltd, which is owned
by Alfred H. Balm. Alfred H. Balm is the father of
Mike Balm, one of our directors. Mike Balm is a director of
Emergo Alpha Fund Limited. He disclaims beneficial
ownership of the 3,341,173 shares of common stock owned of
record by Emergo Alpha Fund Limited. |
|
(4) |
|
Includes 38,400 shares issuable to Mr. Grosso upon the
exercise of options that are exercisable within 60 days
following June 1, 2010. |
|
(5) |
|
Includes 3,000 shares issuable to Mr. Bailey upon the
exercise of options that are exercisable within 60 days
following June 1, 2010. |
|
(6) |
|
Includes 38,400 shares issuable to Mr. Davis upon the
exercise of options that are exercisable within 60 days
following June 1, 2010. |
|
(7) |
|
Includes 38,400 shares issuable to
Mr. Grosso, III upon the exercise of options that are
exercisable within 60 days following June 1, 2010. |
|
(8) |
|
Includes 17,526 shares issuable to Ms. Tabler upon the
exercise of options that are exercisable within 60 days
following June 1, 2010. |
|
(9) |
|
Includes (i) 170,248 owned of record by HENTOM, LLC, a
North Carolina limited liability company wholly owned by Thomas
B. Henson and (ii) 3,470,503 shares of common stock
owned of record by Southeastern Private Investment Fund IV,
LLC and referenced in footnote (2) above, for which
Mr. Henson holds voting and investment power.
Mr. Henson disclaims beneficial ownership of 3,220,503 of
the shares of common stock owned of record by Southeastern
Private Investment Fund IV, LLC. |
|
(10) |
|
Includes 3,341,173 shares of common stock owned of record
by Emergo Alpha Fund Limited and referenced in footnote
(3) above. Mike Balm is a director of Emergo Alpha
Fund Limited and one of our directors. He disclaims
beneficial ownership of the 3,341,173 shares of common
stock owned of record by Emergo Alpha Fund Limited. |
88
DESCRIPTION
OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock
will consist of:
|
|
|
|
|
shares
of common stock, par value $0.01 per share; and
|
|
|
|
shares
of preferred stock, par value $0.01 per share.
|
At May 2, 2010, we had outstanding 4,356,446 shares of
common stock held of record by 10 stockholders,
1,800,000 shares of Series A Preferred Stock held of
record by two stockholders and 2,354,257 shares of
Series B Preferred Stock held of record by two
stockholders. As of May 2, 2010, there were outstanding
options to acquire 542,000 shares of our common stock at a
weighted average exercise price of $7.96 per share. Upon
completion of this
offering,
shares of our common stock and no shares of our preferred stock
will be outstanding.
The description below summarizes the material rights and terms
of our capital stock after giving effect to the amendment and
restatement of our certificate of incorporation and bylaws,
which will occur prior to the completion of this offering. This
summary is not complete. For more detailed information, see the
form of our amended and restated certificate of incorporation
and bylaws, copies of which will be filed as exhibits to the
registration statement of which this prospectus is a part.
Common
stock
Each holder of our common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of
stockholders. Except as required by law and by the terms of any
series of preferred stock designated by the Board of Directors
pursuant to the amended and restated certificate of
incorporation, holders of our common stock have the exclusive
right to vote for the election of directors and for all other
purposes. Holders of common stock vote together as a single
class. Holders of our common stock do not have cumulative voting
rights in the election of directors or any other matter.
In the event of our liquidation, dissolution or winding up,
holders of our common stock will be entitled to share ratably in
all assets remaining after payments to creditors and after
satisfaction of the liquidation preference, if any, of the
holders of any preferred stock then outstanding. Subject to
preferences that may apply to any then outstanding preferred
stock, holders of common stock are entitled to receive ratably
those dividends, if any, as the Board of Directors may declare
from time to time. We do not currently anticipate paying cash
dividends.
Holders of common stock have no preemptive or redemption rights
and will not be subject to further capital calls or assessments
by us. All of the shares of common stock to be issued and sold
in this offering will be validly issued, fully paid and
non-assessable.
The rights, preferences and privileges of the holders of our
common stock are subject to, and may be adversely affected by,
the rights of the holders of any series of preferred stock that
we designate and issue in the future.
Preferred
stock
Our Board of Directors has the authority, without further action
by our stockholders, to issue shares of our authorized preferred
stock from time to time in one or more series. The Board of
Directors also has the authority to prescribe for each series of
preferred stock it establishes the number of shares in that
series, the number of votes, if any, to which the shares in that
series are entitled, the consideration for the shares in that
series, and the designations, powers, preferences and other
rights, qualifications, limitations or restrictions of the
shares in that series. It is not possible to determine the
actual effects of the issuance of any shares of preferred stock
on the rights of holders of common stock until the Board of
Directors determines the specific rights attached to that
preferred stock. However, the effects of issuing preferred stock
could include one or more of the following:
|
|
|
|
|
restricting dividends on the common stock;
|
|
|
|
diluting the voting power of the common stock;
|
|
|
|
impairing the liquidation rights of the common stock; or
|
89
|
|
|
|
|
delaying or preventing a change of control of us.
|
We have no current plans to issue any shares of preferred stock.
Registration
rights
After this offering, holders of
approximately shares
of our common stock will have the right to require us to
register the sales of their shares under the Securities Act,
under the terms of the Amended and Restated Investors
Rights Agreement between us and the holders of these securities.
Subject to limitations specified in this agreement, these
registration rights include:
Demand registration rights. At any time
following 180 days after completion of this offering, a
majority of the holders of the registrable securities can
require us to file with the SEC and cause to be declared
effective a long-form registration statement on
Form S-1
or, if eligible, a short-form registration statement on
Form S-3
covering the resale of all shares of common stock held by such
persons. Any demand for long-form registration must cover at
least 20% of the registrable securities then outstanding, or a
lesser percentage if the aggregate offering price would exceed
$10,000,000. There may be a total of two demands for long-form
registration. The anticipated aggregate offering price of any
shares covered by a demand for short-form registration must
exceed $5,000,000. There may be a total of three demands for
short-form registration in any
12-month
period.
Piggyback registration rights. If we register
any of our common stock under the Securities Act, solely for
cash, either for our own account or for the account of other
security holders, the holders of shares of registrable
securities are entitled to notice of the registration and to
include their shares of common stock in the registration.
Limitations and expenses. With specified
exceptions, a holders right to include shares in an
underwritten registered offering is subject to the right of the
underwriters to limit the number of shares included in such
offering. We are generally required to pay all expenses of
registration, including the fees and expenses of one legal
counsel to the registering security holders up to a prescribed
maximum amount, but excluding underwriters discounts and
commissions.
Anti-takeover
effects of our certificate of incorporation and bylaws and
Delaware law
The following is a summary of provisions of our amended and
restated certificate of incorporation and bylaws that may be
deemed to have an anti-takeover effect and may delay, deter or
prevent a tender offer or takeover attempt that you might
consider to be in your best interest, including those attempts
that might result in a premium over the market price for the
shares held by stockholders.
Authorized
but unissued shares of preferred stock and common
stock
The ability to issue authorized but unissued shares of preferred
stock and to establish the relative powers, preferences and
other rights of each series of preferred stock makes it possible
for our Board of Directors to issue preferred stock with voting
or other rights or preferences that could impede the success of
any attempt to acquire us. These and other provisions may have
the effect of deferring hostile takeovers or delaying changes in
control of our company or removal of our incumbent directors or
management.
Our Board of Directors also may approve the issuance of
authorized but unissued shares of our common stock without
further action by our stockholders, unless such action is
required in a particular case by applicable laws or regulations
or by the NASDAQ or any other stock exchange upon which our
common stock may then be listed. Our stockholders do not have
the preemptive right to purchase or subscribe to any additional
shares of common stock that we may issue. Authorized but
unissued shares may be used for a variety of corporate purposes,
including future public or private offerings to raise additional
capital or to facilitate acquisitions of other businesses. One
of the effects of the existence of authorized but unissued
shares may be to enable our Board of Directors to issue shares
to persons friendly to our management, which could render more
difficult or discourage an attempt to obtain control of us by
means of a merger, tender offer, proxy contest or otherwise, and
thereby protect the continuity of our management and possibly
deprive our
90
stockholders of opportunities to sell their shares of common
stock at prices higher than prevailing market prices.
Advance
notification of stockholder nominations and
proposals
Our amended and restated bylaws establish an advance notice
procedure for stockholder proposals to be brought before an
annual meeting of our stockholders, including proposed
nominations of candidates for election to the Board of
Directors, other than nominations made by us. In most
circumstances, a stockholder must provide notice of any proposed
business or director nominations at least 120 days before
the anniversary date of the proxy statement for the immediately
preceding annual meeting. The notice must also include
descriptions of certain matters as set forth in our bylaws.
Although our bylaws do not give the Board of Directors the power
to approve or disapprove stockholder nominations or candidates
or proposals regarding other business to be conducted at an
annual or special meeting, our bylaws may have the effect of
precluding certain actions at a meeting if the proper procedures
are not followed or may discourage or deter a potential acquiror
from conducting a solicitation of proxies to elect the
acquirors own slate of directors or otherwise attempting
to obtain control of our company.
Inability
of stockholders to act by written consent; special
meetings
Our amended and restated certificate of incorporation provides
that our stockholders may not act by written consent in lieu of
a meeting and that stockholder action can only be taken at an
annual or special meeting of stockholders. Our amended and
restated certificate of incorporation further provides that
special meetings of stockholders may be called only by our
President, our Chairman of the Board or a majority of our Board
of Directors. These provisions may lengthen the amount of time
required to take stockholder actions. As a result, a stockholder
or group of stockholders that controls a majority of our common
stock would not be able to amend our bylaws or remove directors
except at an annual stockholders meeting.
Provisions
related to our Board of Directors
The number of directors constituting our Board of Directors is
determined from time to time by our Board of Directors. This
provision, in conjunction with the provisions of our amended and
restated certificate of incorporation authorizing our Board of
Directors to fill vacancies on the board, will prevent
stockholders from removing incumbent directors without cause and
filling the resulting vacancies with their own nominees.
Voting
requirements on amending our amended and restated certificate of
incorporation or bylaws
Our amended and restated certificate of incorporation and our
bylaws provide that amendments to certain provisions of our
bylaws, including those related to stockholder proposals and
calling special meetings of stockholders, must be approved by
both our Board of Directors and by the vote, at a regular or
special stockholders meeting, of the holders of at least
two-thirds of the votes entitled to be cast by the holders of
all of our capital stock then entitled to vote. All other
amendments to our bylaws require either: (i) approval by a
majority of our entire Board of Directors (without stockholder
consent) or (ii) the vote, at a regular or special
stockholders meeting, of the holders of at least
two-thirds of the votes entitled to be cast by the holders of
all of our capital stock then entitled to vote. In addition, our
amended and restated certificate of incorporation provides that
amendments to certain provisions of our certificate of
incorporation, including those relating to the calling of
special meetings and no stockholder action by written consent,
must be approved by our Board of Directors and by the vote, at a
regular or special stockholders meeting, of the holders of
at least two-thirds of the votes entitled to be cast by the
holders of all of our capital stock then entitled to vote (in
addition to the approval of our Board of Directors).
Delaware
business combination statute
We are organized under Delaware law. Section 203 of the
Delaware General Corporation Law prohibits a publicly held
corporation from engaging in a business combination
with an interested stockholder for three years after
the stockholder becomes an interested stockholder, unless the
corporations board of directors
91
and stockholders approve the business combination in a
prescribed manner. An interested stockholder is a
person who directly or indirectly owns, or within three years
did own, 15% or more of the corporations outstanding
voting stock. A business combination includes a
merger, asset sale or other transaction that results in a
financial benefit to the interested stockholder.
Section 203 does not prohibit these business combinations
if:
|
|
|
|
|
before the stockholder becomes an interested stockholder, the
corporations board approves either the business
combination or the transaction that resulted in the stockholder
becoming an interested stockholder;
|
|
|
|
after the transaction that results in the stockholder becoming
an interested stockholder, the interested stockholder owns at
least 85% of the corporations outstanding voting stock
(excluding voting stock held by directors who are also officers
and voting stock held in employee stock plans if participants do
not have the right to determine whether their plan stock will he
tendered in a tender or exchange offer); or
|
|
|
|
the corporations board approves the business combination
and the holders of at least two-thirds of the corporations
outstanding voting stock, excluding voting stock held by the
interested stockholder, authorize the business combination.
|
Because we were not subject to Section 203 prior to the
offering, none of our current stockholders would as of the time
of the offering be considered an interested stockholder.
Limitations
on director liability
Section 102(b)(7) of the Delaware General Corporation Law
provides that a Delaware corporation may eliminate or limit the
personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty
as a director, provided that such provision shall not eliminate
or limit the liability of a director (i) for any breach of
the directors duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware
General Corporation Law (relating to liability for unauthorized
acquisitions or redemptions of, or dividends on, capital stock),
or (iv) for any transaction from which the director derived
an improper personal benefit. Our amended and restated
certificate of incorporation will include the provisions
permitted by Section 102(b)(7) of the Delaware General
Corporation Law.
Under the Delaware General Corporation Law, we may indemnify any
person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was
our director, officer, employee or agent, or is or was serving
at our request as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to our best
interests, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
Transfer
Agent and Registrar
The transfer agent and registrar of our common stock is American
Stock Transfer & Trust Company, whose address is
59 Maiden Lane, New York, New York 10038, and whose telephone
number at this location is
(212) 936-5100.
Listing
We intend to apply to have our common stock approved for listing
on the NASDAQ Global Market under the symbol PTRT.
92
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common
stock. We cannot predict the effect, if any, that sales of
shares or the availability of shares for sale will have on the
market price of our common stock prevailing from time to time.
Sales of substantial amounts of our common stock in the public
market, or a perception that such sales may occur, could
adversely affect prevailing market prices of our common stock.
When this offering is completed, we will have a total
of shares
of our common stock outstanding, assuming no exercise of
outstanding options. All of the shares sold in this offering
will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are
acquired by our affiliates as that term is defined
in Rule 144 under the Securities Act. All remaining shares
of common stock held by existing stockholders are
restricted securities as that term is defined in
Rule 144. Shares acquired by our affiliates in this
offering and restricted securities may be sold in the public
market only if registered or sold in accordance with
Rule 144 or Rule 701 under the Securities Act.
All of the restricted shares described above will be subject to
the 180-day
underwriters
lock-up
described below under Restrictive
agreements and Underwriting.
In addition, immediately following this offering, options to
purchase shares
of our common stock will be outstanding. Except as described
below regarding the registration of common stock issuable upon
the exercise of options granted under our stock option plans,
these option shares will also be restricted
securities as described above.
Restrictive
agreements
Our executive officers, directors and the selling stockholders,
who hold an aggregate of
approximately shares
of our common stock, have agreed, subject to limited exceptions,
not to offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any shares of
common stock beneficially owned (as such term is used in
Rule 13d-3
of the Securities Exchange Act of 1934, as amended) or any other
securities so owned convertible into or exercisable or
exchangeable for common stock or enter into any swap or other
arrangement that transfers to another, in whole or in part, any
of the economic consequences of ownership of any shares of
common stock or any securities convertible into or exercisable
or exchangeable for shares of common stock for a period of
180 days after the date of this prospectus, subject to
extension in specific circumstances, without the prior written
consent of J.P. Morgan Securities Inc. and Wells Fargo
Securities, LLC.
As shares held by our executive officers, directors and existing
stockholders become available for sale and are sold into the
market, the market price of our common stock could decline.
After a restricted persons holding of common stock has
been released from the restrictions on sale described above,
they will be available for sale to the public subject to
satisfaction of the requirements of Rule 144 or
Rule 701, which are described below.
Rule 144
In general, under Rule 144 under the Securities Act of
1933, as in effect on the date of this prospectus, beginning
90 days after the effective date of this offering, a person
who is not one of our affiliates who has beneficially owned
shares of our common stock for at least six months may sell
shares without restriction, provided the current public
information requirements of Rule 144 continue to be
satisfied. In addition, any person who is not one of our
affiliates at any time during the three months preceding a
proposed sale, and who has beneficially owned shares of our
common stock for at least one year would be entitled to sell an
unlimited number of shares without restriction. Our affiliates
who have beneficially owned shares of our common stock for at
least six months are entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
|
|
|
|
|
one percent of the number of shares of our common stock then
outstanding, which will equal
approximately shares
immediately after this offering; and
|
93
|
|
|
|
|
the average weekly trading volume of our common stock on The
NASDAQ Global Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to the sale.
|
Sales of restricted shares under Rule 144 are also subject
to requirements regarding the manner of sale, notice, and the
availability of current public information about us.
Rule 144 also provides that affiliates relying on
Rule 144 to sell shares of our common stock that are not
restricted shares must nonetheless comply with the same
restrictions applicable to restricted shares, other than the
holding period requirement.
Rule 701
In general, under Rule 701 as currently in effect, any of
our employees, consultants or advisors who purchased shares from
us in connection with a compensatory stock or option plan or
other written agreement in a transaction that was completed
before the effective date of this filing in reliance on
Rule 701 and complied with the requirements of
Rule 701 is eligible to resell such shares 90 days
after the effective date of this offering in reliance on
Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical
stock options granted by an issuer before it becomes subject to
the reporting requirements of the Securities Exchange Act of
1934, along with the shares acquired upon exercise of such
options, including exercises after the date of this prospectus.
Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions
described above, beginning 90 days after the date of this
prospectus, may be sold by persons other than
affiliates, as defined in Rule 144, subject
only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance
with its one-year minimum holding period requirement.
Stock
options
Following the completion of this offering, we intend to file a
registration statement on
Form S-8
under the Securities Act covering shares of common stock
reserved for issuance under our stock option plans. The
Form S-8
will become effective automatically upon filing. As of
May 2, 2010, options to purchase 542,000 shares of
common stock were issued and outstanding, 319,032 of which have
vested. Accordingly, subject to vesting provisions and
Rule 144 volume limitations applicable to our affiliates,
shares registered under the
Form S-8
will be available for sale in the open market after the
applicable
lock-up
agreements expire.
Registration
rights
Upon completion of this offering, the holders of
approximately shares
of our common stock will be entitled to registration rights.
Registration of the sale of these shares upon exercise of these
rights would make them freely tradable without restriction under
the Securities Act. For more information regarding these
registration rights, see Description of Capital
Stock Registration rights.
94
MATERIAL
U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-U.S.
HOLDERS OF COMMON STOCK
The following is a general discussion of the material
U.S. federal income and estate tax consequences of the
ownership and disposition of common stock by a beneficial owner
that is a
non-U.S. holder,
other than a
non-U.S. holder
that owns, or has owned, actually or constructively, more than
5% of our common stock. A
non-U.S. holder
is a person or entity that, for U.S. federal income tax
purposes, is:
|
|
|
|
|
a non-resident alien individual, other than certain former
citizens and residents of the United States subject to tax as
expatriates;
|
|
|
|
a corporation, or other entity treated as a corporation for
U.S. federal income tax purposes, created or organized in
or under the laws of a jurisdiction other than the United States
or any state or political subdivision thereof; or
|
|
|
|
an estate or trust, other than an estate or trust the income of
which is subject to U.S. federal income taxation regardless
of its source.
|
A
non-U.S. holder
does not include an individual who is present in the United
States for 183 days or more in the taxable year of
disposition. Such an individual is urged to consult his or her
own tax advisor regarding the U.S. federal income tax
consequences of the sale, exchange or other disposition of
common stock.
This discussion is based on the Internal Revenue Code of 1986,
as amended (the Code), and administrative
pronouncements, judicial decisions and final, temporary and
proposed Treasury Regulations, changes to any of which
subsequent to the date of this prospectus may affect the tax
consequences described herein. This discussion does not address
all aspects of U.S. federal income and estate taxation that
may be relevant to
non-U.S. holders
in light of their particular circumstances or to
non-U.S. holders
that may be subject to special treatment under U.S. federal
tax laws, such as certain financial institutions, insurance
companies, tax-exempt organizations, hybrid entities,
partnership and other pass-through entities, broker-dealers,
persons subject to the alternative minimum tax, persons that
receive our common stock as compensation, or persons that hold
our common stock as part of a hedge, straddle, conversion
transaction, synthetic security or other integrated investment.
Furthermore, this discussion does not address any tax
consequences arising under the laws of any state, local or
foreign jurisdiction. Prospective holders are urged to consult
their tax advisors with respect to the particular tax
consequences to them of owning and disposing of common stock,
including the consequences under the laws of any state, local or
foreign jurisdiction.
Dividends
Distributions will constitute dividends for U.S. federal
income tax purposes to the extent paid from our current or
accumulated earnings and profits, as determined under
U.S. federal income tax principles. To the extent the
distributions exceed our current and accumulated earnings and
profits, such distributions will constitute a return of capital
and will first reduce a holders adjusted tax basis in its
common stock and, thereafter, will be treated as capital gain.
Distributions that constitute dividends for U.S. federal
income tax purposes that are paid to a
non-U.S. holder
of common stock generally will be subject to withholding tax at
a 30% rate or a reduced rate specified by an applicable income
tax treaty. In order to obtain a reduced rate of withholding, a
non-U.S. holder
will be required to provide an Internal Revenue Service
Form W-8BEN
certifying its entitlement to benefits under a treaty. The
withholding tax does not apply to dividends paid to a
non-U.S. holder
who provides a
Form W-8ECI,
certifying that the dividends are effectively connected with the
non-U.S. holders
conduct of a trade or business within the United States.
Effectively connected dividends, net of certain deductions and
credits, will be subject to regular U.S. income tax as if
the
non-U.S. holder
were a U.S. person, unless an applicable income tax treaty
provides otherwise. A
non-U.S. corporation
receiving effectively connected dividends may also be subject to
an additional branch profits tax imposed at a rate
of 30% (or a lower rate provided by any applicable income tax
treaty).
95
Gain on
disposition of common stock
A
non-U.S. holder
generally will not be subject to U.S. federal income tax on
gain realized on a sale or other disposition of common stock
unless:
|
|
|
|
|
the gain is effectively connected with a trade or business of
the
non-U.S. holder
in the United States, subject to an applicable income tax treaty
providing otherwise, or
|
|
|
|
we are or have been a U.S. real property holding
corporation at any time within the five-year period preceding
the disposition or the
non-U.S. holders
holding period, whichever period is shorter, and its common
stock has ceased to be traded on an established securities
market prior to the beginning of the calendar year in which the
sale or disposition occurs.
|
We believe that we are not, and we do not anticipate becoming, a
U.S. real property holding corporation.
Gain that is effectively connected with a U.S. trade or
business will be subject to regular U.S. income tax as if
the
non-U.S. holder
were a U.S. person, subject to an applicable income tax
treaty providing otherwise. A
non-U.S. corporation
with effectively connected gains may also be subject to
additional branch profits tax imposed at a rate of
30% (or a lower treaty rate).
Information
reporting requirements and backup withholding
Information returns will be filed with the Internal Revenue
Service in connection with payments of dividends. This
information also may be made available to the tax authorities in
the
non-U.S. holders
country of residence. A
non-U.S. holder
may have to comply with certification procedures to establish
that it is not a U.S. person in order to avoid information
reporting and backup withholding with respect to payments of
dividends and the proceeds from a sale or other disposition of
common stock. The certification procedures required to claim a
reduced rate of withholding under a treaty generally should also
satisfy the certification requirements necessary to avoid the
backup withholding tax as well. The amount of any backup
withholding from a payment to a
non-U.S. holder
will be allowed as a credit against such holders
U.S. federal income tax liability and may entitle such
holder to a refund, provided that the required
information is timely furnished to the Internal Revenue Service.
Recent legislation generally imposes a withholding tax of 30% on
payments to certain foreign entities, after December 31,
2012, of dividends on and the gross proceeds of dispositions of
U.S. common stock, unless various U.S. information
reporting and due diligence requirements relating to ownership
of those entities by U.S. persons have been satisfied.
These new requirements are different from, and in addition to,
the beneficial owner certification requirements described above.
Non-U.S. holders
should consult their tax advisers regarding the possible
implications of this legislation on their investment in our
common stock.
Federal
estate tax
Common stock owned or treated as owned by an individual who is a
non-U.S. holder
at the time of death generally will be included in the
individuals gross estate for U.S. federal estate tax
purposes and may be subject to U.S. federal estate tax
unless an applicable estate tax treaty provides otherwise.
96
UNDERWRITING
We and the selling stockholders are offering the shares of
common stock described in this prospectus through a number of
underwriters. J.P. Morgan Securities Inc. and Wells Fargo
Securities, LLC are acting as joint book-running managers of the
offering and as representatives of the underwriters. We and the
selling stockholders have entered into an underwriting agreement
with the underwriters. Subject to the terms and conditions of
the underwriting agreement, we and the selling stockholders have
agreed to sell to the underwriters, and each underwriter has
severally agreed to purchase, at the public offering price less
the underwriting discounts and commissions set forth on the
cover page of this prospectus, the number of shares of common
stock listed next to its name in the following table:
|
|
|
|
|
|
|
Number of
|
|
Name
|
|
Shares
|
|
|
J.P. Morgan Securities Inc.
|
|
|
|
|
Wells Fargo Securities, LLC
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
The underwriters are committed to purchase all the common shares
offered by us and the selling stockholders if they purchase any
shares. The underwriting agreement also provides that if an
underwriter defaults, the purchase commitments of non-defaulting
underwriters may also be increased or the offering may be
terminated.
The underwriters propose to offer the common shares directly to
the public at the initial public offering price set forth on the
cover page of this prospectus and to certain dealers at that
price less a concession not in excess of
$ per share. Any such dealers may
resell shares to certain other brokers or dealers at a discount
of up to $ per share from the
initial public offering price. After the initial public offering
of the shares, the offering price and other selling terms may be
changed by the underwriters. Sales of shares made outside of the
United States may be made by affiliates of the underwriters. The
representatives have advised us that the underwriters do not
intend to confirm discretionary sales in excess of 5% of the
common shares offered in this offering.
The underwriters have an option to buy up
to
additional shares of common stock from certain of the selling
stockholders to cover sales of shares by the underwriters which
exceed the number of shares specified in the table above. The
underwriters have 30 days from the date of this prospectus
to exercise this over-allotment option. If any shares are
purchased with this over-allotment option, the underwriters will
purchase shares in approximately the same proportion as shown in
the table above. If any additional shares of common stock are
purchased, the underwriters will offer the additional shares on
the same terms as those on which the shares are being offered.
The underwriting fee is equal to the public offering price per
share of common stock less the amount paid by the underwriters
to us and the selling stockholders per share of common stock.
The underwriting fee is $ per
share. The following table shows the per share and total
underwriting discounts and commissions to be paid to the
underwriters assuming both no exercise and full exercise of the
underwriters option to purchase additional shares.
|
|
|
|
|
|
|
|
|
|
|
Without
|
|
With Full
|
|
|
Over-Allotment
|
|
Over-Allotment
|
|
|
Exercise
|
|
Exercise
|
|
Per Share
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
We estimate that the total expenses of this offering, including
registration, filing and listing fees, printing fees and legal
and accounting expenses, but excluding the underwriting
discounts and commissions, will be approximately
$ .
A prospectus in electronic format may be made available on the
web sites maintained by one or more underwriters, or selling
group members, if any, participating in the offering. The
underwriters may agree to
97
allocate a number of shares to underwriters and selling group
members for sale to their online brokerage account holders.
Internet distributions will be allocated by the representatives
to underwriters and selling group members that may make Internet
distributions on the same basis as other allocations.
We have agreed that we will not, subject to limited exceptions,
(i) offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the Securities
and Exchange Commission a registration statement under the
Securities Act relating to, any shares of our common stock or
securities convertible into or exchangeable or exercisable for
any shares of our common stock, or publicly disclose the
intention to make any offer, sale, pledge, disposition or
filing, or (ii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences
associated with the ownership of any shares of common stock
(regardless of whether any of these transactions are to be
settled by the delivery of shares of common stock, or such other
securities, in cash or otherwise), in each case without the
prior written consent of J.P. Morgan Securities Inc. and
Wells Fargo Securities, LLC for a period of 180 days after
the date of this prospectus other than shares of our common
stock issued upon the exercise of options granted under our
stock-based compensation plans. Notwithstanding the foregoing,
if (1) during the last 17 days of the
180-day
restricted period, we issue an earnings release or material news
or a material event relating to our company occurs; or
(2) prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period, the restrictions described above shall continue to apply
until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
Our directors and executive officers and certain of our
significant stockholders have entered into
lock-up
agreements with the underwriters prior to the commencement of
this offering pursuant to which each of these persons or
entities, subject to limited exceptions, for a period of
180 days after the date of this prospectus, may not,
without the prior written consent of J.P. Morgan Securities
Inc. and Wells Fargo Securities, LLC, (i) offer, pledge,
announce the intention to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock
(including, without limitation, common stock which may be deemed
to be beneficially owned by such directors, executive officers,
managers and members in accordance with the rules and
regulations of the SEC and securities which may be issued upon
exercise of a stock option or warrant) or (ii) enter into
any swap or other agreement that transfers, in whole or in part,
any of the economic consequences of ownership of the common
stock, whether any such transaction described in clause (i)
or (ii) above is to be settled by delivery of common stock
or such other securities, in cash or otherwise. Notwithstanding
the foregoing, if (1) during the last 17 days of the
180-day
restricted period, we issue an earnings release or material news
or a material event relating to our company occurs; or
(2) prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period, the restrictions described above shall continue to apply
until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act of 1933.
We will apply to have our common stock approved for listing on
the NASDAQ Global Market under the symbol PTRT.
In connection with this offering, the underwriters may engage in
stabilizing transactions, which involves making bids for,
purchasing and selling shares of common stock in the open market
for the purpose of preventing or retarding a decline in the
market price of the common stock while this offering is in
progress. These stabilizing transactions may include making
short sales of the common stock, which involves the sale by the
underwriters of a greater number of shares of common stock than
they are required to purchase in this offering, and purchasing
shares of common stock on the open market to cover positions
created by short sales. Short sales may be covered
shorts, which are short positions in an amount not greater than
the underwriters over-allotment option referred to above,
or may be naked shorts, which are short positions in
excess of that amount. The underwriters may close out any
covered short position either by exercising their over-allotment
option, in whole or in part, or by purchasing shares in the open
market. In making this determination, the
98
underwriters will consider, among other things, the price of
shares available for purchase in the open market compared to the
price at which the underwriters may purchase shares through the
over-allotment option. A naked short position is more likely to
be created if the underwriters are concerned that there may be
downward pressure on the price of the common stock in the open
market that could adversely affect investors who purchase in
this offering. To the extent that the underwriters create a
naked short position, they will purchase shares in the open
market to cover the position.
The underwriters have advised us that, pursuant to
Regulation M of the Securities Act of 1933, they may also
engage in other activities that stabilize, maintain or otherwise
affect the price of the common stock, including the imposition
of penalty bids. This means that if the representatives of the
underwriters purchase common stock in the open market in
stabilizing transactions or to cover short sales, the
representatives can require the underwriters that sold those
shares as part of this offering to repay the underwriting
discount received by them.
These activities may have the effect of raising or maintaining
the market price of the common stock or preventing or retarding
a decline in the market price of the common stock, and, as a
result, the price of the common stock may be higher than the
price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue
them at any time. The underwriters may carry out these
transactions on the NASDAQ Global Market, in the
over-the-counter
market or otherwise.
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
determined by negotiations between us and the representatives of
the underwriters. In determining the initial public offering
price, we and the representatives of the underwriters expect to
consider a number of factors including:
|
|
|
|
|
the information set forth in this prospectus and otherwise
available to the representatives;
|
|
|
|
our prospects and the history and prospects for the industry in
which we compete;
|
|
|
|
an assessment of our management;
|
|
|
|
our prospects for future earnings;
|
|
|
|
the general condition of the securities markets at the time of
this offering;
|
|
|
|
the recent market prices of, and demand for, publicly traded
common stock of generally comparable companies; and
|
|
|
|
other factors deemed relevant by the underwriters and us.
|
Neither we nor the underwriters can assure investors that an
active trading market will develop for our common shares, or
that the shares will trade in the public market at or above the
initial public offering price.
Other than in the United States, no action has been taken by us
or the underwriters that would permit a public offering of the
securities offered by this prospectus in any jurisdiction where
action for that purpose is required. The securities offered by
this prospectus may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering
material or advertisements in connection with the offer and sale
of any such securities be distributed or published in any
jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of that
jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and to observe any
restrictions relating to the offering and the distribution of
this prospectus. This prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities offered
by this prospectus in any jurisdiction in which such an offer or
a solicitation is unlawful.
This document is only being distributed to and is only directed
at (i) persons who are outside the United Kingdom or
(ii) to investment professionals falling within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 (the Order) or
(iii) high net worth entities, and other persons to whom it
may lawfully be communicated, falling within
Article 49(2)(a) to (d) of the Order (all such persons
together being referred to as relevant persons). The
securities are only available to, and any invitation, offer
99
or agreement to subscribe, purchase or otherwise acquire such
securities will be engaged in only with, relevant persons. Any
person who is not a relevant person should not act or rely on
this document or any of its contents.
In relation to each Member State of the European Economic
Area1
which has implemented the Prospectus Directive (each, a
Relevant Member State), from and including the date
on which the European Union Prospectus Directive (the EU
Prospectus Directive) is implemented in that Relevant
Member State (the Relevant Implementation Date) an
offer of securities described in this prospectus may not be made
to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the shares which has
been approved by the competent authority in that Relevant Member
State or, where appropriate, approved in another Relevant Member
State and notified to the competent authority in that Relevant
Member State, all in accordance with the EU Prospectus
Directive, except that it may, with effect from and including
the Relevant Implementation Date, make an offer of shares to the
public in that Relevant Member State at any time:
|
|
|
|
|
to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
|
|
|
|
to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than 43,000,000 and
(3) an annual net turnover of more than 50,000,000,
as shown in its last annual or consolidated accounts;
|
|
|
|
to fewer than 100 natural or legal persons (other than qualified
investors as defined in the EU Prospectus Directive) subject to
obtaining the prior consent of the book-running managers for any
such offer; or
|
|
|
|
in any other circumstances which do not require the publication
by the Issuer of a prospectus pursuant to Article 3 of the
Prospectus Directive.
|
For the purposes of this provision, the expression an
offer of securities to the public in relation to any
securities in any Relevant Member State means the communication
in any form and by any means of sufficient information on the
terms of the offer and the securities to be offered so as to
enable an investor to decide to purchase or subscribe for the
securities, as the same may be varied in that Member State by
any measure implementing the EU Prospectus Directive in that
Member State and the expression EU Prospectus Directive means
Directive 2003/71/EC and includes any relevant implementing
measure in each Relevant Member State.
Certain of the underwriters and their affiliates have provided
in the past to us and our affiliates and may provide from time
to time in the future certain commercial banking, financial
advisory, investment banking and other services for us and such
affiliates in the ordinary course of their business, for which
they have received and may continue to receive customary fees
and commissions. In addition, from time to time, certain of the
underwriters and their affiliates may effect transactions for
their own account or the account of customers, and hold on
behalf of themselves or their customers, long or short positions
in our debt or equity securities or loans, and may do so in the
future. An affiliate of Wells Fargo Securities, LLC is the
lender under our revolving credit facility. To the extent any of
the proceeds of this offering are applied to repay loans
outstanding under our revolving credit facility, such affiliate
will receive the amounts so repaid under such facility.
CONFLICTS
OF INTEREST
An affiliate of Wells Fargo Securities, LLC, one of the
underwriters, is the lender under our revolving credit facility
and may receive more than five percent of the net proceeds of
this offering as a result of our intention to repay debt under
the revolving credit facility. Thus, Wells Fargo Securities, LLC
has a conflict of interest as defined in
Rule 2720 of the Conduct Rules of the Financial Industry
Regulatory Authority, Inc., or
1 The
EU plus Iceland, Norway and Liechtenstein.
100
FINRA. Accordingly, this offering will be made in compliance
with the applicable provisions of Rule 2720 of the Conduct
Rules. Rule 2720 currently requires that a qualified
independent underwriter, as defined by the FINRA rules,
participate in the preparation of the registration statement and
the prospectus and exercise the usual standards of due diligence
in respect thereto. J.P. Morgan Securities Inc. is acting
as the qualified independent underwriter and will not receive
any compensation in such capacity. We have agreed to indemnify
J.P. Morgan Securities Inc. in its capacity as the
qualified independent underwriter against liabilities under the
Securities Act, or contribute to payments that it may be
required to make in that respect.
LEGAL
MATTERS
The validity of our common stock offered in this offering will
be passed upon for us by Robinson, Bradshaw & Hinson,
P.A., Charlotte, North Carolina. Davis Polk & Wardwell
LLP, New York, New York has acted as counsel to the underwriters
in connection with certain legal matters related to this
offering.
EXPERTS
The consolidated financial statements of Portrait Innovations
Holding Company as of February 1, 2009 and January 31,
2010, and for each of the three years in the period ended
January 31, 2010 have been included herein and in the
registration statement in reliance upon the report of KPMG LLP,
independent registered public accounting firm, appearing
elsewhere herein, upon the authority of such firm as experts in
auditing and accounting.
The audit report covering the January 31, 2010 consolidated
financial statements refers to a change in the accounting for
uncertain tax positions and a change in the accounting for the
fair value measurements of nonfinancial assets and liabilities.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act that registers the shares of our common
stock to be sold in this offering. This prospectus does not
contain all of the information set forth in the registration
statement and the exhibits and schedules filed as part of the
registration statement. For further information with respect to
us and our common stock, we refer you to the registration
statement and the exhibits and schedules filed as a part of the
registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document
are not necessarily complete. If a contract or document has been
filed as an exhibit to the registration statement, we refer you
to the copy of the contract or document that has been filed.
Each statement in this prospectus relating to a contract or
document filed as an exhibit is qualified in all respects by the
filed exhibit. The reports and other information we file with
the SEC can be read and copied at the SECs Public
Reference Room at 100 F Street, N.E., Washington D.C.
20549. Copies of these materials can be obtained at prescribed
rates from the SECs Public Reference Room at such address.
You may obtain information regarding the operation of the public
reference room by calling
1-800-SEC-0330.
The SEC also maintains a website
(http://www.sec.gov)
that contains reports, proxy and information statements and
other information regarding issuers that file electronically
with the SEC.
Upon completion of this offering, we will become subject to the
reporting and information requirements of the Securities
Exchange Act of 1934, as amended, and, as a result, will file
periodic reports, proxy statements and other information with
the SEC. These periodic reports, proxy statements and other
information will be available on or through our website at
www.portraitinnovations.com, free of charge. The information
contained on our website is not incorporated into and does not
form a part of this prospectus or the registration statement of
which it forms a part.
101
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Portrait Innovations Holding Company:
We have audited the accompanying consolidated balance sheets of
Portrait Innovations Holding Company and Subsidiary (the
Company) as of and February 1, 2009 and January 31,
2010, and the related statements of income, stockholders
equity and cash flows for each of the years in the three-year
period ended January 31, 2010. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. 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 the Company as of February 1, 2009 and
January 31, 2010, and the results of its operations and its
cash flows for each of the years in the three-year period ended
January 31, 2010, in conformity with U.S. generally
accepted accounting principles.
As discussed in Notes 2(l) and 2(t) to the consolidated
financial statements, the Company has changed its method of
accounting for uncertain tax positions effective
January 29, 2007, due to the adoption of Accounting
Standards Codification Subtopic
740-10, and
the Company has changed its method of accounting for fair value
measurements of non-financial assets and non-financial
liabilities that are recognized or disclosed at fair value in
the financial statements on a non-recurring basis, due to the
adoption of ASC Topic 820, effective February 2, 2009.
/s/ KPMG LLP
Charlotte, North Carolina
June 29, 2010
F-2
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
February 1,
2009 and January 31, 2010
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except
|
|
|
|
share data)
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,951
|
|
|
|
1,987
|
|
Accounts receivable, less allowance for doubtful accounts of $49
in 2009 and $39 in 2010
|
|
|
1,182
|
|
|
|
1,216
|
|
Store supplies inventory
|
|
|
614
|
|
|
|
726
|
|
Prepaid expenses
|
|
|
1,110
|
|
|
|
1,370
|
|
Deferred income taxes
|
|
|
475
|
|
|
|
836
|
|
Other assets
|
|
|
189
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
9,521
|
|
|
|
6,317
|
|
Property and equipment, net
|
|
|
50,517
|
|
|
|
50,636
|
|
Deferred financing costs
|
|
|
153
|
|
|
|
110
|
|
Deferred income taxes
|
|
|
871
|
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
61,062
|
|
|
|
57,761
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current installments of capital lease obligations
|
|
$
|
368
|
|
|
|
24
|
|
Accounts payable
|
|
|
2,606
|
|
|
|
4,093
|
|
Accrued compensation
|
|
|
5,577
|
|
|
|
5,811
|
|
Accrued and other liabilities
|
|
|
3,659
|
|
|
|
5,445
|
|
Current portion of deferred rent
|
|
|
1,356
|
|
|
|
1,434
|
|
Income taxes payable
|
|
|
85
|
|
|
|
1,843
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
13,651
|
|
|
|
18,650
|
|
Obligations under capital leases, excluding current installments
|
|
|
19
|
|
|
|
18
|
|
Long term debt
|
|
|
13,950
|
|
|
|
4,950
|
|
Other liabilities
|
|
|
7,450
|
|
|
|
7,512
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
35,070
|
|
|
|
31,130
|
|
|
|
|
|
|
|
|
|
|
Cumulative convertible redeemable preferred stock:
|
|
|
|
|
|
|
|
|
10% Series A cumulative convertible preferred stock,
$0.01 par value, liquidation value $1.67 per share.
Authorized 1,800,000 shares; issued and outstanding
1,800,000 shares as of February 1, 2009 and
January 31, 2010
|
|
|
3,299
|
|
|
|
3,304
|
|
10% Series B cumulative convertible preferred stock,
$0.01 par value, liquidation value $8.92 per share.
Authorized 2,354,257 shares; issued and outstanding
2,354,257 shares as of February 1, 2009 and
January 31, 2010
|
|
|
23,094
|
|
|
|
23,129
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value. Authorized 15,000,000
shares; issued and outstanding 4,147,498 and 4,167,446 shares as
of February 1, 2009 and January 31, 2010, respectively
|
|
|
41
|
|
|
|
42
|
|
Additional paid in capital
|
|
|
2,278
|
|
|
|
342
|
|
Accumulated deficit
|
|
|
(2,720
|
)
|
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
(401
|
)
|
|
|
198
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
61,062
|
|
|
|
57,761
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Years
ended February 3, 2008, February 1, 2009 and
January 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except share data)
|
|
|
Net sales
|
|
$
|
73,203
|
|
|
|
97,402
|
|
|
|
111,009
|
|
Cost of goods sold, excluding depreciation and amortization
|
|
|
18,433
|
|
|
|
24,422
|
|
|
|
28,663
|
|
Selling, general and administrative expenses
|
|
|
44,409
|
|
|
|
58,559
|
|
|
|
65,863
|
|
Depreciation and amortization expense
|
|
|
7,247
|
|
|
|
10,643
|
|
|
|
12,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,114
|
|
|
|
3,778
|
|
|
|
4,275
|
|
Interest income
|
|
|
(141
|
)
|
|
|
(27
|
)
|
|
|
(19
|
)
|
Interest expense
|
|
|
1,600
|
|
|
|
1,284
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,655
|
|
|
|
2,521
|
|
|
|
3,778
|
|
Provision (benefit) for income taxes
|
|
|
(1,454
|
)
|
|
|
1,234
|
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3,109
|
|
|
|
1,287
|
|
|
|
2,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share basic
|
|
$
|
0.12
|
|
|
|
(0.29
|
)
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted
|
|
$
|
0.12
|
|
|
|
(0.29
|
)
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
basic
|
|
|
2,944,759
|
|
|
|
3,879,927
|
|
|
|
4,164,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common and equivalent shares
outstanding diluted
|
|
|
7,092,963
|
|
|
|
3,879,927
|
|
|
|
8,544,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Years
ended February 3, 2008, February 1, 2009 and
January 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.01
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Number of
|
|
|
Par
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
|
(In thousands, except share data)
|
|
|
Balances as of January 28, 2007
|
|
|
2,943,300
|
|
|
$
|
29
|
|
|
$
|
1,180
|
|
|
$
|
(6,256
|
)
|
|
$
|
(5,047
|
)
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
211
|
|
|
|
|
|
|
|
211
|
|
Stock options exercised
|
|
|
1,780
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Preferred stock dividend accrual
|
|
|
|
|
|
|
|
|
|
|
(1,396
|
)
|
|
|
(860
|
)
|
|
|
(2,256
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,109
|
|
|
|
3,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of February 3, 2008
|
|
|
2,945,080
|
|
|
|
29
|
|
|
|
|
|
|
|
(4,007
|
)
|
|
|
(3,978
|
)
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
269
|
|
Preferred stock dividend paid in common stock
|
|
|
1,202,418
|
|
|
|
12
|
|
|
|
4,402
|
|
|
|
|
|
|
|
4,414
|
|
Preferred stock dividend accrual
|
|
|
|
|
|
|
|
|
|
|
(2,393
|
)
|
|
|
|
|
|
|
(2,393
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,287
|
|
|
|
1,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of February 1, 2009
|
|
|
4,147,498
|
|
|
|
41
|
|
|
|
2,278
|
|
|
|
(2,720
|
)
|
|
|
(401
|
)
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
335
|
|
|
|
|
|
|
|
335
|
|
Stock options exercised, including tax benefits of $82
|
|
|
19,948
|
|
|
|
1
|
|
|
|
122
|
|
|
|
|
|
|
|
123
|
|
Preferred stock dividend accrual
|
|
|
|
|
|
|
|
|
|
|
(2,393
|
)
|
|
|
|
|
|
|
(2,393
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,534
|
|
|
|
2,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 31, 2010
|
|
|
4,167,446
|
|
|
$
|
42
|
|
|
$
|
342
|
|
|
$
|
(186
|
)
|
|
$
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Years
ended February 3, 2008, February 1, 2009 and
January 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,109
|
|
|
|
1,287
|
|
|
|
2,534
|
|
Adjustments to reconcile net income to net cash flows used in
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,247
|
|
|
|
10,643
|
|
|
|
12,208
|
|
Amortization of debt financing costs
|
|
|
588
|
|
|
|
511
|
|
|
|
128
|
|
Loss on disposal of equipment
|
|
|
251
|
|
|
|
224
|
|
|
|
119
|
|
Share-based compensation
|
|
|
211
|
|
|
|
269
|
|
|
|
335
|
|
Deferred income taxes
|
|
|
(1,720
|
)
|
|
|
1,026
|
|
|
|
(840
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(356
|
)
|
|
|
329
|
|
|
|
(34
|
)
|
Store supplies inventory
|
|
|
(148
|
)
|
|
|
60
|
|
|
|
(112
|
)
|
Prepaid expenses
|
|
|
(826
|
)
|
|
|
(123
|
)
|
|
|
(260
|
)
|
Other assets
|
|
|
27
|
|
|
|
(30
|
)
|
|
|
7
|
|
Accounts payable
|
|
|
1,769
|
|
|
|
(1,376
|
)
|
|
|
1,064
|
|
Accrued expenses and other current liabilities
|
|
|
3,103
|
|
|
|
3,014
|
|
|
|
1,787
|
|
Income taxes payable
|
|
|
176
|
|
|
|
(153
|
)
|
|
|
1,758
|
|
Other liabilities
|
|
|
1,856
|
|
|
|
1,057
|
|
|
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
15,287
|
|
|
|
16,738
|
|
|
|
19,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(26,514
|
)
|
|
|
(15,292
|
)
|
|
|
(11,709
|
)
|
Proceeds received from disposal of equipment
|
|
|
|
|
|
|
4
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(26,514
|
)
|
|
|
(15,288
|
)
|
|
|
(11,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on capital lease obligations
|
|
|
(553
|
)
|
|
|
(533
|
)
|
|
|
(375
|
)
|
Proceeds from borrowings
|
|
|
|
|
|
|
7,000
|
|
|
|
|
|
Repayment of debt
|
|
|
|
|
|
|
(7,000
|
)
|
|
|
(9,000
|
)
|
Proceeds from issuance of preferred stock
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
5
|
|
|
|
|
|
|
|
41
|
|
Share-based compensation tax benefits
|
|
|
|
|
|
|
|
|
|
|
82
|
|
Cash dividends paid
|
|
|
|
|
|
|
|
|
|
|
(2,353
|
)
|
Bank fees for loan modification
|
|
|
|
|
|
|
(26
|
)
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities
|
|
|
9,452
|
|
|
|
(559
|
)
|
|
|
(11,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(1,775
|
)
|
|
|
891
|
|
|
|
(3,964
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
6,835
|
|
|
|
5,060
|
|
|
|
5,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
5,060
|
|
|
|
5,951
|
|
|
|
1,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,011
|
|
|
|
698
|
|
|
|
415
|
|
Cash paid for taxes
|
|
$
|
89
|
|
|
|
361
|
|
|
|
244
|
|
Supplemental disclosure of noncash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures included in accounts payable
|
|
$
|
|
|
|
|
|
|
|
|
423
|
|
Capital expenditures included in accrued expenses
|
|
$
|
|
|
|
|
|
|
|
|
311
|
|
Capital leases for equipment
|
|
$
|
|
|
|
|
|
|
|
|
30
|
|
Accrued preferred stock dividends
|
|
$
|
2,256
|
|
|
|
2,393
|
|
|
|
2,393
|
|
See accompanying notes to consolidated financial statements.
F-6
February 1, 2009 and January 31, 2010
|
|
(1)
|
Organization
and Business
|
Portrait Innovations Holding Company (PH) and its wholly owned
subsidiary, Portrait Innovations, Inc. (PI) (PH and PI together,
the Company), are principally engaged in operating a digital
imaging portrait studio business. As of January 31, 2010,
PI has 170 stores operating under the name of Portrait
Innovations in the United States.
PI was incorporated under the laws of the state of Delaware on
July 22, 2002. PI commenced operations on November 18,
2002.
PH, a non-operating holding company, was incorporated on
April 24, 2008. PH formed a non-operating subsidiary that
merged with PI, with PI being the surviving entity (the Merger)
(see note 5).
|
|
(2)
|
Summary
of Significant Accounting Policies
|
|
|
(a)
|
Basis
of Presentation and Consolidation
|
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles in the
United States of America (U.S. GAAP). The accompanying
consolidated financial statements include the accounts of PH and
its wholly owned subsidiary, PI. All material intercompany
amounts have been eliminated.
The preparation of consolidated financial statements in
conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Significant items subject to estimates and assumptions
include the carrying amount of property and equipment,
share-based compensation, income tax uncertainties and the
valuation allowance for deferred tax assets. Actual results
could differ from those estimates.
The Companys fiscal year ends on the Sunday nearest the
January month end. The fiscal years ended February 3, 2008,
February 1, 2009 and January 31, 2010 were 53-week,
52-week and 52-week years, respectively.
The Company considers all highly liquid investments with
maturity date of three months or less at the date of purchase to
be cash equivalents. Cash and cash equivalents consist of cash
on deposit with banks and money market funds.
Accounts receivable are stated at their carrying values, net of
an allowance for doubtful accounts. Accounts receivable consist
primarily of credit card and landlord receivables for which
collectibility is reasonably assured. Landlord receivables
primarily consist of construction allowances receivable. Other
miscellaneous receivables are evaluated for collectibility on a
regular basis and an allowance for doubtful accounts is recorded
as deemed necessary.
F-7
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
Prepaid expenses consist of expenses which are paid in advance
and will result in a probable future economic benefit. Prepaid
expenses consist primarily of prepaid rent and insurance.
|
|
(g)
|
Store
Supplies Inventory
|
Store supplies inventory include photography and sales supplies
which are valued at the lower of cost or market, cost being
determined on the
first-in,
first-out basis.
|
|
(h)
|
Property
and Equipment
|
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization
related to property and equipment, except for leasehold
improvements, is provided utilizing the straight-line method
over the estimated asset lives. Depreciation related to
leasehold improvements is provided utilizing the straight-line
method over the shorter of the estimated asset lives or related
lease terms.
A summary of estimated useful lives is as follows:
|
|
|
Asset Classification
|
|
Estimated Useful Lives
|
|
Leasehold improvements
|
|
Lease terms
|
Studio furniture and equipment
|
|
2 to 10 years
|
Computer equipment
|
|
5 years
|
Equipment under capital lease
|
|
5 to 10 years
|
As of January 31, 2010, leasehold improvements had a
weighted average life of 7.5 years.
Property and equipment leased by the Company under capital
leases is stated at an amount equal to the lesser of either
(a) the present value of the minimum lease payments less
accumulated amortization, or (b) the fair value of the
leased property.
|
|
(i)
|
Impairment
of Long-lived Assets
|
In accordance with Financial Accounting Standards Board (FASB)
Accounting Standards Codifications (ASC) Subtopic
360-10-35
Impairment or Disposal of Long-Lived Assets,
long-lived assets, such as property, plant, and equipment, are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. If circumstances require a long-lived asset
or asset group be tested for possible impairment, the Company
first compares undiscounted cash flows expected to be generated
by that asset or asset group to its carrying value. If the
carrying value of the long-lived asset or asset group is not
recoverable on an undiscounted cash flow basis, an impairment is
recognized to the extent that the carrying value exceeds its
fair value.
For leases that contain fixed escalation of the minimum annual
lease payment during the original term of the lease and rent
holidays, the Company recognizes rental expense on a
straight-line basis over the lease term, including the
construction period, and records the difference between rent
expense and amount currently payable as deferred rent. The
Company begins recognizing rent expense during the construction
period. Deferred lease incentives, which include construction
allowances received from landlords, are amortized on a
straight-line basis over the lease term, including the
construction period. Deferred rent is presented in current
portion of deferred rent and other liabilities.
F-8
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
Deferred rent as of February 1, 2009 and January 31,
2010 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Current portion of deferred rent
|
|
$
|
1,356
|
|
|
|
1,434
|
|
Noncurrent portion of deferred rent presented in other
liabilities
|
|
|
6,798
|
|
|
|
7,512
|
|
|
|
|
|
|
|
|
|
|
Total deferred rent
|
|
|
8,154
|
|
|
|
8,946
|
|
|
|
|
|
|
|
|
|
|
|
|
(k)
|
Deferred
Financing Costs
|
Deferred financing costs are amortized to interest expense over
the term of the loan agreement.
The Company utilizes the asset and liability method to account
for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company adopted the provision on accounting for uncertainty
in income taxes as prescribed by ASC Subtopic
740-10 at
the beginning of fiscal 2008. This standard clarifies the
accounting for uncertainty in income taxes by prescribing a
minimum recognition threshold for a tax position taken or
expected to be taken in a tax return that is required to be met
before being recognized in the financial statements. This
standard also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company classifies
interest and penalties associated with income tax positions
within the provision for income taxes. The adoption of the
standard did not have a material impact on the Companys
financial condition, results of operations or cash flows.
Sales are recorded when services are accepted by the customer
and the customer takes delivery of the photographs and assumes
risk of loss, collection of the relevant receivable is probable,
persuasive evidence of an arrangement exists, and the sales
price is fixed or determinable. Sales taxes are recorded on a
net basis.
Cost of goods sold includes printing costs, occupancy costs,
studio supplies and credit card fees. Printing costs include
cost of raw materials and equipment repair and maintenance
costs. Occupancy costs include rent, contingent rent, common
area maintenance, real and personal property taxes, insurance,
utilities and studio repair and maintenance costs. Studio supply
costs include seasonal props and backgrounds, photography
supplies, freight and other miscellaneous supplies.
|
|
(o)
|
Selling,
General and Administrative Expenses
|
Selling, general and administrative expenses include studio and
corporate payroll and benefit expenses, share-based
compensation, marketing and advertising expenses, studio
recruiting and training expenses,
F-9
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
expenses for accounting and legal services, information
technology expenses, travel expenses and expenses related to our
corporate facilities.
|
|
(p)
|
Start-Up
Activities and Pre-Opening Costs
|
Start-up
activity costs and store pre-opening costs are expensed as
incurred.
Advertising is expensed as incurred and amounted to $6,312,000,
$9,273,000 and $10,925,000, for the years ended,
February 3, 2008, February 1, 2009 and
January 31, 2010, respectively. Advertising is included in
selling, general and administrative expenses in the consolidated
statements of income.
|
|
(r)
|
Share-Based
Compensation
|
As of January 30, 2006, the Company adopted ASC Topic 718,
Compensation Stock Compensation, which
requires measurement of the cost of employee services received
in exchange for share-based compensation based on the grant-date
fair value of the employee stock options. Incremental
compensation costs arising from subsequent modifications of
awards after the grant date must be recognized. The Company
adopted this standard on January 30, 2006 under the
prospective method of application, which is allowed for
nonpublic entities. Under this method, the Company recognizes
compensation costs for new grants of share-based awards. For
awards granted prior to that date, the standard is applied only
to the extent those awards are subsequently modified,
repurchased or cancelled.
The Company operates in one segment, operating a digital imaging
portrait studio business.
On February 2, 2009, the Company adopted the provisions of
ASC Topic 820 Fair Value Measurements and
Disclosures, which defines the fair value measurement of
non-financial assets and non-financial liabilities recognized or
disclosed at fair value in the financial statements on a
non-recurring basis. ASC Topic 820 establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and
the lowest priority to measurements involving significant
unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy are as follows:
|
|
|
|
|
Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has
the ability to access at the measurement date.
|
|
|
|
Level 2 inputs are inputs other than quoted prices included
within Level 1 that are observable for the asset or
liability, either directly or indirectly.
|
|
|
|
Level 3 inputs are unobservable inputs for the asset or
liability.
|
The level in the fair value hierarchy within which a fair
measurement in its entirety falls is based on the lowest level
input that is significant to the fair value measurement in its
entirety.
The adoption of this standard resulted in additional disclosures
(see note 13).
F-10
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
|
|
(u)
|
Recently
Issued Accounting Pronouncements
|
In June 2009, the FASB established authoritative U.S. GAAP,
codifying and superseding all pre-existing accounting standards
and literature. This newly codified U.S. GAAP is effective
for financial statements issued for interim and annual periods
ending after September 15, 2009. The Company has adopted
the guidance without any impact on the consolidated financial
statements.
In May 2009, the FASB issued authoritative guidance included in
ASC Topic 855 Subsequent Events, which establishes
general standards of accounting for and disclosure of events
that occur after the balance sheet date, but before financial
statements are issued or are available to be issued.
Specifically, this guidance provides (i) the period after
the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements;
(ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance
sheet date in its financial statements; and (iii) the
disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. This
guidance is effective for interim or annual financial periods
ending after June 15, 2009, and is to be applied
prospectively. The Company adopted this guidance in the second
quarter of 2009. The adoption of this guidance did not have a
material effect on the Companys consolidated financial
position, results of operations or cash flows. Subsequent events
have been evaluated for recognition and disclosure through
June 29, 2010.
Accounts receivable as of February 1, 2009 and
January 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Credit card receivable
|
|
$
|
796
|
|
|
|
804
|
|
Landlord receivable
|
|
|
194
|
|
|
|
311
|
|
Other miscellaneous receivable
|
|
|
241
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
|
1,231
|
|
|
|
1,255
|
|
Allowance for doubtful accounts
|
|
|
(49
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
1,182
|
|
|
|
1,216
|
|
|
|
|
|
|
|
|
|
|
A rollforward of the allowance for doubtful accounts is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
(22
|
)
|
|
|
(9
|
)
|
|
|
(49
|
)
|
Provision for doubtful accounts
|
|
|
|
|
|
|
(92
|
)
|
|
|
(42
|
)
|
Write-off of uncollectible balances
|
|
|
13
|
|
|
|
52
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
(9
|
)
|
|
|
(49
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-11
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
|
|
(4)
|
Property
and Equipment
|
Property and equipment as of February 1, 2009 and
January 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Leasehold improvements
|
|
$
|
43,268
|
|
|
|
50,025
|
|
Studio furniture and equipment
|
|
|
28,365
|
|
|
|
34,434
|
|
Computer equipment
|
|
|
1,369
|
|
|
|
1,815
|
|
Equipment under capital lease
|
|
|
2,076
|
|
|
|
667
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, gross
|
|
|
75,078
|
|
|
|
86,941
|
|
Accumulated depreciation and amortization
|
|
|
(24,561
|
)
|
|
|
(36,305
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
50,517
|
|
|
|
50,636
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
Holding
Company Formation
|
PH formed a non-operating subsidiary that merged with PI, with
PI being the surviving entity. In connection with the Merger,
each share of PIs common stock was converted into one
share of the common stock of PH. Each share of PIs
Series A Preferred Stock and Series B Preferred Stock
(see note 6(a)) was converted into two shares of
Series A Preferred Stock and Series B Preferred Stock
of PH, respectively. The stockholders of PH following the Merger
are the same as the stockholders of PI immediately prior to the
Merger, with each stockholder owning, both immediately before
and after the Merger, the same fully diluted ownership
percentage of PI or PH, as applicable. Following the Merger, the
stock options and warrants of PI are exercisable for common
stock of PH. Since the entities are under common control, the
Merger was not accounted for as a business combination. The
Merger was recorded at the historical cost amounts of assets and
liabilities of PI.
|
|
(6)
|
Cumulative
Convertible Redeemable Preferred Stock
|
Series A Convertible Redeemable Preferred Stock of PH, par
value $0.01 per share (Series A Preferred Stock), is convertible
into common stock of PH at the option of the Series A
Preferred Stock stockholders at any time after the issuance of
such shares and prior to any redemption of such shares by PH.
The current conversion price is $1.67 per share. Each share of
Series A Preferred Stock shall automatically be converted
into common stock of PH upon the consummation of a qualified
public offering (as defined in the Companys Certificate of
Incorporation) of the common stock of PH. PH is authorized to
issue 1,800,000 shares of Series A Preferred Stock.
Series B Convertible Redeemable Preferred Stock of PH, par
value $0.01 per share (Series B Preferred Stock), is convertible
into common stock of PH at the option of the Series B
Preferred Stock stockholders at any time after issuance of such
shares and prior to any redemption of such shares by PH. The
current conversion price is $8.92 per share. Each share of
Series B Preferred Stock shall automatically be converted
into common stock of PH upon the consummation of a qualified
public offering (as defined in the Companys Certificate of
Incorporation) of the common stock of PH. PH is authorized to
issue 2,354,257 shares of Series B Preferred Stock.
Because the redemption of Series A and B Convertible
Redeemable Preferred Stock is outside the control of the
Company, the securities are classified outside of permanent
equity and recorded at their redemption amount, including
dividends accrued and unpaid.
F-12
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
Series A Preferred Stock and the Series B Preferred
Stock rank senior to the common stock of PH with respect to
dividend rights. The Series A Preferred Stock and the
Series B Preferred Stock rank pari passu with respect to
dividend rights, except with respect to liquidation (see
note 6(d)). The holders of preferred stock are entitled to
cumulative dividends when, as and if declared by the Board of
Directors, payable in cash for all accrued and unpaid dividends.
Dividends on the preferred stock accrue in arrears at a rate of
10% annually (noncompounded) on the original issue price of such
preferred stock from the date of issuance to and including the
earlier of the date on which a liquidation event occurs, such
share is converted into common stock, such share is redeemed or,
with respect to Series B Preferred Stock only, the seventh
anniversary of the issuance of such stock. The original issue
prices of the Series A Preferred Stock and the
Series B Preferred Stock are $1.67 and $8.92, respectively.
The preferred dividends are payable, in each case, out of assets
legally available.
Unless otherwise waived by the holders, dividends on the
Series A Preferred Stock and the Series B Preferred
Stock accrue as
paid-in-kind
in additional shares of common stock of PH. All dividends on the
Series A Preferred Stock accrue as
paid-in-kind
in additional shares of common stock through the earlier of
January 31, 2009, or the liquidation, conversion, or
redemption of such Series A Preferred Stock, and thereafter
accrue and accumulate in cash until payable. All dividends on
the Series B Preferred Stock accrue as
paid-in-kind
in additional shares of common stock until the earlier of the
third (3rd) anniversary of the issuance date of such
Series B Preferred Stock, or the liquidation, conversion,
or redemption of such Series B Preferred Stock, and
thereafter accrue and accumulate in cash until payable. On
August 1, 2008, the holders of the preferred stock waived
their right to receive accrued or future dividends with respect
to the preferred stock as
paid-in-kind
in additional shares of the common stock of PH.
Immediately prior to the Merger on April 24, 2008 (see
note 5), the Board of Directors declared dividends in the
amount of $1,450,000 for Series A Preferred Stock and
$2,964,000 for Series B Preferred Stock, which amounts
equal the accrued and unpaid dividends with respect to the
preferred stock as of February 3, 2008. The Company issued
870,164 shares of common stock as payment for the
Series A Preferred Stock dividend and 332,254 shares
of common stock as payment for the Series B Preferred Stock
dividend. In connection with the Merger, these shares of the
common stock of the PI were converted into common stock of PH.
On January 26, 2009, the Board of Directors of PH declared
cash dividends with respect to the Series A Preferred Stock
and the Series B Preferred Stock in the amounts of $294,000
and $2,059,000 with dividends per share of $.16 and $.87,
respectively. The dividends represented payment of the accrued
and unpaid dividends with respect to the preferred stock for the
period from February 4, 2008 through January 26, 2009.
Such dividends were paid in March 2009.
After the accrued preferred dividends are paid, the holders of
the common stock and the preferred stock may, on a pari passu,
as-converted basis, be paid dividends at such times and in such
amounts as determined by the Board of Directors.
F-13
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
A rollforward of preferred stock is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
Number of
|
|
|
Carrying
|
|
|
Number of
|
|
|
Carrying
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Total
|
|
|
|
(In thousands, except share data)
|
|
|
Balances as of January 28, 2007
|
|
|
900,000
|
|
|
$
|
4,145
|
|
|
|
616,591
|
|
|
$
|
12,013
|
|
|
$
|
16,158
|
|
Issuance of preferred stock
|
|
|
|
|
|
|
|
|
|
|
560,538
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Preferred stock dividend accrual payable in shares of common
stock
|
|
|
|
|
|
|
305
|
|
|
|
|
|
|
|
1,951
|
|
|
|
2,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of February 3, 2008
|
|
|
900,000
|
|
|
|
4,450
|
|
|
|
1,177,129
|
|
|
|
23,964
|
|
|
|
28,414
|
|
Stock conversion (see note 5)
|
|
|
900,000
|
|
|
|
|
|
|
|
1,177,128
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend accrual payable in shares of common
stock
|
|
|
|
|
|
|
299
|
|
|
|
|
|
|
|
2,094
|
|
|
|
2,393
|
|
Preferred dividend payment
|
|
|
|
|
|
|
(1,450
|
)
|
|
|
|
|
|
|
(2,964
|
)
|
|
|
(4,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of February 1, 2009
|
|
|
1,800,000
|
|
|
|
3,299
|
|
|
|
2,354,257
|
|
|
|
23,094
|
|
|
|
26,393
|
|
Preferred stock dividend accrual payable in cash
|
|
|
|
|
|
|
299
|
|
|
|
|
|
|
|
2,094
|
|
|
|
2,393
|
|
Preferred stock dividend payment
|
|
|
|
|
|
|
(294
|
)
|
|
|
|
|
|
|
(2,059
|
)
|
|
|
(2,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 31, 2010
|
|
|
1,800,000
|
|
|
$
|
3,304
|
|
|
|
2,354,257
|
|
|
$
|
23,129
|
|
|
$
|
26,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The holders of preferred stock are entitled to one vote based on
the conversion rate of such preferred stock to common stock.
Each holder of shares of common stock shall be entitled to one
vote for each whole share of common stock.
PH, the investors, and certain other stockholders of PH
entered into an Investors Rights Agreement on
April 24, 2008 (the Investors Rights Agreement) which
agreement contains provisions regarding their ownership, voting,
registration and the transfer of the shares of the capital stock
of PH. The Investors Rights Agreement also contains
provisions whereby the parties thereto agree to vote their
shares of the capital stock of PH in a predetermined manner in
connection with the election of directors of PH. On
June 29, 2010, PH, the investors and certain other
stockholders of PH entered into an agreement to amend the
Investors Rights Agreement, subject to and effective upon
the completion of a specified initial public offering of common
stock (as defined by the Investors Rights Agreement) by
PH, to eliminate all of the rights and obligations described
above, except for certain registration rights of the investors
and stockholders who are parties to this agreement.
|
|
(d)
|
Liquidation
Preference
|
In the event of liquidation, either voluntary or involuntary,
each holder of Series A Preferred Stock shall be entitled,
after payment of the Companys debts and other liabilities,
to be paid the sum of $1.67 per share, as appropriately adjusted
for subsequent stock dividends or stock splits, plus all accrued
or declared, but unpaid dividends on such Series A
Preferred Stock (the Series A Liquidation Value). Each
holder of Series B Preferred Stock shall be entitled, after
payment of the Companys debts and other liabilities, to be
paid the greater of (i) an amount equal to $8.92 per share,
as appropriately adjusted for subsequent stock dividends or
stock splits, plus all accrued or declared, but unpaid dividends
on such Series B Preferred Stock (the Series B
Liquidation Value), and (ii) the amount it would receive on
an as-converted basis.
If the assets and proceeds distributed among the holders of
preferred stock in connection with the event of liquidation are
insufficient to permit full payment of the Series A
Liquidation Value and the Series B
F-14
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
Liquidation Value, then all assets and proceeds of the Company
legally available for distribution will be distributed ratably
to the holders of preferred stock.
If the assets and proceeds remaining after Liquidation Values
have been paid to the holders of Series A Preferred Stock
and, if applicable, to the holders of Series B Preferred
Stock, the remaining assets and proceeds of the Company shall be
distributed to the holders of the common stock of PH, the
Series A Preferred Stock on an as-converted basis and, if
applicable, the Series B Preferred Stock on an as-converted
basis.
The Series A Preferred Stock is redeemable at the elections
of holders of at least 50% of the Series A Preferred Stock
at a redemption price equal to the Series A Liquidation
Value with respect to such shares. The Series B Preferred
Stock is redeemable at the elections of holders of at least 50%
of the Series B Preferred Stock at a redemption price equal
to the Series B Liquidation Value with respect to such
shares at any time after the earlier of January 31, 2013 or
the occurrence of certain Triggering Events set
forth in the Certificate of Incorporation of PH.
As of January 31, 2010, PH was authorized to issue
15,000,000 shares of common stock, par value $0.01 per
share. On August 7, 2002, in connection with a sale of
Series A Preferred Stock, PI issued to the investors
warrants for the purchase of the common stock of PI. Each
warrant has an expiration of August 7, 2010 and an exercise
price of $1.67 per share. As of January 31, 2010, the
warrants were exercisable for 189,000 shares of the common
stock of PH. In March and April 2010, all of these warrants were
exercised by the holders.
Income tax expense (benefit) consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
91
|
|
|
|
|
|
|
|
1,627
|
|
State
|
|
|
175
|
|
|
|
208
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266
|
|
|
|
208
|
|
|
|
2,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,319
|
)
|
|
|
767
|
|
|
|
(476
|
)
|
State
|
|
|
(401
|
)
|
|
|
259
|
|
|
|
(364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,720
|
)
|
|
|
1,026
|
|
|
|
(840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(1,454
|
)
|
|
|
1,234
|
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Deferred tax expense before change in valuation allowance
|
|
$
|
421
|
|
|
|
828
|
|
|
|
(606
|
)
|
Change in the valuation allowance for deferred tax assets
|
|
|
(2,141
|
)
|
|
|
198
|
|
|
|
(234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,720
|
)
|
|
|
1,026
|
|
|
|
(840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
The differences between the effective tax rate reflected in the
total income tax expense and the amount determined by applying
the statutory U.S. rate of 34% to income before income
taxes for the years ended February 3, 2008,
February 1, 2009 and January 31, 2010 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Computed expected tax expense
|
|
$
|
563
|
|
|
|
857
|
|
|
|
1,284
|
|
Increase in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax expense, net of federal income tax before
valuation allowance
|
|
|
50
|
|
|
|
95
|
|
|
|
169
|
|
Permanent differences, primarily due to officers insurance
and meals and entertainment
|
|
|
74
|
|
|
|
84
|
|
|
|
52
|
|
Change in valuation allowance
|
|
|
(2,141
|
)
|
|
|
198
|
|
|
|
(234
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,454
|
)
|
|
|
1,234
|
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The tax effects of temporary
differences that give rise to significant portions of the
deferred tax assets and liabilities as of February 1, 2009
and January 31, 2010 are presented below:
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Federal and state net operating loss carryforwards
|
|
$
|
1,236
|
|
|
|
93
|
|
Property and equipment, principally due to differences in
depreciation
|
|
|
344
|
|
|
|
1,525
|
|
Accrued expenses
|
|
|
626
|
|
|
|
1,057
|
|
Alternative minimum tax credit carryforwards
|
|
|
147
|
|
|
|
|
|
Stock based compensation
|
|
|
266
|
|
|
|
385
|
|
Allowance for doubtful accounts
|
|
|
19
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred income tax assets
|
|
|
2,638
|
|
|
|
3,075
|
|
Valuation allowance
|
|
|
(362
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
|
2,276
|
|
|
|
2,947
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liability:
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
(930
|
)
|
|
|
(1,413
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liability
|
|
|
(930
|
)
|
|
|
(1,413
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
1,346
|
|
|
|
1,534
|
|
|
|
|
|
|
|
|
|
|
A rollforward of the valuation allowance for deferred tax assets
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
(2,305
|
)
|
|
|
(164
|
)
|
|
|
(362
|
)
|
Additions to valuation allowance
|
|
|
|
|
|
|
(198
|
)
|
|
|
|
|
Reductions of valuation allowance
|
|
|
2,141
|
|
|
|
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
(164
|
)
|
|
|
(362
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
The valuation allowance as of February 1, 2009 and
January 31, 2010 was $362,000 and $128,000, respectively.
The valuation allowance as of January 31, 2010 is primarily
related to state net operating loss carryforwards and state
depreciation temporary differences that, in the judgment of
management, are not more likely than not to be realized. In
assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in
which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in
making this assessment. In order to fully realize the deferred
tax asset, the Company will need to generate, in certain states,
approximately $2,675,000 in state taxable income prior to the
expiration of the state net operating loss in 2018.
The Company has net state operating loss carryforwards of
approximately $2,042,000 expiring beginning in the 2018 tax year
for state income tax purposes. During the year ended
January 31, 2010, the Company utilized federal and state
net operating loss and credit carryforwards of $3,342,000 and
$1,070,000, respectively.
The Company adopted the provision on accounting for uncertainty
in income taxes as prescribed by ASC Subtopic
740-10 at
the beginning of fiscal 2008. At the date of adoption, the
Companys consolidated balance sheet did not have any
uncertain tax positions. As of February 1, 2009, the
Companys consolidated balance sheet included $652,000 of
tax positions that are highly certain but for which there is
uncertainty about the timing of the related deductions. Because
of the impact of deferred tax accounting, other than interest
and penalties, the disallowance of these positions would not
affect the annual effective tax rate but would accelerate the
payment of cash to the tax authority to an earlier period. For
the year ended January 31, 2010, the Company reversed all
previous provisions for uncertain tax positions and related
interest due to resolution of the uncertain timing differences.
There were no interest and penalties recognized during the years
ended February 1, 2009 and January 31, 2010.
The following table summarizes the activity related to the
Companys unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Unrecognized tax benefits at beginning of year
|
|
$
|
|
|
|
|
652
|
|
Additions based on tax positions related to the current year
|
|
|
652
|
|
|
|
152
|
|
Reductions for tax positions of prior years
|
|
|
|
|
|
|
(652
|
)
|
Reductions for tax positions of current year
|
|
|
|
|
|
|
(152
|
)
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits at end of year and included in the
consolidated balance sheets
|
|
$
|
652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
|
|
(9)
|
Commitments
and Contingencies
|
The Company is obligated under capital leases covering equipment
that expires in September 2013. As of February 1, 2009 and
January 31, 2010, the gross amount of equipment and related
accumulated amortization recorded under capital leases were as
follows:
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Equipment
|
|
$
|
2,076
|
|
|
|
667
|
|
Accumulated amortization
|
|
|
(1,003
|
)
|
|
|
(344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,073
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
Amortization of the equipment held under capital leases is
recognized as amortization expense in depreciation and
amortization in the consolidated statements of income.
|
|
(b)
|
Future
Minimum Lease Payments
|
Future minimum lease payments under noncancelable operating
leases and future minimum capital lease payments as of
January 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
|
(In thousands)
|
|
|
Year ending:
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
26
|
|
|
|
13,737
|
|
2011
|
|
|
8
|
|
|
|
13,015
|
|
2012
|
|
|
7
|
|
|
|
11,929
|
|
2013
|
|
|
5
|
|
|
|
10,431
|
|
2014
|
|
|
|
|
|
|
9,530
|
|
Later years
|
|
|
|
|
|
|
24,352
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
46
|
|
|
$
|
82,994
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum capital lease payments
|
|
|
42
|
|
|
|
|
|
Less current installments of obligations under capital leases
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations under capital leases, excluding current installments
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rental expense under operating leases aggregated
$7,161,000, $9,983,000 and $11,717,000 for the years ended
February 3, 2008, February 1, 2009 and
January 31, 2010, respectively.
|
|
(c)
|
Employee
Benefit Plan
|
On April 1, 2007, the Company adopted the Portrait
Innovations 401(k) Savings Plan (Plan), an employee
contributory, defined contribution plan, which provides benefits
for substantially all full time employees. The contributions to
the Plan are comprised of employee contributions up to the
annual eligible compensation limits as determined by the
Internal Revenue Service. The Company is responsible for funding
Plan expenses,
F-18
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
which totaled $2,000 for each of the years ended
February 3, 2008, February 1, 2009 and
January 31, 2010, respectively.
|
|
(10)
|
Share-Based
Compensation
|
As of January 31, 2010, the Company has the following stock
option plans that reserve shares of common stock for issuance to
executives and key employees: the 2004 Portrait Innovations,
Inc. Stock Option Plan and the 2009 Portrait Innovations Holding
Company Stock Option Plan (the Plans). The Plans were approved
by the Companys shareholders. The Plans authorize the
grant of up to 780,000 shares of the Companys common
stock.
Stock options granted under the Plans have
10-year
terms and vest on a pro rata basis over a five-year term with
the first vesting date on the anniversary of the grant date.
Share-based compensation expense of $211,000, $269,000 and
$335,000 was recorded in the consolidated statements of income
during the years ended February 3, 2008, February 1,
2009 and January 31, 2010, respectively. The fair value of
the stock options was estimated at the date of grant using the
Black-Scholes option pricing model. The Company used historical
data to estimate the expected life and expected forfeitures of
the stock option value. Expected volatility was estimated by
calculating an implied volatility using historical volatility of
peer companies. The risk-free rate was based on the
U.S. Treasury rate in effect at the time of grant.
No share-based compensation expense was recognized during the
years ended February 3, 2008, February 1, 2009 and
January 31, 2010, related to the stock options granted in
years prior to the adoption of ASC Topic 718. Had compensation
expense been determined based on the fair value at the grant
date consistent with the provisions of ASC Topic 718, the change
to net income would have been immaterial to these consolidated
financial statements.
A summary of the status of the Companys stock option plan
as of February 1, 2009 and January 31, 2010, changes
during the years ended February 1, 2009 and
January 31, 2010, and related weighted average exercise
price is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2009
|
|
|
January 31, 2010
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Share Options:
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at beginning of period
|
|
|
467,550
|
|
|
$
|
7.41
|
|
|
|
490,050
|
|
|
$
|
7.57
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
(19,948
|
)
|
|
|
2.00
|
|
Forfeited
|
|
|
(45,750
|
)
|
|
|
7.92
|
|
|
|
(37,320
|
)
|
|
|
8.78
|
|
Granted
|
|
|
68,250
|
|
|
|
8.92
|
|
|
|
114,098
|
|
|
|
8.92
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at period end (aggregate intrinsic value of $735,000
and $5,227,000 as of February 1, 2009 and January 31,
2010, respectively)
|
|
|
490,050
|
|
|
$
|
7.57
|
|
|
|
546,880
|
|
|
$
|
7.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at period end (aggregate intrinsic value of
$531,000 and $2,623,000 as of February 1, 2009 and
January 31, 2010, respectively)
|
|
|
194,970
|
|
|
$
|
6.35
|
|
|
|
253,282
|
|
|
$
|
7.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
As of January 31, 2010, the average period remaining to
vest and become exercisable was 2.0 years. The weighted
average remaining contractual term of stock options outstanding
as of January 31, 2010 was 6.9 years. The weighted
average remaining contractual term of stock options exercisable
as of January 31, 2010 was 5.8 years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Share Option Values
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value of share options granted
|
|
$
|
3.78
|
|
|
|
5.37
|
|
|
|
8.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total grant date fair value of share options vested
|
|
$
|
304,000
|
|
|
|
550,000
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions Used
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term of share options
|
|
|
6.5 years
|
|
|
|
6.5 years
|
|
|
|
6.5 years
|
|
Expected volatility
|
|
|
40%
|
|
|
|
60%
|
|
|
|
45% and 60%
|
|
Expected dividends
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Risk-free interest rate
|
|
|
3.1%
|
|
|
|
2.3%
|
|
|
|
3.0%
|
|
Upon the exercise of stock options, it is the Companys
policy to issue new shares. The total cash received from stock
options exercised for the exercise price during the years ended
February 3, 2008, February 1, 2009 and
January 31, 2010 was $5,000, $0 and $41,000, respectively.
The aggregate intrinsic value of stock options exercised during
the years ended February 3, 2008, February 1, 2009 and
January 31, 2010 are $10,000, $0 and $227,000, respectively.
The following table summarizes the stock options outstanding and
exercisable as of February 1, 2009 and January 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
February 1, 2009
|
|
|
January 31, 2010
|
|
Price
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
$1.67
|
|
|
33,600
|
|
|
|
33,600
|
|
|
|
21,126
|
|
|
|
21,126
|
|
2.78
|
|
|
1,200
|
|
|
|
960
|
|
|
|
1,200
|
|
|
|
1,200
|
|
2.56
|
|
|
47,000
|
|
|
|
29,080
|
|
|
|
38,726
|
|
|
|
30,206
|
|
3.04
|
|
|
19,000
|
|
|
|
11,400
|
|
|
|
19,000
|
|
|
|
15,200
|
|
8.92
|
|
|
389,250
|
|
|
|
119,930
|
|
|
|
466,828
|
|
|
|
185,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
490,050
|
|
|
|
194,970
|
|
|
|
546,880
|
|
|
|
253,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11)
|
Related
Party Transactions
|
The Companys revolving credit facility with a bank lender
was jointly guaranteed by the holders of the Companys
Series A and Series B Preferred Stock in the principal
amount of up to $5,000,000. These guaranties were released by
the bank on March 18, 2010 and have no continuing force or
effect.
One of the Companys directors is a minority owner and
former manager of, and an affiliate of one of the Companys
principal stockholders is also a minority owner of, the entity
from which the Company leases its corporate headquarters. This
lease is on a triple net basis. Rent paid was $263,000,
$347,000, and $461,000 for the years ended February 3,
2008, February 1, 2009 and January 31, 2010,
respectively.
F-20
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
|
|
(12)
|
Debt
Financing Arrangements
|
PI has a revolving credit facility with a bank lender for up to
$17 million, which amount increases to $20 million on
August 4, 2010. Borrowings under the revolving credit
agreement are not subject to a borrowing base limitation. At
January 31, 2010, loans in the aggregate principal amount
of $5.0 million were outstanding under this facility and
the remaining $12.0 million was available for borrowing at
that date. The revolving credit facility matures on
August 2, 2011 and bears interest at an annual rate of
LIBOR plus a margin, ranging from 2.50 to 3.00 percentage
points based on the ratio of the Companys funded debt to
EBITDA (as defined in the credit agreement), which rate was
2.73% as of January 31, 2010. The applicable margin is
adjusted quarterly based on a calculation of the ratio of funded
debt to EBITDA for the trailing four quarters. An unused
commitment fee based on the difference between the amount of the
facility and outstanding borrowings will begin to accrue under
the facility once the Company receives an equity investment of
$10 million or more. The unused commitment fee is at an
annual rate of 0.375%.
The revolving credit facility contains financial covenants,
which among other things, require the Company to maintain a
minimum EBITDA level, a maximum ratio of adjusted funded debt to
EBITDA plus rent expense and a minimum fixed charge coverage
ratio. In addition, the revolving credit agreement includes
customary negative covenants, including a covenant restricting
the Companys ability to pay dividends (other than
dividends of no more than $625,000 per quarter for the years
ending January 31, 2010 and January 30, 2011). As of
January 31, 2010, the Company was in compliance with, or
obtained waivers with respect to, all debt covenants. The
revolving credit facility is secured by a pledge of all of the
Companys accounts, equipment, inventory and other personal
property, including general intangible assets, as well as
100 percent of the stock of the Companys operating
subsidiary, Portrait Innovations, Inc. Although certain
affiliates of the Companys principal stockholders provided
limited guarantees of the revolving credit facility, those
guarantees were terminated in March 2010.
On June 17, 2010, the Company amended the revolving credit
agreement to extend the maturity date to February 1, 2012
and modified the above loan covenants.
Long-term debt as of February 1, 2009 and January 31,
2010 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Amended and Restated Loan Agreement, credit bearing interest at
LIBOR plus 250 basis points, accrued interest is payable
monthly, entire balance due on August 2, 2011
|
|
$
|
13,950
|
|
|
|
4,950
|
|
|
|
|
|
|
|
|
|
|
|
|
(13)
|
Financial
Instruments
|
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash
equivalents and accounts receivable. The Company limits the
amount of credit exposure of cash equivalents by placing its
temporary cash into investments of high credit quality.
Concentrations of credit risk with respect to accounts
receivable are limited due to the nature of the balance.
Accounts receivable consist primarily of credit card and
landlord receivables for which collectibility is reasonably
assured. Other miscellaneous receivables are evaluated for
collectibility on a regular basis and an allowance for doubtful
accounts is recorded as deemed necessary.
The carrying amounts for certain of the Companys financial
instruments, including cash and cash equivalents, accounts
receivable, accounts payable and other accrued liabilities
approximate fair value because of their short maturities. The
estimated fair value of the Companys credit facility is
based on observable corporate bond yields for comparable company
debt instruments and market bond yield indices as of each
F-21
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
valuation date (Level 2 inputs). The estimated fair value
and the carrying amount outstanding as of February 1, 2009
and January 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Estimated fair value
|
|
$
|
13,532
|
|
|
|
4,906
|
|
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
$
|
13,950
|
|
|
|
4,950
|
|
|
|
|
|
|
|
|
|
|
The Company accrued approximately $396,000, $601,000 and
$717,000, net of tax, for the years ended February 3, 2008,
February 1, 2009 and January 31, 2010, respectively in
its consolidated financial statements for the errors associated
with the administration of employee benefit plans and related
tax effects. The Company plans to voluntarily disclose the
errors to the appropriate tax authorities to seek a closing
agreement and settle the matter. Settlement with the respective
tax authorities could result in differences from the amounts
recorded in the consolidated financial statements. Such
differences will be reflected in operations in the period a
change in estimate is probable and can be estimated.
|
|
(15)
|
Earnings
Per Share (EPS)
|
Under ASC Topic 260 Earnings Per Share, the
two-class method is an earnings allocation formula that
determines net income (loss) per share for common stock and
participating securities, according to dividends declared and
participation rights in undistributed earnings. Under this
method, net income is reduced by the amount of dividends
declared in the current period for common shareholders and
participating security holders. The remaining earnings or
undistributed earnings are allocated between common
stock and participating securities to the extent that each
security may share in earnings as if all of the earnings for the
period had been distributed. Once calculated, the net income
(loss) per common share is computed by dividing the net income
(loss) attributed to common stockholders by the weighted average
number of common shares outstanding during each year presented.
Diluted net income (loss) attributable to common shareholders
per common share has been computed by dividing the net income
(loss) attributable to common shareholders by the weighted
average number of common shares outstanding plus the dilutive
effect of options and warrants outstanding during the applicable
periods computed using the treasury method. In cases where the
Company has a net loss, no dilutive effect is shown as options
and warrants become anti-dilutive.
F-22
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to
Consolidated Financial
Statements (Continued)
February 1, 2009 and January 31, 2010
The following table presents the calculation of historical basic
and diluted income per common share for the fiscal years ending
February 3, 2008, February 1, 2009 and
January 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,109
|
|
|
|
1,287
|
|
|
|
2,535
|
|
Preferred stock dividends
|
|
|
(2,256
|
)
|
|
|
(2,393
|
)
|
|
|
(2,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available for distribution
|
|
|
853
|
|
|
|
(1,106
|
)
|
|
|
142
|
|
Net income (loss) allocated to participating preferred stock
|
|
|
(489
|
)
|
|
|
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders
|
|
$
|
364
|
|
|
|
(1,106
|
)
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
2,944,759
|
|
|
|
3,879,927
|
|
|
|
4,164,487
|
|
Net income (loss) per common share basic
|
|
$
|
0.12
|
|
|
$
|
(0.29
|
)
|
|
$
|
0.02
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available for distribution
|
|
$
|
853
|
|
|
|
(1,106
|
)
|
|
|
142
|
|
Weighted average number of common shares outstanding
|
|
|
2,944,759
|
|
|
|
3,879,927
|
|
|
|
4,164,487
|
|
Net potential common share equivalents participating
preferred stock
|
|
|
3,948,779
|
|
|
|
|
|
|
|
4,154,257
|
|
Incremental shares from assumed conversions
|
|
|
|
|
|
|
|
|
|
|
|
|
Net potential common share equivalents stock options
|
|
|
47,169
|
|
|
|
|
|
|
|
65,365
|
|
Net potential common share equivalents warrants
|
|
|
152,256
|
|
|
|
|
|
|
|
160,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common and equivalent shares
outstanding diluted
|
|
|
7,092,963
|
|
|
|
3,879,927
|
|
|
|
8,544,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted
|
|
$
|
0.12
|
|
|
$
|
(0.29
|
)
|
|
$
|
0.02
|
|
The following redeemable convertible preferred stock, options to
purchase common stock, and warrants to purchase common stock
were excluded from the computation of diluted net income (loss)
per common share for the periods presented because including
them would have had an anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 1,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Redeemable convertible preferred stock
|
|
|
3,948,779
|
|
|
|
4,154,257
|
|
|
|
4,154,257
|
|
Options to purchase common shares
|
|
|
|
|
|
|
46,151
|
|
|
|
|
|
Warrants to purchase common shares
|
|
|
|
|
|
|
154,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
3,948,779
|
|
|
|
4,354,609
|
|
|
|
4,154,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
May 2,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(In thousands, except share data)
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,987
|
|
|
|
78
|
|
Accounts receivable, less allowance for doubtful accounts of $39
and $41 as of January 31, 2010 and May 2, 2010,
respectively
|
|
|
1,216
|
|
|
|
2,322
|
|
Store supplies inventory
|
|
|
726
|
|
|
|
638
|
|
Prepaid expenses
|
|
|
1,370
|
|
|
|
2,066
|
|
Deferred income taxes
|
|
|
836
|
|
|
|
824
|
|
Other assets
|
|
|
182
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,317
|
|
|
|
6,110
|
|
Property and equipment, net
|
|
|
50,636
|
|
|
|
51,860
|
|
Deferred financing costs
|
|
|
110
|
|
|
|
84
|
|
Deferred income taxes
|
|
|
698
|
|
|
|
1,120
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
57,761
|
|
|
|
59,174
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current installments of capital lease obligations
|
|
$
|
24
|
|
|
|
6
|
|
Accounts payable
|
|
|
4,093
|
|
|
|
3,005
|
|
Accrued compensation
|
|
|
5,811
|
|
|
|
1,715
|
|
Accrued and other liabilities
|
|
|
5,445
|
|
|
|
8,747
|
|
Current portion of deferred rent
|
|
|
1,434
|
|
|
|
1,612
|
|
Income taxes payable
|
|
|
1,843
|
|
|
|
716
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
18,650
|
|
|
|
15,801
|
|
Obligations under capital leases, excluding current installments
|
|
|
18
|
|
|
|
16
|
|
Long term debt
|
|
|
4,950
|
|
|
|
7,950
|
|
Other liabilities
|
|
|
7,512
|
|
|
|
7,681
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
31,130
|
|
|
|
31,448
|
|
|
|
|
|
|
|
|
|
|
Cumulative convertible redeemable preferred stock:
|
|
|
|
|
|
|
|
|
10% Series A cumulative convertible preferred stock,
$0.01 par value, liquidation value $1.67 per share.
Authorized 1,800,000 shares; issued and outstanding
1,800,000 shares as of January 31, 2010 and
May 2, 2010
|
|
|
3,304
|
|
|
|
3,379
|
|
10% Series B cumulative convertible preferred stock,
$0.01 par value, liquidation value $8.92 per share.
Authorized 2,354,257 shares; issued and outstanding
2,354,257 shares as of January 31, 2010 and
May 2, 2010
|
|
|
23,129
|
|
|
|
23,652
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value. Authorized
15,000,000 shares; issued and outstanding 4,167,446 and
4,356,446 shares as of January 31, 2010 and
May 2, 2010, respectively
|
|
|
42
|
|
|
|
44
|
|
Additional paid in capital
|
|
|
342
|
|
|
|
173
|
|
Accumulated deficit
|
|
|
(186
|
)
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
198
|
|
|
|
695
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
57,761
|
|
|
|
59,174
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements (unaudited).
F-24
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Thirteen
weeks ended May 3, 2009 and May 2, 2010
|
|
|
|
|
|
|
|
|
|
|
May 3,
|
|
|
May 2,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except share data)
|
|
|
|
(Unaudited)
|
|
|
Net sales
|
|
$
|
25,566
|
|
|
|
29,867
|
|
Cost of goods sold, excluding depreciation and amortization
|
|
|
6,424
|
|
|
|
7,418
|
|
Selling, general and administrative expenses
|
|
|
15,563
|
|
|
|
18,232
|
|
Depreciation and amortization expense
|
|
|
2,924
|
|
|
|
3,087
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
655
|
|
|
|
1,130
|
|
Interest income
|
|
|
(11
|
)
|
|
|
(9
|
)
|
Interest expense
|
|
|
148
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
518
|
|
|
|
1,077
|
|
Provision for income taxes
|
|
|
194
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
324
|
|
|
|
664
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Net income (loss) per common share basic
|
|
$
|
(0.07
|
)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted
|
|
$
|
(0.07
|
)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
basic
|
|
|
4,155,609
|
|
|
|
4,235,984
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common and equivalent shares
outstanding diluted
|
|
|
4,155,609
|
|
|
|
8,637,076
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements (unaudited).
F-25
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Thirteen
weeks ended May 3, 2009 and May 2, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.01
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Number of
|
|
|
Par
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
|
(In thousands, except share data)
|
|
|
|
(Unaudited)
|
|
|
Balances as of February 1, 2009
|
|
|
4,147,498
|
|
|
$
|
41
|
|
|
$
|
2,278
|
|
|
$
|
(2,720
|
)
|
|
$
|
(401
|
)
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
63
|
|
Stock options exercised
|
|
|
19,948
|
|
|
|
1
|
|
|
|
40
|
|
|
|
|
|
|
|
41
|
|
Preferred stock dividend accrual
|
|
|
|
|
|
|
|
|
|
|
(599
|
)
|
|
|
|
|
|
|
(599
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of May 3, 2009
|
|
|
4,167,446
|
|
|
$
|
42
|
|
|
$
|
1,782
|
|
|
$
|
(2,396
|
)
|
|
$
|
(572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.01
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Number of
|
|
|
Par
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
|
(In thousands, except share data)
|
|
|
|
(Unaudited)
|
|
|
Balances as of January 31, 2010
|
|
|
4,167,446
|
|
|
$
|
42
|
|
|
$
|
342
|
|
|
$
|
(186
|
)
|
|
$
|
198
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
116
|
|
Warrants exercised
|
|
|
189,000
|
|
|
|
2
|
|
|
|
313
|
|
|
|
|
|
|
|
315
|
|
Preferred stock dividend accrual
|
|
|
|
|
|
|
|
|
|
|
(598
|
)
|
|
|
|
|
|
|
(598
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
664
|
|
|
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of May 2, 2010
|
|
|
4,356,446
|
|
|
$
|
44
|
|
|
$
|
173
|
|
|
$
|
478
|
|
|
$
|
695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements (unaudited).
F-26
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Thirteen
weeks ended May 3, 2009 and May 2, 2010
|
|
|
|
|
|
|
|
|
|
|
May 3,
|
|
|
May 2,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
324
|
|
|
|
664
|
|
Adjustments to reconcile net income to net cash flows used in
operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,924
|
|
|
|
3,087
|
|
Amortization of debt financing costs
|
|
|
37
|
|
|
|
26
|
|
Loss on disposal of equipment
|
|
|
10
|
|
|
|
7
|
|
Share-based compensation
|
|
|
63
|
|
|
|
116
|
|
Deferred income taxes
|
|
|
(123
|
)
|
|
|
(410
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(663
|
)
|
|
|
(1,106
|
)
|
Store supplies inventory
|
|
|
199
|
|
|
|
88
|
|
Prepaid expenses
|
|
|
(162
|
)
|
|
|
(696
|
)
|
Other assets
|
|
|
(1
|
)
|
|
|
|
|
Accounts payable
|
|
|
(51
|
)
|
|
|
(976
|
)
|
Accrued expenses and other current liabilities
|
|
|
(1,904
|
)
|
|
|
(1,036
|
)
|
Income taxes payable
|
|
|
186
|
|
|
|
(1,127
|
)
|
Other liabilities
|
|
|
130
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities
|
|
|
969
|
|
|
|
(1,194
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(2,420
|
)
|
|
|
(4,012
|
)
|
Proceeds received from disposal of equipment
|
|
|
8
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,412
|
)
|
|
|
(4,010
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on capital lease obligations
|
|
|
(124
|
)
|
|
|
(20
|
)
|
Proceeds from borrowings
|
|
|
|
|
|
|
3,000
|
|
Proceeds from exercise of stock options
|
|
|
41
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
|
|
|
|
315
|
|
Cash dividends paid
|
|
|
(2,353
|
)
|
|
|
|
|
Bank fees for loan modification
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities
|
|
|
(2,477
|
)
|
|
|
3,295
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(3,920
|
)
|
|
|
(1,909
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
5,951
|
|
|
|
1,987
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
2,031
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
145
|
|
|
|
34
|
|
Cash paid for taxes
|
|
$
|
132
|
|
|
|
1,950
|
|
Supplemental disclosure of noncash financing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures included in accounts payable
|
|
$
|
|
|
|
|
(112
|
)
|
Capital expenditures included in accrued expenses
|
|
$
|
|
|
|
|
420
|
|
Accrued preferred stock dividends
|
|
$
|
599
|
|
|
|
598
|
|
See accompanying notes to condensed consolidated financial
statements (unaudited).
F-27
|
|
(1)
|
Organization
and Business
|
Portrait Innovations Holding Company (PH) and its wholly owned
subsidiary, Portrait Innovations, Inc. (PI) (PH and PI together,
the Company), are principally engaged in operating a digital
imaging portrait studio business. As of May 2, 2010, PI has
181 stores operating under the name of Portrait Innovations in
the United States.
PI was incorporated under the laws of the state of Delaware on
July 22, 2002. PI commenced operations on November 18,
2002.
PH, a non-operating holding company, was incorporated on
April 24, 2008. PH formed a non-operating subsidiary that
merged with PI, with PI being the surviving entity.
|
|
(2)
|
Summary
of Significant Accounting Policies
|
|
|
(a)
|
Basis
of Presentation and Consolidation
|
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles in the
United States of America (U.S. GAAP). The accompanying
consolidated financial statements include the accounts of PH and
its wholly owned subsidiary, PI. All material intercompany
amounts have been eliminated.
The condensed consolidated financial statements as of
May 2, 2010 and for the thirteen weeks ended May 3,
2009 and May 2, 2010, are unaudited. In addition, certain
information and footnote disclosures normally included in
financial statements prepared in accordance with U.S. GAAP
have been condensed or omitted. The interim financial statements
reflect all adjustments, which are, in the opinion of
management, necessary for a fair presentation in conformity with
U.S. GAAP. The interim financial statements should be read
in conjunction with the audited financial statements and notes
thereto for the year ended January 31, 2010.
The Company has historically experienced and expects to continue
to experience seasonal fluctuations in its revenues, operating
income and net income due to the seasonal nature of the retail
business. The highest revenue period for the Company is the
fourth quarter, which includes the holiday selling season. A
disproportionate amount of the Companys revenues and a
substantial amount of the Companys operating and net
income are realized during the fourth quarter. If for any reason
the Companys revenues were below seasonal norms during the
fourth quarter, the Companys annual results of operations
could be adversely affected. The Companys quarterly
results of operations could also fluctuate significantly as a
result of a variety of factors, including the timing of new
store openings.
The Companys consolidated condensed balance sheet as of
January 31, 2010 has been derived from the audited
consolidated balance sheet as of that date.
The preparation of consolidated financial statements in
conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Significant items subject to estimates and assumptions
include the carrying amount of property and equipment,
share-based compensation, income tax uncertainties and the
valuation allowance for deferred tax assets. Actual results
could differ from those estimates.
F-28
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements (Continued)
January 31, 2010 and May 2, 2010
(Unaudited)
The Companys reporting periods are generally thirteen
weeks and periodically consist of 14 weeks because the
Companys fiscal year ends on the Sunday nearest the
January month end. The fiscal years ended February 3, 2008,
February 1, 2009 and January 31, 2010 were 53-week,
52-week and 52-week years, respectively.
|
|
(3)
|
Property
and Equipment
|
Property and equipment as of January 31, 2010 and
May 2, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
May 2,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Leasehold improvements
|
|
$
|
50,025
|
|
|
|
52,367
|
|
Studio furniture and equipment
|
|
|
34,434
|
|
|
|
36,972
|
|
Computer equipment
|
|
|
1,815
|
|
|
|
1,875
|
|
Equipment under capital lease
|
|
|
667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, gross
|
|
|
86,941
|
|
|
|
91,214
|
|
Accumulated depreciation and amortization
|
|
|
(36,305
|
)
|
|
|
(39,354
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
50,636
|
|
|
|
51,860
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
Cumulative
Convertible Redeemable Preferred Stock
|
A rollforward of preferred stock is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
Number of
|
|
|
Carrying
|
|
|
Number of
|
|
|
Carrying
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Total
|
|
|
|
(In thousands, except share data)
|
|
|
Balances as of February 1, 2009
|
|
|
1,800,000
|
|
|
$
|
3,299
|
|
|
|
2,354,257
|
|
|
$
|
23,094
|
|
|
$
|
26,393
|
|
Preferred stock dividend accrual payable in cash
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
523
|
|
|
|
598
|
|
Preferred stock dividend payment
|
|
|
|
|
|
|
(294
|
)
|
|
|
|
|
|
|
(2,059
|
)
|
|
|
(2,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of May 3, 2009
|
|
|
1,800,000
|
|
|
$
|
3,080
|
|
|
|
2,354,257
|
|
|
$
|
21,558
|
|
|
$
|
24,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
Number of
|
|
|
Carrying
|
|
|
Number of
|
|
|
Carrying
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Total
|
|
|
|
(In thousands, except share data)
|
|
|
Balances as of January 31, 2010
|
|
|
1,800,000
|
|
|
$
|
3,304
|
|
|
|
2,354,257
|
|
|
$
|
23,129
|
|
|
$
|
26,393
|
|
Preferred stock dividend accrual payable in cash
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
523
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of May 2, 2010
|
|
|
1,800,000
|
|
|
$
|
3,379
|
|
|
|
2,354,257
|
|
|
$
|
23,652
|
|
|
$
|
26,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements (Continued)
January 31, 2010 and May 2, 2010
(Unaudited)
As of May 2, 2010, PH was authorized to issue
15,000,000 shares of common stock, par value $0.01 per
share. On August 7, 2002, in connection with a sale of
Series A Preferred Stock, PI issued to the investors
warrants for the purchase of the common stock of PI. As of
January 31, 2010, the warrants were exercisable for
189,000 shares of the common stock of PH at an exercise
price of $1.67 per share. In March and April 2010, all of these
warrants were exercised by the holders.
The provision for income taxes is based on the current estimate
of the annual effective tax rate and is adjusted as necessary
for discrete events occurring in a particular period. The
effective income tax rate for the thirteen weeks ended
May 3, 2009 was 37.5% compared to 38.3% for the thirteen
weeks ended May 2, 2010. The higher effective income tax
rate for thirteen weeks ended May 2, 2010 was primarily the
result of the increase in the applicable state effective tax
rate.
|
|
(7)
|
Share-Based
Compensation
|
As of May 2, 2010, the Company has the following stock
option plans that reserve shares of common stock for issuance to
executives and key employees: the 2004 Portrait Innovations,
Inc. Stock Option Plan and the 2009 Portrait Innovations Holding
Company Stock Option Plan (the Plans). The Plans were approved
by the Companys shareholders. The Plans authorize the
grant of up to 780,000 shares of the Companys common
stock.
Stock options granted under the Plans have
10-year
terms and vest on a pro rata basis over a five-year term with
the first vesting date on the anniversary of the grant date.
Share-based compensation expense of $63,000 and $116,000 was
recorded in the consolidated statements of income during the
thirteen weeks ended May 3, 2009 and May 2, 2010,
respectively.
For the thirteen weeks ended May 2, 2010, the only activity
which occurred was the forfeiture of 4,880 stock options.
|
|
(8)
|
Related
Party Transactions
|
The Companys revolving credit facility with a bank lender
was jointly guaranteed by the holders of the Companys
Series A and Series B Preferred Stock in the principal
amount of up to $5,000,000. These guaranties were released by
the bank on March 18, 2010 and have no continuing force or
effect.
One of the Companys directors is a minority owner and
former manager of, and an affiliate of one of the Companys
principal stockholders is also a minority owner of, the entity
from which the Company leases its corporate headquarters. This
lease is on a triple net basis. Rent paid was $103,000 and
$121,000 for the thirteen weeks ended May 3, 2009 and
May 2, 2010, respectively.
|
|
(9)
|
Debt
Financing Arrangements
|
PI has a revolving credit facility with a bank lender for up to
$17 million, which amount increases to $20 million on
August 4, 2010. Borrowings under the revolving credit
agreement are not subject to a borrowing base limitation. At
May 2, 2010, loans in the aggregate principal amount of
$8.0 million were outstanding under this facility and the
remaining $9.0 million was available for borrowing at that
date. The revolving credit facility matures on August 2,
2011 and bears interest at an annual rate of LIBOR plus a
margin, ranging from 2.50 to 3.00 percentage points based
on the ratio of the Companys funded debt to
F-30
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements (Continued)
January 31, 2010 and May 2, 2010
(Unaudited)
EBITDA (as defined in the credit agreement), which rate was
2.78% as of May 2, 2010. The applicable margin is adjusted
quarterly based on a calculation of the ratio of funded debt to
EBITDA for the trailing four quarters. An unused commitment fee
based on the difference between the amount of the facility and
outstanding borrowings will begin to accrue under the facility
once the Company receives an equity investment of
$10 million or more. The unused commitment fee is at an
annual rate of 0.375%.
The revolving credit facility contains financial covenants,
which among other things, require the Company to maintain a
minimum EBITDA level, a maximum ratio of adjusted funded debt to
EBITDA plus rent expense and a minimum fixed charge coverage
ratio. In addition, the revolving credit agreement includes
customary negative covenants, including a covenant restricting
the Companys ability to pay dividends (other than
dividends of no more than $625,000 per quarter for the years
ending January 31, 2010 and January 30, 2011). As of
May 2, 2010, the Company was in compliance with all debt
covenants. The revolving credit facility is secured by a pledge
of all of the Companys accounts, equipment, inventory and
other personal property, including general intangible assets, as
well as 100 percent of the stock of the Companys
operating subsidiary, PI. Although certain affiliates of the
Companys principal stockholders provided limited
guarantees of the revolving credit facility, those guarantees
were terminated in March 2010.
On June 17, 2010, the Company amended the revolving credit
agreement to extend the maturity date to February 1, 2012
and modified the above loan covenants.
Long-term debt as of January 31, 2010 and May 2, 2010
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
May 2,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Amended and Restated Loan Agreement, credit bearing interest at
LIBOR plus 250 basis points, accrued interest is payable
monthly, entire balance due on August 2, 2011
|
|
$
|
4,950
|
|
|
|
7,950
|
|
|
|
|
|
|
|
|
|
|
|
|
(10)
|
Financial
Instruments
|
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash
equivalents and accounts receivable. The Company limits the
amount of credit exposure of cash equivalents by placing its
temporary cash into investments of high credit quality.
Concentrations of credit risk with respect to accounts
receivable are limited due to the nature of the balance.
Accounts receivable consist primarily of credit card and
landlord receivables for which collectibility is reasonably
assured. Other miscellaneous receivables are evaluated for
collectibility on a regular basis and an allowance for doubtful
accounts is recorded as deemed necessary.
The carrying amounts for certain of the Companys financial
instruments, including cash and cash equivalents, accounts
receivable, accounts payable and other accrued liabilities
approximate fair value because of their short maturities. The
fair value of variable interest debt is equal to its carrying
amount. The estimated fair value of the Companys credit
facility is based on observable corporate bond yields for
comparable company debt instruments and market bond yield
indices as of each valuation date (Level 2 inputs). The
F-31
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements (Continued)
January 31, 2010 and May 2, 2010
(Unaudited)
estimated fair value and the carrying amount outstanding as of
January 31, 2010 and May 2, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
May 2,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Estimated fair value
|
|
$
|
4,906
|
|
|
|
7,881
|
|
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
$
|
4,950
|
|
|
|
7,950
|
|
|
|
|
|
|
|
|
|
|
As of January 31, 2010, the Company has accrued
$1.7 million, net of tax, for the errors associated with
the administration of employee benefit plans and related tax
effects. For the thirteen weeks ending May 2, 2010, no
additional settlement accruals were required as the Company
ceased the plan. The Company plans to voluntarily disclose the
errors to the appropriate tax authorities to seek a closing
agreement and settle the matter. Settlement with the respective
tax authorities could result in differences from the amounts
recorded in the consolidated financial statements. Such
differences will be reflected in operations in the period a
change in estimate is probable and can be estimated.
F-32
PORTRAIT
INNOVATIONS HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements (Continued)
January 31, 2010 and May 2, 2010
(Unaudited)
|
|
(12)
|
Earnings
Per Share (EPS)
|
The following table presents the calculation of historical basic
and diluted net income (loss) per common share for the thirteen
weeks ending May 3, 2009 and May 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
May 3,
|
|
|
May 2,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
324
|
|
|
|
664
|
|
Preferred stock dividends
|
|
|
(599
|
)
|
|
|
(598
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) available for distribution
|
|
|
(275
|
)
|
|
|
66
|
|
Net income (loss) allocated to participating preferred stock
|
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders
|
|
$
|
(275
|
)
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
4,155,609
|
|
|
|
4,235,984
|
|
Net income (loss) per common share basic
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Net income (loss) available for distribution
|
|
$
|
(275
|
)
|
|
|
66
|
|
Weighted average number of common shares outstanding
|
|
|
4,155,609
|
|
|
|
4,235,984
|
|
Net potential common share equivalents participating
preferred stock
|
|
|
|
|
|
|
4,154,257
|
|
Incremental shares from assumed conversions
|
|
|
|
|
|
|
|
|
Net potential common share equivalents stock options
|
|
|
|
|
|
|
144,379
|
|
Net potential common share equivalents warrants
|
|
|
|
|
|
|
102,456
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common and equivalent shares
outstanding diluted
|
|
|
4,155,609
|
|
|
|
8,637,076
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
The following redeemable convertible preferred stock, options to
purchase common stock, and warrants to purchase common stock
were excluded from the computation of diluted net income (loss)
per common share for the periods presented because including
them would have had an anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
May 3,
|
|
|
May 2,
|
|
|
|
2009
|
|
|
2010
|
|
|
Redeemable preferred stock
|
|
|
4,154,257
|
|
|
|
4,154,257
|
|
Options to purchase common shares
|
|
|
40,931
|
|
|
|
|
|
Warrants to purchase common shares
|
|
|
154,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
4,349,389
|
|
|
|
4,154,257
|
|
|
|
|
|
|
|
|
|
|
F-33
Shares
PORTRAIT INNOVATIONS HOLDING
COMPANY
Common Stock
PROSPECTUS
|
|
J.P.
Morgan |
Wells Fargo Securities |
,
2010
We have not authorized anyone to provide any information
other than that contained in this prospectus or in any free
writing prospectus prepared by or on behalf of us or to which we
have referred you. We take no responsibility for, and can
provide no assurance as to the reliability of, any other
information that others may give you. The company, the selling
stockholders and the underwriters are offering to sell, and
seeking offers to buy, common stock only in jurisdictions where
offers and sales are permitted. You should assume that the
information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery
of this prospectus or of any sale of common stock. Our business,
results of operations, financial condition and prospects may
have changed since that date.
No action is being taken in any jurisdiction outside the
United States to permit a public offering of the common shares
or possession or distribution of this prospectus in that
jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are
required to inform themselves about and to observe any
restrictions as to this offering and the distribution of this
prospectus applicable to that jurisdiction.
Until , 2010, all dealers that
buy, sell or trade in our common shares, whether or not
participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The following table sets forth the costs, other than
underwriting discounts and commissions, we will pay in
connection with the sale of all of the common stock being
registered. All amounts, except the SEC registration fee, the
FINRA filing fee and the NASDAQ Stock Market listing fee, are
estimates.
|
|
|
|
|
Registration fee
|
|
$
|
5,348.00
|
|
FINRA filing fee
|
|
$
|
8,000.00
|
|
NASDAQ listing fee
|
|
|
*
|
|
Blue sky fees and expenses
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Accounting fees and expenses
|
|
|
*
|
|
Transfer agent and registrar fees and expenses
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
* |
|
To be furnished by amendment. |
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Section 102(b)(7) of the Delaware General Corporation Law
(DGCL) permits a Delaware corporation to include a provision in
its certificate of incorporation eliminating or limiting the
personal liability of a director to the corporation, but not an
officer in his or her capacity as an officer, to the corporation
or its stockholders for monetary damages for any breach of
fiduciary duty as a director, except that the provision cannot
limit the liability of a director for:
|
|
|
|
|
any breach of the directors duty of loyalty to the
corporation or its stockholders,
|
|
|
|
acts or omissions by the director not in good faith or that
involve intentional misconduct or a knowing violation of law,
|
|
|
|
liability under Section 174 of the DGCL for unlawful
payment of dividends and unlawful stock purchases and
redemptions by the corporation, or
|
|
|
|
any transaction from which the director derived an improper
personal benefit.
|
Our amended and restated certificate of incorporation will
provide that our directors will not be personally liable to us
or our stockholders for monetary damages for breach of fiduciary
duty as a director except to the extent the exclusion from
liability is not permitted under the DGCL.
Section 145(b) of the DGCL permits a corporation to
indemnify any individual made a party or threatened to be made a
party to any threatened, pending or completed action, suit or
proceeding because he or she is or was an officer, director,
employee or agent of the corporation, or is or was serving at
the request of the corporation as an officer, director, employee
or agent of another corporation or entity, against expenses,
judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with the action, suit or
proceeding:
|
|
|
|
|
if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best
interests of the corporation; and
|
|
|
|
in the case of a criminal proceeding, he or she had no
reasonable cause to believe that his or her conduct was unlawful.
|
Our amended and restated certificate of incorporation and bylaws
will provide for such indemnification.
II-1
Section 145(c) of the DGCL provides that to the extent a
present or former director or officer who has been successful on
the merits or otherwise in his or her defense of any threatened,
pending or completed action, suit or proceeding, or any claims,
issue or matter therein, referred to above, such person shall be
indemnified against expenses (including attorneys fees)
actually and reasonably incurred in connection with that
defense. Such expenses incurred by a current officer or director
of a corporation in defending any civil, criminal,
administrative or investigative action, suit or proceeding may
be paid by the corporation in advance of the final disposition
of the matter if the officer or director agrees to repay the
advanced amount if it ultimately shall be determined that he or
she is not entitled to the indemnification. As provided in our
amended and restated certificate of incorporation and bylaws, we
may also advance expenses to former officers or directors or
other employees or agents of the corporation as deemed
appropriate by the corporations board of directors. These
provisions are not exclusive of any other rights to which an
indemnified person may be entitled under our amended and
restated certificate of incorporation or bylaws, by a vote of
stockholders or disinterested directors, by agreement or
otherwise.
We maintain directors and officers liability
insurance for directors, officers, employees and agents of our
company, against certain liabilities for actions taken by such
persons in their capacity as such, including liabilities under
federal securities laws.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
Portrait Innovations Holding Company was formed on
April 24, 2008 and issued no securities prior to that date.
On April 24, 2008, Portrait Innovations, Inc. merged with a
wholly-owned subsidiary of Portrait Innovations Holding Company
and as a consequence became a wholly owned subsidiary of
Portrait Innovations Holding Company. As a result of that
transaction, all of the existing stockholders of Portrait
Innovations, Inc. became stockholders of Portrait Innovations
Holding Company. Except as otherwise noted, for the transactions
described in this section, any transactions occurring prior to
April 24, 2008 involved the issuance of securities of
Portrait Innovations, Inc. and any transactions occurring on or
after April 24, 2008 involved the issuance of securities of
Portrait Innovations Holding Company.
The following is a summary of sales of our securities during the
past three years that were not registered under the Securities
Act:
1. On June 1, 2007, we issued and sold
56,053.75 shares of our series B preferred stock to
Southeastern Private Investment Fund IV, LLC for an
aggregate purchase price of $1,000,000.
2. On June 1, 2007, we issued and sold
56,053.75 shares of our series B preferred stock to
Emergomed Limited for an aggregate purchase price of $1,000,000.
3. On July 31, 2007, upon the exercise of stock
options, we issued 1,780 shares of our common stock to
certain of our employees, in exchange for $5,528.40.
4. On February 3, 2008, in satisfaction of accrued
dividends on our series A and series B preferred stock
in the amount of $2,209,794.07, we issued 601,524 shares of
our common stock to Southeastern Private Investment
Fund IV, LLC.
5. On February 3, 2008, in satisfaction of accrued
dividends on our series A and series B preferred stock
in the amount of $2,204,177.63, we issued 600,894 shares of
our common stock to Emergo Alpha Fund Limited.
II-2
6. On April 24, 2008, in connection with the formation
of our holding company structure, we issued to the stockholders
of Portrait Innovations, Inc.:
|
|
|
|
|
an aggregate of 4,147,498 shares of our common stock in
exchange for an aggregate of 4,147,498 shares of Portrait
Innovations, Inc. common stock.
|
|
|
|
an aggregate of 1,800,000 shares of our series A
preferred stock in exchange for an aggregate of
900,000 shares of Portrait Innovations, Inc. series A
preferred stock.
|
|
|
|
an aggregate of 2,354,257 shares of our series B
preferred stock in exchange for an aggregate of
1,177,128.5 shares of Portrait Innovations, Inc.
series B preferred stock.
|
7. On April 3, 2009, upon the exercise of stock
options, we issued 19,948 shares of our common stock to
certain of our employees, in exchange for $39,890.23.
8. On December 7, 2009, in connection with his
becoming an employee, we granted to Robert Venetucci options to
purchase 40,000 shares of our common stock at an exercise
price of $8.920 per share.
9. In March and April 2010, HENTOM, LLC and Emergo Alpha
Fund Limited each exercised warrants to purchase
94,500 shares of our common stock, in exchange for an
aggregate payment of $315,006.30.
10. During the period between June 1, 2007 and
January 31, 2010, we granted to our employees and officers
options to purchase an aggregate of 260,998 shares of our
common stock at a weighted average exercise price of $8.92 per
share, pursuant to the 2004 Portrait Innovations, Inc. Stock
Option Plan, as amended, and the 2009 Portrait Innovations
Holdings Company Stock Option Plan, as amended (no options have
since been granted from January 31, 2010 through
June 29, 2010). Any options to purchase the stock of
Portrait Innovations, Inc. granted but not exercised prior to
April 24, 2008 were converted into options to purchase the
same number of shares of Portrait Innovations Holding Company
common stock.
None of these transactions involved any underwriters,
underwriting discounts or commissions, or any public offering.
The securities referenced in items (1), (2), (4), (5) and
(9) were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities
Act. These transactions did not involve any public offering and
all recipients of these securities were accredited investors
within the meaning of Rule 501 of Regulation D of the
Securities Act. The securities referenced in item (6) were
issued in reliance upon the exemption in Section 4(2) of
and Rule 506 under the Securities Act. The securities were
issued in connection with the exchange of stock necessary to
effect our reorganization into a holding company structure and
did not involve any public offering. The securities referenced
in items (3), (7), (8) and (10) were issued in
reliance on the exemption from registration provided by
Section 3(b) of the Securities Act and Rule 701
promulgated thereunder. These securities were issued pursuant to
written compensatory benefit plans (or written contracts or
arrangements relating to compensation) established for our
employees and officers.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) The list of exhibits is incorporated by reference to
the Exhibit Index on page II-6.
(b) All consolidated financial statement schedules have
been omitted because they are either inapplicable or the
required information has been given in the consolidated
financial statements or the notes thereto.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the SEC such indemnification is against public
policy as
II-3
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 1 to the
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of
Charlotte, State of North Carolina, on August 6, 2010.
Portrait Innovations Holding Company
John Grosso
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the registration statement has been
signed by the following persons in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ John
Grosso
John
Grosso
|
|
President and Chief Executive Officer, Director
(principal executive officer)
|
|
August 6, 2010
|
|
|
|
|
|
/s/ William
K. Bailey II
William
K. Bailey II
|
|
Chief Financial Officer, Vice President of Finance and Investor
Relations
(principal financial and accounting officer)
|
|
August 6, 2010
|
|
|
|
|
|
*
John
M. Davis
|
|
Director
|
|
August 6, 2010
|
|
|
|
|
|
*
Thomas
B. Henson
|
|
Director
|
|
August 6, 2010
|
|
|
|
|
|
*
Mike
Balm
|
|
Director
|
|
August 6, 2010
|
|
|
|
|
|
|
|
*By:
|
|
/s/ John
Grosso
John
Grosso, as Attorney-in-Fact
|
|
|
|
|
II-5
Exhibit Index
|
|
|
|
|
Number
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement
|
|
3
|
.1*
|
|
Form of Amended and Restated Certificate of Incorporation of
Portrait Innovations Holding Company
|
|
3
|
.2*
|
|
Form of Amended and Restated Bylaws of Portrait Innovations
Holding Company
|
|
4
|
.1*
|
|
Specimen Common Stock Certificate
|
|
4
|
.2#
|
|
Amended and Restated Investors Rights Agreement dated as
of June 29, 2010 between Portrait Innovations Holding
Company and the stockholders party thereto
|
|
5
|
.1*
|
|
Opinion of Robinson, Bradshaw & Hinson, P.A.
|
|
10
|
.1#+
|
|
2004 Portrait Innovations, Inc. Stock Option Plan, as amended
|
|
10
|
.2#+
|
|
2009 Amended and Restated Portrait Innovations Holding Company
Stock Option Plan
|
|
10
|
.3+*
|
|
Form of Stock Option Agreement
|
|
10
|
.4#+
|
|
Employment Agreement dated as of December 7, 2009, between
Portrait Innovations, Inc. and Robert Venetucci
|
|
10
|
.5#**
|
|
Supply Agreement dated as of July 26, 2008 between Portrait
Innovations, Inc. and FUJIFILM U.S.A., Inc.
|
|
10
|
.6#
|
|
First Amendment to Amended and Restated Loan Agreement dated
June 17, 2010 by and between Portrait Innovations, Inc. and
Wells Fargo Bank, N.A. (successor by merger to Wachovia Bank,
National Association)
|
|
10
|
.7#
|
|
Amended and Restated Loan Agreement dated as of October 30,
2009, by and between Wachovia Bank, National Association and
Portrait Innovations, Inc.
|
|
10
|
.8#
|
|
Amendment to Amended and Restated Promissory Note dated
June 17, 2010 by and between Portrait Innovations, Inc. and
Wells Fargo Bank, N.A. (successor to Wachovia Bank, National
Association)
|
|
10
|
.9#
|
|
Amended and Restated Promissory Note dated October 30, 2009
issued by Portrait Innovations, Inc. in favor of Wachovia Bank,
National Association
|
|
10
|
.10#
|
|
Security Agreement dated March 19, 2009, between Portrait
Innovations, Inc. and Wachovia Bank, National Association
|
|
10
|
.11#
|
|
Amended and Restated Pledge Agreement dated as of March 19,
2009, by and between Portrait Innovations Holding Company and
Wachovia Bank, National Association
|
|
21
|
.1#
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm
|
|
23
|
.2*
|
|
Consent of Robinson, Bradshaw & Hinson, P.A. (included
as part of Exhibit 5.1)
|
|
24
|
.1#
|
|
Power of Attorney (included in signature page)
|
|
99
|
.1#
|
|
Consent of Director Nominee
|
|
99
|
.2#
|
|
Consent of Director Nominee
|
|
|
|
* |
|
To be filed by amendment. |
|
+ |
|
Denotes management compensation plan or contract. |
|
|
|
** |
|
Portions of this Exhibit have been omitted and filed separately
with the Securities and Exchange Commission as part of an
application for confidential treatment pursuant to the
Securities Act. |
II-6