10-Q 1 cpi10q83101.txt CPI CORP 2ND QUARTER FY01 RESULTS UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 CPI CORP. --------- For the Quarter Ended July 21, 2001 -------------- Commission File Number 1-10204 ------- DELAWARE 43-1256674 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1706 Washington Avenue, St. Louis, Missouri 63103-1790 ---------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (314) 231-1575 -------------- (Registrant's Telephone Number) Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of August 30, 2001 there were 7,894,903 shares of the Registrant's common stock outstanding. TABLE OF CONTENTS -----------------
(PAGE NUMBERS REFER TO PAPER DOCUMENT ONLY) PART 1. FINANCIAL INFORMATION PAGE(S) ------------------------------- ------- Item 1. Financial Statements - Interim Condensed Consolidated Balance Sheets For July 21, 2001 and February 3, 2001 3-5 - Interim Condensed Consolidated Statement of Earnings - For the 12 and 24 Weeks Ended July 21, 2001 and July 22, 2000 6-9 - Interim Condensed Consolidated Statement of Changes in Stockholders' Equity - For the 52 Weeks Ended February 3, 2001 and for the 24 Weeks Ended July 21, 2001 10-11 - Interim Condensed Consolidated Statement of Cash Flows - For the 24 Weeks Ended July 21, 2001 and July 22, 2000 12-13 - Notes to the Interim Condensed Consolidated Financial Statements 14-18 Item 2. Management's Discussions and Analysis of Results of Operations, Financial Condition and Cash Flow 19-25 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 PART II. OTHER INFORMATION --------------------------- Item 4. Submission of Matters to a Vote to Security Holders 26 Item 6. Exhibits and Reports on Form 8-K 27 Signature 28 Index to Exhibits 29
2 PART 1 FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CPI CORP. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS - ASSETS (UNAUDITED)(in thousands of dollars)
July 21, February 3, 2001 2001 ---------- ----------- Current assets: Cash and cash equivalents $ 22,535 $ 38,820 Receivables, less allowance of $654 and $241, respectively 9,904 9,306 Inventories 8,753 10,997 Prepaid expenses and other current assets 7,543 6,013 Refundable income taxes 11,707 - Deferred tax assets - 5,266 --------- ----------- Total current assets 60,442 70,402 --------- ----------- Net property and equipment 71,357 72,603 Net assets of discontinued operations - 16,011 Assets of business transferred under contractual arrangements: Preferred stock 11,000 - Loan receivable 3,615 - Other assets, net of amortization of $1,338 and $1,321, respectively 15,420 16,896 --------- ----------- Total assets $161,834 $ 175,912 ========= =========== See accompanying notes to consolidated financial statements.
3 CPI CORP. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) (in thousands of dollars)
July 21, February 3, 2001 2001 --------- ----------- Current liabilities: Current maturities of long-term debt $ 8,580 $ 8,580 Accounts payable 9,760 9,388 Accrued employment costs 9,804 11,159 Accrued deferred revenue 8,871 10,192 Sales taxes payable 1,751 2,799 Accrued advertising expense 1,928 1,328 Accrued expenses and other liabilities 5,017 5,049 Income taxes - 1,067 Deferred income taxes 992 - --------- ---------- Total current liabilities 46,703 49,562 --------- ----------- Long-term debt 42,593 51,142 Other liabilities 8,301 11,670 Long-term deferred revenue 2,706 2,966 --------- ----------- Total liabilities $ 100,303 $ 115,340 --------- ----------- See accompanying notes to consolidated financial statements.
4 CPI CORP. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) (continued) (in thousands of dollars)
July 21, February 3, 2001 2001 --------- ----------- Stockholders' equity: Preferred stock, no par value, 1,000,000 shares authorized; no shares outstanding - - Preferred stock, Series A, no par value - - Common stock, $0.40 par value, 50,000,000 shares authorized; 18,133,138 and 17,885,645 shares outstanding at July 21, 2001 and February 3, 2001, respectively 7,253 7,154 Additional paid-in capital 48,844 44,363 Retained earnings 236,999 240,227 Accumulated other comprehensive income (3,920) (3,466) ---------- ----------- 289,176 288,278 Treasury stock at cost, 10,238,235 and 10,242,035 shares at July 21, 2001 and February 3, 2001, respectively (227,641) (227,699) Unamortized deferred compensation- restricted stock (4) (7) ---------- ----------- Total stockholders' equity 61,531 60,572 ---------- ----------- Total liabilities and stockholders' equity $ 161,834 $ 175,912 ========== =========== See accompanying notes to consolidated financial statements.
5 CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (in thousands of dollars except share and per share amounts) Twelve weeks ended July 21, 2001 and July 22, 2000
Twelve Weeks Ended -------------------------- July 21, July 22, 2001 2000 ---------- ---------- Net sales $ 59,071 $ 60,845 Costs and expenses: Cost of sales (exclusive of depreciation expense shown below) 8,447 7,590 Selling, administrative and general expenses 46,067 43,924 Depreciation 5,525 5,615 Amortization 26 30 ---------- ---------- 60,065 57,159 ---------- ---------- Income (loss) from operations (994) 3,686 Interest expense 1,007 1,058 Interest income 264 352 Other expense - 51 Other income 14 164 ---------- ---------- Earnings (loss) before income tax expense (1,723) 3,093 Income tax expense (benefit) (603) 1,082 ---------- ---------- Net earnings (loss) from continuing operations (1,120) 2,011 ---------- ---------- Loss from discontinued operations net of income tax benefit of $314 - (583) ---------- ---------- Net earnings (loss) $ (1,120) $ 1,428 ========== ========== See accompanying notes to consolidated financial statements.
6 CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)(continued) (in thousands of dollars except share and per share amounts) Twelve weeks ended July 21, 2001 and July 22, 2000
Twelve Weeks Ended ---------------------------- July 21, July 22, 2001 2000 ------------ ------------ Net earnings (loss) from continuing operations-diluted $ (0.14) $ 0.25 Net loss from discontinued operations-diluted - (0.07) ------------ ------------ Net earnings (loss)-diluted $ (0.14) $ 0.18 ============ ============ Net earnings (loss) from continuing operations-basic $ (0.14) $ 0.25 Net loss from discontinued operations-basic - (0.07) ------------ ------------ Net earnings (loss)-basic $ (0.14) $ 0.18 ============ ============ Dividends per share $ 0.14 $ 0.14 ============ ============ Weighted average number of common and common equivalent shares outstanding- diluted 7,790,534 8,176,471 ============ ============ Weighted average number of common and common equivalent shares outstanding- basic 7,790,534 7,961,242 ============ ============ See accompanying notes to consolidated financial statements.
7 CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (in thousands of dollars except share and per share amounts) Twenty-four weeks ended July 21, 2001 and July 22, 2000
Twenty-four Weeks Ended -------------------------- July 21, July 22, 2001 2000 ---------- ---------- Net sales $ 124,098 $ 127,746 Costs and expenses: Cost of sales (exclusive of depreciation expense shown below) 16,637 15,586 Selling, administrative and general expenses 95,004 93,113 Depreciation 11,002 11,266 Amortization 52 61 ---------- ---------- 122,695 120,026 ---------- ---------- Income from operations 1,403 7,720 Interest expense 2,076 2,111 Interest income 693 797 Other expense 1,715 151 Other income 35 192 ---------- ---------- Earnings (loss) before income tax expense (1,660) 6,447 Income tax expense (benefit) (581) 2,256 ---------- ---------- Net earnings (loss) from continuing operations (1,079) 4,191 ---------- ---------- Loss from discontinued operations net of income tax benefit of $314 - (583) ---------- ---------- Net earnings (loss) $ (1,079) $ 3,608 ========== ========== See accompanying notes to consolidated financial statements.
8 CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (continued) (in thousands of dollars except share and per share amounts) Twenty-four weeks ended July 21, 2001 and July 22, 2000
Twenty-four Weeks Ended ---------------------------- July 21, July 22, 2001 2000 ------------ ------------ Net earnings(loss)from continuing operations-diluted $ (0.14) $ 0.50 Net loss from discontinued operations-diluted - (0.07) ------------ ------------ Net earnings (loss)-diluted $ (0.14) $ 0.43 ============ ============ Net earnings(loss)from continuing operations-basic $ (0.14) $ 0.52 Net loss from discontinued operations-basic - (0.07) ------------ ------------ Net earnings (loss)-basic $ (0.14) $ 0.45 ============ ============ Dividends per share $ 0.28 $ 0.28 ============ ============ Weighted average number of common and common equivalent shares outstanding- diluted 7,740,278 8,323,342 ============ ============ Weighted average number of common and common equivalent shares outstanding- basic 7,740,278 8,096,913 ============ ============ See accompanying notes to consolidated financial statements.
9 CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (in thousands of dollars except share and per share amounts) Fifty-two weeks ended February 3, 2001
Accum Deferred Add'l other Treasury comp'n Common paid-in Retained comp'h stock restr'td stock capital earnings income at cost stock Total ------ ------- --------- -------- ---------- -------- --------- Balance at Feb. 5, 2000 $7,117 $42,804 $233,739 $(2,945) $(199,426) $ (32) $ 81,257 ------ ------- --------- -------- ---------- -------- ---------- Issuance of common stock (94,195 shares) 37 1,559 - - - - 1,596 Comprehensive income Net earnings - - 10,954 - - - Foreign currency translation - - - (521) - - Comprehensive income - - - - - - 10,433 Dividends ($0.56 per common share) - - (4,466) - - - (4,466) Purchase of treasury stock, at cost - - - - (28,273) - (28,273) Amortization of deferred compensation- restricted stock - - - - - 25 25 ------ ------- --------- -------- ---------- -------- ---------- Balance at Feb. 3, 2001 $7,154 $44,363 $240,227 $(3,466) $(227,699) $ (7) $ 60,572 ====== ======= ========= ======== ========== ======== ========== See accompanying notes to consolidated financial statements.
10 CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (Continued) (in thousands of dollars except share and per share amounts) Twenty-four weeks ended July 21, 2001
Accum Deferred Add'l other Treasury comp'n Common paid-in Retained comp'h stock restr'td stock capital earnings income at cost stock Total ------ ------- --------- -------- ---------- -------- ---------- Balance at Feb. 3, 2001 $7,154 $44,363 $240,227 $(3,466) $(227,699) $ (7) $ 60,572 ------ ------- --------- -------- ---------- -------- ---------- Issuance of common stock (247,493 shares) 99 4,481 - - - - 4,580 Comprehensive income Net loss - - (1,079) - - - Foreign currency translation - - - (454) - - Comprehensive income - - - - - - (1,533) Dividends ($0.28 per common share) - - (2,149) - - - (2,149) Purchase of treasury stock, at cost - - - - 58 - 58 Amortization of deferred compensation- restricted stock - - - - - 3 3 ------ ------- --------- -------- ---------- -------- ---------- Balance at July 21, 2001 $7,253 $48,844 $236,999 $(3,920) $(227,641) $ (4) $ 61,531 ====== ======= ========= ======== ========== ======== ========== See accompanying notes to consolidated financial statements.
11 CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands of dollars) Twenty-four weeks ended July 21, 2001 and July 22, 2000
24 Weeks Ended -------------------- July 21, July 22, 2001 2000 --------- --------- Cash flows provided by operating activities $ 623 $ 6,930 --------- --------- Cash flows used in financing activities: Repayment of long-term obligations (8,580) - Issuance of common stock to employee stock plans 4,580 733 Cash dividends (2,149) (2,317) Purchase of treasury stock 58 (24,206) --------- -------- Cash flows used in financing activities (6,091) (25,790) --------- -------- Cash flows used in investing activities: Additions to property and equipment (9,756) (5,738) Purchase of long-term investment (921) - --------- -------- Cash flows used in investing activities (10,677) (5,738) --------- -------- Effect of exchange rate changes on cash and cash equivalents (140) (124) --------- --------- Net decrease in cash and cash equivalents (16,285) (24,722) Cash and cash equivalents at beginning of year 38,820 49,546 --------- --------- Cash and cash equivalents at end of period $ 22,535 $ 24,824 ========= ========= Supplemental cash flow information: Interest paid $ 2,277 $ 2,238 ========= ========= Income taxes paid $ 6,436 $ 7,317 ========= ========= See accompanying notes to consolidated financial statements.
12 CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) Twenty-four weeks ended July 21, 2001 and July 22, 2000 RECONCILIATION OF NET EARNINGS TO CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES (UNAUDITED)
24 Weeks Ended -------------------- July 21, July 22, 2001 2000 --------- --------- Net earnings (loss) from operations $ (1,079) $ 4,191 Adjustments for items not requiring cash: Depreciation and amortization 11,054 11,327 Deferred income taxes 5,833 (6) Deferred revenue, net of commissions (1,353) 634 Other 480 (748) Decrease (increase) in current assets: Receivables and inventories 1,647 578 Refundable income taxes (11,707) (522) Prepaid expenses and other current assets (1,722) (622) Increase (decrease) in current liabilities: Accounts payable, accrued expenses and other liabilities (1,463) (1,345) Income taxes (1,067) (4,912) -------- -------- Cash flows from continuing operations 623 8,575 Cash flows from discontinued operations - (1,645) -------- -------- Cash flows provided by operating activities $ 623 $ 6,930 ======== ======== See accompanying notes to consolidated financial statements.
13 CPI CORP. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair presentation of CPI Corp.'s (the "Company") financial position as of July 21, 2001 and February 3, 2001 and the results of its operations and changes in its cash flows for the 24 weeks ended July 21, 2001 and July 22, 2000. Certain prior year amounts have been reclassified to conform to the second quarter 2001 presentation. These financial statements should be read in conjunction with the financial statements and the notes included in the Company's annual report on Form 10-K for its fiscal year ended February 3, 2001. 2. In April 2000, the Company announced it was negotiating to sell its Wall Decor segment, a business operated by the Company since 1993 under the name Prints Plus. As a result of the decision to exit this business, a loss of $6.4 million after taxes was recorded in fiscal year 1999 to recognize anticipated losses and related expenses in connection with the sale. The Company also classified the Wall Decor segment as a discontinued operation and reclassified prior years' financial statements to reflect this change. The Company had planned to complete this transaction in the summer of 2000. However, in August 2000, the Company announced that negotiations to sell its Wall Decor business had terminated and the Company was pursuing other buyers for this business. Subsequently, in April 2001, the Company announced it had signed an agreement with TRU Retail, Inc. ("TRU Retail"), a corporation formed by top management of Prints Plus, to buy the Wall Decor segment from the Company. As a result of these events, in fiscal year 2000, net earnings of the Company were adjusted to include a further $4.1 million after tax loss for the discontinued Wall Decor operations. This loss reflected fiscal year 2000 operating results of Wall Decor operation, the consideration to be received at the closing date of the sale, and the anticipated 2001 losses and related expenses in connection with the sale. On July 25, 2001 the Company announced that effective July 21, 2001, it provided TRU Retail with a $6.4 million revolving line of credit (the "Revolver"). The Revolver is fully collateralized by the assets of TRU Retail, expires on July 26, 2004, has interest charged at 1.0% over prime, and has a commitment fee of 0.5% per annum payable on the unused portion of the Revolver. The Revolver also requires TRU Retail to maintain certain financial ratios and comply with certain restrictive covenants. The Revolver will be held as a 14 long-term asset on the Company's balance sheet captioned "Assets of business transferred under contractual arrangements: Loan Receivable." Further, the Company also announced on July 25,2001, that effective July 21, 2001, the sale of the Wall Decor segment had been completed to TRU Retail for $16.0 million, which included the receipt of $11.0 million in preferred stock of TRU Retail, approximately $4.0 million in cash, $1.0 million in other consideration and the assumption of certain liabilities including the ongoing guarantee of certain operating real estate leases. To effect the close, TRU Retail drew approximately $3.6 million on the Revolver. Although the legal transfer of the ownership has been completed, for accounting purposes, the preferred stock, which has a mandatory redemption in January 2012 and pays 9% dividends annually, is classified as a long-term asset under the caption "Assets of business transferred under contractual arrangements: Preferred Stock" on the Company's balance sheet. In addition, in the future, the Company will assess the need for a valuation allowance and corresponding charge to income should the preferred stock become impaired due to operating losses of TRU Retail. Net sales of the discontinued operations for the 12-week second quarter and 24-week first half of 2000 were $12.7 million and $25.6 million, respectively. Operating losses of the discontinued operations for the 12-week second quarter and 24-week first half of 2000 were $1.8 million and $3.3 million, respectively. However, $2.4 million of anticipated losses for the Wall Decor business for the first half of 2000 were included in the $6.4 million after tax loss of discontinued operations recorded in fiscal year 1999. This resulted in recording $583,000 in losses net of income taxes in the financial statements for the second quarter and first half of 2000. 15 SUPPLEMENTAL CASH FLOW INFORMATION FROM DISCOUNTINUED OPERATIONS (in thousands of dollars)
July 22, 2000 (24 weeks) Loss from discontinued operations, net of income tax benefit of $314 $ (583) Adjustments for items not requiring cash: Depreciation and amortization 2,268 Decrease (increase) in current assets: Receivables and inventories 683 Prepaid expenses and other current assets (733) Reduction in loss reserve (1,561) Increase in current liabilities: Accounts payable, accrued expenses and other liabilities (352) Capital expenditures (1,367) ---------- Cash flows from discontinued operations $ (1,645) ==========
3. States, Canada and Puerto Rico, while the Technology Development segment The Company has operations in two business segments: Portrait Studios and Technology Development. The Portrait Studios segment functions as the exclusive operator of Sears Portrait Studios with locations in the United operates an internet-based and mail order photofinishing business under the name searsphotos.com, as well as offers software programs primarily for the retail service industry use, software consulting and custom software development under the name Centrics Technology, Inc. 16 SELECTED INDUSTRY SEGMENT INFORMATION (in thousands of dollars)
Twelve Weeks Ended ----------------------------- July 21, 2001 July 22,2000 --------------- ------------- NET SALES: Portrait Studio $ 59,009 $ 60,845 Technology Development 1,431 - Intersegment sales (1,369) - ----------- ----------- $ 59,071 $ 60,845 =========== =========== INCOME (LOSS) FROM OPERATIONS: Portrait Studio operating earnings $ 1,743 $ 7,732 Technology Development operating earnings 75 (384) Corporate expense (2,812) (3,662) ----------- ----------- $ (994) $ 3,686 =========== =========== Twenty-four Weeks Ended ----------------------------- July 21, 2001 July 22,2000 --------------- ------------- NET SALES: Portrait Studio $ 124,022 $ 127,746 Technology Development 1,445 - Intersegment sales (1,369) - ----------- ----------- $ 124,098 $ 127,746 =========== =========== INCOME FROM OPERATIONS: Portrait Studio operating earnings $ 7,851 $ 15,262 Technology Development operating earnings (691) (734) Corporate expense (5,757) (6,808) ----------- ----------- $ 1,403 $ 7,720 =========== =========== SEGMENT ASSETS: Portrait Studio $ 80,898 $ 92,043 Technology Development 901 -- Corporate cash and cash equivalents 22,535 24,824 Corporate other 57,500 29,593 Net assets of discontinued operations - 23,627 ----------- ----------- $ 161,834 $ 170,087 =========== ===========
17 GEOGRAPHIC FINANCIAL INFORMATION --------------------------------
Twelve Weeks Ended -------------------------------- July 21, 2001 July 22, 2000 -------------- -------------- NET SALES: United States $ 55,011 $ 56,481 Canada 4,060 4,364 -------------- -------------- $ 59,071 $ 60,845 ============== ============== Twenty-four Weeks Ended -------------------------------- July 21, 2001 July 22, 2000 -------------- -------------- NET SALES: United States $ 116,108 $ 119,384 Canada 7,990 8,362 -------------- -------------- $ 124,098 $ 127,746 ============== ============== LONG-LIVED ASSETS: United States $ 96,058 $ 85,110 Canada 5,334 3,755 -------------- -------------- $ 101,392 $ 88,865 ============== ==============
18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS - OVERVIEW ----------------------------------------------- SAFE HARBOR STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements contained in this report, and in particular in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, that 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 CPI Corp.'s ("the Company's") outlook for Sears Portrait Studios, future cash requirements and capital expenditures, are only predictions or expectations; actual events or results may differ materially as a result of risks facing the Company. Such risks include, but are not limited to: customer demand for the Company's products and services, the overall level of economic activity in the Company's major markets, competitors' actions, manufacturing interruptions, dependence on certain suppliers, changes in the Company's relationship with Sears, Roebuck and Company ("Sears") and the condition and strategic planning of Sears, fluctuations in operating results, the attractions and retention of qualified personnel and other risks as may be described in the Company's filings with the Securities and Exchange Commission, including its form 10-K for the year ended February 3, 2001. FISCAL YEARS The Company's fiscal year ends the first Saturday of February. Accordingly, fiscal year 2000 ended February 3, 2001 and consisted of 52 weeks. The second fiscal quarters of 2001 and 2000 consisted of twelve weeks and ended July 21, 2001 and July 22, 2000, respectively. Throughout "Management's Discussion and Analysis of Financial Condition and Results of Operation," reference to 2000 will mean the fiscal year-end 2000 and reference to second quarter 2001 and second quarter 2000 will mean the second fiscal quarter of 2001 and 2000, respectively. BUSINESS SEGMENTS The Company has operations in two business segments: Portrait Studios and Technology Development. The Portrait Studios segment functions as the exclusive operator of Sears Portrait Studios with locations in the United States, Canada and Puerto Rico, while the Technology Development segment operates an internet-based and mail order photofinishing business under the name searsphotos.com, as well as offers software programs primarily for the retail service industry use, software consulting and custom software development 19 under the name Centrics Technology, Inc. DISCONTINUED OPERATIONS In April 2000, the Company announced it was negotiating to sell its Wall Decor segment, a business operated by the Company since 1993 under the name Prints Plus. As a result of the decision to exit this business, a loss of $6.4 million after taxes was recorded in fiscal year 1999 to recognize anticipated losses and related expenses in connection with the sale. The Company also classified the Wall Decor segment as a discontinued operation and reclassified prior years' financial statements to reflect this change. The Company had planned to complete this transaction in the summer of 2000. However, in August 2000, the Company announced that negotiations to sell its Wall Decor business had terminated and the Company was pursuing other buyers for this business. Subsequently, in April 2001, the Company announced it had signed an agreement with TRU Retail, Inc. ("TRU Retail"), a corporation formed by top management of Prints Plus, to buy the Wall Decor segment from the Company. As a result of these events, in fiscal year 2000, net earnings of the Company were adjusted to include a further $4.1 million after tax loss for the discontinued wall decor operations. This loss reflected fiscal year 2000 operating results of the Wall Decor operation, the consideration to be received at the closing date of the sale, and the anticipated 2001 losses and related expenses in connection with the sale. On July 25, 2001 the Company announced that effective July 21, 2001, it provided TRU Retail with a $6.4 million revolving line of credit (the "Revolver"). The Revolver is fully collateralized by the assets of TRU Retail, expires on July 26, 2004, has interest charged at 1.0% over prime, and has a commitment fee of 0.5% per annum payable on the unused portion of the Revolver. The Revolver also requires TRU Retail to maintain certain financial ratios and comply with certain restrictive covenants. The Revolver will be held as a long-term asset on the Company's balance sheet captioned "Assets of business transferred under contractual arrangements: Loan Receivable." Further, the Company also announced on July 25,2001, that effective July 21, 2001, the sale of the Wall Decor segment had been completed to TRU Retail for $16.0 million, which included the receipt of $11.0 million in preferred stock of TRU Retail, approximately $4.0 million in cash, $1.0 million in other consideration and the assumption of certain liabilities including the ongoing guarantee of certain operating real estate leases. To effect the close, TRU Retail drew approximately $3.6 million on the Revolver. 20 Although the legal transfer of the ownership has been completed, for accounting purposes, the preferred stock, which has a mandatory redemption in January 2012 and pays 9% dividends annually, is classified as a long- term asset under the caption "Assets of business transferred under contractual arrangements: Preferred Stock" on the Company's balance sheet. In addition, in the future, the Company will assess the need for a valuation allowance and corresponding charge to income should the preferred stock become impaired due to operating losses of TRU Retail. Net sales of the discontinued operations for the 12-week second quarter and 24-week first half of 2000 were $12.7 million and $25.6 million, respectively. Operating losses of the discontinued operations for the 12-week second quarter and 24-week first half of 2000 were $1.8 million and $3.3 million, respectively. However, $2.4 million of anticipated losses for the Wall Decor business for the first half of 2000 were included in the $6.4 million after tax loss of discontinued operations recorded in fiscal year 1999. This resulted in recording $583,000 in losses net of income taxes in the financial statements for the second quarter and first half of 2000. STOCK REPURCHASES Under various authorizations from the Company's Board of Directors to acquire shares of its outstanding common stock through purchases at management's discretion from time to time at acceptable market prices, in the second quarter of 2000, the Company purchased 299,300 shares of stock for $6.8 million at an average stock price of $22.62. For the first two quarters of 2000, 1,029,700 shares of stock were repurchased for $24.2 million. No stock was repurchased in the first two quarters of 2001. Acquired shares are held as treasury stock and will be available for general corporate purposes. The weighted average shares outstanding have been adjusted to reflect the changes in shares outstanding resulting from the repurchase of the Company's common stock. MANAGEMENT'S DISCUSSION AND ANALYSIS - RESULTS OF OPERATIONS ------------------------------------------------------------ TWELVE WEEKS ENDED JULY 21,2001 COMPARED TO TWELVE WEEKS ENDED JULY 22, 2000 Net Sales --------- Overall, net sales decreased from $60.8 million for the second quarter of 2000, to $59.1 million, or 2.9%, for the second quarter of 2001. Net sales for the second quarter 2001 for the Portrait Studios segment were $59.0 million, down 3.0% from the $60.8 million 21 recorded for the same time period in 2000. The 3.5% decrease in customer traffic was offset by the 0.7% increase in average sales per customer and the impact of the recognition of deferred revenues arising from the Smile Savers Plan(R). Before consideration of the recognition of deferred revenues from the Smile Savers program, sales would have decreased 4.3% in second quarter 2001 from 2000 levels. Net sales for the Technology Development segment were $1.4 million for the second quarter 2001. There were no second quarter 2000 sales for Technology Development. Included in net sales are intersegment sales from Technology Development to Portrait Studios of $1.3 million in second quarter 2001. There were no intersegment sales between the two segments in second quarter 2000. Income (Loss) From Operations ----------------------------- Income from operations decreased from $3.7 million for second quarter 2000 to a $1.0 million loss from operations for second quarter 2001 primarily as a result of lower operating earnings in the Portrait Studio segment. In the Portrait Studio segment, operating earnings decreased from $7.7 million in second quarter 2000 to $1.7 million in second quarter 2001. Although decreased sales were the primary factor contributing to this change, increased labor costs, advertising costs and cost of sales also decreased operating earnings in second quarter 2001 compared to second quarter 2000. In the Technology Development segment, operating earnings increased to $75,000 for second quarter 2001 from an operating loss of $384,000 recorded in second quarter 2000 due to intersegment sales. General corporate expenses were slightly lower from $3.7 million in second quarter 2000 to $2.8 million in second quarter of 2001 due primarily to lower bonuses. Interest Expense, Interest Income, Other Expense and Other Income ----------------------------------------------------------------- Interest expense, interest income, other expense and other income were relatively unchanged from second quarter 2000 compared to second quarter 2001. Income Tax Expense (Benefit) ---------------------------- Income tax expense decreased from $1.1 million in second quarter 2000 to an income tax benefit of $603,000 in second quarter 2001 as a result of decreased earnings. Net Earnings (Loss) ------------------- Net earnings decreased from $1.4 million in second quarter 22 2000, which included $583,000 in net loss from discontinued operations, to a net loss of $1.1 million in second quarter 2001 due to the various factors previously noted. TWENTY-FOUR WEEKS ENDED JULY 21,2001 COMPARED TO TWENTY-FOUR WEEKS ENDED JULY 22, 2000 Net Sales --------- Overall, net sales decreased from $127.7 million for the first two quarters of 2000, to $124.1 million, or 2.9%, for the first two quarters of 2001. Net sales for the first two quarters 2001 for the Portrait Studios segment were $124.0 million, down from the $127.7 million recorded for the same time period in 2000. The 5.1% decrease in customer traffic was offset by the 2.3% increase in average sales per customer and the favorable impact of the recognition of deferred revenues arising from the Smile Savers Plan(R). Before consideration of the recognition of deferred revenues from the Smile Savers program, sales would have decreased 4.6% in the first two quarters 2001 from 2000 levels. Net sales for the Technology Development segment were $1.4 million for the first two quarters of 2001. There were no sales for Technology Development in the first two quarters of 2000. Included in net sales are intersegment sales from Technology Development to Portrait Studios of $1.3 million for the first two quarters of 2001. There were no intersegment sales between the two segments for the first two quarters of 2000. Income From Operations ---------------------- Income from operations decreased from $7.7 million for the first two quarters 2000 to $1.4 million for the first two quarters 2001 primarily as a result of lower operating earnings in the Portrait Studio segment. In the Portrait Studio segment, operating earnings decreased from $15.3 million in the first two quarters 2000 to $7.9 million in 2001. Although decreased sales were the primary factor contributing to this change, increased labor costs and cost of sales also decreased operating earnings in the first two quarters 2001 compared to the first two quarters 2000. In the Technology Development segment, operating losses were relatively unchanged from $734,000 in the first two quarters 2000 to $691,000 in the first two quarters 2001. General corporate expenses were slightly lower from $6.8 million in the first two quarters 2000 to $5.8 million in the first two quarters of 2001 due primarily to lower bonuses. 23 Interest Expense, Interest Income, Other Expense and Other Income ----------------------------------------------------------------- Interest expense, interest income and other income were relatively unchanged from the first two quarters 2000 compared to the first two quarters 2001. The increase in other expense from $151,000 in the first two quarters 2000 to $1.7 million in the first two quarters 2001 reflected the costs in the first two quarters 2001 related to the retirement of Alyn V. Essman and recruitment of J. David Pierson as Chairman and Chief Executive Officer. Income Tax Expense (Benefit) ---------------------------- Income tax expense decreased from $2.3 million in the first two quarters 2000 to an income tax benefit of $581,000 in the first two quarters 2001 as a result of decreased earnings. Net Earnings (Loss) ------------------- Net earnings decreased from $3.6 million in the first two quarters 2000, which included $583,000 in net loss from discontinued operations, to a net loss of $1.1 million in the first two quarters 2001 due to the various factors previously noted. MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL CONDITION ---------------------------------------------------------- ASSETS Total assets decreased 8.0% at the end of second quarter 2001 from year-end 2000 reflecting lower cash and cash equivalents, due to the schedule payments of debt, increased capital expenditures and seasonal cash demands, and lower inventories, due to improved inventory management, offset by higher refundable income taxes caused by seasonal tax payments and quarterly losses. LIABILITIES Total liabilities decreased 13.0% at the end of second quarter 2001 from year-end 2000, reflecting the scheduled payment on long-term debt, reductions in deferred supplementary retirement benefits due to the retirement of the Company's chairman, and seasonal decreases in accrued bonuses, payroll and sales tax liabilities and deferred revenue created under the Smile Savers Plan(R). STOCKHOLDERS' EQUITY Stockholders' equity increased 1.6% for second quarter 2001 from year-end 2000 as the $4.6 million issuance of common stock under various employee stock plans was only partially offset by the 24 distribution of $2.2 million in dividends and second quarter 2001 net losses of $1.1 million. MANAGEMENT'S DISCUSSION AND ANALYSIS - CASH FLOWS ------------------------------------------------- During the first two quarters of 2001, the Company provided $623,000 in internal funds from operations. Cash flow used in financing activities during this timeframe amounted to $6.1 million which included the payment of $8.6 million of long-term debt obligations under the $60.0 million Senior Note Agreement and $2.2 million in dividends, offset by the issuance of $4.6 million in common stock to employee stock plans. The $10.7 million of cash flows used in investing activities included $9.8 million in capital expenditures. The net result of these transactions was a $16.6 million decrease in cash and cash equivalents during the first two uarters 2001. Although the Company had previously announced in its Annual Report to Shareholders that planned capital expenditures for fiscal year 2001 would be approximately $30.0 million, the Company now believes the 2001 level will closer to $24.0 million, primarily due to fewer equipment and systems upgrades. 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, scheduled principle payments on long-term debt, planned capital expenditures and dividends to shareholders. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risks relating to the Company's operations result primarily from changes in interest rates and changes in foreign exchange rates. The Company's debt obligations have primarily fixed interest rates; therefore, the Company's exposure to changes in interest rates is minimal. The Company's exposure to changes in foreign exchange rates relates to the Canadian operations, which is minimal, as these operations constitute 8.1% of the Company's total assets and 6.4% of the Company's total sales. PART II OTHER INFORMATION ---------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders was held in St. Louis, Missouri on Thursday, June 7, 2001. The following items were voted on and the results are listed below: a) The following individuals were elected to the Company's Board of Directors: RESULTS OF VOTES FOR DIRECTORS
SHARES FOR SHARES WITHHELD ---------- --------------- Russell Isaak 6,424,962 229,154 Lee Liberman 6,406,862 247,254 Patrick J. Morris 6,424,962 229,154 J. David Pierson 6,408,462 245,654 Nicholas L. Reding 6,408,462 245,654 Martin Sneider 6,407,862 246,254 Robert Virgil 6,408,462 245,654
b) The Board of Directors' appointment of KPMG LLP to audit the Company's accounts for the 2001 fiscal year was approved by a vote of 6,603,643 shares in favor, 46,859 shares opposed and 3,614 shares abstaining. c) A Resolution to provide for an Annual Incentive Program for Chairman and Chief Executive Officer, President and Senior Executive Vice Presidents was approved by a vote of 5,903,944 shares in favor, 732,448 shares opposed and 17,723 shares abstaining. 26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS The following exhibits are being filed as part of this Report: Exhibit 10.38 - First Amendment to Revolving Credit Agreement Exhibit 10.39 - Loan Agreement among TRU Retail, Inc., Prints Plus, Inc. and Consumer Programs, Incorporated Exhibit 10.40 - Stock Purchase Agreement among Ridgedale Prints Plus, Inc. and TRU Retail, Inc. Exhibit 10.41 - Exhibit B, Certificate of Designation, Preferences and Rights of Series A Preferred Stock of TRU Retail, Inc. Exhibit 11.0 - Computation of Earnings per Common Share b) REPORTS ON FORM 8-K - On April 30, 2001, CPI Corp. issued a press release announcing the sale of Prints Plus to TRU Retail, Inc. - On June 1, 2001, CPI Corp. issued a press release announcing first quarter FY 2001 results. - On July 26, 2001, CPI Corp. issued a press release announcing the completion of the sale of Prints Plus to TRU Retail, Inc. 27 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CPI Corp. (Registrant) By: /s/ Barry Arthur --------------------------- Barry Arthur Authorized Officer and Principal Financial Officer Dated: August 31, 2001 28
CPI CORP. EXHIBIT INDEX (PAGE NUMBERS REFER TO PAPER DOCUMENT ONLY) Exhibit 10.38 - First Amendment to Revolving Credit Agreement 30 Exhibit 10.39 - Loan Agreement among TRU Retail, Inc., Prints Plus, Inc. and Consumer Programs, Incorporated 31 Exhibit 10.40 - Stock Purchase Agreement among Ridgedale Prints Plus, Inc. and TRU Retail, Inc. 32 Exhibit 10.41 - Exhibit B, Certificate of Designation, Preferences and Rights of Series A Preferred Stock of TRU Retail, Inc. 33 Exhibit 11.0 - CPI Corp. Computation of Earnings per Common Share 34-37
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