-----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, AnOg0mp3Eh7SN6AJNdhrdPJgNksIEUdwY8UEiqi3jb8w12lSQBe1Up/fNsg4ArD4 T/obb7fy9iZvFNMMc9jw3A== 0001169232-03-003862.txt : 20030516 0001169232-03-003862.hdr.sgml : 20030516 20030516164147 ACCESSION NUMBER: 0001169232-03-003862 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20021109 FILED AS OF DATE: 20030516 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: 0206 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10204 FILM NUMBER: 03708905 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-Q/A 1 d55821_10q-a.txt FORM 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION PRIVATE WASHINGTON, D.C. 20549 FORM 10-Q/A Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 CPI CORP. For the Quarter Ended November 9, 2002 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 December 10, 2002 there were 8,044,203 shares of the Registrant's common stock outstanding. TABLE OF CONTENTS (PAGE NUMBERS REFER TO PAPER DOCUMENT ONLY) PAGE(S) ------- PART 1. FINANCIAL INFORMATION Item 1. Financial Statements - Interim Condensed Consolidated Balance Sheets as of November 9, 2002 and February 2, 2002 4-5 - Interim Condensed Consolidated Statements of Operations - For the 16 and 40 Weeks Ended November 9, 2002 and November 10, 2001 6-7 - Interim Condensed Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income - For the 40 Weeks Ended November 9, 2002 8 - Interim Condensed Consolidated Statements of Cash Flows - For the 40 Weeks Ended November 9, 2002 and November 10, 2001 9-10 - Notes to the Interim Condensed Consolidated Financial Statements 11-21 Item 2. - Management's Discussions and Analysis, Financial Condition and Results of Operations 22-33 Item 3. Quantitative and Qualitative Disclosures About Market Risk 34 Item 4. Controls and Procedures 34 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 35 Signature 36 Certifications 37-40 Index to Exhibits 41 2 EXPLANATORY NOTE CPI Corp. is filing this Form 10-Q/A for the quarter ended November 9, 2002 to reflect the restatement of its audited consolidated financial statements for the fiscal year ended February 2, 2002 and unaudited consolidated financial statements for the sixteen and forty weeks ended November 9, 2002 and November 10, 2001. The restatement resulted from the Company changing its policy for recognizing revenues to be consistent with Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" See the consolidated financial statements and Note 1 thereto included herein for a description of the restatement. This Form 10-Q/A does not attempt to modify or update any other disclosures set forth in the original filing, except as required to reflect the effects of the restatement. Additionally, this Form 10-Q/A does not purport to provide a general update or discussion of any other developments at the Company subsequent to the original filing. The filing of this Form 10-Q/A shall not be deemed an admission that the original filing, when made, included any untrue statement of material fact or omitted to state a material fact necessary to make a statement not misleading. 3 PART 1 FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CPI CORP. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS - ASSETS (in thousands of dollars) (RESTATED) (RESTATED) November 9, February 2, 2002 2002 (UNAUDITED) ----------- ----------- Current assets: Cash and cash equivalents $ 25,343 $ 46,555 Receivables, less allowance of $25 and $254, respectively 16,848 5,421 Inventories 16,484 12,920 Prepaid expenses and other current assets 11,608 6,795 Refundable income taxes 11,305 9,123 Deferred tax assets 4,386 1,990 ---------- ---------- Total current assets 85,974 82,804 ---------- ---------- Net property and equipment 51,493 63,708 Assets of business transferred under contractual arrangements: Preferred security 10,221 10,069 Loan receivable 4,710 1,518 Assets of supplemental retirement plan: Cash surrender value of life insurance policies (net of borrowings of $1,595, as of November 9, 2002) 9,196 9,455 Long-term investments held in Rabbi Trust 4,846 4,951 Other assets, net of amortization of 1,359 9,099 9,056 ---------- ---------- Total assets $ 175,539 $ 181,561 ========== ========== See accompanying notes to consolidated financial statements. 4 CPI CORP. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands of dollars except share and per share amounts) (RESTATED) (RESTATED) November 9, February 2, 2002 2002 (UNAUDITED) ----------- ----------- Current liabilities: Current maturities of long-term debt $ 8,580 $ 8,580 Accounts payable 14,380 9,741 Accrued employment costs 11,101 13,538 Deferred revenue 36,743 26,953 Sales taxes payable 2,744 2,816 Accrued advertising expense 3,927 1,384 Accrued expenses and other liabilities 4,391 3,289 ---------- ---------- Total current liabilities 81,866 66,301 ---------- ---------- Long-term debt 34,103 42,639 Other liabilities 9,047 10,686 Long-term deferred revenue 4,575 5,891 Stockholders' equity: Preferred stock, no par value, 1,000,000 shares authorized; no shares outstanding -- -- Preferred stock, Series A, no par value, 200,000 shares authorized; no shares outstanding -- -- Common stock, $0.40 par value, 50,000,000 shares authorized; 18,282,506 and 18,201,743 shares issued at November 9, 2002 and February 2, 2002, respectively 7,313 7,281 Additional paid-in capital 51,137 49,845 Retained earnings 220,386 231,980 Accumulated other comprehensive income (5,223) (5,386) ---------- ---------- 273,613 283,720 Treasury stock at cost, 10,238,303 shares at both November 9, 2002 and February 2, 2002 (227,642) (227,642) Unamortized deferred compensation- restricted stock (23) (34) ---------- ---------- Total stockholders' equity 45,948 56,044 ---------- ---------- Total liabilities and stockholders' equity $ 175,539 $ 181,561 ========== ========== See accompanying notes to consolidated financial statements. 5 CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Sixteen weeks ended November 9, 2002 and November 10, 2001 (in thousands of dollars except share and per share amounts) (RESTATED) (RESTATED) Sixteen Weeks Ended ------------------------ Nov. 9, Nov. 10, 2002 2001 ---------- ---------- Net sales $ 81,111 $ 86,357 Costs and expenses: Cost of sales (exclusive of depreciation and amortization expense shown below) 10,691 11,042 Selling, general and administrative expenses 71,554 72,246 Depreciation and amortization 5,865 7,247 Other charges and impairments 4,816 480 ---------- ---------- 92,926 91,015 ---------- ---------- Loss from operations (11,815) (4,658) Interest expense 1,023 1,228 Interest income 501 619 Other income (expense), net 37 (372) ---------- ---------- Loss before income tax benefit (12,300) (5,639) Income tax benefit (4,800) (2,046) ---------- ---------- Net loss $ (7,500) $ (3,593) ========== ========== Net loss per share-diluted $ (.93) $ (.45) ========== ========== Net loss per share-basic $ (.93) $ (.45) ========== ========== Dividends per share $ 0.14 $ 0.14 ========== ========== Weighted average number of common and common equivalent shares outstanding - diluted 8,044,203 7,912,532 ========== ========== Weighted average number of common and common equivalent shares outstanding - basic 8,044,203 7,912,532 ========== ========== See accompanying notes to consolidated financial statements. 6 CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Forty weeks ended November 9, 2002 and November 10, 2001 (in thousands of dollars except share and per share amounts) (RESTATED) (RESTATED) Forty Weeks Ended ------------------------ Nov. 9, Nov. 10, 2002 2001 ---------- ---------- Net sales $ 198,802 $ 208,824 Costs and expenses: Cost of sales (exclusive of depreciation and amortization expense shown below) 27,450 26,864 Selling, general and administrative expenses 162,933 166,649 Depreciation and amortization 15,996 18,300 Other charges and impairments 4,816 2,213 ---------- ---------- 211,195 214,026 ---------- ---------- Loss from operations (12,393) (5,202) Interest expense 2,793 3,304 Interest income 1,608 1,313 Other income (expense), net 79 (319) ---------- ---------- Loss before income tax benefit (13,499) (7,512) Income tax benefit (5,277) (2,700) ---------- ---------- Net loss $ (8,222) $ (4,812) ========== ========== Net loss per share - diluted $ (1.02) $ (0.62) ========== ========== Net loss per share - basic $ (1.02) $ (0.62) ========== ========== Dividends per share $ 0.42 $ 0.42 ========== ========== Weighted average number of common and common equivalent shares outstanding - diluted 8,038,874 7,809,179 ========== ========== Weighted average number of common and common equivalent shares outstanding - basic 8,038,874 7,809,179 ========== ========== See accompanying notes to consolidated financial statements. 7 CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (UNAUDITED) (in thousands of dollars except share and per share amounts) Forty weeks ended November 9, 2002
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. 2, 2002, as restated $ 7,281 $ 49,845 $ 231,980 $ (5,386) $(227,642) $ (34) $ 56,044 --------- --------- --------- --------- --------- --------- --------- Issuance of common stock in conjunction with employee benefit plans and option exercises (80,763 shares) 32 1,292 -- -- -- -- 1,324 Comprehensive income: Net loss, as restated -- -- (8,222) -- -- -- Foreign currency translation, as restated- -- -- -- 163 -- Comprehensive income, as restated -- -- -- -- -- -- (8,059) Dividends ($0.42 per common share) -- -- (3,372) -- -- -- (3,372) Amortization of deferred compensation - restricted stock -- -- -- -- -- 11 11 --------- --------- --------- --------- --------- --------- --------- Balance at Nov. 9, 2002, as restated $ 7,313 $ 51,137 $ 220,386 $ (5,223) $(227,642) $ (23) $ 45,948 ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 8 CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands of dollars) Forty weeks ended November 9, 2002 and November 10, 2001 RECONCILIATION OF NET EARNINGS (LOSS) TO CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES (RESTATED) (RESTATED) 40 Weeks Ended ------------------------ Nov. 9, Nov. 10, 2002 2001 ---------- ---------- Net loss $ (8,222) $ (4,812) Adjustments for items not requiring cash: Depreciation and amortization 15,996 18,300 Deferred income taxes (3,332) 3,455 Deferred revenue 7,431 8,354 Post-closing adjustment on preferred security 147 -- Accrued interest on preferred security (652) (305) Impairment loss 4,436 -- Other (3,138) 1,336 Increase (decrease) in current assets: Receivables and inventories (14,991) (10,226) Refundable income taxes (2,182) (11,832) Prepaid expenses and other current assets (2,374) (2,427) Increase (decrease) in current liabilities: Accounts payable, accrued expenses and other liabilities 5,775 8,644 Income taxes -- (1,067) ---------- ---------- Cash flows provided by (used in)operating activities $ (1,106) $ 9,420 ========== ========== See accompanying notes to consolidated financial statements. 9 CPI CORP. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands of dollars) Forty weeks ended November 9, 2002 and November 10, 2001 40 Weeks Ended ------------------------ Nov. 9, Nov. 10, 2002 2001 ---------- ---------- Cash flows provided by (used in) operating activities $ (1,106) $ 9,420 ---------- ---------- Cash flows (used in) provided by financing activities: Repayment of long-term debt (8,580) (8,580) Proceeds from borrowing against cash surrender value of life insurance 1,595 -- Issuance of common stock in conjunction with employee benefit plans and option exercises 1,324 5,066 Cash dividends (3,372) (3,255) Issuance of treasury stock -- 62 Purchase of treasury stock -- (4) ---------- ---------- Cash flows used in financing activities (9,033) (6,711) ---------- ---------- Cash flows (used in) provided by investing activities: Additions to property and equipment, net (8,054) (14,701) Change in loan receivable (3,192) (5,171) Purchase of investment securities in Rabbi Trust (2,544) (1,909) Proceeds from sale of investment securities in Rabbi Trust 2,649 3,654 ---------- ---------- Cash flows used in investing activities (11,141) (18,127) ---------- ---------- Effect of exchange rate changes on cash and cash equivalents 68 (303) ---------- ---------- Net decrease in cash and cash equivalents (21,212) (15,721) Cash and cash equivalents at beginning of period 46,555 38,820 ---------- ---------- Cash and cash equivalents at end of period $ 25,343 $ 23,099 ========== ========== Supplemental cash flow information: Interest paid $ 1,920 $ 2,302 ========== ========== Income taxes paid $ 778 $ 6,794 ========== ========== See accompanying notes to consolidated financial statements. 10 CPI CORP. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 BASIS OF PRESENTATION AND RESTATEMENT OF FINANCIAL STATEMENTS Our consolidated balance sheet at February 2, 2002 was obtained from our audited balance sheet, as restated, as of that date. 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's") financial position as of November 9, 2002 and February 2, 2002 and the results of its operations for the sixteen and forty weeks ended November 9, 2002 and November 10, 2001 and changes in its cash flows for the forty weeks ended November 9, 2002 and November 10, 2001. Certain prior year amounts have been reclassified to conform to the first quarter 2002 presentation. Our accounting policies and certain other disclosures are set forth in the notes to our audited consolidated financial statements as of and for the year ended February 2, 2002, or in the case of restated amounts, as indicated within this Form 10-Q/A. Effective for fiscal year 2000, the Company changed its policy for recognizing both portrait studio revenues and fees received under its customer loyalty program to be consistent with the SEC Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". As a result, certain information in the accompanying consolidated financial statements has been restated. Portrait studio revenues are now recognized upon delivery of the portraits to the customer. Costs incurred relating to portraits processed, or in-process, are inventoried and expensed when the related sales revenue is recognized. Previously, portrait studio revenues were recognized at the time the customer approved the photographic proofs and made a firm commitment for a portrait order, at the conclusion of the photographic session. At that same time, all remaining costs to be incurred in the processing and delivery of the portraits were accrued. The effect of the change is to defer the recognition of portrait studio revenues approximately three weeks from the date of the portrait session to allow for processing and delivery of the related portraits. The cumulative effect of the change in accounting principle on years prior to fiscal 2000 resulted in an after-tax adjustment to earnings of $3.4 million, which has been reflected in the results of operations for the year ended February 3, 2001. The Company changed its method of recognizing customer loyalty program fees (Smile Savers Plan (r) fees) to defer the entire amount of the fee received and amortize it into revenues on a straight-line basis over the twenty-four month period of the customer's 11 program. Previously, the Company allocated an amount of the fee equal to published sitting fees to the initial sitting and recognized that amount upfront at the time of the initial sitting. The remainder of the Smile Savers Plan (r) fee not recognized at the time of the initial sitting under the plan was deferred and recognized as revenue on a straight-line basis over the remaining twenty-four month period of the plan. The cumulative effect of this change in accounting principle on years prior to fiscal 2000 resulted in an after-tax adjustment to earnings of $6.8 million, which has been reflected in the results of operations for the year ended February 3, 2001. The Company recognized pre-tax revenues of $1.2 million in the third quarter of fiscal 2001 and $4.3 million in the forty weeks ended November 10, 2001 that were included in the cumulative effect adjustment. Additionally, in the first quarter of 2001, the Company reclassified certain management repositioning costs totaling $1.7 million originally recorded as a component of Other Expenses, below Income from Operations, to a separate line entitled "Other Charges and Impairments", a component of operating income. The following tables reflect the specific line item impact of the aforementioned restatements, including related changes to the Company's allowance for doubtful accounts, foreign currency translation adjustments and income taxes, by comparing applicable restated amounts with those amounts originally reported. The restatements had no net impact on our cash flows from operations, investing or financing activities. 12
SIXTEEN WEEKS ENDED FISCAL 2002 -------------------------------------------------------- Nov.9, 2002 Nov.10, 2001 Restated Orig Rept Restated Orig Rept ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Net sales $ 81,111 $ 90,190 $ 86,357 $ 96,872 Cost and expenses: Cost of sales (exclusive of depreciation expense shown below) 10,691 12,132 11,042 12,774 Selling, general and administrative expense 71,554 74,406 72,246 75,749 Other charges and impairments 4,816 4,436 480 -- Income (loss) from operations (11,815) (6,649) (4,658) 1,102 Earnings (loss) before income tax expense (12,300) (7,134) (5,639) 121 Income tax benefit (4,800) (2,782) (2,046) (32) Net earnings (loss) (7,500) (4,352) (3,593) 153 =========== =========== =========== =========== Net earnings (loss) per share - diluted $ (0.93) $ (0.54) $ (0.45) $ 0.02 =========== =========== =========== =========== Weighted average number of common and common equivalent shares outstanding - diluted 8,044,203 8,044,203 7,912,532 7,982,501 =========== =========== =========== ===========
13
FORTY WEEKS ENDED FISCAL 2002 -------------------------------------------------------- Nov.9, 2002 Nov.10, 2001 Restated Orig Rept Restated Orig Rept ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Net sales $ 198,802 $ 208,746 $ 208,824 $ 220,970 Cost and expenses: Cost of sales (exclusive of depreciation expense shown below) 27,450 29,136 26,864 29,411 Selling, general and administrative expense 162,933 165,972 166,649 170,754 Other charges and impairments 4,816 4,436 2,213 -- Income (loss) from operations (12,393) (6,794) (5,202) 2,505 Other income (expense), net 79 79 (319) (2,052) Loss before income tax benefit (13,499) (7,900) (7,512) (1,538) Income tax benefit (5,277) (3,081) (2,700) (613) Net loss (8,222) (4,819) (4,812) (925) =========== =========== =========== =========== Net loss per share - diluted $ (1.02) $ (0.60) $ (0.62) $ (0.12) =========== =========== =========== =========== Weighted average number of common and common equivalent shares outstanding - diluted 8,038,874 8,038,874 7,809,179 7,809,179 =========== =========== =========== ===========
14
FISCAL 2002 -------------------------------------------------------- Nov.9, 2002 Feb 02, 2002 Restated Orig Rept Restated Orig Rept ----------- ----------- ----------- ----------- BALANCE SHEET DATA: ASSETS: Receivables, less allowance $ 16,848 $ 20,968 $ 5,421 $ 8,417 Inventories 16,484 10,656 12,920 9,510 Prepaid expenses and other current assets 11,608 7,668 6,795 4,257 Deferred tax assets 4,386 -- 1,990 -- Total current assets 85,974 75,940 82,804 77,862 Other assets, net 9,099 5,655 9,056 5,239 Total Assets $ 175,539 $ 162,061 $ 181,561 $ 172,802 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY: Deferred revenue 36,743 9,860 26,953 9,529 Accrued expenses and other liabilities 4,391 5,949 3,289 4,134 Total current liabilities 81,866 56,541 66,301 49,722 Long-term deferred revenue 4,575 3,002 5,891 3,677 Retained earnings 220,386 233,824 231,980 242,015 Accumulated other comprehensive loss (5,223) (5,241) (5,386) (5,387) Total stockholders' equity 45,948 59,368 56,044 66,078 Total liabilities and stockholders' equity $ 175,539 $ 162,061 $ 181,561 $ 172,802 =========== =========== =========== ===========
15 Note 2 The Company has operations in two business segments: Portrait Studios and Technology Development. (See Note 6) The Portrait Studios segment functions as the exclusive operator of Sears Portrait Studios with 1,031 locations in the United States, Canada and Puerto Rico as of November 9, 2002. The Technology Development segment operates an internet-based, mail order photofinishing business under the name searsphoto.com and offers software programs primarily for the retail service industry use, software consulting and custom software development under the name Centrics Technology, Inc. SELECTED INDUSTRY SEGMENT INFORMATION (in thousands of dollars) (RESTATED) (RESTATED) Sixteen Weeks Ended ------------------------ Nov. 9, Nov. 10, 2002 2001 ---------- ---------- NET SALES: Portrait Studios $ 80,913 $ 86,196 Technology Development 1,205 933 Intersegment sales (1,007) (772) ---------- ---------- $ 81,111 $ 86,357 ========== ========== LOSS FROM OPERATIONS: Portrait Studios $ (5,823) $ (423) Technology Development (927) (487) Corporate expense (5,065) (3,748) ---------- ---------- $ (11,815) $ (4,658) ========== ========== 16 SELECTED INDUSTRY SEGMENT INFORMATION (in thousands of dollars) (RESTATED) (RESTATED) Forty Weeks Ended ------------------------ Nov. 9, Nov. 10, 2002 2001 ---------- ---------- NET SALES: Portrait Studios $ 197,853 $ 208,588 Technology Development 3,377 2,377 Intersegment sales (2,428) (2,141) ---------- ---------- $ 198,802 $ 208,824 ========== ========== INCOME (LOSS) FROM OPERATIONS: Portrait Studios $ 826 $ 7,214 Technology Development (1,371) (1,178) Corporate expense (11,848) (11,238) ---------- ---------- $ (12,393) $ (5,202) ========== ========== SEGMENT ASSETS: Portrait Studios $ 99,007 $ 105,328 Technology Development 1,302 1,316 Corporate cash and cash equivalents 25,343 23,099 Corporate other 49,887 56,234 ---------- ---------- $ 175,539 $ 185,977 ========== ========== 17 GEOGRAPHIC FINANCIAL INFORMATION (RESTATED) (RESTATED) Sixteen Weeks Ended ------------------------ Nov. 9, Nov. 10, 2002 2001 ---------- ---------- NET SALES: United States $ 75,610 $ 80,368 Canada 5,501 5,989 ---------- ---------- $ 81,111 $ 86,357 ========== ========== Forty Weeks Ended ------------------------ Nov. 9, Nov. 10, 2002 2001 ---------- ---------- NET SALES: United States $ 185,451 $ 194,818 Canada 13,351 14,006 ---------- ---------- $ 198,802 $ 208,824 ========== ========== LONG-LIVED ASSETS: United States $ 84,422 $ 98,895 Canada 5,143 5,205 ---------- ---------- $ 89,565 $ 104,100 ========== ========== Note 3 On February 3, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). Under SFAS 142, goodwill amortization ceases upon adoption of the new standard. The new rules also require an initial goodwill impairment assessment in the year of adoption and an annual impairment test thereafter. In addition, interim testing of goodwill is now required if an event or circumstance indicates that an impairment loss has been incurred. During the first quarter ended April 27, 2002, the Company performed the first of the required impairment tests of goodwill. No impairment loss resulted from the initial goodwill impairment test. As of February 2, 2002 and November 9, 2002, the carrying value of goodwill was $513,000 and related to acquisitions by the Portrait Studio division prior to June 30, 2001. For the periods prior to fiscal year 2002, the adoption of SFAS 142 has no pro forma effect on the loss per share reported for the sixteen weeks ended November 10, 2001 and a $.01 increase in earnings per share reported for the 40 weeks ended November 10, 2001. 18 Note 4 In July 2001, the Company announced it had provided TRU Retail, Inc., the predecessor legal entity of Prints Plus, Inc. ("Prints Plus") with a $6.4 million revolving line of credit. The Company further announced the completion of the sale of its Wall Decor segment for $16.0 million. The sales price reflected the receipt of $11.0 million in a Preferred Security of Prints Plus, approximately $4.0 million in cash, other consideration netting to $1.0 million and the assumption of certain liabilities including the ongoing guarantee of certain operating real estate leases. The sales price was subject to final post-closing adjustments. Subsequently, in January 2002 and May 2002, the balance of the Preferred Security decreased due to the optional redemption of $1.0 million and $353,000, respectively, of the security by Prints Plus, and, in the first quarter of 2002, by a final post-closing adjustment of $147,000 to the security reflecting a decrease in the final sales price. These events, when offset by the accrued interest income of $721,000 that is also reflected in the value of the Preferred Security, resulted in a balance on November 9, 2002 of $10.2 million. Borrowings under the revolving line of credit extended to Prints Plus were $4.7 million and $5.2 million as of November 9, 2002 and November 10, 2001, respectively. Interest income earned on this revolving line of credit for the third quarter 2002 and 2001 was $64,000 and $84,000, respectively. Due to the Company's continuing financial interest in Prints Plus, the Company is required to follow a modified equity method of accounting, which requires cumulative losses, if any, incurred by Prints Plus during its fiscal year be reflected in the Company's financials as a valuation allowance and corresponding charge to income. As a result of Prints Plus' operating performance and compliance with the covenants of the Preferred Security and revolving line of credit, no valuation allowance was recorded as of November 9, 2002. Further, if Prints Plus defaults on certain operating real estate leases, the Company has guaranteed monthly lease payments over the remaining life of these leases. As of November 9, 2002, the maximum future obligation to the Company would be $16.0 million before any negotiation with landlords or subleasing. Based on scheduled lease payments, the maximum future obligations will decrease an additional $908,000 by the end of fiscal 2002, then annually by approximately $5.2 million to $4.8 million during the next two years. To recognize the risk associated with these leases and based on the Company's past experience with renegotiating lease obligations, a $1.0 million reserve was established in 2001. At November 9, 2002, the Company had made no further allowances for defaults under these operating leases as, in the opinion of management, Prints Plus is meeting the performance standards established under the operating leases. 19 Note 5 As discussed in the Company's Annual Report on Form 10-K/A, the Company has a $60.0 million Senior Note Agreement and $30.0 million Revolving Facility. In April 2002 and November 2002, the Company amended its Revolving Facility to adjust the minimum consolidated earnings before income taxes, depreciation and amortization ("EBITDA") covenant. In the November 2002 amendment, the Company also reduced the line to $15 million since the Company has minimal borrowing needs other than to support $7.2 million in outstanding letters of credit as of November 9, 2002. As of November 9, 2002, the Company was in compliance with all covenants under both the amended Revolving Facility and the Senior Note Agreement, and expects to be in compliance with the covenants under the Senior Note Agreement for the remainder of this year. However, given the sales shortfall incurred in the first three quarters compared to the prior year periods, the Company may not achieve the EBITDA covenant related solely to its Revolving Facility for the fourth quarter of this fiscal year. Other than supporting outstanding letters of credit in the principal amount of $7.2 million as of November 9, 2002, the Company has no outstanding borrowings under the Revolving Facility, nor does it currently expect to need to draw on the facility prior to its expiration in June 2003. The Company anticipates that it will reach an agreement before the end of the fourth quarter with the lending institutions offering the Revolving Facility whereby either the above mentioned covenant will be amended or the facility will be eliminated and replaced. Note 6 During the third quarter of fiscal 2002, management completed its previously announced review of the infrastructure and platform from which it delivers technology development and support services. The objectives of the review were to 1) improve focus on and support for the Company's core portraiture business, 2) improve organizational functionality and systems flexibility, and 3) eliminate duplicative cost structures. To achieve the aforementioned objectives, the Company is in the process of transferring the technology development activities, previously performed by its subsidiary Centrics Technology, Inc. ("Centrics"), back into a newly reorganized and right-sized corporate technology function. In addition, the Company will no longer pursue the sale of consulting and software development to third parties. As a result of these decisions, the Company is currently negotiating with management of Centrics for the acquisition of the stock of Centrics by its management group. If an agreement is reached, the Company anticipates the transaction will close prior to the end of its current fiscal year. If an agreement is not reached, all of the aforementioned transfer and reorganization activities will still be completed by the end of the 20 Company's current fiscal year. Under either the sale or transfer of activities scenarios, the Company expects to incur certain fourth quarter charges to earnings when the ultimate outcome is known. Under either the sale or transfer of activities scenarios, the Company anticipates incurring a charge for employee severance ranging from approximately $450,000 to $550,000. Under the sale scenario, the Company would record a loss on sale ranging from approximately $150,000 to $200,000 representing the excess of the net book value of assets transferred over liabilities assumed, without giving effect to the contingent consideration to be received in the form of royalties on future sales of consulting services and/or software by the buyer. Under the transfer scenario, the Company would also incur a charge for anticipated settlement of the existing Centrics office lease of approximately $284,000 representing the remaining lease payments under the lease and assuming no sub-lease rentals or negotiated settlements. Through the elimination of the currently existing duplicative cost structures and the reorganization and right-sizing of the newly formed corporate technology group, the Company anticipates annualized payroll costs savings beginning in fiscal 2003 of approximately $4.0 million. As part of the ongoing transfer and reorganization activities, certain strategic technology decisions were made in the third quarter of fiscal 2002 that either reduce or eliminate the future utility of certain historic capitalized technology development costs necessitating a write-down or write-off of these costs, thus resulting in a pre-tax, non-cash, charge of $4.2 million. The impacted development activities include a proprietary digital camera development project ($2.9 million), a digital manufacturing system ($445,000) and, a portion of the store automation system platform ($863,000). In the case of both the digital camera project and the digital manufacturing system, the Company has made the decision to prospectively utilize commercially-available cameras and digital manufacturing software. The Company's change in technology direction and its decision to no longer pursue the sale of technology services to third parties resulted in the need to write-off a portion of its store automation system capitalized software code. Note 7 The projected accumulated benefit obligation of the Company's defined benefit pension plan as of December 31, 2002 (the measurement date) exceeds the fair value of the plan's assets as of September 30, 2002 by approximately $10.4 million. Should a shortfall exist at year-end, the Company would be required to record a charge to accumulated other comprehensive income in stockholders' equity, consisting of the amount of any shortfall plus the amount of the prepaid pension asset (approximately $5.2 million, net of tax, at September 30, 2002). 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE STATEMENTS CONTAINED IN THIS REPORT, AND IN PARTICULAR IN THE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" SECTION THAT ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION ACT OF 1995, AND INVOLVE RISKS AND UNCERTAINTIES. MANAGEMENT WISHES TO CAUTION THE READER THAT THESE FORWARD-LOOKING STATEMENTS, SUCH AS THE COMPANY'S OUTLOOK FOR PORTRAIT STUDIOS AND OTHER STRATEGIC INITIATIVES, FUTURE CASH REQUIREMENTS, COMPLIANCE WITH DEBT COVENANTS, VALUATION ALLOWANCES, AND CAPITAL EXPENDITURES, ARE ONLY PREDICTIONS OR EXPECTATIONS; ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY AS A RESULT OF RISKS FACING THE COMPANY. SUCH RISKS INCLUDE, BUT ARE NOT LIMITED TO: CUSTOMER DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES, THE OVERALL LEVEL OF ECONOMIC ACTIVITY IN THE COMPANY'S MAJOR MARKETS, COMPETITORS' ACTIONS, MANUFACTURING INTERRUPTIONS, DEPENDENCE ON CERTAIN SUPPLIERS, CHANGES IN THE COMPANY'S RELATIONSHIP WITH SEARS AND THE CONDITION AND STRATEGIC PLANNING OF SEARS, FLUCTUATIONS IN OPERATING RESULTS, THE CONDITION OF PRINTS PLUS, INC., THE ATTRACTION 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/A FOR THE YEAR ENDED FEBRUARY 2, 2002. The Company's fiscal year ends the first Saturday of February. Accordingly, fiscal year 2001 ended February 2, 2002 and consisted of 52 weeks. The third fiscal quarters of 2002 and 2001, which consisted of sixteen weeks, and the first three quarters of 2002 and 2001, which consisted of forty weeks, ended November 9, 2002 and November 10, 2001, respectively. Throughout "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION," reference to 2001 will mean the fiscal year ended February 2, 2002 and reference to third quarter 2002 and third quarter 2001 or first three quarters 2002 and first three quarters 2001 will mean the third fiscal quarter or the first three quarters fiscal of 2002 and 2001, respectively. All comparisons and references in this Form 10-Q/A to results for fiscal years 2002 and 2001 are to the restated results. See Note 1 to the consolidated financial statements contained in Item 1. The Company has operations in two business segments: Portrait Studios and Technology Development. (See Item 1. Financial Statements, Note 6.) The Portrait Studios segment functions as the exclusive operator of Sears Portrait Studios with 1,031 locations in the United States, Canada and Puerto Rico as of November 9, 2002. The Technology Development segment operates an internet-based, mail order photofinishing business under the name searsphoto.com and offers software programs primarily for the retail service industry 22 use, software consulting and custom software development under the name Centrics Technology, Inc. RESULTS OF OPERATIONS SIXTEEN WEEKS ENDED NOVEMBER 9, 2002 COMPARED TO SIXTEEN WEEKS ENDED NOVEMBER 10, 2001 Net Sales and Loss From Operations The following table sets forth certain operating information for each period and should be viewed in conjunction with the consolidated financial statements and notes included in Item 1 of this Form 10-Q/A. (RESTATED) (RESTATED) Sixteen Weeks Ended ------------------------ Change Nov. 9, Nov. 10, Increase 2002 2001 (Decrease) ---------- ---------- ---------- (in thousands of dollars except sittings and average sales per customer sitting) Net sales: Portrait Studios $ 80,913 $ 86,196 (6.1)% Technology Development 1,205 933 29.2 % Intersegment sales (1,007) (772) 30.4 % ---------- ---------- $ 81,111 $ 86,357 (6.1)% ========== ========== Operating losses: Portrait Studio $ (5,823) $ (423) (1276.6)% Technology Development (927) (487) 90.3 % ---------- ---------- Total operating loss (6,750) (910) (641.8)% ---------- ---------- General corporate expenses 5,065 3,748 35.1 % ---------- ---------- Loss from operations $ (11,815) $ (4,658) (153.6)% ========== ========== Sittings: Custom 797,102 840,190 (5.1)% Package 529,567 686,077 (22.8)% ---------- ---------- 1,326,669 1,526,267 (13.1)% ========== ========== Average sales per customer sitting: Custom $ 71.59 $ 67.74 5.7 % Package $ 44.92 $ 42.60 5.4 % Overall $ 60.94 $ 56.45 7.9 % 23 Net sales for the Portrait Studios segment decreased in third quarter of 2002 from third quarter of 2001, as a decrease in sittings was only partially offset by an increase in average sales per customer sitting. The decrease in sittings continues to be a function of significantly reduced sittings related to the Company's package offers. The decline in package sittings is attributable to both the impacts of a larger percentage of the Company's customers choosing the higher value custom offer versus the package offer and the effects of competitors with lower price package offers. The increase in average sales per customer sitting is primarily the result of the Company's success in converting more if its customers to the higher value custom offer and the Company's decision made during the second quarter to begin selling custom proof sheets which had previously been provided free of charge as part of the custom offer. Included in the above mentioned sales revenues for the third quarter of 2001 is $1.2 million of pre-tax revenues that were included in the cumulative effect adjustment recorded in fiscal 2000 as discussed in Note 1 to the Consolidated Financial Statements. The operating loss for the Portrait Studios segment in the third quarter of 2002 compared to the operating earnings recorded in the same time frame in 2001 was significantly impacted by the $4.2 million pre-tax, non-cash charge related to the write-off or write- down of certain previously capitalized technology development costs (see further details below). Exclusive of the write-offs and write-downs, lower operating expenses partially offset the lower sales results. The lower operating expenses are due to reduced cost of sales and commissions attributable to lower sales, reduced depreciation expense due to certain assets becoming fully depreciated, reduced credit card fees due to credit card transactions being processed directly by Sears and other various reductions resulting from the Company's continuing focus on expense reductions. Net sales for the Technology Development segment reflected an increase in the third quarter of 2002 from the third quarter of 2001. However, after elimination of intersegment sales, the negative swing in operating results quarter to quarter is attributable to higher employment costs and the write-off of certain assets having diminished or no future utility. During the third quarter of fiscal 2002, management completed its previously announced review of the infrastructure and platform from which it delivers technology development and support services. The objectives of the review were to 1) improve focus on and support for the Company's core portraiture business, 2) improve organizational functionality and systems flexibility, and 3) eliminate duplicative cost structures. To achieve the aforementioned objectives, the Company is in the process of transferring the technology development 24 activities, previously performed by its subsidiary Centrics Technology, Inc. ("Centrics"), back into a newly reorganized and right-sized corporate technology function. In addition, the Company will no longer pursue the sale of consulting and software development to third parties. As a result of these decisions, the Company is currently negotiating with management of Centrics for the acquisition of the stock of Centrics by its management group. If an agreement is reached, the Company anticipates the transaction will close prior to the end of its current fiscal year. If an agreement is not reached, all of the aforementioned transfer and reorganization activities will still be completed by the end of the Company's current fiscal year. Under either the sale or transfer of activities scenarios, the Company expects to incur certain fourth quarter charges to earnings when the ultimate outcome is known. Under either the sale or transfer of activities scenarios, the Company anticipates incurring a charge for employee severance ranging from approximately $450,000 to $550,000. Under the sale scenario, the Company would record a loss on sale ranging from approximately $150,000 to $200,000, representing the excess of the net book value of assets transferred over liabilities assumed, without giving effect to the contingent consideration to be received in the form of royalties on future sales of consulting services and/or software by the buyer. Under the transfer scenario, the Company would also incur a charge for anticipated settlement of the existing Centrics office lease of approximately $284,000, representing the remaining lease payments under the lease and assuming no sub-lease rentals or negotiated settlements. Through the elimination of the currently existing duplicative cost structures and the reorganization and right-sizing of the newly formed corporate technology group, the Company anticipates annualized payroll costs savings beginning in fiscal 2003 of approximately $4.0 million. As part of the ongoing transfer and reorganization activities, certain strategic technology decisions were made in the third quarter of fiscal 2002 that either reduce or eliminate the future utility of certain historic capitalized technology development costs necessitating a write-down or write-off of these costs, thus resulting in a pre-tax, non-cash, charge of $4.2 million. The impacted development activities include a proprietary digital camera development project ($2.9 million, including $2.5 million in equipment costs), a digital manufacturing system ($445,000) and, a portion of the store automation system platform ($863,000). In the case of both the digital camera project and the digital manufacturing system, the Company has made the decision to prospectively utilize commercially-available cameras and digital manufacturing software. The Company's change in technology direction and its decision to no longer pursue the sale of technology services to third parties resulted in the need to write- off a portion of its store automation system capitalized software code. 25 General corporate expenses increased between quarters due to increases in supplemental retirement benefit plan costs, workers' compensation costs, professional service fees and severance costs in the third quarter of 2002 compared to 2001. Other Items Effecting Results of Operations The following table sets forth certain operating information for each period and should be viewed in conjunction with the consolidated financial statements and notes included in Item 1 of this Form 10-Q/A. Sixteen Weeks Ended ------------------------ Change Nov. 9, Nov. 10, Increase 2002 2001 (Decrease) ---------- ---------- ---------- (in thousands of dollars) Interest expense: Debt $ 980 $ 1,177 (16.7)% Other 43 51 (15.7)% ---------- ---------- Total interest expense $ 1,023 $ 1,228 (16.6)% ========== ========== Interest income: Investments $ 175 $ 230 (24.2)% Income from Preferred Security 262 305 (13.8)% Revolver 64 84 (23.5)% ---------- ---------- Total interest income $ 501 $ 619 (19.0)% ========== ========== Other income (expense), net: Other income $ 37 $ 30 23.3 % Investment revaluation -- (402) -- ---------- ---------- Total other income (expense), net $ 37 $ (372) (109.9)% ========== ========== Effective income tax rate 39.0% 26.8% ========== ========== Interest expense decreased in third quarter of 2002 from the third quarter of 2001 as a result of the scheduled repayment of long-term debt. Interest income was lower in the third quarter of 2002 compared to third quarter of 2001 due principally to the lower income earned on invested cash as a result of higher invested balances offset by significantly lower interest rates. The Company's effective income tax rate increased from 26.8% in fiscal 2001 to 39% in fiscal 2002. The fiscal 2001 rate was positively impacted by adjustments to the income tax reserve related to various income tax matters. 26 RESULTS OF OPERATIONS FORTY WEEKS ENDED NOVEMBER 9, 2002 COMPARED TO FORTY WEEKS ENDED NOVEMBER 10, 2001 Net Sales and Income From Operations The following table sets forth certain operating information for each period and should be viewed in conjunction with the consolidated financial statements and notes included in Item 1 of this Form 10-Q/A. (RESTATED) (RESTATED) Forty Weeks Ended ------------------------ Change Nov. 9, Nov. 10, Increase 2002 2001 (Decrease) ---------- ---------- ---------- (in thousands of dollars except sittings and average sales per customer sitting) Net sales: Portrait Studios $ 197,853 $ 208,588 (5.1)% Technology Development 3,377 2,377 42.1 % Intersegment sales (2,428) (2,141) 13.4 % ---------- ---------- $ 198,802 $ 208,824 (4.8)% ========== ========== Operating earnings (losses): Portrait Studios $ 826 $ 7,214 (95.9)% Technology Development (1,371) (1,178) 16.4 % ---------- ---------- Total operating earnings (losses) (545) 6,036 (109.0)% ---------- ---------- General corporate expenses 11,848 11,238 5.4 % ---------- ---------- Loss from operations $ (12,393) $ (5,202) (138.2)% ========== ========== Sittings: Custom 1,957,903 1,863,784 5.0 % Package 1,312,055 1,720,298 (23.7)% ---------- ---------- 3,269,958 3,584,082 (8.8)% ========== ========== Average sales per customer sitting: Custom $ 70.62 $ 70.11 0.7 % Package $ 45.33 $ 45.22 0.2 % Overall $ 60.47 $ 58.17 4.0 % 27 Net sales for the Portrait Studios segment decreased in the first three quarters of 2002 from the first three quarters of 2001, as a decrease in sittings was only partially offset by an increase in average sales per customer sitting. The decrease in sittings is attributable to the effects of an early Easter that historically results in reduced sittings in the first quarter and significantly reduced sittings related to the Company's package offers. The decline in package sittings is attributable to both the impacts of a larger percentage of the Company's customers choosing the higher value custom offer versus package offer and the effects of competitors with lower price package offers. The increase in average sales per customer sitting is primarily the result of the Company's success in converting more of its customers to the higher value custom offer and the Company's decision made during the second quarter to begin selling custom proof sheets which had previously been provided free of charge as part of the custom offer. Included in the above mentioned sales revenues for the forty weeks ended November 10, 2001 is $4.3 million of pre-tax revenues that were included in the cumulative effect adjustment recorded in fiscal 2000 as discussed in Note 1 to the Consolidated Financial Statements. Operating earnings for the Portrait Studios segment decreased in the first three quarters of 2002 from the same timeframe in 2001 primarily due to the $4.2 million non-cash charge related to the write-off or write-down of certain previously capitalized technology development costs. Exclusive of write-off and write-down amounts, lower operating expenses partially offset the lower sales results. The lower operating expenses resulted from reduced cost of sales and commissions attributable to lower sales, reduced advertising expense resulting principally from planned reductions in spring television and direct mail advertising, reduced depreciation expense due to certain assets becoming fully depreciated, reduced credit card fees due to credit card transactions being processed directly by Sears and other various reductions resulting from the Company's continuing focus on expense reductions. Net sales for the Technology Development segment reflected an increase in the first three quarters of 2002 from the first three quarters of 2001 due to an increase in intersegment sales and net sales to nonaffiliated companies. After elimination of intersegment sales, operating losses for the same timeframe increased reflecting the increase in nonaffiliated sales offset by higher employment costs, costs relating to supplies and maintenance and the write-down of certain assets having diminished no future utility. General corporate expenses increased $610,000 between the first three quarters of 2002 compared to the first three quarters of 2001 due to the absence in 2002 of $1.7 million of executive management 28 repositioning costs incurred in 2001 offset by 2002 expenses which included $688,000 associated with the final phase of the Company's strategic planning initiative and increases in supplemental retirement benefit plan costs and workers' compensation. Other Items Effecting Results of Operations The following table sets forth certain operating information for each period and should be viewed in conjunction with the consolidated financial statements and notes included in Item 1 of this Form 10-Q/A. (RESTATED) (RESTATED) Forty Weeks Ended ------------------------ Change Nov. 9, Nov. 10, Increase 2002 2001 (Decrease) ---------- ---------- ---------- (in thousands of dollars) Interest expense: Debt $ 2,686 $ 3,176 (15.4)% Other 107 128 (17.1)% ---------- ---------- Total interest expense $ 2,793 $ 3,304 (15.5)% ========== ========== Interest income: Investments $ 523 $ 924 (43.4)% Interest on income tax refund 297 -- -- Income from Preferred Security 658 305 116.1% Revolver 130 84 55.5% ---------- ---------- Total interest income $ 1,608 $ 1,313 22.6% ========== ========== Other income (expense), net: Other income $ 79 $ 83 (4.8)% Investment revaluation -- (402) ---------- ---------- Total other income (expense), net $ 79 $ (319) ========== ========== Effective income tax rate 39.0% 39.9% ========== ========== Interest expense decreased in the first three quarters of 2002 from the first three quarters of 2001 as a result of the scheduled repayment of long-term debt. Interest income was higher in the first three quarters of 2002 compared to first half of 2001 due to the receipt of interest on a federal income tax refund and accrued income relating to the Preferred Security and Revolver offsetting the lower income earned on invested cash. The lower income earned on invested cash was a result of higher invested balances offset by significantly lower interest rates. 29 Discontinued Operations In July 2001, the Company announced it had provided TRU Retail, Inc., the predecessor legal entity of Prints Plus, Inc. ("Prints Plus") with a $6.4 million revolving line of credit. The Company further announced the completion of the sale of its Wall Decor segment for $16.0 million. The sales price reflected the receipt of $11.0 million in a Preferred Security of Prints Plus, approximately $4.0 million in cash, other consideration netting to $1.0 million and the assumption of certain liabilities including the ongoing guarantee of certain operating real estate leases. The sales price was subject to final post-closing adjustments. Subsequently, in January 2002 and May 2002, the balance of the Preferred Security decreased due to the optional redemption of $1.0 million and $353,000, respectively, of the security by Prints Plus, and, in the first quarter of 2002, by a final post-closing adjustment of $147,000 to the security reflecting a decrease in the final sales price. These events, when offset by the accrued interest income of $721,000 that is also reflected in the value of the Preferred Security, resulted in a balance on November 9, 2002 of $10.2 million. Borrowings under the revolving line of credit extended to Prints Plus were $4.7 million and $5.2 million as of November 9, 2002 and November 10, 2001, respectively. Interest income earned on this revolving line of credit for the third quarter 2002 and 2001 was $64,000 and $84,000, respectively. Due to the Company's continuing financial interest in Prints Plus, the Company is required to follow a modified equity method of accounting, which requires cumulative losses, if any, incurred by Prints Plus during its fiscal year be reflected in the Company's financials as a valuation allowance and corresponding charge to income. As a result of Prints Plus' operating performance and compliance with the covenants of the Preferred Security and revolving line of credit, no valuation allowance was recorded as of November 9, 2002. Further, if Prints Plus defaults on certain operating real estate leases, the Company has guaranteed monthly lease payments over the remaining life of these leases. As of November 9, 2002, the maximum future obligation to the Company would be $16.0 million before any negotiation with landlords or subleasing. Based on scheduled lease payments, the maximum future obligations will decrease an additional $908,000 by the end of fiscal 2002, then annually by approximately $5.2 million to $4.8 million during the next two years. To recognize the risk associated with these leases and based on the Company's past experience with renegotiating lease obligations, a $1.0 million reserve was established in 2001. At November 9, 2002, the Company had made no further allowances for defaults under these operating leases as, in the opinion of management, Prints Plus is meeting the performance standards established under the operating leases. 30 For further detailed information regarding risk, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operation-Liquidity, Capital Resources and Financial Condition-Risk and Critical Accounting Policies," in the Company's Annual Report on Form 10-K/A for fiscal year ended February 2, 2002. LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION Operating Activities Net cash used in operating activities in the first three quarters of 2002 of $1.1 million decreased $10.5 million from the $9.4 million provided by in the first three quarters of 2001 due to changes in various deferred and refundable income taxes relating to the net operating loss carrybacks that resulted from the sale of Prints Plus in second quarter of 2001, a decline in accrued advertising based on cost reduction initiatives and an increase in outstanding receivable balances that resulted primarily from normal seasonal growth and from a change in settlement methods with Sears Roebuck and Company ("Sears") in the second quarter of 2002. The settlement method change resulted from a recent amendment to the Company's Sears agreement that now allows the Company's credit card transactions to be processed directly through Sears, thereby reducing credit card processing fees paid to third-party vendors but resulting in an slight increase in the collection period of the receivable from Sears. Financing Activities Net cash used in financing activities in the three quarters of 2002 of $9.0 million increased $2.3 million from the $6.7 million recorded in the first three quarters of 2001 due to a decrease in funds provided by the issuance of common stock in conjunction with employee benefit plans and option exercises in 2001 not being repeated in 2002 offset by proceeds from the borrowing against the cash surrender value of life insurance. As discussed in the Company's Annual Report on Form 10-K/A, the Company has a $60.0 million Senior Note Agreement and $30.0 million Revolving Facility. In April 2002 and November 2002, the Company amended its Revolving Facility to adjust the minimum consolidated earnings before income taxes, depreciation and amortization ("EBITDA") covenant. In the November 2002 amendment, the Company also reduced the line to $15 million since the Company has minimal borrowing needs other than to support $7.2 million in outstanding letters of credit as of November 9, 2002. As of November 9, 2002, the Company was in compliance with all covenants under both the amended Revolving Facility and the Senior Note Agreement, and expects to be in compliance with the covenants under both the Revolving Facility and the Senior Note Agreement for the remainder of this year. 31 However, given the sales shortfall incurred in the first three quarters compared to the prior year periods, the Company may not achieve the EBITDA covenant related solely to its Revolving Facility for the fourth quarter of this fiscal year. Other than supporting outstanding letters of credit in the principal amount of $7.2 million as of November 9, 2002, the Company has no outstanding borrowings under the Revolving Facility, nor does it currently expect to need to draw on the facility prior to its expiration in June 2003. The Company anticipates that it will reach an agreement before the end of the fourth quarter with the lending institutions offering the Revolving Facility whereby either the above mentioned covenant will be amended or the facility will be eliminated and replaced. Investing Activities Net cash used in investing activities in the first three quarters of 2002 of $11.1 million reflects a $7.0 million decrease from the first three quarters of 2001 due principally to lower levels of capital expenditures. Cash Flows Cash flows from operations and cash and cash equivalents on hand represent the Company's expected source of funds in fiscal year 2002 for planned capital expenditures, scheduled principal payments in June of each year on long-term debt of $8.6 million, normal business operations and dividends to shareholders. With the exception of letters of credit used to support the Company's self-insurance program and operating leases, the Company does not use off-balance sheet arrangements to finance business activities. Financial Condition Assets of the Company decreased 3.3%in the first three quarters of 2002 from year-end 2001 due primarily to a decrease in net property and equipment resulting from depreciation charges exceeding property and equipment additions, the write-down or write- off of certain previously capitalized technology development costs, decreases in cash and cash equivalents resulting from the second scheduled principal payment in June 2002 of $8.6 million of the Company's long-term debt and decreases in cash balances driven by normal seasonal cash needs. Liabilities of the Company increased 3.2% primarily as a result the increase in deferred revenue. Stockholders' equity decreased 18.0% at the end of the first three quarters of 2002 from year-end 2001 reflecting the year-to-date 2002 net losses and payments of dividends to stockholders, offset by increases in additional paid-in capital that resulted from issuing shares of stock in conjunction with employee benefit plans and option exercises. 32 Strategic Planning Initiatives On June 4, 2002, the Company announced that its Board of Directors had approved management's recommendation for the recently completed strategic planning process. For additional information on the Company's strategic initiatives, refer to the Company's Form 8-K filed on June 4, 2002. 33 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 outstanding debt obligations carry primarily fixed interest rates; therefore, the Company's exposure to changes in interest rates is minimal. The Company's exposure to changes in foreign exchange rates relates to the Canadian operations, which is minimal, as these operations constitute 6.5% of the Company's total assets and 6.7% of the Company's total sales. ITEM 4. CONTROLS AND PROCEDURES An evaluation of the Company's disclosure controls and procedures (as defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the "Act") was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management within the 90-day period preceding the filing date of this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i)accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. In the quarter ended November 9, 2002, the Company did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls. In addition, since the date of this evaluation to the filing date of this Quarterly Report, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 34 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS The following exhibits are being filed as part of this Report: Exhibit 10.53 - Fifth Amendment to Sears License Agreement Exhibit 10.54 - Sixth Amendment to Sears License Agreement Exhibit 10.55 - Third Amendment to Sears License Agreement (Off Mall) Exhibit 10.56 - Fourth Amendment to Sears License Agreement (Off Mall) Exhibit 10.57 - Fifth Amendment to Sears License Agreement (Off Mall) Exhibit 10.58 - Employment Agreement by and between Peggy J. Deal and CPI Corp. Exhibit 10.59 - Employment Agreement by and between Thomas Gallahue and CPI Corp. Exhibit 11.0 - Computation of Earnings Per Common Share Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer Exhibit 99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer b) REPORTS ON FORM 8-K On August 2, 2002, CPI Corp. filed an 8-K Current Report announcing the issuance of a press release dated July 31, 2002 on the election of Jim Clifford to CPI Corp.'s Board of Directors. On August 8, 2002, CPI Corp. filed an 8-K Current Report announcing the issuance of a press release dated August 6, 2002 declaring a third quarter cash dividend of 14 cents per share. On August 15, 2002, CPI Corp. filed an 8-K Current Report announcing the issuance of a press release dated August 15, 2002 reporting the second quarter FY 2002 results. 35 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CPI Corp. (Registrant) By: /s/ Gary W. Douglass --------------------------- Gary W. Douglass Authorized Officer and Principal Financial Officer Dated: May 15, 2003 36 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, J. David Pierson, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of CPI Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 37 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 By: /s/ J. David Pierson --------------------------- J. David Pierson Chief Executive Officer 38 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Gary W. Douglass, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of CPI Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; 39 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 By:/s/ Gary W. Douglass ---------------------------- Gary W. Douglass Chief Financial Officer 40 CPI CORP. EXHIBIT INDEX Exhibit 10.53 - Fifth Amendment to Sears License Agreement 42 Exhibit 10.54 - Sixth Amendment to Sears License Agreement 43 Exhibit 10.55 - Third Amendment to Sears License Agreement (Off Mall) 44 Exhibit 10.56 - Fourth Amendment to Sears License Agreement (Off Mall) 45 Exhibit 10.57 - Fifth Amendment to Sears License Agreement (Off Mall) 46 Exhibit 10.58 - Employment Agreement by and between Peggy J. Deal and CPI Corp. 47 Exhibit 10.59 - Employment Agreement by and between Thomas Gallahue and CPI Corp. 48 Exhibit 11.0 - Computation of Earnings Per Common Share 49-51 Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer 52 Exhibit 99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer 53 41 EX-10.53 3 d55821_ex10-53.txt FIFTH AMENDEMENT TO SEARS LICENSE AGREEMENT EXHIBIT 10.53 Fifth Amendment to Sears License Agreement (This exhibit has been filed with the Securities and Exchange Commission and is retained at the office of the Company.) 42 EX-10.54 4 d55821_ex10-54.txt SIXTH AMENDMENT TO SEARS LICENSE AGREEMENT EXHIBIT 10.54 Sixth Amendment to Sears License Agreement (This exhibit has been filed with the Securities and Exchange Commission and is retained at the office of the Company.) 43 EX-10.55 5 d55821_ex10-55.txt THIRD AMENDMENT TO SEARS LICENSE AGREEMENT EXHIBIT 10.55 Third Amendment to Sears License Agreement (Off Mall) (This exhibit has been filed with the Securities and Exchange Commission and is retained at the office of the Company.) 44 EX-10.56 6 d55821_ex10-56.txt FOURTH AMENDMENT TO SEARS LICENSE AGREEMENT EXHIBIT 10.56 Fourth Amendment to Sears License Agreement (Off Mall) (This exhibit has been filed with the Securities and Exchange Commission and is retained at the office of the Company.) 45 EX-10.57 7 d55821_ex10-57.txt FIFTH AMENDMENT TO SEARS LICENSE AGREEMENT EXHIBIT 10.57 Fifth Amendment to Sears License Agreement (Off Mall) (This exhibit has been filed with the Securities and Exchange Commission and is retained at the office of the Company.) 46 EX-10.58 8 d55821_ex10-58.txt EMPLOYMENT AGREEMENT BY AND BETWEEN EXHIBIT 10.58 Employment Agreement by and between Peggy J. Deal and CPI Corp. (This exhibit has been filed with the Securities and Exchange Commission and is retained at the office of the Company.) 47 EX-10.59 9 d55821_ex10-59.txt EMPLOYMENT AGREEMENT EXHIBIT 10.59 Employment Agreement by and between Thomas Gallahue and CPI Corp. (This exhibit has been filed with the Securities and Exchange Commission and is retained at the office of the Company.) 48 EX-11.0 10 d55821_ex11.txt COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 11.0 - COMPUTATION OF EARNINGS PER COMMON SHARE CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE - DILUTED Sixteen Weeks ended November 9, 2002 and November 10, 2001 (Restated) Sixteen Weeks Ended ------------------------ Nov. 9, Nov. 10, 2002 2001 ---------- ---------- Diluted: Net earnings (loss) applicable to common shares $ (7,500) $ (3,593) ========== ========== Shares: Weighted average number of common shares outstanding 18,282 18,151 Shares issuable under employee stock plans-weighted average -* -** Dilutive effect of exercise of certain stock options -* -** Less: Treasury stock-weighted average (10,238) (10,238) ---------- ---------- Weighted average number of common and common equivalent shares outstanding 8,044 7,913 ========== ========== Net earnings (loss) per common and common equivalent shares $ (0.93) $ (0.45) ========== ========== * The dilutive effect of stock options in the amount of 16,207 shares and 23,374 shares issuable under employee stock plans were not considered as the effect is antidilutive. ** The dilutive effect of stock options in the amount of 36,956 shares and 33,011 shares issuable under employee stock plans were not considered as the effect is antidilutive. 49 EXHIBIT 11.0-COMPUTATION OF EARNINGS PER COMMON SHARE (continued) CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE - DILUTED Forty Weeks ended November 9, 2002 and November 10, 2001 (Restated) Forty Weeks Ended ------------------------ Nov. 9, Nov. 10, 2002 2001 ---------- ---------- Diluted: Net loss applicable to common shares $ (8,222) $ (4,812) ========== ========== Shares: Weighted average number of common shares outstanding 18,277 18,049 Shares issuable under employee stock plans-weighted average -* -** Dilutive effect of exercise of certain stock options -* -** Less: Treasury stock-weighted average (10,238) (10,240) ---------- ---------- Weighted average number of common and common equivalent shares outstanding 8,039 7,809 ========== ========== Net loss per common and common equivalent shares $ (1.02) $ (0.62) ========== ========== * The dilutive effect of stock options in the amount of 17,820 shares and 27,589 shares issuable under employee stock plans were not considered as the effect is antidilutive. ** The dilutive effect of stock options in the amount of 71,518 shares and 34,017 shares issuable under employee stock plans were not considered as the effect is antidilutive. 50 EXHIBIT 11.0-COMPUTATION OF EARNINGS PER COMMON SHARE (continued) CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE - BASIC Sixteen and Forty Weeks ended November 9, 2002 and November 10, 2001 (Restated) Sixteen Weeks Ended ------------------------ Nov. 9, Nov. 10, 2002 2001 ---------- ---------- Basic: Net earnings (loss) applicable to common shares $ (7,500) $ (3,593) ========== ========== Shares: Weighted average number of common shares outstanding 18,282 18,151 Less: Treasury stock-weighted average (10,238) (10,238) ---------- ---------- Weighted average number of common and common equivalent shares outstanding 8,044 7,913 ========== ========== Net loss per common and common equivalent shares $ (0.93) $ (0.45) ========== ========== Forty Weeks Ended ------------------------ Nov. 9, Nov. 10, 2002 2001 ---------- ---------- Basic: Net loss applicable to common shares $ (8,222) $ (4,812) ========== ========== Shares: Weighted average number of common shares outstanding 18,277 18,049 Less: Treasury stock-weighted average (10,238) (10,240) ---------- ---------- Weighted average number of common and common equivalent shares outstanding 8,039 7,809 ========== ========== Net loss per common and common equivalent shares $ (1.02) $ (0.62) ========== ========== 51 EX-99.1 11 d55821_ex99-1.txt CERTIFICATION PURSUANT TO 18 U.S.C. EXHIBIT 99.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CPI Corp. (the "Company") on Form 10-Q/A for the period ending November 9, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J. David Pierson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Subsection 1350, as adopted pursuant to Subsection 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) The information contained in the Report fairly present, in all material respects, the financial condition and the results of operations of the Company. By: /s/ J. David Pierson -------------------------- J. David Pierson Chief Executive Officer May 12, 2003 52 EX-99.2 12 d55821_ex99-2.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 99.2 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CPI Corp. (the "Company") on Form 10-Q/A for the period ending November 9, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gary W. Douglass, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Subsection 1350, as adopted pursuant to Subsection 906 of the Sarbanes-Oxley Act of 2002, that: (3) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (4) The information contained in the Report fairly present, in all material respects, the financial condition and the results of operations of the Company. By: /s/ Gary W. Douglass -------------------------- Gary W. Douglass Chief Financial Officer May 12, 2003 53 -----END PRIVACY-ENHANCED MESSAGE-----