-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BU8byuxRtxk+c2mTMcERaxseCFCaUE4eR1wvgDANRXWYjJx5Fsd586W08aveuuus VwjZafz5RBpstv2XpE6RSA== 0000025354-99-000007.txt : 19990506 0000025354-99-000007.hdr.sgml : 19990506 ACCESSION NUMBER: 0000025354-99-000007 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19990206 FILED AS OF DATE: 19990505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CPI CORP CENTRAL INDEX KEY: 0000025354 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 431256674 STATE OF INCORPORATION: DE FISCAL YEAR END: 0203 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10204 FILM NUMBER: 99611653 BUSINESS ADDRESS: STREET 1: 1706 WASHINGTON AVE CITY: ST LOUIS STATE: MO ZIP: 63103-1790 BUSINESS PHONE: 3142311575 MAIL ADDRESS: STREET 1: 1706 WASHINGTON AVE CITY: ST LOUIS STATE: MO ZIP: 63103 10-K405 1 UNITED STATES SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K405 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 6, 1999 COMMISSION FILE NUMBER 1-10204 ------------------------------ CPI CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 43-1256674 (State of Incorporation) (I.R.S. Employer Identification No.) 1706 WASHINGTON AVENUE ST. LOUIS, MISSOURI 63103-1790 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(314)231-1575 ------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------------------ ----------------------- Common Stock $.40 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES __X__ NO _____. INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. YES __X__ NO _____. Aggregate market value of the Registrant's voting stock held by non-affiliates, based upon the closing price of said stock on the New York Stock Exchange - Composite Transaction Listing on May 4, 1999 ($27.00 per share): $252,827,298. As of May 4, 1999, 9,906,506 shares of the Common Stock, $0.40 par value, of the Registrant were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to Shareholders for the year ended February 6, 1999, are incorporated by reference into Parts I, II and IV of this Report. Portions of the Proxy Statement relating to the Annual Meeting of Shareholders to be held June 22, 1999 are incorporated by reference into Part III of this Report. PAGE NUMBERS REFER TO PAPER DOCUMENT TABLE OF CONTENTS PAGE PART I - ------ Item 1. Business 3 Item 2. Properties 7 Item 3. Legal Proceedings 8 Item 4. Results of Votes of Security Holders 8 PART II - ------- Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 9 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 9 Item 8. Financial Statements and Supplementary Data 10 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 10 PART III - -------- Item 10. Directors, Executive Officers, Promoters, and Control Persons of the Registrant 11 Item 11. Executive Compensation 11 Item 12. Security Ownership of Certain Beneficial Owners and Management 11 Item 13. Certain Relationships and Related Transactions 11 PART IV - ------- Item 14. Exhibits, Financial Statement Schedules and and Reports on Form 8-K 12 Signatures 22 Independent Auditors Report 24 Schedule II Valuation and Qualifying Accounts 25
PART I ITEM I. BUSINESS THE COMPANY - ----------- CPI Corp. is a holding company engaged, through its subsidiaries, in developing and marketing consumer services and related products through a network of centrally-managed, small retail locations. Founded in 1942, CPI Corp. became a publicly held company in 1982 and currently operates professional portrait studios throughout the United States, Canada and Puerto Rico and posters, prints and framing outlets throughout the United States. Unless the context otherwise requires, references herein to the "Company" or "CPI Corp." mean CPI Corp., its consolidated subsidiaries and their predecessor companies. EXISTING BUSINESSES - ------------------- For the fiscal year ended February 6, 1999, approximately 84% of net sales and substantially all of the operating earnings (before deduction of general corporate expenses, net interest income (expense), other income and income tax expense) were derived from the Sears Portrait Studio business. The Company has operated portrait studios as a Sears, Roebuck and Company ("Sears") licensee since 1961, when it was one of more than 15 Sears portrait photography licensees. Today, the Company is the only operator of Sears Portrait Studios in the United States, Canada and Puerto Rico. The Company is materially dependent upon the continued goodwill of Sears and the integrity of the Sears name in the retail marketplace. The Company believes that its relationship with Sears is excellent and that it has been beneficial to both companies. (See "BUSINESS RELATIONSHIP WITH SEARS.") In addition, since the 1993 acquisition of Prints Plus, Inc. ("Prints Plus"), the Company operates a wall decor business. Prints Plus is a posters, prints and custom framing retail chain with 152 stores located in malls throughout the United States. The Company's executive offices are located at 1706 Washington Avenue,St. Louis, Missouri, 63103-1790. CPI Corp.'s telephone number is (314) 231-1575 and address on the world-wide web is http://www.cpicorp.com. OTHER BUSINESSES - ---------------- In 1982, the Company started a photofinishing business and continued operations until October 1996. The following is a chronological listing of the Company's business activities in the photofinishing business: 3 1982-1991 Expanded photofinishing business to include 334 locations operating under the name of CPI Photofinishing. August 1991- Acquired Fox Photo, Inc., which operated 305 locations under the name Fox Photo. December 1992- Purchased operational assets of Pemtom, Inc., operating 25 locations under the name of Proex. June 1996- Sold 50 one-hour photofinishing stores to Wolf Camera, Inc. October 1996- Established a joint venture with Eastman Kodak Company by selling 51% interest in existing photofinishing operations. October 1997- Sold remaining 49% interest to Eastman Kodak Company and entered into a two-year Non- competition and Nonsolicitation Agreement in which the Company agreed not to engage in the retail photofinishing business and not to employ previous photofinishing employees without consent. The Company, from 1988 until 1996, also operated an Electronic Publishing division. In April 1996, the Company announced its intentions to sell the assets of this division, and in May of 1996, the sale was completed and the Company classified the Electronic Publishing operation as a discounted operation in fiscal year 1995 and reclassified the prior years' financial statements to reflect this change. RELATIONSHIP WITH SEARS - ----------------------- The Company operates its 1,027 Sears Portrait Studio locations under multiple license agreements. The agreements are terminable by either the Company or Sears with respect to any or all studios upon 90-days notice. Early in 1993, Sears announced plans to close 113 stores, which included 38 Sears stores with portrait studios. The Company relocated some of these studios to new sites in the same market areas. Except in connection with store closings, Sears has never terminated the operation of any Company studio under any license agreement. The relationship with Sears, which started in 1959, is long-standing and the Company has no reason to believe that Sears will exercise its rights under the agreements to reduce materially the scope of the Company's business with Sears. In the United States, the Company and Sears have entered into three license agreements (Sears, Off-Mall and Puerto Rico) for fixed location studios as of January 1, 1999. These agreements expire on December 31, 2003. The Sears and Puerto Rico agreements provide for the Company to pay Sears a license fee of 15% of total annual net sales for studios located in a Sears store. The Off-Mall agreement provides for the Company to 4 pay Sears a license fee of 7.5% of total annual net sales for studios not located in a Sears store but located in retail locations where Sears does not otherwise have a presence. Net sales for all agreements are defined as gross sales less customer returns, allowances and sales taxes. The Company provides all studio furniture, equipment, fixtures and leasehold improvements and conducts advertising at its own expense, and is responsible for hiring, training and compensating the Company employees and must indemnify Sears against all claims. In Canada, all of the Company's studios operate under a separate nonexclusive license agreement with Sears Canada, Inc., a subsidiary of Sears. The agreement, originally negotiated in 1977, renews automatically on a year-to-year basis but is terminable by either party on 60 days' notice. The license fee is 15% of net sales. The Company provides all studio furniture, equipment, fixtures and leasehold improvements and conducts all advertising at its own expense and is responsible for its Canadian employees. As a Sears licensee, the Company enjoys the benefits of its use of the Sears name, Sears' daily cashiering and bookkeeping system, store security services and customers' ability to use their Sears credit cards to purchase the Company's products or services, for which Sears bears the credit risk of authorized credit card use. FOR ADDITIONAL INFORMATION, SEE THE REGISTRANT'S 1998 ANNUAL REPORT TO SHAREHOLDERS, EXHIBIT 13 OF THIS FILING, IN THE DISCUSSION ENTITLED "SEARS AND CPI." COMPETITION - ----------- In the portrait photography business, the Company competes with a number of companies that operate fixed-location, traveling and freestanding photography studios. Independent professional photographers also compete with the Company in various locations. The Company believes that its portrait photography products are competitive in terms of price, quality and convenience of purchase with similar products of its competitors. In the wall decor segment, the Company competes with numerous national, regional and local framing retailers serving the home furnishings market. The primary competitors in this business are franchise locations, small regional chains and many individual stores which focus on custom framing. Other competitors in this segment include mass merchants and other specialty home furnishings stores which offer a fixed selection of pre-framed prints. The Company believes it is competitive in this segment by 5 offering a large selection of prints and frames, fast custom framing service and competitive pricing. SUPPLIER RELATIONSHIPS - ---------------------- The Company purchases photographic paper and film for its studio operations from two major manufacturers. The Company purchases other equipment and supplies used in its studios from a number of suppliers and is not dependent upon any supplier for any specific kind of equipment. The Company has had no difficulty in the past obtaining sufficient material to conduct its businesses. The Company believes its relations with suppliers are good. SEASONALITY - ----------- In the professional portrait photography business, sales are seasonal, with the largest volume occurring in the 16-week third and 12-week fourth fiscal quarters preceding and including the Thanksgiving/Christmas season. In the wall decor business, sales are seasonal, with the largest volume occurring in the fourth fiscal quarter preceding and including the Thanksgiving/Christmas season. EMPLOYEES - --------- At February 6, 1999, the Company had approximately 8,178 employees. Approximately 5,221 of these employees were part-time or temporary employees. The Company's employees are not members of any union and the Company has experienced no work stoppages. The Company believes that its relations with its employees are good. ADDITIONAL INFORMATION REQUIRED UNDER THIS ITEM I IS CONTAINED IN THE REGISTRANT'S 1998 ANNUAL REPORT TO SHAREHOLDERS, EXHIBIT 13 OF THIS FILING, IN THE DISCUSSION OF THE COMPANY'S BUSINESS SEGMENTS FOUND IN THE NOTES TO CONSOLIDATED STATEMENTS, ITEM 11 ENTITLED "INDUSTRY SEGMENT INFORMATION." 6 ITEM 2. PROPERTIES The following table sets forth certain information concerning the Company's principal facilities: PRINCIPAL FACILITIES - CPI CORP.
APPROXIMATE AREA IN PRIMARY OWNERSHIP LOCATION SQUARE FEET USES OR LEASE - ------------------- ------------ ------------------ ---------- St. Louis, Missouri 270,000 Administration and Owned Photoprocessing St. Louis, Missouri 155,000 Parking Lots Owned St. Louis, Missouri 78,312 Warehousing Leased(1) St. Louis, Missouri 14,340 Printing Leased(2) Brampton, Ontario 40,000 Administration, Owned Warehousing and Photoprocessing Las Vegas, Nevada 12,200 Photoprocessing Leased(3) Thomaston, Connecticut 25,000 Administration and Owned Photoprocessing Concord, California 43,088 Administration, Leased(4) Warehousing and Manufacturing (1) Lease term expires on June 30, 1999. (2) Lease term expires on November 30, 1999. (3) Lease term expires on July 15, 2001. (4) Lease term expires on March 31, 2002.
The Company operates 943 portrait studios in Sears stores pursuant to the license agreement with Sears. See "BUSINESS RELATIONSHIP WITH SEARS." The Company also operates 84 Sears Portrait Studios located in shopping centers without Sears stores, which are generally leased for at least three years with some having renewal options. The 152 wall decor locations operated by the company are generally in enclosed regional malls with lease terms of ten years without renewal options. 7 ITEM 3. LEGAL PROCEEDINGS There are various suits pending against the Company, none of which is material in nature. It is the opinion of management that the ultimate liability, if any, resulting from such suits will not materially affect the consolidated financial position or results of operations of the Company. ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS No matters were submitted to stockholders for a vote during the fourth quarter of fiscal year 1998. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Information required under this Item is contained in the Registrant's 1998 Annual Report to Shareholders, Exhibit 13 of this filing, in the section entitled "Selected Quarterly Financial Data," and will be contained in the Registrant's 1999 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1998, and is incorporated herein by reference. As of April 8, 1999, the market price of the Registrant's common stock was $23.6875 per share with 9,898,777 shares outstanding and approximately 2,010 holders of record. ITEM 6. SELECTED FINANCIAL DATA Information required under this Item is contained in the Registrant's 1998 Annual Report to Shareholders, Exhibit 13 of this filing, in the section titled "Financial Highlights," and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required under this Item is contained in the Registrant's 1998 Annual Report to Shareholders, Exhibit 13 of this filing, in the sections entitled "Management's Discussion and Analysis - Overview," "Management's Discussion and Analysis - - Financial Condition," "Management's Discussion and Analysis - Results of Operations," and "Management's Discussion and Analysis of Cash Flows," and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risks relating to the Company's operations result primarily from changes in interest rates and changes in foreign exchange rates. The Company's debt obligations have primarily fixed interest rates, therefore, the Company's exposure to changes in interest rates is minimal. The Company's exposure to changes in foreign exchange rates relates to the Canadian operations, which is minimal as these operations constitute less than 4% of the Company's total assets, and less than 6% of the Company's total sales. 9 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required under this Item is contained in the Registrant's 1998 Annual Report to Shareholders, Exhibit 13 of this filing, in the sections titled "Consolidated Balance Sheets," "Consolidated Statements of Earnings," "Consolidated Statement of Changes in Stockholders' Equity," "Consolidated Statement of Cash Flows," "Notes to Consolidated Financial Statements" and "Selected Quarterly Financial Data," and is incorporated herein by reference. Additional information required under this Item is contained in this Annual Report to Shareholders, Schedule II of this filing, in the section titled "Valuation and Qualifying Account", and is incorporated herein by reference. ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 10 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS OF THE REGISTRANT Information required under this Item will be contained in the Registrant's 1999 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1998, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required under this Item will be contained in the Registrant's 1999 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1998, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required under this Item will be contained in the Registrant's 1999 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1998, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not Applicable. 11 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Index to Certain Documents (1) Independent Auditor's Reports These reports are included in this filing under the sections titled "Independent Auditors' Report" in this Form 10-K and "Exhibit 13" (under the title "Independent Auditors' Report" in the Registrant's 1998 Annual Report to Shareholders), and are incorporated herein by reference. (2) Financial Statements: (a) Consolidated Balance Sheets as of February 6, 1999 and February 7, 1998 (b) Consolidated Statements of Earnings for the fiscal years ended February 6, 1999, February 7, 1998 and February 1, 1997 (c) Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended February 6, 1999, February 7, 1998 and February 1, 1997 (d) Consolidated Statements of Cash Flows for the fiscal years ended February 6, 1999, February 7, 1998 and February 1, 1997 Information required under these items is contained in the Registrant's 1998 Annual Report to Shareholders, Exhibit 13 of this filing, under the sections titled "Consolidated Balance Sheets," "Consolidated Statements of Earnings," "Consolidated Statement of Changes in Stockholders' Equity," and "Consolidated Statements of Cash Flows," and is incorporated herein by reference. (3) Notes to Consolidated Financial Statements This information is included in the Registrant's 1998 Annual Report to Shareholders, Exhibit 13 of this filing, under the section titled "Notes to Consolidated Financial Statements," and is incorporated herein by reference. 12 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (4) Financial Statement Schedules II. Valuation and Qualifying Accounts This information is included in this filing under the section titled "Schedule II" in this Form 10-K (page 24), and is incorporated herein by reference. All other schedules and notes under Regulation S-X are omitted because they are either not applicable, not required or the information called for therein appears in the consolidated financial statements or notes thereto. (b) Reports on Form 8-K On December 21, 1998, the Company filed Form 8-K Current Report discussing the issuance of a press release which announced: third quarter sales for Sears Portrait Studios up 14.7% from last year. The increase, however, was impacted by the shift of one week of seasonal sales from the fourth quarter. The Wall Decor segment showed moderate growth to $17.8 million from $17 million, and gross profit was marginally higher. (c) Index to Exhibits 13 EXHIBIT 3. ARTICLES OF INCORPORATION AND BYLAWS Information required by this Exhibit 3 is incorporated by reference to the below listed documents with corresponding filing date and registration or Commission file numbers where applicable.
REGISTRATION INFORMATION INCORPORATED DOCUMENT FILING COMMISSION BY REFERENCE REFERRED TO DATE FILE NO. - -------------------------- ------------- -------- ------------ (3.1) Articles of Annual Report 4/30/90 1-10204 Incorporation on Form 10-K dated 4/27/90 (3.2) Bylaws Annual Report 4/30/90 1-10204 on Form 10-K dated 4/27/90 (3.4) Amendment to Bylaws Form 8-K 8/3/95 0-11227 (3.5) Amendment to Bylaws Annual Report 5/2/97 1-10204 on Form 10-K405 dated 4/3/97
14 EXHIBIT 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING DEBENTURES Information required by this Exhibit 4 is incorporated by reference to the below listed documents with corresponding filing date and registration or Commission file numbers where applicable.
REGISTRATION INFORMATION INCORPORATED DOCUMENT FILING COMMISSION BY REFERENCE REFERRED TO DATE FILE NO. - -------------------------- ------------- -------- ------------ (4.1) Articles of Annual Report 4/30/90 1-10204 Incorporation and on Form 10-K Bylaws dated 4/27/90 (4.2) Note Agreement for Form 10-Q 9/3/93 1-10204 Series A Senior Notes Due August 31, 2000 and Series B Notes Due August 31, 2000 (4.3) Pledge Agreement Form 10-Q 9/3/93 1-10204 (4.4) Series A Senior Note Form 10-Q 9/3/93 1-10204 Due August 31, 2000, No. R-A1 (4.5) Series B Senior Note Form 10-Q 9/3/93 1-10204 Due August 31, 2000, No. R-B1 (4.6) Series B Senior Note Form 10-Q 9/3/93 1-10204 Due August 31, 2000, No. R-B2 (4.7) CPI Corp. Shareholder Form 8-A 5/2/89 - Rights Plan (4.8) First Amendment to Form 10-Q 9/3/93 1-10204 CPI Corp. Shareholder Rights Plan
15 EXHIBIT 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING DEBENTURES (Continued)
REGISTRATION INFORMATION INCORPORATED DOCUMENT FILING COMMISSION BY REFERENCE REFERRED TO DATE FILE NO. - -------------------------- ------------- -------- ------------ (4.9) Second Amendment to Form 8-K 8/3/95 0-11227 CPI Corp. Shareholder Rights Plan (4.10) First Amendment to Form 10-Q 9/2/94 1-10204 Note Agreement dated 2/24/94 (4.11) Second Amendment to Form 10-Q 9/2/94 1-10204 Note Agreement dated 6/14/94 (4.12) Note Agreement for Form 8-K 7/1/97 0-11227 CPI Corp. Senior Notes dated June 16, 1997 (4.13) CPI Corp. 7.46% Form 8-K 7/1/97 0-11227 Senior Notes due June 16, 2007, PPN 12617# ACO (4.14) CPI Corp. 7.46% Form 8-K 7/1/97 0-11227 Senior Notes due June 16, 2007, Security No. !Inv5641! (4.15) Registration of Form S-8 3/31/98 002-86403 50,000 shares of common to be issued under the CPI Corp. 1981 Stock Bonus Plan (4.16) Registration of Form S-8 3/31/98 002-86403 250,000 shares of common stock to be issued under the CPI Corp. Employees Profit Sharing Plan and Trust
16 EXHIBIT 10. MATERIAL CONTRACTS [CAPTION] PAGE NUMBER FORM 10-K ------------- (10.28) License Agreement 26 Sears, Roebuck and Co. (10.29) License Agreement 27 Sears, Roebuck and Co. (Off Mall) (10.30) License Agreement 28 Sears Roebuck De Puerto Rico, Inc. (10.31) License Agreement 29 Sears Canada, Inc. (10.32) CPI. Corp 1998 Employee Profit 30 Sharing Plan and Trust (10.33) First Amendment to CPI. Corp 31 Employee Profit Sharing Plan and Trust
Additional information required by this Exhibit 10 is incorporated by reference to the below listed documents with corresponding filing date and registration or Commission file numbers where applicable 17 EXHIBIT 10. MATERIAL CONTRACTS (Continued)
REGISTRATION INFORMATION INCORPORATED DOCUMENT FILING COMMISSION BY REFERENCE REFERRED TO DATE FILE NO. - -------------------------- ------------- -------- ------------ (10.1) Employment Contract Annual Report 5/6/98 1-10204 Alyn V. Essman * on Form 10-K, dated 4/9/98 (10.2) Employment Contract Annual Report 5/6/98 1-10204 Russell H. Isaak * on Form 10-K dated 4/9/98 (10.3) Employment Contract Annual Report 5/6/98 1-10204 Patrick J. Morris * on Form 10-K dated 4/9/98 (10.4) Employment Contract Annual Report 5/6/98 1-10204 Barry C. Arthur * on Form 10-K dated 4/9/98 (10.5) Employment Contract Annual Report 5/6/98 1-10204 Fran Scheper * on Form 10-K dated 4/9/98 (10.6) CPI Corp. 1981 Stock Annual Report 5/5/93 1-10204 Bonus Plan (As on Form 10-K, Amended and Restated dated 4/30/93 on 2/3/91) (10.7) Deferred Compensa- Annual Report 5/1/92 1-10204 tion and Stock on Form 10-K, Appreciation Rights dated 4/24/92 (10.8) CPI Corp. Restricted Annual Report 5/1/92 1-10204 Stock Plan on Form 10-K, dated 4/24/92 (10.9) Deferred Compensa- Annual Report 5/1/92 1-10204 tion and Retirement on Form 10-K, Plan for Non- dated 4/24/92 Management Directors * Employment contract is automatically renewed and extended for one year unless terminated by the Board of Directors or the employee.
18 EXHIBIT 10. MATERIAL CONTRACTS (Continued)
REGISTRATION INFORMATION INCORPORATED DOCUMENT FILING COMMISSION BY REFERENCE REFERRED TO DATE FILE NO. - -------------------------- ------------- -------- ------------ (10.10) CPI Corp. Stock Form S-8 7/28/92 33-50082 Option Plan (As Amended and Restated effective 2/2/92) (10.11) Registration of Form 8-A 3/21/89 - Securities on the New York Stock Exchange (10.12) CPI Corp. Shareholder Exhibit to 5/2/89 - Rights Plan Form 8-A (10.13) CPI Voluntary Stock Form D 3/31/93 - Option Plan (10.14) First Amendment to Form 10-Q 9/3/93 1-10204 CPI Corp. Shareholder Rights Plan (10.15) Second Amendment to Form 8-K 8/3/95 0-11227 CPI Corp. Shareholder Rights Plan (10.16) $60 Million Revolving Form 10-Q 9/1/95 1-10204 Credit Agreement (10.17) $25 Million Revolving Form 10-Q 9/1/95 1-10204 Credit Note with Mercantile Bank (10.18) $20 Million Revolving Form 10-Q 9/1/95 1-10204 Credit Note with Harris Trust & Savings (10.19) $15 Million Revolving Form 10-Q 9/1/95 1-10204 Credit Note with The Daiwa Bank
19 EXHIBIT 10. MATERIAL CONTRACTS (Continued)
REGISTRATION INFORMATION INCORPORATED DOCUMENT FILING COMMISSION BY REFERENCE REFERRED TO DATE FILE NO. - ---------------------------- ------------- -------- ------------ (10.21) Employment Contract- Annual Report 5/3/95 1-10204 Jane E. Nelson ** on Form 10-K dated 4/6/95 (10.22) CPI Consent to Annual Report 5/2/96 1-10204 Assignment and on Form 10-K Assumption of $15 dated 4/4/96 Million Revolving Credit Note (10.23) Notification of Annual Report 5/2/96 1-10204 Assignment and on Form 10-K Assumption of $15 dated 4/4/96 Million Credit Note Agreement (10.24) $40 Million Form 10-Q 12/8/97 1-10204 Revolving Credit Agreement (10.25) $17 Million Form 10-Q 8/29/97 1-10204 Revolving Credit Note with Mercantile Bank National Association (10.26) $13 Million Form 10-Q 8/29/97 1-10204 Revolving Credit Note with Harris Trust and Savings (10.27) $10 Million Form 10-Q 8/29/97 1-10204 Revolving Credit Note with The Sumitomo Bank, Limited ** Employment contract is automatically renewed and extended for one month unless terminated by the Board of Directors or the employee.
20
Page Number Form 10-K ----------- EXHIBIT 11. COMPUTATION OF EARNINGS PER COMMON SHARE 32 EXHIBIT 13. 1998 ANNUAL REPORT TO SHAREHOLDERS 34 EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT 35 EXHIBIT 23. INDEPENDENT AUDITORS' CONSENT 36 EXHIBIT 27. FINANCIAL DATA SCHEDULE
21 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CPI CORP. BY: /s/ Alyn V. Essman ------------------------- (Alyn V. Essman) Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. SIGNATURES OF DIRECTORS AND PRINCIPAL OFFICERS
Signature Title Date - ----------------------- ------------------------ ------------- /s/ Alyn V. Essman Chairman of the Board, April 8, 1999 - ----------------------- Chief Executive Officer (Alyn V. Essman) and Director (Principal Executive Officer) /s/ Milford Bohm Director April 8, 1999 - ----------------------- (Milford Bohm) /s/ Mary Ann Krey Director April 8, 1999 - ----------------------- (Mary Ann Krey) /s/ Lee Liberman Director April 8, 1999 - ----------------------- (Lee Liberman) /s/ Nicholas L. Reding Director April 8, 1999 - ----------------------- (Nicholas L. Reding) /s/ Martin Sneider Director April 8, 1999 - ----------------------- (Martin Sneider)
22 SIGNATURES OF DIRECTORS AND PRINCIPAL OFFICERS (Continued)
Signature Title Date - ----------------------- ------------------------ ------------- /s/ Robert L. Virgil Director April 8, 1999 - ----------------------- (Robert L. Virgil) /s/ Russell Isaak President and Director April 8, 1999 - ----------------------- (Russell Isaak) /s/ Patrick J. Morris Senior Executive Vice April 8, 1999 - ----------------------- President and Director (Patrick J. Morris) /s/ Barry C. Arthur Vice President and April 8, 1999 - ----------------------- Treasurer (Principal (Barry C. Arthur) Financial and Accounting Officer)
23 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders CPI Corp.: Under date of April 8, 1999, we reported on the consolidated balance sheets of CPI Corp. and subsidiaries as of February 6, 1999 and February 7, 1998, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the fiscal years in the three-year period ended February 6, 1999, as contained in the 1998 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K of CPI Corp. for the 1998 fiscal year. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related financial statement schedule as listed in the accompanying index. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP - ------------------------- KPMG LLP St. Louis, Missouri April 8, 1999 24 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS CPI CORP. CONSOLIDATED ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES FISCAL YEARS ENDED FEBRUARY 6, 1999, FEBRUARY 7, 1998 AND FEBRUARY 1, 1997 (in thousands of dollars)
FEBRUARY 6, FEBRUARY 7, FEBRUARY 1, 1999 1998 1997 ----------- ----------- ----------- Balance at beginning of year $ 291 $ 382 $ 1,216 =========== =========== =========== Balance at end of year $ 302 $ 291 $ 382 =========== =========== ===========
The majority of receivable amounts at year ending February 6, 1999, February 7, 1998 and February 1, 1997, respectively are due from portrait studio customers for amounts collected or to be collected, for which the Company assumes all credit risks. Prior to February 1, 1997, receivable balances for which an allowance for uncollectible receivables is established relate primarily to sales recorded through use of Company commercial charge accounts for photofinishing and other products and services. The majority of the allowance for uncollectible receivables is computed and adjusted every four weeks based on a predetermined percentage of the related receivable balances. These percentages are determined using historical results adjusted for current economic conditions. As a result, the Company does not record separate additions or deductions to the allowance for individual accounts but rather adjusts every four weeks for the net change in the computed allowance based on gross receivable balances. 25 EX-10.28 2 EXHIBIT (10.28) License Agreement - Sears, Roebuck and Co. 26 SEARS, ROEBUCK AND CO. LICENSE AGREEMENT CONSUMER PROGRAMS INCORPORATED SEARS PORTRAIT STUDIOS January 1, 1999 (PAGE NUMBERS REFER TO PAPER DOCUMENT) TABLE OF CONTENTS I. GRANT OF LICENSE ................................. 5 1.1. License for On-Premises Operations .......... 5 1.2. Scope of License/Restrictions ............... 5 1.3. No Representations .......................... 5 II. USE OF SEARS MARKS ............................... 5 2.1 License to Use Sears Marks .................. 5 2.2 Communications with Third Parties ........... 6 2.3 No Challenge to Marks ....................... 6 2.4 No Rights to Marks .......................... 6 2.5 Registration of Marks ....................... 6 2.6 Injunctive Relief ........................... 7 2.7 Infringing Use .............................. 7 2.8 Limitations ................................. 7 2.9 Survival .................................... 7 III. TERM ............................................. 7 IV. FEES ............................................. 8 4.1 Amount ...................................... 8 4.2 Net Sales ................................... 8 4.3 Gross Sales ................................. 8 V. OPERATIONAL OBLIGATIONS OF LICENSEE .............. 8 5.1 Performance Standards ....................... 8 5.2 Business Conduct ............................ 8 5.3 Hours of Operation .......................... 9 5.4 Merchandise Standards ....................... 9 5.5 Pricing ..................................... 9 5.6 Discount Policy ............................. 9 5.7 Bonus Club .................................. 9 5.8 Customer Adjustment ......................... 9 5.9 Employee Standards .......................... 10 5.10 Licensee's Employees ........................ 10 5.11 Employee Compensation ....................... 10 5.12 Compliance with Labor Laws .................. 10 5.13 Compliance with Law ......................... 11 5.14 Year 2000 Compliance ........................ 11 5.15 Payment of Obligations ...................... 11 5.16 Licensee's Obligations ...................... 11 5.17 Liens ....................................... 12 VI. LICENSED BUSINESS AREA ........................... 12 6.1 Block Plan .................................. 12 6.2 Improvements ................................ 12 6.3 Operations .................................. 12 6.4 Condition of Licensed Business Area ......... 13 6.5 Changes of Location/Store Inventory ......... 13 2
TABLE OF CONTENTS (continued) 6.6 Remodeling .................................. 13 6.7 Electric/HVAC ............................... 13 6.8 Telephone ................................... 13 6.9 Yellow/White Page Listings .................. 14 6.10 Access to Licensed Business Area ............ 14 6.11 Effect of Store Leases ...................... 14 6.12 Waiver of Casualty Liability ................ 14 VII. ADVERTISING ...................................... 15 7.1 Advertising ................................. 15 7.2 Publicity ................................... 15 7.3 Forms ....................................... 15 VIII. LICENSED BUSINESS EQUIPMENT ..................... 16 8.1 Licensee's Equipment ........................ 16 8.2 Licensee's Point of Sale System ............. 16 8.3 Sears Card .................................. 16 IX. TRANSACTIONS AND SETTLEMENT ...................... 16 9.1 Checks ...................................... 16 9.2 Credit Sales ................................ 17 9.3 Sales Receipts .............................. 17 9.4 Settlement .................................. 18 9.5 Reports ..................................... 18 9.6 Audit Rights ................................ 18 9.7 Underreporting .............................. 18 9.8 Rights of Recoupment and Setoff ............. 19 X. CUSTOMER INFORMATION; CONFIDENTIALITY............. 19 10.1 Customer Information ........................ 19 10.2 Confidential Information .................... 20 XI. RELATIONSHIP OF PARTIES .......................... 20 XII. DEFENSE AND INDEMNITY ............................ 21 12.1 Defense ..................................... 21 12.2 Indemnity ................................... 21 XIII. INSURANCE ....................................... 22 13.1 Types of Insurance .......................... 22 13.2 No Cancellation Without Notice .............. 22 13.3 Certificates ................................ 23 13.4 Expiration/Non-Renewal ...................... 23 XIV. TERMINATION ...................................... 23 14.1 Mutual Right of Termination ................ 23 14.2 Termination of License by Sears With Notice . 23 14.3 Termination of License by Sears Without Further Notice ............................. 24 14.4 Termination on Store Closing ................ 24 14.5 Effect of Termination ....................... 24 14.6 Survivability ............................... 25 XV. ASSIGNMENT AND SUBLICENSING ...................... 25 15.1 Assignment by Licensee ...................... 25 15.2 Assignment by Sears ......................... 25
3 TABLE OF CONTENTS (continued) 15.3 Binding Nature .............................. 26 XVI. MISCELLANEOUS .................................... 26 16.1 Cumulative Remedies ......................... 26 16.2 Severability ................................ 26 16.3 Governing Law ............................... 26 16.4 Entire Agreement ............................ 26 16.5 Headings .................................... 27 16.6 Notices ..................................... 27 EXHIBIT A ..................................... 29 DESIGNATED SEARS STORES ..................... 29 EXHIBIT B ..................................... 51 AUTHORIZED MERCHANDISE AND/OR SERVICES ...... 51 EXHIBIT C ..................................... 52 SEARS COMMISSION ............................ 52 EXHIBIT D ..................................... 53 ALLOCATION OF COSTS ......................... 53
4 LICENSE AGREEMENT THIS LICENSE AGREEMENT (hereinafter referred to as "Agreement") is entered into as of the 1st day of January, 1999, by SEARS, ROEBUCK AND CO., a New York corporation ("Sears") and CONSUMER PROGRAMS INCORPORATED, a Missouri corporation, ("Licensee"). Sears and Licensee hereby agree as follows: I. GRANT OF LICENSE 1.1. License for On-Premises Operations. Sears hereby grants Licensee the non-exclusive privilege of conducting and operating, and Licensee shall conduct and operate, pursuant to the terms, provisions and conditions contained in this Agreement, a licensed business offering the goods and services listed on Exhibit B ("Licensed Business"), only at the Sears locations described in Exhibit A or in Location Riders attached ("Designated Sears Store(s)"). 1.2. Scope of License/Restrictions. Licensee shall use the Licensed Business area only for the purpose authorized in this Agreement, and shall offer for sale only those services and merchandise expressly authorized by this Agreement as listed on Exhibit B attached hereto and shall offer those services and merchandise only from the Designated Sears Stores. Any changes, additions or deletions of services or merchandise require the prior written approval of Sears appropriate Licensing Manager ("Licensing Manager"). 1.3. No Representations. Sears makes no promises or representations whatsoever as to the potential amount of business Licensee can expect at any time during operation of the Licensed Business. Except as otherwise set forth herein, Licensee is solely responsible for any expenses it incurs related to this Agreement, including, but not limited to, any increase in the number of Licensee's employees or any expenditures for additional facilities or equipment. II. USE OF SEARS MARKS 2.1 License to Use Sears Marks. Licensee shall operate the Licensed Business under the name SEARS PORTRAIT STUDIO. Licensee shall use the name of Sears only in connection with the operation of the Licensed Business and only in a manner described herein or upon prior written approval by Sears Licensing Manager. Licensee may use the name Sears when communicating with customers or 5 potential customers of the Licensed Business, or to identify the location of the Licensed Business and in other instances specifically approved by Sears. Licensee shall not begin any business activity under this Agreement without Sears prior written approval of any and all names that Licensee intends to use in conjunction with the Licensed Business. 2.2 Communications with Third Parties. Except in the case of communication permitted by Paragraph 2.1, or as otherwise specifically approved by Sears, Licensee shall not use the name of Sears, or any Sears trademarks, service marks or trade names (the "Mark(s)"), either orally or in writing, including, but not limited to, use of any letterhead, checks, business cards, or contracts. All communications with persons or entities other than customers or potential customers of the Licensed Business shall be done solely in Licensee's own name. 2.3 No Challenge to Marks. Licensee shall not question, contest or challenge, either during or after the Term of this Agreement, Sears ownership of the Marks, or Sears ownership in any mailing lists, credit files or other factual information compiled by Sears and made available for use by Licensee ("Sears Information"). Licensee shall claim no right, title or interest in any Mark or Sears Information, except the right to use the same pursuant to the terms and conditions of this Agreement, and shall not register or attempt to register any Mark. 2.4 No Rights to Marks. Licensee recognizes and acknowledges that the use of any Mark or Sears Information shall not confer upon Licensee any proprietary rights to any Mark or Sears Information. Upon expiration or termination of this Agreement, Licensee shall immediately stop using all Marks and Sears Information, and shall execute all documents Sears requests in order to confirm Sears ownership, or to transfer to Sears any rights Licensee may have acquired from Sears in any Mark or Sears Information. Nothing in this Agreement shall be construed to bar Sears, during or after expiration or termination of this Agreement, from protecting its right to the exclusive ownership of Sears Information or Marks against infringement or appropriation by any party or parties, including Licensee. 2.5 Registration of Marks. Sears may register in its own name any and all of the trademarks, service marks or trade names used in operation of the Licensed Business, except for such trademarks, service marks or trade names which are owned or licensed by Licensee prior to execution of this Agreement, and Licensee's use of such names and marks shall inure to the benefit of Sears for such purposes as well as for all other purposes and such marks shall be included in the term "Marks". Licensee shall cooperate in any such registration or application for registration by Sears. No name or mark registered in the name of Licensee or any of Licensee's affiliates and used in conjunction with the Licensed Business shall be used for any other purpose without the written consent of Sears. 6 2.6 Injunctive Relief. Licensee acknowledges that the Marks and Sears Information possess a special, unique and extraordinary character, which makes it difficult to assess the monetary damage Sears would sustain in the event of unauthorized use. Irreparable injury would be caused to Sears by such unauthorized use, and Licensee agrees that in the event of breach of this Section II by Licensee there would be no adequate remedy at law and preliminary or permanent injunctive relief would be appropriate. 2.7 Infringing Use. If Licensee learns of any manufacture or sale by any third party of products and/or services similar to those offered by Licensee that would be confusingly similar in the minds of the public to those sold by Licensee and which bear or are promoted in association with the Marks or any names, symbols, emblems, or designs or colors which would be confusingly similar in the minds of the public to the Marks, Licensee shall promptly notify Sears. Sears may, at its sole expense, take such action as it determines, in its sole discretion, is appropriate. Licensee shall cooperate and assist in such protest or legal action at Sears expense. If demanded by Sears, Licensee shall join in such protest or legal action at Sears expense. Licensee shall not undertake any protest or legal action on its own behalf without first securing Sears written permission to do so. If Sears permits Licensee to undertake such protest or legal action, such protest or legal action shall be at Licensee's sole expense. Sears shall cooperate and assist Licensee at Licensee's expense. For the purposes of this paragraph, expenses shall include reasonable attorneys' fees. All recovery in the form of legal damages or settlement shall belong to the party bearing the expense of such protest or legal action. 2.8 Limitations. Licensee shall not file suit using Sears name. Licensee shall not use the services of a collection agency or undertake any legal proceeding against any customer without the prior written approval of Sears Licensing Manager. 2.9 Survival. The provisions of this Section II shall survive the expiration or termination of this Agreement. III. TERM The term of this Agreement ("Term") shall be for a five (5) year period beginning on January 1, 1999, and ending at the close of business on December 31, 2003, unless sooner terminated under any of the provisions of this Agreement. 7 IV. FEES 4.1 Amount. Licensee shall pay Sears a commission ("Sears Commission") which is set forth on Exhibit C attached hereto. 4.2 Net Sales. "Net Sales" means Gross Sales from operation of the Licensed Business, less sales taxes, returns and allowances. 4.3 Gross Sales. "Gross Sales" means all of Licensee's direct or indirect sales of services and merchandise from the Licensed Business, including, but not limited to, sales arising out of referrals, contacts, or recommendations obtained through the operation of the Licensed Business. V. OPERATIONAL OBLIGATIONS OF LICENSEE 5.1 Performance Standards. Licensee shall provide Sears with copies of its written procedures and policies establishing minimum standards of quality, performance and customer service. Licensee shall immediately advise Sears of any changes in its standards. Without limiting Paragraph 5.8, Licensee shall observe no less than such minimum standards of quality, performance and customer service. Sears may visit the Licensed Business area at any reasonable time during business hours for the purpose of verifying Licensee's compliance with its standards of quality, performance and customer service. Licensee shall conduct its operations in a courteous and efficient manner and shall present a neat, business like appearance, including adherence by Licensees' employees to a reasonable dress code. Licensee shall abide by all safety and security rules and regulations of Sears in effect from time to time. 5.2 Business Conduct. Licensee shall also conduct its operations in an honest and ethical manner at all times. In dealing with Sears associates and Sears customers, Licensee shall adhere to the highest ethical standards, including those standards described in the "A Guide To Business Conduct For Sears Licensed Business Associates" as provided to Licensee and updated from time to time. 8 5.3 Hours of Operation. The Licensed Business shall be kept open for business and operated during the same business hours that the Designated Sears Store is open for business, unless otherwise agreed to by Sears Licensing Manager and Licensee. 5.4 Merchandise Standards. Licensee shall maintain a stock of good quality merchandise as necessary to assure efficient operation of the Licensed Business. Licensee shall maintain merchandise presentation standards consistent with Sears own standards. 5.5 Pricing. Except as noted, Sears shall have no right or power to establish or control the prices at which Licensee offers service and/or merchandise in the Licensed Business. Such right and power is retained by Licensee, however, Licensee also shall participate in Sears national storewide sales and/or merchandise price off events. Licensee shall not charge customers for estimates or proposals. 5.6 Discount Policy. Sales made under this Agreement shall be offered for sale by Licensee to the employees of Sears (to include other eligible family members) at the same discount which Sears allows its own employees on purchases of similar merchandise as fully described in Sears Courtesy Discount Guide. Licensee's employees who are exclusively employed to service the Licensed Business shall be entitled to receive the same discount on purchases made from Sears; provided, however, that the employees, but not their family members, are entitled to receive the discount. Misuse of the Sears discount policy by any employee of Licensee could result in Sears request that Licensee remove an employee from the Licensed Business pursuant to Paragraph 5.10 of this Agreement. 5.7 Bonus Club. Licensee shall accept Sears Card Bonus Club Bonus Certificates. Sears shall reimburse Licensee for such bonus certificates provided Licensee has followed prescribed procedures. 5.8 Customer Adjustment. All of the work and services performed by Licensee in connection with the Licensed Business shall be of a high standard of workmanship, and all of the merchandise sold in the Licensed Business shall be of high quality. Licensee shall at all times maintain a general policy of "Satisfaction Guaranteed" to customers and shall adjust all complaints of and controversies with customers arising out of the operation of the Licensed Business. In any case 9 in which an adjustment is unsatisfactory to the customer, Sears shall have the right, at Licensee's expense, to make such further adjustment as Sears deems necessary under the circumstances, and any adjustment made by Sears shall be conclusive and binding upon Licensee. Sears may deduct the amounts of any such adjustments from the sales receipts held by Sears as described in Paragraph 9.4. Licensee shall maintain files pertaining to customer complaints and their adjustment and make such files available to Sears. 5.9 Employee Standards. Licensee shall employ all management and other personnel necessary for the efficient operation of the Licensed Business. The Licensed Business shall be operated solely by Licensee's employees, and not by independent contractors, sub-contractors, sub-licensees or by any other such arrangement. 5.10 Licensee's Employees. Licensee has no authority to employ persons on behalf of Sears and no employees of Licensee shall be deemed to be employees or agents of Sears. Licensee has sole and exclusive control over its labor and employee relations policies, and its policies relating to wages, hours, working conditions, or conditions of its employees. Licensee has the sole and exclusive right to hire, transfer, suspend, lay off, recall, promote, assign, discipline, adjust grievances and discharge its employees, provided, however, that Sears may request at any time that Licensee remove from the Licensed Business any employee who is objectionable to Sears because of risk of harm or loss to the health, safety and/or security of Sears customers, employees or merchandise and/or whose manner impairs Sears customer relations. If Sears objects to any of Licensee's employees, and Licensee determines not to remove such employee, Sears may terminate any affected location by giving thirty (30) days notice to Licensee. 5.11 Employee Compensation. Licensee shall pay in a timely manner and is solely responsible for so paying, for all salaries and other compensation of its employees and shall make all necessary salary deductions and withholdings from its employees' salaries and other compensation. Licensee shall pay in a timely manner, and is solely responsible for so paying any and all contributions, taxes and assessments and all other requirements of the Federal Social Security, Federal and state unemployment compensation and Federal, state and local withholding of income tax laws on all salary and other compensation of its employees. 5.12 Compliance with Labor Laws. Licensee shall comply with any other contract and all Federal, state and local laws, ordinances, rules and regulations regarding its employees, including, but not limited to, Federal or state laws or regulations regarding minimum compensation, overtime and equal opportunities for employment. Without limiting the foregoing, Licensee shall comply with the terms of the Federal Civil Rights Acts, Age Discrimination in Employment Act, Occupational Safety and Health Act, the Federal Fair Labor Standards Act, and the Americans with 10 Disabilities Act, whether or not Licensee may otherwise be exempt from such acts because of its size or the nature of its business or for any other reason whatsoever. 5.13 Compliance with Law. Licensee shall, at its expense, obtain all permits and licenses which may be required under any applicable Federal, state, or local law, ordinance, rule or regulation by virtue of any act performed in connection with the operation of the Licensed Business. Licensee shall comply fully with all applicable Federal, state and local laws, ordinances, rules and regulations, including, but not limited to, all rules and regulations of the Federal Trade Commission. In addition, Licensee represents and warrants that Licensee and all subcontractors and agents involved in the production or delivery of the merchandise to be sold in connection with the Licensed Business shall strictly adhere to all applicable laws, regulations, and prohibitions of the United States and all country(ies) in which such merchandise is produced or delivered with respect to the operation of their production facilities and their other businesses and labor practices, including without limitation, laws, regulations and prohibitions governing the working conditions, wages and minimum age of the work force. Licensee further represents and warrants that such merchandise shall not be produced or manufactured, in whole or in part, by convict or forced labor. 5.14 Year 2000 Compliance. Licensee represents and warrants that its point of sale system utilizes and includes four digit year elements (e.g. 1999, 2000, etc.) and that the use, entry or creation of dates before, on or after January 1, 2000 will neither cause failure nor produce incorrect results in the transmission of data to Sears settlement system, nor cause interruption to or disruption of the Licensed Business. 5.15 Payment of Obligations. Licensee shall, at its expense, pay and discharge all license fees, business, use, sales, gross receipts, income, property or other applicable taxes or assessments which may be charged or levied by reason of any act performed in connection with the operation of the Licensed Business, excluding, however, all taxes and assessments applicable to Sears income from Sears Commission or applicable to Sears property. Licensee shall promptly pay all its obligations, including those for labor and material, and shall not allow any liens to attach to any Sears or customer's property as a result of Licensee's failure to pay such sums. 5.16 Licensee's Obligations. Licensee shall not make purchases or incur any obligation or expense of any kind in the name of Sears. Prior to any purchases involving the Licensed Business, Licensee shall inform its vendors that Sears is not responsible for any obligations incurred by Licensee. 11 5.17 Liens. Licensee shall not allow any liens, claims or encumbrances to attach against any of the Designated Sears Stores. In the event any lien, claim or encumbrance so attaches or is threatened, Licensee shall immediately take all necessary action to cause such lien, claim or encumbrance to be satisfied and released, or Sears, may either terminate this Agreement or charge Licensee or withhold from sales receipts all expenses, including attorneys' fees, incurred by Sears in removing and/or resolving such liens or claims. VI. LICENSED BUSINESS AREA 6.1 Block Plan. The defined area of space provided by Sears for the operation of the Licensed Business ("Block Plan") will be submitted for each Designated Sears Store to Licensee. Licensee shall be solely responsible for providing final plans for the Licensed Business area and Licensee shall authorize Sears to prepare the final blueprint plans in accordance with Exhibit D. All costs and expenses related to such plans, including, but not limited to, blueprints, shall be borne by Licensee. The expense of preparing the initial space assigned to any Licensed Business location shall be allocated between parties as described in Exhibit D attached hereto and hereafter made a part of this Agreement. Licensee shall be primarily responsible for any preparations necessary for the operation of the Licensed Business. Any improvements and installations made by Sears shall be made to Sears specifications for its own departments. All improvements or installations which vary from Sears standard specifications shall be at Licensee's sole expense. 6.2 Improvements. All permanent improvements to the Licensed Business area shall become the property of Sears at the expiration or termination of this Agreement. At the expiration or termination of this Agreement, or if Licensee vacates or abandons the Licensed Business, Licensee shall convey to Sears, without charge, good title to such improvements free from any and all liens, charges, encumbrances and rights of third parties. 6.3 Operations. If the Licensed Business is not fully operational within thirty (30) days after Sears has made the Licensed Business area ready for Licensee as a result of delay by Licensee, Sears may, at Sears sole option, terminate this Agreement and have no further obligation to Licensee, and Licensee shall reimburse Sears within ten (10) days after receipt of an invoice, for Sears cost, of constructing the Licensed Business area and of putting such space back to its condition immediately prior to the commencement of such construction. 12 6.4 Condition of Licensed Business Area. Licensee shall, at its expense, keep the Licensed Business area in a thoroughly clean and neat condition and shall maintain Licensee's Equipment in good order and repair. Sears shall provide routine janitorial service in the Licensed Business area, consistent with the janitorial services regularly performed in the Designated Sears Store. 6.5 Changes of Location/Store Inventory. Sears shall have the right, in its sole discretion, to change the location, dimensions and amount of area of the Licensed Business from time to time during the Term of this Agreement in accordance with Sears judgment as to what arrangements will be most satisfactory for the general good of the Designated Sears Store(s). In the event Sears decides to change the location of the Licensed Business, Sears shall move Licensee's Equipment to the new location and prepare the new space for occupancy by Licensee and the expense shall be allocated between the parties as described on Exhibit D. If a change in location is requested or initiated by Licensee, then Licensee shall bear all expense involved in moving Licensee's Equipment and the expense for preparing the new space for occupancy by Licensee shall be allocated between the parties as described on Exhibit D. Sears may, solely at Sears discretion, not open any Designated Sears Store at any time to take a physical inventory of Sears property. Licensee waives any claim it may have against Sears for damages resulting from such closing. 6.6 Remodeling Licensee shall remodel the Licensed Business area per the terms of Exhibit D and the expense of such remodel shall be divided between the parties as described on Exhibit D. 6.7 Electric/HVAC. Sears shall furnish, at reasonable hours, and except as otherwise provided, without expense to Licensee, reasonable amounts of heat, light, air conditioning and electric power for the operation of the Licensed Business, except when prevented by strikes, accidents, breakdowns, improvements and repairs to the heating, lighting and electric power systems or other causes beyond the control of Sears. Sears shall not be liable for any injury or damage, whatsoever which may arise by reason of Sears failure to furnish such heat, light, air conditioning and electric power, regardless of the cause of such failure. All claims for such injury or damage are expressly waived by Licensee. The allocations of costs to bring such utilities to the Licensed Business location are described on Exhibit D. 6.8 Telephone. Sears will arrange for local telephone service by providing a single Direct Inward Dial Telephone line ("Sears Phone Line") for the Licensed Business location(s). In stores that have not been remodeled, Sears will provide a Sears Phone to the cash register area for the Licensed Business location (s). In new and remodeled stores as described in Exhibit D, Sears 13 shall provide a single Sears Phone to the cash register area and one extension phone line ("Sears Extension Line") in each camera room. Sears shall bear the cost of outbound local and toll-free calls and provide compatible telephone hardware for the Sears Phone Line and the Sears Extension Lines. If Licensee requires additional phone lines ("Additional Phone(s)") to be installed in the Licensed Business location(s), Licensee shall arrange with the appropriate telephone company for such installation and all installation costs and monthly service associated with any such Additional Phone(s) are to be paid by Licensee. Licensee shall arrange with the appropriate telephone company for direct billing to Licensee of all long distance calls made in the Licensed Business location(s). All telephone numbers used in connection with the Licensed Business shall be separate from phone numbers used by Licensee in its other business operations and such numbers shall be deemed to be the property of Sears. Upon expiration or termination of this Agreement, Licensee shall immediately cease to use such numbers and shall transfer such numbers to Sears or to any party Sears designates, and Licensee shall immediately notify the Telephone Company of any such transfer. 6.9 Yellow/White Page Listings. All white and yellow page telephone listings for the Licensed Business shall be approved by Sears prior to placement; provided, however, approval is not required for listings consisting only of Licensee's name and address as authorized in Paragraph 2.1. Sears may, at its sole option, require that any telephone number listed in any telephone directory using Sears name is billed through a Sears store or office. 6.10 Access to Licensed Business Area. Licensee shall have access to the Licensed Business area at all times that the Designated Sears Store is open to customers for business and at all other times as the appropriate Store General Manager approves. Sears shall be furnished with keys to the Licensed Business area and shall have access to the Licensed Business area at all times. 6.11 Effect of Store Leases. If any Designated Sears Store is leased to Sears or is the subject of an easement agreement, this Agreement shall be subject to all of the terms, agreements and conditions contained in such lease or easement agreement. In case of the termination of any such lease by expiration of time or otherwise, this Agreement shall immediately terminate with respect to affected Licensed Business locations. 6.12 Waiver of Casualty Liability. Licensee waives any and all claims it may have against Sears for damage to Licensee, for the safekeeping or safe delivery or damage to any property whatsoever of Licensee or of any customer of Licensee in or about the Licensed Business area, because of the actual or 14 alleged negligence, act or omission of any tenant, licensee or occupant of the premises at which the Licensed Business may be located; or because of any damage caused by any casualty from any cause whatsoever, including, but not limited to, fire, water, snow, steam, gas or odors in or from such store or store premises, or because of the leaking of any plumbing, or because of any accident or event which may occur in such store or upon store premises; or because of the actual or alleged acts or omissions of any janitors or other persons in or about such store or store premises or from any other such cause whatsoever; except for damage caused by Sears gross negligence. VII. ADVERTISING 7.1 Advertising. Licensee shall advertise and actively promote the Licensed Business. Licensee shall at all times adhere to Sears Licensed Business Marketing Manual as provided to Licensee and updated from time to time ("Marketing Manual"). Prior to use in connection with the Licensed Business, Licensee shall submit to Sears Marketing Manager, Licensed Businesses, or his designee, (a) all signs and advertising copy (including, but not limited to, sales brochures, telemarketing scripts, newspaper advertisements, radio and television commercials), and (b) all sales promotional plans and devices. Licensee shall not use any such advertising material or sales promotional plan or device without the prior written approval of Sears Marketing Manager. Sears has the right, in its sole discretion, to disapprove or require modification of any or all such advertising forms and other materials. Licensee shall not engage in any Internet advertising without the prior written consent of Sears Marketing Manager. Sears shall have the right to audit Licensee's advertising materials and practices to determine Licensee's compliance with this Agreement, including but not limited to compliance with all laws. 7.2 Publicity. Licensee shall not issue any publicity or press release regarding its contractual relations with Sears or regarding the Licensed Business, and shall refrain from making any reference to this Agreement or to Sears in any prospectus, annual report or other filing required by Federal or state law, or in the solicitation of business, without obtaining Sears prior written approval of such action from Sears Licensing Manager and Sears Public Relations Manager. Licensee shall at all times adhere to Sears written policies regarding interaction with the media as contained in the Marketing Manual. 7.3 Forms. Prior to use in connection with the Licensed Business, Licensee shall submit all customer contract forms, guarantee certificates and other forms and materials to Sears Licensing Manager for approval. Licensee shall not utilize any forms or related materials that have not been approved in advance by Sears Licensing Manager. 15 VIII. LICENSED BUSINESS EQUIPMENT 8.1 Licensee's Equipment. Entirely at its own expense, Licensee shall in- stall furniture, fixtures and equipment as necessary for the efficient operation of the Licensed Business ("Licensee's Equipment"). Licensee's Equipment, and its size, design and location shall at all times be subject to Sears approval. 8.2 Licensee's Point of Sale System. At its own expense, Licensee shall furnish a point of sale system and peripheral devices, including, but not limited to printers, bar-code scanning devices, and electronic signature capture devices ("Licensee's POS"). Licensee's POS shall have the capability of processing Sears Card and any other credit cards Sears may accept from time to time. At such time as Licensee's POS interfaces with the Sears in- store processor("Sears ISP), Licensee's POS shall be compatible with the Sears ISP, and Licensee's POS shall have substantially the same capabilities as the point of sale system used by Sears in its own merchandise departments to the extent applicable to the operation of the Licensed Business. This transition will occur no later than June 30, 2000. Licensee shall also be responsible for upgrading Licensee's POS to be compatible with enhancements and changes in functionality made to the Sears ISP. Sears shall be responsible for the cost of installing and maintaining a Sears data line to the Licensed Business location. Subject to Licensee's fulfillment of its obligations under this paragraph, Sears shall also be responsible for the cost of developing and maintaining the third party interface software that is necessary to support the integration of Licensee's POS with the Sears ISP. 8.3 Sears Card. At such time when Licensee's POS interfaces with the Sears ISP as described in Paragraph 8.2, Licensee agrees to accept and process Sears Card payments from customers at Licensee's POS, and upon written approval from Sears Licensing Manager, Licensee will be authorized to open Sears Card instant credit accounts ("Rapid Credit") for customers. IX. TRANSACTIONS AND SETTLEMENT 9.1 Checks. All checks or money orders which Licensee accepts from customers shall be made payable to Sears, Sears, Roebuck and Co. or Sears Portrait Studio. Licensee shall make certain that all checks are filled out correctly and are verified in accordance with Sears policies in effect from time to time. Checks which are deficient in any manner may be charged back to Licensee, and Licensee shall reimburse Sears for any of Sears Commission lost as a result of Licensee's failure to obtain a properly filled out and verified check. 16 Sears shall not be entitled to Sears Commission for those checks that have all of the above information but which are not paid upon presentment. Any and all losses which may be sus- tained by reason of nonpayment of any checks upon presentment shall be borne by Licensee, and Sears shall have no liability with respect to such checks, provided that Sears shall make whatever effort it deems reasonable to collect all such checks prior to charging back such checks to Licensee. 9.2 Credit Sales. With the approval of the Credit Central designated by Sears, sales may be made by Licensee on such of Sears regularly established credit plans as may be first approved by such Credit Central. The approval of such Credit Central is required for each individual credit sale, and approval shall be granted in the sole discretion of the Credit Central. No part of the finance charge which may be earned by Sears in connection with any credit sale shall be payable to or credited in any way to Licensee. All losses sustained by Sears as a result of non-payment of a Sears credit account shall be borne by Sears, provided that Licensee has complied with Sears credit policies and procedures. Except for non-payment of a Sears credit account, Sears shall have no liability whatsoever to Licensee for Sears failure to properly accept or reject a customer's charge. Licensee agrees to accept third party credit cards as designated by Sears from time to time. Licensee may not distribute or solicit any customer applications for any third party credit cards in the Licensed Business. At such time when Licensee's POS interfaces with the Sears ISP as described in Paragraph 8.2, Sears shall pay Licensee's third party merchant discount fees for using third party credit cards, as long as Licensee's balance of sale for third party credit does not exceed the Sears full-line stores balance of sale for third party credit for that Sears fiscal year. If Licensee's balance of sale for third party credit exceeds the Sears full-line stores balance of sale for third party credit for that Sears fiscal year, Licensee will reimburse Sears one and one half percent (1.5%) of all third party credit sales over the Sears full-line stores average balance of sale for third party credit. Sears shall have the right to withhold such third party credit fees owed to Sears, from the next regular settlement after the close of that fiscal year. Licensee shall comply with all provisions of Federal and state laws governing credit sales, and their solicitation, including but not limited to provisions dealing with disclosures to customers and finance charges. Licensee shall not modify, in any way, the terms and conditions of Sears credit plans. 9.3 Sales Receipts. At the close of each business day, Licensee shall submit an accounting of the Gross Sales and the returns, allowances and customer adjustments made during such day by Licensee to the cashier of the Sears unit designated by Sears, together with the gross amount, in cash, of all cash sales, and all credit sales documents for transactions completed that day. Sears may retain out of such receipts the proper amount of the Sears Commission payable under this 17 Agreement together with any other sums due Sears from Licensee. The remaining balance shall be payable to Licensee at the regular settlement set forth in Paragraph 9.4. 9.4 Settlement. A settlement between the parties shall be made at the end of each Sears fiscal month for all transactions of Licensee during such period, in accordance with Sears customary accounting procedures. Such settlement will be done through the Sears Accounting Center designated by Sears. Sears will advance Licensee eighty-five percent (85%) of Net Sales weekly. Such advances shall be deducted and reconciled in the next regular settlement. All settlements and advances shall be made by electronic funds transfer (EFT) to a bank account designated by Licensee. For all transactions entered into the Sears system for settlement purposes, and until such time when Licensee's POS interfaces with the Sears ISP as described in Section 8.2, Sears will pay transaction fees for any processing service with whom Sears has an agreement to provide access for the point of sale settlement system to the appropriate Sears credit system. Licensee shall reimburse Sears at each settlement for all invoiced expenses, including any advertising expense, incurred by Sears at Licensee's request, outstanding at the time of such settlement. If Sears is not reimbursed at such settlement, then Sears shall have the right, but not the obligation, to retain out of Licensee's sales receipts the amount of such expenses with interest, if any, due Sears. 9.5 Reports. If requested by Sears, Licensee shall provide to Sears reports of sales and income and Sears commissions paid in the manner and form prescribed by Sears, together with any other information Sears may require for its records or auditing purposes. If requested by Sears, Licensee shall promptly submit its financial report to Sears after the close of Licensee's fiscal year. Such report shall be certified by an accountant or by an officer of Licensee in the event that no audit is performed. Such report shall include, but shall not be limited to, Licensee's profit and loss statement for such fiscal year and balance sheet at the end of such fiscal year, and shall be prepared in accordance with generally accepted accounting principles. If Licensee is a publicly held corporation, this requirement may be fulfilled by submission of Licensee's Annual Report on Form 10-K. Sears shall not disclose any such information that is not available to the public to any third parties without Licensee's prior consent. 9.6 Audit Rights. Licensee shall keep and maintain books and records that accurately reflect the sales made by Licensee under this Agreement and the expenses that Licensee incurs in performing under this Agreement. Sears shall have the right at any reasonable time to review and audit the books and records of Licensee regarding this Agreement. Such books and records shall be kept and maintained according to generally accepted accounting principles. 9.7 Underreporting. 18 If an audit reveals that sales were under-reported at any Licensed Business location being audited, by more than five percent (5%) of the total sales which were actually reported by such location, then the cost of such audit shall be charged to such Licensed Business location. If a sampling of Licensee's records at a Licensed Business location, using standard audit practices, reveals that sales have been under- reported by more than five percent (5%) of the total sales which were actually reported by such Licensed Business location, then such Licensed Business location shall at its option, (a) pay Sears for all under-reported sales for each year audited by annualizing the rate by which sales were under- reported in the audit sample plus an administrative fee which shall be calculated by multiplying the annualized under- reported commissions by the percent of under-reported sales; or (b) pay the actual amount of any under-reported sales based on a complete audit of the books and records (at Licensee's expense) relating to such Licensed Business location, including a comprehensive audit of all such books and records for the then-current year and if Sears so elects, a comprehensive audit (at Licensee's expense) of prior years plus an administrative fee which shall be calculated by multiplying the audited annual under-reported commission by the percent of under-reported sales. Each audited location shall be subject to another audit (at Licensee's expense) one (1) year after the initial audit. If this audit reveals that sales were again under-reported by more than five percent (5%), Licensee shall pay Sears for these sales as per the above except that, due to the increased expenses incurred by Sears in continued monitoring of the Licensed Business, the administrative fee shall be doubled. All under-reported sales equal to or less than five percent (5%) of total sales actually reported by such Licensed Business location, shall be reimbursed to Sears, as appropriate, based on the actual amounts of such under-reports. Sears, at its sole option, may also charge interest on all under-reported sales at the rate of prime (as published in the Wall Street Journal as of the date of the completion of the audit) plus one percent (1%). Licensee, at its expense, shall develop and implement a program to conduct internal audits of the Licensed Business to verify accuracy of sales and commissions. 9.8 Rights of Recoupment and Setoff. Sears shall have the right to reduce, withhold or set-off against any payment due Licensee hereunder any liability or obligation which Licensee may have to Sears. Any Licensee liabilities or obligations which remain outstanding after any exercise of Sears right of set-off shall be paid by Licensee promptly upon demand by Sears. Sears rights under this Paragraph are cumulative, shall be in addition to all other rights, remedies available at law or in equity, and shall survive the expiration or termination of this Agreement. X. CUSTOMER INFORMATION; CONFIDENTIALITY 10.1 Customer Information. 19 The Sears Information and any customer list developed by Licensee, its employees or agents from the operation of, or from records generated as a result of the operation of the Licensed Business (collectively, the "Customer Information"), are deemed exclusively owned by Sears. Licensee shall not use, permit use, disclose or permit disclosure of such Customer Information for any purpose except the performance of this Agreement. Licensee shall at all times maintain any such Customer Information, including lists, physically separate and distinct from any customer information Licensee may maintain that is unrelated to the Licensed Business. Licensee shall not reproduce, release or in any way make available or furnish, either directly or indirectly, to any person, firm, corporation, association or organization at any time, any such Customer Information which will or may be used to solicit sales or business from such customers, including but not limited to the type of sales or business covered by this License Agreement. Upon written request by Sears during the Term and on expiration or termination of this Agreement for any reason, Licensee shall immediately deliver all copies of lists of customers and copies of all other such Customer Information to Sears; and Licensee, its officers, employees, successors and assigns, shall not use any such Customer Information to solicit any of such customers. Licensee shall protect all such Customer Information from destruction, loss or theft during the term of this Agreement, and until all copies of customer lists and copies of all other Customer Information are turned over to Sears. Licensee acknowledges that there is no adequate remedy at law for violation by Licensee of this Section X and, in case of breach of this Section X, preliminary or permanent injunctive relief would be appropriate. 10.2 Confidential Information. Information furnished by Sears to Licensee or which becomes known to Licensee through Licensee's operation of the Licensed Business or Licensee's relationship with Sears is confidential and proprietary to Sears (collectively, the "Confidential Information"). All such Confidential Information shall be held in utmost confidence by Licensee. All Confidential Information, including, but not limited to, information regarding Sears stores, and any other information not specifically designated by Sears for release to the public that may come into the possession of Licensee during the Term of this Agreement shall be delivered to the appropriate Licensing Manager at Sears upon request by Sears, and Licensee shall not make or retain copies or portions of the Confidential Information. The terms and content of this Agreement, including but not limited to, exhibits attached hereto, and any other agreements entered into pursuant to this Agreement shall at all times remain confidential and shall not be revealed to any third party by Licensee without the prior written consent of Sears except to the extent (a) permitted by this Agreement, (b) required by law or any court, or (c) made to a court or mediator in connection with a dispute between the parties. The provisions of this Section X shall survive the expiration or termination of this Agreement. XI. RELATIONSHIP OF PARTIES Licensee is an independent contractor. Nothing contained in or done pursuant to this Agreement shall be construed as creating a partnership, agency or joint venture; and neither party shall become bound by any representation, act or omission of the other party. 20 XII. DEFENSE AND INDEMNITY 12.1 Defense. Licensee shall defend all allegations asserted in any claim, action, lawsuit or proceeding (even though such allegations may be false, fraudulent or groundless) against Sears, its affiliates and subsidiaries, and/or Sears subsidiaries or affiliates, directors, officers, employees, agents, independent contractors, parents, subsidiaries and affiliates which contains any allegations of liability actually or allegedly resulting from or connected with the operation of the Licensed Business (including, without limitation of the foregoing, goods sold, work done, services rendered, or products utilized in the Licensed Business, lack of repair in or about the area occupied by the Licensed Business, operations of or defect in any machinery, motor vehicles, or equipment used in connection with the Licensed Business, or located in or about the Licensed Business area; or arising out of any actual or alleged infringement of any patent or claim of patent, copyright or non-Sears trademark, service mark, or trade name); or from the omission or commission of any act, lawful or unlawful, by Licensee or its directors, officers, employees, agents or independent contractors, whether or not such act is within the scope of the authority or employment of such persons. Licensee shall use counsel satisfactory to Sears in defense of such allegations. Sears may, at its election, take control of the defense and investigation of any claims, may employ and engage attorneys of its own choice to manage and defend such claims, at Licensee's cost, risk and expense, provided that Sears and its counsel shall proceed with diligence and good faith with respect thereto. The provisions of this Paragraph shall survive the expiration or termination of this Agreement. 12.2 Indemnity. Licensee shall hold harmless and indemnify Sears and Sears directors, officers, employees, agents, independent contractors, parents, subsidiaries and affiliates from and against any and all claims, demands, actions, lawsuits, proceedings, liabilities, losses, costs and expenses (including, without limitation, fees and disbursements of counsel incurred by Sears in any claim, demand, lawsuit, or proceeding between Licensee and Sears or between Sears and any third party or otherwise), actually or allegedly resulting from or connected with the operation of the Licensed Business (including, without limitation of the foregoing, goods sold, work done, services rendered, or products utilized in the Licensed Business, lack of repair in or about the area occupied by the Licensed Business, operation of or defects in any machinery, motor vehicles, or equipment used in connection with the Licensed Business, or located in or about the Licensed Business area; or arising out of any actual or alleged infringement of any patent or claim of patent, copyright or non-Sears trademark, service mark, or trade name); or from the omission or commission of any act, lawful or unlawful, by Licensee or its directors, officers, employees, agents or independent contractors, whether or not such act is within the scope of the authority or employment of such persons. The provisions of this Paragraph shall not apply to the extent any injury or damage is caused solely by Sears negligence. The provisions of this Paragraph shall survive the expiration or termination of the Agreement. 21 XIII. INSURANCE 13.1 Types of Insurance. Licensee shall, at its sole expense, obtain and maintain during the Term of this Agreement the following policies of insurance from companies having a rating of at least A-VII or better in the current Best's Insurance Reports published by A.M. Best Company and adequate to fully protect Sears as well as Licensee from and against all expenses, claims, actions, liabilities and losses related to the subjects covered by the policies of insurance below: (a) Worker's Compensation insurance covering all costs, benefits and liabilities under Workers Compensation and similar laws which may accrue in favor of any person employed by Licensee for all states in which Licensee operates, and Employer's Liability insurance with limits of liability of at least $100,000 per accident or disease and $500,000 aggregate by disease. Such insurance shall contain a waiver of subro- gation in favor of Sears. Limits of liability requirements for Employer's Liability may be satisfied by a combination of Employer's Liability and Umbrella Excess Liability policies. (b) Commercial General Liability insurance, including but not limited to, premises/operations liability, contractual liability, personal and advertising injury liability, and products and completed operations liability, with limits of at least $1,000,000 for bodily injury and property damage combined. Sears shall be named as an additional insured. Limits of liability requirements may be satisfied by a combination of Commercial General Liability and Umbrella Excess Liability policies. (c) Motor Vehicle Liability insurance, for owned, non-owned and hired motor vehicles used in connection with the Licensed Business, with limits of at least $1,000,000 for bodily injury and property damage combined. If only private passenger vehicles are owned or shall be used in conjunction with this Agreement, $500,000 combined single limit of liability is acceptable. If no vehicles are owned or leased by Licensee, the Commercial General Liability insurance shall be extended to provide insurance for non-owned and hired motor vehicles. Limits of liability requirements may be satisfied by a combination of Motor Vehicle Liability and Umbrella Excess Liability policies. (d) "All Risk" Property insurance upon all building improvements and supplies on the premises, including those perils generally covered on a "Cause of Loss - Special Form", including fire, extended coverage, windstorm, vandalism, malicious mischief, sprinkler leakage, water damage, accidental collapse, in an amount equal to at least 90% of the full replacement cost, with a coverage extension for increased cost of construction, including a waiver of subrogation in favor of Sears. (e) Fidelity insurance with limits of liability of at least $50,000. 13.2 No Cancellation Without Notice. 22 Licensee's policies of insurance shall expressly provide that they shall not be subject to material change or cancellation without at least thirty (30) days' prior written notice to Sears Certificate Management Services, c/o Near North Technology Services, P.O. Box 811310, Chicago, Illinois 60681-1310, or other address of which Licensee is notified. 13.3 Certificates. Licensee shall furnish Sears with certificates of insurance or, at Sears request, copies of policies, prior to execution of this Agreement and upon each policy renewal during the Term of this Agreement. If Licensee does not provide Sears with such certificates of insurance or, in Sears opinion, such policies do not afford adequate protection for Sears, Sears shall so advise Licensee, and if Licensee does not furnish evidence of acceptable coverage within five (5) days, Sears shall have the right to immediately terminate this Agreement upon written notice to Licensee. 13.4 Expiration/Non-Renewal. If Licensee's policies of insurance expire or are canceled during the Term of this Agreement or are materially modified, Licensee shall promptly notify Sears of such expiration, cancellation or material modification. If such policies of insurance are materially modified such that, in Sears opinion, such policies do not afford adequate protection to Sears, Sears shall so advise Licensee. If Licensee does not furnish evidence of acceptable replacement coverage within five (5) days after the expiration or cancellation of coverage or the notification from Sears that modified policies are not sufficient, Sears shall have the right, at its option, to immediately terminate this Agreement upon written notice to Licensee. Any approval by Sears of any of Licensee's insurance policies shall not relieve Licensee of any responsibility under this Agreement, including liability for claims in excess of described limits. XIV. TERMINATION 14.1 Mutual Right of Termination. Either party may terminate this Agreement, or any location, without cause, without penalty, and without liability for any damages as a result of such termination, at any time hereafter by giving the other party at least ninety (90) days' prior written notice. The notice shall specify the termination date. 14.2 Termination of License by Sears With Notice. This Agreement shall terminate effective upon delivery of notice of termination to Licensee if Licensee, or its owner(s): (a) abandons or fails to actively operate the License Business or fails to commence operation of his Licensed Business as required in Paragraph 6.3 of 23 this Agreement; (b) surrenders or transfers control of the Licensed Business without Sears prior written consent; (c) has made any material misrepresentation or omission in his application; (d) is convicted of or pleads no contest to a felony, or engages in any conduct that is likely to adversely affect the reputation of Licensee, the Licensed Business or Sears; (e) makes an unauthorized transfer of the Licensed Business; (f) makes any unauthorized use, duplication or disclosure of the Confidential Information or Customer Information; (g) fails to secure and maintain appropriate insurance coverage as set forth in Section XIII; (h) a petition is filed either by or against Licensee in any bankruptcy or insolvency proceeding, or if any property of Licensee passes into the hands of any receiver, assignee, officer of the law or creditor; or (i) materially misuses or makes an unauthorized use of any Sears Mark. 14.3 Termination of License by Sears Without Further Notice. This Agreement shall terminate without further action by Sears or notice to Licensee if Licensee or its owners(s): (a) fails to make payment of any Sears Commissions or any other amounts due Sears, and does not correct such failure within ten (10) days after written notice of such failure is delivered to Licensee; or (b) fails to comply with any other provision of this Agreement or any mandatory specification, standard or operating procedures as prescribed by Sears and does not correct such failure within thirty (30) days after written notice of such failure to comply is delivered to Licensee. 14.4 Termination on Store Closing. Sears may, solely at Sears discretion, terminate this Agreement with respect to any affected Licensed Business location without notice, due to the closing of the Designated Sears Store. Licensee shall not be entitled to any notice of such store closing prior to a public announcement of such closing. Licensee waives any claim it may have against Sears for damages, if any, incurred as a result of such closing. If any Designated Sears Store is damaged by fire or any other casualty so that the Licensed Business area becomes untenantable, this Agreement may be terminated with respect to such Licensed Business location, without penalty and without liability for any damages as a result of such termination, effective as of the date of such casualty, by either party giving the other party written notice of such termination within twenty (20) days after the occurrence of such casualty. If such notice is not given, then this Agreement shall not terminate, but shall remain in full force and effect and the parties shall cooperate with each other so that Licensee may resume the conduct of business as soon as possible. 14.5 Effect of Termination. Upon the termination of this Agreement by expiration of time or otherwise, Licensee shall, immediately pay all amounts owed to Sears, cease use of all Sears Marks, the Confidential Information and Customer Information and, at its expense, immediately remove all 24 of Licensee's Equipment from Sears premises and shall, without delay and, at Licensee's expense, repair any damage to Sears premises caused by such removal. Upon the termination of this Agreement by expiration of time or otherwise, the expense to return the Licensed Business area to the condition Sears made it ready for use by the Licensee shall be allocated per the terms of Exhibit D. 14.6 Survivability. No termination of this Agreement, by expiration of time or otherwise, shall relieve the parties of obligations arising before expiration or termination or arising upon or after expiration or termination of this Agreement. XV. ASSIGNMENT AND SUBLICENSING 15.1 Assignment by Licensee. Notwithstanding any other provision contained in this Agreement, this Agreement is not transferable by Licensee in whole or in part without Sears prior written consent and Licensee shall not sub-license the license granted herein to any person or entity. Any transfer or attempt to transfer by Licensee whether expressly or by operation of law, and without Sears prior written consent, shall, at the option of Sears, without notice, immediately terminate this Agreement. The sale of Licensee's business or any other transaction (including sales of stock) which shifts the rights or liabilities of Licensee to another controlling interest shall be deemed such a prohibited transfer. 15.2 Assignment by Sears. This Agreement is fully transferable by Sears and shall inure to the benefit of any transferee or other legal successor to Sears interest herein. 25 15.3 Binding Nature. The provisions of this Agreement shall be binding upon Licensee and upon Licensee's successors and assigns and shall be binding upon and inure to the benefit of Sears, its successors and assigns. XVI. MISCELLANEOUS 16.1 Cumulative Remedies. The remedies provided in this Agreement are cumulative, and shall not affect in any manner any other remedies that either party may have for any default or breach by the other party. The exercise of any right or remedy shall not constitute a waiver of any other right or remedy under this Agreement or provided by law or equity. No waiver of any such right or remedy shall be implied from failure to enforce any such right or remedy other than that to which the waiver is applicable, and only for that occurrence. 16.2 Severability. If any provision in this Agreement is held to be invalid, illegal or unenforceable by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been included. 16.3 Governing Law. This Agreement shall be interpreted and governed by the internal substantive laws of the State of Illinois, without regard to its conflict of law principles. This Agree- ment shall not be effective until it has been received and executed by Sears in Hoffman Estates, Illinois. The federal and/or state courts of Illinois shall have personal and subject matter jurisdiction over, and the parties each hereby submit to the venue of such courts with respect to, any dispute arising pursuant to this Agreement, and all objections to such jurisdiction and venue are hereby waived. 16.4 Entire Agreement. This Agreement sets forth the entire agreement and understanding between the parties with respect to the Licensed Business. This Agreement shall not be supplemented, modified or amended except by a written instrument signed by duly authorized representatives of Licensee and Sears, and no person has or shall have the authority to supplement, modify or amend this Agreement in any other manner. This Agreement shall be effective when signed by Sears. 26 16.5 Headings. The paragraph titles in this Agreement are for the mere convenience of the parties, and shall not be considered in any construction or interpretation of this Agreement. 16.6 Notices. All notices provided for or which may be given in connection with this Agreement shall be in writing and given by personal delivery, certified mail with postage prepaid and return receipt requested or its equivalent, such as private express courier, or by facsimile transmission (with a confirmation copy sent by regular mail). Notices given by Licensee to Sears shall be addressed to: SEARS, ROEBUCK AND CO. Attention: Licensing Manager, Licensed Businesses, Department 725 E3-378B 3333 Beverly Road Hoffman Estates, Illinois 60179 Notices given by Sears to Licensee shall be addressed to: CONSUMER PROGRAMS INCORPORATED Attention: Senior Vice President of Administration 1706 Washington Avenue St. Louis, Missouri 63103 Notices if so sent by mail shall be deemed to have been given when deposited in the mail or with the private courier. All changes of address must be communicated to the other party in writing. -[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]- 27 IN WITNESS WHEREOF, the parties have executed this Agreement or caused this Agreement to be executed on their behalf by duly authorized officers or representatives. SEARS, ROEBUCK AND CO. By: /s/ Ken E. Hux ----------------------------- Its: Vice President and General Manager, Licensed Businesses LICENSEE By: /s/ Alyn V. Essman ------------------------------ Its: Chairman and Chief Executive Officer EXHIBIT A DESIGNATED SEARS STORES
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 1001 11C43 WESTMINSTER CO 1003 01Y50 SALEM NH 1004 01Y82 GARDEN CITY NY 1005 01M26 LAKE WALES FL 1006 01M41 OCALA FL 1007 01Y72 BRANDON FL 1008 11C89 LOS ANGELES CA 1009 11847 SEATTLE WA 1010 11859 CHICAGO IL 1012 11836 DES MOINES IA 1013 01C59 GLEN BURNIE MD 1014 01Z05 ENFIELD CT 1015 01Y92 VERO BEACH FL 1016 01818 LITTLE ROCK AR 1017 01482 HOUSTON TX 1018 11R89 LOS ANGELES CA 1019 11Y85 PLEASANTON CA 1020 11868 CHICAGO IL 1022 11Y93 OMAHA NE 1024 01Z06 FALLS CHURCH VA 1025 01E87 DANVILLE VA 1026 01E22 MEMPHIS TN 1027 11Y81 EL PASO TX 1028 11E04 HOLLYWOOD CA 1029 11794 SPOKANE WA 1030 11869 CHICAGO IL 1031 11C42 DENVER CO 1032 11EG3 BROOKLYN CTR MN 1033 01Q02 N ATTLEBORO MA 1034 01R53 PITTSBURGH PA 1035 01EH3 AUGUSTA GA 1038 11Z07 SPOKANE WA 1039 11Y95 OAKLAND CA
29 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 1040 11N68 EAU CLAIRE WI 1041 11EC7 OMAHA NE 1042 01M31 JOPLIN MO 1043 01V65 MERIDEN CT 1044 01C55 JERSEY CITY NJ 1045 01E81 DURHAM NC 1048 11C33 PASADENA CA 1050 11N52 MOLINE IL 1051 01Y91 STRONGSVILLE OH 1052 11EG2 ST PAUL MN 1053 01V81 SAUGUS MA 1055 01Q16 CORAL SPRINGS FL 1056 01791 MOBILE AL 1057 01427 DALLAS TX 1059 11850 SEATTLE WA 1060 11EA6 CHUBBUCK ID 1062 11EF7 BROOKFIELD WI 1063 01V12 WEST HARTFORD CT 1064 01Q12 LANGEHORNE PA 1065 01E29 GLENN ALLAN VA 1066 01Y25 JACKSONVILLE FL 1067 01483 HOUSTON TX 1068 11EK3 PALMDALE CA 1069 11851 REDMOND WA 1070 11R19 MANKATO MN 1071 11C44 DENVER CO 1072 11EJ2 WATERLOO IA 1074 01Y12 WALDORF MD 1075 01N02 DAYTONA BEACH FL 1076 01R99 LEWISVILLE TX 1077 01879 SHREVEPORT LA 1078 11Y37 MESA AZ 1079 11790 PORTLAND OR 1081 11EJ7 HEATH OH 1082 11EF8 GREENDALE WI 1083 01V29 WARWICK RI 1084 01487 PHILADELPHIA PA 1086 01862 BATON ROUGE LA
30 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 1087 01Y23 HOUSTON TX 1088 11C98 GLENDALE CA 1089 11C74 ANCHORAGE AK 1090 11870 CHICAGO IL 1091 01825 OKLAHOMA CITY OK 1092 11Y98 WESTLAND MI 1093 01V51 SPRINGFIELD MA 1094 01C52 HACKENSACK NJ 1096 01866 PENSACOLA FL 1097 01C70 SAN ANTONIO TX 1099 11852 FEDERAL WAY WA 1100 11773 FLINT MI 1101 11467 OVERLAND PARK KS 1102 11EF5 MILWAUKEE WI 1103 01V13 ALBANY NY 1104 01Y84 MARLBOROUGH MA 1105 01Y86 OCOEE FL 1106 01860 JACKSON MS 1109 11N33 LYNNWOOD WA 1110 11N07 PORTAGE MI 1111 11N62 COLORADO SPGS CO 1112 11EG5 MINNETONKA MN 1113 01V42 ORANGE CT 1114 01C05 BROOKLYN NY 1115 01R67 CHATTANOOGA TN 1116 01863 MONROE LA 1117 01480 FT WORTH TX 1118 11EA1 SALT LAKE CITY UT 1119 11M06 PORTLAND OR 1120 11Z02 COLUMBUS OH 1121 11798 INDEPENDENCE MO 1122 11EG6 MAPLEWOOD MN 1123 01V41 DEDHAM MA 1124 01C02 BAYSHORE NY 1125 01M02 MIAMI FL 1126 01865 MONTGOMERY AL 1127 01484 HOUSTON TX 1129 11848 TACOMA WA
31 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 1130 11E60 JANESVILLE WI 1131 11C45 LITTLETON CO 1132 11EG7 BURNSVILLE MN 1133 01V82 LEOMINSTER MA 1135 01E27 RICHMOND VA 1136 01810 BIRMINGHAM AL 1137 01761 AUSTIN TX 1139 11849 TUKWILA WA 1140 11N17 GRAND RAPIDS MI 1141 11C41 AURORA CO 1142 11EG8 EDEN PRAIRIE MN 1143 01Z10 BROOKLYN NY 1145 01C40 COLUMBUS GA 1146 01Z04 MEMPHIS TN 1147 01Y99 BATON ROUGE LA 1149 11Z03 WHITTIER CA 1150 11803 COLUMBUS OH 1151 01C31 TULSA OK 1154 01V21 WHITEHALL PA 1155 01R40 KENNESAW GA 1158 11C47 HONOLULU OAHU HI 1159 11R35 FAIRFIELD CA 1161 11C71 WICHITA KS 1163 01V83 BURLINGTON MA 1166 01EE1 MERIDIAN MS 1167 01762 SAN ANTONIO TX 1168 11837 N HOLLYWOOD CA 1170 11E80 LANSING MI 1171 01N98 SPRINGFIELD MO 1172 11Y41 BLOOMINGDALE IL 1174 01752 UPPER DARBY PA 1175 01M43 MERRITT ISLAND FL 1176 01492 PASADENA TX 1177 01C11 ARLINGTON TX 1178 11E07 SANTA MONICA CA 1179 11Y88 CANOGA PARK CA 1180 11C46 WATERFORD MI 1181 11P16 KANSAS CITY MO
32 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 1182 11Y24 ST PETERS MO 1185 01E84 ASHEVILLE NC 1186 01E21 MEMPHIS TN 1187 01477 MESQUITE TX 1189 11C88 WEST COVINA CA 1193 01V37 WATERFORD CT 1195 01M03 FT LAUDERDALE FL 1197 01475 HOUSTON TX 1199 11Y94 SAN MATEO CA 1202 11Y63 BEAVERCREEK OH 1204 01Y21 FREEHOLD NJ 1205 01EB4 POMPANO BEACH FL 1206 01819 NO LITTLE ROCK AR 1207 01788 RICHARDSON TX 1208 11C92 FRESNO CA 1209 11Y90 LONG BEACH CA 1211 01N91 OKLAHOMA CITY OK 1213 01V79 AUBURN MA 1216 01E19 MEMPHIS TN 1217 01C83 CORPUS CHRISTI TX 1220 11EH8 TOLEDO OH 1221 11M61 COLORADO SPGS CO 1224 01V39 HARRISBURG PA 1225 01C39 ORLANDO FL 1226 01795 METAIRIE LA 1227 01756 DALLAS TX 1228 11C93 SACRAMENTO CA 1229 11EA9 BOISE ID 1234 01Z19 OWINGS MILLS MD 1236 01760 TULSA OK 1237 01C30 HOUSTON TX 1238 11826 MT VIEW CA 1243 01V77 HANOVER MA 1244 01V57 YORK PA 1245 01E76 CHARLOTTE NC 1247 01C62 LUBBOCK TX 1248 11C96 HAYWARD CA 1250 11802 LINCOLN PARK MI
33 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 1253 01V78 PEABODY MA 1254 01815 WILMINGTON DE 1257 01E11 FRIENDSWOOD TX 1261 01861 MIDWEST CITY OK 1263 01V18 WATERBURY CT 1264 01C06 HICKSVILLE NY 1265 01426 VIRGINIA BEACH VA 1266 01808 BIRMINGHAM AL 1267 01C72 FT WORTH TX 1268 11C16 BUENA PARK CA 1270 11493 CRESTWOOD MO 1271 11M86 LITTLETON CO 1273 01V35 HOLYOKE MA 1274 01Y80 RICHMOND VA 1275 01N42 ATLANTA GA 1277 01E12 SAN ANTONIO TX 1278 11C17 TORRANCE CA 1280 11ED5 SPRINGDALE OH 1283 01V55 BRAINTREE MA 1284 01E24 ALEXANDRIA VA 1285 01R41 ORLANDO FL 1286 01797 GRETNA LA 1287 11758 ALBUQUERQUE NM 1288 11EK4 STOCKTON CA 1290 11874 NILES IL 1294 01C54 WATCHUNG NJ 1295 01856 ST PETERSBURG FL 1297 01E14 HURST TX 1298 11C38 RIVERSIDE CA 1300 11876 OAK BROOK IL 1301 11EA5 PROVO UT 1303 01V69 DANBURY CT 1304 01494 SILVER SPRINGS MD 1305 01M42 SAVANNAH GA 1306 01M45 HATTIESBURG MS 1307 01EB9 ABILENE TX 1309 11Y87 DOWNEY CA 1310 01893 ELYRIA OH
34 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 1313 01V76 NASHUA NH 1314 01C09 NEW BRUNSWICK NJ 1315 01N84 CHATTANOOGA TN 1316 01E17 ANTIOCH TN 1317 11827 EL PASO TX 1318 11C95 BAKERSFIELD CA 1321 11N67 PEORIA IL 1323 01V47 MIDDLETOWN NY 1325 01E95 CHARLESTON SC 1327 01E37 BAYTOWN TX 1328 11EG9 LAS VEGAS NV 1330 11EL2 EVANSVILLE IN 1333 01V45 POUGHKEEPSIE NY 1334 01842 PITTSBURGH PA 1335 01E59 GREENSBORO NC 1336 01EE2 LAKE CHARLES LA 1337 01M32 PLANO TX 1338 11793 TUCSON AZ 1343 01Y30 CAMBRIDGE MA 1344 01844 PITTSBURGH PA 1345 01EB5 HIALEAH FL 1347 01E68 LAFAYETTE LA 1350 01894 MENTOR OH 1353 01V14 DEWITT NY 1354 01768 WILLOW GROVE PA 1355 01792 ALTAMONTE SPGS FL 1357 01M34 AUSTIN TX 1358 11C12 CHULA VISTA CA 1364 01C56 LAKE GROVE NY 1365 01EB3 MIAMI FL 1367 01P05 WACO TX 1368 11C97 CONCORD CA 1370 11779 COLUMBUS OH 1375 01E86 WINSTON-SALEM NC 1377 01M46 HOUSTON TX 1378 11C34 ORANGE CA 1380 11872 CHICAGO IL 1385 01N43 ATLANTA GA
35 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 1386 01785 GOODLETTSVILLE TN 1387 01829 AMARILLO TX 1388 11C28 COSTA MESA CA 1390 11C84 ANN ARBOR MI 1395 01N97 KNOXVILLE TN 1397 01EL8 ODESSA TX 1398 11C37 SAN BERNARDINO CA 1401 11E65 WICHITA KS 1403 01V72 NATICK MA 1404 01C57 MASSAPEQUA NY 1405 01E85 FAYETTEVILLE NC 1407 01883 BEAUMONT TX 1408 11806 SACRAMENTO CA 1410 01N10 CANTON OH 1414 01C58 NANUET NY 1415 01838 CLEARWATER FL 1417 01R23 HUMBLE TX 1424 01495 BETHESDA MD 1427 01R80 SAN ANTONIO TX 1430 01892 MIDDLEBERG HTS OH 1434 01C10 WAYNE NJ 1435 01E94 MACON GA 1437 01R61 ARLINGTON TX 1438 11C13 EL CAJON CA 1440 11781 COLUMBUS OH 1443 01V68 MANCHESTER CT 1444 01C03 WHITE PLAINS NY 1445 01E28 RICHMOND VA 1448 11E50 OXNARD CA 1450 11774 ROSEVILLE MI 1454 01812 BENSALEM PA 1455 01E70 WILMINGTON NC 1457 01Y69 WOODLANDS TX 1458 11M55 SCOTTSDALE AZ 1460 11771 LIVONIA MI 1463 01V26 S BURLINGTON VT 1464 01816 DEPTFORD NJ 1465 01839 TAMPA FL
36 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 1468 11C19 CUPERTINO CA 1470 11EE3 GREENWOOD IN 1473 01Z22 SELINSGROVE PA 1474 01N37 YOUNGSTOWN OH 1478 11C18 SAN BRUNO CA 1483 01Z16 VOORHEES NJ 1484 01V34 READING PA 1485 01E93 ORANGE PARK FL 1487 01Y78 CEDAR PARK TX 1488 11C65 SAN JOSE CA 1490 11772 TROY MI 1494 01817 MOORESTOWN NJ 1495 01E25 FORT MEYERS FL 1500 11414 ST ANN MO 1504 01N28 WILLIAMSVILLE NY 1505 01769 TAMPA FL 1508 11C36 NORTHRIDGE CA 1510 11C86 CALUMET CITY IL 1514 01N25 NIAGARA FALLS NY 1515 01E69 CHARLOTTE NC 1518 11E05 CERRITOS CA 1520 01887 AKRON OH 1524 01N27 ROCHESTER NY 1525 01820 COLUMBIA SC 1528 11E32 SAN RAFAEL CA 1530 01896 RICHMOND HGTS OH 1534 01V50 SCRANTON PA 1535 01E18 PLANTATION FL 1538 11807 CITRUS HEIGHTS CA 1540 11EE5 INDIANAPOLIS IN 1544 01Y79 REGO PARK NY 1545 01E75 SPARTANBURG SC 1548 11801 LAGUNA HILLS CA 1554 01V22 MAYS LANDING NJ 1555 01Y76 SANFORD FL 1558 11EA2 MURRAY UT 1560 11ED2 DAYTON OH 1564 01N38 NILES OH
37 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 1565 01N46 MORROW GA 1568 11C94 CARSON CA 1570 11832 SCHAUMBURG IL 1574 01C53 MIDDLETOWN NJ 1575 01C23 HAMPTON VA 1578 11C48 AIEA OAHU HI 1580 11ED8 LEXINGTON KY 1584 01N23 VICTOR NY 1585 01EC4 TALLAHASSEE FL 1588 11M54 PHOENIX AZ 1590 11EK9 SAGINAW MI 1594 01840 MONACA PA 1595 01N32 GREENVILLE SC 1598 11E09 CITY OF INDSTY CA 1600 11EE6 INDIANAPOLIS IN 1604 01767 LANDOVER MD 1608 11800 WESTMINSTER CA 1610 11EC9 CINCINNATI OH 1614 01C04 LIVINGSTON NJ 1615 01C77 CHESAPEAKE VA 1618 11C64 MODESTO CA 1620 11877 VERNON HILLS IL 1623 01V15 CLAY NY 1624 01C08 STATEN ISLAND NY 1625 01EJ1 SARASOTA FL 1628 11M57 MESA AZ 1630 11787 FLORISSANT MO 1634 01C85 BALTIMORE MD 1635 01EB8 JACKSONVILLE FL 1638 11E08 BREA CA 1640 11C21 FAIRVIEW HGTS IL 1642 11EE9 TOPEKA KS 1644 01V25 LANCASTER PA 1645 01N92 BOCA RATON FL 1646 01Y40 PINEVILLE NC 1648 11821 N SAN DIEGO CA 1650 11833 MERRILLVILLE IN 1654 01786 MEDIA PA
38 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 1655 01EB2 MIAMI FL 1658 11N16 SANTA ROSA CA 1660 11804 AURORA IL 1664 01C61 PARAMUS NJ 1665 01M44 GAINESVILLE FL 1668 11EF2 LAS VEGAS NV 1670 01888 AKRON OH 1675 01N96 KNOXVILLE TN 1678 11EJ8 CARLSBAD CA 1680 11EE7 INDIANAPOLIS IN 1684 01Y74 WOODBRIDGE NJ 1685 01R16 DULUTH GA 1688 11N35 SALINAS CA 1690 11C32 CHESTERFIELD MO 1694 01E38 ERIE PA 1695 01Y62 ALPHARETTA GA 1698 11N80 NEWARK CA 1700 11C29 DEARBORN MI 1705 01EB7 W PALM BEACH FL 1708 11M53 PHOENIX AZ 1710 01897 NORTH OLMSTED OH 1714 01846 GREENSBURG PA 1715 01M96 MIAMI FL 1718 11EA3 OGDEN UT 1720 11C27 STERLING HGTS MI 1722 11Y55 BLOOMINGTON MN 1728 11M49 TUCSON AZ 1730 11867 FLORENCE KY 1733 01Y77 YONKERS NY 1734 01C81 LAWRENCEVILLE NJ 1738 11M62 KANEOHE OAHU HI 1740 11E31 JOLIET IL 1744 01V80 OCEAN NJ 1748 11R38 MONTCLAIR CA 1750 11C67 ORLAND PK IL 1754 01E10 GAITHERSBURG MD 1755 01Y56 BOYNTON BEACH FL 1758 11C20 ESCONDIDO CA
39 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 1760 11822 NOVI MI 1764 01E15 ROCKAWAY NJ 1765 01R47 PALM BCH GRDNS FL 1768 11M56 PHOENIX AZ 1770 01895 NORTH RANDALL OH 1773 01V48 SALISBURY MD 1775 01EB6 PEMBROKE PINES FL 1780 11N61 SPRINGFIELD IL 1784 01E46 JOHNSON CITY NY 1788 11Y39 RICHMOND CA 1790 11E16 OKOLONA KY 1794 01C07 EAST NORTHPORT NY 1800 11EL6 MISHAWAKA IN 1804 01N88 BARBOURSVILLE WV 1805 01E82 RALEIGH NC 1810 11EC8 CINCINNATI OH 1814 01N31 FAIRFAX VA 1820 11N79 WEST DUNDEE IL 1824 01845 WEST MIFFLIN PA 1830 11N58 FT WAYNE IN 1834 01N89 NORTH WALES PA 1838 11Y38 BURBANK CA 1840 11M35 CHICAGO RIDGE IL 1844 01M36 COLUMBIA MD 1850 11778 LOUISVILLE KY 1853 01814 WILMINGTON DE 1854 01M39 PARKVILLE MD 1863 01E62 JOHNSTOWN PA 1864 01M47 COCKEYSVILLE MD 1868 11Y58 MORENO VALLEY CA 1874 01C87 BURLINGTON NJ 1884 01R03 KING OF PRUSSIA PA 1894 01N26 ROCHESTER NY 1921 11830 MATTESON IL 1924 01R08 VALLEY STREAM NY 1944 01R10 YORKTOWN HGTS NY 1954 01EC1 CHARLESTON WV 1955 01N83 LAKELAND FL
40 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 1958 11Y75 SAN JOSE CA 1974 01E89 ROANOKE VA 1978 11EJ9 RENO NV 1980 11M25 LAFAYETTE IN 1984 01N24 BUFFALO NY 1985 01R01 HIGH POINT NC 1998 11Y52 MONTEBELLO CA 1999 11Y57 VALENCIA CA 2003 01Y08 ROCHESTER NY 2004 01Q09 BOWIE MD 2010 11EL4 MANSFIELD OH 2012 11R66 MONROE MI 2013 01N36 NEW CASTLE PA 2016 01EH4 HAMMOND LA 2020 11EH9 TOLEDO OH 2021 11Z09 ALTON IL 2022 11Z21 COUNCIL BLUFFS IA 2023 01V74 CONCORD NH 2024 01N21 ANNAPOLIS MD 2025 01M80 DOTHAN AL 2026 01R37 SLIDELL LA 2028 11N93 HEMET CA 2029 11881 UNION GAP WA 2030 11Y03 ELIZABETHTOWN KY 2031 11Z01 FOND DU LAC WI 2032 11R81 HOLLAND MI 2033 01Y22 MASSENA NY 2035 01Y19 COLUMBIA SC 2036 01N03 JACKSON TN 2040 11N74 BATTLE CREEK MI 2041 11Y36 ST CHARLES IL 2042 11R88 AMES IA 2043 01Q03 KINGSTON MA 2044 01R70 MANASSAS VA 2045 01R49 MUSKOGEE OK 2046 01N04 JONESBORO AR 2048 11R82 CHICO CA 2049 11855 EVERETT WA
41 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 2050 11N06 JACKSON MI 2051 11E99 BELLEVUE NE 2052 11N49 FT DODGE IA 2055 01R60 MORRISTOWN TN 2056 01899 MARY ESTHER FL 2057 01R96 SHAWNEE OK 2058 11C50 INDIO CA 2059 11Y97 TRACY CA 2060 11ED3 DAYTON OH 2061 11Z18 DEFIANCE OH 2062 11N69 FORSYTH IL 2064 01N95 COLONIAL HGTS VA 2065 01M90 BRUNSWICK GA 2068 11E48 VISALIA CA 2069 11E55 E WENATCHEE WA 2070 11M65 COLUMBUS IN 2072 11R34 MARION IN 2073 01V63 WOONSOCKET RI 2074 01Y66 STROUDSBURG PA 2075 01E77 CONCORD NC 2077 01E03 TYLER TX 2078 11E91 YUMA AZ 2080 01R86 NEW PHILADLPHIA OH 2082 11P10 FARGO ND 2086 01P06 COLUMBUS MS 2087 01898 ALEXANDRIA LA 2088 11EL9 SANTA MARIA CA 2089 11E44 CHEHALIS WA 2090 11ED7 FRANKFORT KY 2092 11N12 APPLETON WI 2094 01Q15 MARTINSVILLE VA 2095 01Q18 AIKEN SC 2097 01Q06 PARIS TX 2104 01E96 ST CLAIRSVILLE OH 2105 01E83 BURLINGTON NC 2106 01M70 TUPELO MS 2109 11EA8 TWIN FALLS ID 2112 11N13 GREEN BAY WI
42 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 2113 01R85 SCHENECTADY NY 2114 01N40 WASHINGTON PA 2119 11858 SALEM OR 2122 11N48 DUBUQUE IA 2124 01R92 DUBOIS PA 2125 01M88 VALDOSTA GA 2126 01M83 HOT SPRINGS AR 2130 11N18 ELKHART IN 2131 11P08 SALINA KS 2134 01R94 CHEEKTOWAGA NY 2138 11E51 SANTA BARBARA CA 2140 11M28 ANDERSON IN 2143 01V61 PRESQUE ISLE ME 2145 01R98 PORT CHARLOTTE FL 2146 01P02 CAPE GIRARDEAU MO 2147 01805 IRVING TX 2148 11R32 KAHULUI MAUI HI 2149 11E39 BELLINGHAM WA 2150 11M66 ADRIAN MI 2152 11M10 MINOT ND 2155 01Q17 MIAMI FL 2156 01M87 MARYVILLE TN 2160 11ED6 CLARKSVILLE IN 2161 11N47 CORALVILLE IA 2164 01V56 CAMILLUS NY 2165 01Q11 MOREHEAD CITY NC 2166 01R30 HUNTSVILLE AL 2173 01Y18 SARATOGA SPGS NY 2175 01R07 GREENVILLE NC 2176 11P03 PADUCAH KY 2177 01EJ5 WICHITA FALLS TX 2179 11EK1 MEDFORD OR 2180 11R63 TRAVERSE CITY MI 2181 11Z20 MT VERNON IL 2182 11Z24 LAWRENCE KS 2183 01V33 S PORTLAND ME 2186 01M40 OXFORD AL 2191 11E79 LINCOLN NE
43 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 2195 01Q05 TITUSVILLE FL 2196 01N05 GAUTIER MS 2197 01C78 TEXAS CITY TX 2198 11M19 HANFORD CA 2200 11EG1 RACINE WI 2202 11Q13 BOULDER CO 2203 01V60 BRUNSWICK ME 2205 01Z13 COOKEVILLE TN 2206 01Y17 FAIRFIELD AL 2207 11R12 ROSWELL NM 2208 11R15 SANTA FE NM 2209 11R56 LEWISTON ID 2210 11Z26 GARDEN CITY KS 2212 11E90 CEDAR RAPIDS IA 2215 01M97 KEY WEST FL 2216 01E78 PINE BLUFF AR 2219 11E57 LACEY WA 2220 11Z11 ST GEORGE UT 2221 01R33 BARTLESVILLE OK 2224 01Y06 CHAMBERSBURG PA 2225 01M74 GOLDSBORO NC 2226 01Y13 MURFREESBORO TN 2227 01E43 LAKE JACKSON TX 2228 11C51 EL CENTRO CA 2231 01P04 FT SMITH AR 2232 11N15 MADISON WI 2233 01V43 BROCKTON MA 2235 01Y61 HOMESTEAD FL 2236 01M91 DECATUR AL 2238 11EC2 YUBA CITY CA 2239 11857 VANCOUVER WA 2241 01N87 FAYETTEVILLE AR 2242 11M21 BILLINGS MT 2244 01V49 HANOVER PA 2245 01M17 MELBOURNE FL 2247 01M52 LAREDO TX 2252 11N50 MASON CITY IA 2254 01V59 LEBANON PA
44 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 2255 01Z25 ORANGEBURG SC 2256 01EH5 BILOXI MS 2258 11N55 SAN LUIS OBISPO CA 2259 11N19 MISSOULA MT 2265 01M82 JOHNSON CITY TN 2271 11N86 FT COLLINS CO 2272 11EF6 MILWAUKEE WI 2278 11EA7 IDAHO FALLS ID 2279 11N99 BEND OR 2281 11N63 PUEBLO CO 2283 01V30 SWANSEA MA 2284 01R87 BLOOMSBURG PA 2288 11EK2 ANTIOCH CA 2289 11N90 ROSEBURG OR 2290 11N73 MICHIGAN CITY IN 2291 01M89 ENID OK 2293 01V58 AUGUSTA ME 2298 11E49 MERCED CA 2299 11E54 ABERDEEN WA 2301 11799 KANSAS CITY MO 2304 01Y26 WESTOVER WV 2305 01N78 ANDERSON SC 2306 01E36 GADSDEN AL 2308 11E52 SANTA CRUZ CA 2309 11853 SILVERDALE WA 2311 01823 NORMAN OK 2315 01Q10 JENSEN BEACH FL 2316 01EH2 FLORENCE AL 2318 11EK6 THOUSAND OAKS CA 2319 11E56 KELSO WA 2323 01V70 HYANNIS MA 2324 01N39 STEUBENVILLE OH 2326 01M95 GREENVILLE MS 2328 11R13 SIERRA VISTA AZ 2329 11E58 KENNEWICK WA 2330 11Y64 PUYALLUP WA 2331 11P07 JEFFERSON CITY MO 2332 11M09 GRAND FORKS ND
45 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 2335 01E63 CLARKSVILLE TN 2338 11EJ4 REDDING CA 2339 11E61 SPRINGFIELD OR 2341 11P09 CASPER WY 2342 11EF9 KENOSHA WI 2343 01V64 LANESBORO MA 2344 01M71 STATE COLLEGE PA 2345 01Y53 CLEVELAND TN 2348 11R09 PRESCOTT AZ 2349 11Q01 COEUR D ALENE ID 2352 11N09 ST CLOUD MN 2353 01V46 KINGSTON NY 2354 01EK7 PARKERSBURG WV 2358 11M18 FLAGSTAFF AZ 2360 11N82 QUINCY IL 2361 11M22 GRAND JUNCTION CO 2362 11M30 DANVILLE IL 2365 01Q14 SUMTER SC 2368 11R59 LIHUE KAUAI HI 2371 11P12 CHEYENNE WY 2372 11M94 SHEBOYGAN WI 2373 01V32 N DARTMOUTH MA 2374 01V67 VINELAND NJ 2375 01Q08 COLUMBIA TN 2376 01Y31 OAK RIDGE TN 2380 11N08 BAY CITY MI 2381 01EC3 LAWTON OK 2382 11N14 MADISON WI 2385 01Y04 MERAUX LA 2388 11R27 HILO HAWAII HI 2389 11E45 BURLINGTON WA 2390 11N76 SPRINGFIELD OH 2392 11880 DES MOINES IA 2398 11R46 LONGMONT CO 2402 11N20 BISMARCK ND 2412 11EJ3 RAPID CITY SD 2414 01M85 HAGERSTOWN MD 2415 01Y70 CENTERVILLE GA
46 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 2419 11EE8 ALBANY OR 2420 11M14 MARION OH 2421 11P15 GRAND ISLAND NE 2422 11N01 SIOUX CITY IA 2425 01M24 BRISTOL VA 2430 11P18 MANHATTAN KS 2432 11N34 LA CROSSE WI 2435 01M73 CHARLOTTESVILLE VA 2443 01V36 MANCHESTER NH 2450 11EL5 LIMA OH 2451 11N94 GREELEY CO 2453 01V19 GLENS FALLS NY 2454 01Q07 CHESAPEAKE VA 2460 11M67 LOGANSPORT IN 2463 01V20 LEWISTON ME 2465 01E74 GASTONIA NC 2470 11M63 WAUSAU WI 2473 01V75 AUBURN NY 2480 11P14 COLUMBIA MO 2482 11EK8 FT GRATIOT MI 2484 01V40 POTTSTOWN PA 2487 01M04 KILEEN TX 2494 01E41 ALTOONA PA 2497 01E67 BROWNSVILLE TX 2500 11R50 DULUTH MN 2505 01R52 GAINESVILLE GA 2507 01E98 MCALLEN TX 2510 11M20 SANDUSKY OH 2515 01E73 HICKORY NC 2517 01EC5 SAN ANGELO TX 2524 01V31 TOMS RIVER NJ 2527 11M68 LAS CRUCES NM 2533 01R48 PLATTSBURGH NY 2537 01E97 HARLINGEN TX 2544 01E64 SHARON PA 2546 01R51 BOWLING GREEN KY 2547 01E01 COLLEGE STATION TX 2550 11M07 ZANESVILLE OH
47 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 2555 01Y29 CRYSTAL RIVER FL 2557 01E71 LONGVIEW TX 2564 01R97 ITHACA NY 2565 01M58 BRADENTON FL 2567 01E13 TEXARKANA TX 2570 11M29 MUNCIE IN 2574 11Q04 PHILLIPSBURG NJ 2577 01R18 LUFKIN TX 2583 01V23 BANGOR ME 2584 01EJ6 LAKEWOOD NY 2587 01889 DENTON TX 2590 11E66 HUTCHINSON KS 2593 01V44 NEWBURGH NY 2595 01P11 AUBURN AL 2597 11M77 FARMINGTON NM 2599 11R25 WALLA WALLA WA 2600 11N71 TERRE HAUTE IN 2602 11N11 ROCHESTER MN 2603 01V16 NEW HARTFORD NY 2604 01V24 WILKES BARRE PA 2610 11M12 PIQUA OH 2614 01E23 UNIONTOWN PA 2615 01R02 DALTON GA 2617 01N54 VICTORIA TX 2623 01Y73 RUTLAND VT 2624 01V27 CAMP HILL PA 2627 01N77 SHERMAN TX 2628 11N64 EUREKA CA 2635 01M92 ROCKY MOUNT NC 2637 01884 PORT ARTHUR TX 2642 11Y47 MIDLAND MI 2644 01V53 PENSDALE PA 2645 01R91 ASHEBORO NC 2650 11R44 LEAVENWORTH KS 2654 01V62 DOVER DE 2657 01N53 MIDLAND TX 2663 01V71 PORTSMOUTH NH 2664 01M05 FREDERICK MD
48 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 2674 01M72 INDIANA PA 2677 01864 BOSSIER CITY LA 2683 01R43 WATERTOWN NY 2684 01V54 FRACKVILLE PA 2694 01M64 FREDERICKSBURG VA 2695 01M59 NAPLES FL 2696 01EH7 HOUMA LA 2704 01M50 MT HOPE WV 2705 01M76 FLORENCE SC 2710 11N56 KOKOMO IN 2712 11EF1 ST JOSEPH MO 2714 01M51 BLUEFIELD WV 2724 01M48 BUTLER PA 2730 11N57 FT WAYNE IN 2734 01M60 CRANBERRY PA 2744 01N29 HORSEHEADS NY 2745 01Y67 LEESBURG FL 2750 11Y02 LANCASTER OH 2755 01M75 JACKSONVILLE NC 2760 11M38 DAVENPORT IA 2764 01C60 BRONX NY 2774 01M84 CUMBERLAND MD 2784 01R20 WINCHESTER VA 2785 01P13 MYRTLE BEACH SC 2790 11M13 FINDLAY OH 2796 01N22 TUSCALOOSA AL 2800 11M15 RICHMOND IN 2802 11N65 BOURBONNAIS IL 2805 01E92 PANAMA CITY FL 2806 01M37 MEMPHIS TN 2807 01E72 ROCK HILL SC 2808 11M16 GREAT FALLS MT 2814 01Y44 MARTINSBURG WV 2815 01N81 ALBANY GA 2819 11Y48 FAIRBANKS AK 2820 11N72 BLOOMINGTON IN 2823 01Y46 BALTIMORE MD 2824 01Y43 CARY NC
49 EXHIBIT A DESIGNATED SEARS STORES (continued)
SEARS # STUDIO# CITY STATE - ------- ------- -------------------- ----- 2825 01M78 KINGSPORT TN 2826 01N30 BRIDGEPORT WV 2829 11E53 VICTORVILLE CA 2835 01E88 LYNCHBURG VA 2840 11N66 BLOOMINGTON IL 2844 01Y65 SHELBY NC 2845 01M01 ATHENS GA 2850 11M23 CHILLICOTHE OH 2854 01R21 ASHLAND KY 2855 01M33 CHARLESTON SC 2865 01N85 UNION CITY GA 2872 11N51 SIOUX FALLS SD 2875 01784 FRANKLIN TN 2885 01M69 PORT RICHEY FL 2888 11R11 CLOVIS NM 2895 01R05 ROME GA 2902 11Y27 COON RAPIDS MN 2910 11M11 GALESBURG IL 2920 11N70 CHAMPAIGN IL 2922 11M08 MARION IL 2930 11N75 MUSKEGAN MI 2931 11Y68 MATTOON IL 2932 01Y54 ASHTABULA OH 2933 01Y09 NEW HYDE PARK NY 2934 01Y51 TAUNTON MA 2935 01Z12 STATESVILLE NC 2940 11ED9 FRANKLIN OH 2950 11EL3 OWENSBORO KY 2960 11EL7 BENTON HARBOR MI 2963 01R57 WESTMINSTER MD 2965 01Z14 WILSON NC 2980 11R95 CHICAGO IL 2985 01R84 CHRISTIANBURG VA 2990 11N60 ROCKFORD IL 3244 01R54 FLUSHING NY
50 EXHIBIT B AUTHORIZED MERCHANDISE AND/OR SERVICES The following items, merchandise lines and/or services are authorized for sale by Licensee in the Licensed Business: 1. Portrait photography service and photographs 2. Passport photography service and photographs 3. Portrait-related retail merchandise (e.g., frames, mats, albums, greeting cards) 4. Portrait-related promotional merchandise for customer give-aways 5. Digital images (e.g. Portrait Creations(TM), proof sheets, portrait restoration) 6. Internet archiving services 51 EXHIBIT C SEARS COMMISSION Licensee shall pay to Sears a commission ("Sears Commission") which, for each Designated Sears Store, shall be a sum equal to ten percent (10%) of total annualized net sales for each Designated Sears Store at which total annualized net sales are less than $50,000 and fifteen percent (15%) of total annualized net sales for each Designated Sears Store at which total annualized net sales are equal to or over $50,000 - retroactive to the first dollar. Accounting Centers are to deduct commission rate at fifteen percent (15%). Licensee will bill Sears annually for any excess commissions taken from any Designated Sears Store with annual net sales of less than $50,000. 52 EXHIBIT D ALLOCATION OF COSTS TYPICAL COST ANALYSIS The Licensed Business shall be built and constructed in accordance with the plans and specifications prepared and will include agreed upon standards for the cost of construction. Items in accordance with the plans and specifications are listed on a Typical Cost Analysis (TCA) attached as part of Exhibit D. The TCA is based on the current Annual Edition of Means Repair & Remodeling Cost Data. Sears and Licensee agree that this Exhibit D will be updated bi-annually and mutually agreed upon to reflect subsequent Annual Editions of Means Repair & Remodeling Cost Data and to reflect modification of typical designs and modifications. The TCA cost will be represented as a dollar-cost per square foot ratio. FINANCIAL RESPONSIBILITIES The financial responsibilities and standard costs are described in the TCA. Items that are classified as "Sears Costs" (S) on the TCA, shall be Sears responsibility and items that are classified as "Licensee Costs" (L/B) shall be Licensee's responsibility. A cost estimate, known as the Estimated/Actual Buildout (EAB) may be required to determine the viability or scope of a project. Sears will remit payment for the total cost of all projects directly to contractors or workmen performing such work and will invoice Licensee for its share of the expense, at the end of Sears fiscal year. Sears shall make a settlement adjustment thirty (30) days after notifying Licensee of the project close out for the year and all expenses to be charged to Licensee. In the event Licensee disputes the settlement adjustment made by Sears with respect to Change of Location or remodel, it shall notify Sears and the parties shall have sixty (60) days from the December end of the month settlement adjustment (which was made by Sears) to resolve any such dispute. Any further adjustment due to either Sears or Licensee relating to such Change of Location or remodel shall be made pursuant to the end of the month settlement adjustment following the above mentioned sixty (60) days. Material Charge Backs. When, due to shortages or delays, Licensee provides standard construction materials that are Sears financial responsibility, Licensee will remit payment directly to the supplier(s) and will invoice Sears for the expense. The amount of any such invoice submitted by Licensee to Sears shall be deducted from the amount payable by Licensee at the time of Project year close out (Sears Billing). Punch List Charge Backs. Provided the conditions set forth below are met, Licensee shall select and employ the services of a general contractor to complete any remaining punch list items: (1) Sears General Contractor is no longer on the job site; 53 (2) Licensee has issued written punch list to Sears; (3) A period of at least 30 days has elapsed for Sears to complete punch list items; (4) Licensee has provided the cost estimates to Sears prior to scheduling any work and such cost estimates have been approved by the Quality/Evaluation Manager, Licensed Businesses; and (5) The General Contractor retained by Licensee shall be bondable and shall meet all applicable licensing, permitting, insurance and approval requirements established by Sears and/or the governmental bodies of the jurisdiction in which the project is located. Licensee shall remit payment directly to any general contractor retained by Licensee to complete punch list items and shall invoice Sears for the aggregate amounts paid to the general contractor. The amount of any such invoices submitted to Sears shall be deducted from the total Licensee cost at the project close out (i.e. Sears billing). Change Order Request Procedures. Change Orders prior to Licensee installation: - Licensee shall submit a written request for a written quotation from Sears for the costs of implementing a proposed change order. - Within a reasonable time after receipt of Licensee's request, Sears Project Manager shall return a written quotation for change order to Licensee. - Licensee shall approve and return change order amount to Sears for approval. - Sears shall submit approval to Sears Project Manager and Licensee within a reasonable time. - The cost of any change orders after the project is bid by the contractor shall be borne by the party requesting such change. Change Orders during Licensee installation: - Licensee shall submit written request for a written quotation from Sears for the costs of implementing a proposed change order. - Within a reasonable time after receipt of Licensee's request, Sears Project Manager shall submit change order cost to Licensee for approval. - Licensee shall approve and return change order amount to Sears for approval. - Sears shall submit approval to Sears Project Manager and Licensee within a reasonable time. - The cost of any change orders after the project is bid by the contractor shall be borne by the party requesting such change. 54 GENERAL RESPONSIBILITIES Licensee shall be responsible for all furniture, trade fixtures (display units, cabinets, and counters), trade equipment (cameras, lighting units, and computers), Licensee's POS and peripheral devices (printers, bar-code scanning devices, electronic signature capture devices) and any other items not listed on the TCA. Sears shall be responsible for all costs associated with bringing electrical panel and service, air conditioning, heating and ventilation ducts into the Licensed Business area. The expense of purchasing and installing all electrical fixtures and equipment (including, but not limited to circuit boxes, dedicated outlets, lighting fixtures and all necessary electrical connections within the area occupied by the Licensed Business. All air conditioning work required by Licensee shall be designed and installed by Sears. Licensee shall provide mechanical drawing identifying the number and location of supply/return air diffuser required. This work shall include, without limitation, connections to supply/return air lines, duct work, supply and return air diffusers, and any circuitry/controls required for the operation of said air conditioning system, and shall be allocated in accordance with the TCA and further outlined in Exhibit D. Any responsibility not provided for in the TCA or Exhibit D shall be negotiated in good faith by Sears and Licensee. Licensee shall be responsible for any additional leasehold improvements, included, but not limited to electrical wiring, lighting, air conditioning, heating or ventilation ducts which Licensee feels are required to change or improve the utility service to the Licensed Business area to a level that is greater than the service provided to rest of the Designated Sears Store. NEW DEPARTMENT Licensee's share of the cost will be determined by applying the TCA to the Usable Space. For purposes of this Agreement, "Usable Space" means net square footage of the area dedicated for the operation of the Licensed Business. REMODEL PROJECTS Sears Update Projects - Update Projects initiated by Sears Construction (D/824), budget a fixed cost per square foot for store remodeling. Sears shall bear all costs of carpeting and repainting (including removal of existing wallcovering) for each Update Project. Sears will do nothing beyond the scope of the Update Project unless requested by Licensee. If Licensee requests, and Sears agrees, that additional work should be done within the Licensed Business area, Sears and Licensee agree to share equally the construction costs related to the Update Project. If Sears requests additional work within the Licensed Business area, the costs shall be allocated as follows: (a) If there is a decrease in Usable Space for the Licensed Business area of 10% or more, the TCA cost factor shall be applied to the reduced Usable Space, and Sears shall pay Licensee the sum of Fifteen Hundred Dollars ($1500); or 55 (b) If there is no change, a decrease of less than 10%, or an increase in Usable Space, the construction costs related to the Update Project shall be shared equally by Sears and Licensee. Sears Remodel/Local Projects - If Sears requests or initiates a Change of Location of a Licensed Business location that has previously been subject to a Change of Location during the term of this Agreement, Sears shall bear all construction costs related to such Change of Location and shall pay Licensee the sum of Fifteen Hundred Dollars ($1500) for incidental costs incurred in such a Change of Location. If a Change of Location results in a(n): Decrease in Space-- Sears shall bear all construction costs related to such Change of Location and shall pay Licensee the sum of Fifteen Hundred Dollars ($1500.00) for incidental costs incurred in such a Change of Location. or Increase in Space-- The Licensee's share of the TCA will be applied to only the increase in space (new square footage). The Licensee's share of the TCA will be charged to Licensee if space has been requested and approved by Licensee. Licensee Remodel/Local Projects - Projects requested by Licensee and approved by Sears. The Licensee's share of the TCA will be applied to the total Usable Space assigned to Licensee. All exceptions to the above will be agreed on prior to the completion of final plans for construction. Any changes after approval of final plans by both parties shall be the responsibility of the party making the change. ADDITIONAL CAMERA ROOMS The construction cost of new camera rooms shall be shared equally between Sears and Licensee, and the total TCA cost shall be applied to a standard of 500 square feet. MAINTENANCE OF FACILITIES Sears shall be responsible for all costs associated with the regular maintenance of the physical facility of the Designated Sears Stores, including electrical service, air conditioning, heating, ventilation, standard lighting (including standard light bulbs), ceiling tiles, drywall repair, paint, and carpet. The cost to replace any of the general construction items due to age and/or normal wear shall be allocated in accordance with the TCA. Licensee shall be responsible for all costs associated with maintaining Licensee's Equipment and Licensee's POS in good order and repair. 56 TYPICAL COST ANALYSIS NEW STORE PORTRAIT STUDIO (2 CAMERA ROOM) June 1998 GROSS AREA - 1428 SF
UNIT ITEM QUANTITY UNIT COST TOTAL - ---------------------------- -------- ---- ------- ------- S 10'Partitions 220 LF 30.00 6,600 S Wall insulation - SF 0.40 - S Doors 2 EA 700.00 1,400 S Cabinets, upper and lower - LF 175.00 - S Vanity - EA 300.00 - S Acoustical ceiling 1428 SF 1.50 2,142 S Ceiling insulation - SF 0.60 - S Paint walls 3000 SF 0.50 1,500 S Paint doors 2 EA 100.00 200 LB Wallcovering 240 SF 1.60 384 LB Carpeting 182 SY 18.00 3,284 S Base 300 LF 1.20 360 LB Shock pad 24 SY 5.00 122 S Fire protection 1428 SF 1.50 2,142 S HVAC ductwork 1428 SF 5.00 7,140 LB 225 amp 120/208 PA 1 EA 1800.00 1,800 S Light fixtures 10 EA 150.00 1,500 LB Dedicated circuits 8 EA 200.00 1,600 LB Track lighting 70 LF 38.50 2,695 LB Wall washer - EA 150.00 - LB Light bar 4 LF 50.00 200 LB Exit lights 1 EA 150.00 150 LB Light switch 8 EA 125.00 1,000 LB Duplex outlets 19 EA 108.00 2,052 LB Phone outlet 4 EA 365.00 1,460 LB Triple duplex recept 2 EA 150.00 300 LB Floor outlets 1 EA 300.00 300 LB Quad outlet 2 EA 130.00 260 LB Data 5 EA 50.00 250 S Cash register 1 EA 536.00 536 S Baffle 19 LF 20.00 380 LB Chair rail 101 LF 5.00 505 LB Architectural services 1428 LS 2.00 2,856 S/LB G.C.O.H. and fee 1 LS 6673.26 6,468 ------- $49,586 ======= New Store COST/SF 34.72 Remodel in warehouse space $/SF 38.97 Remodel in retail or office space $/SF 39.47 Remodel in existing license business (Low to High) $/SF 19.24
57 TYPICAL COST ANALYSIS (continued) NEW STORE PORTRAIT STUDIO (2 CAMERA ROOM) June 1998 GROSS AREA - 1428 SF
ITEM SEARS L.B. - ---------------------------- ------- ------------ S 10' Partitions 6,600 - S Wall insulation - - S Doors 1,400 - S Cabinets, upper and lower - - S Vanity - - S Acoustical ceiling 2,142 - S Ceiling insulation - - S Paint walls 1,500 - S Paint doors 200 - LB Wallcovering - 384 LB Carpeting - 3,284 S Base 360 - LB Shock pad - 122 S Fire protection 2,142 - S HVAC ductwork 7,140 - LB 225 amp 120/208 PA - 1,800 S Light fixtures 1,500 - LB Dedicated circuits - 1,600 LB Track lighting - 2,695 LB Wall washer - - LB Light bar - 200 LB Exit lights - 150 LB Light switch - 1,000 LB Duplex outlets - 2,052 LB Phone outlet - 1,460 LB Triple duplex recept - 300 LB Floor outlets - 300 LB Quad outlet - 260 LB Data - 250 S Cash register 536 - S Baffle 380 - LB Chair rail - 505 LB Architectural services - 2,856 S/LB G.C.O.H. and fee 6,673 - -------- ------- $30,573 $19,219 $49,792 ======== ======= New Store 21.41 13.46 Remodel in warehouse space 23.41 15.71 39.12 Remodel in retail or office space 23.91 15.71 39.62 Remodel in existing license business (Low to High) 22.91 15.71 38.62
58 EX-10.29 3 EXHIBIT (10.29) License Agreement - Sears, Roebuck and Co. (Off-Mall) 27 SEARS, ROEBUCK AND CO. LICENSE AGREEMENT (OFF MALL) CONSUMER PROGRAMS INCORPORATED SEARS PORTRAIT STUDIOS JANUARY 1, 1999 1 (PAGE NUMBERS REFER TO PAPER DOCUMENT) TABLE OF CONTENT I. GRANT OF LICENSE .................................... 4 1.1 License for Off-Premises Operations ............ 4 1.2 Scope of License/Restrictions .................. 4 1.3 No Representations ............................. 4 II. USE OF SEARS MARKS .................................. 5 2.1 License to Use Sears Marks ..................... 5 2.2 Communications with Third Parties .............. 5 2.3 No Challenge to Marks .......................... 5 2.4 No Rights to Marks ............................. 5 2.5 Registration of Marks .......................... 5 2.6 Injunctive Relief .............................. 6 2.7 Infringing Use ................................. 6 2.8 Limitations .................................... 6 2.9 Survival ....................................... 6 III. TERM ................................................ 7 IV. FEES ................................................ 7 4.1 Amount ......................................... 7 4.2 Net Sales ...................................... 7 4.3 Gross Sales .................................... 7 V. OPERATIONAL OBLIGATIONS OF LICENSEE ................. 7 5.1 Performance Standards .......................... 7 5.2 Business Conduct ............................... 7 5.3 Customer Adjustment ............................ 8 5.4 Employee Standards ............................. 8 5.5 Licensee's Employees ........................... 8 5.6 Employee Compensation .......................... 8 5.7 Compliance with Law ............................ 8 5.8 Payment of Obligations ......................... 9 5.9 Year 2000 Compliance ........................... 9 5.10 No Sears Obligations ........................... 9 VI. DESIGNATED LOCATIONS ................................ 9 6.1 Condition of Designated Locations .............. 9 6.2 Telephone ...................................... 9 6.3 Yellow/White Page Listings ..................... 10 VII. ADVERTISING ......................................... 10 7.1 Advertising .................................... 10 7.2 Publicity ...................................... 10 7.3 Forms .......................................... 10 VIII. LICENSED BUSINESS EQUIPMENT ......................... 11 8.1 Licensee's Equipment ........................... 11 8.2 Licensee's Point of Sale System ................ 11 IX. TRANSACTIONS AND SETTLEMENT ......................... 11 9.1 Checks ......................................... 11 9.2 Credit Sales ................................... 11 9.3 Settlement ..................................... 12
2 TABLE OF CONTENT (continued) 9.4 Reports ........................................ 12 9.5 Audit Rights ................................... 13 9.6 Underreporting ................................. 13 9.7 Rights of Recoupment and Setoff ................ 14 X. CUSTOMER INFORMATION; CONFIDENTIALITY ............... 14 10.1 Customer Information ........................... 14 10.2 Confidential Information ....................... 14 XI. RELATIONSHIP OF PARTIES ............................. 15 XII. DEFENSE AND INDEMNITY ............................... 15 12.1 Defense ........................................ 15 12.2 Indemnity ...................................... 16 XIII. INSURANCE ........................................... 16 13.1 Types of Insurance ............................. 16 13.2 No Cancellation Without Notice ................. 17 13.3 Certificates ................................... 17 13.4 Expiration/Non-Renewal ......................... 17 XIV. TERMINATION ......................................... 18 14.1 Mutual Right of Termination .................... 18 14.2 Termination of License by Sears With Notice .... 18 14.3 Termination of License by Sears Without Further Notice ............................... 18 14.4 Survivability .................................. 19 XV. ASSIGNMENT AND SUBLICENSING ......................... 19 15.1 Assignment by Licensee ......................... 19 15.2 Assignment by Sears ............................ 19 15.3 Binding Nature ................................. 19 XVI. MISCELLANEOUS ....................................... 19 16.1 Cumulative Remedies ............................ 19 16.2 Severability ................................... 20 16.3 Governing Law .................................. 20 16.4 Entire Agreement ............................... 20 16.5 Headings ....................................... 20 16.6 Notices ........................................ 20 EXHIBIT A ......................................... 23 EXHIBIT B ......................................... 26 EXHIBIT C ......................................... 27
3 LICENSE AGREEMENT (OFF MALL) THIS LICENSE AGREEMENT (hereinafter referred to as "Agreement") is entered into as of the 1st day of January, 1999, by SEARS, ROEBUCK AND CO., a New York corporation ("Sears") and CONSUMER PROGRAMS INCORPORATED, a Missouri corporation, ("Licensee"). Sears and Licensee hereby agree as follows: I. GRANT OF LICENSE 1.1 License for Off-Premises Operations. Sears hereby grants Licensee the non-exclusive privilege of conducting and operating, and Licensee shall conduct and operate, pursuant to the terms, provisions and conditions contained in this Agreement, a licensed business offering the goods and services listed on Exhibit B ("Licensed Business"), only at the locations described in Exhibit A or in Location Riders attached ("Designated Locations(s)"). 1.2 Scope of License/Restrictions. Licensee shall use the Designated Locations only for the purposes authorized in this Agreement, and shall offer for sale only those services and merchandise listed on Exhibit B attached hereto. Any changes, additions or deletions of services or merchandise require the prior written approval of Sears designated Licensing Manager ("Licensing Manager"). 1.3 No Representations. Sears makes no promises or representations whatsoever as to the potential amount of business Licensee can expect at any time during operation of the Licensed Business. Licensee is solely responsible for any expenses it incurs related to this Agreement, including, but not limited to, any increase in the number of Licensee's employees or any expenditures for the Designated Locations or for additional facilities or equipment. 4 II. USE OF SEARS MARKS 2.1 License to Use Sears Marks. Licensee shall operate the Licensed Business under the name SEARS PORTRAIT STUDIO. Licensee shall use the name of Sears only in connection with the operation of the Licensed Business and only in a manner described herein or upon prior written approval by Sears Licensing Manager. Licensee may use the name Sears when communicating with customers or potential customers of the Licensed Business, or to identify the location of the Licensed Business and in approved advertising. 2.2 Communications with Third Parties. Except in the case of communication permitted by Section 2.1, or as otherwise specifically approved by Sears, Licensee shall not use the name of Sears, or any Sears trademarks, service marks or trade names (the "Mark(s)"), either orally or in writing, including, but not limited to, use on any letterhead, checks, business cards, or contracts. All communications with persons or entities other than customers or potential customers of the Licensed Business shall be done solely in Licensee's own name. 2.3 No Challenge to Marks. Licensee shall not question, contest or challenge, either during or after the Term of this Agreement, Sears ownership of the Marks, or Sears ownership in any mailing lists, credit files or other factual information compiled by Sears and made available for use by Licensee ("Sears Information"). Licensee shall claim no right, title or interest in any Mark or Sears Information, except the right to use the same pursuant to the terms and conditions of this Agreement, and shall not register or attempt to register any Mark. 2.4 No Rights to Marks. Licensee recognizes and acknowledges that the use of any Mark or Sears Information shall not confer upon Licensee any proprietary rights to any Mark or Sears Information. Upon expiration or termination of this Agreement, Licensee shall immediately stop using all Marks and Sears Information, and shall execute all documents Sears requests in order to confirm Sears ownership, or to transfer to Sears any rights Licensee may have acquired from Sears, in any Mark or Sears Information. Nothing in this Agreement shall be construed to bar Sears, during or after the Term of this Agreement, from protecting its right to the exclusive ownership of Sears Information or Marks against infringement or appropriation by any party or parties, including Licensee. 2.5 Registration of Marks. Sears may register in its own name any and all of the trademarks, service marks or trade names used in operation of the Licensed Business, except for such trademarks, service 5 marks or trade names which are owned or licensed by Licensee prior to execution of this Agreement, and Licensee's use of such names and marks shall inure to the benefit of Sears for such purposes as well as for all other purposes and such marks shall be included in the term "Marks". Licensee shall cooperate in any such registration or application for registration by Sears. No name or mark registered in the name of Licensee or any of Licensee's affiliates and used in conjunction with the Licensed Business shall be used for any other purpose without the written consent of Sears. 2.6 Injunctive Relief. Licensee acknowledges that the Marks and Sears Information possess a special, unique and extraordinary character, which makes it difficult to assess the monetary damage Sears would sustain in the event of unauthorized use. Irreparable injury would be caused to Sears by such unauthorized use, and Licensee agrees that in the event of breach of this Section II by Licensee there would be no adequate remedy at law and preliminary or permanent injunctive relief would be appropriate. 2.7 Infringing Use. If Licensee learns of any manufacture or sale by any third party of products and/or services similar to those offered by Licensee that would be confusingly similar in the minds of the public to those sold by Licensee and which bear or are promoted in association with the Marks or any names, symbols, emblems, designs or colors which would be confusingly similar in the minds of the public to the Marks, Licensee shall promptly notify Sears. Sears may, at its sole expense, take such action as it determines, in its sole discretion, is appropriate. Licensee shall cooperate and assist in such protest or legal action at Sears expense. If demanded by Sears, Licensee shall join in such protest or legal action at Sears expense. Licensee shall not undertake any protest or legal action on its own behalf without first securing Sears written permission to do so. If Sears permits Licensee to undertake such protest or legal action, such protest or legal action shall be at Licensee's sole expense. Sears shall cooperate and assist Licensee at Licensee's expense. For the purposes of this section, expenses shall include reasonable attorneys' fees. All recovery in the form of legal damages or settlement shall belong to the party bearing the expense of such protest or legal action. 2.8 Limitations. Licensee shall not file suit using Sears name. Licensee shall not use the services of a collection agency or undertake any legal proceeding against any customer without the prior written approval of Sears Licensing Manager. 2.9 Survival. The provisions of this Section II shall survive the expiration or termination of this Agreement. 6 III. TERM The term of this Agreement ("Term") shall be for a five (5) year period beginning on January 1, 1999, and ending at the close of business on December 31, 2003, unless sooner terminated under any of the provisions of this Agreement. IV. FEES 4.1 Amount. Licensee shall pay Sears a commission ("Sears Commission") which is set forth on Exhibit C attached hereto. 4.2 Net Sales "Net Sales" means Gross Sales from operation of the Licensed Business, less sales taxes, returns and allowances. 4.3 Gross Sales. "Gross Sales" means all of Licensee's direct or indirect sales of services and merchandise from the Licensed Business, including, but not limited to, sales arising out of referrals, contacts, or recommendations obtained through the operation of the Licensed Business. V. OPERATIONAL OBLIGATIONS OF LICENSEE 5.1 Performance Standards. Licensee shall provide Sears with copies of its written procedures and policies establishing minimum standards of quality, performance and customer service, which shall be subject to Sears approval, and Licensee shall abide by such standards at all times. Licensee shall immediately advise Sears of any changes in its standards. Licensee shall operate the Licensed Business in a courteous and efficient manner and shall present a neat, business like appearance at the Designated Locations, including adherence by Licensees' employees to a reasonable dress code. 5.2 Business Conduct. Licensee shall operate the Licensed Business in an honest and ethical manner at all times. 7 5.3 Customer Adjustment. All of the work and services performed by Licensee in connection with the Licensed Business shall be of a high standard of workmanship, and all of the merchandise sold in the Licensed Business shall be of high quality. Licensee shall at all times maintain a general policy of "Satisfaction Guaranteed" to customers and shall adjust all complaints of and controversies with customers arising out of the operation of the Licensed Business. In any case in which an adjustment is unsatisfactory to the customer, Sears shall have the right, at Licensee's expense, to make such further adjustment as Sears deems necessary under the circumstances, and any adjustment made by Sears shall be conclusive and binding upon Licensee. Sears may deduct the amounts of any such adjustments from the sales receipts held by Sears as described in Section 9.3. Licensee shall maintain files pertaining to customer complaints and their adjustment and make such files available to Sears. 5.4 Employee Standards. The Licensed Business shall be operated solely by Licensee's employees, and not by independent contractors, sub-contractors, sub-licensees or by any other such arrangement. 5.5 Licensee's Employees. Licensee has no authority to employ persons on behalf of Sears and no employees of Licensee shall be deemed to be employees or agents of Sears. Licensee has sole and exclusive control over its labor and employee relations policies, and its policies relating to wages, hours, working conditions, or conditions of its employees. Licensee has the sole and exclusive right to hire, transfer, suspend, lay off, recall, promote, assign, discipline, adjust grievances and discharge its employees. 5.6 Employee Compensation. Licensee is solely responsible for paying, all salaries and other compensations of its employees and Licensee shall make all necessary salary deductions and withholdings from its employees' compensation. Licensee is solely responsible for paying any and all contributions, taxes and assessments and all other requirements of the Federal Social Security, Federal and state unemployment compensation and Federal, state and local withholding of income tax laws on all salary and other compensation of its employees. 5.7 Compliance with Law. Licensee shall, at its expense, obtain all permits and licenses which may be required under any applicable Federal, state, or local law, ordinance, rule or regulation by virtue of any act performed in connection with the operation of the Licensed Business. Licensee shall comply fully with all applicable Federal, state and local laws, ordinances, rules and regulations, including, but not limited to, all rules and regulations of the Federal Trade Commission. In addition, Licensee represents and warrants that Licensee and all subcontractors and agents 8 involved in the production or delivery of the merchandise to be sold in connection with the Licensed Business shall strictly adhere to all applicable laws, regulations, and prohibitions of the United States and all country(ies) in which such merchandise is produced or delivered with respect to the operation of their production facilities and their other businesses and labor practices, including without limitation, laws, regulations and prohibitions governing the working conditions, wages and minimum age of the work force. Licensee further represents and warrants that such merchandise shall not be produced or manufactured, in whole or in part, by convict or forced labor. 5.8 Payment of Obligations. Licensee shall, at its expense, pay and discharge all license fees, business, use, sales, gross receipts, income, property or other applicable taxes or assessments which may be charged or levied by reason of any act performed in connection with the operation of the Licensed Business, excluding, however, all taxes and assessments applicable to Sears income from Sears Commission or applicable to Sears property. 5.9 Year 2000 Compliance. Licensee represents and warrants that its point of sale system utilizes and includes four digit year elements (e.g. 1999, 2000, etc.) and that the use, entry or creation of dates before, on or after January 1, 2000 will neither cause failure nor produce incorrect results in the transmission of data to Sears settlement system, nor cause interruption to or disruption of the Licensed Business. 5.10 No Sears Obligations. Licensee shall not make purchases or incur any obligation or expense of any kind in the name of Sears. Prior to any purchases involving the Licensed Business, Licensee shall inform its vendors that Sears in not responsible for any obligations incurred by Licensee. VI. DESIGNATED LOCATIONS 6.1 Condition of Designated Locations. Licensee shall, at its expense, keep the Designated Locations in a thoroughly clean and neat condition and shall maintain Licensee's Equipment in good order and repair. 6.2 Telephone. All telephone numbers used in connection with the Licensed Business shall be separate from phone numbers used by Licensee in its other business operations and such numbers shall be deemed to be the property of Sears. Upon expiration or termination of this Agreement, Licensee shall immediately cease to use such numbers and shall transfer such 9 numbers to Sears or to any party Sears designates, and Licensee shall immediately notify the Telephone Company of any such transfer. 6.3 Yellow/White Page Listings. All white and yellow page telephone listings for the Licensed Business shall be approved by Sears prior to placement; provided, however, approval is not required for listings consisting only of the Licensed Business name and address as authorized in Section 2.1. VII. ADVERTISING 7.1 Advertising. Licensee shall advertise and actively promote the Licensed Business. Licensee shall at all times adhere to Sears Licensed Business Marketing Manual as provided to Licensee and updated from time to time ("Marketing Manual"). Prior to use in connection with the Licensed Business, Licensee shall submit to Sears Marketing Manager, Licensed Businesses, or his designee any and all of the following materials containing, using or referring to the Sears Marks:, (a) all signs and advertising copy (including, but not limited to, sales brochures, telemarketing scripts, newspaper advertisements, radio and television commercials), and (b) all sales promotional plans and devices containing the Sears Marks. Licensee shall not use any such advertising material or sales promotional plan or device containing the Sears Marks without the prior written approval of Sears Marketing Manager. Sears has the right, in its sole discretion, to disapprove or require modification of any or all such advertising forms and other materials. Licensee shall not engage in any Internet advertising without the prior written consent of Sears Marketing Manager. Sears shall have the right to audit Licensee's advertising materials and practices to determine Licensee's compliance with this Agreement, including but not limited to compliance with all laws. 7.2 Publicity. Licensee shall not issue any publicity or press release regarding its contractual relations with Sears or regarding the Licensed Business, and shall refrain from making any reference to this Agreement or to Sears in any prospectus, annual report or other filing required by Federal or state law, or in the solicitation of business, without obtaining Sears prior written approval of such action from Sears Licensing Manager and Sears Public Relations Manager. Licensee shall at all times adhere to Sears written policies regarding interaction with the media as contained in the Marketing Manual. 7.3 Forms. Prior to use in connection with the Licensed Business, Licensee shall submit all customer contract forms, guarantee certificates and other forms and materials to Sears Licensing Manager for approval. 10 VIII. LICENSED BUSINESS EQUIPMENT 8.1 Licensee's Equipment. Entirely at its own expense, Licensee shall install furniture, fixtures and equipment as necessary for the efficient operation of the Licensed Business ("Licensee's Equipment"). 8.2 Licensee's Point of Sale System. At its own expense, Licensee shall furnish a point of sale system and peripheral devices, including, but not limited to printers, bar-code scanning devices, and electronic signature capture devices ("Licensee's POS"), and Licensee shall be responsible for all installation charges, phone line charges and data line charges for such system. Licensee's POS shall have the capability of processing Sears Card and any other credit cards Sears may accept from time to time. Licensee's POS shall have the capability of transmitting sales data to the Sears off-premise settlement system, as described in section 9.3. IX. TRANSACTIONS AND SETTLEMENT 9.1 Checks. All checks or money orders which Licensee accepts from customers shall be made payable to Sears, Sears, Roebuck and Co. or Sears Portrait Studio. Any and all losses which may be sustained by reason of nonpayment of any checks upon presentment shall be borne by Licensee, and Sears shall have no liability with respect to such checks. Licensee may establish a bank account in the name Consumer Programs Incorporated d/b/a Sears Portrait Studio or CPI Images LLC d/b/a Sears Portrait Studio, solely for clearing customer checks. In no event shall Licensee have or obtain check blanks in such name. 9.2 Credit Sales. With the approval of the Credit Central designated by Sears, sales may be made by Licensee on such of Sears regularly established credit plans as may be first approved by such Credit Central. The approval of such Credit Central is required for each individual credit sale, and approval shall be granted in the sole discretion of the Credit Central. No part of the finance charge which may be earned by Sears in connection with any credit sale shall be payable to or credited in any way to Licensee. All losses sustained by Sears as a result of non-payment of a Sears credit account shall be borne by Sears, provided that Licensee has complied with Sears credit policies and procedures. Except for non-payment of a Sears credit account, Sears shall have no liability whatsoever to Licensee for Sears failure to properly accept or reject a customer's charge. Licensee shall accept Sears Card Bonus Club Bonus Certificates. Sears shall 11 reimburse Licensee for such bonus certificates provided Licensee has followed prescribed procedures. Licensee agrees to accept third party credit cards as designated by Sears from time to time, and Licensee is responsible for the payment of any applicable discount fee or merchant's fee for such third party credit cards. Licensee may not distribute or solicit any customer applications for any third party credit cards in the Licensed Business. Licensee shall comply with all provisions of Federal and state laws governing credit sales, and their solicitation, including but not limited to provisions dealing with disclosures to customers and finance charges. Licensee shall not modify, in any way, the terms and conditions of Sears credit plans. 9.3 Settlement. Licensee will submit the total dollar amount of transactions, including sales taxes, through the Sears settlement system. Sears Credit Card and third party credit card transactions will be entered into the Sears settlement system as they occur. Cash transactions may be entered once daily as a single cash transaction. A settlement between the parties shall be made at the end of each Sears fiscal month for all transactions of Licensee during such period, in accordance with Sears customary accounting procedures. Such settlement will be done through the Sears Accounting Center designated by Sears. Sears will advance Licensee ninety-two and one-half percent (92 1/2%) of Net Sales weekly. Such advances shall be deducted and reconciled in the next regular settlement. All settlements and advances shall be made by electronic funds transfer (EFT) to a bank account designated by Licensee. Sears will pay the transaction fees for any processing service with whom Sears has an agreement to provide access for the Sears off-premise settlement system to the appropriate Sears credit system. Licensee shall reimburse Sears at each settlement for all invoiced expenses, including any advertising expense, incurred by Sears at Licensee's request, outstanding at the time of such settlement. If Sears is not reimbursed at such settlement, then Sears shall have the right, but not the obligation, to retain out of Licensee's sales receipts the amount of such expenses with interest, if any, due Sears. 9.4 Reports. If requested by Sears, Licensee shall provide to Sears reports of sales and income and Sears commissions paid in the manner and form prescribed by Sears, together with any other information Sears may require for its records or auditing purposes. If requested by Sears, Licensee shall promptly submit its financial report to Sears after the close of Licensee's fiscal year. Such report shall be certified by an accountant or by an officer of Licensee in the event that no audit is performed. Such report shall include, but shall not be limited to, Licensee's profit and loss statement for such fiscal year and balance sheet at the end of such fiscal year, and shall be prepared in accordance with generally accepted accounting principles. If Licensee is a 12 publicly held corporation, this requirement may be fulfilled by submission of Licensee's Annual Report on Form 10-K. Sears shall not disclose any such information that is not available to the public to any third parties without Licensee's prior consent. 9.5 Audit Rights. Licensee shall keep and maintain books and records that accurately reflect the sales made by Licensee under this Agreement and the expenses that Licensee incurs in performing under this Agreement. Sears shall have the right at any reasonable time to review and audit the books and records of Licensee regarding this Agreement. Such books and records shall be kept and maintained according to generally accepted accounting principles. 9.6 Underreporting. If an audit reveals that sales were under-reported at any Licensed Business location being audited, by more than five percent (5%) of the total sales which were actually reported by such location, then the cost of such audit shall be charged to such Licensed Business location. If a sampling of Licensee's records at a Licensed Business location, using standard audit practices, reveals that sales have been under-reported by more than five percent (5%) of the total sales which were actually reported by such Licensed Business location, then such Licensed Business location shall at its option, (a) pay Sears for all under-reported sales for each year audited by annualizing the rate by which sales were under-reported in the audit sample plus an administrative fee which shall be calculated by multiplying the annualized under-reported commissions by the percent of under-reported sales; or (b) pay the actual amount of any under-reported sales based on a complete audit of the books and records (at Licensee's expense) relating to such Licensed Business location, including a comprehensive audit of all such books and records for the then-current year and if Sears so elects, a comprehensive audit (at Licensee's expense) of prior years plus an administrative fee which shall be calculated by multiplying the audited annual under-reported commission by the percent of under-reported sales. Each audited location shall be subject to another audit (at Licensee's expense) one (1) year after the initial audit. If this audit reveals that sales were again under-reported by more than five percent (5%), Licensee shall pay Sears for these sales as per the above except that, due to the increased expenses incurred by Sears in continued monitoring of the Licensed Business, the administrative fee shall be doubled. All under-reported sales equal to or less than five percent (5%) of total sales actually reported by such Licensed Business location, shall be reimbursed to Sears, as appropriate, based on the actual amounts of such under-reports. Sears, at its sole option, may also charge interest on all under-reported sales at the rate of prime (as published in the Wall Street Journal as of the date of the completion of the audit) plus one percent (1%). Licensee, at its expense, shall develop and implement a program to conduct internal audits of the Licensed Business to verify accuracy of sales and commissions. 13 9.7 Rights of Recoupment and Setoff. Sears shall have the right to reduce, withhold or set-off against any payment due Licensee hereunder any liability or obligation which Licensee may have to Sears. Any Licensee liabilities or obligations which remain outstanding after any exercise of Sears right of set-off shall be paid by Licensee promptly upon demand by Sears. Sears rights under this Section are cumulative, shall be in addition to all other rights, remedies available at law or in equity, and shall survive the expiration or termination of this Agreement. X. CUSTOMER INFORMATION; CONFIDENTIALITY 10.1 Customer Information. The Sears Information and any customer list developed by Licensee, its employees or agents from the operation of, or from records generated as a result of the operation of the Licensed Business (collectively, the "Customer Information"), are deemed exclusively owned by Sears. Licensee shall not use, permit use, disclose or permit disclosure of such Customer Information for any purpose except the performance of this Agreement. Licensee shall at all times maintain any such Customer Information, including lists, physically separate and distinct from any customer information Licensee may maintain that is unrelated to the Licensed Business. Licensee shall not reproduce, release or in any way make available or furnish, either directly or indirectly, to any person, firm, corporation, association or organization at any time, any such Customer Information which will or may be used to solicit sales or business from such customers, including but not limited to the type of sales or business covered by this License Agreement. Upon written request by Sears during the Term and on expiration or termination of this Agreement for any reason, Licensee shall immediately deliver all copies of lists of customers and copies of all other such Customer Information to Sears; and Licensee, its officers, employees, successors and assigns, shall not use any such Customer Information to solicit any of such customers. Licensee shall protect all such Customer Information from destruction, loss or theft during the term of this Agreement, and until all copies of customer lists and copies of all other Customer Information are turned over to Sears. Licensee acknowledges that there is no adequate remedy at law for violation by Licensee of this Section X and, in case of breach of this Section X, preliminary or permanent injunctive relief would be appropriate. 10.2 Confidential Information. Information furnished by Sears to Licensee or which becomes known to Licensee through Licensee's operation of the Licensed Business or Licensee's relationship with Sears is confidential and proprietary to Sears (collectively, the "Confidential Information"). All such Confidential Information shall be held in utmost confidence by Licensee. All Confidential Information, including, but not limited to, information regarding Sears stores, and any other information not specifically designated by Sears for release to the public that may come into the possession of Licensee during the Term of this Agreement shall be delivered to the appropriate 14 Licensing Manager at Sears upon request by Sears, and Licensee shall not make or retain copies or portions of the Confidential Information. The terms and content of this Agreement, including but not limited to, exhibits attached hereto, and any other agreements entered into pursuant to this Agreement shall at all times remain confidential and shall not be revealed to any third party by Licensee without the prior written consent of Sears except to the extent (a) permitted by this Agreement, (b) required by law or any court, or (c) made to a court or mediator in connection with a dispute between the parties. The provisions of this Section X shall survive the expiration or termination of this Agreement. XI. RELATIONSHIP OF PARTIES Licensee is an independent contractor. Nothing contained in or done pursuant to this Agreement shall be construed as creating a partnership, agency or joint venture; and neither party shall become bound by any representation, act or omission of the other party. XII. DEFENSE AND INDEMNITY 12.1 Defense. Licensee shall defend all allegations asserted in any claim, action, lawsuit or proceeding (even though such allegations may be false, fraudulent or groundless) against Sears, its affiliates and subsidiaries, and/or Sears subsidiaries or affiliates, directors, officers, employees, agents, independent contractors, parents, subsidiaries and affiliates which contains any allegations of liability actually or allegedly resulting from or connected with the operation of the Licensed Business (including, without limitation of the foregoing, goods sold, work done, services rendered, or products utilized in the Licensed Business, lack of repair in or about the area occupied by the Licensed Business, operations of or defect in any machinery, motor vehicles, or equipment used in connection with the Licensed Business, or located in or about the Licensed Business area; or arising out of any actual or alleged infringement of any patent or claim of patent, copyright or non-Sears trademark, service mark, or trade name); or from the omission or commission of any act, lawful or unlawful, by Licensee or its directors, officers, employees, agents or independent contractors, whether or not such act is within the scope of the authority or employment of such persons. Licensee shall use counsel satisfactory to Sears in defense of such allegations. Sears may, at its election, take control of the defense and investigation of any claims, may employ and engage attorneys of its own choice to manage and defend such claims, at Licensee's cost, risk and expense, provided that Sears and its counsel shall proceed with diligence and good faith with respect thereto. The provisions of this Section shall survive the expiration or termination of this Agreement. 15 12.2 Indemnity. Licensee shall hold harmless and indemnify Sears and Sears directors, officers, employees, agents, independent contractors, parents, subsidiaries and affiliates from and against any and all claims, demands, actions, lawsuits, proceedings, liabilities, losses, costs and expenses (including, without limitation, fees and disbursements of counsel incurred by Sears in any claim, demand, lawsuit, or proceeding between Licensee and Sears or between Sears and any third party or otherwise), actually or allegedly resulting from or connected with the operation of the Licensed Business (including, without limitation of the foregoing, goods sold, work done, services rendered, or products utilized in the Licensed Business, lack of repair in or about the area occupied by the Licensed Business, operation of or defects in any machinery, motor vehicles, or equipment used in connection with the Licensed Business, or located in or about the Licensed Business area; or arising out of any actual or alleged infringement of any patent or claim of patent, copyright or non-Sears trademark, service mark, or trade name); or from the omission or commission of any act, lawful or unlawful, by Licensee or its directors, officers, employees, agents or independent contractors, whether or not such act is within the scope of the authority or employment of such persons. The provisions of this Section shall not apply to the extent any injury or damage is caused solely by Sears negligence. The provisions of this Section shall survive the expiration or termination of the Agreement. XIII. INSURANCE 13.1 Types of Insurance. Licensee shall, at its sole expense, obtain and maintain during the Term of this Agreement the following policies of insurance from companies having a rating of at least A-VII or better in the current Best's Insurance Reports published by A.M. Best Company and adequate to fully protect Sears as well as Licensee from and against all expenses, claims, actions, liabilities and losses related to the subjects covered by the policies of insurance below: (a) Worker's Compensation insurance covering all costs, benefits and liabilities under Workers Compensation and similar laws which may accrue in favor of any person employed by Licensee for all states in which Licensee operates, and Employer's Liability insurance with limits of liability of at least $100,000 per accident or disease and $500,000 aggregate by disease. Such insurance shall contain a waiver of subrogation in favor of Sears. Limits of liability requirements for Employer's Liability may be satisfied by a combination of Employer's Liability and Umbrella Excess Liability policies. (b) Commercial General Liability insurance, including but not limited to, premises/operations liability, contractual liability, personal and advertising injury liability, and products and completed operations liability, with limits of at least $1,000,000 for bodily injury and property damage combined. Sears shall be named as an additional insured. Limits of liability requirements may be satisfied by a combination of Commercial General Liability and Umbrella Excess Liability policies. 16 (c) Motor Vehicle Liability insurance, for owned, non-owned and hired motor vehicles used in connection with the Licensed Business, with limits of at least $1,000,000 for bodily injury and property damage combined. If only private passenger vehicles are owned or shall be used in conjunction with this Agreement, $500,000 combined single limit of liability is acceptable. If no vehicles are owned or leased by Licensee, the Commercial General Liability insurance shall be extended to provide insurance for non-owned and hired motor vehicles. Limits of liability requirements may be satisfied by a combination of Motor Vehicle Liability and Umbrella Excess Liability policies. (d) "All Risk" Property insurance upon all building improvements and supplies on the premises, including those perils generally covered on a "Cause of Loss - Special Form", including fire, extended coverage, windstorm, vandalism, malicious mischief, sprinkler leakage, water damage, accidental collapse, in an amount equal to at least 90% of the full replacement cost, with a coverage extension for increased cost of construction, including a waiver of subrogation in favor of Sears. (e) Fidelity insurance with limits of liability of at least $50,000. 13.2 No Cancellation Without Notice. Licensee's policies of insurance shall expressly provide that they shall not be subject to material change or cancellation without at least thirty (30) days' prior written notice to Sears Certificate Management Services, c/o Near North Technology Services, P.O. Box 811310, Chicago, Illinois 60681-1310, or other address of which Licensee is notified. 13.3 Certificates. Licensee shall furnish Sears with certificates of insurance or, at Sears request, copies of policies, prior to execution of this Agreement and upon each policy renewal during the Term of this Agreement. If Licensee does not provide Sears with such certificates of insurance or, in Sears opinion, such policies do not afford adequate protection for Sears, Sears shall so advise Licensee, and if Licensee does not furnish evidence of acceptable coverage within five (5) days, Sears shall have the right to immediately terminate this Agreement upon written notice to Licensee. 13.4 Expiration/Non-Renewal. If Licensee's policies of insurance expire or are canceled during the Term of this Agreement or are materially modified, Licensee shall promptly notify Sears of such expiration, cancellation or material modification. If such policies of insurance are materially modified such that, in Sears opinion, such policies do not afford adequate protection to Sears, Sears shall so advise Licensee. If Licensee does not furnish evidence of acceptable replacement coverage within five (5) days after the expiration or cancellation of coverage or the notification from Sears that modified policies are not sufficient, Sears shall have the right, at its option, to immediately terminate this Agreement upon written notice to Licensee. 17 Any approval by Sears of any of Licensee's insurance policies shall not relieve Licensee of any responsibility under this Agreement, including liability for claims in excess of described limits. XIV. TERMINATION 14.1 Mutual Right of Termination. Either party may terminate this Agreement, or any location, without cause, without penalty, and without liability for any damages as a result of such termination, at any time hereafter by giving the other party at least ninety (90) days' prior written notice. The notice shall specify the termination date. 14.2 Termination of License by Sears With Notice. This Agreement shall terminate effective upon delivery of notice of termination to Licensee if Licensee, or its owner(s): (a) abandons or fails to actively operate the License Business; (b) surrenders or transfers control of the Licensed Business without Sears prior written consent; (c) has made any material misrepresentation or omission in its application to Sears; (d) is convicted of or pleads no contest to a felony, or engages in any conduct that is likely to adversely affect the reputation of Licensee, the Licensed Business or Sears; (e) makes any unauthorized use, duplication or disclosure of the Confidential Information or Customer Information; (f) fails to secure and maintain appropriate insurance coverage as set forth in Section XIII; (g) a petition is filed either by or against Licensee in any bankruptcy or insolvency proceeding, or if any property of Licensee passes into the hands of any receiver, assignee, officer of the law or creditor; (h) materially misuses or makes an unauthorized use of any Sears Mark; or (i) is in default under either of the License Agreements, entered into concurrently herewith by Licensee and Sears, for operation of the Licensed Business in Sears full-line retail stores in the United States and Puerto Rico. 14.3 Termination of License by Sears Without Further Notice. This Agreement shall terminate without further action by Sears or notice to Licensee if Licensee or its owners(s): (a) fails to make payment of any Sears Commissions or any other amounts due Sears, and does not correct such failure within ten (10) days after written notice of such failure is delivered to Licensee; or (b) fails to comply with any other provision of this Agreement and does not correct such failure within thirty (30) days after written notice of such failure to comply is delivered to Licensee. 18 14.4 Survivability. No termination of this Agreement, by expiration of time or otherwise, shall relieve the parties of obligations arising before expiration or termination or arising upon or after expiration or termination of this Agreement. XV. ASSIGNMENT AND SUBLICENSING 15.1 Assignment by Licensee. Notwithstanding any other provision contained in this Agreement, this Agreement is not transferable by Licensee in whole or in part without Sears prior written consent and Licensee shall not sub-license the license granted herein to any person or entity. Any transfer or attempt to transfer by Licensee whether expressly or by operation of law, and without Sears prior written consent, shall, at the option of Sears, without notice, immediately terminate this Agreement. The sale of Licensee's business or any other transaction (including sales of stock) which shifts the rights or liabilities of Licensee to another controlling interest shall be deemed such a prohibited transfer. 15.2 Assignment by Sears. This Agreement is fully transferable by Sears and shall inure to the benefit of any transferee or other legal successor to Sears interest herein. 15.3 Binding Nature. The provisions of this Agreement shall be binding upon Licensee and upon Licensee's successors and assigns and shall be binding upon and inure to the benefit of Sears, its successors and assigns. XVI. MISCELLANEOUS 16.1 Cumulative Remedies. The remedies provided in this Agreement are cumulative, and shall not affect in any manner any other remedies that either party may have for any default or breach by the other party. The exercise of any right or remedy shall not constitute a waiver of any other right or remedy under this Agreement or provided by law or equity. No waiver of any such right or remedy shall be implied from failure to enforce any such right or remedy other than that to which the waiver is applicable, and only for that occurrence. 19 16.2 Severability. If any provision in this Agreement is held to be invalid, illegal or unenforceable by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been included. 16.3 Governing Law. This Agreement shall be interpreted and governed by the internal substantive laws of the State of Illinois, without regard to its conflict of law principles. This Agreement shall not be effective until it has been received and executed by Sears in Hoffman Estates, Illinois. The federal and/or state courts of Illinois shall have personal and subject matter jurisdiction over, and the parties each hereby submit to the venue of such courts with respect to, any dispute arising pursuant to this Agreement, and all objections to such jurisdiction and venue and hereby waived. 16.4 Entire Agreement. This Agreement sets forth the entire agreement and understanding between the parties with respect to the Licensed Business. This Agreement shall not be supplemented, modified or amended except by a written instrument signed by duly authorized representatives of Licensee and Sears, and no person has or shall have the authority to supplement, modify or amend this Agreement in any other manner. This Agreement shall be effective when signed by Sears. 16.5 Headings. The paragraph titles in this Agreement are for the mere convenience of the parties, and shall not be considered in any construction or interpretation of this Agreement. 16.6 Notices. All notices provided for or which may be given in connection with this Agreement shall be in writing and given by personal delivery, certified mail with postage prepaid and return receipt requested or its equivalent, such as private express courier, or by facsimile transmission (with a confirmation copy sent by regular mail). Notices given by Licensee to Sears shall be addressed to: SEARS, ROEBUCK AND CO. Attention: Licensing Manager, Licensed Businesses, Department 725 E3-378B 3333 Beverly Road Hoffman Estates, Illinois 60179 20 Notices given by Sears to Licensee shall be addressed to: CONSUMER PROGRAMS INCORPORATED Attention: Senior Vice President of Administration 1706 Washington Avenue St. Louis, Missouri 63103 Notices if so sent by mail shall be deemed to have been given when deposited in the mail or with the private courier. All changes of address must be communicated to the other party in writing. 21 IN WITNESS WHEREOF, the parties have executed this Agreement or caused this Agreement to be executed on their behalf by duly authorized officers or representatives. SEARS, ROEBUCK AND CO. By: /s/ Ken E. Hux ------------------------------- Its: Vice President and General Manager, Licensed Businesses LICENSEE By: /s/ Alyn V. Essman ------------------------------- Its: Chairman and Chief Executive Officer EXHIBIT A. DESIGNATED LOCATIONS
STUDIO # MALL NAME ADDRESS CITY ST ZIP - ----- ---------------- ---------------- ---------- ---- --- 02K02 LAUREL CENTER 14762 BALT WASH LAUREL MD 20707 BLVD 02K10 EASTLAND MALL SUITE A 23A TULSA OK 74134 02K11 LOCKPORT MALL SPACE 111 LOCKPORT NY 14095 02K13 SOUTH MALL ROOM 709 ALLENTOWN PA 18103 02K27 LAUREL MALL SPACE 29A HAZELTON PA 18201 02K42 CHELTENHAM SQUARE SPACE 360 PHILADELPHIA PA 19150 02K43 YODER PLAZA SUITE B NEWPORTNEWS VA 23602 02K44 HARFORD MALL SPACE H-15 BEL AIR MD 21014 02K46 NORTHTOWN MALL SPACE E7 SPRINGFIELD MO 65803 02KA1 NORTHWAY S/C 3717 N 16TH ST ORANGE TX 77632 02KA2 CARLISLE PLAZA 472 CARLISLE CARLISLE PA 17013 MALL PLAZA MALL 02KA3 PRINCE GEORGE SPACE 1444 HYATTSVILLE MD 20782 PLAZA 02KB1 VALLEY MALL SPACE 600 HARRISONBURG VA 22801 02KB5 THE PLAZA SPACE 868 NEW ORLEANS LA 70127 02KD4 BRISTOL COMMONS SPACE J BRISTOL CT 06010 02KD7 GANSETT S/C SPACES 84 & 86 E.PROVIDENCE RI 02916 02KD9 PARKWAY CENTER 1165 MCKINNEY PITTSBURGH PA 15220 MALL 02KE6 IMPERIAL PLAZA SUITES A4 & A5 PHILADELPHIA PA 19134 S/C 02KE7 HERNDON CENTER 414 ELDEN STREET HERNDON VA 22070 02KF1 MEADOWBROOK SPACE 10 FREEPORT NY 11520 COMMONS 02KF3 SUNVET MALL 5801 SUNRISE HWY HOLBROOK NY 11741 02KF5 RIVERTOWNE #48 OXON HILL MD 20745 COMMONS 02KF6 WHITMAN PLAZA 500 WEST OREGON PHILADELPHIA PA 19148 AVENUE 02KG6 CONCOURSE PLAZA SUITE 72 BRONX NY 10451 02KG7 SHERIDAN PLAZA 5121 SHERIDAN ST HOLLYWOOD FL 33021 02KH2 K-MART SHOPPING SPACE #3 HAMILTON NJ 08610 PLAZA 02KH3 SAWMILL SQUARE SPACE E9 LAUREL MS 39440 S/C 12428 MAPLE HILLS MALL 5130 W MAIN ST KALAMAZOO MI 49009
23 EXHIBIT A. DESIGNATED LOCATIONS (continued)
STUDIO # MALL NAME ADDRESS CITY ST ZIP - ----- ---------------- ---------------- ---------- ---- --- 12433 LAKEHURST MALL SPACE C2L WAUKEGAN IL 60085 12436 EVERGREEN SQUARE SPACE 15 PEORIA IL 61614 S/C 12446 ROGERS PLAZA 28 & MICHAEL WYOMING MI 49509 STREETS SW 12D47 WESTLAND MALL SPACE 222 W BURLINGTON IA 52655 12D49 SOUTH COUNTY SP 80 S.LIND- ST LOUIS MO 63129 BERGH/I-270 12K04 METRO NORTH MALL 400 NORTHWEST KANSAS CITY MO 64155 BARRY RD 12K06 WONDERLAND MALL 29655 PLYMOUTH LIVONIA MI 48150 RD 12K12 SOUTHWYCK MALL SPACE 825 TOLEDO OH 43614 12K16 SIERRA VISTA S/C SPACE C58 CLOVIS CA 93612 12K24 LAKEWOOD MALL SPACE 108A LAKEWOOD CTR WA 98499 SPACE 12K26 PERU MALL B 20 PERU IL 61354 12K29 NORTH COUNTY 10859 W FERGUSON MO 63136 FESTIVAL FLORISSANT 12K31 QUINCY PLACE 1110 QUINCY AVE OTTUMWA IA 52501 MALL 12K32 LANSING MALL 5768 W SAGINAW LANSING MI 48917 HWY 12K34 MUSCATINE MALL SPACE 41 MUSCATINE IA 52761 12K37 RANDHURST CENTER SPACE 2037 MT PROSPECT IL 60056 12K47 HAMILTON SPACE 1790D HAMILTON OH 45011 CROSSINGS 12K48 4130 1/2 EAST BURTON MI 48509 COURT ST 12KA6 COTTONWOOD AREA Q-INSIDE GLEN CARBON IL 62034 STATION DELIVERY 12KA7 COUNTY FAIR MALL 1264 E GIBSON RD WOODLAND CA 95776 SP A103 12KA8 CENTERPOINT MALL 1201 THIRD COURT STEVENS WI 54481 SP C 4 POINT 12KA9 PANORAMA MALL 9 PANORAMA MALL PANORAMA CA 91402 SP54 CITY 12KB3 SOUTH GRAND SPACE C2 ST LOUIS MO 63118 SQUARE 12KB4 THE MEADOWS SPACE 14 FREEPORT IL 61032 12KB6 LEMON GROVE SPACE A17 LEMON GROVE CA 91945 PLAZA 12KB8 STATER BROTHERS SPACE K BARSTOW CA 92311 CTR 12KC1 INLAND EMPIRE SPACE B & C FONTANA CA 92335 CENTER 12KC4 MOUNTAIN PLAZA 2090 SPACE B SIMI VALLEY CA 93065
24 EXHIBIT A. DESIGNATED LOCATIONS (continued)
STUDIO # MALL NAME ADDRESS CITY ST ZIP - ----- ---------------- ---------------- ---------- ---- --- 12KC5 TRI CITY CENTER 825 TRI CITY REDLANDS CA 92373 CENTER 12KC6 FOOTHILLS PARK SPACE G7 PHOENIX AZ 85044 PLACE 12KC7 1068 WEST LANCASTER CA 93534 AVENUE K 12KC8 HIGHLAND RIDGE 3274 HIGHLAND CINCINNATI OH 45213 PLAZA AVE 12KC9 TUSTIN MARKET SPACE 2925 TUSTIN CA 92680 PLACE 12KD1 HOPS AT PALOS STORE 241 ROLLING CA 90274 VERDES HILLS 12KD2 THE GROVE 1300 UNIT#I W DOWNER'S IL 60516 75TH ST GROVE 12KD5 SEQUOIA STATION SPACE D1-106 REDWOOD CA 94064 CTR CITY 12KD8 SOUTHLAND 3983A 7TH STREET LOUISVILLE KY 40216 TERRACE S/C ROAD 12KE3 CHARLESTON SPACE C2 LAS VEGAS NV 89110 COMMONS 12KE4 GATEWAY PLAZA SUITE 203 VALLEJO CA 94591 12KE5 EAST HILLS SPACE 104 BAKERSFIELD CA 93306 PAVILLION 12KE9 MARKET STREET SPACE 3590 W.VALLEY UT 84119 CENTER CITY 12KF2 COUNTRYSIDE SPACE B10 TURLOCK CA 95380 PLAZA 12KF4 WEST AURORA 1951 W GALENA AURORA IL 60506 PLAZA BLVD 12KF8 REGENCY PLAZA SPACE A7 ST CHARLES MO 63303 MALL 12KF9 EVANSTON PLAZA SPACE 11 EVANSTON IL 60202 12KG1 MIDVALE S/C SPACE 113 TUCSON AZ 85746 12KG2 NORTH VALLEY P/C SUITE 122 PEORIA AZ 85382 12KG3 MANCHESTER 13945 MANCHESTER TOWN&COUNTRY MO 63011 ROAD 12KG4 SWEETWATER T/C 1536-B SWEET- NATIONAL CA 91950 WATER ROAD CITY 12KG5 ATEISCO PLAZA SPACE G1 ALBUQUERQUE NM 87105 12KG8 SOMERSET MALL SPACE 10 SOMERSET KY 42501 12KG9 EASTLAND CENTER 18000 VERNIER HARPER WOODS MI 48225 ROAD 12KH1 NORTHLAND CENTER SPACE 792 SOUTHFIELD MI 48075 12KH4 RICHMOND CENTER 6674 CLAYTON RICHMOND MO 63117 ROAD HEIGHTS 12R31 WESTERN HILLS SPACE 144 CINCINNATI OH 45211 PLAZA
25 EXHIBIT B AUTHORIZED MERCHANDISE AND/OR SERVICES The following items, merchandise lines and/or services are authorized for sale by Licensee in the Licensed Business. 1. Portrait photography service and photographs 2. Passport photography service and photographs 3. Portrait-related retail merchandise (e.g., frames, mats, albums, greeting cards) 4. Portrait-related promotional merchandise for customer give-aways 5. Digital images (e.g. Portrait Creations(TM), proof sheets, portrait restoration) 6. Internet archiving services 26 EXHIBIT C SEARS COMMISSION Licensee shall pay to Sears a commission ("Sears Commission") which shall be a sum equal to seven and one-half percent (7 %) of Net Sales. 27 EX-10.30 4 EXHIBIT (10.30) License Agreement - Sears Roebuck De Puerto Rico, Inc. 28 SEARS ROEBUCK DE PUERTO RICO, INC. LICENSE AGREEMENT CONSUMER PROGRAMS INCORPORATED SEARS PORTRAIT STUDIOS January 1, 1999 (PAGE NUMBERS REFER TO PAPER DOCUMENT) TABLE OF CONTENTS I. GRANT OF LICENSE ................................... 5 1.1 License for On-Premises Operations ............ 5 1.2 Scope of License/Restrictions ................. 5 1.3 No Representations ............................ 5 II. USE OF SEARS MARKS ................................. 6 2.1 License to Use Sears Marks .................... 6 2.2 Communications with Third Parties ............. 6 2.3 No Challenge to Marks ......................... 6 2.4 No Rights to Marks ............................ 6 2.5 Registration of Marks ......................... 7 2.6 Injunctive Relief ............................. 7 2.7 Infringing Use ................................ 7 2.8 Limitations ................................... 7 2.9 Survival ...................................... 8 III. TERM ............................................... 8 IV. FEES ............................................... 8 4.1 Amount ........................................ 8 4.2 Net Sales ..................................... 8 4.3 Gross Sales ................................... 8 V. OPERATIONAL OBLIGATIONS OF LICENSEE ................ 8 5.1 Performance Standards ......................... 8 5.2 Business Conduct .............................. 9 5.3 Hours of Operation ............................ 9 5.4 Merchandise Standards ......................... 9 5.5 Pricing ....................................... 9 5.6 Discount Policy ............................... 9 5.7 Bonus Club .................................... 10 5.8 Customer Adjustment ........................... 10 5.9 Employee Standards ............................ 10 5.10 Licensee's Employees .......................... 10 5.11 Employee Compensation ......................... 11 5.12 Compliance with Labor Laws .................... 11 5.13 Compliance with Law ........................... 11 5.14 Year 2000 Compliance .......................... 11 5.15 Payment of Obligations ........................ 12 5.16 Licensee's Obligations ........................ 12 5.17 Liens ......................................... 12 VI. LICENSED BUSINESS AREA ............................. 12 6.1 Block Plan .................................... 12 6.2 Improvements .................................. 12 6.3 Operations .................................... 13 6.4 Condition of Licensed Business Area ........... 13 6.5 Changes of Location/Store Inventory ........... 13
2 TABLE OF CONTENTS (continued) 6.6 Remodeling .................................... 13 6.7 Electric/HVAC ................................. 13 6.8 Telephone ..................................... 14 6.9 Yellow/White Page Listings .................... 14 6.10 Access to Licensed Business Area .............. 14 6.11 Effect of Store Leases ........................ 15 6.12 Waiver of Casualty Liability .................. 15 VII. ADVERTISING ........................................ 15 7.1 Advertising ................................... 15 7.2 Publicity ..................................... 15 7.3 Forms ......................................... 16 VIII. LICENSED BUSINESS EQUIPMENT ........................ 16 8.1 Licensee's Equipment .......................... 16 8.2 Licensee's Point of Sale System ............... 16 8.3 Sears Card .................................... 16 IX. TRANSACTIONS AND SETTLEMENT ........................ 17 9.1 Checks ........................................ 17 9.2 Credit Sales .................................. 17 9.3 Sales Receipts ................................ 18 9.4 Settlement .................................... 18 9.5 Reports ....................................... 18 9.6 Audit Rights .................................. 19 9.7 Underreporting ................................ 19 9.8 Rights of Recoupment and Setoff ............... 20 X. CUSTOMER INFORMATION; CONFIDENTIALITY .............. 19 10.1 Customer Information .......................... 20 10.2 Confidential Information ...................... 20 XI. RELATIONSHIP OF PARTIES ............................ 21 XII. DEFENSE AND INDEMNITY .............................. 21 12.1 Defense ....................................... 21 12.2 Indemnity ..................................... 22 XIII. INSURANCE .......................................... 22 13.1 Types of Insurance ............................ 22 13.2 No Cancellation Without Notice ................ 23 13.3 Certificates .................................. 23 13.4 Expiration/Non-Renewal ........................ 23 XIV. TERMINATION ........................................ 24 14.1 Mutual Right of Termination ................... 24 14.2 Termination of License by Sears With Notice ... 24 14.3 Termination of License by Sears Without Further Notice ............................... 24 14.4 Termination on Store Closing .................. 25 14.5 Effect of Termination ......................... 25 14.6 Survivability ................................. 25 XV. ASSIGNMENT AND SUBLICENSING ........................ 25 15.1 Assignment by Licensee ........................ 25 15.2 Assignment by Sears ........................... 26
3 TABLE OF CONTENTS (continued) 15.3 Binding Nature ................................ 26 XVI. MISCELLANEOUS ...................................... 26 16.1 Cumulative Remedies ........................... 26 16.2 Severability .................................. 26 16.3 Governing Law ................................. 26 16.4 Arbitration ................................... 26 16.5 Entire Agreement .............................. 27 16.6 Headings ...................................... 27 16.7 Notices ....................................... 27 EXHIBIT A ....................................... 30 DESIGNATED SEARS STORES ....................... 30 EXHIBIT B ....................................... 31 AUTHORIZED MERCHANDISE AND/OR SERVICES ........ 31 EXHIBIT C ....................................... 32 SEARS COMMISSION .............................. 32 EXHIBIT D ....................................... 33 ALLOCATION OF COSTS ........................... 33
4 LICENSE AGREEMENT THIS LICENSE AGREEMENT ("Agreement") is made and entered into as of the 1st day of January, 1999, by SEARS ROEBUCK DE PUERTO RICO, INC., a Delaware corporation ("Sears"), and CONSUMER PROGRAMS INCORPORATED, a Missouri corporation ("Licensee"). Sears and Licensee hereby agree as follows: I. GRANT OF LICENSE 1.1. License for On-Premises Operations. Sears hereby grants Licensee the non-exclusive privilege of conducting and operating, and Licensee shall conduct and operate, pursuant to the terms, provisions and conditions contained in this Agreement, a licensed business offering the goods and services listed on Exhibit B ("Licensed Business"), only at the Sears locations described in Exhibit A or in Location Riders attached ("Designated Sears Store(s)"). 1.2. Scope of License/Restrictions. Licensee shall use the Licensed Business area only for the purpose authorized in this Agreement, and shall offer for sale only those services and merchandise expressly author- ized by this Agreement as listed on Exhibit B attached hereto and shall offer those services and merchandise only from the Designated Sears Stores. Any changes, additions or deletions of services or merchandise require the prior written approval of Sears appropriate Licensing Manager ("Licensing Manager"). 1.3. No Representations. (a) Sears makes no promises or representations whatsoever as to the potential amount of business Licensee can expect at any time during operation of the Licensed Business. Licensee is solely responsible for any expenses it incurs related to this Agreement, including, but not limited to, any increase in the number of Licensee's employees or any expenditures for additional facilities or equipment. (b) Licensee acknowledges that, by entering into this Agreement, Licensee seeks to provide services for customers of Sears and Licensee shall not be required to create or develop an independent customer base. Licensee further acknowledges that customers of Sears who use Licensee's services likely seek such services because of the commercial reputation of Sears, rather than the commercial reputation of Licensee. Licensee represents and warrants that Licensee has considered the acknowledgments made in this provision of the Agreement in determining the commission rate set forth in this Agreement. 5 II. USE OF SEARS MARKS 2.1 License to Use Sears Marks. Licensee shall operate the Licensed Business under the name SEARS PORTRAIT STUDIO. Licensee shall use the name of Sears only in connection with the operation of the Licensed Business and only in a manner described herein or upon prior written approval by Sears Licensing Manager. Licensee may use the name Sears when communicating with customers or potential customers of the Licensed Business, or to identify the location of the Licensed Business and in other instances specifically approved by Sears. Licensee shall not begin any business activity under this Agreement without Sears prior written approval of any and all names that Licensee intends to use in conjunction with the Licensed Business. 2.2 Communications with Third Parties. Except in the case of communication permitted by Paragraph 2.1, or as otherwise specifically approved by Sears, Licensee shall not use the name of Sears, or any Sears trademarks, service marks or trade names (the "Mark(s)"), either orally or in writing, including, but not limited to, use of any letterhead, checks, business cards, or contracts. All communications with persons or entities other than customers or potential customers of the Licensed Business shall be done solely in Licensee's own name. 2.3 No Challenge to Marks. Licensee shall not question, contest or challenge, either during or after the Term of this Agreement, Sears owner- ship of the Marks, or Sears ownership in any mailing lists, credit files or other factual information compiled by Sears and made available for use by Licensee ("Sears Information"). Licensee shall claim no right, title or interest in any Mark or Sears Information, except the right to use the same pursuant to the terms and conditions of this Agreement, and shall not register or attempt to register any Mark. 2.4 No Rights to Marks. Licensee recognizes and acknowledges that the use of any Mark or Sears Information shall not confer upon Licensee any proprietary rights to any Mark or Sears Information. Upon expiration or termination of this Agreement, Licensee shall immediately stop using all Marks and Sears Information, and shall execute all documents Sears requests in order to confirm Sears ownership, or to transfer to Sears any rights Licensee may have acquired from Sears in any Mark or Sears Information. Nothing in this Agreement shall be construed to bar Sears, during or after expiration or termination of this Agreement, from protecting its right to the exclusive ownership of Sears Information or Marks against infringement or appropriation by any party or parties, including Licensee. 6 2.5 Registration of Marks. Sears may register in its own name any and all of the trademarks, service marks or trade names used in operation of the Licensed Business, except for such trademarks, service marks or trade names which are owned or licensed by Licensee prior to execution of this Agreement, and Licensee's use of such names and marks shall inure to the benefit of Sears for such purposes as well as for all other purposes and such marks shall be included in the term "Marks". Licensee shall cooperate in any such registration or application for registration by Sears. No name or mark registered in the name of Licensee or any of Licensee's affiliates and used in conjunction with the Licensed Business shall be used for any other purpose without the written consent of Sears. 2.6 Injunctive Relief. Licensee acknowledges that the Marks and Sears Information possess a special, unique and extraordinary character, which makes it difficult to assess the monetary damage Sears would sustain in the event of unauthorized use. Irreparable injury would be caused to Sears by such unauthorized use, and Licensee agrees that in the event of breach of this Section II by Licensee there would be no adequate remedy at law and preliminary or permanent injunctive relief would be appropriate. 2.7 Infringing Use. If Licensee learns of any manufacture or sale by any third party of products and/or services similar to those offered by Licensee that would be confusingly similar in the minds of the public to those sold by Licensee and which bear or are promoted in association with the Marks or any names, symbols, emblems, or designs or colors which would be confusingly similar in the minds of the public to the Marks, Licensee shall promptly notify Sears. Sears may, at its sole expense, take such action as it determines, in its sole discretion, is appropriate. Licensee shall cooperate and assist in such pro- test or legal action at Sears expense. If demanded by Sears, Licensee shall join in such protest or legal action at Sears expense. Licensee shall not undertake any protest or legal action on its own behalf without first securing Sears written permission to do so. If Sears permits Licensee to undertake such protest or legal action, such protest or legal action shall be at Licensee's sole expense. Sears shall cooperate and assist Licensee at Licensee's expense. For the purposes of this paragraph, expenses shall include reasonable attorneys' fees. All recovery in the form of legal damages or settlement shall belong to the party bearing the expense of such protest or legal action. 2.8 Limitations. Licensee shall not file suit using Sears name. Licensee shall not use the services of a collection agency or undertake any legal proceeding against any customer without the prior written approval of Sears Licensing Manager. 7 2.9 Survival. The provisions of this Section II shall survive the expiration or termination of this Agreement. III. TERM The term of this Agreement ("Term") shall be for a five (5) year period beginning on January 1, 1999, and ending at the close of business on December 31, 2003, unless sooner terminated under any of the provisions of this Agreement. IV. FEES 4.1 Amount. Licensee shall pay Sears a commission ("Sears Commission") which is set forth on Exhibit C attached hereto. 4.2 Net Sales. "Net Sales" means Gross Sales from operation of the Licensed Business, less sales taxes, returns and allowances. 4.3 Gross Sales. "Gross Sales" means all of Licensee's direct or indirect sales of services and merchandise from the Licensed Business, including, but not limited to, sales arising out of referrals, contacts, or recommendations obtained through the operation of the Licensed Business. V. OPERATIONAL OBLIGATIONS OF LICENSEE 5.1 Performance Standards. Licensee shall provide Sears with copies of its written procedures and policies establishing minimum standards of quality, performance and customer service. Licensee shall immediately advise Sears of any changes in its standards. Without limiting Paragraph 5.8, Licensee shall observe no less than such minimum standards of quality, performance and customer service. Sears may visit the Licensed Business area at any reasonable time during business hours for the purpose of verifying Licensee's compliance with its standards of quality, performance and customer service. 8 Licensee shall conduct its operations in a courteous and efficient manner and shall present a neat, business like appearance, including adherence by Licensees' employees to a reasonable dress code. Licensee shall abide by all safety and security rules and regulations of Sears in effect from time to time. 5.2 Business Conduct. Licensee shall also conduct its operations in an honest and ethical manner at all times. In dealing with Sears associates and Sears customers, Licensee shall adhere to the highest ethical standards, including those standards described in the "A Guide To Business Conduct For Sears Licensed Business Associates" as provided to Licensee and updated from time to time. 5.3 Hours of Operation. The Licensed Business shall be kept open for business and operated during the same business hours that the Designated Sears Store is open for business, unless otherwise agreed to by Sears Licensing Manager and Licensee. 5.4 Merchandise Standards. Licensee shall maintain a stock of good quality merchandise as necessary to assure efficient operation of the Licensed Business. Licensee shall maintain merchandise presentation standards consistent with Sears own standards. 5.5 Pricing. Except as noted, Sears shall have no right or power to establish or control the prices at which Licensee offers service and/or merchandise in the Licensed Business. Such right and power is retained by Licensee, however, Licensee also shall participate in Sears national storewide sales and/or merchandise price off events. Licensee shall not charge customers for estimates or proposals. 5.6 Discount Policy. Sales made under this Agreement shall be offered for sale by Licensee to the employees of Sears (to include other eligible family members) at the same discount which Sears allows its own employees on purchases of similar merchandise as fully described in Sears Courtesy Discount Guide. Licensee's employees who are exclusively employed to service the Licensed Business shall be entitled to receive the same discount on purchases made from Sears; provided, however, that the employees, but not their family members, are entitled to receive the discount. Misuse of the Sears discount policy by any employee of Licensee could result in Sears request that Licensee remove an employee from the Licensed Business pursuant to Paragraph 5.10 of this Agreement. 9 5.7 Bonus Club. Licensee shall accept Sears Card Bonus Club Bonus Certificates. Sears shall reimburse Licensee for such bonus certificates provided Licensee has followed prescribed procedures. 5.8 Customer Adjustment. All of the work and services performed by Licensee in connection with the Licensed Business shall be of a high standard of workmanship, and all of the merchandise sold in the Licensed Business shall be of high quality. Licensee shall at all times maintain a general policy of "Satisfaction Guaranteed" to customers and shall adjust all complaints of and controversies with customers arising out of the operation of the Licensed Business. In any case in which an adjustment is unsatisfactory to the customer, Sears shall have the right, at Licensee's expense, to make such further adjustment as Sears deems necessary under the circumstances, and any adjustment made by Sears shall be conclusive and binding upon Licensee. Sears may deduct the amounts of any such adjustments from the sales receipts held by Sears as described in Paragraph 9.4. Licensee shall maintain files pertaining to customer complaints and their adjustment and make such files available to Sears. 5.9 Employee Standards. Licensee shall employ all management and other personnel necessary for the efficient operation of the Licensed Business. The Licensed Business shall be operated solely by Licensee's employees, and not by independent contractors, sub-contractors, sub-licensees or by any other such arrangement. 5.10 Licensee's Employees. Licensee has no authority to employ persons on behalf of Sears and no employees of Licensee shall be deemed to be employees or agents of Sears. Licensee has sole and exclusive control over its labor and employee relations policies, and its policies relating to wages, hours, working conditions, or conditions of its employees. Licensee has the sole and exclusive right to hire, transfer, suspend, lay off, recall, promote, assign, discipline, adjust grievances and discharge its employees, provided, however, that Sears may request at any time that Licensee remove from the Licensed Business any employee who is objectionable to Sears because of risk of harm or loss to the health, safety and/or security of Sears customers, employees or merchandise and/or whose manner impairs Sears customer relations. If Sears objects to any of Licensee's employees, and Licensee determines not to remove such employee, Sears may terminate any affected location by giving thirty (30) days notice to Licensee. 10 5.11 Employee Compensation. Licensee shall pay in a timely manner and is solely responsible for so paying, for all salaries and other compensation of its employees and shall make all necessary salary deductions and withholdings from its employees' salaries and other compensation. Licensee shall pay in a timely manner, and is solely responsible for so paying any and all contributions, taxes and assessments and all other requirements of the Federal Social Security, Federal and state unemployment compensation and Federal, state and local withholding of income tax laws on all salary and other compensation of its employees. 5.12 Compliance with Labor Laws. Licensee shall comply with any other contract and all Federal, state and local laws, ordinances, rules and regulations regarding its employees, including, but not limited to, Federal or state laws or regulations regarding minimum compensation, overtime and equal opportunities for employment. Without limiting the foregoing, Licensee shall comply with the terms of the Federal Civil Rights Acts, Age Discrimination in Employment Act, Occupational Safety and Health Act, the Federal Fair Labor Standards Act, and the Americans with Disabilities Act, whether or not Licensee may otherwise be exempt from such acts because of its size or the nature of its business or for any other reason whatsoever. 5.13 Compliance with Law. Licensee shall, at its expense, obtain all permits and licenses which may be required under any applicable Federal, state, or local law, ordinance, rule or regulation by virtue of any act performed in connection with the operation of the Licensed Business. Licensee shall comply fully with all applicable Federal, state and local laws, ordinances, rules and regulations, including, but not limited to, all rules and regulations of the Federal Trade Commission. In addition, Licensee represents and warrants that Licensee and all subcontractors and agents involved in the production or delivery of the merchandise to be sold in connection with the Licensed Business shall strictly adhere to all applicable laws, regulations, and prohibitions of the United States and all country(ies) in which such merchandise is produced or delivered with respect to the operation of their production facilities and their other businesses and labor practices, including without limitation, laws, regulations and prohibitions governing the working conditions, wages and minimum age of the work force. Licensee further represents and warrants that such merchandise shall not be produced or manufactured, in whole or in part, by convict or forced labor. 5.14 Year 2000 Compliance. Licensee represents and warrants that its point of sale system utilizes and includes four digit year elements (e.g. 1999, 2000, etc.) and that the use, entry or creation of dates before, on or after January 1, 2000 will neither cause failure nor produce incorrect results in the transmission of data to Sears settlement system, nor cause interruption to or disruption of the Licensed Business. 11 5.15 Payment of Obligations. Licensee shall, at its expense, pay and discharge all license fees, business, use, sales, gross receipts, income, property or other applicable taxes or assessments which may be charged or levied by reason of any act performed in connection with the operation of the Licensed Business, excluding, however, all taxes and assessments applicable to Sears income from Sears Commission or applicable to Sears property. Licensee shall promptly pay all its obligations, including those for labor and material, and shall not allow any liens to attach to any Sears or customer's property as a result of Licensee's failure to pay such sums. 5.16 Licensee's Obligations. Licensee shall not make purchases or incur any obligation or expense of any kind in the name of Sears. Prior to any purchases involving the Licensed Business, Licensee shall inform its vendors that Sears in not responsible for any obligations incurred by Licensee. 5.17 Liens. Licensee shall not allow any liens, claims or encumbrances to attach against any of the Designated Sears Stores. In the event any lien, claim or encumbrance so attaches or is threatened, Licensee shall immediately take all necessary action to cause such lien, claim or encumbrance to be satisfied and released, or Sears, may either terminate this Agreement or charge Licensee or withhold from sales receipts all expenses, including attorneys' fees, incurred by Sears in removing and/or resolving such liens or claims. VI. LICENSED BUSINESS AREA 6.1 Block Plan. The defined area of space provided by Sears for the operation of the Licensed Business ("Block Plan") will be submitted for each Designated Sears Store to Licensee. Licensee shall be solely responsible for providing final plans for the Licensed Business area and Licensee shall authorize Sears to prepare the final blueprint plans in accordance with Exhibit D. All costs and expenses related to such plans, including, but not limited to, blueprints, shall be borne by Licensee. The expense of preparing the initial space assigned to any Licensed Business location shall be allocated between parties as described in Exhibit D attached hereto and hereafter made a part of this Agreement. Licensee shall be primarily responsible for any preparations necessary for the operation of the Licensed Business. Any improvements and installations made by Sears shall be made to Sears specifications for its own departments. All improvements or installations which vary from Sears standard specifications shall be at Licensee's sole expense. 6.2 Improvements. All permanent improvements to the Licensed Business area shall become the property of Sears at the expiration or termination of this Agreement. At the expiration or 12 termination of this Agreement, or if Licensee vacates or abandons the Licensed Business, Licensee shall convey to Sears, without charge, good title to such improvements free from any and all liens, charges, encumbrances and rights of third parties. 6.3 Operations. If the Licensed Business is not fully operational within thirty (30) days after Sears has made the Licensed Business area ready for Licensee as a result of delay by Licensee, Sears may, at Sears sole option, terminate this Agreement and have no further obligation to Licensee, and Licensee shall reimburse Sears within ten (10) days after receipt of an invoice, for Sears cost, of constructing the Licensed Business area and of putting such space back to its condition immediately prior to the commencement of such construction. 6.4 Condition of Licensed Business Area. Licensee shall, at its expense, keep the Licensed Business area in a thoroughly clean and neat condition and shall maintain Licensee's Equipment in good order and repair. Sears shall provide routine janitorial service in the Licensed Business area, consistent with the janitorial services regularly performed in the Designated Sears Store. 6.5 Changes of Location/Store Inventory. Sears shall have the right, in its sole discretion, to change the location, dimensions and amount of area of the Licensed Business from time to time during the Term of this Agreement in accordance with Sears judgment as to what arrangements will be most satisfactory for the general good of the Designated Sears Store(s). In the event Sears decides to change the location of the Licensed Business, Sears shall move Licensee's Equipment to the new location and prepare the new space for occupancy by Licensee and the expense shall be allocated between the parties as described on Exhibit D. If a change in location is requested or initiated by Licensee, then Licensee shall bear all expense involved in moving Licensee's Equipment and the expense for preparing the new space for occupancy by Licensee shall be allocated between the parties as described on Exhibit D. Sears may, solely at Sears discretion, not open any Designated Sears Store at any time to take a physical inventory of Sears property. Licensee waives any claim it may have against Sears for damages resulting from such closing. 6.6 Remodeling. Licensee shall remodel the Licensed Business area per the terms of Exhibit D and the expense of such remodel shall be divided between the parties as described on Exhibit D. 6.7 Electric/HVAC. Sears shall furnish, at reasonable hours, and except as otherwise provided, without expense to Licensee, reasonable amounts of heat, light, air conditioning and electric power for the operation of the Licensed Business, except when prevented by strikes, accidents, breakdowns, improvements and repairs to the heating, lighting and electric power systems or 13 other causes beyond the control of Sears. Sears shall not be liable for any injury or damage, whatsoever which may arise by reason of Sears failure to furnish such heat, light, air conditioning and electric power, regardless of the cause of such failure. All claims for such injury or damage are expressly waived by Licensee. The allocations of costs to bring such utilities to the Licensed Business location are described on Exhibit D. 6.8 Telephone. Sears will arrange for local telephone service by providing a single Direct Inward Dial Telephone line ("Sears Phone Line") for the Licensed Business location(s). In stores that have not been remodeled, Sears will provide a Sears Phone to the cash register area for the Licensed Business location(s). In new and remodeled stores as described in Exhibit D, Sears shall provide a single Sears Phone to the cash register area and one extension phone line ("Sears Extension Line") in each camera room. Sears shall bear the cost of outbound local and toll-free calls and provide compatible telephone hardware for the Sears Phone Line and the Sears Extension Lines. If Licensee requires additional phone lines ("Additional Phone(s)") to be installed in the Licensed Business location(s), Licensee shall arrange with the appropriate telephone company for such installation and all installation costs and monthly service associated with any such Additional Phone(s) are to be paid by Licensee. Licensee shall arrange with the appropriate telephone company for direct billing to Licensee of all long distance calls made in the Licensed Business location(s). All telephone numbers used in connection with the Licensed Business shall be separate from phone numbers used by Licensee in its other business operations and such numbers shall be deemed to be the property of Sears. Upon expiration or termination of this Agreement, Licensee shall immediately cease to use such numbers and shall transfer such numbers to Sears or to any party Sears designates, and Licensee shall immediately notify the Telephone Company of any such transfer. 6.9 Yellow/White Page Listings. All white and yellow page telephone listings for the Licensed Business shall be approved by Sears prior to placement; provided, however, approval is not required for listings consisting only of Licensee's name and address as authorized in Paragraph 2.1. Sears may, at its sole option, require that any telephone number listed in any telephone directory using Sears name is billed through a Sears store or office. 6.10 Access to Licensed Business Area. Licensee shall have access to the Licensed Business area at all times that the Designated Sears Store is open to customers for business and at all other times as the appropriate Store General Manager approves. Sears shall be furnished with keys to the Licensed Business area and shall have access to the Licensed Business area at all times. 14 6.11 Effect of Store Leases. If any Designated Sears Store is leased to Sears or is the subject of an easement agreement, this Agreement shall be subject to all of the terms, agreements and conditions contained in such lease or easement agreement. In case of the termination of any such lease by expiration of time or otherwise, this Agreement shall immediately terminate with respect to affected Licensed Business locations. 6.12 Waiver of Casualty Liability. Licensee waives any and all claims it may have against Sears for damage to Licensee, for the safekeeping or safe delivery or damage to any property whatsoever of Licensee or of any customer of Licensee in or about the Licensed Business area, because of the actual or alleged negligence, act or omission of any tenant, licensee or occupant of the premises at which the Licensed Business may be located; or because of any damage caused by any casualty from any cause whatsoever, including, but not limited to, fire, water, snow, steam, gas or odors in or from such store or store premises, or because of the leaking of any plumbing, or because of any accident or event which may occur in such store or upon store premises; or because of the actual or alleged acts or omissions of any janitors or other persons in or about such store or store premises or from any other such cause whatsoever; except for damage caused by Sears gross negligence. VII. ADVERTISING 7.1 Advertising. Licensee shall advertise and actively promote the Licensed Business. Licensee shall at all times adhere to Sears Licensed Business Marketing Manual as provided to Licensee and updated from time to time ("Marketing Manual"). Prior to use in connection with the Licensed Business, Licensee shall submit to Sears Marketing Manager, Licensed Businesses, or his designee, (a) all signs and advertising copy (including, but not limited to, sales brochures, telemarketing scripts, newspaper advertisements, radio and television commercials), and (b) all sales promotional plans and devices. Licensee shall not use any such advertising material or sales promotional plan or device without the prior written approval of Sears Marketing Manager. Sears has the right, in its sole discretion, to disapprove or require modification of any or all such advertising forms and other materials. Licensee shall not engage in any Internet advertising without the prior written consent of Sears Marketing Manager. Sears shall have the right to audit Licensee's advertising materials and practices to determine Licensee's compliance with this Agreement, including but not limited to compliance with all laws. 7.2 Publicity. Licensee shall not issue any publicity or press release regarding its contractual relations with Sears or regarding the Licensed Business, and shall refrain from making any reference to this Agreement or to Sears in any prospectus, annual report or other filing required 15 by Federal or state law, or in the solicitation of business, without obtaining Sears prior written approval of such action from Sears Licensing Manager and Sears Public Relations Manager. Licensee shall at all times adhere to Sears written policies regarding interaction with the media as contained in the Marketing Manual. 7.3 Forms. Prior to use in connection with the Licensed Business, Licensee shall submit all customer contract forms, guarantee certificates and other forms and materials to Sears Licensing Manager for approval Licensee shall not utilize any forms or related materials that have not been approved in advance by Sears Licensing Manager. VIII. LICENSED BUSINESS EQUIPMENT 8.1 Licensee's Equipment. Entirely at its own expense, Licensee shall install furniture, fixtures and equipment as necessary for the efficient operation of the Licensed Business ("Licensee's Equipment"). Licensee's Equipment, and its size, design and location shall at all times be subject to Sears approval. 8.2 Licensee's Point of Sale System At its own expense, Licensee shall furnish a point of sale system and peripheral devices, including, but not limited to printers, bar-code scanning devices, and electronic signature capture devices ("Licensee's POS"). Licensee's POS shall have the capability of processing Sears Card and any other credit cards Sears may accept from time to time. At such time as Licensee's POS interfaces with the Sears in-store processor ("Sears ISP"), Licensee's POS shall be compatible with the Sears ISP, and Licensee's POS shall have substantially the same capabilities as the point of sale system used by Sears in its own merchandise departments to the extent applicable to the operation of the Licensed Business. This transition will occur no later than June 30, 2000. Licensee shall also be responsible for upgrading Licensee's POS to be compatible with enhancements and changes in functionality made to the Sears ISP. Sears shall be responsible for the cost of installing and maintaining a Sears data line to the Licensed Business location. Subject to Licensee's fulfillment of its obligations under this paragraph, Sears shall also be responsible for the cost of developing and maintaining the third party interface software that is necessary to support the integration of Licensee's POS with the Sears ISP. 16 8.3 Sears Card. At such time when Licensee's POS interfaces with the Sears ISP as described in Paragraph 8.2, Licensee agrees to accept and process Sears Card payments from customers at Licensee's POS, and upon written approval from Sears Licensing Manager, Licensee will be authorized to open Sears Card instant credit accounts ("Rapid Credit") for customers. IX. TRANSACTIONS AND SETTLEMENT 9.1 Checks. All checks or money orders which Licensee accepts from customers shall be made payable to Sears, Sears, Roebuck and Co. or Sears Portrait Studio. Licensee shall make certain that all checks are filled out correctly and are verified in accordance with Sears policies in effect from time to time. Checks which are deficient in any manner may be charged back to Licensee, and Licensee shall reimburse Sears for any of Sears Commission lost as a result of Licensee's failure to obtain a properly filled out and verified check. Sears shall not be entitled to Sears Commission for those checks that have all of the above information but which are not paid upon presentment. Any and all losses which may be sus- tained by reason of nonpayment of any checks upon presentment shall be borne by Licensee, and Sears shall have no liability with respect to such checks, provided that Sears shall make whatever effort it deems reasonable to collect all such checks prior to charging back such checks to Licensee. 9.2 Credit Sales. With the approval of the Credit Central designated by Sears, sales may be made by Licensee on such of Sears regularly established credit plans as may be first approved by such Credit Central. The approval of such Credit Central is required for each individual credit sale, and approval shall be granted in the sole discretion of the Credit Central. No part of the finance charge which may be earned by Sears in connec- tion with any credit sale shall be payable to or credited in any way to Licensee. All losses sustained by Sears as a result of non-payment of a Sears credit account shall be borne by Sears, provided that Licensee has complied with Sears credit policies and procedures. Except for non-payment of a Sears credit account, Sears shall have no liability whatsoever to Licensee for Sears failure to properly accept or reject a customer's charge. Licensee agrees to accept third party credit cards as designated by Sears from time to time. Licensee may not distribute or solicit any customer applications for any third party credit cards in the Licensed Business. At such time when Licensee's POS interfaces with the Sears ISP as described in Paragraph 8.2, Sears shall pay Licensee's third party merchant discount fees for using third party credit cards, as long as Licensee's balance of sale for third party credit does not exceed the Sears full-line stores 17 balance of sale for third party credit for that Sears fiscal year. If Licensee's balance of sale for third party credit exceeds the Sears full-line stores balance of sale for third party credit for that Sears fiscal year, Licensee will reimburse Sears one and one half percent (1.5%) of all third party credit sales over the Sears full-line stores average balance of sale for third party credit. Sears shall have the right to withhold such third party credit fees owed to Sears, from the next regular settlement after the close of that fiscal year. Licensee shall comply with all provisions of Federal and state laws governing credit sales, and their solicitation, including but not limited to provisions dealing with disclosures to customers and finance charges. Licensee shall not modify, in any way, the terms and conditions of Sears credit plans. 9.3 Sales Receipts. At the close of each business day, Licensee shall submit an accounting of the Gross Sales and the returns, allowances and customer adjustments made during such day by Licensee to the cashier of the Sears unit designated by Sears, together with the gross amount, in cash, of all cash sales, and all credit sales documents for transactions completed that day. Sears may retain out of such receipts the proper amount of the Sears Commission payable under this Agreement together with any other sums due Sears from Licensee. The remaining balance shall be payable to Licensee at the regular settlement set forth in Paragraph 9.4. 9.4 Settlement. A settlement between the parties shall be made at the end of each Sears fiscal month for all transactions of Licensee during such period, in accordance with Sears customary accounting procedures. Such settlement will be done through the Sears Accounting Center designated by Sears. Sears will advance Licensee eighty-five percent (85%) of Net Sales weekly. Such advances shall be deducted and reconciled in the next regular settlement. All settlements and advances shall be made by electronic funds transfer (EFT) to a bank account designated by Licensee. For all transactions entered into the Sears system for settlement purposes, and until such time when Licensee's POS interfaces with the Sears ISP as described in Section 8.2, Sears will pay transaction fees for any processing service with whom Sears has an agreement to provide access for the point of sale settlement system to the appropriate Sears credit system. Licensee shall reimburse Sears at each settlement for all invoiced expenses, including any advertising expense, incurred by Sears at Licensee's request, outstanding at the time of such settlement. If Sears is not reimbursed at such settlement, then Sears shall have the right, but not the obligation, to retain out of Licensee's sales receipts the amount of such expenses with interest, if any, due Sears. 9.5 Reports. If requested by Sears, Licensee shall provide to Sears reports of sales and income and Sears commissions paid in the manner and form prescribed by Sears, together with any other information Sears may require for its records or auditing purposes. If requested by Sears, 18 Licensee shall promptly submit its financial report to Sears after the close of Licensee's fiscal year. Such report shall be certified by an accountant or by an officer of Licensee in the event that no audit is performed. Such report shall include, but shall not be limited to, Licensee's profit and loss statement for such fiscal year and balance sheet at the end of such fiscal year, and shall be prepared in accordance with generally accepted accounting principles. If Licensee is a publicly held corporation, this requirement may be fulfilled by submission of Licensee's Annual Report on Form 10-K. Sears shall not disclose any such information that is not available to the public to any third parties without Licensee's prior consent. 9.6 Audit Rights. Licensee shall keep and maintain books and records that accurately reflect the sales made by Licensee under this Agreement and the expenses that Licensee incurs in performing under this Agreement. Sears shall have the right at any reasonable time to review and audit the books and records of Licensee regarding this Agreement. Such books and records shall be kept and maintained according to generally accepted accounting principles. 9.7 Underreporting. If an audit reveals that sales were under-reported at any Licensed Business location being audited, by more than five percent (5%) of the total sales which were actually reported by such location, then the cost of such audit shall be charged to such Licensed Business location. If a sampling of Licensee's records at a Licensed Business location, using standard audit practices, reveals that sales have been under-reported by more than five percent (5%) of the total sales which were actually reported by such Licensed Business location, then such Licensed Business location shall at its option, (a) pay Sears for all under-reported sales for each year audited by annualizing the rate by which sales were under- reported in the audit sample plus an administrative fee which shall be calculated by multiplying the annualized under- reported commissions by the percent of under-reported sales; or (b) pay the actual amount of any under-reported sales based on a complete audit of the books and records (at Licensee's expense) relating to such Licensed Business location, including a comprehensive audit of all such books and records for the then-current year and if Sears so elects, a comprehensive audit (at Licensee's expense) of prior years plus an administrative fee which shall be calculated by multiplying the audited annual under-reported commission by the percent of under-reported sales. Each audited location shall be subject to another audit (at Licensee's expense) one (1) year after the initial audit. If this audit reveals that sales were again under-reported by more than five percent (5%), Licensee shall pay Sears for these sales as per the above except that, due to the increased expenses incurred by Sears in continued monitoring of the Licensed Business, the administrative fee shall be doubled. All under-reported sales equal to or less than five percent (5%) of total sales actually reported by such Licensed Business location, shall be reimbursed to Sears, as appropriate, based on the actual amounts of such under-reports. Sears, at its sole option, may also charge interest on all under-reported sales at the rate of prime (as published in the Wall Street Journal as of the date of the completion of the audit) plus one 19 percent (1%). Licensee, at its expense, shall develop and implement a program to conduct internal audits of the Licensed Business to verify accuracy of sales and commissions. 9.8 Rights of Recoupment and Setoff. Sears shall have the right to reduce, withhold or set-off against any payment due Licensee hereunder any liability or obligation which Licensee may have to Sears. Any Licensee liabilities or obligations which remain outstanding after any exercise of Sears right of set-off shall be paid by Licensee promptly upon demand by Sears. Sears rights under this Paragraph are cumulative, shall be in addition to all other rights, remedies available at law or in equity, and shall survive the expiration or termination of this Agreement. X. CUSTOMER INFORMATION; CONFIDENTIALITY 10.1 Customer Information. The Sears Information and any customer list developed by Licensee, its employees or agents from the operation of, or from records generated as a result of the operation of the Licensed Business (collectively, the "Customer Information"), are deemed exclusively owned by Sears. Licensee shall not use, permit use, disclose or permit disclosure of such Customer Information for any purpose except the performance of this Agreement. Licensee shall at all times maintain any such Customer Information, including lists, physically separate and distinct from any customer information Licensee may maintain that is unrelated to the Licensed Business. Licensee shall not reproduce, release or in any way make available or furnish, either directly or indirectly, to any person, firm, corporation, association or organization at any time, any such Customer Information which will or may be used to solicit sales or business from such customers, including but not limited to the type of sales or business covered by this License Agreement. Upon written request by Sears during the Term and on expiration or termination of this Agreement for any reason, Licensee shall immediately deliver all copies of lists of customers and copies of all other such Customer Information to Sears; and Licensee, its officers, employees, successors and assigns, shall not use any such Customer Information to solicit any of such customers. Licensee shall protect all such Customer Information from destruction, loss or theft during the term of this Agreement, and until all copies of customer lists and copies of all other Customer Information are turned over to Sears. Licensee acknowledges that there is no adequate remedy at law for violation by Licensee of this Section X and, in case of breach of this Section X, preliminary or permanent injunctive relief would be appropriate. 10.2 Confidential Information. Information furnished by Sears to Licensee or which becomes known to Licensee through Licensee's operation of the Licensed Business or Licensee's relationship with Sears is confidential and proprietary to Sears (collectively, the "Confidential Information"). All such Confidential Information shall be held in utmost confidence by Licensee. All Confidential Information, including, but not limited to, information regarding Sears stores, and any other 20 information not specifically designated by Sears for release to the public that may come into the possession of Licensee during the Term of this Agreement shall be delivered to the appropriate Licensing Manager at Sears upon request by Sears, and Licensee shall not make or retain copies or portions of the Confidential Information. The terms and content of this Agreement, including but not limited to, exhibits attached hereto, and any other agreements entered into pursuant to this Agreement shall at all times remain confidential and shall not be revealed to any third party by Licensee without the prior written consent of Sears except to the extent (a) permitted by this Agreement, (b) required by law or any court, or (c) made to a court or mediator in connection with a dispute between the parties. The provisions of this Section X shall survive the expiration or termination of this Agreement. XI. RELATIONSHIP OF PARTIES Licensee is an independent contractor. Nothing contained in or done pursuant to this Agreement shall be construed as creating a partnership, agency or joint venture; and neither party shall become bound by any representation, act or omission of the other party. XII. DEFENSE AND INDEMNITY 12.1 Defense. Licensee shall defend all allegations asserted in any claim, action, lawsuit or proceeding (even though such allegations may be false, fraudulent or groundless) against Sears, its affiliates and subsidiaries, and/or Sears subsidiaries or affiliates, directors, officers, employees, agents, independent contractors, parents, subsidiaries and affiliates which contains any allegations of liability actually or allegedly resulting from or connected with the operation of the Licensed Business (including, without limitation of the foregoing, goods sold, work done, services rendered, or products utilized in the Licensed Business, lack of repair in or about the area occupied by the Licensed Business, operations of or defect in any machinery, motor vehicles, or equipment used in connection with the Licensed Business, or located in or about the Licensed Business area; or arising out of any actual or alleged infringement of any patent or claim of patent, copyright or non-Sears trademark, service mark, or trade name); or from the omission or commission of any act, lawful or unlawful, by Licensee or its directors, officers, employees, agents or independent contractors, whether or not such act is within the scope of the authority or employment of such persons. Licensee shall use counsel satisfactory to Sears in defense of such allegations. Sears may, at its election, take control of the defense and investigation of any claims, may employ and engage attorneys of its own choice to manage and defend such claims, at Licensee's cost, risk and expense, provided that Sears and its counsel shall proceed with diligence and good faith with respect thereto. The provisions of this Paragraph shall survive the expiration or termination of this Agreement. 21 12.2 Indemnity. Licensee shall hold harmless and indemnify Sears and Sears directors, officers, employees, agents, independent contractors, parents, subsidiaries and affiliates from and against any and all claims, demands, actions, lawsuits, proceedings, liabilities, losses, costs and expenses (including, without limitation, fees and disbursements of counsel incurred by Sears in any claim, demand, lawsuit, or proceeding between Licensee and Sears or between Sears and any third party or otherwise), actually or allegedly resulting from or connected with the operation of the Licensed Business (including, without limitation of the foregoing, goods sold, work done, services rendered, or products utilized in the Licensed Business, lack of repair in or about the area occupied by the Licensed Business, operation of or defects in any machinery, motor vehicles, or equipment used in connection with the Licensed Business, or located in or about the Licensed Business area; or arising out of any actual or alleged infringement of any patent or claim of patent, copyright or non-Sears trademark, service mark, or trade name); or from the omission or commission of any act, lawful or unlawful, by Licensee or its directors, officers, employees, agents or independent contractors, whether or not such act is within the scope of the authority or employment of such persons. The provisions of this Paragraph shall not apply to the extent any injury or damage is caused solely by Sears negligence. The provisions of this Paragraph shall survive the expiration or termination of the Agreement. XIII. INSURANCE 13.1 Types of Insurance. Licensee shall, at its sole expense, obtain and maintain during the Term of this Agreement the following policies of insurance from companies having a rating of at least A-VII or better in the current Best's Insurance Reports published by A.M. Best Company and adequate to fully protect Sears as well as Licensee from and against all expenses, claims, actions, liabilities and losses related to the subjects covered by the policies of insurance below: (a) Worker's Compensation insurance covering all costs, benefits and liabilities under Workers Compensation and similar laws which may accrue in favor of any person employed by Licensee for all states in which Licensee operates, and Employer's Liability insurance with limits of liability of at least $100,000 per accident or disease and $500,000 aggregate by disease. Such insurance shall contain a waiver of subrogation in favor of Sears. Limits of liability requirements for Employer's Liability may be satisfied by a combination of Employer's Liability and Umbrella Excess Liability policies. (b) Commercial General Liability insurance, including but not limited to, premises/operations liability, contractual liability, personal and advertising injury liability, and products and completed operations liability, with limits of at least $1,000,000 for bodily injury and property damage combined. Sears shall be named as an additional insured. Limits of liability requirements may be satisfied by a combination of Commercial General Liability and Umbrella Excess Liability policies. 22 (c) Motor Vehicle Liability insurance, for owned, non-owned and hired motor vehicles used in connection with the Licensed Business, with limits of at least $1,000,000 for bodily injury and property damage combined. If only private passenger vehicles are owned or shall be used in conjunction with this Agreement, $500,000 combined single limit of liability is acceptable. If no vehicles are owned or leased by Licensee, the Commercial General Liability insurance shall be extended to provide insurance for non-owned and hired motor vehicles. Limits of liability requirements may be satisfied by a combination of Motor Vehicle Liability and Umbrella Excess Liability policies. (d) "All Risk" Property insurance upon all building improvements and supplies on the premises, including those perils generally covered on a "Cause of Loss - Special Form", including fire, extended coverage, windstorm, vandalism, malicious mischief, sprinkler leakage, water damage, accidental collapse, in an amount equal to at least 90% of the full replacement cost, with a coverage extension for increased cost of construction, including a waiver of subrogation in favor of Sears. (e) Fidelity insurance with limits of liability of at least $50,000. 13.2 No Cancellation Without Notice. Licensee's policies of insurance shall expressly provide that they shall not be subject to material change or cancellation without at least thirty (30) days' prior written notice to Sears Certificate Management Services, c/o Near North Technology Services, P.O. Box 811310, Chicago, Illinois 60681-1310, or other address of which Licensee is notified. 13.3 Certificates. Licensee shall furnish Sears with certificates of insurance or, at Sears request, copies of policies, prior to execution of this Agreement and upon each policy renewal during the Term of this Agreement. If Licensee does not provide Sears with such certificates of insurance or, in Sears opinion, such policies do not afford adequate protection for Sears, Sears shall so advise Licensee, and if Licensee does not furnish evidence of acceptable coverage within five (5) days, Sears shall have the right to immediately terminate this Agreement upon written notice to Licensee. 13.4 Expiration/Non-Renewal. If Licensee's policies of insurance expire or are canceled during the Term of this Agreement or are materially modified, Licensee shall promptly notify Sears of such expiration, cancellation or material modification. If such policies of insurance are materially modified such that, in Sears opinion, such policies do not afford adequate protection to Sears, Sears shall so advise Licensee. If Licensee does not furnish evidence of acceptable replacement coverage within five (5) days after the expiration or cancellation of coverage or the notification from Sears that modified policies are not sufficient, Sears shall have the right, at its option, to immediately terminate this Agreement upon written notice to Licensee. 23 Any approval by Sears of any of Licensee's insurance policies shall not relieve Licensee of any responsibility under this Agreement, including liability for claims in excess of described limits. XIV. TERMINATION 14.1 Mutual Right of Termination. Either party may terminate this Agreement, or any location, without cause, without penalty, and without liability for any damages as a result of such termination, at any time hereafter by giving the other party at least ninety (90) days' prior written notice. The notice shall specify the termination date. 14.2 Termination of License by Sears With Notice. This Agreement shall terminate effective upon delivery of notice of termination to Licensee if Licensee, or its owner(s): (a) abandons or fails to actively operate the License Business or fails to commence operation of his Licensed Business as required in Paragraph 6.3 of this Agreement; (b) surrenders or transfers control of the Licensed Business without Sears prior written consent; (c) has made any material misrepresentation or omission in his application; (d) is convicted of or pleads no contest to a felony, or engages in any conduct that is likely to adversely affect the reputation of Licensee, the Licensed Business or Sears; (e) makes an unauthorized transfer of the Licensed Business; (f) makes any unauthorized use, duplication or disclosure of the Confidential Information or Customer Information; (g) fails to secure and maintain appropriate insurance coverage as set forth in Section XIII; (h) a petition is filed either by or against Licensee in any bankruptcy or insolvency proceeding, or if any property of Licensee passes into the hands of any receiver, assignee, officer of the law or creditor; or (i) materially misuses or makes an unauthorized use of any Sears Mark. 14.3 Termination of License by Sears Without Further Notice. This Agreement shall terminate without further action by Sears or notice to Licensee if Licensee or its owners(s): (a) fails to make payment of any Sears Commissions or any other amounts due Sears, and does not correct such failure within ten (10) days after written notice of such failure is delivered to Licensee; or (b) fails to comply with any other provision of this Agreement or any mandatory specification, standard or operating procedures as prescribed by Sears and does not correct such failure within thirty (30) days after written notice of such failure to comply is delivered to Licensee. 24 14.4 Termination on Store Closing. Sears may, solely at Sears discretion, terminate this Agreement with respect to any affected Licensed Business location without notice, due to the closing of the Designated Sears Store. Licensee shall not be entitled to any notice of such store closing prior to a public announcement of such closing. Licensee waives any claim it may have against Sears for damages, if any, incurred as a result of such closing. If any Designated Sears Store is damaged by fire or any other casualty so that the Licensed Business area becomes untenantable, this Agreement may be terminated with respect to such Licensed Business location, without penalty and without liability for any damages as a result of such termination, effective as of the date of such casualty, by either party giving the other party written notice of such termination within twenty (20) days after the occurrence of such casualty. If such notice is not given, then this Agreement shall not terminate, but shall remain in full force and effect and the parties shall cooperate with each other so that Licensee may resume the conduct of business as soon as possible. 14.5 Effect of Termination. Upon the termination of this Agreement by expiration of time or otherwise, Licensee shall, immediately pay all amounts owed to Sears, cease use of all Sears Marks, the Confidential Information and Customer Information and, at its expense, immediately remove all of Licensee's Equipment from Sears premises and shall, without delay and, at Licensee's expense, repair any damage to Sears premises caused by such removal. Upon the termination of this Agreement by expiration of time or otherwise, the expense to return the Licensed Business area to the condition Sears made it ready for use by the Licensee shall be allocated per the terms of Exhibit D. 14.6 Survivability. No termination of this Agreement, by expiration of time or otherwise, shall relieve the parties of obligations arising before expiration or termination or arising upon or after expiration or termination of this Agreement. XV. ASSIGNMENT AND SUBLICENSING 15.1 Assignment by Licensee. Notwithstanding any other provision contained in this Agreement, this Agreement is not transferable by Licensee in whole or in part without Sears prior written consent and Licensee shall not sub-license the license granted herein to any person or entity. Any transfer or attempt to transfer by Licensee whether expressly or by operation of law, and without Sears prior written consent, shall, at the option of Sears, without notice, immediately terminate this Agreement. The sale of Licensee's business or any other transaction (including sales of stock) which shifts the rights or liabilities of Licensee to another controlling interest shall be deemed such a prohibited transfer. 25 15.2 Assignment by Sears. This Agreement is fully transferable by Sears and shall inure to the benefit of any transferee or other legal successor to Sears interest herein. 15.3 Binding Nature. The provisions of this Agreement shall be binding upon Licensee and upon Licensee's successors and assigns and shall be binding upon and inure to the benefit of Sears, its successors and assigns. XVI. MISCELLANEOUS 16.1 Cumulative Remedies. The remedies provided in this Agreement are cumulative, and shall not affect in any manner any other remedies that either party may have for any default or breach by the other party. The exercise of any right or remedy shall not constitute a waiver of any other right or remedy under this Agreement or provided by law or equity. No waiver of any such right or remedy shall be implied from failure to enforce any such right or remedy other than that to which the waiver is applicable, and only for that occurrence. 16.2 Severability. If any provision in this Agreement is held to be invalid, illegal or unenforceable by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been included. 16.3 Governing Law. This Agreement shall be interpreted and governed by the internal substantive laws of the State of Illinois, without regard to its conflict of law principles. This Agreement shall not be effective until it has been received and executed by Sears in Hoffman Estates, Illinois. 16.4 Arbitration. The parties agree to attempt to resolve any disputes which arise under this Agreement. In any case where a dispute cannot be resolved between the parties, the parties agree to submit the dispute for binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"); provided, however that this section shall not limit Sears right to obtain any provisional remedy, including, without limitation, injunctive or other equitable relief, from any court of competent jurisdiction, as may be 26 necessary to protect Sears Marks, or other property rights. Such arbitration shall be conducted by a single arbitrator in the English language in San Juan, Puerto Rico, and the arbitra- tor shall apply the substantive law as provided for in Section 16.3 of this Agreement. The parties shall agree upon an arbi- trator; provided, however, that if an arbitrator cannot be agreed upon within thirty (30) days, the arbitrator shall be appointed as provided in the AAA Commercial Arbitration Rules. The parties may offer such evidence as is relevant and material to the dispute and shall produce such evidence as the arbitra- tor may deem necessary to an understanding and determination of the dispute. Judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof. 16.5 Entire Agreement. This Agreement sets forth the entire agreement and understanding between the parties with respect to the Licensed Business. This Agreement shall not be supplemented, modified or amended except by a written instrument signed by duly authorized representatives of Licensee and Sears, and no person has or shall have the authority to supplement, modify or amend this Agreement in any other manner. This Agreement shall be effective when signed by Sears. 16.6 Headings. The paragraph titles in this Agreement are for the mere convenience of the parties, and shall not be considered in any construction or interpretation of this Agreement. 16.7 Notices. All notices provided for or which may be given in connection with this Agreement shall be in writing and given by personal delivery, certified mail with postage prepaid and return receipt requested or its equivalent, such as private express courier, or by facsimile transmission (with a confirmation copy sent by regular mail). Notices given by Licensee to Sears shall be addressed to: SEARS ROEBUCK DE PUERTO RICO, INC. Attention: President P.O. Box 3670302 San Juan, Puerto Rico 00936-7302 with a copy to: SEARS, ROEBUCK AND CO. Attention: Vice President and General Manager, Licensed Businesses Department 725 E3-359B 3333 Beverly Road Hoffman Estates, Illinois 60179 27 Notices given by Sears to Licensee shall be addressed to: CONSUMER PROGRAMS INCORPORATED Attention: Senior Vice President of Administration 1706 Washington Avenue St. Louis, Missouri 63103 Notices if so sent by mail shall be deemed to have been given when deposited in the mail or with the private courier. All changes of address must be communicated to the other party in writing. - -[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]- 28 IN WITNESS WHEREOF, the parties have executed this Agreement or caused this Agreement to be executed on their behalf by duly authorized officers or representatives. SEARS, ROEBUCK DE PUERTO RICO, INC. By: /s/ David F. Lauflin ------------------------------- David F. Lauflin President LICENSEE By: /s/ Alyn V. Essman ------------------------------- Alyn V. Essman Its: Chairman and Chief Executive Officer EXHIBIT A DESIGNATED SEARS STORES SEARS PORTRAIT STUDIOS PUERTO RICO LOCATIONS
Sears # Studio # City 1085 03R77 CAGUAS, PR 1905 03R71 HATOREY, PR 1915 03R73 BAYAMON, PR 1925 03R72 CAROLINA, PR 1935 03R76 MAYAGUEZ, PR 1945 03R75 PONCE, PR 2355 03R79 HATILLO, PR
EXHIBIT B AUTHORIZED MERCHANDISE AND/OR SERVICES The following items, merchandise lines and/or services are authorized for sale by Licensee in the Licensed Business: 1. Portrait photography service and photographs 2. Passport photography service and photographs 3. Portrait-related retail merchandise (e.g., frames, mats, albums, greeting cards) 4. Portrait-related promotional merchandise for customer give-aways 5. Digital images (e.g. Portrait Creations(TM), proof sheets, portrait restoration) 6. Internet archiving services 31 EXHIBIT C SEARS COMMISSION Licensee shall pay to Sears a commission ("Sears Commission") which, for each Designated Sears Store, shall be a sum equal to ten percent (10%) of total annualized net sales for each Designated Sears Store at which total annualized net sales are less than $50,000 and fifteen percent (15%) of total annualized net sales for each Designated Sears Store at which total annualized net sales are equal to or over $50,000 - retroactive to the first dollar. Accounting Centers are to deduct commission rate at fifteen percent (15%). Licensee will bill Sears annually for any excess commissions taken from any Designated Sears Store with annual net sales of less than $50,000. 32 EXHIBIT D ALLOCATION OF COSTS TYPICAL COST ANALYSIS The Licensed Business shall be built and constructed in accordance with the plans and specifications prepared and will include agreed upon standards for the cost of construction. Items in accordance with the plans and specifications are listed on a Typical Cost Analysis (TCA) attached as part of Exhibit D. The TCA is based on the current ANNUAL EDITION OF MEANS REPAIR & REMODELING COST DATA. Sears and Licensee agree that this Exhibit D will be updated bi-annually and mutually agreed upon to reflect subsequent ANNUAL EDITIONS OF MEANS REPAIR & REMODELING COST DATA and to reflect modification of typical designs and modifications. The TCA cost will be represented as a dollar-cost per square foot ratio. FINANCIAL RESPONSIBILITIES The financial responsibilities and standard costs are described in the TCA. Items that are classified as "Sears Costs" (S) on the TCA, shall be Sears responsibility and items that are classified as "Licensee Costs" (L/B) shall be Licensee's responsibility. A cost estimate, known as the Estimated/Actual Buildout (EAB) may be required to determine the viability or scope of a project. Sears will remit payment for the total cost of all projects directly to contractors or workmen performing such work and will invoice Licensee for its share of the expense, at the end of Sears fiscal year. Sears shall make a settlement adjustment thirty (30) days after notifying Licensee of the project close out for the year and all expenses to be charged to Licensee. In the event Licensee disputes the settlement adjustment made by Sears with respect to Change of Location or remodel, it shall notify Sears and the parties shall have sixty (60) days from the December end of the month settlement adjustment (which was made by Sears) to resolve any such dispute. Any further adjustment due to either Sears or Licensee relating to such Change of Location or remodel shall be made pursuant to the end of the month settlement adjustment following the above mentioned sixty (60) days. MATERIAL CHARGE BACKS. When, due to shortages or delays, Licensee provides standard construction materials that are Sears financial responsibility, Licensee will remit payment directly to the supplier(s) and will invoice Sears for the expense. The amount of any such invoice submitted by Licensee to Sears shall be deducted from the amount payable by Licensee at the time of Project year close out (Sears Billing). PUNCH LIST CHARGE BACKS. Provided the conditions set forth below are met, License shall select and employ the services of a general contractor to complete any remaining punch list items: (1) Sears General Contractor is no longer on the job site; 33 (2) Licensee has issued written punch list to Sears; (3) A period of at least 30 days has elapsed for Sears to complete punch list items; (4) Licensee has provided the cost estimates to Sears prior to scheduling any work and such cost estimates have been approved by the Quality/Evaluation Manager, Licensed Businesses; and (5) the General Contractor retained by Licensee shall be bondable and shall meet all applicable licensing, permitting, insurance and approval requirements established by Sears and/or the governmental bodies of the jurisdiction in which the project is located. Licensee shall remit payment directly to any general contractor retained by Licensee to complete punch list items and shall invoice Sears for the aggregate amounts paid to the general contractor. The amount of any such invoices submitted to Sears shall be deducted from the total Licensee cost at the project close out (i.e. Sears billing). CHANGE ORDER REQUEST PROCEDURES. Change Orders prior to Licensee installation: - Licensee shall submit a written request for a written quotation from Sears for the costs of implementing a proposed change order. - Within a reasonable time after receipt of Licensee's request, Sears Project Manager shall return a written quotation for change order to Licensee. - Licensee shall approve and return change order amount to Sears for approval. - Sears shall submit approval to Sears Project Manager and Licensee within a reasonable time. - The cost of any change orders after the project is bid by the contractor shall be borne by the party requesting such change. Change Orders during Licensee installation: - Licensee shall submit written request for a written quotation from Sears for the costs of implementing a proposed change order. - Within a reasonable time after receipt of Licensee's request, Sears Project Manager shall submit change order cost to Licensee for approval. - Licensee shall approve and return change order amount to Sears for approval. - Sears shall submit approval to Sears Project Manager and Licensee within a reasonable time. - The cost of any change orders after the project is bid by the contractor shall be borne by the party requesting such change. 34 GENERAL RESPONSIBILITIES Licensee shall be responsible for all furniture, trade fixtures (display units, cabinets, and counters), trade equipment (cameras, lighting units, and computers), Licensee's POS and peripheral devices (printers, bar-code scanning devices, electronic signature capture devices) and any other items not listed on the TCA. Sears shall be responsible for all costs associated with bringing electrical panel and service, air conditioning, heating and ventilation ducts into the Licensed Business area. The expense of purchasing and installing all electrical fixtures and equipment (including, but not limited to circuit boxes, dedicated outlets, lighting fixtures and all necessary electrical connections within the area occupied by the Licensed Business. All air conditioning work required by Licensee shall be designed and installed by Sears. Licensee shall provide mechanical drawing identifying the number and location of supply/return air diffuser required. This work shall include, without limitation, connections to supply/return air lines, duct work, supply and return air diffusers, and any circuitry/controls required for the operation of said air conditioning system, and shall be allocated in accordance with the TCA and further outlined in Exhibit D. Any responsibility not provided for in the TCA or Exhibit D shall be negotiated in good faith by Sears and Licensee. Licensee shall be responsible for any additional leasehold improvements, included, but not limited to electrical wiring, lighting, air conditioning, heating or ventilation ducts which Licensee feels are required to change or improve the utility service to the Licensed Business area to a level that is greater than the service provided to rest of the Designated Sears Store. NEW DEPARTMENT Licensee's share of the cost will be determined by applying the TCA to the Usable Space. For purposes of this Agreement, "Usable Space" means net square footage of the area dedicated for the operation of the Licensed Business. REMODEL PROJECTS Sears Update Projects - Update Projects initiated by Sears Construction (D/824), budget a fixed cost per square foot for store remodeling. Sears shall bear all costs of carpeting and repainting (including removal of existing wallcovering) for each Update Project. Sears will do nothing beyond the scope of the Update Project unless requested by Licensee. If Licensee requests, and Sears agrees, that additional work should be done within the Licensed Business area, Sears and Licensee agree to share equally the construction costs related to the Update Project. If Sears requests additional work within the Licensed Business area, the costs shall be allocated as follows: (a) If there is a decrease in Usable Space for the Licensed Business area of 10% or more, the TCA cost factor shall be applied to the reduced Usable Space, and Sears shall pay Licensee the sum of Fifteen Hundred Dollars ($1500); or 35 (b) If there is no change, a decrease of less than 10%, or an increase in Usable Space, the construction costs related to the Update Project shall be shared equally by Sears and Licensee. Sears Remodel/Local Projects - If Sears requests or initiates a Change of Location of a Licensed Business location that has previously been subject to a Change of Location during the term of this Agreement, Sears shall bear all construction costs related to such Change of Location and shall pay Licensee the sum of Fifteen Hundred Dollars ($1500) for incidental costs incurred in such a Change of Location. If a Change of Location results in a(n): Decrease in Space-- Sears shall bear all construction costs related to such Change of Location and shall pay Licensee the sum of Fifteen Hundred Dollars ($1500.00) for incidental costs incurred in such a Change of Location. or Increase in Space-- The Licensee's share of the TCA will be applied to only the increase in space (new square footage). The Licensee's share of the TCA will be charged to Licensee if space has been requested and approved by Licensee. Licensee Remodel/Local Projects - Projects requested by Licensee and approved by Sears. The Licensee's share of the TCA will be applied to the total Usable Space assigned to Licensee. All exceptions to the above will be agreed on prior to the completion of final plans for construction. Any changes after approval of final plans by both parties shall be the responsibility of the party making the change. ADDITIONAL CAMERA ROOMS The construction cost of new camera rooms shall be shared equally between Sears and Licensee, and the total TCA cost shall be applied to a standard of 500 square feet. MAINTENANCE OF FACILITIES Sears shall be responsible for all costs associated with the regular maintenance of the physical facility of the Designated Sears Stores, including electrical service, air conditioning, heating, ventilation, standard lighting (including standard light bulbs), ceiling tiles, drywall repair, paint, and carpet. The cost to replace any of the general construction items due to age and/or normal wear shall be allocated in accordance with the TCA. Licensee shall be responsible for all costs associated with maintaining Licensee's Equipment and Licensee's POS in good order and repair. 36 TYPICAL COST ANALYSIS NEW STORE PORTRAIT STUDIO (2 CAMERA ROOM) June 1998 GROSS AREA - 1428 SF
UNIT ITEM QUANTITY UNIT COST TOTAL - ---------------------------- -------- ---- ------- ------- S 10'Partitions 220 LF 30.00 6,600 S Wall insulation - SF 0.40 - S Doors 2 EA 700.00 1,400 S Cabinets, upper and lower - LF 175.00 - S Vanity - EA 300.00 - S Acoustical ceiling 1428 SF 1.50 2,142 S Ceiling insulation - SF 0.60 - S Paint walls 3000 SF 0.50 1,500 S Paint doors 2 EA 100.00 200 LB Wallcovering 240 SF 1.60 384 LB Carpeting 182 SY 18.00 3,284 S Base 300 LF 1.20 360 LB Shock pad 24 SY 5.00 122 S Fire protection 1428 SF 1.50 2,142 S HVAC ductwork 1428 SF 5.00 7,140 LB 225 amp 120/208 PA 1 EA 1800.00 1,800 S Light fixtures 10 EA 150.00 1,500 LB Dedicated circuits 8 EA 200.00 1,600 LB Track lighting 70 LF 38.50 2,695 LB Wall washer - EA 150.00 - LB Light bar 4 LF 50.00 200 LB Exit lights 1 EA 150.00 150 LB Light switch 8 EA 125.00 1,000 LB Duplex outlets 19 EA 108.00 2,052 LB Phone outlet 4 EA 365.00 1,460 LB Triple duplex recept 2 EA 150.00 300 LB Floor outlets 1 EA 300.00 300 LB Quad outlet 2 EA 130.00 260 LB Data 5 EA 50.00 250 S Cash register 1 EA 536.00 536 S Baffle 19 LF 20.00 380 LB Chair rail 101 LF 5.00 505 LB Architectural services 1428 LS 2.00 2,856 S/LB G.C.O.H. and fee 1 LS 6673.26 6,468 ------- $49,586 ======= New Store COST/SF 34.72 Remodel in warehouse space $/SF 38.97 Remodel in retail or office space $/SF 39.47 Remodel in existing license business (Low to High) $/SF 19.24
37 TYPICAL COST ANALYSIS (continued) NEW STORE PORTRAIT STUDIO (2 CAMERA ROOM) June 1998 GROSS AREA - 1428 SF
ITEM SEARS L.B. - ---------------------------- ------- ------------ S 10' Partitions 6,600 - S Wall insulation - - S Doors 1,400 - S Cabinets, upper and lower - - S Vanity - - S Acoustical ceiling 2,142 - S Ceiling insulation - - S Paint walls 1,500 - S Paint doors 200 - LB Wallcovering - 384 LB Carpeting - 3,284 S Base 360 - LB Shock pad - 122 S Fire protection 2,142 - S HVAC ductwork 7,140 - LB 225 amp 120/208 PA - 1,800 S Light fixtures 1,500 - LB Dedicated circuits - 1,600 LB Track lighting - 2,695 LB Wall washer - - LB Light bar - 200 LB Exit lights - 150 LB Light switch - 1,000 LB Duplex outlets - 2,052 LB Phone outlet - 1,460 LB Triple duplex recept - 300 LB Floor outlets - 300 LB Quad outlet - 260 LB Data - 250 S Cash register 536 - S Baffle 380 - LB Chair rail - 505 LB Architectural services - 2,856 S/LB G.C.O.H. and fee 6,673 - -------- ------- $30,573 $19,219 $49,792 ======== ======= New Store 21.41 13.46 Remodel in warehouse space 23.41 15.71 39.12 Remodel in retail or office space 23.91 15.71 39.62 Remodel in existing license business (Low to High) 22.91 15.71 38.62
38 EX-10.31 5 EXHIBIT (10.31) License Agreement - Sears Canada, Inc. 29 THIS LICENSE AGREEMENT made in triplicate this 6th day of April, 1977, between SIMPSONS-SEARS LIMITED, a Company incorporated under the laws of Canada (hereinafter called "Sears") and CHROMALLOY PHOTOGRAPHIC INDUSTRIES LIMITED, a Company incorporated under the laws of Ontario, (hereinafter called "Licensee") which said parties, in consideration of the promises, undertakings and commitments of each party to the other as set forth herein, hereby mutually agree as follows: 1. LICENSE: Sears hereby licenses Licensee to have the privilege of conducting and operating, pursuant to the terms, provisions and conditions contained in this agreement, a photography concession department (hereinafter called "Department") in certain of Sears retail stores for the purpose of producing photographic portraits, passport photographs, photographic copy and restoration work, the sale of frames and related items, and for no other purpose whatsoever. The name of such service shall appear as "Sears Portrait Studio" in advertising and in-store signing. 2. LOCATIONS: This License Agreement authorizes Licensee to operate said photography concession departments in those retail stores of Sears as Licensee and Sears shall mutually agree in writing and as are designated in Location Approval Rider attached hereto from time to time and marked Schedule "A". 3. TERM: The initial term of this License Agreement shall be for one (1) year commencing the 6th day of April, 1977, and this Agreement shall continue to be effective from year to year thereafter, except that either party may, at any time during the initial term or any renewal thereof, by giving sixty (60) days written notice, terminate this agreement. 4. If any one or more of the premises in which said departments are located are under lease to Sears, then the rights granted to Licensee under this agreement shall also be subject to all the terms, agreements and conditions and to any cancellation privileges contained in said lease or leases and for any other shopping center agreements applicable to Sears; and in the event of termination of any such lease or leases by expiration of time, or otherwise during the continuance of this agreement, then the rights granted to Licensee under this agreement shall likewise terminate as to such department. 5. SEARS COMMISSION: (a) In consideration of the privilege herein granted to Licensee to conduct and operate said Department under the terms, provisions and conditions of this License Agreement, Licensee in addition to its other undertaking herein, shall pay to Sears, and Sears shall be entitled to receive from Licensee, a commission (herein called "Sears Commission") which shall be a sum equal to fifteen percent (15%) of Licensee's net sales of Sears Portrait Studio each month. (b) NET SALES DEFINED: Licensee's said "Net Sales" are herein defined to mean gross sales of merchandise and services made in, upon or from said Department, less returns and allowances. 6. (a) SALES RECEIPTS: At the close of each business day, the amount of the gross sales of Licensee, and the returns and allowances made during said day by Licensee in, upon or from said Department shall be reported by Licensee to the head cashier of said retail store of Sears, and, when making such daily reports, Licensee shall deliver therewith to said cashier all money derived from such sales; and an account thereof shall be kept by both Licensee and Sears. Sears shall have the right to retain out of such receipts the proper amount of the Sears Commission payable hereunder together with any other sums that may be due Sears from Licensee. (b) SETTING OF ACCOUNTS: A setting of accounts between the parties shall be made promptly after the end of each calendar month for the receipts and any authorized credit sales of said Department during such calendar month. Sears shall have the right at any reasonable time to inspect and audit the books and records of Licensee with respect to the business conducted by Licensee in said Department. Said books and records shall be kept and maintained according to standard and generally acceptable accounting practices. The Store Manager of said retail store and Licensee may agree to make settlement at more frequent intervals. 7. CHANGES OF LOCATION: Sears shall have the right to change the location, dimensions and amount of space for said Department from time to time during the term of this License Agreement in accordance with Sears judgement as to what arrangements will be most satisfactory for the general good of all departments of its said retail store and at which said Department shall be conducted and operated hereunder. In the event Sears desires that the location of said Department be so changed Sears will, at its expense, move Licensee's Equipment used in said Department to the new location of said Department. 8. (a) CASH REGISTER: Sears shall, at its expense, furnish a cash register and stand for use in said Department during the term hereof, it being understood and agreed that such cash register shall be of a size and design satisfactory to Sears and that such cash register shall at all times be and remain the property of Sears. (b) LICENSEE'S EQUIPMENT: Licensee shall, entirely at its expense, install in said Department all such furniture, fixtures and equipment as may be necessary and proper for the operation of the business to be conducted therein pursuant to this License Agreement (such furniture, fixtures and equipment being herein for convenience referred to as "Licensee's Equipment"). Said Licensee's Equipment and the size, design and location thereof shall at all times be subject to Sears approval. SEARS AT ITS OWN EXPENSE WILL ERECT THE ROUGH WALLS (PERIMETER AND INSIDE) FINISHING AND DECORATING SAID WALLS, AS WELL AS INSTALLING CARPETING OR OTHER FLOORING OF THE STUDIO. If Sears arranges for the installation of any of Licensee's Equipment, or any other items which are Licensee's obligation hereunder, Licensee shall promptly reimburse Sears for the cost of the installation of such items upon receipt by Licensee from Sears of a statement therefor. (c) PROHIBITED LIENS: Licensee shall not allow, suffer or permit any liens, claims or encumbrances to attach to or against any of said Licensee's Equipment, or, by reason of the installation of Licensee's Equipment, to or against the premises in or upon which the same shall have installed; and in the event any lien, claim or encumbrance should attach to any such Licensee's Equipment or such premises, Licensee shall immediately take all such steps as may be necessary to cause such lien or encumbrance to be released and discharged. (d) CONDITIONS OF DEPARTMENT: At all times during the term hereof, Licensee shall, at its expense, keep said Department in a thoroughly clean and neat condition and shall maintain said Licensee's Equipment in good order and repair and shall make such repairs or replacements as may be deemed necessary either by Licensee or Sears. 9. (a) DEPARTMENT EMPLOYEES: (1) Licensee shall have no authority to employ persons on behalf of Sears and no employees of Licensee shall be deemed to be employees or agents of Sears, said employees at all times remaining Licensee's employees. Licensee shall have the sole and exclusive control over Licensee's labour relations policies and policies relating to wages, hours, working conditions, or conditions of employment of Licensee's employees, and the sole and exclusive right to hire, transfer, suspend, lay off, recall, promote, assign, discipline, adjust grievances and discharge said employees, provided, however, that at any time Sears so requests, Licensee will give consideration to the transfer from any Sears store of any employee who is objectionable to Sears for reasons of health, safety and/or security of Sears customers, employees or merchandise and/or whose manner impairs Sears customer relations. (2) Licensee agrees to assume complete responsibility for all salaries and other compensation of all of Licensee's employees and will make all necessary deductions and withholdings from said employees' salaries and other compensation, file such returns as may be required, and assumes full responsibility for the payment of any and all contributions, taxes, assessments, and agrees to meet all other Federal and Provincial requirements. (3) (a) Licensee further agrees and warrants that Licensee will comply with any other Federal, Provincial or Local law or regulation regarding compensation, hours of work or other conditions of employment including but not limited to Federal or Provincial laws or regulations regarding minimum compensation, overtime and equal opportunities for employment. (b) Licensee agrees and warrants that said employees while present in Sears store will comply with any and all Federal, Provincial and Local laws, regulations and ordinances applicable to Licensee. (c) Licensee agrees to protect, defend, indemnify and hold Sears harmless from and against all claims (including lawyers' fees and penalties) made against Sears: (1) by employees of Licensee for salaries and other compensation; (2) by employees of Licensee under the Workmen's Compensation Act of any Province, if applicable; (3) with regard to employees of Licensee, arising out of any party responsible therefor (including Sears): (i) failing to pay contributions, taxes, or assessments due under Federal or Provincial laws; (ii) failing to make reports or failing to comply with any other requirements of said laws; (iii) failing to comply with any other Federal or Provincial laws or regulations regarding compensation, hours of work or other conditions of employment including but not limited to Federal, Provincial or Local laws or regulations regarding minimum compensation, overtime and equal opportunities for employment; (iv) failing to comply with any other Federal, Provincial or Local law, regulation or ordinance. 10. (a) MERCHANDISE AND SERVICES: During the term hereof, Licensee shall maintain in said Department a complete stock of merchandise to be sold therein, the quantity and quality thereof being subject to the approval of Sears. The merchandise and services to be sold in said Department shall be sold to the public at reasonable prices. Licensee expressly covenants that such prices shall not exceed those of competitors for merchandise and services of a quality similar to those offered for sale in said Department and that prices shall be plainly marked on all merchandise offered for sale in said Department. (b) UNAUTHORIZED SALES: Licensee covenants that during the term of this License Agreement, the space occupied by said Department shall not be used for any purpose other than for the purpose expressly authorized in this License Agreement, and that no services will be rendered and no merchandise will be handled in said Department except such services and merchandise as are ordinarily rendered and handled in the conduct of such Department and which are approved as to their nature by Sears Store Manager. (c) CUSTOMER ADJUSTMENTS: All of the work and services performed by Licensee in said Department shall be up to a high standard of workmanship and all the merchandise sold in such Department shall be of high quality. Licensee shall at all times maintain the general policy of satisfaction or money refunded to customers and shall adjust all complaints of, and controversies with customers, with respect to said Department or to services rendered or merchandise sold therein. In any case in which said adjustment is unsatisfactory to the customer, Sears reserves and shall have the right at Licensee's expense, to make such further adjustment as Sears may deem necessary under the circumstances and any adjustment made by Sears shall be conclusive and binding upon Licensee and Licensee shall abide by and comply with such adjustment. (d) SEARS EMPLOYEES DISCOUNT: Such merchandise and services shall be offered for sale by Licensee to the employees of Sears at the same fifteen percent (15%) discount which Sears allows its own employees on purchases of merchandise. (e) CASH AND CREDIT SALES: All sales made in said Department shall be made for cash only; provided, however, that with the approval of the Store Manager or the Credit Manager of the retail store of Sears at which the Department is operated hereunder, sales may be made by Licensee on such of Sears regularly established credit plans as may be first approved by such Store Manager or Credit Manager. No part of the carrying charges which may be made by Sears in connection with any credit sale shall be payable to or credited in any way to Licensee. Licensee shall not be responsible for or charged with any credit losses on such credit sales. Licensee shall make no reference in any advertising of the service that Sears credit services are available. (f) CHEQUES: If cheques should be accepted by Licensee or its employees in payment for services rendered or sales made in said Department, it is agreed that any and all losses which may be sustained by reason of non-payment of such cheques upon presentment, shall be borne and charged to Licensee, and Sears shall have no liability with respect thereto. 11. (a) HOURS, RULES, NAME: Said Department shall be kept open for business and operated during the same business hours in which the said retail store of Sears is open for business except to the extent prevented by circumstances beyond the control of Sears or Licensee. In order to protect customers and the respective employees of Sears and Licensee on the store premises, Licensee agrees to conduct Licensee's operations in an honest, courteous, and efficient manner and to abide by safety rules and regulations of Sears in effect from time to time. Licensee shall not use its names or any other name in connection with conduct and operation of such Department without the consent of Sears. Licensee shall conduct said Department under the name "Sears Portrait Studio". (b) ACCESS TO DEPARTMENT: Licensee and Sears shall have the access to said Department at all times as said Sears retail store is open to customers for business and at all such other times as the Store Manager of said Sears retail store shall authorize and approve. Said Store Manager shall be furnished with keys too said Department and shall have access thereto at all times. 12. ADVERTISING: Licensee shall advertise and actively promote the business conducted by such Department. It is expressly understood and agreed that all signs, advertising copy and all sales promotional plans and devices which may be utilized with respect to said Department, shall be first submitted for approval to SEARS DEPARTMENT 702-0, Toronto, or to such other person said SEARS DEPARTMENT 702-0 shall designate, and Licensee further agrees that it will not issue any such advertising material or conduct any such sales promotional plan or device without such prior approval. Licensee shall at no time during this License Agreement or at any time thereafter issue any publicity or press releases regarding this License Agreement or Licensee's activities hereunder unless Licensee obtains the prior written approval of such publicity or press releases from SEARS DEPARTMENT 702-0. 13. (a) UTILITIES: Sears shall furnish, without expense to Licensee, a reasonable amount of heat, light, electric power and normal rubbish disposal for the operation of said Department at reasonable hours except when prevented by strikes, accidents, or the making of repairs to the heating, lighting and electric power systems, and except when prevented by other causes beyond the control of Sears; however, Sears shall not be liable for any injury or damage whatsoever which may arise by reason of Sears failure to furnish such heat, light and electric power, regardless of the cause of such failure, all claims for such injury or damage being hereby expressly waived by Licensee. The expense for installing light, ventilation, and power lines, which may be required in order to bring such utilities up to (but not within) such Department shall be borne and paid by Sears, and the expense of purchasing and installing all fixtures and equipment within the confines of such Department, including, but without limitation to, all necessary electrical connections for said Department, and also including the subsequent maintenance of such fixtures and equipment shall be borne and paid by Licensee. (b) TELEPHONE: If requested by Licensee, Sears will arrange for the furnishing of telephone service for said Department, and Licensee shall bear and pay the entire cost of the installation of the telephone equipment necessary to provide said service. Licensee shall also bear and pay the entire cost of the telephone service furnished said Department, including the prorata cost of the operation of the switchboard at said retail store. 14. LICENSEE'S PURCHASES: All purchases and contracts in connection with the conduct and operation of said Department shall be made by Licensee in its own name. Under no circumstances will Licensee make any purchases or incur any obligation or expense of any kind in the name of Sears. Licensee shall promptly pay all the obligations of such Department and will hold Sears free and harmless from any and all claims and liabilities incurred by Licensee in the conduct and operation of such Department. Upon request by Sears, Licensee shall furnish Sears with the names of all parties from whom Licensee purchases merchandise for sale in said Department, as well as the names of all other parties with whom Licensee may have any business or contractual relations in connection with the conduct of the business of said Department. 15. LICENSES, LAWS, ORDINANCES: Licensee shall, at its expense, obtain all permits and licenses which may be required under any applicable Federal, Provincial or Local law, ordinance, rule or regulation by virtue of anything done in the conduct of said Department and in the performance of this License Agreement, and Licensee shall in the conduct of said Department and in the performance of this License Agreement comply fully with all applicable Federal, Provincial and Local laws, ordinances, rules and regulations. 16. FEES, TAXES: Licensee shall, at its expense, pay, collect and remit or discharge all License fees, business, use, sales, or other similar or different taxes or assessments which may be charged or levied by reason of anything done in the conduct of said Department and in the performance of this License Agreement, excluding, however, all taxes and assessments applicable to Sears income from Sears Commission hereunder or applicable to Sears property. If the Licensee is not separately assessed by the taxing authorities, Licensee shall be responsible to Sears for that portion of taxes on the occupied area, calculation to be based on the area occupied to the total area of the demised premises assessed for such tax. Should the period of occupancy be less than a full taxation year, then such taxes shall be pro-rated accordingly. 17. SEARS LIEN: Licensee hereby grants and gives to Sears and Sears shall at all times have, a first charge and lien upon all of Licensee's Equipment in said Department as security for the payments herein provided to be made by Licensee to Sears, and for the due performance and observance of all the other covenants and agreements of Licensee in any of said payments or in any of Licensee's covenants herein contained, with or without notice and without in any manner affecting any other remedies that Sears may have by reason thereof, to terminate this License Agreement, to take possession of said Department and of Licensee's Equipment and all other property therein, to exclude Licensee from said Department, and at Licensee's expense, to remove from the respective premises if Sears the said property of Licensee or to purchase or to sell such of Licensee's Equipment and other property in or at said Department as may be necessary in order to pay Sears all amounts due or to become due Sears from Licensee and to cure all other defaults of Licensee hereunder. 18. (a) RIGHT TO TERMINATE ON DEFAULT OF LICENSEE: This License Agreement is not transferable by Licensee in whole or in part without Sears prior written consent. Any transfer or attempt to transfer hereof by Licensee, either expressly or by operation of law, without Sears prior written consent, shall, at the option of Sears, without any notice whatsoever, immediately terminate this License Agreement. In the event any bankruptcy or insolvency proceedings should be commenced by or against Licensee, or if any property of Licensee passes into the hands of any receiver, assignee, officer of the law or creditor, or it Licensee vacates, abandons or ceases to operate any said Department, or in any event Licensee should fail or refuses after three (3) days' written notice from Sears to comply with any agreement or conditions of this License Agreement, then, in any such event Sears shall have the right immediately to terminate this License Agreement with respect to said Department operated hereunder, with or without notice to Licensee, whereupon Sears may, at its option, enforce the rights, remedies and liens mentioned in Paragraph 16 hereof, without, however, affecting any other rights or remedies which Sears may have by reason thereof. Licensee agrees too pay and discharge all costs and expenses including, but without limitation to, Lawyer's fees, which may be incurred by Sears in enforcing the terms of this License Agreement. (b) RIGHT OF TERMINATION AFTER FIRE: In the event that the store of Sears at which said Department is conducted hereunder should be damaged by fire or any other casualty in such manner that the space occupied by said Department should be untenantable, this License Agreement may be terminated with respect to said Department by either party hereto, effective as of the date of the casualty, by giving to the other party written notice of such termination within twenty (20) days after the happening of such casualty. If such notice is not given, then this License Agreement shall not so terminate, but shall remain in full force and effect, and the parties hereto shall cooperate with each other so that said Department may resume the conduct of business as soon as possible after the happening of said casualty. (c) MUTUAL RIGHT OF TERMINATION: Either party hereto shall have the right to terminate this License Agreement with respect to said Department in any or all of the Sears retail stores designated in Location Approval Rider at any time hereafter by giving to the other party at least sixty (60) days prior written notice of such termination. 19. SEARS OPTION TO PURCHASE LICENSEE'S EQUIPMENT: In the event of the termination of this License Agreement with respect to said Department by expiration of time or otherwise, Sears shall have the right, privilege and option, but not the obligation, to purchase from Licensee, and Licensee shall convey and sell to Sears, such items of said Licensee's Equipment as Sears may designate in a written notice delivered to Licensee at least twenty (20) days prior to the effective date of such termination. The purchase price of any items which may be purchased by Sears hereunder shall be equal to the original cost of such items to Licensee less all liens and indebtedness against the same and less depreciation at the rate of ten percent (10%) per annum from the date of installation of each item so purchased until the effective date of such termination, and Licensee will give Sears good and valid bills of sale therefor. 20. REMOVAL OF LICENSEE'S EQUIPMENT: Upon the termination of this License Agreement with respect to said Department by expiration of time or otherwise, if Licensee is not then in default under this Agreement, Licensee shall, at its expense, immediately remove all of Licensee's said Equipment (except such of Licensee's Equipment as may be purchased by Sears as hereinbefore provided) from the premises of Sears and shall, without delay and at Licensee's expense, repair any damage caused by such removal. 21. INDEMNITY BY LICENSEE: (a) Licensee agrees that Sears shall not be liable for any damage to Licensee or any property whatsoever of Licensee in said Department because of the alleged negligence, act of omission of Sears or of any tenant, licensee or occupant of the premises at which said Department may be located, or because of any damage caused by any casualty, including but not limited to, fire, water, snow, steam, gas, odours, in or from said store or store premises, or because of the leaking of any plumbing, or because of any accident or event which may occur in said store or upon said premises, or because of any alleged lack of repair in or about said store or store premises, or because of the alleged acts or omissions of any janitors or other persons in or about said store or store premises, Licensee hereby releasing and waiving any and all claims therefor. Sears shall not be liable for the safekeeping or safe delivery of any property of Licensee or of any customer of Licensee in or upon any of the said store premises, nor for any loss or damage thereto, by fire, theft, accident, breakage or any other cause whatsoever. (b) Licensee covenants that it will protect, defend, hold harmless and indemnify Sears, its directors, officers and employees, from and against any and all expenses, claims, actions, liabilities, damages and losses of any kind whatsoever (including without limitation of the foregoing, death of or injury to persons and damage to property), actually or allegedly resulting from or connected with the operation of said Department (including, without limitation of the foregoing, goods sold, work done, services rendered or products utilized therein, lack of repair in or about said Department, operation of or defects in any machinery or equipment used or located in said Department) or from the omission or commission of any act, lawful or unlawful, by Licensee or its agents or employees, whether or not such act is within the scope of the employment of such agents or employees. 22. INSURANCE: (a) Licensee hereby agrees and covenants that it shall, at its sole expense, obtain and maintain during the term of this License Agreement the following policies of insurance from companies satisfactory to Sears and containing provisions and being in amounts satisfactory to Sears and adequate to fully protect Sears as well as Licensee from and against all expenses, claims actions, liabilities and losses arising out of the subjects covered by said policies of insurance: (1) Fire Insurance upon Licensee's fixtures, furniture, equipment and merchandise in the Department for the full insurable value thereof. (2) Workmen's Compensation, if applicable, and Employer's Liability Insurance (with limits of not less than $100,000) covering all persons employed or working in said Department. (3) Public Liability Insurance covering all expenses, claims, actions, liabilities, damages and losses arising out of the alleged death of or injury to persons and damage to property (with limits of not less than $1,000,000 inclusive) and containing a Contractual Liability endorsement expressly covering Licensee's liability to Sears assumed by Licensee in this License Agreement. (b) All such aforesaid policies of insurance shall expressly provide that they shall not be subject to cancellation except upon at least thirty (30) days' prior written notice to Sears. Licensee shall, if requested by Sears, furnish Sears with copies of such policies or certificates thereof. If in Sears' opinion any of said policies do not adequately protect Sears, then Sears shall have the right, at its option, to obtain additional insurance at the expense of Licensee. 23. REMEDIES CUMULATIVE: It is agreed that the remedies herein provided in case of any default or breach by Licensee of this License Agreement are cumulative and shall not affect in any manner any other remedies that Sears may have by reason of such default or breach by Licensee. 24. ASSIGNS: The provisions of this License Agreement shall be binding upon Licensee and upon Licensee's successors and assigns and shall be binding upon and inure to the benefit of Sears, its successors and assigns, it being expressly stipulated that nothing herein contained shall authorize the assignment of this License Agreement by Licensee. 25. OTHER AGREEMENTS: It is understood and agreed that this agreement shall terminate immediately, at Sears' sole option, without cost or penalty, if any claim is made that this agreement in any way contravenes any previous agreements entered into by Sears, provided that Sears shall first conduct a thorough investigation of such claim, and shall give Licensee notice of such claim and shall disclose to Licensee the results of such investigation. 26. NOTICES: All notices herein provided for or which may be given in connection with this License Agreement shall be in writing and given either in person or by certified mail with postage pre-paid or by registered mail with postage pre-paid and return receipt requested. If any such notice be given by Licensee to Sears, it shall be addressed to: Simpsons-Sears Limited, Attention: Vice President Operating, D/702-0, 222 Jarvis Street, Toronto, Ontario. M5B 2B8 and if given by Sears to Licensee such notice shall be addressed to: Chromalloy Photographic Industries Ltd., 2792 Slough Street, Mississauga, Ontario. L4T 1G3 Attention: Mr. A. Almond, Executive Vice-President. and such notices shall be deemed to have been given when deposited in the mail. 27. ENTIRE AGREEMENT: It is mutually understood and agreed that this License Agreement sets forth the entire agreement and understanding between the parties hereto with respect to the subject matter hereof, and that this License Agreement shall not be supplemented, modified or amended except by a written instrument signed by Licensee (or by a duly authorized officer of Licensee if Licensee is a corporation) and by a duly authorized officer or agent of Sears, and that no person has or shall have the authority to supplement, modify or amend this License Agreement in any other manner. 28. RELATIONSHIP BETWEEN PARTIES: It is understood and agreed that nothing contained in or done pursuant to this License Agreement shall be construed as creating a partnership, agency or joint venture, and, except as may be otherwise expressly provided in this License Agreement, neither party shall become bound by any representation, act or omission of the other party hereto. 29. SEARS NAME: Sears hereby grants to the Licensee, the limited right and permission to use the trademarks and tradenames "Simpsons-Sears" and "Sears", which are owned by Sears, in connection with the conduct of the Licensee's business pursuant to this Agreement. Licensee covenants and warrants that said trademarks and tradenames are and shall remain the sole and exclusive property of Sears and that Licensee shall not in any way whatsoever acquire any right or interest in such trademarks and tradenames other than expressly set forth herein. Upon the expiration or termination of this Agreement, Licensee shall cease to use the names "Simpsons-Sears" and "Sears" for any purpose whatsoever and shall promptly destroy all letterheads, advertising materials or other devices, signs, logos and similar paraphernalia which depict the "Simpsons-Sears" and "Sears" logos, or which in any way indicates that Licensee is conducting business in conjunction with Sears. 30. HEADINGS: The headings or title captions in this License Agreement have been placed thereon for the mere convenience of the parties, and shall not be considered in any construction or interpretation of this License Agreement. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and affixed their seals as of the day and year first above written the corporate party or parties by its or their proper officers or agents duly authorized thereunto. SIMPSONS-SEARS LIMITED /s/ T. R. Hammond ----------------------- Vice-President CHROMALLOY PHOTOGRAPHIC INDUSTRIES LIMITED /s/ A. J. Almond ----------------------- President SCHEDULE "A" - ------------ LOCATION APPROVAL RIDER - ----------------------- To Licensee Agreement dated the 6th day of April, 1977, made between SIMPSONS-SEARS LIMITED (Sears) and CHROMALLOY PHOTOGRAPHIC INDUSTRIES LIMITED (Licensee). Sears retail stores in which Sears authorizes Licensee to operate photography concession Department: Calgary-North Hill Edmonton-Kingsway Kitchener Sarnia Windsor Victoria SCHEDULE "A" - ------------ LOCATION APPROVAL RIDER - ----------------------- To License Agreement dated the 6th day of April, 1977, made between SIMPSONS-SEARS LIMITED (Sears) and CHROMALLOY PHOTOGRAPHIC INDUSTRIES LIMITED (Licensee). Sears retail stores in which Sears authorizes Licensee to operate photography concession departments: Calgary-North Hill Edmonton-Kingsway Guelph Kitchener Moncton Red Deer Saint John St. John's Sarnia Toronto-Markham Windsor Vancouver-Burnaby Vancouver-Capilano Vancouver-Harbour Centre Vancouver-Richmond Vancouver-Surrey Victoria Schedule "A" Location Approval Rider hereby amended this 24th day of July, 1978. SIMPSONS-SEARS LIMITED /s/ T. R. Hammond ------------------------ Vice-President CHROMALLOY PHOTOGRAPHIC INDUSTRIES LIMITED /s/ A. J. Almond ------------------------ President SCHEDULE "A" - ------------ LOCATION APPROVAL RIDER - ----------------------- To License Agreement dated the 6th day of April 1977, made between SIMPSONS-SEARS LIMITED (Sears) and CHROMALLOY PHOTOGRAPHIC INDUSTRIES LIMITED (Licensee). Sears retail stores in which Sears authorizes Licensee to operate Photography Concession Departments: Calgary-Chinook Centre Calgary-North Hill Chilliwack Cornwall Edmonton-Bonnie Doon Edmonton-Kingsway Guelph Hamilton-Centre Kamloops Kelowna Kitchener Lethbridge Moncton Ottawa-Carlingwood Ottawa-Hull Prince George Red Deer Saint John St. John's Sarnia Thunder Bay Toronto-Markham Toronto-Mississauga Toronto-Newmarket Vancouver-Burnaby Vancouver-Capilano Vancouver-Harbour Centre Vancouver-Richmond Vancouver-Surrey Victoria Windsor Schedule "A" Locatio Approval Rider hereby amended this 27th day of February, 1980. SIMPSONS-SEARS LIMITED /s/ T. R. Hammond ------------------------ Vice-President CHROMALLOY PHOTOGRAPHIC INDUSTRIES LIMITED /s/ Lynette King ------------------------ President EX-10.32 6 EXHIBIT (10.32) CPI. Corp 1998 Employee Profit Sharing Plan and Trust 30 CPI CORP. EMPLOYEES PROFIT SHARING PLAN AND TRUST (As Amended and Restated Effective January 1, 1998) TABLE OF CONTENTS ARTICLE Page I NAME, PURPOSE AND DEFINITIONS ....................... 3 II SERVICE ............................................. 7 III PLAN PARTICIPATION ................................. 10 IV CONTRIBUTIONS ....................................... 11 V ALLOCATIONS AND ACCOUNTS ............................ 20 VI VALUATION OF ACCOUNTS ............................... 23 VII ENTITLEMENT TO BENEFITS ............................. 24 VIII DISTRIBUTION OF BENEFITS ............................ 25 IX SPENDTHRIFT TRUST AND QUALIFIED DOMESTIC RELATIONS ORDERS .................................... 33 X ADMINISTRATION ...................................... 35 XI THE TRUSTEE ......................................... 37 XII INVESTMENTS ......................................... 41 XIII GENERAL PROVISIONS REGARDING FIDUCIARIES ............ 44 XIV AMENDMENT AND TERMINATION ........................... 46 XV MERGER, DISSOLUTION AND ADOPTION .................... 47 XVI MISCELLANEOUS PROVISIONS ............................ 47 XVII ROLLOVERS AND TRANSFERS ............................. 48 XVIII TOP-HEAVY PROVISIONS ................................ 49 XIX SPECIAL PROVISIONS FOR 1997 TENDER OFFER ............ 51 XIX DIRECTED TRUSTEE .................................... 51 XXI SPECIAL EFFECTIVE DATES ............................. 52 2 CPI CORP. EMPLOYEES PROFIT SHARING PLAN AND TRUST (As Amended and Restated Effective January 1, 1998) Effective as of September 9, 1980, CPI Corp., a Delaware corporation (hereinafter referred to as the "Company"), established a profit sharing plan and trust which was there- after amended and restated and thereafter further amended. The Company now deems it advisable to make certain further amendments to that plan and trust effective as of January 1, 1998, except as otherwise provided in Article XXI or elsewhere in this document, and to restate the plan and trust in its entirety by the adoption of this document. ARTICLE I NAME, PURPOSE AND DEFINITIONS Section 1.1. Name. This Plan and Trust shall be known as the "CPI Corp. Employees Profit Sharing Plan and Trust." Section 1.2. Purpose. The Company has established this Plan and Trust to encourage its Employees to continue in its employ, to induce desirable persons to enter its employ in the future, to permit its Employees to accumulate tax-deferred savings for their own retirement, and to give its Employees a definite interest in the successful operation of the Company's business by permitting them to share in its profits and to acquire a proprietary interest in the Company. Consequently, the Company's contributions to the Plan shall be made in Qualifying Employer Securities which, unless otherwise directed by the Company, shall be retained in the Plan and Trust unless and until distributed in accordance with the terms hereof. The Plan is intended to meet the requirements of the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 (as both may be amended from time to time) and to comply fully with the requirements of these laws in effect. Section 1.3. Definitions. Whenever used herein, the following words and phrases shall have the meanings ascribed to them in this Section, unless otherwise specifically defined or unless the context clearly otherwise requires: (a) Accrued Benefit: The total amount credited to one or more accounts maintained for a Participant or Beneficiary. (b) Active Participant: Any Employee of the Company who has satisfied the eligibility requirements of the Plan. An Employee will cease to be an Active Participant in the Plan if he ceases to be an Employee of the Company or if he becomes covered by a collective bargaining agree- ment to which the Company is a party or by which it is bound and with respect to which retirement benefits were the subject of good faith bargaining. (c) Affiliate: Any corporation which, together with CPI Corp., is a member of a controlled group of corpor- tions, as defined in Section 414(b) of the Code; any trade or business (whether or not incorporated) which, together with CPI 3 Corp., is a member of a group of trades or businesses under common control, as defined in Section 414(c) of the Code; any corporation, partnership or other organization which, together with CPI Corp., is a member of an affiliated service group, as defined in Section 414(m) of the Code; and any other corporation, partnership or other organization required to be aggregated with CPI Corp. pursuant to Regulations under Section 414(o) of the Code. (d) After-tax Contribution Account: The account main- tained for a Participant to record his voluntary aftertax contributions made to the Trust pursuant to paragraph (a) of Section 4.1, and adjustments relating thereto. (e) Beneficiary: The person or persons who, by the terms of this Plan and Trust, may become entitled to a benefit hereunder in case of the death of a Participant. (f) Code: The Internal Revenue Code of 1986, as amended from time to time. (g) Company: CPI Corp. together with any Affiliate of, or successor to CPI Corp. (or any Affiliate thereof), which shall adopt and assume the obligations of this Plan and Trust. However, if another Company has adopted the Plan and Trust, the term "Company," for purposes of the provisions of this Plan relating to its management and administration, shall refer only to CPI Corp. (h) Company Contribution Account: The account maintained for a Participant to record his share of matching Company contributions made to the Trust pursuant to Section 4.2, and adjustments relating thereto. (i) Compensation: Subject to the provisions of subparagraphs (i), (ii) and (iii) below, all of the Compensation (as that term is defined in Section 415(c)(3) of the Code and the Regulations thereunder) paid to an Employee by the Employer in a Plan Year, including, without limitation, salary, wages, commissions, tips, bonuses, overtime pay and other items of taxable remuneration. (i) For purposes of Section 4.1 and Section 4.2, Compensation shall consist of only salary, wages, commissions and amounts included under subparagraph (ii). (ii) Compensation shall also include amounts contributed on behalf of an Employee pursuant to a salary reduction agreement to this Plan or to any other cash or deferred arrangement under Section 401(k) of the Code, simplified employee pension under Section 408(k) of the Code, tax sheltered annuity under Section 403(b) of the Code, and/or cafeteria plan under Section 125 of the Code. Except as provided in the preceding sentence, all contributions to this Trust and any contribution or payment to any other trust, fund or plan providing retire- ment, pension, profit sharing, health, welfare, death, insurance or similar benefits shall not be included in Compensation. (iii) The Compensation of any Participant taken into account under the Plan for any Plan Year shall not exceed $150,000 (as indexed for cost of living adjustments provided for under the Code) (the "Annual Maximum"). 4 (j) Effective Date: The Effective Date of this amended and restated Plan and Trust is January 1, 1998; however, certain provisions of the Plan and Trust shall be effective as of such other dates as are specified in Article XXI and in other sections of the Plan. The provisions of this Plan and Trust shall only apply to an Employee who terminates employment on or after the Effective Date. Except as otherwise expressly provided herein, the rights and benefits, if any, of a former Employee shall be determined under the provisions of the Prior Plan in effect on the date his employment terminated. (k) Employee: Any person employed by the Employer. In addition, a person (a "Leased Employee") who is not an Employee under the preceding sentence but who provides services to the Employer, shall, except to the extent otherwise provided in the Regulations, be considered an Employee with respect to such services if: (i) The services are provided pursuant to an agreement between the Employer and any other person or entity (the "Leasing Organization"); (ii) such Leased Employee has performed services for the Employer (or for the Employer and related persons as defined in Section 144(a)(3) of the Code) on a substantially full-time basis for a period of at least 1 year; and (iii) such services are performed under the primary direction or control of the Employer. However, a Leased Employee shall not be considered an Employee if: (i) He is covered by a money purchase pension plan main- tained by the Leasing Organization which has a nonintegrated employer contribution rate of at least 10% of compensation (including amounts contributed on behalf of the Leased Employee pursuant to a salary reduction agreement to one or more plans under Section 401(k), Section 408(k), Section 403(b) and/or Section 125 of the Code), full and immediate vesting, and each employee of the Leasing Organization immediately participates in such plan (except those who perform substantially all of their service for the Leasing Organization and those whose compensation from the Leasing Organization for each year during the 4-year period ending with the Plan Year is less than $1,000); and (ii) Leased Employees do not constitute more than 20% of the Employer's nonhighly compensated work force, as defined in Section 414(n)(5)(C)(ii) of the Code. (l) Employer: CPI Corp. and any Affiliates of it. (m) ERISA: The Employee Retirement Income Security Act of 1974, as amended from time to time. (n) Former Participant: A Participant whose employment with the Company has terminated or who has become covered by a collective bargaining agreement to which the Company is a party or by which it is bound and with respect to which retirement benefits were the subject of good faith bargaining, but whose Accrued Benefit has not been fully distributed and/or forfeited. (o) Highly Compensated Employee: Any Employee who performed services for the Employer during the Plan Year and who: (i) Was at any time during such Plan Year or the preceding Plan Year a 5% owner (within the meaning of Section 416(i)(1) of the Code) of the Company or any Affiliate; or 5 (ii) for the preceding Plan Year received Compensation from the Employer in excess of $80,000 (as indexed for cost of living adjustments provided for under the Code). The determination of who is a Highly Compensated Employee shall be made in accordance with Section 414(q) of the Code and the Regulations thereunder. (p) Key Employee: Any Employee who, at any time during the Plan Year is or, in any of the 4 preceding Plan Years, was: (i) An officer of the Employer having Compensation from the Employer for such Plan Year in excess of 50% of the dollar limitation in effect for such Plan Year under Section 415(b)(1)(A) of the Code; (ii) one of the 10 Employees owning (or considered as owning within the meaning of Section 318 of the Code) the largest percentage interest in the Company or any Affiliate and having Compensation from the Employer for such Plan Year in excess of the dollar limitation in effect for such Plan Year under Section 415(c)(1)(A) of the Code; (iii) a 5% owner of the Company or any Affiliate; or (iv) a 1% owner of the Company or any Affiliate having annual Compensation from the Employer in excess of $150,000. For purposes of subparagraph (i) above, no more than 50 Employees (or, if lesser, the greater of 3 or 10% of the Employees) shall be treated as officers. For purposes of subparagraph (ii) above, if 2 Employees have the same interest in the Employer, the Employee having the greater Compensation shall be treated as having a larger interest. The Beneficiary of a Key Employee is also a Key Employee. The determination of who is a Key Employee shall be made in accordance with Section 416(i)(1) of the Code and the Regulations thereunder. (q) Non-key Employee: Any Employee or Beneficiary who is not a Key Employee. (r) Normal Retirement Date: The date on which a Participant attains 65 years of age. (s) Participant: Any Active Participant or any Former Participant who has an Accrued Benefit in the Plan. (t) Plan: This agreement, together with any and all amendments or supplements hereto. (u) Plan Year: The 12-consecutive month period commencing on January 1 of each year and ending on December 31 of the same year. (v) Pre-tax Contribution Account: The account maintained for a Participant to record tax deductible contributions made to the Trust by the Company 6 on his behalf and pursuant to his election as described in paragraph (b) of Section 4.1, and adjustments relating thereto. (w) Prior Plan: This profit sharing plan and trust as maintained by the Company and in effect immediately prior to the Effective Date, and any predecessor plans maintained by the Employer. (x) Qualifying Employer Security: Stock issued by CPI Corp. or any corporate affiliate. (y) Regulations: The Internal Revenue Service Regulations, as amended from time to time. (z) Trust: This agreement, together with any and all amendments or supplements hereto, and the Trust established hereunder. (aa) Trustee: Effective January 1, 1998, Barry Arthur. Effective February 1, 1998, American Express Trust Company and its successor or successors as Trustee hereunder. (bb) Valuation Date: The last day of each Plan Year shall be the Annual Valuation Date. The Company has also designated any date that the New York Stock Exchange is open for business as an interim Valuation Date pursuant to the provisions of Section 6.2. Section 1.4.Other Definitions. In addition to the above definitions, certain words and phrases used in the Plan are defined in other portions of the Plan. ARTICLE II SERVICE Section 2.1. Hour of Service. Subject to the provisions of Section 2.2, the term "Hour of Service" means, with respect to any Employee: (a) Each hour for which an Employee is directly or indirectly paid or entitled to payment by the Employer for the performance of duties for the Employer during the applicable computation period; (b) each hour for which an Employee is directly or indirectly paid or entitled to payment by the Employer for reasons (such as vacation, sickness, disability, layoff, jury duty, military duty or leave of absence) other than for the performance of duties (up to a maximum of 501 hours for any single continuous period during which the Employee performs no duties); (c) each hour for which back pay, irrespective of mitigation of damage, has been either awarded or agreed to by the Employer. The same Hours of Service shall not be credited both under paragraph (a) or paragraph (b), as the case may be, and under paragraph (c). With respect to Hours of Service, the rules of paragraphs (b) and (c) 7 of Section 2530.200b-2 of the Department of Labor Regulations are incorporated in this Section 2.1 by this reference. Section 2.2. 1 Year Break in Service. The term "1 Year" Break in Service" means, with respect to any Employee, any Plan Year during which such Employee completes 500 or fewer Hours of Service. Solely for the purpose of determining whether an Employee has incurred a 1 Year Break in Service, Hours of Service shall include, to the extent not included under Section 2.1, the hours described below that the Employee is: (a) Absent from active employment with the Employer by reason ofjury duty or by reason of service in the Armed Forces of the United States of America; (b) on any other unpaid Employer-approved absence granted under rules uniformly applied by it; or (c) absent from active employment for any period: (i) By reason of the pregnancy of the Employee; (ii) by reason of the birth of a child of the Employee; (iii) by reason of the placement of a child with the Employee in connection with the adoption of such child by the Employee; or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement. The number of Hours of Service to be credited under paragraphs (a), (b) or (c) above shall be the number of Hours of Service that would otherwise have been credited to the Employee but for such absence, or, in any case where the Employer is unable to determine such number of Hours of Service, 8 Hours of Service per normal workday of absence. The same hours shall not be credited as Hours of Service under more than 1 of such paragraphs. The Hours of Service credited under paragraph (c) shall be credited to the Plan Year in which the absence begins if necessary to prevent a 1 Year Break in Service in that Plan Year, otherwise to the following Plan Year. No credit for Hours of Service will be given under paragraph (c) unless the Company receives such timely information as it may reasonably require to establish that the absence is for reasons described in paragraph (c) and the number of days for which there was such an absence. Section 2.3. Year of Service - Eligibility. For purposes of eligibility to participate in the Plan, the term "Year of Service" means, with respect to any Employee, any Plan Year during which such Employee completes at least 1,000 Hours of Service with the Employer, subject to the following: (a) Initial Eligibility: For purposes of Section 3.1 and paragraph (c) of this Section 2.3: (i) The term Year of Service shall not include any Plan Year commencing prior to the date on which an Employee first completes an Hour of Service; and (ii) the 12-consecutive-month period commencing on the date on which an Employee first completes an Hour of Service shall be deemed to be a 8 Year of Service if he completes at least 1,000 Hours of Service during such 12-consecutive-month period. (b) Service After 1 Year Break in Service: Except as otherwise provided in Section 3.2, if an Employee incurs a 1 Year Break in Service, service before such break shall be disregarded until he has completed 1,000 Hours of Service in: (i) The 12-consecutive-month period commencing on the date he first completes an Hour of Service following his reemployment by the Employer; or (ii) in any Plan Year commencing after such date. (c) Nonvested Participants: If an Employee or Parti- cipant does not have a nonforfeitable right to any portion of his Accrued Benefit in his Company Contribution Account, and if the number of his consecutive 1 Year Breaks in Service equals or exceeds the greater of 5 or the aggregate number of his Years of Service, as modified by paragraph (a) above, his Years of Service prior to such break shall be disregarded, and he shall be considered as a new Employee. In computing Years of Service prior to such break, Years of Service which could have been disre- garded under the provisions of this paragraph (c) by reason of any prior breaks in service shall be disregarded. Section 2.4. Years of Service - Vesting. For purposes of determining the nonforfeitable percentage of a Participant's Accrued Benefit derived from Company contributions pursuant to Section 7.6, the term "Years of Service" means the period of years and fractions of years, based on days, commencing on the date an Employee first completes an Hour of Service, and, in the case of an Employee who is reemployed following a Period of Severance of more than 12 months, commencing on the first date he again completes an Hour of Service, and ending on the date a Period of Severance begins; however, for purposes of determining vesting, an Employee shall also be credited with days during any Period of Severance not exceeding 12 months. Section 2.5. Period of Severance. The term "Period of Severance" means a continuous period of time during which an Employee is not employed by the Employer, beginning on the date the Employee retires, quits, or is discharged and ending on the date on which he again performs an Hour of Service. If no more than 1 Year of Service is required for participation in the Plan, and if an Employee has a Period of Severance at a time when he has completed at least 1 Year of Service but no percentage of his Accrued Benefit derived from Company contributions is nonforfeitable, his Years of Service prior to such Period of Severance shall be disregarded if the length of his Period of Severance equals or exceeds the longer of 60 months or the length of his Years of Service completed before the date such Period of Severance began (not including in such Years of Service any Year of Service previously excluded be- cause of an earlier Period of Severance). Further, a Partici-pant's Years of Service after a Period of Severance exceeding 60 months shall be disregarded for the purpose of determining the nonforfeitable percentage of his Accrued Benefit derived from Company contributions which accrued before such Period of Severance. Section 2.6. Maternity or Paternity Absence. If an Employee is absent from active employment for maternity or paternity reasons, the 12-consecutive-month period commencing on the first anniversary of the first day of such absence shall not constitute a Period of Severance exceeding 12 months. An absence from active employment for maternity or paternity reasons shall mean an absence: (a) By reason of the pregnancy of the Employee; 9 (b) by reason of the birth of a child of the Employee; (c) by reason of the placement of a child with the Employee in connection with the adoption of such child by the Employee or Participant; or (d) for purposes of caring for such child for a period beginning immediately following such birth or placement. No credit will be given under this Section 2.6 unless the Company receives such timely information as it may reasonably require to establish that an absence is for maternity or paternity reasons. Section 2.7. Predecessor Employer Service. Service with Prints Plus shall be deemed to be service with the Employer for both eligibility and vesting purposes for those Employees who became Employees of the Employer as a result of its acquisition of Prints Plus in 1993. Service with Fotomat, Corporation shall be deemed to be service with the Employer for both eligibility and vesting purposes for those Employees who became Employees of the Employer as a result of its acquisition of Fotomat, Corporation in 1993. Section 2.8. Service with Fox Photo, Inc. Prior service with Fox Photo, Inc. shall be deemed to be service with the Employer for both eligibility and vesting purposes for those Employees who became Employees of the Company as a result of its acquisition of Fox Photo, Inc. in 1991. In addition, service with Fox Photo, Inc. after the Company's sale of Fox Photo, Inc. on October 4, 1996 (the "Closing Date") shall be deemed to be service with the Employer for vesting purposes for Participants who ceased to be Employees of the Employer and Active Participants in the Plan as a result of such sale but continued to be employees of Fox Photo, Inc. after the Closing Date for the limited period until the assets of the Plan attributable to employees of Fox Photo, Inc. were or are transferred to a new qualified plan for such employees in a plan-to-plan transfer. ARTICLE III PLAN PARTICIPATION Section 3.1. Commencement of Participation. Each former Employee who retired or terminated employment while covered under the Prior Plan shall continue to be entitled to the same benefits under this Plan to which he was entitled under the Prior Plan, and such benefits shall continue to be governed by the provisions of the Prior Plan. In addition, each Employee who was an active participant in the Prior Plan on the Effective Date shall be deemed to have met the requirements to become an Active Participant in this Plan as of the Effective Date. Each other Employee of the Company except Leased Employees (as defined in paragraph (k) of Section 1.3) and except Employees covered by a collective bargaining agreement to which the Company is a party or by which it is bound and with respect to which retirement benefits are the subject of good faith bargaining, shall become an Active Participant in the Plan on the Effective Date or on the first day of any pay period thereafter, if: (a) He has completed 1 Year of Service; (b) he has attained at least 21 years of age; and 10 (c) the date on which he first completed an Hour of Service (excluding any Hours of Service disregarded under paragraph (c) of Section 2.3) occurred at least 12 months prior thereto. Section 3.2. Continued Participation. Except as specifically provided in paragraph (c) of Section 2.3, a former Employee or Participant whose employment terminates or who becomes ineligible to be an Active Participant pursuant to paragraph (b) of Section 1.3 after he has once met the service requirement of Section 3.1 shall not be required to again meet that requirement upon his resumption of employment or upon his ceasing to be so ineligible, as the case may be. Section 3.3. No Guaranty and Facts Regarding Eligibility. Participation in the Plan shall not constitute a guaranty or contract of employment with the Company. With respect to the facts determining the eligibility or noneligibility of any Employee to participate, the Trustee shall be fully protected in relying on information furnished by the Company and shall not be required to make any further inquiry of fact. ARTICLE IV CONTRIBUTIONS Section 4.1. Participant Contributions. Each Employee who becomes an Active Participant in this Plan and Trust shall have such contributions made to the Plan on his behalf pursuant to the provisions of this Section 4.1 as he shall elect from time to time. The aggregate amount an Active Participant shall be permitted to have contributed to the Plan on his behalf for any Plan Year under this Section 4.1 shall not exceed 15% of such Participant's Compensation for such Plan Year. (a) After-tax Contributions: After-tax Contributions may only be made to the Plan through January 31, 1998. Thereafter, no such contributions shall be made. An Active Participant who elects prior to February 1, 1998 to make after-tax contributions to the Plan agrees that he will contribute to the Plan not less than 1% nor more than 15% (rounded to the nearest 1%) of his Compensation from the Company through January 31, 1998, and expressly authorizes the Company to withhold from his Compensation and to contribute to the Plan such amounts as shall equal said percentage. All such contributions shall be subject to the requirements and limitations of Section 4.10. (b) Pre-tax Contributions: An Active Participant who elects to have pre-tax contributions made to the Plan agrees that as long as such election remains in effect the Company shall deduct a percentage not less than 1% nor more than 15% (rounded to the nearest 1%) from his Compensation from the Company, as periodically payable to him, and shall contribute such amount to the Plan on his behalf. Each election shall be an express authorization for the reduction by the Company of his Compensation by such amounts as shall equal the percentage elected and the contribution of such amounts to the Plan and Trust. All such contributions shall be subject to the requirements and limitations of Section 4.8 and Section 4.9. If and to the extent necessary to comply with the remaining requirements of this Article IV, the Company may limit the amounts a Participant may elect to have contributed pursuant to this 11 Section 4.1 and/or distribute any or all such amounts in accordance with the remaining provisions of this Article IV. Section 4.2. Company Contributions. Subject to Section 4.3, for each Plan Year the Company shall make a contribution to the Trust on behalf of each Participant who made a contribu-tion for such Plan Year under Section 4.1 and who either (a) was still an Employee of the Employer at the close of such Plan Year and had not withdrawn his contribution for such Plan Year before the close of such Plan Year, or (b) ceased to be an Employee during such Plan Year due to death or due to normal, early or disability retirement under Section 7.1, Section 7.3 or Section 7.2, unless such retired Participant (or the Beneficiary of a deceased Former Participant) elected to have some or all of his interest in the Plan distributed to him prior to the end of such Plan Year. The amount of the Company contribution for each such Participant shall be equal to 50% of the lesser of (a) the total amount contributed by or on behalf of such Participant pursuant to Section 4.1 for such year or (b) 5% of such Participant's Compensation for such year. The total contribution to the Plan and Trust for any Plan Year shall be allocated and charged to each Company by aggregating the total amounts allocated under Section 5.1 to each Partici-pant who was an Employee of such Company and had a contribution made on his behalf; provided, however, that if any such Participant was employed by more than one Company during a Plan Year, the amount allocated to such Participant under Section 5.1 shall be allocated and charged to each such Company in proportion to such Participant's Compensation from each such Company for such Plan Year. Contributions made by the Company shall be subject to the requirements of Section 4.10. Section 4.3. Contributions Out of Profits. No contribu-tion shall be made pursuant to Section 4.2 except out of the Company's current or accumulated earnings or profits. However, in the case of any "affiliated group" within the meaning Section 1504 of the Code, if any Company is prevented from making a contribution which it would otherwise have made under the Plan (including any contribution which would be charged and allocated to it under Section 4.2), by reason of having no current or accumulated earnings or profits or because such earnings or profits are less than the contribution which it would otherwise have made, then so much of the contribution which such Company was so prevented from making may be made by one or more of the other Companies to the extent of current or accumulated earnings or profits, except that such contribution by each such other Company shall be limited, where all such Companies do not file a consolidated return, to that proportion of its total current and accumulated earnings or profits remaining after adjustment for its contribution deductible without regard to this sentence which the total prevented contribution bears to the total current and accumulated earnings or profits of all of the Companies remaining after adjustment for all contributions deductible without regard to this sentence. Contributions to the Plan made pursuant to Section 4.1 shall be made without regard to whether or not the Company has current or accumulated earnings or profits. Notwithstanding the preceding sentence, the Plan and Trust is designed to qualify as a profit sharing plan for purposes of all applicable provisions of the Code. Section 4.4. Rules for Making Elections. The Company shall establish uniform rules and procedures governing the percentage or amount of Compensation which may be contributed and the time and manner in which the elections authorized in Section 4.1 may be made, changed and/or revoked. To the extent permitted under procedures established by the Company from time to time, such elections may be accomplished by any electronic or telephonic means not otherwise prohibited by law. Section 4.5. When Contributions are Due. All amounts withheld from the pay of Participants pursuant to Section 4.1 shall be paid over and delivered by the Company to the Trustee promptly on a monthly or more frequent basis as soon as is administratively feasible, and in no event 12 later than 12 months after the end of the Plan Year for which they were made. Contributions made to the Plan and Trust by the Company for any Plan Year pursuant to Section 4.2 may be made in 1 or more installments. Any contribution for a Plan Year made after the end of such Plan Year shall be paid over not later than the time prescribed by law for filing the federal income tax return of the Company (including extensions thereof) for its taxable year with or within which such Plan Year ends. Section 4.6. No Reversion. The entire amount of all monies and Qualifying Employer Securities so paid or made available by the Company to the Trustee under the preceding Sections of this Article IV shall constitute an irrevocable contribution by the Company to this Trust, and the Company shall have no further rights or claims to said funds other than the right to require the Trustee to hold, use and administer said funds for the benefit of the Participants and their Beneficiaries in accordance with the provisions of this Trust. Notwithstanding the foregoing: (a) Any contribution made by the Company by a mistake of fact shall be returned to the Company, upon its request, within 1 year after such contribution was made; and (b) each contribution of the Company shall be conditioned upon its deductibility under Section 404 of the Code, and if a deduction is disallowed with respect to any contribution, it shall be returned to the Company, upon its request, within 1 year after the disallowance of the deduction. Section 4.7. Acceptance by Trustee. The Trustee may accept any amount paid to the Trustee by the Company without any responsibility or necessity on the part of the Trustee to check or otherwise determine if the amount so paid was properly authorized and paid in accordance with the provisions hereof. Section 4.8. Maximum Pre-tax Contributions. The amount contributed in any taxable year of a Participant on his behalf to this Plan pursuant to paragraph (b) of Section 4.1, when added to all other amounts contributed on his behalf in such year pursuant to a salary reduction agreement or other deferral mechanism to any other cash or deferred arrangement under Section 401(k) of the Code, simplified employee pension under Section 408(k) of the Code, simple retirement account under Section 408(p) of the Code, tax-sheltered annuity under Section 403(b) of the Code, eligible deferred compensation plan under Section 457 of the Code and/or plan under Section 501(c)(18) of the Code, shall not exceed the dollar limitation contained in Section 402(g) of the Code in effect on the first day of such taxable year. (a) If for any taxable year any such aggregate pre-tax contributions are made on behalf of a Participant in excess of the applicable dollar limitation ("Excess Deferrals"), the Participant may request distribution of such excess by notifying the Company, in writing, no later than March 15 of the year following the taxable year in which the Excess Deferrals were made. Such notice shall specify the amount of the Excess Deferrals to be distributed from the Plan and shall state that such distribution is required to avoid exceeding the dollar limitation for the taxable year in which the contributions were made. Upon receiving such notice, or upon the Company's independent determination that the limitation has been exceeded, any Excess Deferrals, plus any income and minus any loss allocable thereto, shall be distributed to the Participant no later than April 15 of the year following the taxable year in which the Excess Deferrals were made. 13 (b) The amount of Excess Deferrals to be distributed to any Participant pursuant to this Section 4.8 shall be reduced by the amount of Excess Contributions made on behalf of such Participant for the Plan Year beginning with or within such taxable year which have been previously distributed to such Participant pursuant to Section 4.9. (c) The income or loss allocable to Excess Deferrals for the Plan Year in which they were made and up to the date of the corrective distribution shall be determined using the methods described in paragraphs (g) and (h) of Section 4.9 in accordance with applicable Regulations. Section 4.9. Limitations on Pre-tax Contributions for Highly Compensated Employees. If the pre-tax contributions allocated to the accounts of Participants for any Plan Year are such that an Acceptable Deferral Percentage Ratio (as defined below) is not achieved for the Plan Year, the Company shall distribute to Participants who are Highly Compensated Employees any excess amounts contributed on behalf of such Participants pursuant to paragraph (b) of Section 4.1 for that Plan Year ("Excess Contributions"), plus the income and minus any loss allocable thereto, within 2 and one-half months following the close of the Plan Year in which such contributions were made in such amounts and in the manner determined under this Section 4.9. Any such distributions shall not require the consent of the Participants on whose behalf the contributions were made and shall be made in accordance with the applicable provisions of the Code (including Section 401(k)(3) of the Code) and the Regulations thereunder. (a) An Acceptable Deferral Percentage Ratio shall mean a relationship between the Average Deferral Percentage ("ADP") (as defined below) for such Plan Year for the group of Active Participants who are Highly Compensated Employees for such Plan Year and the ADP for the preceding Plan Year for the group of Active Participants for such preceding Plan Year who were not Highly Compensated Employees for such preceding Plan Year ("all other Active Participants") which satisfies either of the following tests: (i) The ADP for the group of Highly Compensated Employees is not more than 125% of the ADP of all other Active Participants (the "Basic Limit"); or (ii) the ADP for the group of Highly Compensated Employees does not exceed the ADP of all other Active Participants by more than 2 percentage points, and the ADP for the group of Highly Compensated Employees is not more than 200% of the ADP of all other Active Participants. In applying the foregoing tests, the Company may elect to use the current Plan Year instead of the preceding Plan Year for purposes of identifying the group of all other Active Participants and determining the Deferral Percentages and the ADP for such group. Any such election shall not be changed except as provided by the Secretary of the Treasury. (b) For each Active Participant, a "Deferral Percentage" shall be determined each year by dividing the sum of the amounts contributed on his behalf to his Pre-tax Contribution Account (excluding any Excess Deferrals if the Participant is not a Highly Compensated Employee) for the current or preceding Plan Year, as applicable, by his Compensation for such Plan Year. The Deferral Percentage of a 14 Participant who has had no amounts contributed to his Pre-tax Contribution Account for a Plan Year shall be zero. The ADP for a specified group of Employees shall be the average of the Deferral Percentages for each Active Participant in such group. (c) If any pre-tax contributions are made on behalf of any Highly Compensated Employee to 1 or more other cash or deferred arrangements sponsored by the Employer, all such contributions shall be considered in determining his Deferral Percentage, with all such cash or deferred arrangements ending with or within the same calendar year being treated as a single arrangement. (d) If this Plan must be aggregated with 1 or more other plans of the Employer for this or any other such plan to satisfy the requirements of Section 401(k), Section 401(a)(4), or Section 410(b) of the Code, the Deferral Percentages shall be determined as if all such plans were a single plan, provided that all such plans have the same Plan Year. (e) The amount of Excess Contributions to be distributed for any Plan Year to any Participant who is a Highly Compensated Employee shall be determined by following a two step process. First, the aggregate amount of Excess Contributions shall be calculated by following a leveling method (the "Percentage Leveling Method") under which the Deferral Percentage of the Highly Compensated Employee with the highest Deferral Percentage shall be reduced to the extent necessary to reach an Acceptable Deferral Percentage Ratio or to cause his Deferral Percentage to equal the next highest Deferral Percentage of a Highly Compensated Employee, and by repeating this process until an Acceptable Deferral Percentage Ratio is achieved. The aggregate amount of Excess Contributions to be returned shall then be calculated by adding the dollar amounts by which each Highly Compensated Employee's elective contributions must be reduced using the Percentage Leveling Method to achieve an Acceptable Deferral Percentage Ratio. Second, the aggregate amount of Excess Contributions to be returned as so calculated shall be allocated among and distributed to the Highly Compensated Employees by following the "Dollar Leveling Method" under which the elective contributions of the Highly Compensated Employee with the highest dollar amount of elective contributions shall be reduced to the extent necessary to cause the dollar amount of his elective contributions to equal the next highest dollar amount of elective contributions of a Highly Compensated Employee, and by repeating this process until all of the Excess Contributions have been returned. (f) The amount of Excess Contributions to be distributed to any Participant pursuant to this Section 4.9 shall be reduced by any Excess Deferrals previously distributed to such Participant pursuant to Section 4.8 for the Participant's taxable year ending with or within the Plan Year. (g) The income or loss allocable to Excess Contributions for the Plan Year in which they were made shall be determined in accordance with either of the following methods, provided that the same method is used on a uniform and consistent basis for all corrective distributions for a given Plan Year: (i) The "Fractional Method", whereby the income or loss allocable to the Participant's Pre-tax Contribution Account for the Plan Year in which such Excess Contributions were made is multiplied by a fraction, the numerator of which is such Participant's Excess Contributions for such Plan Year and the 15 denominator of which is the value of the Participant's Pre-tax Contribution Account as of the last day of the preceding Plan Year after all allocations and adjustments have been made as of such date for such preceding Plan Year; or (ii) any reasonable method which is normally used by the Plan for allocating income or losses to Participants' accounts. (h) The income or loss allocable to Excess Contributions for the period after the end of the Plan Year in which such Excess Contributions were made up to the date of the corrective distribution (the "Gap Period") shall be determined in accordance with one of the following methods, provided that the same method is used on a uniform and consistent basis for all corrective distributions for a given Plan Year: (i) The income or loss for the Gap Period shall be deemed to be zero; (ii) the income or loss for the Gap Period shall be deemed to be 10% of the amount determined under paragraph (g)(i) of this Section 4.9 multiplied by the number of whole calendar months between the end of the Plan Year and the date of the corrective distribution, counting the month of distribution if distribution occurs after the 15th day of such month; (iii) the income or loss for the Gap Period shall be determined by applying the Fractional Method to the income or loss allocable to the Participant's Pre-tax Contribution Account for the Gap Period; or (iv) the income or loss for the Gap Period shall be determined in accordance with any reasonable method which is normally used by the Plan for allocating income or losses to Participants' accounts. Section 4.10. Limitations on After-tax and Matching Contributions for Highly Compensated Employees. If the matching contributions allocated to the Company Contribution Accounts (and, for 1997 and 1998, the after-tax contributions allocated to the After-tax Contribution Accounts) of Participants for any Plan Year are such that an Acceptable Contribution Percentage Ratio (as defined below) is not achieved for the Plan Year, the Company may forfeit (if otherwise forfeitable under the terms of the Plan) and/or distribute to Participants who are Highly Compensated Employees any excess amounts contributed by the Company pursuant to Section 4.2 for that Plan Year (and, for 1997 and 1998, by Participants under paragraph (a) of Section 4.1) ("Excess Aggregate Contributions"), plus the income and minus any loss allocable to such amounts, within 2 1/2 months following the close of the Plan Year for which such contributions were made in such amounts and in the manner determined under this Section 4.10. Any such distribution shall not require the consent of the Participants on whose behalf the contributions were made and shall be made in accordance with the applicable provisions of the Code (including Section 401(m)(6) of the Code) and the Regulations thereunder. (a) An Acceptable Contribution Percentage Ratio shall mean a relationship between the Average Contribution Percentage ("ACP") (as defined below) for such Plan Year for the group of Active Participants who are Highly Compensated Employees for such Plan Year and the ACP for the preceding Plan Year for the group of all other Active Participants for the preceding Plan Year which satisfies either of the following tests: 16 (i) The ACP for the group of Highly Compensated Employees is not more than 125% of the ACP of all other Active Participants (the "Basic Limit"); or (ii) the ACP for the group of Highly Compensated Employees does not exceed the ACP of all other Active Participants by more than 2 percentage points, and the ACP for the group of Highly Compensated Employees is not more than 200% of the ACP of all other Active Participants. In applying the foregoing tests, the Company may elect to use the current Plan Year instead of the preceding Plan Year for purposes of identifying the group of all other Active Participants and determining the Contribution Percentages and the ACP for such group. Any such election shall not be changed except as provided by the Secretary of the Treasury. (b) For each Active Participant, a "Contribution Percentage" shall be determined each year by dividing the sum of the contributions allocated to his Company Contribution Account (and, for 1997 and 1998, to his After-tax Contribution Account) for the applicable Plan Year by his Compensation for such Plan Year. The Contribution Percentage of a Participant who has had no amounts contributed to either such account for a Plan Year shall be zero (except to the extent the last sentence of this paragraph (b) may apply). The ACP for a specified group of Employees shall be the average of the Contribution Percentages for each Active Participant in such group. If the requirements of Section 1.401(m)-1(b) (5) of the Regulations are met, the Company may include in the numerator for purposes of determining a Participant's Contribution Percentage for a Plan Year some or all of the contributions allocated to his Pre-tax Contribution Account for such Plan Year, but to the extent such contributions are included for that purpose, they may not otherwise be taken into account to satisfy the requirements of Section 401(a)(4) and Section 401(k)(3) of the Code, as set forth in the ADP test described in Section 4.9. (c) If any voluntary after-tax contributions or Employer matching contributions are made on behalf of any Highly Compensated Employee to 1 or more other qualified plans sponsored by the Employer, all such contributions shall be considered in determining his Contribution Percentage. (d) If this Plan must be aggregated with 1 or more other plans of the Employer for this or any other such plan to satisfy the requirements of Section 401(m), Section 401(a)(4), or Section 410(b) of the Code, the Contribution Percentages shall be determined as if all such plans were a single plan, provided that all such plans have the same Plan Year. (e) The amount of Excess Aggregate Contributions to be forfeited and/or distributed for any Plan Year to any Participant who is a Highly Compensated Employee shall be determined by following a two step process. First, the aggregate amount of Excess Aggregate Contributions shall be calculated by following the Percentage Leveling Method under which the Contribution Percentage of the Highly Compensated Employee with the highest Contribution Percentage shall be reduced to the extent necessary to reach an Acceptable Contribution Percentage Ratio or to cause his Contribution Percentage to equal the next highest Contribution Percentage of a 17 Highly Compensated Employee, and by repeating this process until an Acceptable Contribution Percentage Ratio is achieved. The aggregate amount of Excess Aggregate Contributions shall then be calculated by adding the dollar amounts by which each Highly Compensated Employee's matching contributions (and, for 1997 and 1988, after-tax contributions) must be reduced using the Percentage Leveling Method to achieve an Acceptable Contribution Percentage Ratio. Second, the aggregate amount of Excess Aggregate Contributions as so calculated shall be allocated among the Highly Compensated Employees by following the Dollar Leveling Method under which the matching (and after-tax) contributions of the Highly Compensated Employee with the highest dollar amount of matching (and after-tax) contributions are reduced to the extent necessary to cause the dollar amount of his matching (and after-tax) contributions to equal the next highest dollar amount of matching (and after-tax) contributions of a Highly Compensated Employee, and by repeating this process until all of the Excess Aggregate Contributions have been returned and/or forfeited. (f) The income or loss allocable to Excess Aggregate Contributions for the Plan Year in which they were made shall be determined in accordance with either of the following methods, provided that the same method is used on a uniform and consistent basis for all corrective distributions for a given Plan Year: (i) The "Fractional Method," whereby the income or loss allocable to the Participant's After-tax Contribution Account and/or Company Contribution Account (depending upon from which account or accounts the corrective distributions were made) for the Plan Year in which such Excess Aggregate Contributions were made is multiplied by a fraction, the numerator of which is such Participant's Excess Aggregate Contributions for such Plan Year and the denominator of which is the value of the Participant's After-tax Contribution Account and/or his Company Contribution Account, as appropriate, as of the last day of the preceding Plan Year after all allocations and adjustments have been made as of such date for such preceding Plan Year; or (ii) any reasonable method which is normally used by the Plan for allocating income or losses to Participants' accounts. (g) The income or loss allocable to Excess Aggregate Contributions for the period after the end of the Plan Year in which such Excess Aggregate Contributions were made up to the date of the corrective distribution (the "Gap Period") shall be determined in accordance with one of the following methods, provided that the same method is used on a uniform and consistent basis for all corrective distributions for a given Plan Year: (i) The income or loss for the Gap Period shall be deemed to be zero; (ii) the income or loss for the Gap Period shall be deemed to be 10% of the amount determined under paragraph (f)(i) of this Section 4.10 multiplied by the number of whole calendar months between the end of the Plan Year and the date of the corrective distribution, counting the month of distribution if distribution occurs after the 15th day of such month; 18 (iii) the income or loss for the Gap Period shall be determined by applying the Fractional Method to the income or loss allocable to the Participant's After-tax Contribution Account and/or Company Contribution Account, as appropriate, for the Gap Period; or (iv) the income or loss for the Gap Period shall be determined in accordance with any reasonable method which is normally used by the Plan for allocating income or losses to Participants' accounts. Section 4.11. Multiple Use of Alternative Limitations. If for any Plan Year neither the ADP test calculated pursuant to Section 4.9 nor the ACP test calculated pursuant to Section 4.10 can be satisfied using the Basic Limit described in subparagraph (a)(i) of each such Section, respectively, then the sum of (a) the ADP of the group of Active Participants who are Highly Compensated Employees and (b) the ACP of the group of Active Participants who are Highly Compensated Employees shall not exceed the "Aggregate Limit". For purposes of determining the Aggregate Limit, the ADP and the ACP of Highly Compensated Employees shall be determined after the distribution of any Excess Contributions or Excess Aggregate Contributions required by Section 4.9 or Section 4.10, respectively. The Aggregate Limit shall mean the greater of: (a) The sum of: (i) 125% of the greater of the ADP or the ACP of all other Active Participants, plus (ii) the lesser of 2 percentage points above, or 200% of, the lesser of the ADP or the ACP of all other Active Participants; or (b) the sum of: (i) 125% of the lesser of the ADP or the ACP of all other Active Participants, plus (ii) the lesser of 2 percentage points above, or 200% of, the greater of the ADP or the ACP of all other Active Participants. In the event that the Aggregate Limit is exceeded, Excess Aggregate Contributions made for such Plan Year and allocated to the accounts of Highly Compensated Employees, plus the income and minus any loss allocable to such Excess Aggregate Contributions, shall be distributed within 2 and one-half months following the close of the Plan Year for which such contributions were made, using the method set forth in Section 4.10, to the extent necessary to reduce the ACP of the Highly Compensated Employees so that, when added to the ADP of the Highly Compensated Employees, the sum is not greater than the Aggregate Limit. Section 4.12. Form of Contributions. The Company's contribution shall be made in Qualifying Employer Securities, except that the Company shall make cash contributions to the extent that cash is required to be distributed in lieu of fractional shares pursuant to Section 8.13. 19 ARTICLE V ALLOCATIONS AND ACCOUNTS Section 5.1. Allocation of Participant Contributions. (a) After-tax Contributions: Subject to the limitations contained in Section 5.4, after-tax contributions made to the Trust by Participants pursuant to paragraph (a) of Section 4.1 shall be allocated to the respective After-tax Contribution Accounts of the Participants who contributed such amounts to the Trust. (b) Pre-tax Contributions: Subject to the limitations contained in Section 5.4, pre-tax contributions made to the Trust by the Company on behalf of Participants pursuant to paragraph (b) of Section 4.1 shall be allocated to the respective Pre-tax Contribution Accounts of the Participants who elected to have such amounts so contributed to the Trust. Section 5.2. Allocation of Company Contributions. Subject to the limitations contained in Section 5.4, the contributions made by the Company to the Trust for a Plan Year pursuant to Section 4.2 shall be allocated to the respective Company Contribution Accounts of the Participants on whose behalf such contributions were made. Section 5.3. Separate Accounts. The Trustee shall create and maintain an After-tax Contribution Account for each Participant who elected to make contributions to this Trust under paragraph (a) of Section 4.1 prior to February 1, 1998, and shall credit such account with all voluntary after-tax contributions made by such Participant. The Trustee shall also create and maintain a Pre-tax Contribution Account for each Participant who elects to have contributions made on his behalf under paragraph (b) of Section 4.1, and shall credit such account with all pre-tax contributions made on behalf of such Participant. The Trustee shall also create and maintain a Company Contribution Account for each Participant to which the Company's contributions made pursuant to Section 4.2 and allocated to such Participant shall be credited, along with a subaccount to which cash dividends allocable to such Participant shall be credited. If a Participant incurs a Period of Severance exceeding 60 months, and if the nonforfeitable portion of his Accrued Benefit in his Company Contribution Account which accrued prior to said Period of Severance is not distributed in full, and if he again becomes an Active Participant, separate Company Contribution Accounts shall be provided for his pre-severance and post-severance Accrued Benefit. If the Participant made any after-tax contributions prior to January 1, 1987, a subaccount shall be maintained reflecting all such contributions credited to his After-tax Contribution Account as of December 31, 1986. The creation of such accounts and subaccounts is primarily for accounting purposes and does not require a segregation of assets or funds to any such account. Section 5.4. Limitations on Annual Additions. For purposes of this Section 5.4, the following words and phrases shall have the following meanings: (a) Affiliate: As defined in paragraph (c) of Section 1.3 but subject to the modifications of Section 414(b) and Section 414(c) of the Code described in Section 415(h) of the Code. (b) Annual Addition: With respect to each Plan Year, the total contributions (including any excess elective contributions returned to the Participant pursuant to the provisions of Section 4.8) and forfeitures allocated to a Participant's 20 accounts in this and any other Defined Contribution Plans maintained by the Employer. Notwithstanding the foregoing, for Plan Years commencing prior to 1987, only the lesser of (i) 2 of a Participant's after-tax contributions or (ii) the amount of his after-tax contributions in excess of 6% of his Compensation for such Plan Year shall be included in his Annual Addition for such year. If applicable, for purposes of the dollar limitation but not the percentage limitation, both (i) amounts allocated after March 31, 1984, to an individual medical account (as defined in Section 415(l)(2) of the Code) which is a part of a pension or annuity plan maintained by the Employer, and (ii) amounts derived from contributions paid or accrued after 1985 in taxable years ending after such date which are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee under a welfare benefit fund (as defined in Section 419(e) of the Code) maintained by the Employer shall be included in a Participant's Annual Addition. (c) Compensation: As defined in Section 415(c)(3) of the Code and the Regulations thereunder. (d) Defined Benefit Plan: A plan which is not a Defined Contribution Plan. For purposes of applying the limitations of this Section 5.4, all Defined Benefit Plans (whether or not terminated) of the Employer shall be treated as one Defined Benefit Plan. (e) Defined Benefit Plan Fraction: For any Plan Year, a fraction, the numerator of which is the projected annual benefit of the Participant under all Defined Benefit Plans maintained by the Employer, and the denominator of which is the lesser of (i) 125% of $90,000 (indexed for cost of living adjustments provided for under the Code), or (ii) 140% of the Participant's average Compensation for the 3-consecutive calendar years of service with the Employer which produce the highest average. (f) Defined Contribution Plan: A plan which provides for one or more individual accounts for each Participant and benefits based solely on the amounts contributed to each Participant's account, and any income, expenses, gains, losses and forfeitures which may be allocated thereto. For purposes of applying the limitations of this Section 5.4, all Defined Contribution Plans (whether or not terminated) of the Employer shall be treated as one Defined Contribution Plan. (g) Defined Contribution Plan Fraction: For any Plan Year, a fraction, the numerator of which is the sum of the Annual Additions to the Participant's account for such Plan Year and all prior Plan Years, and the denominator of which is the sum of the lesser of the following amounts determined for such Plan Year and for each prior Plan Year of service with the Employer: (i) 125% of $30,000 (indexed for cost of living adjustments provided for under the Code); or (ii) 35% of the Participant's Compensation for the Plan Year. The Annual Addition for any Plan Year beginning before January 1, 1987 shall not be recomputed to treat all of a Participant's voluntary contributions as Annual Additions. If the Participant was a Participant as of the first day of the first Limitation Year beginning after December 31, 1986 in any Prior Plan which was in existence on May 6, 1986, the numerator of the Defined Contribution Plan Fraction shall be adjusted if the sum of this fraction and the Defined Benefit Plan Fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (i) the excess of the sum of the fractions over 1.0 times (ii) the denominator of the Defined Contribution Plan Fraction shall be 21 permanently subtracted from the numerator of the Defined Contribution Plan Fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987 and disregarding any changes in the terms and conditions of the Plan made after May 5, 1986, but using the limitations applicable under Section 415 of the Code to the first Limitation Year beginning on or after January 1, 1987. (h) Employer: As defined in paragraph (l) of Section 1.3 but using the definition of Affiliate set forth in paragraph (a) above. (i) Limitation Year: The Plan Year. Notwithstanding any other provision contained herein, the total Annual Addition made to the account of a Participant for any Plan Year shall not exceed the lesser of (a) $30,000 (or, if greater, 25% of the dollar limitation in effect for such Plan Year under Section 415(b)(1)(A) of the Code), or (b) 25% of the Participant's Compensation for such Plan Year. In addition, if in any Plan Year a Participant in this Plan also participates in a Defined Benefit Plan maintained by the Employer, the sum of the Defined Benefit Plan Fraction and the Defined Contribution Plan Fraction, both computed as of the close of the Plan Year, shall not exceed 1.0. At the election of the Company, special transitional rules may apply for both the Defined Benefit Plan Fraction and the Defined Contribution Plan Fraction for Employees who were Participants in the Prior Plan as of December 31, 1982. If any Annual Addition exceeds any limitation contained in this Section 5.4, first the after-tax contributions made by such Participant for the Plan Year pursuant to paragraph (a) of Section 4.1 which caused such excess shall be returned to the Participant, and then, if necessary, the pre-tax contributions made on behalf of such Participant for such Plan Year pursuant to paragraph (b) of Section 4.1 which caused such excess shall be returned to the Participant. If, after returning all such contributions for such Plan Year, an excess still exists, such excess shall be held in a suspense account and applied to reduce the contribution of the Company for such Plan Year and for each succeeding Plan Year until exhausted. If more than 1 Company has contributed to the account of a Participant in a Plan Year, any such excess shall be applied to reduce the contributions of such Companies in proportion to the amount of contributions made by each such Company and allocated to such Participant. Section 5.5. Dividends. Notwithstanding any other provision of this Plan and Trust, any cash dividend on Qualifying Employer Securities held by the Trust and allocated to the accounts of Participants shall be credited to the respective Company Contribution Accounts to which the Qualifying Employer Securities are credited. Such dividends shall be invested and reinvested as directed by Participants pursuant to Section 12.4. Except as hereinafter set forth, such dividends and all earnings thereon shall at all times be fully nonforfeitable and shall be distributed in accordance with the provisions of Article VIII, provided, however, that in cases where such dividends and earnings are less than $1.00 and represent the entire nonforfeitable Accrued Benefit with respect to a Participant, such dividends and earnings shall be forfeited and applied in accordance with Section 8.9. Dividends on Qualifying Employer Securities held by the Trust and not allocated to the accounts of Participants shall be invested as directed by the Company and such dividends and earnings thereon shall be used to provide cash distributions in lieu of fractional shares. 22 ARTICLE VI VALUATION OF ACCOUNTS Section 6.1. Valuation Date. The last day of each Plan Year shall be the Annual Valuation Date as of which the value of each Participant's share in the Trust shall be determined. As soon as possible, but in any event within a reasonable period after the Trustee shall have received the Company's contribution for any Plan Year, or within a reasonable period of time after the expiration of the time permitted to the Company to make payment of its contribution as provided in Section 4.5, whichever shall first occur, the Trustee shall appraise the fair market value of all property and funds of the Trust as of the close of such Plan Year and prepare a written account. Such written account shall set forth all investments, receipts, disbursements and other transactions of the Trust for or during such Plan Year and shall contain an itemized schedule of all Trust property and funds showing in each case the appraised fair market value thereof as of the close of such Plan Year and an itemized schedule of all liabilities of the Trust as of the close of the Plan Year. Section 6.2. Interim Valuation. As of any time during the Plan Year that the Company deems it necessary, the Company shall direct the Trustee to revalue the Trust upon the basis of the then market value of the assets in the Trust. Such interim Valuation Date shall be substituted for the valuation as of the end of the preceding Plan Year, or for any more recent interim Valuation Date, in determining the amounts in the accounts of Participants and their Beneficiaries for all purposes of the Plan. Whenever reference is made in the Plan to the account as of the end of the preceding Plan Year, it shall mean as of the most immediately preceding interim Valuation Date. Section 6.2. Allocation of Earnings. All earnings, gains, and losses of the Trust for each Plan Year shall be allocated among the accounts and subaccounts on the books of the Trust as of each Valuation Date in proportion to the respective balances of such accounts and subaccounts as of the immediately preceding Valuation Date; provided, however, that if any portion of a Participant's Accrued Benefit is held in any directed account pursuant to Section 12.4, such portion of his Accrued Benefit shall share only in the earnings, gains and losses of the investment funds held in such directed account. Section 6.4. Value of Accrued Benefit upon Termination. For the purpose of determining the value of the Accrued Benefit of each Participant in the event of the death, retirement, or other termination of employment or participation of such Participant, the value of such Participant's Accrued Benefit shall be the value thereof as of the last Valuation Date preceding his death, retirement, or other termination of employment or participation, after giving effect to any credits and/or debits thereto made as of the said Valuation Date in accordance with any of the foregoing provisions of this Plan and Trust, and to any other credits and/or debits made to his Accrued Benefit subsequent to such last preceding Valuation Date pursuant to any of the provisions of this Plan and Trust. Section 6.5. Valuation of Qualifying Employer Securities. The value of Qualifying Employer Securities for all purposes of this Plan and Trust shall be determined in good faith by the Company based on all relevant factors. The Trustee shall have no responsibility for the determination of such value or liability therefrom. Section 6.6. Unit Accounting. The Trustee or the Contract Administrator may, for administrative purposes, establish unit values for one or more investment funds (or any portion thereof) and maintain the accounts setting forth each Participant's interest in each such investment fund (or portion thereof) in terms of such units, all in accordance with such rules and procedures as the Trustee or Contract Administrator shall deem to be fair, equitable and administratively practicable. In the event 23 that unit accounting is thus established for any investment fund (or any portion thereof) the value of a Participant's interest in that investment fund (or any portion thereof) at any time shall be an amount equal to the then value of a unit in such investment fund (or any portion thereof) multiplied by the number of units then credited to the Participant. ARTICLE VII ENTITLEMENT TO BENEFITS Section 7.1. Normal Retirement Date. Each Participant shall have the right, at his option, to retire at any time from and after his Normal Retirement Date; provided, that until such retirement or other termination of employment thereafter his right to full participation as a Participant hereunder shall continue. If a Participant's employment with the Employer is terminated on or after his Normal Retirement Date (other than termination by reason of his death), his entire Accrued Benefit shall thereafter be fully nonforfeitable and shall be distributed in accordance with the provisions of Section 8.1. Section 7.2. Disability Retirement Prior to Normal Retirement Date. The Company will permit a Participant to retire prior to his Normal Retirement Date in any case in which it is determined by a duly licensed physician selected by the Company that, because of ill health, accident, disability or general inability because of age, the Participant is no longer able, properly and satisfactorily, to perform his regular duties as an Employee. The foregoing provisions of this Section 7.2 shall be administered in such manner that all Participants are treated similarly under similar circumstances. If a Participant's employment with the Employer is terminated pursuant to this Section 7.2, his entire Accrued Benefit shall thereafter be fully nonforfeitable and shall be distributed in accordance with the provisions of Section 8.1. Section 7.3. Early Retirement. Each Participant shall have the right, at his option, to retire at any time after he has attained 55 years of age and completed 15 Years of Service. If a Participant's employment is terminated after he has satisfied the aforesaid age and service requirements (other than termination by reason of his death), his entire Accrued Benefit shall thereafter be nonforfeitable and shall be distributed in accordance with the provisions of Section 8.1. For purposes of this Section 7.3, Years of Service shall be determined under Section 2.4 without regard to the provisions of Section 2.5. Section 7.4. Death. Upon the death of a Participant while in the employ of the Employer, his entire Accrued Benefit shall thereafter be fully nonforfeitable and shall be distributed in accordance with the provisions of Section 8.2. Section 7.5. Termination for Other Reasons. If a Participant's employment with the Employer is terminated other than as described in the preceding Sections of this Article VII, he shall have a nonforfeitable interest in all of his Accrued Benefit in his After-tax Contribution Account and his Pre-tax Contribution Account and in the following percentage of his Accrued Benefit in his Company Contribution Account (other than dividends credited to such account as provided in Section 5.5): 24
Years of Service Nonforfeitable Percentage - ---------------- ------------------------- Less than 1 0% 1 but less than 2 20% 2 but less than 3 40% 3 but less than 4 60% 4 but less than 5 80% 5 or more 100%
Said nonforfeitable percentage shall be distributed in accordance with the provisions of Section 8.3 Section 7.6. Lost Distributees. If a Former Participant or his Beneficiary cannot be located for a period of 2 years after the benefits payable with respect to such Former Participant could be distributed under the provisions of this Plan and Trust without the consent of the Participant or Beneficiary, the Accrued Benefit of such Former Participant which has not already been forfeited pursuant to the provisions of Section 8.9 shall be forfeited as of the next Annual Valuation Date. Any Accrued Benefit forfeited in accordance with the foregoing provision shall be reinstated if a claim is made by the Former Participant or Beneficiary. Notwithstanding any other provision of this Plan and Trust, the amounts to be reinstated may come from earnings and gains of the Trust, Company contributions and forfeitures. ARTICLE VIII DISTRIBUTION OF BENEFITS Section 8.1. Retirement. Subject to the remaining provisions of this Article VIII, upon the termination of employment of any Participant on account of normal, early or disability retirement pursuant to Section 7.1, Section 7.3 or Section 7.2, the Company shall direct the Trustee to distribute the Accrued Benefit of such Participant in one or more of the following methods: (a) In a lump sum; (b) in annual or more frequent periodic payments of not less than $10.00 each, until the entire Accrued Benefit has been fully and completely distributed; provided, however, that if such Participant shall die prior to having received all of his Accrued Benefit, then and in that event the Company shall direct the Trustee to distribute the remaining balance of such deceased Participant's Accrued Benefit in accordance with the provisions of Section 8.2. Until distributed in full, the Accrued Benefit of such Participant shall be subject to the valuation adjustments described in Article VI. To the extent the distribution qualifies as an Eligible Rollover Distribution (as defined below), the Participant may also elect to have a portion or all of such distribution paid in the form of a direct rollover to another Eligible Retirement Plan (as defined below) designated by the Participant in accordance with the provisions of Section 402 of the Code and Section 401(a)(31) of the Code. An Eligible Rollover Distribution shall mean any distribution of all or any portion of a Participant's Accrued Benefit other than: (i) A distribution that is 1 in a series of substantially equal periodic payments made for the life (or life expectancy) of the Participant or joint lives (or joint life expectancy) of the Participant and his designated Beneficiary, or for a specified period of 10 years or more; (ii) any portion of a distribution required under Section 8.6, Section 8.7 or Section 8.8 of the Plan; and (iii) any 25 portion of a distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Qualifying Employer Securities). An Eligible Retirement Plan shall mean an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code. Section 8.2. Death. Upon the death of a Participant prior to his retirement or other termination of employment, or prior to commencement of his benefits, the Company shall direct the Trustee to distribute his Accrued Benefit to his surviving spouse or, if there is no surviving spouse or the surviving spouse consents or such consent is not required, to his designated Beneficiary or Beneficiaries, if any, otherwise to the duly appointed, qualified and acting personal representative, executor or administrator of the estate of such deceased Participant. (a) Beneficiary Designation: Each Participant may, from time to time, designate in writing to the Company the name or names of any Beneficiary or Beneficiaries and/or contingent Beneficiary entitled to receive any benefits which may be payable under the Trust in the event of his death. Any such designation may be changed or revoked by a Participant at any time and from time to time by appropriate instrument signed in writing and delivered to the Company. (b) Consent of Spouse: Any designation by a married Participant of a Beneficiary or Beneficiaries other than his spouse under the foregoing provisions of this Section 8.2 shall not be effective unless: (i) The designation either designates a specific Beneficiary, including any class of Beneficiaries or contingent Beneficiaries, which may not be changed without the spouse's further consent, or expressly permits the Participant to change his Beneficiary designation without the spouse's further consent; (ii) the spouse of the Participant consents in writing to such designation; (iii) such consent acknowledges the effect of such designation; (iv) if the designation permits the Participant to change his Beneficiary without the spouse's further consent, the consent acknowledges that the spouse has a right to limit consent to a specific Beneficiary and voluntarily relinquishes that right; and (v) such consent is witnessed by a Plan representative or a notary public. However, the spouse's consent shall not be required if it is established to the satisfaction of a Plan representative that it cannot be obtained because there is no spouse, because the spouse cannot be located or because of such other circumstances as the Regulations may prescribe. (c) Commencement of Distribution: If the Participant's Accrued Benefit exceeds or at any time exceeded $5,000, distribution to his surviving spouse, if any, shall not commence prior to the later of what would have been the Participant's Normal Retirement Date or the date the Participant would have attained 62 years of age, unless the Company provides the surviving spouse with notice of the payment options available and the right to defer distribution and obtains the spouse's written consent to distribution. Such notice and consent shall satisfy the notice and consent requirements set forth in Section 8.4. (d) Method of Distribution: Distribution shall be made to the Beneficiary in 1 or more of the methods described in Section 8.1; provided, however, that the direct rollover option shall be available only to a Beneficiary who is the Participant's surviving spouse or his former spouse who is the Alternate Payee under a Qualified Domestic Relations Order (both as defined in Section 9.2 of the Plan); and, provided further, that with respect to a Beneficiary who is a surviving spouse (but not with 26 respect to a former spouse who is an Alternate Payee), the Eligible Retirement Plan must be an individual retirement account or individual retirement annuity. Section 8.3. Termination of Employment. If a Participant's employment terminates other than because of his death, his disability pursuant to Section 7.2, or after he has met the requirements for normal or early retirement pursuant to Section 7.1 or Section 7.3, the nonforfeitable portion of his Accrued Benefit shall be distributed to him by the Trustee at the direction of the Company in accordance with Section 8.1 at his Normal Retirement Date. Distribution may be advanced to a date earlier than his Normal Retirement Date if the Former Participant so elects, in writing, in accordance with the requirements of Section 8.4. If the nonforfeitable portion of a Former Participant's Accrued Benefit does not exceed $5,000 and has never exceeded such amount, the Company may direct the Trustee to distribute such benefit in a lump sum as promptly as feasible following termination of his employment with or without his consent, subject to his right to elect the direct rollover option described in Section 8.1 in lieu of such lump sum payment. If a Former Participant dies prior to having received any part or all of the nonforfeitable portion of his Accrued Benefit, the Company shall direct the Trustee to distribute the remaining balance thereof in accordance with Section 8.2. Until distributed in full, the Accrued Benefit of any such Former Participant shall be subject to the valuation adjustment described in Article VI. Section 8.4. Payment Elections. The Company shall direct the Trustee to distribute the Accrued Benefit of a Participant in accordance with any written request filed by the Participant or his Beneficiary specifying the method or methods permitted under this Article VIII by which he desires distribution. If a Participant's Accrued Benefit exceeds or at any time exceeded $5,000 and he becomes entitled to distribution for any reason at any time prior to the later of his Normal Retirement Date or the date he attains 62 years of age, such benefit shall not be distributed unless the Company provides the Participant with notice of the payment options available to him and obtains his written consent to distribution. Such consent shall be valid only if: (a) The notice includes a general description of the material features and an explanation of the relative values of the optional forms of benefit available under the Plan, including the direct rollover option described in Section 8.1; (b) the notice advises the Participant of his right to defer distribution; and (c) the consent is signed after such notice has been received and no more than 90 days before payment commences. Such consent shall not be required if distribution commences on account of or after the death of the Participant. Section 8.5. Commencement of Benefits. Except as other-wise provided in Section 8.3, any distribution under Section 8.1, Section 8.2 or Section 8.3 shall generally be payable as soon as administrative feasible following the Participant's retirement, death or other termination of employment. The Participant may elect to postpone the distribution of his Accrued Benefit to a later date, but not later than the Participant's Required Beginning Date as defined in Section 8.6. Unless otherwise elected by the Participant, payment of benefits shall commence no later than 60 days after the close of the Plan Year in which occurs the latest of: (a) The Participant's attainment of age 65 (or the Participant's Normal Retirement Date, if earlier) (b) the Participant's employment with the Employer terminates, or (c) the 10th anniversary of the Participant's participation in the Plan occurs; provided however, that if the amount of benefits cannot be ascertained by such date, payment shall be retroactive to such date, after ascertainment, and shall commence not later than 60 days after the amount is ascertained. The failure of a Participant to consent to a distribution as required by Section 8.4 shall be deemed to be an election to postpone payment sufficient to satisfy this Section 8.5. Section 8.6. Required Beginning Date. In accordance with Section 401(a)(9) of the Code and the Regulations thereunder, distribution of a Participant's Accrued Benefit shall commence no later than his "Required Beginning Date," determined as follows: 27 (a) General Rule: The Required Beginning Date of a Participant who is not a 5% owner shall be the first day of April of the calendar year following the calendar year in which the later of his retirement or attainment of age 70 and one-half occurs. (b) 5% Owners: The Required Beginning Date of a Participant who is a 5% owner (as defined in Section 416(i) of the Code but without regard to whether the Plan is top-heavy) with respect to the Plan Year in which the Employee attains age 70 1/2 shall be the first day of April following the calendar year in which he attains age 70 1/2. Once distributions have begun to a 5% owner under this Section, they shall continue to be distributed even if he ceases to be a 5% owner in a subsequent year. (c) Transition Rule: If the Required Beginning Date of a Participant who is not a 5% owner occurred prior to 1997 under the provisions of this Section 8.6 in effect under the Prior Plan and such Participant has not retired, such Participant may but is not required to elect to have his Required Beginning Date deferred to the date determined under paragraph (a). Section 8.7. Non Lump Sum Distributions. If not made in a lump sum payment, distributions may only be made over one of the following periods (or a combination thereof) in accordance with Section 401(a)(9) of the Code and the Regulations thereunder: (a) The life of the Participant; (b) the life of the Participant and a designated Beneficiary; (c) a period certain not extending beyond the life expectancy of the Participant; or (d) a period certain not extending beyond the joint and last survivor expectancy of the Participant and a designated Beneficiary. If the Participant's entire Accrued Benefit is to be distributed pursuant to (c) or (d) above, the amount to be distributed for each year, commencing with the calendar year in which the Participant's Required Beginning Date occurs, must be at least an amount equal to the quotient obtained by dividing the entire Accrued Benefit by the life expectancy of the Participant or the joint and last survivor expectancy of the Participant and designated Beneficiary. Life expectancy and joint and last survivor expectancy shall be computed by the use of the return multiples contained in Section 1.72-9 of the Regulations. For purposes of this computation, the life expectancy of the Participant and spouse may be recalculated no more frequently than annually; however, the life expectancy of a nonspouse Beneficiary may not be recalculated. If the spouse is not the designated Beneficiary, the method of distribution selected must assure that more than 50% of the present value of the amount available for distribution will be paid within the life expectancy of the Participant. If the spouse is not the designated Beneficiary, the method of distribution selected must assure a minimum annual payment for each year, beginning with the calendar year in which the Participant's Required Beginning Date occurs, in an amount determined in accordance with Section 1.401(a)(9)-2 of the Regulations. Section 8.8. Death Distribution Provisions. If a Participant dies after distribution of his Accrued Benefit has commenced, the remaining portion of such Accrued Benefit shall continue to be distributed at least as rapidly as under the method of distribution being used prior to his death. If a Participant dies before distribution of his Accrued Benefit has commenced, the entire Accrued Benefit shall be distributed no later than the last day of the calendar year in which the 5th anniversary of the 28 Participant's death occurs, except to the extent that an election is made to receive distributions in accordance with (a) or (b) below and Section 401(a)(9) of the Code and the Regulations thereunder: (a) If any portion of the Participant's Accrued Benefit is payable to a designated Beneficiary, distributions may be made in substantially equal installments over the life or life expectancy of the designated Beneficiary commencing no later than the last day of the calendar year following the calendar year of the Participant's death; and (b) if the designated Beneficiary is the Participant's surviving spouse, the date distributions are required to begin shall not be earlier than the last day of the calendar year in which the Participant would have attained age 70 1/2, and, if the spouse dies before payments begin, subsequent distributions shall be made as if the spouse had been the Participant. For purposes of this Section 8.8, life expectancy shall be calculated by use of the return multiples specified in Section 1.72-9 of the Regulations based on the attained age of the Beneficiary as of his birthday in the calendar year of distribution. Life expectancy of a surviving spouse may be recalculated annually; however, in the case of any other designated Beneficiary, such life expectancy shall be calculated at the time payment first commences without further recalculation. Furthermore, for purposes of this Section 8.8, any amount paid to a child of the Participant shall be treated as if it had been paid to the surviving spouse if the amount becomes payable to the surviving spouse when the child reaches the age of majority. Section 8.9. Forfeitures. If a distribution is made from the Plan and Trust to any Participant, pursuant to Section 8.3 or pursuant to any other provision of this Plan and Trust, at a time when the nonforfeitable percentage of his Accrued Benefit in his Company Contribution Account is less than 100% and prior to the time that he incurs a Period of Severance exceeding 60 months, the Company shall comply with the requirements of either paragraph (a) or paragraph (b) of this Section 8.9, or a combination thereof, pursuant to uniform rules so that all Participants are treated similarly under similar circumstances. (a) Cash Out: The portion of such Participant's Accrued Benefit which has not yet become nonforfeitable may be forfeited in the Plan Year in which the distribution occurs; provided, however, that if the Participant resumes employment covered under this Plan on or before the date he incurs a Period of Severance exceeding 60 months following the date of distribution, his Accrued Benefit shall be restored. Notwithstanding any other provision of this Plan, the amounts to be so restored may come from other forfeitures, Company contributions, or Trust earnings. For purposes of this Section 8.9, if the value of the nonforfeitable portion of a Participant's Accrued Benefit is $0.00, he shall be deemed to have received a distribution of such Accrued Benefit upon termination of his employment. If the amount distributed to the Participant is less than the entire nonforfeitable portion of his Accrued Benefit in his Company Contribution Account, the part of such Accrued Benefit which is not nonforfeitable that may be forfeited in the Plan Year of distribution shall be the total portion of such Accrued Benefit which is not nonforfeitable 29 multiplied by a fraction, the numerator of which is the amount of the distribution and the denominator of which is the total nonforfeitable portion of such Accrued Benefit. (b) Special Account: If at the end of the Plan Year in which the distribution occurs the entire portion of his Accrued Benefit which is not nonforfeitable has not been forfeited in accordance with the provisions of paragraph (a) of this Section 8.9, then, thereafter, at any relevant time, the nonforfeitable amount of such Participant's Accrued Benefit in his Company Contribution Account shall be not less than an amount ("X") determined by the formula X = P(AB+D) - D where: P is the nonforfeitable percentage at the relevant time; AB is the Accrued Benefit in his Company Contribution Account at the relevant time; D is the amount of the distribution; and the relevant time is when he incurs a Period of Severance exceeding 60 months. At the end of the Plan Year when any terminated Participant incurs a Period of Severance exceeding 60 months, that portion, if any, of his Accrued Benefit to which he has not acquired a nonforfeitable interest and which has not already been forfeited pursuant to paragraph (a) of this Section 8.9 shall be forfeited. Any amount so forfeited pursuant to the foregoing provisions of this Section 8.9 or pursuant to any other provisions of this Plan and Trust shall be applied to reduce the contribution of the Company which originally contributed the amount so forfeited for the Plan Year in which the forfeiture occurs and for each succeeding Plan Year until exhausted; and that portion, if any, of the Participant's Accrued Benefit to which he had acquired a nonforfeitable interest, if not already distributed, shall be distributed to him as provided in Section 8.3. If more than 1 Company has contributed amounts which are forfeited by a Participant, such amounts shall be applied to reduce the contributions of such Companies in proportion to the amount of contributions made by each such Company and allocated to such Participant. Section 8.10. Restrictions on Distribution of Pre-tax Contributions. The portion of a Participant's Accrued Benefit allocated to his Pre-tax Contribution Account shall not be distributed to the Participant or his Beneficiary prior to his termination of employment, death or disability, except under the following circumstances: (a) Termination of the Plan without the establishment by the Employer of another Defined Contribution Plan that is a "successor plan" as defined in Section 1.401(k)-1(d)(3) of the Regulations; (b) the disposition by the Employer to an unrelated corporation of substantially all of the assets (within the meaning of Section 409(d)(2) of the Code) used in a trade or business of such Employer if the Employer continues to maintain this Plan after the disposition, but only with respect to former Employees who continue employment with the unrelated corporation acquiring such assets; (c) the disposition by the Employer to an unrelated entity of such Employer's interest in a subsidiary (within the meaning of Section 409(d)(3) of the Code) if such Employer continues to maintain this Plan, but only with respect to former Employees who continue employment with such subsidiary; (d) the Participant's attainment of age 59 1/2; (e) the hardship of the Participant as described in Section 8.11. Distributions that may be made pursuant to 1 or more of the foregoing distributable events (other than that described in paragraph (a) above) shall be subject to the consent requirements of Section 8.4. Section 8.11. Distribution on Account of Financial Hardship. In the event of financial hardship (as defined below), a Participant may file a written request with the Company for distribution 30 of a portion of his Accrued Benefit in his Pre-tax Contribution Account. If the Company determines that distribution can be made consistent with the requirements of this Section 8.11 and all applicable laws, the Company shall direct the Trustee to and the Trustee shall, upon the written direction of the Company, distribute to the Participant such amounts, in such manner, and at such times as the Company shall direct, and the Accrued Benefit of such Participant shall be reduced by the amount or amounts so distributed. Hardship distributions shall be subject to the following requirements: (a) Financial hardship shall mean an immediate and heavy financial need of the Participant where such Participant lacks other available resources and the distribution is necessary to satisfy the financial need. (b) The following financial needs shall be considered immediate and heavy: (i) Deductible medical expenses (within the meaning of Section 213(d) of the Code) of the Participant, the Participant's spouse, children or dependents; (ii) the purchase (excluding mortgage payments) of a principal residence for the Participant; (iii) payment of tuition and related fees for up to the next 12 months of post-secondary education for the Participant, the Participant's spouse, children or dependents; (iv) the need to prevent eviction of the Participant from, or a foreclosure on the mortgage of, the Participant's principal residence; or (v) such other immediate and heavy financial needs as the Commissioner of the Internal Revenue Service may specify through the publication of revenue rulings or other notices of general applicability. (c) A distribution shall be considered to be necces- sary to satisfy an immediate and heavy financial need of the Participant if: (i) The Participant has first obtained all distributions, other than hardship distributions, and all nontaxable loans available to him under all qualified plans maintained by the Employer; (ii) all contributions made on behalf of the Participant pursuant to 1 or more salary reduction agreements and all nondeductible Employee contribu- tions to all qualified plans maintained by the Employer are suspended for 12 months after the Participant's receipt of the hardship distribution; (iii) the distribution is not in excess of the amount of the immediate and heavy financial need (plus any taxes payable on account of such distribution); and (iv) the Participant does not make any further contributions pursuant to a salary reduction agree- ment to this or any other qualified plan maintained by the Employer for the Participant's taxable year immediately following the year in which the hardship distribution occurs in excess of the 31 applicable limit under Section 402(g) of the Code for such taxable year less the amount contributed on behalf of such Participant pursuant to 1 or more salary reduction agreements for the taxable year in which the hardship distribution occurred. (d) Earnings accrued on a Participant's Pre-tax Contribution Account shall not be distributed pursuant to this Section 8.11. Section 8.12. Withdrawal or Application of After-tax Contributions. Subject to the provisions of this Section 8.12, a Participant may withdraw his Accrued Benefit derived from his after-tax contributions at any time in accordance with uniform rules established by the Company from time to time. For the 1998 Plan Year, any withdrawal from his Accrued Benefit derived from the Participant's after-tax contributions shall be deemed to be made first from contributions for such Plan Year and must be of the entire amount of such contributions. Any additional withdrawals or withdrawals made in subsequent years must be of at least the lesser of $500 or 100% of the total Accrued Benefit derived from the Participant's after-tax contributions for prior Plan Years. For tax accounting purposes, withdrawals shall be charged first against after-tax contributions made prior to 1987, until exhausted, then against the Accrued Benefit derived from after-tax contributions made after 1986, until exhausted, and finally against earnings, if any, on contributions made prior to 1987. A Participant may also direct that all or any part of his Accrued Benefit derived from his own after-tax contributions may be withdrawn and applied against any withholding required because of a distribution to such Participant under Section 8.14. Any such direction shall be made at such time and in accordance with such rules as the Company shall establish. Except as specifically otherwise provided in the preceding two sentences, any such application shall be deemed a withdrawal and all provisions of this Plan and Trust relating to the withdrawal of a Participant's Accrued Benefit derived from his own after-tax contributions shall be applicable to such application. Section 8.13. Form of Distribution. Distributions under this Plan and Trust of the portion of a Participant's Accrued Benefit consisting of Qualifying Employer Securities contributed by the Company shall generally be made in whole shares of Qualifying Employer Securities and cash in lieu of any fractional shares. The Participant may, however, elect to have the Trustee sell the Qualifying Employer Securities allocated to his account on the open market and distribute the proceeds to the Participant in cash. A cash distribution may be reduced by brokerage fees incurred by the Trustee in making such sale. Distribution of the remaining portion of a Participant's Accrued Benefit may be made in cash and/or any other property. Section 8.14. Distributions During Employment. Notwithstanding any other provision of this Plan and Trust, distributions may be made to Plan Participants who are active Employees in accordance with the following terms: (a) From and after the 5th anniversary of the commencement of his participation in the Plan, each Participant shall have the right to elect at any time to have a portion or all of his nonforfeitable Accrued Benefit in his Company Contribution Account distributed to him. However: (i) In no event shall the amount distributed be less than the lesser of $500 or 100% of the total nonforfeitable portion of the Participant's Accrued Benefit in his Company Contribution Account; and (ii) if the Participant has not been a Participant for at least 5 full Plan Years, in no event shall the amount distributed exceed the portion of his Accrued Benefit in his Company Contribution Account which has been in the Plan and Trust for at least 2 years. 32 (b) If: (i) An Employee who is eligible to participate in the Plan has not contributed to the Plan for 2 years and has no balance in his Pre-Tax Contribution Account and his After-tax Contribution Account; (ii) such Employee has been a Participant for at least 5 full Plan Years or his Accrued Benefit derived from Company contributions has been in the Plan for at least 2 years; and (iii) his Accrued Benefit derived from Company contributions is fully nonforfeitable and does not exceed and has never exceeded $5,000, such Employee's Accrued Benefit' may be distributed to him in a lump sum as soon as feasible after fulfillment of the foregoing conditions. (c) A Participant who continues to be an Employee of the Employer after he has attained age 59 1/2 may elect in writing to commence distribution of any part or all of his Accrued Benefit any time after he attains age 59 and one- half. ARTICLE IX SPENDTHRIFT TRUST AND QUALIFIED DOMESTIC RELATIONS ORDERS Section 9.1. Prohibition Against Alienation. Each and every distribution, transfer or payment of any of the Trust funds, or property into which the same may be converted, either of principal or income, made by the Trustee shall be made only to the persons entitled thereto under the provisions of this Plan and Trust (or, in the case of any minor Beneficiary, to the legal guardian of such minor or the minor directly, as the Company may determine) and not to any assignee or transferee of any such person, and shall be free from anticipation or alienation, voluntary or involuntary. No money or other property, whether principal or income, payable or distributable under the provisions of this Trust, shall be pledged, assigned, transferred, sold or in any manner whatsoever anticipated, charged or encumbered by any Participant or by any of the Beneficiaries, heirs, executors or administrators of any Participant, nor shall the same be liable in any manner, while in the possession of the Trustee, for the debts, obligations or liabilities of any such person, voluntary or involuntary, or for any claim, legal, equitable or otherwise, against any such person, including claims for alimony or for the support of any spouse, and any attempted assignment, anticipation or other disposition of any such interest shall be not merely voidable, but absolutely null and void. The foregoing provisions of this Section 9.1 shall apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order except that such provisions shall not apply to a domestic relations order that is determined to be a Qualified Domestic Relations Order as described in Section 9.2. Section 9.2. Compliance with Qualified Domestic Relations Orders. Notwithstanding the provisions of Section 9.1, the Company shall direct the Trustee to comply with a domestic relations court order calling for the distribution of all or a portion of a Participant's nonforfeitable Accrued Benefit to any current or former spouse, child or other dependent of the Participant (the "Alternate Payee") if such order is determined to be a Qualified Domestic Relations Order within the meaning of Section 414(p) of the Code. A domestic relations order shall be determined to be a Qualified Domestic Relations Order if each of the following conditions is met: (a) The order specifies the name and last known mailing address of the Participant and the name and mailing address of each Alternate Payee covered by the order. 33 (b) The order specifies the amount or percentage of the Participant's nonforfeitable Accrued Benefit to be paid by the Plan to each such Alternate Payee, or the manner in which such amount is to be determined. (c) The order specifies the number of payments or period to which such order applies. (d) The order specifies that it applies to the Plan. (e) The order does not require payment of any type or form of benefit, or any option, not otherwise provided under the Plan. (f) The order does not require the Plan to provide increased contributions. (g) The order does not require the payment of benefits under the Plan to an Alternate Payee which are required to be paid to another Alternate Payee under another order previously determined to be a Qualified Domestic Relations Order. For purposes of this Section 9.2, a domestic relations order shall mean any judgment, decree, or order, including approval of a property settlement, which relates to the provision of child support, alimony payments, or marital property rights to a spouse, child, or other dependent of a Participant and which is made pursuant to state domestic relations law (including community property law). Notwithstanding the restriction in paragraph (e) above, even if a Participant continues to be an Employee of the Employer, a Qualified Domestic Relations Order may require payments to an Alternate Payee to commence on the earlier of: (a) The date on which the Participant is entitled to a distribution under the Plan; or (b) the later of (i) the date the Participant attains age 50 or (ii) the earliest date on which the Participant could commence benefits under the Plan if he separated from service with the Employer, and the amount of such payments to the Alternate Payee shall be calculated as if the Participant had retired on the date on which such payments commence under the Qualified Domestic Relations Order. A domestic relations order may require payment of benefits to an Alternate Payee in any form in which benefits may be paid to the Participant under the Plan. In the case of a domestic relations order entered prior to 1985, the Company shall treat such order as a Qualified Domestic Relations Order if the Plan is paying benefits pursuant to such order on such date, and may treat such order as a Qualified Domestic Relations Order even if it does not meet the requirements of Section 414(p) of the Code. Section 9.3. Procedure to Determine Status and Notice. When the Company receives a domestic relations order which purports to be a Qualified Domestic Relations Order, the Company shall promptly notify the Participant and any Alternate Payee of the receipt of such order and of the procedures for determining the qualified status of domestic relations orders. Upon the receipt of the domestic relations order, the Company shall have at least 60 days, or such other reasonable time period as may be prescribed by Regulations, within which to determine whether the court order is a Qualified Domestic Relations Order. While the status of the order is being reviewed by the Company (or by a court of competent jurisdiction) to determine whether it is qualified, the Company shall direct the Trustee to separately account for the amounts which would be payable to an Alternate Payee during such period if the order was a Qualified Domestic Relations Order. If within the 18-month period beginning with the date on which the first payment would be required to be made under the domestic relations order it is determined by the Company to be a Qualified Domestic Relations Order, the Company shall direct the Trustee to pay any amount separately accounted for, plus interest, to the Alternate Payee. If within the 18-month period it is determined that the domestic relations order is not qualified or if the issue is not resolved, the Company shall direct the Trustee to pay any amount separately accounted for, plus interest, to the person or persons who would have been entitled to such 34 amount had there been no order. Any determination that an order is a Qualified Domestic Relations Order which is made after the close of the 18-month period shall apply prospectively only. When the Company determines whether the domestic relations order is qualified, it shall notify the Participant and each Alternate Payee of its determination. Section 9.4. Distribution Pursuant to QDRO. Notwithstanding any other provision of this Plan and Trust, if some or all of a Participant's Accrued Benefit is required by the terms of a Qualified Domestic Relations Order to be distributed to an Alternate Payee, the Alternate Payee's portion of the benefit shall be distributed in accordance with the terms of the Qualified Domestic Relations Order any time after entry of such order and the election of the Alternate Payee, even if the Participant is still an Employee of the Employer and the Participant's benefit would not otherwise be distributable under the terms of this Plan. Any such election by the Alternate Payee shall be subject to the notice and consent requirements of Section 8.4. ARTICLE X ADMINISTRATION Section 10.1. Authority. Except to the extent the Company otherwise designates pursuant to the provisions of Section 10.5, the Company shall be the Plan administrator and the named fiduciary as defined in Section 402(a)(1) of ERISA and shall have authority to control and manage the operation and administration of the Plan. Section 10.2. Rights, Powers and Duties. The Company shall have such discretionary authority as may be necessary to discharge its responsibilities under the Plan, including, without limitation, the following powers, rights and duties: (a) To interpret and construe the provisions of the Plan; (b) to adopt such rules of procedure and regulations as are consistent with the provisions of the Plan and as it deems necessary and proper; (c) to establish and carry out a funding policy and method consistent with the purposes of the Plan and the requirements of applicable law, as may be appropriate from time to time; (d) to select the investment funds among which Participants may direct the investment of their accounts; (e) to direct the Trustee with respect to the voting, purchase, retention and sale of Qualifying Employer Securities as described in paragraph (l) of Section 11.1; (f) to determine all questions relating to the eligibility, benefits and other Plan rights of Employees, Participants and Beneficiaries; (g) to maintain and keep adequate records concerning the Plan and concerning its proceedings and acts in such form and detail as the Company may decide; 35 (h) to employ agents, attorneys, actuaries, accountants or other persons (who may also be employed by or represent the Company or the Trustee) for such purposes as the Company considers necessary or desirable; (i) to engage the services of a Contract Administrator in accordance with the provisions of Section 10.8; and (j) to designate any officer or other Employee of the Company or any other individual to carry out any of the Company's duties, including all or any part of its authority to manage and control the operation and administration of the Plan. The Company shall furnish the Trustee with the names and specimen signatures of any such officer, Employee or individual and shall promptly notify the Trustee of the termination of authority of any such person. A written statement signed by any such person may be relied upon by the Trustee or any other person. Section 10.3. Application of Rules. In operating and administering the Plan, the Company shall apply all rules of procedure and regulations adopted by the Company in a uniform and nondiscriminatory manner so that all Employees, Participants and Beneficiaries are treated similarly under similar circumstances. Section 10.4. Delegation to Committee. The Company shall have the right to designate a committee consisting of at least 2 persons to carry out any and/or all of its responsibilities of control and management of the operation and administration of the Plan. If, but only if, the Company designates such a committee, the remaining provisions of this Section 10.4 shall be applicable. A member of the committee may resign at any time by mailing to the Company a written notice of resignation addressed to the Company or by delivering written notice of such resignation to the Company. The Company may remove any member of the committee by written notice mailed or delivered to such member. Any such resignation or removal shall occur on the date specified in the notice, but not less than 30 nor more than 60 days following the date of delivery or mailing of such notice, provided, however, that such notice period may be waived by the party receiving the notice. In the event of the death, removal or resignation of a member of the committee, the Company may appoint a successor unless such death, resignation or removal results in the committee having less than 2 members, in which event the Company shall appoint such a successor. The committee shall act by a majority of its members either at a meeting or by a written consent without a meeting. The committee may appoint a Secretary and Chairman. The Company shall furnish the Trustee with the names and specimen signatures of the members of the committee and shall promptly notify the Trustee of the termination of office of any member of the committee and the appointment of a successor. Any written statement or direction signed by a majority of the members of the committee may be relied upon by the Trustee or any other person. Section 10.5. Plan Administrator and Named Fiduciary. In addition to the Company's right to delegate under paragraph (j) of Section 10.2 and Section 10.4, the Company may also designate any individual described in paragraph (j) of Section 10.2 or the committee described in Section 10.4 as the Plan administrator or named fiduciary. Section 10.6. Indemnification. The Company shall indemnify the committee described in Section 10.4 (including each member thereof), and any and all other officers, Employees or directors of the Company to whom it or the committee has delegated any fiduciary duties, against any and all claims, losses, damages, expenses, and liabilities arising from their responsibilities in connection with the Plan, unless the same is determined to be due to gross negligence or willful misconduct. 36 Section 10.7. Expenses. Eligible expenses incurred by the Company or the Trustee with respect to the employment of agents, attorneys, actuaries, administrators or other persons pursuant to the terms and provisions hereof, including expenses incurred with respect to maintaining the Plan and Trust's qualified and exempt status, respectively, shall be paid from the Trust fund unless paid by the Company. Section 10.8. Contract Administrator. Pursuant to the terms of a written agreement the Company may engage the services of an independent company which provides professional plan administration services (a "Contract Administrator") to perform, without discretionary authority or control, certain administrative functions required for proper administration of the Plan. Such administrative duties shall be performed within the framework of policies, interpretations, rules, practices and procedures made by the Company or other Plan fiduciary and in accordance with the written agreement between the parties. Any action made or taken by the Contract Administrator may be appealed by an affected Participant to the Company in accordance with the claims review procedures provided in Section 10.10. Decisions which require interpretation of Plan provisions shall be deferred to the Company or other Plan fiduciary for resolution. The Contract Administrator shall not be considered a fiduciary of the Plan with respect to services it provides as Contract Administrator. Section 10.9. Claims Procedure. Claims for benefits shall be filed with the Company on forms supplied by it. If a claim is denied, in whole or in part, the claimant shall be furnished with notice of the denial within 90 days of the date that the initial claim was filed. However, if special circumstances require an extension, written notice of an extension (which may not exceed 90 days) shall be given to the claimant prior to the end of the initial 90-day period. The written denial of any claim shall contain the specific reasons for the denial, a reference to the pertinent Plan provisions on which the denial was based, a description of any additional materials required for the claimant to perfect the claim (with an explanation of why such material is necessary), and an explanation of the claims review procedures of Section 10.10. Section 10.10. Claims Review. Any Participant or Beneficiary who has had a claim denied, in whole or in part, may appeal, in writing, to the Company. The appeal must be filed with the Company not later than 60 days after the claimant has received notice of the denial of his claim. The Company shall furnish the claimant a written decision regarding the appeal within 60 days from the date the appeal was filed. If special circumstances require additional time for processing the appeal, a decision on appeal shall be made as soon as possible, but in no event later than 120 days following the date on which the appeal was filed. ARTICLE XI THE TRUSTEE Section 11.1. General Powers. Except to the extent that the Trustee is designated as a Directed Trustee in accordance with the provisions of Article XX, and subject to other provisions of this Plan and Trust, including the provisions in paragraph (e) of Section 10.2 giving the Company the right of direction with respect to certain matters involving Qualifying Employer Securities, the provisions of Section 12.4 relating to the rights of Participants to direct the investment of their accounts, and the provisions of Section 12.2 relating to the appointment of an investment manager, the Trustee shall have exclusive authority and discretion to manage and control the assets of the Plan, and shall have the following powers, rights and duties in addition to those provided elsewhere herein or by law: 37 (a) To have the custody and care of all securities, funds and other property of the Trust fund, and to receive, hold and administer all funds and property deposited with the Trustee from time to time by the Company, and the income therefrom, and to hold uninvested or to invest and reinvest said amounts from time to time in property of any kind whatsoever, real or personal, domestic or foreign, including, without limitation, stocks, common and preferred, shares or participations in any common fund, trust or participation certificates, interests in investment companies whether open-end or closed-end, options, leaseholds, fee titles, bonds, notes, debentures, mortgages, deeds of trust and real estate. (b) To sell, exchange, convey, transfer or otherwise dispose of any property held by the Trustee, by private contract or at public auction, for cash or on credit and no person dealing with the Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency or propriety of any such sale or other disposition. (c) To vote upon any stocks, bonds or other securities, to give general or special proxies or limited powers of attorney with or without power of substitution; to exercise any conversion privileges, subscription rights or other options and to make any payments incidental thereto; to oppose, to consent to or otherwise to participate in corporate reorganizations or other changes affecting corporate securities and to delegate discretionary powers and to pay any assessments or charges in connection therewith; to deposit the securities of any issuers in any voting trust or with any protective or like committee or trustee; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities or other property held by the Trust funds. (d) To settle, compromise or arbitrate any claim, debt or obligation due to or from the Trustee, to pay, satisfy and collect judgments, to commence, defend, settle or otherwise dispose of actions or suits at law or in equity and to represent the Trust in all suits or legal proceedings in any court of law or before any other body or tribunal; provided, however, that the Trustee shall not be required to institute or continue litigation unless the Trustee is in possession of adequate funds for that purpose or indemnified to its satisfaction by the Company against counsel fees and all other expenses and liabilities to which the Trustee may be subjected by any such action. (e) To make, execute, acknowledge and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted. (f) To make, execute, incur, enter into and perform contracts, agreements, obligations and evidences of indebtedness of the Trust; to execute, deliver or endorse negotiable or nonnegotiable obligations of or belonging to the Trust; to borrow money upon such terms and conditions as the Trustee shall deem advisable and to pledge any part of the Trust as security therefor. (g) To cause any property of the Trust to be issued, held or registered in the name of the Trustee without qualification or description, or in the Trustee's name as Trustee hereunder, or in the name of a nominee or nominees without qualification or description; and to hold such property unregistered or in a condition which will enable the transfer of title by delivery. 38 (h) To collect all the income and profits of the Trust, and to pay all taxes, assessments and other legal charges upon all property belonging to the Trust, and all expenses growing out of the preservation and administration of the Trust; and to determine the method of accounting. (i) To select depositories and/or custodians, which may include the Trustee or any bank or trust company affiliated with the Trustee, for the deposit, care, custody and safekeeping of any and all funds, securities and/or property of the Trust. (j) To keep such books and records, and prepare and render such reports as are herein provided. (k) To invest and reinvest all or any part of the Trust through the medium of any common, collective or commingled trust fund maintained by the Trustee, as the same may have heretofore been or may hereafter be established or amended, for the collective investment of funds held by the Trustee in a fiduciary capacity for plans qualified under the provisions of Section 401(a) and exempt under the provisions of Section 501(a) of the Code. During such period of time as an investment through any such medium shall exist, the Declaration of Trust of such fund (the "Declaration of Trust") shall constitute a part of this Plan and Trust. Notwithstanding any other provision of the Plan and Trust, the Trustee may commingle the assets from the Trust with the money of trusts created by others, by causing such assets to be invested as a part of any one or more of the collective funds created by the Declaration of Trust and assets of this Trust so added to any of the collective funds at any time shall be subject to all of the provisions of the Declaration of Trust as it may be amended from time to time. (l) As and to the extent so directed by the Company, to invest any portion or all of the Trust fund in Qualifying Employer Securities, and, as and when directed by the Company, to acquire, sell, or vote any such securities upon such terms and conditions and in such manner as the Company shall direct; provided, however, that if such securities are purchased from or sold to the Company or any other party in interest (as defined in Section 3(14) of ERISA), any such purchase or sale shall be for adequate consideration and no commission shall be paid by the Trust fund with respect thereto. The Trustee shall have no liability for the voting, purchase, retention or sale of Qualifying Employer Securities made pursuant to the Company's direction or for any action taken or not taken by the Trustee with respect to Qualifying Employer Securities if the Company fails to direct the Trustee as required by paragraph (e) of Section 10.2. (m) Generally, to do and perform all acts and things which the Trustee in the Trustee's absolute discretion may deem necessary or appropriate for the proper and advantageous preservation and administration of the Trust in the same manner and to the same extent as an individual might or could do with respect to his own property. Section 11.2. Books of Account. The Trustee shall keep books of account which shall show all receipts and expenditures and shall be a complete record of the operation of the Trust; and the Company may at any time demand of the Trustee an accounting with respect to any and all accounts upon agreeing to pay the necessary expenses of same. 39 Section 11.3. Judicial Settlement. The Trustee shall be entitled at any time to have ajudicial settlement of the Trustee's account. The Trustee may from time to time file with the Company a statement or accounting of the Trustee's acts hereunder and the Company may enter into an agreement approving and allowing the same, and any such agreement shall be final, binding and conclusive upon all persons and parties hereto or claiming any interest hereunder and shall be a full discharge and acquittance of the Trustee with respect to the matters set forth in such statement or accounting. Section 11.4. Limited Purpose. The Trustee is a party to this agreement solely for the purposes set forth herein and to perform the acts set forth herein, and no obligation or duty shall be expected or required of the Trustee except as expressly stated in this agreement. Section 11.5. Dispute over Payment. In the event that any dispute shall arise as to the persons as to whom payment and the delivery of any funds or property shall be made by the Trustee, the Trustee may retain such payment and/or postpone such delivery until adjudication of such dispute shall have been made in a court of competent jurisdiction and/or the Trustee shall have been indemnified against loss to the Trustee's satisfaction. Section 11.6. Indemnification. The Company shall indemnify, defend and otherwise hold harmless the Trustee, to the extent allowed by law, for any loss, claim, liability, penalty, surcharge or related expense arising out of or in connection with any act or omission of the Company or other fiduciary with respect to the Plan and Trust, including, without limitation, any direction to the Trustee by the Company or other Plan fiduciary or Participant which the Trustee is required to follow under the terms hereof. The Trustee shall not be entitled to indemnity, however, in any case in which the Trustee itself is guilty of negligence or willful misconduct or breach of the Trustee's fiduciary duty. The foregoing shall not be construed to relieve the Trustee from the performance of any duty it may have hereunder to any Participants and Beneficiaries. Section 11.7. Fees and Expenses. The Trustee's fees for administering this Trust shall be determined in accordance with its published schedule of charges in effect at the time its services are rendered, unless otherwise agreed upon by the Company and the Trustee. If there is no such schedule, the Trustee's fees shall be such as may be mutually agreed upon by the Company and the Trustee; provided, however, that in the event the Trustee is an Employee of the Company, the Trustee shall not receive a fee. The Trustee's fees and any and all necessary expenses incurred by the Trustee in administering this Trust shall be paid from the Trust fund unless paid by the Company. If the Trustee is a trust company or other financial institution, the Trustee may, with the consent of the Company, as part of the Trustee's compensation for services provided to the Plan and Trust, receive the earnings from any uninvested cash awaiting investment into or distributions from the Trust. The Trustee may hold such uninvested cash without incurring any liability for the payment of earnings on such uninvested cash. Section 11.8. Resignation or Removal of Trustee. Any Trustee may resign by mailing to the Company a written notice of resignation addressed to the Company or by delivering written notice of such resignation to the Company. The Company may remove any Trustee appointed by it by written notice of such removal mailed to such Trustee or by delivering written notice to such Trustee. Such resignation or removal shall take effect on the date specified in the letter of removal but not less than 30 nor more than 60 days following the date of mailing or delivery of such notice if it be not mailed, provided, however, that such notice period may be waived by the party receiving such notice. Upon such resignation or removal, any and all expenses incurred by the Trustee in connection with the settlement of such Trustee's accounts shall be paid from the Trust fund unless paid by the Company. 40 Section 11.9. Successor Trustee. In no event shall the death, resignation or removal of a Trustee terminate this Trust. The Company shall have the duty of forthwith appointing a successor Trustee in the event of the death, resignation or removal of all of the then acting Trustees or the sole then acting Trustee, which successor Trustee shall be any individual and/or bank and/or trust company it may desire. Every successor Trustee shall have all of the same full powers, rights, duties and obligations as are herein specified with respect to each original Trustee hereunder. ARTICLE XII INVESTMENTS Section 12.1. General. Except to the extent that the Trustee is designated as a Directed Trustee in accordance with the provisions of Article XX, and subject to the other provisions of this Article XII, the Trustee shall be authorized and empowered to invest and reinvest the principal and income of the Trust in such securities or in such property, real or personal, as the Trustee shall, in its discretion, deem appropriate. Section 12.2. Appointment of Investment Manager. The Company may appoint an investment manager or managers to manage any assets of the Plan, which may include the power to acquire and dispose of any of such assets. Any such investment manager must be registered as an investment adviser under the Investment Advisers Act of 1940, a bank as defined in that act, or an insurance company qualified to perform services relating to the management, acquisition and disposition of the Plan assets under the laws of more than one state, and must acknowledge in writing that he or it is a fiduciary with respect to the Plan. Section 12.3. Protection of Trustee. In the event that an investment manager is appointed pursuant to Section 12.2, the Trustee shall follow the direction of the investment manager regarding the investment and reinvestment of the assets of the Plan under the management of the investment manager, and the Trustee shall have no responsibility for the investment and reinvestment of such assets. The Trustee shall be under no duty or obligation to review any investments to be acquired, held or disposed of pursuant to such direction nor to make any recommendations with respect to the disposition or continued retention of any such investment. The Trustee shall have no liability or responsibility for acting or not acting pursuant to the direction of, or failing to act in the absence of any direction from, the investment manager. The Company shall indemnify the Trustee and hold it harmless from and against any claim or liability which may be asserted against the Trustee arising out of or in connection with any act or omission of the investment manager or which may be asserted against the Trustee by reason of its acting or not acting pursuant to any direction from the investment manager or failing to act in the absence of any such direction, in accordance with the provisions of Section 11.6. Section 12.4. Participant Direction of Investments. Each Participant shall have the right to direct the investment, reinvestment, exchange, or disposal of the amount standing to his credit in his After-tax Contribution Account, his Pre-tax Contribution Account and any rollover account established pursuant to Section 17.3 among such investment funds as may be available from time to time under uniform rules and procedures established by the Company. In the limited circumstances described in Section 12.5 and Section 12.6, a Participant shall also have the right to direct the investment of assets other than Qualifying Employer Securities held in his Company Contribution Account. The rules and procedures established by the Company shall prescribe the investment funds available and the time and manner in which any election may be made, modified and/or revoked by a Participant. The investment funds and the rules and procedures for election may be modified from time to time by the Company. To the extent permitted under the procedures established by the Company, such elections may be 41 accomplished by any electronic or telephonic means not otherwise prohibited by law. The Trustee shall act in accordance with the Participant's directions to the extent such directions are consistent with then applicable rules and procedures and applicable law, and shall have no duty to question any direction or to review any securities or other property or to make any suggestions in connection therewith. To the extent permitted by law, the Trustee shall have no liability for any loss of any kind which may result by reason of its actions taken in accordance with the directions of the Participant and in accordance with then applicable rules and procedures. If and to the extent a Participant does not direct the Trustee with respect to investment of his accounts in accordance with applicable rules and procedures, such accounts shall be invested in such fund or funds selected by the Company from time to time as the default investment fund for undirected assets. Notwithstanding any other provision of this Plan and Trust, in no event shall any portion of the Participant's own contributions or his Accrued Benefit resulting from his own contributions be invested in Qualifying Employer Securities. Section 12.5. Voluntary Diversification of Company Contribution Account. A Participant who has satisfied the age and service requirements for early retirement as described in Section 7.3 shall have the right to begin diversifying the assets in his Company Contribution Account into assets other than Qualifying Employer Securities. Once a Participant meets such requirements, and once each calendar year thereafter, the Participant may elect to have up to 25% of the Qualifying Employer Securities then allocated to his Company Contribution Account sold by the Trustee and invested as directed by the Participant in accordance with the provisions of Section 12.4. The Participant cannot thereafter reinvest the proceeds within the Trust in Qualifying Employer Securities. Section 12.6. Proceeds from Sale of Qualifying Employer Securities in Tender Offer. From time to time the Company has offered and may in the future offer to buy back a specified number of its issued and outstanding shares by offering all of its shareholders an opportunity to tender their shares for purchase by the Company in a tender offer (a "Tender Offer"). If and to the extent that the Company accepts the tender of Qualifying Employer Securities held by the Trust, all proceeds from the sale of Qualifying Employer Securities allocated to a Participant's Company Contribution Account shall be invested by the Trustee in accordance with the investment elections then in effect for such Participant with respect to dividends allocated to his Company Contribution Account. Thereafter, the Participant shall have the right to redirect the investment of the portion of his Company Contribution Account that is no longer invested in Qualifying Employer Securities among the investment funds available from time to time in accordance with the provisions of Section 12.4. Section 12.7. Loans to Participants. The Trustee shall, if so requested by a Participant and directed by the Company, make a loan from the Trust to the Participant. All such loans shall be subject to the following requirements: (a) In granting or denying requests for loans, the Company shall act in a uniform and nondiscriminatory manner so that loans are available to all Participants on a reasonably equivalent basis. (b) Loans shall not be available to Participants who are Highly Compensated Employees in amounts greater than the amounts available to other Participants. (c) Each loan, when added to the outstanding balance of all other loans to the Participant from the Trust or from any other qualified plan maintained by the Employer, shall not exceed the lesser of: 42 (i) $50,000, reduced by the excess (if any) of the highest outstanding balance of such loans to such Participant during the 1-year period ending on the day before the date on which such loan is to be made, over the outstanding balance of such loans to such Participant on the date on which such loan is to be made; or (ii) 50% of the nonforfeitable Accrued Benefit of such Participant determined as of the most recent Valuation Date. (d) Each loan shall be evidenced by a promissory note signed by the Participant. (e) Each loan shall be adequately secured, and, for this purpose, notwithstanding the provisions of Section 9.1, the Participant shall grant the Trustee a security interest in his Accrued Benefit or in such other collateral, or both, as the Company shall deem necessary in order to secure repayment of the loan. If the loan is secured by the Participant's Accrued Benefit, the Participant shall consent, in writing, within the 90-day period before the loan is made, to the making of the loan and to any reduction of his Accrued Benefit which may thereafter be required in order to satisfy the Participant's obligation to the Plan. Unless the Participant directs otherwise, the loan shall be deemed to be secured by that portion of his Accrued Benefit in his Pre-tax Contribution Account only if his Accrued Benefit in all of his other accounts is not sufficient to adequately secure the loan. (f) Each loan shall bear a reasonable rate of interest. (g) Each loan shall be repaid by payroll deduction while the borrower is an Employee and shall be immediately due and payable in full in the event the borrower terminates employment with the Company. Each loan shall be repayable at such time and on such terms and conditions as shall be specified by the Company, but all loans shall require a substantially level amortization, and payment shall be made not less frequently than quarterly. The repayment period shall not extend beyond the earlier of 5 years or the Participant's Normal Retirement Date; provided, however, that the repayment period may extend to the earlier of 30 years or the Participant's Normal Retirement Date if the Participant certifies that the proceeds of the loan will be used to acquire a dwelling unit which within a reasonable time will be used as the principal residence of the Participant. (h) Neither the Company nor the Trustee shall be accountable for any loss sustained by reason of any action taken pursuant to this Section 12.7. Furthermore, all fiduciary responsibility with respect to the making of the loan shall be borne by the Participant. (i) Unless otherwise paid by the Participant, all costs, fees or expenses incurred in connection with a loan shall be paid from and against the Participant's accounts, and all repayments of principal and interest shall be credited to the Participant's accounts. (j) If the Participant dies prior to repaying the loan in full, the Company may (but need not) direct the Trustee to assign the promissory note 43 signed by the Participant and all collateral therefor to the Participant's Beneficiary, and the Trustee shall then be discharged from any further duties or responsibilities concerning the loan. (k) The amount and terms of any loan shall be further limited if and to the extent necessary (based upon facts believed to be true by the Company) to prevent a loan from being treated as a taxable distribution to the Participant under Section 72(p) of the Code. (l) In the event of default, the Participant's Accrued Benefit shall not be used to satisfy said loan, by foreclosure or otherwise, until the occurrence of any event which would permit distribution of such Accrued Benefit in accordance with the provisions of Article VIII. (m) The summary plan description or a separate loan policy provided to Participants shall include the following additional information with respect to Participant loans, and such information shall be incorporated into the Plan by this reference: (i) The identity of the person or position authorized to administer the Participant loan program; (ii) the procedure for applying for loans from the Plan; (iii) the basis on which loans to Participants will be approved or denied; (iv) limitations (if any) on the types and amounts of loans offered; (v) the procedure for determining a reasonable rate of interest; (vi) the types of collateral which may secure a loan to a Participant; and (vii) the events constituting default and the steps that will be taken to preserve Plan assets in the event of such default. ARTICLE XIII GENERAL PROVISIONS REGARDING FIDUCIARIES Section 13.1. Discharge of Duties. Any fiduciary may serve in more than one fiduciary capacity with respect to the Plan. Each fiduciary shall discharge such fiduciary's duties with respect to the Plan solely in the interest of the Participants and Beneficiaries, and, as applicable to such duties: (a) For the exclusive purpose of providing benefits to Participants and their Beneficiaries and defraying reasonable expenses of administering the Plan; 44 (b) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; (c) except to the extent inconsistent with the Plan's purpose of having all Company contributions made in Qualifying Employer Securities which are to be retained unless otherwise directed by the Company, by diversifying the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and (d) in accordance with the documents and instruments governing the Plan insofar as such documents and instruments are consistent with the provisions of ERISA. Section 13.2. Bonding. All persons handling funds of the Trust fund shall be bonded in such form and amount as required by ERISA. The cost of such bonding shall be paid by the Company, or if it fails to do so, by the Trust fund. Section 13.3. Insurance. The Plan and Trust may obtain and maintain insurance policies for itself and/or any fiduciary to cover liability or losses occurring by reason of the act or omissions of a fiduciary, provided such insurance shall permit recourse by the insurer against the fiduciary in the case of a breach of a fiduciary obligation by such fiduciary. The cost of such insurance shall be paid by the Trust fund unless paid by the Company. In addition, the Company or any fiduciary may, at its or his own cost, purchase such insurance for such fiduciary's own account. Section 13.4. Nonliability. No fiduciary shall: (a) Have any liability for any act or omission of any other person or entity except to the extent otherwise required by ERISA; (b) be personally liable or answerable for any debts or liabilities of this Plan and Trust; or (c) be liable for any acts or omissions of any predecessor or successor. Section 13.5. ERISA Section 404(c) Plan. The Plan is intended to constitute a plan described in Section 404(c) of ERISA and Section 2550.404c-1 of the Department of Labor Regulations. To the extent permitted by law, all fiduciary responsibility with respect to the selection of investments for the portion of any Participant's accounts which are subject to investment direction shall be allocated to the Participant who directs the investment and neither the Trustee nor the Company shall be accountable for any losses which are the direct and necessary result of investment directions given by any Participant. 45 ARTICLE XIV AMENDMENT AND TERMINATION Section 14.1. Amendment. Subject to the provisions of Section 14.2, the Company shall have the right to amend this Plan and Trust at any time and from time to time and all parties hereto or claiming any interest hereunder shall be bound thereby; provided, however, that no amendment shall: (a) Permit any part of the assets of the Trust to be diverted to purposes other than for the exclusive benefit of Participants or their Beneficiaries; (b) permit any portion of such assets to revert to or become property of the Company except as provided in Section 4.6; (c) increase the duties or liabilities of the Trustee without its written consent; or (d) reduce any Participant's Accrued Benefit, by eliminating an optional form of distribution (except as permitted in the Regulations) or otherwise, other than to the extent permitted by Section 412(c)(8) of the Code. Any such amendment shall be adopted by resolution of the committee designated by the Company under Section 10.4, or by resolution of the Company's Board of Directors. Any such amendment shall apply prospectively unless the amendment specifically designates that it is to have retroactive application and the retroactive application is permissible under the provisions of ERISA and the Code. Section 14.2. Amendment to Vesting Schedule. In the event of any amendment to the provisions in Section 7.5 setting forth a Participant's nonforfeitable percentage of his Accrued Benefit derived from Company contributions, then, as of the date such amendment is adopted, the Plan, as amended, shall provide that, in the case of each Participant on the later of the date the amendment is adopted or the date the amendment is effective, the nonforfeitable percentage (determined as of such date) of such Participant's Accrued Benefit derived from Company contributions is not less than such percentage computed without regard to such amendment as of the later of the date such amendment is adopted or becomes effective. In addition, in the event of any such amendment, each affected Participant who has completed at least 3 Years of Service prior to the end of the election period (as hereinafter defined) may elect, during such election period, to have the nonforfeitable percentage of his Accrued Benefit derived from Company contributions determined without regard to such amendment; provided, however, that no election need be provided for any Participant whose nonforfeitable percentage under the Plan, as amended, at any time cannot be less than such percentage determined without regard to such amendment. The election period shall commence on the date that the amendment is adopted and shall end on the latest of the following dates: the date which is 60 days after the day the amendment is adopted; the date which is 60 days after the day the amendment becomes effective; or the date which is 60 days after the day the Participant is issued written notice of the amendment. For purposes of this Section 14.2, Years of Service shall be determined under the general definition of Section 2.4 without regard to the provisions of Section 2.5. Any such election made by a Participant shall be irrevocable. Section 14.3. Termination. Notwithstanding anything to the contrary herein contained, the Company reserves the right to terminate this Plan and Trust in its entirety, such termination to become effective upon receipt by the Trustee of a written instrument of termination signed on behalf of the 46 Company by its President or Vice President and attested by its Secretary or Assistant Secretary. Within a reasonable period of time after receipt of such instrument of termination, or within a reasonable period of time after actual termination without such a written instrument, the Trustee shall dispose of the Trust fund in the manner directed by the Company in accordance with Section 8.1. Notwithstanding anything to the contrary herein contained, in the event of such termination, partial termination or complete discontinuance of contributions by the Company to this Trust, each affected Employee shall thereupon acquire a nonforfeitable interest in his entire Accrued Benefit. ARTICLE XV MERGER, DISSOLUTION AND ADOPTION Section 15.1. Merger. In the event that a Company shall lose its existence by merger into or consolidation with any other entity or entities, the entity or entities into which it is merged, or the resulting entity or entities, may continue this Plan and Trust upon executing a proper supplemental agreement with the Trustee. In the case of any merger or consolidation with, or the transfer of assets and liabilities to, any other plan, provision shall be made so that each Participant and Beneficiary of the Plan on the date thereof would, if such other plan then terminated, receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately prior to the merger, consolidation or transfer if this Plan had been then terminated. Section 15.2. Loss of Existence. In the event that a Company is legally dissolved or legally declared bankrupt or insolvent, or in the event that any Company shall lose its existence by merger into or consolidation with another entity or entities and if, in this last event, the entity or entities into which it is merged or the resulting entity or entities shall not agree to continue this Plan and Trust by proper agreement with the Trustee, then, upon any of such events, this Plan and Trust shall automatically terminate with respect to such Company, and the Trustee shall dispose of the Accrued Benefit of each Participant who is an Employee or former Employee of such Company in the manner directed by the Company in the Company's sole discretion in accordance with Section 8.1. Section 15.3. Adoption by Affiliates. Any Affiliate may adopt this Plan and Trust and thereby become a party hereto if CPI Corp. approves. ARTICLE XVI MISCELLANEOUS PROVISIONS Section 16.1. Addresses. A Former Participant shall keep the Company informed as to his address. The Company, the Plan administrator and the Trustee shall not be required to do anything further than sending all papers, notices, payments or the like to the last address given them by the Former Participant unless they can be shown to have acted in bad faith, having had actual knowledge of the Former Participant's whereabouts. Section 16.2. Impossibility. If it becomes impossible for the Company or the Trustee to perform any act under this Plan, that act shall be performed which, in the judgment of the Company or the Trustee, as the case may be, will most nearly carry out the intent and purpose of this Plan. Any individual or entity in any way interested in this Plan and Trust shall be bound by any acts performed under such conditions. 47 Section 16.3. Necessary Acts. All parties to this agreement, or claiming any interest hereunder, agree to perform any and all acts and execute any and all documents and papers which are necessary or desirable for carrying out any provisions of this Plan and Trust. Section 16.4. Discharge of Trustee. The Trustee shall be fully discharged from all liability for any amount paid to a Participant, Beneficiary or anyone else in accordance with the provisions hereof, and the Trustee shall be under no obligation or duty to see to the application of any monies so paid. Section 16.5. Underscored References. The underscored references contained herein are included only for convenience, and they shall not be construed as a part of this Plan and Trust or in any respect affecting or modifying its provisions. Section 16.6. Number and Gender. The masculine and neuter, wherever used herein, shall refer to either the masculine, neuter or feminine; and, unless the context otherwise requires, the singular shall include the plural and the plural the singular. Section 16.7. Governing Law. This Plan shall generally be construed and administered in accordance with the laws of the State of Missouri to the extent that such laws are not preempted by the laws of the United States of America; provided however, that provisions relating to the Trust and administration of the Trust shall be construed and administered in accordance with the laws of the State of Minnesota to the extent that such laws are not preempted by the laws of the United States of America. Section 16.8. Binding Effect. This Plan and Trust shall be binding upon the heirs, executors, administrators, distributees, successors and assigns of all parties hereto, present and future. ARTICLE XVII ROLLOVERS AND TRANSFERS Section 17.1. Rollovers from Other Plans. An Employee otherwise eligible to participate in the Plan, regardless of whether he has satisfied any age and service requirement of Section 3.1, who has had his interest in a plan which meets the requirements of Section 401(a) of the Code distributed to him, or has had his interest in an individual retirement account described in Section 408(d)(3)(A)(ii) of the Code distributed to him, or who is entitled to an eligible rollover distribution as defined in Section 402(f)(2)(A) of the Code from another qualified plan, may, in accordance with procedures approved by the Company, roll over the distribution so received to the Trustee or have such distribution transferred to the Trustee as a direct rollover. Section 17.2. Transfers from Other Plans. An Employee otherwise eligible to participate in the Plan, regardless of whether he has satisfied any age and service requirement of Section 3.1, who is entitled to have his entire interest in a plan which meets the requirements of Section 401(a) of the Code distributed to him in a single sum may, in accordance with procedures approved by the Company, have such amount transferred directly from such plan to the Trustee; provided, however, that no such transfer from a Defined Benefit Plan, a Defined Contribution Plan subject to Section 412 of the Code, or a Defined Contribution Plan subject to Section 401(a)(11) and Section 417 of the Code with respect to that Participant, shall be permitted unless such transfer constitutes an "elective transfer" within the meaning of Section 1.411(d)(4)-3(b) of the Regulations. 48 Section 17.3. Separate Account. A separate account shall be created and maintained for an Employee for any amount transferred to the Trustee under Section 17.1 or Section 17.2. For an Employee who is otherwise eligible to participate in the Plan but who has not yet completed the requirements of Section 3.1, such account shall represent his sole interest in the Plan until he becomes an Active Participant. Such account shall be invested as directed by the Participant in accordance with the provisions of Section 12.4. The creation of any such account is for accounting purposes and shall not require a segregation of assets or funds to any such account. Section 17.4. Nonforfeitability. The entire amount in an account described in Section 17.3 shall be fully nonforfeitable at all times. Section 17.5. Distribution. The amount standing to the credit of a Participant or Employee in an account described in Section 17.3 shall be distributed in accordance with the provisions of Article VIII at the time distribution of his Accrued Benefit derived from Company contributions commences, or, if he is not entitled to receive any benefits derived from Company contributions at the time his employment with the Company terminates, in accordance with the provisions of Section 8.3. ARTICLE XVIII TOP-HEAVY PROVISIONS Section 18.1. Definitions. For purposes of this Article XVIII, the following words and phrases shall have the following meanings: (a) Accrued Benefit: As defined in paragraph (a) of Section 1.3, but, except to the extent provided in the Regulations, excluding the balance in any account described in Section 17.3. In determining the Accrued Benefit or the present value of the cumulative accrued benefit in one or more Defined Benefit Plans (as defined in paragraph (d) of Section 5.4) for any Employee, (i) such Accrued Benefit and present value shall be increased by the aggregate distributions made with respect to such Employee under this Plan (and under any other plan of the Employer with respect to the determination of a Top-heavy Group) during the 5-year period ending on the Determination Date, and (ii) such Accrued Benefit and present value of an Employee who is a Non-key Employee but who was a Key Employee in a prior year or who has performed no services for the Employer at any time during the 5-year period ending on the Determination Date shall not be taken into account. (b) Determination Date: With respect to any Plan Year, the last day of the preceding Plan Year, or, in the case of the first Plan Year of the Plan, the last day of such Plan Year. (c) Permissive Aggregation Group: A group of qualified plans of the Employer not required to be included in a Required Aggregation Group but whose inclusion would not cause such group to fail to meet the requirements of Section 401(a)(4) or Section 410 of the Code. (d) Required Aggregation Group: Each qualified plan of the Employer in which a Key Employee participates (or participated at any time during the 5-year period ending on the Determination Date) and each other qualified plan (whether or 49 not terminated) of the Employer which enables any such plan to meet the requirements of Section 401(a)(4) or Section 410 of the Code. (e) Top-heavy Plan: With respect to any Plan Year, this Plan if as of the Determination Date: (i) The aggregate Accrued Benefits under the Plan of Key Employees exceed 60% of the aggregate Accrued Benefits under the Plan of all Employees; or (ii) the Plan is part of a Required Aggregation Group that is a Top-heavy Group. Notwithstanding the foregoing, in no event shall the Plan be considered a Top-heavy Plan for any Plan Year in which it is part of a Required Aggregation Group or Permissive Aggregation Group which is not a Top-heavy Group. (f) Top-heavy Group: A Required Aggregation Group or a Permissive Aggregation Group in which as of the Determination Date the sum of (i) the aggregate of the Accrued Benefits of Key Employees in all Defined Contribution Plans (as defined in paragraph (f) of Section 5.4) included in such group and (ii) the present value of the cumulative accrued benefits of Key Employees under all Defined Benefit Plans included in such group exceeds 60% of a similar sum determined for all Employees. For purposes of making the foregoing determination for any Defined Benefit Plan, the accrued benefit of each Non-key Employee shall be determined under the method which is used for accrual purposes for all such plans of the Employer, or, if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Section 411(b)(1)(C) of the Code. When plans with different Determination Dates are aggregated, the Determination Dates that fall within the same calendar year shall be used. Section 18.2. Applicability. The provisions of this Article XVIII shall be effective for any Plan Year in which the Plan is determined to be a Top-heavy Plan and shall supersede any conflicting provisions in the Plan. Section 18.3. Minimum Company Contribution. Except to the extent a minimum contribution is not required under the Regulations because a minimum benefit has been provided to each Non-key Employee under another plan of the Employer, the minimum Company contribution (including forfeitures) allocated for any such Plan Year to each Non-key Employee who is an Active Participant and who was an Employee of the Employer at the end of such Plan Year, regardless whether such Non-key Employee completed 1,000 Hours of Service in such Plan Year, shall be not less than the lesser of (a) 3% of such Non-key Employee's Compensation for such Plan Year or (b) the largest percentage of Compensation allocated to any Key Employee for such Plan Year under this Plan and all other Defined Contribution Plans which are a part of its Required Aggregation Group, if any. Pre-tax contributions and Company matching contributions allocated to Key Employees under paragraph (b) of Section 5.1 and Section 5.2 of this Plan or under any other Defined Contribution Plan in its Required Aggregation Group shall be included for purposes of determining the largest percentage of Compensation allocated to any Key Employee for a Plan Year. Pre-tax contributions and Company matching contributions allocated to any Non-key Employee shall not, however, be considered for purposes of determining whether the minimum contribution requirement of this Section 18.3 is satisfied with respect to such Non-key Employee. Section 18.4. Impact on Limitation on Annual Additions. 100% shall be substituted for 125% where it appears in paragraphs (e) and (g) of Section 5.4, unless for such Plan Year: (a) The aggregate Accrued Benefits of Key Employees do not exceed 90% of the aggregate Accrued Benefits of all Employees, (b) 4% percent is substituted for 3% in Section 18.3 as the minimum Company 50 allocation, and (c) except to the extent provided in the Regulations, all other plans in the Required Aggregation Group, if any, meet the minimum benefit requirements of Section 416(c) of the Code, as modified by Section 416(h) of the Code. ARTICLE XIX SPECIAL PROVISIONS FOR 1997 TENDER OFFER Section 19.1. Tender Offer. Effective December 8, 1997 and for the limited period through January 7, 1998, the Company offered to buy back a specified number of its issued and outstanding shares by offering all of its shareholders an opportunity to tender their shares for purchase by the Company in a tender offer (the "1997 Tender Offer"). The provisions of this Article XIX shall apply only for the duration of the 1997 Tender Offer. Section 19.2. Powers of Trustee. Notwithstanding any other provision of this Plan and Trust, including but not limited to paragraph (e) of Section 10.2, paragraph (l) of Section 11.1 and Article XX, the Company shall have no right or power to direct the Trustee with respect to the tender or sale of Qualifying Employer Securities to the Company in connection with the 1997 Tender Offer. The Trustee shall have sole power and fiduciary responsibility for responding to the 1997 Tender Offer with respect to Qualifying Employer Securities held in the Trust, including but not limited to the decisions (a) to tender or not to tender shares to the Company, (b) the number of such shares to be tendered to the Company, if any, and (c) the price at which the shares shall be tendered to the Company, provided that in no event shall such shares be tendered to the Company for less than adequate consideration as such term is defined in ERISA. The Trustee may but shall not be required to retain the services of a qualified independent fiduciary to advise the Trustee with respect to responding to the 1997 Tender Offer. Section 19.3. Allocation of Tendered Shares and Proceeds from Sale. If and to the extent that the Company accepts the Trustee's tender of some but less than all of the Qualifying Employer Securities held by the Trust, the Qualifying Employer Securities sold to the Company shall be drawn from the Company Contribution Accounts of all Participants, including both Active Participants and Former Participants, pro rata based on the number of shares allocated to each such account on December 31, 1997 (excluding shares contributed to the Plan after such date and allocated to Participant accounts as of such date as Company matching contributions for 1997). Any amounts received by the Trustee from the sale of Qualifying Employer Securities to the Company shall be allocated pro rata among the respective Company Contribution Accounts of the Participants from whose accounts such Qualifying Employer Securities were drawn and invested in accordance with the provisions of Section 12.6. ARTICLE XX DIRECTED TRUSTEE Section 20.1. Directed Trustee. The provisions of this Article XX shall apply if and to the extent that the Trustee has been appointed by the Company to function as a Directed Trustee and shall supersede any contrary provisions of the Plan and Trust. Notwithstanding the provisions of Article XI or any other provision of this Plan and Trust, if the Trustee is a Directed Trustee, the Company or other Plan fiduciary designated by the Company and not the Trustee shall have 51 exclusive authority and complete discretion and control over the investment and management of the assets of the Trust with respect to the matters described in this Article XX. Section 20.2. Selection of Investment Funds and Direction of Investments. Except to the extent an investment manager has been appointed under Section 12.2, the Company or other Plan fiduciary designated by the Company shall have the sole authority and discretion to select the investment funds available for investment of Trust assets from time to time and to direct the Trustee with respect to the purchase and sale of Trust assets. In addition, individual Participants shall have the right to direct the investment of certain of their accounts in accordance with the provisions of Section 12.4. The Trustee shall follow the directions of the Company, other Plan fiduciary or Participant, provided, however, that the Trustee shall have no obligation to comply with any such direction to the extent such direction is not consistent with the provisions of this Plan and Trust or with applicable law regulating the investment and management of assets of a qualified employees trust. Section 20.3. Voting Rights. The Company or other Plan fiduciary designated by the Company shall direct the Trustee with respect to the exercise (or non exercise) of any and all voting, proxy or other rights described in paragraph (c) of Section 11.1 pertaining to Trust assets. The Trustee shall have no power, responsibility or duty to exercise any such rights except as directed by the Company or other Plan fiduciary. Section 20.4. Contracts and Disputes. The Company or other Plan fiduciary designated by the Company shall direct the Trustee with respect to the entry into any contracts, agreements or obligations described in paragraph (f) of Section 11.1 and with respect to the commencement, defense or settlement of claims or disputes as described in paragraph (d) of Section 11.1. The Trustee shall have no power, responsibility or duty with respect to such matters on behalf of the Plan and Trust except as directed by the Company or other Plan fiduciary. Section 20.5. Protection of Trustee. If and to the extent that the Trustee is a Directed Trustee, the Trustee shall follow the direction of the Company or other designated Plan fiduciary regarding the investment and reinvestment of the assets of the Trust and the exercise of such voting, proxy and other rights and obligations pertaining thereto. The Trustee shall be under no duty or obligation to question any direction, review any decision made by another Plan fiduciary or review any investments to be acquired, held or disposed of pursuant to such direction, nor to make any recommendations with respect to any such decision or with respect to the disposition or continued retention of any such investment. The Trustee shall have no responsibility or liability for results arising from the Trustee's compliance with the direction of any designated Plan fiduciary which are made in accordance with the terms hereof and which are not contrary to the provisions of any applicable law regulating the investment and management of the assets of a qualified employees trust, and the Trustee shall have no liability or responsibility for failing to act in the absence of direction. The Trustee shall be entitled to indemnification by the Company to the extent permitted by law in accordance with the provisions of Section 11.6. ARTICLE XXI SPECIAL EFFECTIVE DATES Section 21.1. Exceptions to Effective Date. The general Effective Date of this amended and restated Plan and Trust shall be January 1, 1998. However, certain changes required by the Small Business Job Protection Act (SBJPA) and certain other changes in the Plan and Trust shall 52 be effective as of the dates stated in this Article XXI and otherwise in the Plan. Provisions which are effective as of dates prior to January 1, 1998 shall be deemed to be added to the Prior Plan or substituted for the corresponding provisions of the Prior Plan as of such dates. Section 21.2. Definitions. The following definitions set forth in Section 1.3 of Article I shall be effective January 1, 1997 to comply with the SBJPA: (a) Compensation (elimination of family aggregation rules). (b) Employee (definition of Leased Employee). (c) Highly Compensated Employee. Section 21.3. Elective Deferrals and Discrimination Testing. The following Sections in Article IV shall be effective January 1, 1997 to comply with the SBJPA: (a) Section 4.8. Maximum Pre-tax Contributions. Amended to add reference to Section 408(p). (b) Section 4.9. Limitations on Pre-tax Contributions for Highly Compensated Employees. Amended to modify the ADP test. (c) Section 4.10. Limitations on After-tax and Matching Contributions for Highly Compensated Employees. Amended to modify the ACP test. Section 21.4. Required Beginning Date. The provisions of Section 8.6 shall be effective January 1, 1997 to comply with the SBJPA. Section 21.5. Qualified Military Service. Notwithstanding any other provision of the Plan, periods of qualified military service (as defined in Section 414(u)(5) of the Code) shall be credited and contributions shall be made to the Plan with respect to such service in accordance with the requirements of Section 414(u) of the Code and the Regulations thereunder. The provisions of this Section 21.5 shall be effective January 1, 1995. Section 21.6. Trustee. The appointment of American Express Trust Company as a Directed Trustee shall be effective February 1, 1998. Consistent with the provisions of Section 13.4, American Express Trust Company shall have no responsibility or liability for any action (or omission) of the Trustee under this Plan and Trust prior to the effective date of its appointment as Trustee. 53 IN WITNESS WHEREOF, the parties hereto have executed this Plan and Trust this ______ day of January, 1998. CPI CORP. By: /s/ Alyn V. Essman ---------------------------- Title: Chairman and Chief Executive Officer For the Profit Sharing Plan Committee "Company" By: /s/ Barry Arthur ------------------------------ "Directed Trustee" AMERICAN EXPRESS TRUST COMPANY By: /s/ Kevin Weiss ------------------------------- Title: Vice President, Senior Trust Officer "Directed Trustee" 54 EX-10.33 7 EXHIBIT (10.33) First Amendment to CPI. Corp Employee Profit Sharing Plan and Trust 31 FIRST AMENDMENT TO CPI CORP. EMPLOYEES PROFIT SHARING PLAN AND TRUST (As Amended and Restated Effective January 1, 1998) Pursuant to the provisions of Section 14.1 of Article XIV of the CPI Corp. Employees Profit Sharing Plan and Trust (the "Plan"), and pursuant to resolutions of the Profit Sharing Plan Committee, the Plan is hereby amended in the following respect effective January 1, 1999: Section 4.12, Form of Contributions, is amended in its entirety to read as follows: The Company's contribution shall be made in Qualifying Employer Securities, except: (a) the Company shall make cash contributions to the extent cash is required to be distributed in lieu of fractional shares pursuant to Section 8.13; and (b) the Company may, in its sole discretion, contribute in cash any amounts the Company is required to contribute under Section 4.2 which are determined to be Excess Aggregate Contributions as defined in Section 4.10 which must be distributed to Participants from the Plan in accordance with the requirements of Section 4.10 or Section 4.11 within 2 1/2 months following the close of the Plan Year for which they were made, and, in the event such contributions are made in cash, the corresponding distributions shall also be made in cash. IN WITNESS WHEREOF, the Profit Sharing Plan Committee has caused this instrument to be adopted on behalf of CPI Corp. this 10 day of March, 1999, effective January 1, 1999. CPI CORP. By:/s/ Alyn V. Essman ------------------- Title: Chairman of the Board For the Profit Sharing Plan Committee EX-11 8 EXHIBIT (11) CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE--DILUTED FISCAL YEARS ENDED FEBRUARY 6, 1999, FEBRUARY 7, 1998 AND FEBRUARY 1, 1997 (in thousands except per share amounts)
1998 1997 1996 ---------- ---------- --------- Common shares outstanding at beginning of fiscal period 17,499 17,239 17,169 Shares issued during the period - weighted average 144 166 60 Shares issuable under employee stock plans - weighted average 39 38 45 Dilutive effect of exercise of certain stock options 243 186 53 Less: Treasury stock - weighted average (7,708) (5,758) (3,809) --------- --------- --------- Weighted average number of common and common equivalent shares 10,217 11,871 13,518 ========= ========= ========= Net earnings applicable to common shares $ 21,944 $ 12,713 $ 14,363 ========= ========= ========= Earnings per common share $2.15 $1.07 $1.06 ========= ========= =========
32 Options to purchase 182,500 and 182,500 shares of common stock at $30.00 and $35.00 per share, respectively, were outstanding during 1998 but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. The options, which expire on February 2, 2003 and February 2, 2004, respectively, were still outstanding at the end of fiscal year 1998. CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE--BASIC FISCAL YEARS ENDED FEBRUARY 6, 1999, FEBRUARY 7, 1998 AND FEBRUARY 1, 1997 (in thousands except per share amounts)
1998 1997 1996 --------- --------- --------- Common shares outstanding at beginning of fiscal period 17,499 17,239 17,169 Shares issued during the period - weighted average 144 166 60 Less: Treasury stock - weighted average (7,708) (5,758) (3,809) --------- --------- --------- Weighted average number of common and common equivalent shares 9,935 11,647 13,420 ========= ========= ========= Net earnings applicable to common shares $ 21,944 $ 12,713 $ 14,363 ========= ========= ========= Earnings per common share $2.21 $1.09 $1.07 ========= ========= =========
33 EX-13 9 EXHIBIT (13) 1998 ANNUAL REPORT TO SHAREHOLDERS 34 (Front cover of Annual Report to Shareholders) (Pictures: on this page is a collage of eight pictures. These pictures showcase new photography techniques and new props, as well as non-traditional portraits. Starting with the top left corner and proceeding counter clockwise the portraits are: --young child with new book prop --confirmation portrait --group of three children with new background and chair props --young child with new lighting --graduation portrait --group of three boys with the new background and props --teenage girl with younger girl --engagement portrait.) CPI CORP. 1998 Annual Report (Inside Cover) (PAGE NUMBERS REFER TO PAPER DOCUMENT) Contents - -------- 2-3 1998 at a glance / financial results 4-6 Report to our shareholders 7-8 Sears and CPI 10-13 Management's discussion and analysis - overview 14-16 Management's discussion and analysis - results of operation 17 Management's discussion and analysis - financial condition & cash flows 18 Consolidated statements of earnings 19 Consolidated balance sheets 20-21 Consolidated statements of cash flows 22 Consolidated statements of changes in stockholders equity 23-39 Notes to consolidated financial statements 40 Independent auditors' report 41 Selected quarterly financial data 42 Financial highlights 43 Directors and officers 44 Investor information
(This page is translucent with the following phrase starting below the center:) Soaring toward higher returns on our investment in people and technology SEARS Portrait Studio (The page behind and partially visible through the translucent paper has an oval picture with a Sears photographer on the left, a mother in the middle and a child on the right enjoying a portrait session.) 1998 AT A GLANCE Sales in CPI's primary business, Sears Portrait Studios, increased 7.2% to $325.5 million in the 52 weeks of 1998 compared to $303.7 million in the 53 weeks of 1997, with 9.4% growth in the second half over the prior year's comparable period. For the full year, if revenues were reported on a comparable 52-week basis, total revenues would have increased 8.6%. Operating earnings declined 0.7% due primarily to increased employment costs incurred to improve customer service, plus higher expenses related to further system and product development. Wall Decor segment sales increased a slight 1.5% to $64.0 million, with operating earnings of $1.0 million compared to a loss of $1.0 million in the prior year, partly due to the introduction of several successful new products, combined with lower cost of sales. Net earnings increased 72.6%, due in part to the efforts of the sale of the Company's interest in its photofinishing business, in contrast to losses related to that business in the prior year. 2 FINANCIAL RESULTS (in millions of dollars or shares except percents/per share data)
1998 1997 1997-1998 1993 (52 wks) (53 wks) % Change (52 wks) -------- -------- --------- -------- SALES Portrait studios $325.5 $303.7 7.2 % $237.9 Photofinishing - - - 187.2 Wall decor 64.0 63.0 1.5 % 34.6 Total $389.5 $366.7 6.2 % $459.7 - -------------------------------------------------------------- OPERATING EARNINGS Portrait studios $ 44.3 $ 44.6 (0.7)% $ 29.3 Photofinishing - - - 7.0 Wall decor 1.0 (1.0) 203.9 % 5.0 Total operating earnings 45.3 43.6 3.8% 41.3 Net earnings 21.9 12.7 72.6 % 15.1** - -------------------------------------------------------------- AVERAGE SHARES OUTSTANDING* 10.2 11.8 (13.9)% 14.7 - -------------------------------------------------------------- PER SHARE Earnings* $ 2.15 $ 1.07 100.9 % $ 1.03 Dividends 0.56 0.56 - 0.56 Tangible book value 11.75 10.26 14.5 % 7.84 Price: High 27.44 28.00 20.75 Low 18.12 15.88 13.88 - -------------------------------------------------------------- * assuming dilution ** includes $2.1 million credit for accounting change
3 (Pictures: on this page are three pictures. Beginning at the top and proceeding clockwise the pictures are: -- a picture of a mother and an infant -- a picture of an infant -- an associate displaying for customers portraits using the Portrait Preview System (SM).) A REPORT TO OUR SHAREHOLDERS On the cover of our 1997 Annual Report were these words: "...to report growing rewards from our actions of the past several years..." In that report we related how, over a period of about five years, we invested heavily in our core business - the Sears Portrait Studios - in order to create a new paradigm that would rise above the competitive fray within the portrait studio industry. Although our overall results for 1997 showed only marginal improvement, due in part to our exit from the photofinishing industry, a significant increase in portrait studio operating earnings convinced us that our strategic plan, though only partially implemented, would produce positive returns over the long term. We are pleased to report that the sales performance of the portrait studios in 1998, especially in the second half, more than confirmed our expectations. The results in the fourth quarter Christmas season broke all sales records, even though all of our major competitors were promoting at all-time low prices. By way of contrast, our studios offered the highest quality imaging products in a friendly environment at appropriately higher prices, and customers, in a classic case of product differentiation, responded in record numbers. Central to these results was an evolution we have achieved in the culture of our entire organization, in which the concept of total dedication to customer service is symbolized by the phrase, "We get the picture (SM)." We arrived at this concept by talking to thousands of customers in order to better understand their anxieties related to the studio experience, and to learn and respond to their needs. Then we engaged in intensive discussions with our field employees to determine how headquarters support groups could aid them in any way in 4 (Picture: on this page is a picture of an ISP Workbook and the following tables:) PORTRAIT STUDIO SEGMENT
Sales Profit (in millions) Margin % -------------- -------- 1998 $325.5 13.6 1997 303.7 14.7 1996 289.8 12.3 1995 279.6 15.2 1994 276.4 13.9 1993 237.9 12.6 1992 264.4 18.3 1991 279.0 20.3 1990 279.1 23.7 1989 260.5 25.2
CPI CORP.
EBITDA Net Earnings (in millions) (in millions) ------------- ------------- 1998 $ 64.4 21.9 1997 60.4 12.7 1996 58.8 14.4 1995 73.2 17.7 1994 66.5 16.6 1993 53.4 15.1 1992 65.9 24.8 1991 67.6 29.7 1990 68.6 35.0 1989 67.0 33.8
CAPTION ON THE ABOVE CHARTS: - - As CPI rebuilt its portrait studio business, studio profit margins fell to half of historic highs due to heavy investment in the business, made possible by generally consistent cash flows. EBITDA (net income before interest, income taxes, depreciation and amortization) averaged over $64 million since 1989, even though earnings varied significantly. their studio operations. Our findings touched the very core of our company, and now, at every level, people are focusing on the unique interests of those whom they serve, wit ultimate concentration on studio employees serving customers. With the positive results of 1997 and 1998 portrait studio operations, we have begun to harvest the investments we made since 1993. Those investments were initially directed to technology-based programs and extensive studio remodeling. Through 1998, we had committed $131.2 million in funding such infrastructure. While we continue to invest in those areas, in the past two years we have intensified our investments in our people through extensive training programs, increased compensation and more selective recruiting. As expected, these investments in people cost us some margin in 1998, but we are confident we will regain it over the long term. Our continuing objective is to elevate the level of customer service and continue the sales increases. Follow-up consumer research confirms our confidence. In an initiative designed to improve customer service still further, we are introducing an exciting new studio compensation plan early in 1999. Called ISP (for Independent Study Program), the plan offers employees a series of structured lessons covering portrait quality, photographic skills and studio operations. In the portrait quality segment, employees capture digital images on disks and send them to headquarters for grading and feedback, while the other segments are conducted in-studio by skilled reviewers, who are specially trained senior studio managers. Following the successful completion of the lessons, our employees realize salary increases. We believe ISP, which 5 (Picture: on this page is a picture of Alyn V. Essman, CPI Corp.'s chairman and chief executive officer.) will increase employment expense by about $3 - 4 million over normal increases, will represent yet another "product" improvement that further widens the gap between our company and other competitors in the portrait studio industry. While encouraged by our progress to date, we are fully aware of the continuing effort required to maintain our unique market position. To that end, for more than two years we have been working on a new software platform that will ultimately integrate all studio activities. The first phase of the system, called SAS (for Store Automated System), will be rolled out in mid-1999 and will result in increased studio operating efficiency, freeing our employees to focus more intently on customer service. The second phase will be implemented in the year 2000 and will provide the basis for future generations of digital technology. Installing SAS will require some rather specific hardware and program upgrades, which we estimate will involve capital investments of approximately $10 million in 1999 and $22 million in 2000. In summary, since 1993 we have directed the preponderance of our capital resources and the skill and ever-increasing enthusiasm of our people toward the objective of continuing improvement of the total portrait studio experience for our customer. We know that this objective is elusive and never fully attained, but based on feedback from our customers and careful analysis of recent sales increases, we believe we are on our way! April 8, 1999 BY: /s/ Alyn V. Essman ---------------------------------------- Alyn V. Essman CPI chairman and chief executive officer 6 (Pictures: on this page are two pictures. The first is a picture of a membership card to the SmileSavers Plan with the caption: "Recently introduced, the SmileSavers Plan is designed to increase repeat visits and develop long-term customer loyalty." The second is a picture of a newly remodeled Sears Portrait Studio with the caption: "Through 1998, over 600 Sears Portrait Studios have been remodeled and enlarged, and the new design is routinely incorporated in newly opened Sears stores.") SEARS AND CPI CPI is Sears' exclusive portrait service and one of its leading licensed businesses, sharing a 40-year relationship that has been beneficial to both companies. Throughout this long period, CPI and Sears have worked together in creating the mass portrait market, progressing from traveling photographers to permanent studios, developing pre-printed full-color portrait packages, and introducing services based on state-of-the-art technology such as the Portrait Preview System (SM). As evidence of its ongoing contributions and importance to Sears, CPI has been awarded the prestigious "Partners in Progress" award in thirteen of the past sixteen years - most recently in 1998 - and, in 1995, Sears bestowed on CPI the first "Partners in Progress" award ever in accorded a concessionaire in Canada. Still more noteworthy, in 1994 Sears honored CPI with the first "Chairman's Award" given a Sears licensed business in recognition of the significance of the Portrait Preview marketing program. Sears has provided strong support of CPI's studio remodeling program, coordinating the rollout with their own $4 billion store upgrade program. Through 1998, over 600 studios have been remodeled and enlarged, and the new design is routinely incorporated in newly opened Sears stores. An increase of almost 80% in the size of the average remodeled studio has provided space for many additional camera rooms, expanding the overall capacity. Further support was demonstrated in January 1999 by a new five-year licensing agreement that provides for integration of CPI's new SAS studio software platform with the Sears store operating system. 7 (Picture: on this page is a picture of three family members viewing the child's portraits on the internet in the comfort of their home using myportraits.com internet services captioned: "www.myportraits.com On their home computers, customers can view, order and e-mail their portraits to friends and family. (available in selected test markets)".) In the process of rebuilding its portrait studio business, CPI management has maintained a careful balance in its application of resources, supplementing ongoing cash flow from operations with prudent borrowing. Having further narrowed the focus to its core business with the sale of the photofinishing division to Kodak, CPI has applied excess cash to the repurchase of common stock, significantly increasing shareholder value. Judicious Application of Resources CASH SOURCES 1993-1998 (in millions of dollars)
A. FY '93 beginning balance $ 21.0 - ------------------------------------------------------- B. Cash flow-operations 271.8 C. Joint venture formation and sale 100.0 D. Long-term senior debt 58.9 E. 2-year Kodak non-compete 10.0 F. Employee stock plans 13.1 ------ 453.8 ------ Total available cash 474.8
APPLICATION OF CASH 1993-1998 (in millions of dollars)
A. Capital expenditures 224.2 B. Stock repurchases 113.3 C. Dividends 43.5 D. Acquisitions 14.7 E. Other* 3.1 ------ Total applied cash 398.8 - ----------------------------------------------------- F. FY '98 ending balance $ 76.0 * Exchange rate effect and restricted stock
8 (PAGE NUMBERS REFER TO PAPER DOCUMENT) Financial Information - --------------------- 10-13 Management's discussion and analysis - overview 14-16 Management's discussion and analysis - results of operation 17 Management's discussion and analysis - financial condition & cash flows 18 Consolidated statements of earnings 19 Consolidated balance sheets 20-21 Consolidated statements of cash flows 22 Consolidated statements of changes in stockholders' equity 23-39 Notes to consolidated financial statements 40 Independent auditors' report 41 Selected quarterly financial data 42 Financial highlights 43 Directors and officers 44 Investor information
9 MANAGEMENT'S DISCUSSION AND ANALYSIS - OVERVIEW - ----------------------------------------------- FISCAL YEARS CPI Corp.'s (the "Company's") fiscal year ends the first Saturday of February. Accordingly, fiscal years 1998 and 1996 ended February 6, 1999 and February 1, 1997, respectively, and consisted of 52 weeks. Fiscal year 1997 ended February 7, 1998 and consisted of 53 weeks. Throughout MANAGEMENT'S DISCUSSION AND ANALYSIS and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, reference to 1998, 1997 or 1996 will mean the fiscal year ended February 6, 1999, February 7, 1998 and February 1, 1997, respectively. BUSINESS SEGMENTS The Company has operations in two business segments: Portrait Studios and Wall Decor. The Portrait Studios segment, which functions as the exclusive operator of Sears Portrait Studios, has 1,027 locations in the United States, Canada and Puerto Rico. The Wall Decor segment, which operates under the name Prints Plus and offers value-priced posters, prints, frames and framing services, operates in 152 locations throughout the United States. Until October 4, 1996, when the Company entered into a joint venture with Eastman Kodak Company ("Kodak"), the Company operated a third business segment, Photofinishing, which operated under the Fox Photo, CPI Photo Finish, and Proex names. On October 2, 1997, the Company sold its remaining interest in the Photofinishing joint venture to Kodak. (See "Joint Venture" for further discussion.) YEAR 2000 ISSUE The Year 2000 (Y2K) issue is primarily the result of computer software and hardware using two digits rather than four to define the applicable year. For example, the year "00" may be recognized as 1900 rather than 2000 and may result in computers and computer applications failing or creating erroneous results. In reviewing Y2K issues, the Company has identified four areas of primary concern: 1.) the administrative offices and laboratories located in St. Louis, Missouri; Las Vegas, Nevada; Thomaston, Connecticut and Mississauga, Ontario (Canada) (referred to as "Home Office"); 2.) the individual locations of the Photography segment, which operate under the name "Sears Portrait Studios," (referred to as "SPS Field"); 3.) the administrative support office and individual locations of the Wall Decor segment, which operate under the name "Prints Plus" (referred to as "Prints Plus") and 4.) third party vendors or suppliers. Home Office - ----------- Due in part to Y2K issues in older systems, fully-compliant Y2K basic operating and data-base systems were put in place in the Home Office by the end of the first quarter of 1998. In addition, due to this change, all financial systems in the Home Office were reviewed by year-end 1997 and new financial systems, including Y2K compliance upgrades, were substantially installed by the end of 1998 for an estimated cost of $3.4 million. An additional $394,000 will be spent by the end of second quarter 1999 to complete the final changes to all financial systems. Laboratory, telephone and physical plant systems and equipment as well as all personal computers in the Home Office have been tested for Y2K issues and, after an analysis of the test results is made, new or upgraded systems and equipment will be obtained by mid-1999 at an estimated cost of $555,000. 10 SPS Field - ---------- In 1996, as part of the Company's on-going long-range planning and development process, the Company began the process of updating the point-of-sale system used in the SPS Field operations. Development of the new system, which included Y2K compliance, continued through 1997 and, starting in second quarter of 1999, the Company expects to install the software and hardware for the new point-of-sale system in the SPS Field locations. Full implementation of the new system is expected to be completed by third quarter of 1999. At the same time the new point-of-sale system is rolled-out, upgraded software used in thesales stations and camera rooms of the SPS Field locations will be installed at negligible cost. Prints Plus - ----------- Although the hardware used to operate the point-of-sale system utilized by Prints Plus locations is Y2K compliant, the software used is not and is currently being rewritten. The expected completion date and rollout of the Y2K compliant point-of-sale system software for Prints Plus is the end of August. In addition, the upgrading of all financial and merchandise distribution systems utilized by Prints Plus is expected to be completed by June 1999. Total estimated cost for Y2K compliance for all of Prints Plus is estimated to be $420,000. Third Party - ----------- The Company has material relationships with several large companies providing goods and services to the Photography and Wall Decor segments: --Sears, Roebuck and Company, the licensor of Sears Portrait Studios, the Company's primary line of business; --Eastman Kodak Company, a provider of photographic film and paper, dye sublimation paper and related equipment and supplies; --Sony Corporation, a provider of dye sublimation paper and related equipment and supplies; --MCI, a telecommunications company which provides communi- cation links between the Company and its remote locations as well as telephone services in the Home Office; --United Parcel Services, Roadway Package Services and Airborne Express Services, companies which handle the transportation of finished products to and from the Home Office and individual locations; --Mercantile Bank N.A. of St. Louis and Harris Trust and Savings Bank, financial institutions which provide credit facilities and other banking services; --Prudential Insurance Company and the Guardian Insurance Company, holders of the Company's senior debt. All of these companies have published material indicating their awareness of the Y2K issue and the steps they are taking to remedy the problem. However, although the Company does not anticipate service interruptions from its major third party suppliers and vendors, no assurance can be given that the Company will not experience supply disruptions due to Y2K issues. Contingency Plans - ----------------- Taking the previous information into consideration, while the Company has already begun implementing changes as a result of its Y2K assessment, a full assessment of the Y2K issues will not be completed until June 1999. After all changes are implemented and testing of the new systems or related equipment is completed, the Company will develop contingency plans for possible Y2K compliance problems. The Company expects to have the contingency plans in place for Home Office by June 1999 and SPS Field and Prints Plus by September 1999. ENVIRONMENTAL MATTERS The operations of the Company, like those of similar businesses, are subject to various Federal, state and local laws and regulations with respect to environmental matters, including air and water quality, and other regulations intended to protect public health and the environment. At present, the Company has not been identified as a potentially responsible party under the Comprehensive Environmental Responses, Compensation and Liability Act and has not established any reserves or liabilities relating to environmental matters. 11 STOCK REPURCHASE The Company's Board of Directors has authorized the Company to purchase up to 4,500,000 shares of its outstanding common stock through purchases at management's discretion from time to time atacceptable market prices. Under this authorization, during 1998 and 1997, the Company purchased 252,214 and 60,284 shares of stock for $5.4 million and $1.2 million at an average stock price of $21.25 and $19.37, respectively. Acquired shares are held as treasury stock and will be available for general corporate purposes. In addition, the Company has engaged in two separate transactions involving the repurchase of stock during the reporting periods covered by this Annual Report. In 1996, theCompany completed a Dutch Auction tender offer by purchasing 2,250,000 shares of the Company's common stock at $19.00 per share for $43.6 million. The Company used the proceeds received in the formation of the joint venture to finance the tender offer. Also, in 1997, the Company completed another Dutch Auction tender offer by purchasing 1,999,215 shares of the Company's common stock at $23.00 per share for $46.5 million. To finance the tender offer, the Company used the proceeds from: -- the $10.0 million two-year Noncompete Agreement, -- the repayment of a $4.0 million note held by the Company from the joint venture, and -- other working capital and cash from operations. The weighted average shares outstanding have been adjusted to reflect the changes in shares outstanding resulting from the repurchase of the Company's common stock. JOINT VENTURE In 1996, the Company sold 51% of the outstanding shares of Fox Photo, Inc. ("Fox") to Kodak for $56.1 million in cash, which resulted in a pre-tax gain of $6.2 million. On the same date, the Company entered into collateral agreements with Fox and Kodak, including agreements under which the Company provided certain administrative services and management services to Fox (the "Service Agreement" and the "Consulting Agreement"). The ownership of the joint venture was accounted for under the equity method and was reflected as an investment in the Fox joint venture. In selling the 51% interest in Fox to Kodak, the Company believed the joint venture would continue indefinitely based on a shared vision of the potential opportunities to be realized from combining the strengths of the two shareholders. While the parties provided for an exit from the joint venture after the end of 1998, the Company was focused on the long-term development of the joint venture and considered those provisions merely insurance against the then-unlikely risk that the joint venture would not succeed. The original agreement did not contain a noncompete provision because neither party considered it necessary at the time the agreement was negotiated. Unexpectedly, within the first six months of operation, the joint venture encountered a series of problems that severely diminished the prospects of achieving its original vision. These problems included significant deterioration in sales and profits from projections in the first-year operating plan; higher than expected costs in experimental markets; and the divergence of shareholder philosophies, objectives and strategies. After struggling with these and other problems for several months, the Company and Kodak concluded that joint ownership of Fox was no longer tenable or desirable and the parties began to negotiate the terms of dissolution of the joint venture. The original termination provisions set forth in the October 1996 Shareholders Agreement were not the basis for the joint venture's termination. The sale by the Company of its 12 remaining 49% interest in Fox was negotiated on an arms-length basis over three to four months in the context of the changed circumstances and relationships. In 1997, the Company sold its remaining 49% interest in Fox to Kodak for a $43.9 million non-interest bearing promissory note (the "Promissory Note") due on January 4, 1999 (the "Disposition Transaction"). As a result of the sale, the Company recorded a pre-tax loss of $4.2 million in 1997. Due to the non-interest bearing nature of the Promissory Note, a discount of $3.9 million was established and was amortized into income until the maturity of the Promissory Note. During 1998 and 1997, $2.8 million and $1.1 million, respectively, in amortization related to the Promissory Note was recognized. In connection with the dissolution of the cooperative relationship between the Company and Kodak, the Company and Kodak agreed that the Company could pose a competitive threat to Fox. The Company remained committed to further development and commercialization of its proprietary technology, including the Photo Preview and Photo Proof Systems that were featured in joint venture test markets, as well as a store automation system that was originally designed to meet Fox specifications. The Company also possesses more than 50 years of retail management experience and knowledge of the most successful and vulnerable Fox markets and concepts. Accordingly, as part of the Disposition Transaction, the Company entered a two-year Noncompetition and Nonsolicitation Agreement (the "Noncompete Agreement") with Fox under which the Company agreed not to engage in the retail photofinishing business and, subject to certain exceptions, not to employ Fox employees without consent. The Company received $10.0 million cash consideration for entering into the Noncompete Agreement which will be amortized into income over the two-year period of the agreement. For 1998 and 1997, amortization related to the two-year Noncompete Agreement was $5.0 million and $1.8 million, respectively. Prospectively, in fiscal year 1999, the Company will recognize $3.2 million in amortization for the two-year Noncompete Agreement. In conjunction with the dissolution of the joint venture, the Company and Fox also agreed to immediately terminate the Consulting Agreement and terminated the Service Agreement as of February 1998. PHOTOFINISHING STORE SALE In June 1996, the Company announced the sale to Wolf Camera, Inc. of 50 one-hour photofinishing stores located in Florida, Georgia, Illinois and Tennessee for $1.9 million. The Company did not recognize a material gain or loss on the sale of these assets. FORWARD LOOKING STATEMENTS The statements contained in this report which are not historical facts are forward-looking statements that involve risks and uncertainties. Management wishes to caution the reader that these forward-looking statements, such as the Company's outlook for Sears Portrait Studios and Prints Plus, readiness, expectant costs and contingency planning regarding Year 2000 issues, future cash requirements and capital expenditures, are only predictions or expectations; actual events or results may differ materially as a result of risks facing the Company. Such risks include, but are not limited to customer demand for the Company's products and services, the overall level of economic activity in the Company's major markets, competitors' actions, manufacturing interruptions, dependence on certain suppliers, changes in the Company's relationship with Sears, Roebuck & Company and the condition and strategic planning of Sears, Roebuck & Company, fluctuations in operating results, the attractions and retention of qualified personnel, Year 2000 compliance issues and other risks as may be described in the Company's filings with the Securities and Exchange Commission, including its Form 10-K for the year ended February 6, 1999. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS-RESULTS OF OPERATIONS - ---------------------------------------------------------- NET SALES Portrait Studios 1998 net sales were up 7.2% over 1997 as a result of higher average sales per customer, due in part to a price increase and from greater customer acceptance of various portrait programs, and from increased customer traffic in the portrait studios, partially offset by only 52 weeks of sales reported in 1998 compared to 53 weeks in 1997. The 53rd week in 1997 represented $3.8 million, or 1.3%, of the net sales for 1997. If net sales were reported on a comparable 52-week basis for 1998 and 1997, sales would have increased 8.6% year-over- year. Portrait Studios 1997 net sales were up 4.8% over 1996 as a result of the inclusion of the 53rd week and an increase in sales per customer being slightly offset by a decline in customer volume. Again, if net sales were reported on a comparable 52- week basis for 1997 and 1996, sales would have increased 3.5% year-over-year. Wall Decor 1998 net sales were up 1.5% over 1997 as a result of favorable customer response to new products offered in the Wall Decor stores partially offset by only 52 weeks of sales reported in 1998 compared to 53 weeks reported in 1997. The 53rd week in 1997 represented $459,000, or 0.7%, of the net sales for 1997. If net sales were reported on a comparable 52-week basis for 1998 and 1997, sales would have increased 2.2% year-over-year. Wall Decor 1997 net sales were up 0.6% over 1996 as a result of the inclusion of the 53rd week. The decreases in net sales for the Photofinishing segment for 1997 from 1996 was due to the formation of the joint venture in October 1996. Total net sales for 1998 were up 6.2% over 1997 as a result of increased sales in both Portrait Studios and Wall Decor, offset slightly by the exclusion of a 53rd week of sales in 1998. If net sales were reported on a comparable 52-week basis for 1998 and 1997, sales would have increased 7.5% year-over-year. Total net sales for 1997 were down 21.5% from 1996 reflecting an increase in sales for both Portrait Studios and Wall Decor, in part due to the inclusion of a 53rd week of sales, offset by the exclusion of sales for the Photofinishing segment as a result of the formation of the joint venture in 1996. NET SALES (in thousands of dollars) Fifty-two weeks ended February 6, 199 and fifty-three weeks ended February 7, 1998
1998 versus 1997 favorable (unfavorable) ----------------------- 1998 amount percent 1997 change change Portrait Studios $325,547 $ 21,881 7.2% $303,666 Wall Decor 63,963 928 1.5 63,035 Photofinishing - - - - -------- ---------- ------- -------- Total net sales $389,510 $ 22,809 6.2% $366,701 ======== ========== ======= ========
NET SALES (in thousands of dollars) Fifty-three weeks ended February 7, 1998 and fifty-two weeks ended February 1, 1997
1997 versus 1996 favorable (unfavorable) ----------------------- 1997 amount percent 1996 change change Portrait Studios $303,666 $ 13,826 4.8% $289,840 Wall Decor 63,035 359 0.6 62,676 Photofinishing - (114,518) (100.0) 114,518 -------- ---------- -------- -------- Total net sales $366,701 $(100,333) (21.5)% $467,034 ======== ========== ======== ========
14 OPERATING EARNINGS Portrait Studios 1998 operating earnings, which had 52 weeks, were down 0.7% from 1997, which had 53 weeks, as a result of higher other expenses, resulting from increased system and product development, and increased employment costs. Increased employment costs resulted from necessary wage increases in a tight labor market and Portrait Studios movement towards improved customer servicing, which resulted in increased labor hours. In 1997, which had 53 weeks compared to 52 weeks in 1996, the 25.1% increase in Portrait Studios operating earnings was due primarily to increased sales and reduced manufacturing costs resulting from the favorable renegotiation of purchasing contracts; offset slightly by increases in employment costs, due to increased training for newer technologies, and advertising, due to increased television network advertising and direct marketing. Wall Decor 1998 operating earnings were up over 1997 as a result of higher same-store sales and reduced cost of goods sold due to lower purchasing costs for resale products. Wall Decor 1997 operating earnings, representing 53 weeks, were down 129.6% from 1996, a 52-week year, as a result of decreased same-store sales and higher employment and occupancy expenses. Operating earnings for the Photofinishing segment for 1997 and 1996 are not comparable due to the formation of the joint venture in October 1996. SELECTED FINANCIAL DATA (in thousands of dollars) Fifty-two weeks ended February 6, 1999 and fifty-three weeks ended February 7, 1998
1998 versus 1997 favorable (unfavorable) ----------------------- 1998 amount percent 1997 change change Operating earnings: Portrait Studios $ 44,276 $ (321) (0.7%) $ 44,597 Wall Decor 1,002 1,966 203.9 (964) Photofinishing - - - - -------- --------- -------- --------- Total operating earnings 45,278 1,645 3.8 43,633 General corporate expenses 15,918 (483) 3.1 15,435 Interest in joint venture - 3,304 100.0 (3,304) Gain (Loss) on sale of interest in Photofinishing segment - 4,189 100.0 (4,189) Interest expense 4,627 (157) (3.5) 4,470 Interest income 3,709 1,240 50.2 2,469 Other income 5,317 3,124 142.5 2,193 --------- --------- ------- --------- Earnings before income taxes $ 33,759 $ 12,862 61.5% $ 20,897 ========= ========= ======= =========
SELECTED FINANCIAL DATA (in thousands of dollars) Fifty-three weeks ended February 7, 1998 and fifty-two weeks ended February 1, 1997
1997 versus 1996 favorable (unfavorable) ----------------------- 1997 amount percent 1996 change change Operating earnings: Portrait Studios $ 44,597 $ 8,941 25.1% $ 35,656 Wall Decor (964) (4,216) (129.6) 3,252 Photofinishing - (82) (100.0) 82 --------- --------- ------- --------- Total operating earnings 43,633 4,643 11.9 38,990 General corporate expenses 15,435 3,183 17.1 18,618 Interest in joint venture (3,304) (2,819) (581.2) (485) Gain (Loss) on sale of interest in Photofinishing segment (4,189) (10,369) (167.8) 6,180 Interest expense 4,470 (192) (4.5) 4,278 Interest income 2,469 1,960 385.1 509 Other income 2,193 1,692 337.7 501 -------- -------- -------- --------- Earnings before income taxes $ 20,897 $ (1,902) (8.3)% $ 22,799 ========= ========= ======== =========
15 NET EARNINGS Net earnings before taxes for 1998 were up 61.5% over 1997 as a result of: increased operating earnings; an increase in interest income, which reflected the amortized discount from the Kodak Promissory Note of $2.8 million in 1998 compared to $1.1 million in 1997; an increase in other income, which reflected the amortization of the Noncompete Agreement of $5.0 million in 1998 compared to $1.8 million in 1997 ; and the absence in 1998 of both the Company's share of operating losses from its interest in the Fox joint venture and the subsequent loss on the sale of the Company's remaining 49% interest in the Fox joint venture. In 1997, net earnings before taxes decreased 8.3% from 1996 as a result of the sale of the remaining 49% interest in the joint venture, which resulted in a loss of $4.2 million compared to the $6.2 million gain recorded from the sale of the initial 51% of the Photofinishing business recorded in 1996. This decrease was offset slightly by the $1.8 million recognition of amortization for the Noncompete Agreement and $1.1 million recognition of the discount on the Kodak Promissory Note. Other changes in net earnings in 1997 from 1996 were attributable to improved operating earnings; lower corporate expenses, which resulted from the allocation of administrative expenses to the joint venture under the Service and Consulting Agreements; and higher interest income, which resulted from the Company having higher levels of invested cash throughout the year; partially offset by an increase in the loss recorded for the Company's interest in the joint venture. The effective income tax rates were 35.0%, 39.2% and 37.0% in 1998, 1997 and 1996, respectively. The 1997 effective income tax rate variance from 1998 and 1996 was due to the differences in the investment basis of the joint venture for financial and Federal income tax reporting purposes. The 1998 effective rate is also lower due to the implementation of state tax planning strategies that have resulted in lower state income taxes. EARNINGS PER SHARE Unless otherwise indicated, net earnings per share (EPS) shall refer to diluted EPS in MANAGEMENT'S DISCUSSION AND ANALYSIS, the financial statements and footnotes of the Company. EPS was $2.15 for 1998 compared to $1.07 in 1997 reflecting the positive increase in earnings previously discussed in the Net Earnings discussion as well as the absence of losses from the Company's interest in the Fox joint venture, loss on the sale of the remaining 49% interest in the joint venture and the effect of other related joint venture transactions previously discussed. In addition, EPS was affected by the repurchase of 252,214 shares of stock during 1998 and 1,999,215 shares repurchased late in fiscal 1997, which combined to result in a 13.9% decrease in the weighted average number of common and common equivalent shares outstanding for 1998 from 1997. EPS was $1.07 for 1997 as compared to $1.06 in 1996. The loss attributable to the sale of the remaining 49% of the joint venture and related transactions previously discussed was $0.11 per share (assuming dilution) as compared to the $0.29 per share (assuming dilution) gain attributable to the sale of the initial 51% interest in the Photofinishing business recorded in 1996. In addition, EPS in 1997 was also affected by the repurchase of 2,250,000 shares of stock in November 1996 and 1,999,215 shares of stock in January 1998, which resulted in a 12.2% decrease in the weighted average number of common and common equivalent shares outstanding for 1997 from 1996. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL CONDITION - ---------------------------------------------------------- ASSETS In 1998, total assets increased 2.6% from 1997, due to increased cash and cash equivalents attributable to positive cash flows, offset slightly by the reduction of net property and equipment, due to depreciation and amortization costs exceeding additions. LIABILITIES In 1998, total liabilities decreased 6.7% from 1997 due primarily to a decrease in other liabilities, which resulted from the amortization of $5.0 million of the Noncompete Agreement in 1998. Prospectively, for fiscal year end 1999, the Company will amortize $3.2 million, the remaining balance of the Noncompete Agreement. STOCKHOLDERS' EQUITY Stockholders' equity was up 14.1% in 1998 from 1997 due mainly to an increase in retained earnings resulting from the 1998 net earnings. This increase was partially offset by the purchase of the Company's common stock and the distribution of quarterly dividends. MANAGEMENT'S DISCUSSION AND ANALYSIS - CASH FLOWS - ------------------------------------------------- During the period 1996 through 1998, the Company generated $139.6 million in internal funds from operations. Investing activities during this three-year period amounted to $38.5 million including capital expenditures of $71.5 million, which were offset by the $43.9 million proceeds received from the Kodak Promissory Note, $10.0 million proceeds received from the two-year Noncompete Agreement and the $56.1 million received from the initial sale of 51% of Fox Photo, Inc. Financing activities during this time included the repurchase of $96.7 million in treasury stock and the payment of $19.6 million in dividends. The net result of these transactions was a $67.7 million increase in cash and cash equivalents during the three-year period. Planned capital expenditures for fiscal year 1999 are expected to be approximately $30.0 million. Included in fiscal year 1999 capital spending plans are the addition and remodeling of stores in the Portrait Studios and Prints Plus segments and equipment upgrades and enhancements in the Company's information systems, including the roll-out of the first phase of the Store Automation System. Through operating cash flows and existing cash and cash equivalents, the Company believes it has sufficient liquidity over the course of the coming year to meet cash requirements for operations, planned capital expenditures and dividends to shareholders. 17 CONSOLIDATED STATEMENTS OF EARNINGS (in thousands of dollars except share and per share amounts) Fifty-two weeks ended February 6, 1999, fifty-three weeks ended February 7, 1998 and fifty-two weeks ended February 1, 1997
1998 1997 1996 Net sales $ 389,510 $ 366,701 $ 467,034 Costs and expenses: Cost of sales (exclusive of depreciation expense shown below) 56,399 57,782 110,013 Selling, administrative and general expenses 274,001 250,743 298,703 Depreciation 28,561 27,793 34,454 Amortization 1,189 2,185 3,492 ----------- ----------- ---------- 360,150 338,503 446,662 ----------- ----------- ---------- Income from operations 29,360 28,198 20,372 Interest expense 4,627 4,470 4,278 Interest income 3,709 2,469 509 Interest in joint venture - (3,304) (485) Gain (loss) on sale of interest in Photo- finishing segment - (4,189) 6,180 Other income 5,317 2,193 501 ----------- ----------- ---------- Earnings before income taxes 33,759 20,897 22,799 Income tax expense 11,815 8,184 8,436 ----------- ----------- ---------- Net earnings $ 21,944 $ 12,713 $ 14,363 =========== =========== =========== Net earnings per share - diluted $ 2.15 $ 1.07 $ 1.06 =========== =========== =========== Weighted average number of common and common equivalent shares outstanding - diluted 10,216,975 11,871,013 13,518,480 =========== =========== =========== Net earnings per share - basic $ 2.21 $ 1.09 $ 1.07 =========== =========== =========== Weighted average number of common and common equivalent shares outstanding - basic 9,934,993 11,647,307 13,419,740 =========== =========== =========== See accompanying notes to consolidated financial statements.
18 CONSOLIDATED BALANCE SHEETS - ASSETS (in thousands of dollars except share and per share amounts)
February 6, February 7, 1999 1998 Current assets: Cash and cash equivalents $ 76,000 $ 15,292 Receivables, less allowance of $302 and $291, respectively 10,374 11,665 Notes receivable - 41,085 Inventories 19,071 18,044 Prepaid expenses and other current assets 8,194 8,139 Deferred tax assets 32 180 --------- --------- Total current assets 113,671 94,405 --------- --------- Net property and equipment 111,148 124,718 Other assets, net of amortization of $1,244 and $1,206, respectively 9,874 9,638 --------- --------- Total assets $234,693 $228,761 ========= ========= See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS-LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands of dollars except share and per share amounts)
February 6, February 7, 1999 1998 Current liabilities: Accounts payable $ 9,641 $ 13,565 Accrued employment costs 14,256 14,087 Sales taxes payable 2,461 3,093 Accrued advertising expense 2,054 2,541 Accrued expenses and other liabilities 4,644 5,142 Income taxes 2,720 9,014 --------- --------- Total current liabilities 35,776 47,442 --------- --------- Long-term obligations, less current maturities 59,559 59,482 Other liabilities 14,444 17,314 Deferred income taxes 8,398 2,431 Stockholders' equity: Preferred stock, no par value, 1,000,000 shares authorized, no shares issued and outstanding - - Preferred stock, Series A, no par value - - Common stock, $0.40 par value, 50,000,000 shares authorized; 17,730,100 and 17,499,137 shares outstanding at February 6, 1999 and February 7, 1998, respectively 7,092 6,999 Additional paid-in capital 41,605 37,614 Retained earnings 242,409 226,032 Accumulated other comprehensive income (3,363) (2,751) --------- --------- 287,743 267,894 Treasury stock at cost, 7,864,261 and 7,612,047 shares at February 6, 1999 and February 7, 1998, respectively (171,184) (165,789) Unamortized deferred compensation- restricted stock (43) (13) --------- --------- Total stockholders' equity 116,516 102,092 --------- --------- Total liabilities and stockholders' equity $234,693 $228,761 ========= ========= See accompanying notes to consolidated financial statements.
19 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) Fifty-two weeks ended February 6, 1999, fifty-three weeks ended February 7, 1998 and fifty-two weeks ended February 1, 1997
1998 1997 1996 Cash flows provided by operating activities $38,986 $46,753 $53,840 Cash flows used in financing activities: Repayment of short-term borrowings - - (2,875) Proceeds from issuance of long-term debt - 60,646 - Repayment of long-term obligations - (56,273) (5,000) Issuance of common stock to employee stock plans 4,084 4,434 1,240 Cash dividends (5,567) (6,586) (7,473) Purchase of treasury stock (5,395) (47,653) (43,603) -------- -------- -------- Cash flows used in financing activities (6,878) (45,432) (57,711) -------- -------- -------- Cash flows provided by (used in) investing activities: Additions to property and equipment (14,991) (21,749) (34,728) Proceeds from note receivable 43,900 - - Noncompete agreement - 10,000 - Advance (to) payment from venture - 4,000 (4,000) Proceeds from sale of Fox common stock - - 56,100 Issuance of restricted stock (53) - - -------- -------- -------- Cash flows provided by (used in) investing activities 28,856 (7,749) 17,372 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents (256) (203) 91 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 60,708 (6,631) 13,592 Cash and cash equivalents at beginning of year 15,292 21,923 8,331 -------- -------- -------- Cash and cash equivalents at end of year $76,000 $15,292 $21,923 ======== ======== ======== Supplemental cash flow information: Interest paid $ 4,481 $ 5,024 $ 4,468 ======== ======== ======== Income taxes paid $12,350 $ 8,790 $ 9,366 ======== ======== ======== See accompanying notes to consolidated financial statements.
20 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) Fifty-two weeks ended February 6, 1999, fifty-three weeks ended February 7, 1998 and fifty-two weeks ended February 1, 1997 RECONCILIATION OF NET EARNINGS TO CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
1998 1997 1996 Net earnings $21,944 $12,713 $14,363 Adjustments for items not requiring cash: Depreciation and amortization 29,750 29,978 37,946 Deferred income taxes 6,129 (4,000) 3,351 Deferred revenue 1,266 - - Interest in joint venture - 3,304 485 Gain (loss) on sale of interest in Photofinishing segment - 4,189 (6,180) Amortization of noncompete agreement (5,000) (1,772) - Amortization of discount on note receivable (2,815) (1,051) - Other (817) (3,959) (1,888) Decrease (increase) in current assets: Receivables and inventories 264 2,949 (509) Assets held for resale - - 5,055 Prepaid expenses and other current assets (54) 965 (631) Increase (decrease) in current liabilities: Accounts payable, accrued expenses and other liabilities (5,372) (429) 5,566 Income taxes (6,309) 3,866 (3,718) -------- -------- -------- Cash flows provided by operating activities $38,986 $46,753 $53,840 ======== ======== ======== See accompanying notes to consolidated financial statements.
21 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands of dollars except share and per share amounts) Fifty-two weeks ended February 6, 1999, fifty-three weeks ended February 7, 1998 and fifty-two weeks ended February 1, 1997
Add'l Common paid-in Retained stock capital earnings ------- -------- --------- Balance at February 3, 1996 $6,868 $32,071 $213,015 ------- -------- --------- Issuance of common stock (69,471 shares) 28 1,212 - Comprehensive income Net earnings - - 14,363 Foreign currency translation - - - Comprehensive income - - - Dividends ($0.56 per common share) - - (7,473) Purchase of treasury stock, at cost - - - Amortization of deferred compensation-restricted stock - - - ------- -------- --------- Balance at February 1, 1997 $6,896 $33,283 $219,905 ------- -------- --------- Issuance of common stock (260,264 shares) 103 4,331 - Comprehensive income Net earnings - - 12,713 Foreign currency translation - - - Comprehensive income - - - Dividends ($0.56 per common share) - - (6,586) Purchase of treasury stock, at cost - - - Amortization of deferred compensation-restricted stock - - - ------- -------- --------- Balance at February 7, 1998 $6,999 $37,614 $226,032 ------- -------- --------- Issuance of common stock 93 3,991 - (230,963 shares) Comprehensive income Net earnings - - 21,944 Foreign currency translation - - - Comprehensive income - - - Dividends ($0.56 per common share) - - (5,567) Purchase of treasury stock, at cost - - - Amortization of deferred compensation-restricted stock - - - ------- -------- --------- Balance at February 6, 1999 $7,092 $41,605 $242,409 ======= ======== ========= See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued) (in thousands of dollars except share and per share amounts) Fifty-two weeks ended February 6, 1999, fifty-three weeks ended February 7, 1998 and fifty-two weeks ended February 1, 1997
Accumulated other Treasury comprehensive stock income at cost --------- ---------- Balance at February 3, 1996 $(2,109) $ (74,533) -------- ---------- Issuance of common stock (69,471 shares) - - Comprehensive income Net earnings - - Foreign currency translation 249 - Comprehensive income - - Dividends ($0.56 per common share) - - Purchase of treasury stock, at cost - (43,603) Amortization of deferred compensation-restricted stock - - -------- ---------- Balance at February 1, 1997 $(1,860) $(118,136) -------- ---------- Issuance of common stock (260,264 shares) - - Comprehensive income Net earnings - - Foreign currency translation (891) - Comprehensive income - - Dividends ($0.56 per common share) - - Purchase of treasury stock, at cost - (47,653) Amortization of deferred compensation-restricted stock - - -------- ---------- Balance at February 7, 1998 $(2,751) $(165,789) -------- ---------- Issuance of common stock (230,963 shares) - - Comprehensive income Net earnings - - Foreign currency translation (612) - Comprehensive income - - Dividends ($0.56 per common share) - - Purchase of treasury stock, at cost - (5,395) Amortization of deferred compensation-restricted stock - - -------- ---------- Balance at February 6, 1999 $(3,363) $(171,184) ======== ========== See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued) (in thousands of dollars except share and per share amounts) Fifty-two weeks ended February 6, 1999, fifty-three weeks ended February 7, 1998 and fifty-two weeks ended February 1, 1997
Deferred compensation- restricted stock Total -------- --------- Balance at February 3, 1996 $(1,144) $174,168 -------- --------- Issuance of common stock (69,471 shares) - 1,240 Comprehensive income Net earnings - - Foreign currency translation - - Comprehensive income - 14,612 Dividends ($0.56 per common share) - (7,473) Purchase of treasury stock, at cost - (43,603) Amortization of deferred compensation-restricted stock 581 581 -------- --------- Balance at February 1, 1997 $ (563) $139,525 -------- --------- Issuance of common stock (260,264 shares) (15) 4,419 Comprehensive income Net earnings - - Foreign currency translation - - Comprehensive income - 11,822 Dividends ($0.56 per common share) - (6,586) Purchase of treasury stock, at cost - (47,653) Amortization of deferred compensation-restricted stock 565 565 -------- --------- Balance at February 7, 1998 $ (13) $102,092 -------- --------- Issuance of common stock (230,963 shares) (53) 4,031 Comprehensive income Net earnings - - Foreign currency translation - - Comprehensive income - 21,332 Dividends ($0.56 per common share) - (5,567) Purchase of treasury stock, at cost - (5,395) Amortization of deferred compensation-restricted stock 23 23 -------- --------- Balance at February 6, 1999 $ (43) $116,516 ======== ========= See accompanying notes to consolidated financial statements.
22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES BUSINESS OF THE COMPANY AND PRINCIPLES OF CONSOLIDATION CPI Corp. (the "Company") is a holding company engaged, through its majority or wholly owned subsidiaries and partnerships, in developing and marketing consumer services and related products through a network of centrally-managed, small retail locations. The Company operates throughout the United States, Canada and Puerto Rico and has a Photography segment, which operates professional portrait studios under the names "Sears Portrait Studios" and "Mainstreet Portraits," and a Wall Decor segment, which operates posters, prints and framing outlets under the name "Prints Plus." Company management has made a number of estimates and assumptions related to the reporting of assets and liabilities in the preparation of financial statements. Actual results could differ from these estimates. All significant intercompany transactions have been eliminated. TRANSLATION OF FOREIGN CURRENCY Assets and liabilities of foreign operations are translated into U.S. dollars at the exchange rate in effect on the balance sheet date, while equity accounts are translated at historical rates. Income and expense accounts are translated at the average rates in effect during each fiscal period. The Company recognizes that its Canadian operating results are subject to variability arising from foreign exchange rate movements. The Company does not believe such risk is material to the results of operations or the financial position of the Company and as such does not engage in derivative activities in order to hedge against foreign currency fluctuations. CASH AND CASH EQUIVALENTS For the purpose of reporting cash flows, cash and cash equivalents consist primarily of cash on hand and highly liquid investments with insignificant interest-rate risk and maturities of three months or less at date of acquisition. These highly liquid investments consist of master notes, commercial paper, treasury bills, bankers acceptances, term deposits, government agency notes, repurchase agreements, money market funds, auction rate securities and government money market funds. Investment interest income for 1998, 1997 and 1996 was $894,000, $1.2 million and $417,000, respectively. INVENTORIES Inventories in the Portrait Studio segment are comprised of raw material inventories of film, paper, chemicals and portraits-in- process, and are stated at the lower of cost or market, with cost of the majority of inventories being determined by the first-in, first-out (FIFO) method and the remainder by the last-in, first-out (LIFO) method. Inventories in the Wall Decor segment are stated at weighted average cost. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost when acquired. Expenditures for improvements are capitalized, while normal repair and maintenance are expensed as incurred. When properties are disposed of, the related cost and accumulated depreciation are removed from the accounts, and gains or losses on the dispositions are reflected in results of operations. Depreciation is computed principally using the straight-line method over estimated service lives of the respective assets. A summary of estimated useful lives is as follows: Building improvements 15 to 19 years Leasehold improvements 5 to 15 years Furniture and fixtures 5 to 8 years Machinery and equipment 3 to 10 years
23 INTANGIBLE ASSETS Intangible assets acquired through acquisitions were accounted for by the purchase method of accounting and include the excess of cost over fair-value of net assets acquired. This excess of cost over fair-value of net assets acquired is being amortized on a straight-line basis over periods ranging from five to thirty years. The Company analyzes excess of cost over fair-value of net assets acquired periodically to determine whether any impairment has occurred in the value of such assets. Based upon the anticipated future income and cash flow from operations, in the opinion of Company management, there has been no impairment. FAIR VALUE OF FINANCIAL INSTRUMENTS A financial instrument is defined as cash or a contract that both imposes on one entity a contractual obligation to deliver cash or another financial instrument to a second entity and conveys to that second entity a contractual right to receive cash or another financial instrument from the first entity. STOCK-BASED COMPENSATION PLANS The Company records compensation expense for its stock-based employee compensation plans in accordance with the intrinsic- value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Intrinsic value is the amount by which the market price of the underlying stock exceeds the exercise price of the stock option or award on the measurement date, generally the date of grant. No compensation expense is recognized for the Company's stock option plan. REVENUE RECOGNITION Portrait Studio sales revenue is recognized at the time the customer approves photographic proofs and makes a firm commitment for a portrait order. Incremental costs of production are accrued at the time sales revenue is recognized. Appropriate reserves for cancelability are maintained by the Company. Customer club program revenue is recognized partially at the time of the initial photographic session, and the remainder is recognized over the life of the customer's program. RETIREMENT PLAN The Company has a noncontributory defined-benefit retirement plan covering substantially all full-time employees. Pension expense, which is funded as accrued, includes current costs and amortization of prior service costs over a period of ten years. COMPREHENSIVE INCOME The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," on February 8, 1998. This statement requires the separate reporting of components of comprehensive income, as defined. The new standard requires the Company to separately report the translation adjustments of SFAS No. 52, "Foreign Currency Translation" as a component of comprehensive income. Prior year amounts have been reclassified to conform with the 1998 presentation. EARNINGS PER COMMON SHARE Basic earnings per common share are computed by dividing net earnings by the sum total of the weighted average number of shares of common stock outstanding. Diluted earnings per common share are computed by dividing net earnings by the sum total of the weighted average number of shares of common stock outstanding plus contingently issuable shares under the employee stock plans. 24 2. JOINT VENTURE In 1996, the Company sold 51% of the outstanding shares of Fox Photo, Inc. ("Fox") to Eastman Kodak Company ("Kodak") for $56.1 million in cash, which resulted in a pre-tax gain of $6.2 million. On the same date, the Company entered into collateral agreements with Fox and Kodak, including agreements under which the Company provided certain administrative services and management services to Fox (the "Service Agreement" and the "Consulting Agreement"). The ownership of the joint venture was accounted for under the equity method and was reflected as an investment in the Fox joint venture. In 1997, the Company sold its remaining 49% interest in Fox to Kodak for a $43.9 million non-interest bearing promissory note (the "Promissory Note") due on January 4, 1999 (the "Disposition Transaction"). As a result of the sale, the Company recorded a pre-tax loss of $4.2 million in 1997. Due to the non-interest bearing nature of the Promissory Note, a discount of $3.9 million was established and was amortized into income over the life of the Promissory Note. During 1998 and 1997, $2.8 million and $1.1 million, respectively, in amortization related to the Promissory Note was recognized. Once the joint venture was dissolved, the issue of competitive threat surfaced. The Company remained committed to further development and commercialization of its proprietary technology, including the Photo Preview and Photo Proof Systems, that were featured in joint venture test markets, as well as a store automation system. The Company also possessed knowledge of the most successful and vulnerable Fox markets and concepts. Accordingly, as part of the Disposition Transaction, the Company entered a two-year Noncompetition and Nonsolicitation Agreement (the "Noncompete Agreement") with Fox. The Company received a $10.0 million cash consideration which is being amortized into income over the life of the Noncompete Agreement. For 1998 and 1997, amortization was $5.0 million and $1.8 million, respectively. Prospectively, the Company will recognize $3.2 million in amortization in fiscal year 1999. In conjunction with the dissolution of the joint venture, the Company and Fox also agreed to immediately terminate the Consulting Agreement and terminated the Service Agreement as of February 1998. The information below summarizes the unaudited pro forma results of operations for 1997 and 1996, assuming the sale of the remaining 49% of the joint venture at the beginning of 1996, and have been prepared for comparative purposes only. The informa- tion does not purport to be indicative of the results of opera- tions which actually would have resulted had the sale been in effect on the dates indicated, or which may result in the future. PRO FORMA RESULTS (in thousands of dollars except per share amounts)
1997 1996 Net sales $366,701 $352,516 ======== ======== Net earnings $ 19,103 $ 14,645 ======== ======== Net earnings per share: Diluted $ 1.61 $ 1.24 ======== ======== Basic $ 1.64 $ 1.25 ======== ========
25 3. PROPERTY AND EQUIPMENT The adjacent table reflects the costs associated with the Company's property and equipment as of February 6, 1999 and February 7, 1998. The Company leases various premises and equipment under noncancellable operating lease agreements with initial terms in excess of one year and expiring at various dates through fiscal year 2012. The leases generally provide for the lessee to pay maintenance, insurance, taxes and certain other operating costs of the leased property. In addition to the minimum rental commitments, certain of these operating leases provide for contingent rentals based on a percentage of revenues in excess of specified amounts. Rental expense during 1998, 1997 and 1996 on all operating leases was $18.7 million, $19.1 million and $27.8 million, respectively. PROPERTY AND EQUIPMENT (in thousands of dollars)
February 6, February 7, 1999 1998 Land and land improvements $ 2,803 $ 2,803 Building improvements 26,595 26,550 Leasehold improvements 29,558 30,082 Furniture and fixtures 76,085 66,743 Machinery and equipment 119,569 116,189 -------- -------- 254,610 242,367 Less accumulated depreciation 143,462 117,649 -------- -------- Net property and equipment $111,148 $124,718 ======== ========
MINIMUM RENTAL PAYMENTS* (in thousands of dollars)
Fiscal Year 1999 $ 16,763 2000 14,965 2001 12,583 2002 10,095 2003 9,023 Thereafter 18,939 -------- $ 82,368 ======== * Under operating leases with initial terms in excess of one year at February 6, 1999.
26 4. CREDIT AGREEMENTS AND OUTSTANDING DEBT The Company has a $60.0 million Senior Note Agreement (the "Note Agreement") privately placed with two major insurance companies. The notes issued pursuant to the Note Agreement mature over a ten-year period with an average maturity of seven years and with the first principal payment due in 2001. Interest on the notes is payable semi-annually at an average effective fixed rate of 7.46%. The Note Agreement requires the Company maintain certain financial ratios and comply with certain restrictive covenants. The Company incurred $591,000 in issuance costs associated with the private placement of the notes. These costs are being amortized ratably over the ten-year life of the notes. The Company also has a $40.0 million revolving credit agreement (the "Revolving Agreement") with two domestic banks. The Revolving Agreement, which will expire on June 16, 2000, has a variable interest rate charged at either LIBOR or federal funds, with an applicable margin added, or prime rate, based on the Company's discretion. A commitment fee of 0.125% to 0.25% per annum is payable on the unused portion of the Revolving Agreement. The Company has substantially the same financial covenants as those set forth in the Company's $60.0 million Note Agreement. There were no borrowings outstanding at February 6, 1999 or February 7, 1998 under the Revolving Agreement. As of February 6, 1999, the Company had outstanding letters of credit for the principal amount of $3.6 million. DEBT OBLIGATIONS OUTSTANDING (in thousands of dollars)
February 6, February 7, 1999 1998 Senior notes, net of unamortized issuance costs $ 59,545 $ 59,461 Notes payable 14 21 -------- -------- $ 59,559 $ 59,482 ======== ========
AGGREGATE LONG-TERM DEBT MATURITIES AS OF FEBRUARY 6, 1999 (in thousands of dollars)
Fiscal Year 2001 $ 8,580 2002 8,580 2003 8,580 2004 8,580 2005 8,580 Thereafter 17,114 --------- 60,014 Unamortized issuance costs (455) --------- $ 59,559 =========
27 5. ADVERTISING The Company expenses costs involved in advertising the first time the advertising takes place, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists of direct mail advertisements that include coupons for the Company's products and of certain broadcast costs. The capitalized costs of the advertising are amortized over the expected period of future benefits following the delivery of the direct mail in which it appears. Total advertising reported as a capitalized cost for direct- response advertising and is classified with other assets for 1998 and 1997 was $700,000 and $1.0 million, respectively. Advertising expense for 1998, 1997 and 1996 was $43.6 million, $41.9 million and $45.5 million, respectively. 6. INCOME TAX A valuation allowance would be provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. The Company has not established a valuation allowance as of February 6, 1999, due to management's belief that all criteria for recognition have been met, including the existence of a history of taxes paid sufficient to support the realization of deferred tax assets. United States income taxes have not been provided on $13.9 million of undistributed earnings of the Canadian subsidiary because of the Company's intention to reinvest these earnings. The determination of unrecognized deferred U.S. tax liability for undistributed earnings of international subsidiaries is not practicable. However, it is estimated that foreign withholding taxes of $696,500 may be payable if such earnings were distributed. 28 EARNINGS BEFORE INCOME TAXES BY U.S. AND CANADIAN SOURCES (in thousands of dollars)
1998 1997 1996 U.S. $ 33,929 $ 20,720 $ 23,597 Canada (170) 177 (798) --------- --------- --------- $ 33,759 $ 20,897 $ 22,799 ========= ========= =========
COMPONENTS OF INCOME TAXES (in thousands of dollars)
1998 1997 1996 Current: Federal $ 5,202 $10,926 $ 5,399 State and local 831 1,424 1,010 Canada (347) (166) (1,324) -------- -------- -------- 5,686 12,184 5,085 Deferred 6,129 (4,000) 3,351 -------- -------- -------- $11,815 $ 8,184 $ 8,436 ======== ======== ========
RECONCILIATION BETWEEN INCOME TAXES (in thousands of dollars)
1998 1997 1996 Taxes at U.S. federal corporate statutory rate $11,815 $ 7,314 $ 7,980 State and local income taxes, net of federal tax benefit 699 1,043 849 Stock options (606) (519) (25) Other (93) 346 (368) -------- -------- -------- $11,815 $ 8,184 $ 8,436 ======== ======== ========
SOURCES OF TAX EFFECTS (in thousands of dollars)
February 6, February 7, 1999 1998 Deferred tax assets: Deferred compensation and other employee benefits $ 1,442 $ 1,527 Expense accruals 933 1,464 Allowance for doubtful accounts 177 147 Reserve for discontinued operations 376 660 Noncompete amortization 1,435 3,311 Other - 220 -------- -------- Total deferred tax assets 4,363 7,329 -------- -------- Deferred tax liabilities: Property and equipment (8,491) (8,112) Deferred revenue (2,990) - Employee pension plan (1,163) (1,378) Other (85) (90) -------- -------- Total deferred tax liabilities (12,729) (9,580) -------- -------- Net deferred tax liabilities $(8,366) $(2,251) ======== ======== Current deferred income taxes $ 32 $ 180 ======== ======== Long-term deferred income taxes $(8,398) $(2,431) ======== ========
29 7. RETIREMENT PLAN The Company maintains a qualified, noncontributory pension plan that covers all full-time employees meeting certain age and service requirements. The plan provides pension benefits based on an employee's length of service and the average compensation earned from the later of the hire date or January 1, 1995 to the retirement date. The Company's funding policy is to contribute annually at least the minimum amount required by government funding standards, but not more than is tax deductible. Plan assets consist primarily of cash equivalents, a marketable equity securities fund, guaranteed interest contracts, immediate participation guarantee contracts and government bonds. The 1998 benefit obligation was affected by plan amendments involving a change in the date used to calculate an employee's average compensation and the maximum annual compensation included in the benefit calculation. The following provides a reconciliation of benefit obligations, plan assets, and funded status of the plans. NET PERIODIC PENSION BENEFIT COSTS (in thousands of dollars)
Pension Benefits ------------------------- 1998 1997 1996 Service cost $ 1,112 $ 729 $ 1,124 Interest cost 1,809 1,459 1,432 Expected return on plan assets (2,301) (4,109) (2,802) Amortization of transition obligation 3 3 3 Amortization of prior service cost 400 143 173 Amortization of net (gain) or loss - 2,350 1,259 Net (gain) or loss due to a curtailment - - (295) -------- -------- -------- Net periodic pension expse $ 1,023 $ 575 $ 894 ======== ======== ========
ASSUMPTIONS ON FUNDED STATUS
December December December 31, 1998 31, 1997 31, 1996 Discount rate (weighted average) 7.0% 7.0% 8.0% Expected return on plan assets 9.0% 8.0% 8.0% Rate of compensation increase 4.5% 4.5% 5.5%
30 RECONCILIATION OF BENEFIT OBLIGATIONS, PLAN ASSETS, AND FUNDED STATUS (in thousands of dollars)
1998 1997 CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 23,403 $ 18,827 --------- --------- Service cost 1,112 729 Interest cost 1,809 1,459 Actuarial losses 263 3,602 Benefits paid (1,560) (1,214) Plan amendments 2,821 - --------- --------- Benefit obligation at end of year $ 27,848 $ 23,403 ========= ========= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 25,815 $ 22,635 --------- --------- Actual return on plan assets 3,768 4,109 Employer contributions 700 285 Benefits paid (1,560) (1,214) --------- --------- Fair value of assets at end of year $ 28,723 $ 25,815 ========= ========= CHANGE IN FUNDED STATUS OF THE PLAN Funded status of the plan $ 875 $ 2,412 --------- --------- Unrecognized transition obligation 9 12 Unrecognized prior service costs 2,765 344 Unrecognized net (gain) or loss (1,065) 139 --------- --------- Prepaid benefit cost* $ 2,584 $ 2,907 ========= ========= * Prepaid benefit costs are included as a component of prepaid expenses and other current assets.
31 8. SUPPLEMENTARY RETIREMENT BENEFIT PLAN The Company sponsors a non-contributory defined benefit plan providing supplementary retirement benefits for certain key executives which was enhanced in 1997 and became effective February 8, 1998. The cost of providing these benefits will be accrued over the remaining expected service lives of the active plan participants. For 1998, expenses amounted to $965,000 and consisted of $578,000 in interest costs, $290,000 in amortization of unrecognized transition obligations and $97,000 in service costs. PLAN STATUS (in thousands of dollars)
February 6, February 7, 1999 1998 Present value of accumulated post- retirement benefit obligations $ 8,571 $ 8,264 Unrecognized transition obligation (2,683) (2,840) ---------- ----------- Accrued post-retirement benefit obligation $ 5,888 $ 5,424 ========== ===========
The discount rate used in determining the accumulative post- retirement benefit obligation was 7% for both February 6, 1999 and February 7, 1998, respectively. The supplementary retirement benefit plan is funded out of the general funds of the Company. However, the Company has purchased life insurance policies on several active and retired key executives with an aggregate cash surrender value of $5.4 million and $4.5 million at February 6, 1999 and February 7, 1998, respectively. Prior to 1997, the Company recorded the net liability of the defined benefit plan and the cash surrender value of the life insurance policies, the amount of which was not material. 9. EMPLOYEE STOCK PLANS Expenses recognized for 1998, 1997 and 1996 with respect to these plans were $0.9 million, $1.7 million and $1.5 million, respectively. RESTRICTED STOCK PLAN In January 1988, the Company's Board of Directors adopted the CPI Corp. Restricted Stock Plan with an effective date of February 7, 1988. Under the plan, 250,000 shares of CPI Corp. common stock are reserved for issuance to key employees. In 1998, 2,129 restricted shares were issued and vest over a three-year period. Of the grants issued, no shares were forfeited in 1998, 1997 or 1996. As of February 6, 1999, 55,342 shares are reserved for issuance under this plan. Expenses related to the restricted stock plan are accrued periodically, based on the fair market value of the Company's common stock on the grant date. PROFIT-SHARING PLAN Under the Company's profit-sharing plan, eligible employees may elect to invest from 1% to 15% of their base compensation in a trust fund, the assets of which are invested in securities other than Company stock. Effective January 1, 1994, the Company amended the Plan to set the Company match at 50% of the employee's investment contributions, up to a maximum of 5% of the employee's compensation, as long as the Company remains profitable. The Company's matching contributions are made in shares of its common stock which vest 100% once an employee has five years of service with the Company. The difference between the market value of forfeited shares at the dates of their original contribution and their market value at the dates used to satisfy subsequent requirements have been charged to expense, with a corresponding credit to additional paid-in capital. Expenses related to the profit-sharing plan are accrued in the year to which the awards 32 relate, based on the fair market value of the Company's common stock to be issued, determined as of the date earned. The Company provided 23,151, 25,576 and 41,639 shares to satisfy its obligations under the plan for 1998, 1997 and 1996, respectively. STOCK-BONUS PLAN Under the Company's stock-bonus plan, shares of the Company's common stock are reserved for issuance to key employees, based on attainment by the Company of predefined earnings levels established annually. Each year, employees receive one-third of the shares which were awarded in each of the previous three years. For 1998, 1997 and 1996, 4,090, 4,334 and 6,825 shares, respectively, were distributed under this plan. As of February 6, 1999, 93,121 shares are reserved for issuance under this plan. Expenses related to the stock-bonus plan are accrued in the year to which the awards relate, based on the fair market value of the Company's common stock to be issued, determined as of the date earned. VOLUNTARY STOCK-OPTION PLAN The Company has a non-qualified voluntary stock-option plan, under which certain key officers may receive options to acquire shares of the Company's common stock in exchange for a voluntary reduction in base salary. Options were granted as participants elected, pursuant to their Stock Option Agreement, to reduce their compensation for 1993 and 1994. A total of 1,000,000 shares has been authorized for issuance. As of February 6, 1999, 184,220 options at an exercise price of $18.38 for 1993 salary reduction and 196,506 options at an exercise price of $15.50 for 1994 salary reduction have been issued. For 1998, 1997 and 1996, this plan was not offered. Options granted are exercisable after three years and expire at the end of eight years. DEFERRED COMPENSATION AND STOCK APPRECIATION RIGHTS PLAN On February 1, 1986, the Company's Board of Directors approved a Deferred Compensation and Stock Appreciation Rights Plan designed to attract and retain certain key employees. Under the Deferred Compensation Plan, as amended and restated, within thirty days prior to the beginning of the fiscal year, eligible employees may irrevocably elect by written notice to the Company to defer the payment of a portion (not to exceed 50% or less than $5,000 in the aggregate) of an incentive bonus. The participant may choose to have payments made either in a lump sum or in a specified number of annual installments, not to exceed ten. For 1998, 1997 and 1996, certain key executives selected to participate in this plan. All stock appreciation rights previously granted under the Plan have expired. KEY EXECUTIVE DEFERRED COMPENSATION PLAN On April 6, 1995, the Board of Directors established a deferred base salary plan for key executives which allows deferral of base salary on substantially the same terms as bonus compensation may be deferred under the Deferred Compensation and Stock Appreciation Plan. On July 14, 1995, this plan was amended and restated. Under this plan, a participant may elect by written notice to the Company to defer up to 50% of his base salary for the fiscal year, but not less than $5,000 in the aggregate. Payment shall not commence earlier than six months and one day after the initial year of deferral. The participant may choose to have payments made either in a lump sum or in a specified number of annual installments, not to exceed ten. For 1998, 1997 and 1996, certain key executives elected to participate in this plan. 33 STOCK-OPTION PLAN The Company has a non-qualified stock-option plan, under which certain officers and key employees may receive options to acquire shares of the Company's common stock. Awards of stock options and the terms and conditions of such awards are subject to the discretion of the Stock Option Committee created under the plan and consisting of members of the Compensation Committee of the Board of Directors, all of whom are disinterested directors. A total of 1,700,000 shares has been authorized for issuance under the plan. Under the plan, 148,160 options granted become exercisable at a rate of one-fourth a year commencing one year after award and expiring from four to eight years after award. An additional 824,949 options granted under the plan are cliff-vested and become exercisable from four to five years after award and expire six to eight years after award. As of February 6, 1999,there were 411,939 shares reserved for issuance under this plan. TOTAL OUTSTANDING OPTIONS -- YEAR-END 1998
Number of Per Share Weighted Weighted Shares Option Price Life* Average Price --------- ------------- -------- ------------- 349,802 $13.88-$18.88 3.42 $16.51 258,307 $21.63-$25.94 6.54 $25.21 365,000 $30.00-$35.00 4.50 $32.50 --------- Total 973,109 ========= * Weighted average remaining contractual life in years
TOTAL EXERCISABLE OPTIONS -- YEAR-END 1998
Number of Per Share Weighted Shares Option Price Price* --------- ------------- -------- 343,292 $13.88-$25.50 $ 16.56 365,000 $30.00-$35.00 $ 32.50 --------- Total 708,292 ========= * Weighted average exercise price in dollars
OPTIONS AWARDED UNDER THE STOCK OPTION PLAN - 1998
Number Weighted of Average Shares Price --------- -------- Outstanding at beginning of year 887,408 $ 24.40 Granted 252,138 25.27 Cancelled (57,500) 35.00 Exercised (108,937) 17.10 --------- -------- At end of year: Total outstanding 973,109 $ 24.82 ========= ======== Total exercisable 708,292 $ 24.77 ========= ========
OPTIONS AWARDED UNDER THE STOCK OPTION PLAN - 1997
Number Weighted of Average Shares Price ---------- -------- Outstanding at beginning of year 1,247,305 $ 23.56 Granted 9,961 18.77 Cancelled (188,043) 25.33 Exercised (181,815) 17.18 ---------- -------- At end of year: Total outstanding 887,408 $ 24.40 ========== ======== Total exercisable 439,393 $ 32.29 ========== ========
OPTIONS AWARDED UNDER THE STOCK OPTION PLAN - 1996
Number Weighted of Average Shares Price ---------- -------- Outstanding at beginning of year 1,288,961 $ 23.44 Granted 13,704 14.59 Cancelled (35,075) 19.47 Exercised (20,285) 17.02 ---------- -------- At end of year: Total outstanding 1,247,305 $ 23.56 ========== ======== Total exercisable 452,695 $ 25.91 ========== ========
34 The weighted-average fair value of options granted under the stock-option plan for 1998, 1997 and 1996 is $18.28, $11.70 and $9.10, respectively. The fair value of each option grant for 1998, 1997 and 1996 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for the grants: expected volatility of 31.0%, risk-free interest rate of 6%, expected lives of four years and an expected dividend yield of between 2.2% and 3.9%. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date for awards in 1998, 1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per common share would have been: EARNINGS AND EARNINGS PER SHARE (in thousands of dollars except per share amounts)
1998 1997 1996 Net earnings: as reported $21,944 $12,713 $14,363 ======= ======= ======= pro forma $21,765 $12,709 $14,324 ======= ======= ======= Diluted earnings per common share: as reported $ 2.15 $ 1.07 $ 1.06 ======= ======= ======= pro forma $ 2.13 $ 1.07 $ 1.06 ======= ======= ======= Basic earnings per common share: as reported $ 2.21 $ 1.09 $ 1.07 ======= ======= ======= pro forma $ 2.19 $ 1.09 $ 1.07 ======= ======= =======
35 10. INDUSTRY SEGMENT INFORMATION The Company is engaged in developing and marketing products and services for consumers in the United States and Canada through a network of centrally managed retail locations. The Company operates in two business segments: Portrait Studios and Wall Decor. In addition, the Company sold its interest in the Fox joint venture to Kodak on October 2, 1997. This joint venture comprised of Fox Photo, CPI Photo Finish and Proex was entered into October 4, 1996. The Portrait Studios segment operates a professional portrait photography business through fixed location studios. The Wall Decor segment markets an assortment of custom print reproductions and related accessories and provides custom framing services. Substantially all of the Company's Portrait Studio business operates under Sears, Roebuck and Co.("Sears") license agreements that are terminable by either the Company or Sears upon 90 days notice. Except in connection with store closings, Sears has never terminated the operations of any of the Company's portrait studios. The Company's relationship with Sears is long-standing, and management has no reason to believe that Sears will exercise its rights under the agreements to materially reduce the scope of the Company's business with Sears. GEOGRAPHIC FINANCIAL INFORMATION (in thousands of dollars)
1998 1997 1996 NET SALES*: United States $367,985 $344,379 $444,574 Canada 21,525 22,322 22,460 -------- -------- -------- $389,510 $366,701 $467,034 ======== ======== ======== LONG-LIVED ASSETS: United States $117,241 $129,211 $175,940 Canada 3,781 5,144 7,095 -------- -------- -------- $121,022 $134,355 $183,035 ======== ======== ======== * Net sales are attributed to countries based on location.
36 SELECTED INDUSTRY SEGMENT INFORMATION (in thousands of dollars)
1998 1997 1996 NET SALES Portrait Studio $325,547 $303,666 $289,840 Photofinishing - - 114,518 Wall Decor 63,963 63,035 62,676 --------- --------- --------- $389,510 $366,701 $467,034 ========= ========= ========= OPERATING EARNINGS Portrait Studio $ 44,276 $ 44,597 $ 35,656 Photofinishing - - 82 Wall Decor 1,002 (964) 3,252 --------- --------- --------- $ 45,278 $ 43,633 $ 38,990 ========= ========= ========= SEGMENT ASSETS Portrait Studio $ 99,868 $107,770 $115,591 Photofinishing - - - Wall Decor 37,505 42,589 42,557 Corporate cash and marketable sec. 74,552 13,360 20,867 Corporate other 22,768 65,042 19,600 Investment in Fox Joint Venture - - 48,105 --------- --------- --------- $234,693 $228,761 $246,720 ========= ========= ========= DEPRECIATION AND AMORTIZATION Portrait Studio $ 21,923 $ 22,048 $ 21,081 Photofinishing - - 9,494 Wall Decor 4,798 4,447 4,181 Corporate 3,029 3,483 3,190 --------- --------- --------- $ 29,750 $ 29,978 $ 37,946 ========= ========= ========= CAPITAL EXPENDITURES Portrait Studio $ 13,231 $ 13,939 $ 17,820 Photofinishing - - 9,098 Wall Decor 1,105 5,717 9,085 Corporate 1,158 2,676 1,050 Disposals (503) (583) (2,325) --------- --------- --------- $ 14,991 $ 21,749 $ 34,728 ========= ========= =========
37 11. STOCK REPURCHASE PLAN The Company's Board of Directors has authorized the Company to purchase up to 4,500,000 shares of its outstanding common stock through purchases at management's discretion from time to time at acceptable market prices. Acquired shares are held as treasury stock and will be available for general corporate purposes. As of February 6, 1999, the Company had purchased 3,615,046 shares of stock for $81.1 million at an average stock price of $22.42. On November 12, 1996, the Company announced the completion of a "Dutch Auction" tender offer. The Company, as authorized by the Board of Directors, purchased 2,250,000 shares of the Company's common stock at $19.00 per share. The total cost incurred was $43.6 million. The Company used the proceeds from the sale of Fox's common stock to finance the tender offer. On January 7, 1998, the Company, as authorized by the Board of Directors, completed a second "Dutch Auction" tender offer by purchasing 1,999,215 shares of the Company's common stock at $23.00 per share for $46.5 million. The Company used the proceeds from: the $10.0 million two-year Noncompete Agreement; the repayment of a $4.0 million note held by the Company from the joint venture; and other working capital and cash from operations to finance the tender offer. 12. SHAREHOLDER RIGHTS PLAN The Board of Directors of the Company established a Shareholders Rights Plan ("Rights Plan") through the declaration of a dividend distribution of one preferred stock purchase right for each outstanding share of common stock. The Rights Plan entitles holders of common stock to purchase one one-hundredth of a share of Series A Participating Preferred Stock in the Company, or an acquirer of the Company, in the event of certain non-negotiated efforts, as defined in the Rights Plan, to gain control of the Company. The rights issued expire on May 11, 1999, unless redeemed earlier. In addition, the rights will be exercisable if any person or group (other than certain entities affiliated with the Company) becomes the beneficial owner of 15% or more of the Company's common stock. On August 3, 1995, the Board of Directors adopted an amendment to the Rights Plan to clarify that no person would be deemed an "Acquiring Person" as defined in the Rights Plan if that person acquired beneficial ownership of 15% or more of the Company's stock solely as a result of the Company's repurchase of stock, provided that the person did not subsequently acquire additional shares. 38 13. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. CASH AND CASH EQUIVALENTS, RECEIVABLES, ACCOUNTS PAYABLE AND ACCRUED EXPENSES The carrying amounts approximate fair value at February 6, 1999 and February 7, 1998 due to the short maturity of these financial instruments. SHORT-TERM BORROWINGS AND LONG-TERM DEBT The fair value of the Company's debt is estimated based on quoted market prices for similar debt issues with the same remaining maturities. On February 6, 1999, the carrying value and estimated fair market value of the Company's debt was $59.6 million and $64.3 million, respectively. On February 7, 1998, the carrying value and estimated fair market value of the Company's debt was $59.5 million and $63.0 million, respectively. 14. CONTINGENCIES The Company is a defendant in various lawsuits arising in the course of business. It is the opinion of management that the ultimate liability, if any, resulting from the resolution of such lawsuits will not have a material effect on the consolidated financial position or the results of operations of the Company. 39 INDEPENDENT AUDITORS' REPORT - ---------------------------- TO THE BOARD OF DIRECTORS AND STOCKHOLDERS CPI CORP.: We have audited the accompanying consolidated balance sheets of CPI Corp. and subsidiaries as of February 6, 1999 and February 7, 1998, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for each of the fiscal years in the three-year period ended February 6, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CPI Corp. and subsidiaries at February 9, 1999 and February 7, 1998, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended February 6, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP St. Louis, Missouri April 8, 1999 40 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - --------------------------------- The tables presented set forth selected financial data for the quarters of the Company's fiscal years ended February 6, 1999 and February 7, 1998. Although this information is unaudited, in the opinion of the Company, it reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for such periods. The Company's photography business is seasonal, with the largest sales volume during the third and fourth quarters, the period preceding and including the Thanksgiving and Christmas seasons. In October 1997, the Company recorded a $4.2 million loss before taxes on the sale of its interest in the joint venture formed in October 1996. The Company also recorded the repurchase of 1,999,215 shares of common stock for $46.5 million in January 1998. Since April 17, 1989, the Company's common stock has been traded on the New York Stock Exchange under the symbol CPY. The adjacent tables also set forth the high and low sales price of the common stock reported by the New York Stock Exchange during the Company's last two fiscal years. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended: in thousands of dollars except share and per share amounts May 2, July 25 Nov. 14, Feb. 6, 1998 1998 1998 1999 (12 wks) (12 wks) (16 wks) (12 wks) --------------------------------------- Fiscal Year 1998 Net sales $ 73,354 $ 70,997 $124,005 $121,155 Earnings (loss) before income taxes (778) 2,134 9,309 23,095 Net earnings (loss) (506) 1,387 6,051 15,012 - ---------------------------------------------------------------- Earnings (loss) per common share-diluted $ (0.05) $ 0.13 $ 0.59 $ 1.48 Earnings (loss) per common share-basic (0.05) 0.14 0.61 1.53 - ---------------------------------------------------------------- Weighted average number of common and common equivalent shares- diluted 9,914 10,323 10,200 10,120 Weighted average number of common and common equivalent shares- basic 9,914 10,015 9,961 9,841 - ---------------------------------------------------------------- Dividends $ 0.14 $ 0.14 $ 0.14 $ 0.14 - ---------------------------------------------------------------- Stock Price and Volume High $ 27.44 $ 22.38 $ 25.75 $ 27.44 Low $ 23.18 $ 22.75 $ 18.12 $ 20.44 Volume (in thousands of shares) 1,599 827 1,155 1,107
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended: in thousands of dollars except share and per share amounts Apr. 26, July 19, Nov. 8, Feb. 7, 1997 1997 1997 1998 (12 wks) (12 wks) (16 wks) (13 wks) --------------------------------------- Fiscal Year 1997 Net sales $ 70,174 $ 68,494 $108,156 $119,877 Earnings (loss) before income taxes (3,827) 2,198 (433) 22,960 Net earnings (loss) (2,411) 1,385 (725) 14,465 - ---------------------------------------------------------------- Earnings (loss) per common share-diluted $ (0.20) $ 0.12 $ (0.06) $ 1.26 Earnings (loss) per common share-basic (0.21) 0.12 (0.06) 1.29 - ---------------------------------------------------------------- Weighted average number of common and common equivalent shares- diluted 11,835 11,921 12,205 11,448 Weighted average number of common and common equivalent shares- basic 11,726 11,762 11,871 11,194 - ---------------------------------------------------------------- Dividends $ 0.14 $ 0.14 $ 0.14 $ 0.14 - ---------------------------------------------------------------- Stock Price and Volume High $ 19.50 $ 22.13 $ 28.00 $ 25.19 Low $ 15.88 $ 16.00 $ 19.50 $ 17.25 Volume (in thousands of shares) 1,378 1,463 3,063 3,124
41 FINANCIAL HIGHLIGHTS - --------------------
1998 1997 1996 1995 PER SHARE Earnings-diluted $ 2.15 $ 1.07 $ 1.06 $ 1.26 Earnings-basic 2.21 1.09 1.07 1.27 Avg. shares outstanding (millions/shares)-diluted 10.2 11.8 13.5 14.0 Avg. shares outstanding (millions/shares)-basic 9.9 11.6 13.4 13.9 Dividends 0.56 0.56 0.56 0.56 Prices: high 27.44 28.00 21.13 22.13 low 18.12 15.88 13.88 14.25 P/E range: high 12.76 26.17 19.93 21.70 low 8.43 14.84 13.09 13.97 Dividend yield 2.46% 2.55% 3.20% 3.08% - ---------------------------------------------------------------- INCOME DATA (in millions) Net sales $389.5 $366.7 $467.0 $526.7 Income from operations 29.4 28.2 20.4 31.7 Net interest and other income (expense) 4.3 0.2 (3.3) (4.1) Gain (loss) on sale of interest in Photo- finishing segment - (4.2) 6.2 - Interest in joint venture - (3.3) (0.5) - Income taxes 11.8 8.2 8.4 10.0 Accounting change - - - - Net earnings from continuing operations 21.9 12.7 14.4 17.6 - ---------------------------------------------------------------- BALANCE SHEET (in millions): Current assets $113.7 $ 94.4 $ 63.7 $ 72.8 Cash and equivalents 76.0 15.3 21.9 8.3 Net fixed assets 111.1 124.7 130.8 167.9 Total assets 234.7 228.8 246.7 300.5 Employed assets 158.7 213.5 224.8 292.2 Current liabilities 35.8 47.4 50.8 64.0 Long-term debt 59.6 59.5 44.9 54.8 Stockholders' equity 116.5 102.1 139.5 174.2 Employed equity 40.5 86.8 117.6 165.9
FINANCIAL HIGHLIGHTS (continued) - --------------------
1998 1997 1996 1995 CASH FLOW DATA (in millions) From operations $ 39.0 $ 46.8 $ 53.8 $ 53.7 From (used for) investments 28.9 (7.7) 17.4 (43.7) From (used for) financing (6.9) (45.4) (57.7) (11.1) Effect of exchange rate changes (0.3) (0.2) 0.1 0.2 Change in cash and cash equivalents 60.7 (6.6) 13.6 (0.9) Capital expenditures (excluding acquisitions) 15.0 21.7 34.7 48.8 Acquisitions - - - - - ---------------------------------------------------------------- RATIO ANALYSIS Net margin (1) 5.6 3.5 3.1 3.4 Asset turnover (2)* 1.70x 1.49x 1.55x 1.75x Return on assets (3)* 9.57% 5.17% 4.78% 5.88% Financial leverage (4)* 2.24x 1.77x 1.73x 1.81x Return on equity (5)* 21.44% 9.15% 8.25% 10.64% Retention rate (6) 0.746 0.482 0.480 0.459 Implied growth rate (7) 16.00% 4.41% 3.96% 4.88% * Beginning fiscal year (1) Net margin: Net earnings/net sales (2) Asset turnover: Net sales/total assets (beginning) (3) Return on assets: Net margin x asset turnover (4) Financial leverage: Total assets (beginning)/stockholders' equity (beginning) (5) Return on equity: Return on assets x financial leverage (6) Retention rate: Net earnings less dividends on common stock/net earnings (7) Implied growth rate: Return on equity x retention rate
FINANCIAL HIGHLIGHTS (continued) - --------------------
1994 1993 1992 PER SHARE Earnings-diluted $ 1.18 $ 1.03 $ 1.69 Earnings-basic 1.18 1.03 1.69 Avg. shares outstanding (millions/shares)-diluted 14.1 14.7 14.7 Avg. shares outstanding (millions/shares)-basic 14.1 14.6 14.6 Dividends 0.56 0.56 0.56 Prices: high 21.88 20.75 26.38 low 13.88 13.88 15.00 P/E range: high 20.83 23.06 17.13 low 13.21 15.42 9.74 Dividend yield 3.13% 3.23% 2.71% - ---------------------------------------------------------------- INCOME DATA (in millions) Net sales $517.5 $460.0 $433.8 Income from operations 30.3 22.0 38.5 Net interest and other income (expense) (3.9) (0.3) 1.6 Gain (loss) on sale of interest in Photo- finishing segment - - - Interest in joint venture - - - Income taxes 9.8 8.7 15.3 Accounting change - 2.1 - Net earnings from continuing operations 16.6 15.1 24.8 - ---------------------------------------------------------------- BALANCE SHEET (in millions) Current assets $ 82.0 $127.8 $ 73.2 Cash and equivalents 9.2 36.1 21.0 Net fixed assets 159.1 114.3 97.6 Total assets 300.5 305.8 237.8 Employed assets 291.3 269.7 216.8 Current liabilities 69.8 65.2 56.8 Long-term debt 59.7 59.8 0.3 Stockholders' equity 166.0 175.5 171.9 Employed equity 156.8 139.4 151.0
FINANCIAL HIGHLIGHTS (continued) - --------------------
1994 1993 1992 CASH FLOW DATA (in millions) From operations $ 40.4 $ 38.2 $ 36.9 From (used for) investments (51.7) (73.9) (34.4) From (used for) financing (15.3) 51.6 (10.2) Effect of exchange rate changes (0.3) (0.8) (1.3) Change in cash and cash equivalents (26.9) 15.1 (9.0) Capital expenditures (excluding acquisitions) 75.1 28.9 12.0 Acquisitions - 14.7 23.9 - ---------------------------------------------------------------- RATIO ANALYSIS Net margin (1) 3.2 3.3 5.7 Asset turnover (2)* 1.69x 1.93x 1.82x Return on assets (3)* 5.44% 6.36% 10.39% Financial leverage (4)* 1.74x 1.38x 1.49x Return on equity (5)* 9.47% 8.78% 15.47% Retention rate (6) 0.465 0.381 0.637 Implied growth rate (7) 4.40% 3.35% 9.86% * Beginning fiscal year (1) Net margin: Net earnings/net sales (2) Asset turnover: Net sales/total assets (beginning) (3) Return on assets: Net margin x asset turnover (4) Financial leverage: Total assets (beginning)/stockholders' equity (beginning) (5) Return on equity: Return on assets x financial leverage (6) Retention rate: Net earnings less dividends on common stock/net earnings (7) Implied growth rate: Return on equity x retention rate
FINANCIAL HIGHLIGHTS (continued) - --------------------
1991 1990 1989 PER SHARE Earnings-diluted $ 1.97 $ 2.28 $ 2.15 Earnings-basic 1.97 2.29 2.17 Avg. shares outstanding (millions/shares)-diluted 15.1 15.4 15.7 Avg. shares outstanding (millions/shares)-basic 15.1 15.3 15.6 Dividends 0.56 0.50 0.42 Prices: high 34.75 32.88 33.88 low 21.88 24.25 21.00 P/E range: high 19.31 15.01 18.51 low 12.15 11.07 11.48 Dividend yield 1.98% 1.75% 1.53% - ---------------------------------------------------------------- INCOME DATA (in millions) Net sales $400.4 $360.7 $336.9 Income from operations 43.4 49.3 47.3 Net interest and other income (expense) 4.0 6.4 5.5 Gain (loss) on sale of interest in Photo- finishing segment - - - Interest in joint venture - - - Income taxes 17.7 20.7 19.0 Accounting change - - - Net earnings from continuing operations 29.7 35.0 33.8 - ---------------------------------------------------------------- BALANCE SHEET (in millions) Current assets $ 83.6 $130.2 $106.4 Cash and equivalents 30.0 84.5 68.7 Net fixed assets 97.7 80.7 81.4 Total assets 238.9 218.7 196.5 Employed assets 208.9 134.2 127.8 Current liabilities 67.0 51.4 47.8 Long-term debt 0.6 0.5 0.3 Stockholders' equity 160.3 151.7 133.1 Employed equity 130.3 67.3 64.4
FINANCIAL HIGHLIGHTS (continued) - --------------------
1991 1990 1989 CASH FLOW DATA (in millions) From operations $ 51.6 $ 50.0 $ 53.3 From (used for) investments (87.2) (19.2) (15.0) From (used for) financing (18.7) (15.3) (32.1) Effect of exchange rate changes (0.2) 0.3 - Change in cash and cash equivalents (54.5) 15.8 6.2 Capital expenditures (excluding acquisitions) 19.8 15.1 18.5 Acquisitions 70.2 1.2 0.8 - ---------------------------------------------------------------- RATIO ANALYSIS Net margin (1) 7.4 9.7 10.0 Asset turnover (2)* 1.83x 1.84x 1.71x Return on assets (3)* 13.59% 17.83% 17.17% Financial leverage (4)* 1.44x 1.48x 1.44x Return on equity (5)* 19.57% 26.39% 24.72% Retention rate (6) 0.689 0.773 0.771 Implied growth rate (7) 13.48% 20.40% 19.06% * Beginning fiscal year (1) Net margin: Net earnings/net sales (2) Asset turnover: Net sales/total assets (beginning) (3) Return on assets: Net margin x asset turnover (4) Financial leverage: Total assets (beginning)/stockholders' equity (beginning) (5) Return on equity: Return on assets x financial leverage (6) Retention rate: Net earnings less dividends on common stock/net earnings (7) Implied growth rate: Return on equity x retention rate
FINANCIAL HIGHLIGHTS (continued) - --------------------
1988 PER SHARE Earnings-diluted $ 1.95 Earnings-basic 1.96 Avg. shares outstanding (millions/shares)-diluted 16.7 Avg. shares outstanding (millions/shares)-basic 16.6 Dividends 0.25 Prices: high 22.25 low 17.25 P/E range: high 12.29 low 9.53 Dividend yield 1.27% - ---------------------------------------------------- INCOME DATA (in millions) Net sales $310.5 Income from operations 48.1 Net interest and other income (expense) 5.7 Gain (loss) on sale of interest in Photo- finishing segment - Interest in joint venture - Income taxes 21.2 Accounting change - Net earnings from continuing operations 32.6 - ---------------------------------------------------- BALANCE SHEET (in millions) Current assets $104.5 Cash and equivalents 62.5 Net fixed assets 78.0 Total assets 197.0 Employed assets 134.5 Current liabilities 47.3 Long-term debt 0.5 Stockholders' equity 136.6 Employed equity 74.1
FINANCIAL HIGHLIGHTS (continued) - --------------------
1988 CASH FLOW DATA (in millions) From operations $ 42.5 From (used for) investments (23.7) From (used for) financing (9.7) Effect of exchange rate changes 0.4 Change in cash and cash equivalents 9.5 Capital expenditures (excluding acquisitions) 12.1 Acquisitions 11.0 - ---------------------------------------------------- RATIO ANALYSIS Net margin (1) 10.5 Asset turnover (2)* 1.84x Return on assets (3)* 19.30% Financial leverage (4)* 1.44x Return on equity (5)* 27.79% Retention rate (6) 0.863 Implied growth rate (7) 23.99% * Beginning fiscal year (1) Net margin: Net earnings/net sales (2) Asset turnover: Net sales/total assets (beginning) (3) Return on assets: Net margin x asset turnover (4) Financial leverage: Total assets (beginning)/stockholders' equity (beginning) (5) Return on equity: Return on assets x financial leverage (6) Retention rate: Net earnings less dividends on common stock/net earnings (7) Implied growth rate: Return on equity x retention rate
42 DIRECTORS AND OFFICERS - ---------------------- Milford Bohm* Retired founder and Chairman Emeritus, CPI Corp. Alyn V. Essman Chairman of the Board and Chief Executive Officer, CPI Corp. Russell Isaak President, CPI Corp. Mary Ann Krey* Chief Executive Officer, Krey Distributing Co. Lee Liberman Chairman Emeritus, Laclede Gas Company Patrick J. Morris Senior Executive Vice President, CPI Corp. Nicholas L. Reding Retired Vice Chairman, Monsanto Company Martin Sneider Adjunct Professor of Retailing, Washington University Robert L. Virgil* Principal, Edward Jones * Member of the Audit Committee of the Board of Directors DIRECTORS AND OFFICERS (continued) - ---------------------- Chairman, Chief Executive Officer Alyn V. Essman President Russell Isaak Senior Executive Vice President Patrick J. Morris Secretary and General Counsel Jane E. Nelson Corporate Officers Barry Arthur -Executive Vice President, Finance-Chief Financial Officer Edmund J. Chase -Executive Vice President, Strategic Development William F. Cronin -Executive Vice President, Marketing Fran Scheper -Executive Vice President, Human Resources Richard Tarpley -Executive Vice President, Manufacturing Division Presidents Theodore R. Upland III -Prints Plus Patrick J. Morris -Sears Portrait Studios and Canadian Operations 43 INVESTOR INFORMATION - -------------------- MOST RECENT RESEARCH REPORTS FAC Equities, December 23, 1998 Value Line, February 26, 1999 STOCK TRANSFER, REGISTRAR, DIVIDEND REINVESTMENT AND RIGHTS AGENT Harris Trust & Savings Bank, 111 West Monroe, P. O. Box 755, Chicago, IL 60690-0755, (800) 441-9673 10-K REPORT Single copies of the Company's Form 10-K, filed with the Securities and Exchange Commission, are available at no charge to shareholders upon written request. The Form 10-K is also available on the Internet at www.sec.gov\cgi-bin\srch-edgar. ANNUAL MEETING/CORPORATE HEADQUARTERS The annual meeting of stockholders will convene at 10:00 a.m., Thursday, June 22, 1999 at the Corporate Headquarters, 1706 Washington Avenue, St. Louis, MO 63103-1717. INDEPENDENT AUDITORS KPMG LLP, St. Louis, MO AUTOMATIC DIVIDEND REINVESTMENT The automatic dividend reinvestment plan is a convenient way for stockholders to increase their investment in the Company, with all brokerage commissions and service charges paid by CPI Corp. Cash contributions in the amount of $10 to $10,000 per quarter can also be made toward the purchase of additional shares. For a plan description, enrollment card or other information, write or call the Shareholder Service Department at CPI Corporate Headquarters. AT THE COMPANY Alyn V. Essman Chairman CPI Corp., 1706 Washington Avenue, St. Louis, MO 63103-1717 (314) 231-1575, Extension 3240 AT THE FINANCIAL RELATIONS BOARD, INC. John Hancock Center, 875 N. Michigan Avenue, Chicago, IL 60611 George Zagoudis Partner and Account Division Manager Direct line: (312) 640-6663 Tracy Gutwillig Market Intelligence Executive Direct line: (312) 640-6777 INVESTOR INFORMATION (continued) - -------------------- FOR INFORMATION ON THE INTERNET CPI Corp.: http://www.cpicorp.com CPI Human Resources: http://www.cpicorp.com/jobs Sears Portrait Studio: http://www.searsportrait.com George Zagoudis at the Financial Relations Board, Inc.: grz@chi.frbd.com 44 NOTICE TO SHAREHOLDERS - ---------------------- Beginning with the first quarter of Fiscal Year 1996, we have not published a formal quarterly earnings report, thereby saving your Company tens of thousands of dollars. Instead, we offer the option of three formats with which you can receive quarterly earnings information on a more timely basis than with the previous reports. The scheduled release dates are: 1st quarter-June 2, 1999; 2nd quarter-August 24, 1999; 3rd quarter-December 14, 1999. Your options - on an ongoing basis as long as you remain a shareholder - are: 1. You can access the news release on the Internet via the CPI Corp. home page address: http://www.cpicorp.com 2. We can automatically E-Mail to you following the media release. 3. We can mail you a printed copy of the quarterly news release within 7 working days after its release to the news media. Please indicate your choice of formats 2 or 3 by completing the information in the appropriate spaces below: E-Mail Transmission Name __________________________________________________________ E-Mail Address ________________________________________________ Printed Copy of News Release Name __________________________________________________________ Address ___________________City ________ State _____ Zip _____ Please mail this form to: CPI Corp., Shareholder Relations, 1706 Washington Ave., St. Louis, MO 63103-1717 (On the inside back cover of the Annual Report to Shareholders) (Pictures: on this page are two pictures horizontally placed. The title centered over both pictures is captioned: "Visit us on the Internet." On the left is a picture of the internet home page for Sears Portrait Studio captioned: "www.sears-portrait.com". On the right is a picture of the internet home page for CPI Corp. captioned: "www.cpicorp.com".) (Back cover of the Annual Report to Shareholders) (Centered vertically and horizontally is the following:) CPI corp. www.sears-portrait.com www.cpicorp.com (Centered at the bottom of the page is the following:) CPI corp. 1706 Washington Avenue, St. Louis, Missouri 63103 .. 314.231.1575 EX-21 10 EXHIBIT (21) SUBSIDIARIES OF THE REGISTRANT AS OF APRIL 8, 1999
STATE/PROVINCE COUNTRY -------------- ------------- CPI Corp. Delaware United States Consumer Programs Holding, Inc. Delaware United States Consumer Programs, Incorporated Missouri United States d/b/a Sears Portrait Studios CPI Images L.L.C. Missouri United States d/b/a Sears Portrait Studios d/b/a Mainstreet Portraits CPI Management Services L.L.C. Missouri United States CPI Properties L.L.C. Missouri United States myportraits.com, Inc. Missouri United States Consumer Programs Partner,Inc. Delaware United States CPI Research and Development, Inc. Delaware United States CPI Prints Plus, Inc. Delaware United States Ridgedale Prints Plus, Inc. Minnesota United States d/b/a Prints Plus Prints Plus, Inc. California United States d/b/a Prints Plus d/b/a Prints & Posters CPI Technology Corp. Missouri United States CPI Corp. Canada Ontario Canada d/b/a Sears Portrait Studios
35 EX-23 11 EXHIBIT (23) INDEPENDENT AUDITORS' CONSENT The Board of Directors and Stockholders CPI Corp.: We consent to incorporation by reference in the registration statements Nos. 33-50082 and 002-86403 on Forms S-8 of CPI Corp. of our reports dated April 8, 1999, relating to the consolidated balance sheets of CPI Corp. and subsidiaries as of February 6, 1999 and February 7, 1998 and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for each of the fiscal years in the three-year period ended February 6, 1999, and the related schedule, which reports appear in the 1998 annual report on Form 10-K of CPI Corp. /s/ KPMG LLP - ------------------------- KPMG LLP St. Louis, Missouri April 8, 1999 36 EX-27 12 FINANCIAL DATA SCHEDULE
5 1000 12-MOS FEB-06-1999 FEB-06-1999 1,158 74,842 10,676 302 19,071 113,671 254,610 143,462 234,693 35,776 0 0 0 7,092 109,424 234,693 389,510 389,510 56,399 360,150 0 0 4,627 33,759 11,815 21,944 0 0 0 21,944 2.21 2.15
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