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Cpi Corp (CPICQ) SEC Filing 10-K Annual report for the fiscal year ending Saturday, February 2, 2008

Cpi Corp

CIK: 25354 Ticker: CPICQ
EXHIBIT 99.1
 



CPI Corp.
news for immediate release                                                                                                           FOR RELEASE  May 13, 2008


FOR FURTHER INFORMATION, CONTACT:
 
NAME
 
Jane Nelson
 
FROM
CPI Corp.
ADDRESS
 
1706 Washington Avenue
 
CITY
St. Louis
STATE, ZIP
 
Missouri  63103
 
TELEPHONE
(314) 231-1575
  
 
CPI CORP. ANNOUNCES FOURTH QUARTER
 
 
AND FISCAL 2007 RESULTS
 

CORRECTED

St. Louis, MO, May 13, 2008 – CPI Corp. (NYSE-CPY) today reports corrected financial results for the fourth quarter and fiscal year ended February 2, 2008.  Such results were originally released on April 15, 2008.  Subsequently, CPI Corp. (the “Company”) discovered an overstatement in its advertising accruals and, therefore, its operating expenses, and adjusted its results of operations by approximately $1.1 million.  In addition to this adjustment, certain other adjustments to income taxes and reclassifications were recorded with the total effect on previously reported net income being an increase of $561,000.  A summary of the changes is included as the first page of the tables that follow.  The April 15, 2008 press release is corrected below.  Sections of the release that were not impacted by the correction and remain substantially unchanged or are no longer applicable have not been incorporated herein.  Those sections include PMPS Integration Update, Host Contractual Updates, 2008 First Quarter Preliminary Sales Update, Other (which discussed a 2005 restatement) and conference call information.  The CPI Corp. fiscal 2007 Form 10-K is anticipated to be filed today.

Key Highlights

·  
Fourth quarter sales increased 62% to $162.8 million in 2007 from $100.7 million in 2006 due to the addition of the results of the PictureMe Portrait Studio business acquired in June 2007.

o  
Fourth quarter Sears Portrait Studio sales declined 9% to $91.9 million in 2007 from $100.7 million in 2006.

o  
Fourth quarter PictureMe Portrait Studio sales totaled $70.8 million in 2007, an estimated same-store sales decline of 7% decline from comparable 2006 levels.

·  
Fourth quarter earnings improved due to accretive results from the PictureMe Portrait Studio acquisition significantly offset by non-cash interest charge associated with the mark-to-market of an interest swap entered pursuant to the Company’s credit agreement.
 
 
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o  
Fourth quarter EPS increased 5% to $2.44 in 2007 from $2.32 in 2006.

o  
Fourth quarter income from operations, before interest expense, increased 22% to $28.4 million in 2007 from $23.2 million in 2006.

o  
 Fourth quarter adjusted EBITDA improved 42% to $38.7 million from $27.2 million in 2006.

·  
Full year 2007 EPS declined to $0.56 from $2.56 in 2006 principally due to cumulative losses incurred in connection with the PictureMe Portrait Studio brand acquisition.

·  
Full year adjusted EBITDA improved 9% to $49.0 million from $45.1 million in 2006.

·  
PictureMe Portrait Studio integration efforts proceeding well.  The Company expects to realize substantial savings in fiscal 2008 and, especially, fiscal 2009 through the elimination of PictureMe Portrait Studio corporate support expenses and large gains in manufacturing and studio labor productivity.

·  
The PictureMe Portrait Studio digital conversion effort is ahead of plan with 632 U.S. studios converted as of April 11, 2008.  The Company now expects to convert all U.S., Canadian and Mexican studios by the end of 2008.
 
CPI Corp. reported earnings per share of $2.44 per diluted share for the 12-week fourth quarter ended February 2, 2008 compared to earnings per share of $2.32 per diluted share reported in the comparable quarter of fiscal 2006.  Net income for the same periods increased to $15.7 million in 2007 from $14.8 million in 2006, principally due to the contribution of the Company’s PictureMe Portrait Studio (PMPS) business acquired in June 2007 which is accretive notwithstanding continuing significant legacy and transitional costs that are expected to be substantially eliminated by early 2009 as the Company completes its integration efforts.  The Company’s fourth quarter 2007 net income reflects higher borrowings associated with the acquisition of the PictureMe Portrait Studio business as well as a $2.9 million noncash charge booked to reflect the mark-to-market fair value adjustment of the Company’s fixed interest rate swap that was required by the Company’s credit agreement.

Net sales for the fourth quarter of 2007 increased $62.1 million to $162.8 million from the $100.7 million reported in the fourth quarter of 2006 as a result of the inclusion of net sales of $70.8 million attributable to the Company’s PMPS brand.  Sears Portrait Studios (SPS) net sales for the fourth quarter of 2007 declined $8.8 million or approximately 9%,
 
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to $91.9 million versus the prior year.  The 2007 fourth quarter sales performance was the result of an approximate 16% decline in sittings, partially offset by an approximate 8% increase in average sale per customer sitting.  During the 2007 fourth quarter the SPS brand experienced lower customer response to its direct marketing programs and significantly reduced same-day/walk-in business. The PMPS brand reported $70.8 million in sales for the fiscal 2007 fourth quarter representing an approximate 7% decrease in same store sales versus the comparable period of the prior year (such prior year results not reported in the Company’s historical results).  This sales performance resulted from an approximate 19% decline in sittings, partially offset by an approximate 15% increase in average sale per customer sitting.

Cost of sales was $16.2 million in the fourth quarter of 2007 compared to $8.9 million in the comparable prior year period.  The increase in cost of sales is attributable to the inclusion of PMPS cost of sales in the fourth quarter of 2007, partially offset by decreased production costs resulting from lower overall manufacturing production levels, additional gains in manufacturing productivity and an improved product mix.  Cost of sales as a percentage of sales increased to 9.9% in 2007 from 8.8% in 2006.  The increase in cost of sales as a percentage of sales is a result of the higher cost of operation of the PictureMe Portrait Studio business’s analog fulfillment systems and the duplicative costs of transitioning these systems to digital technology as well as PictureMe Portrait Studio’s generally lower customer averages and product margins.

Selling, general and administrative expenses were $108.6 million in the fourth quarter of 2007 versus $65.0 million in the fourth quarter of 2006.  The increase in fourth quarter 2007 SG&A costs is attributable to the inclusion of PMPS costs, which continue to reflect a significant portion of the acquired cost structure of the former Portrait Corporation of America organization.  These increases were partially offset by the net effect of lower studio and corporate employment costs, lower advertising spending, lower workers compensation and general liability costs, increased professional services costs and increased restricted stock amortization expense associated with past performance awards.  As a percentage of sales, selling, general and administrative expenses increased to 66.7% in 2007 from 64.5% in 2006.  The increase in selling, general and administrative expenses as a percentage of sales is due principally to the inclusion of the PictureMe Portrait Studio business as well as some deleveraging of fixed costs as a result of the sales declines experienced in the Sears Portrait Studio business.  The increase in expenses as a percentage of sales also reflects the accrual of an upward commission adjustment provided for in the current Sears contract as a result of the PictureMe Portrait Studio acquisition coupled with the decline in Sears Portrait Studio sales. Depreciation and amortization was $7.7 million in the fourth quarter of 2007 compared to $3.6 million in the fourth quarter of 2006.  This increase is attributable to the inclusion in the fourth quarter of 2007 of depreciation and amortization related to the PMPS brand and includes $1.2 million of amortization of intangible assets resulting from the PMPS acquisition.  The increase from the inclusion of PMPS depreciation and amortization was partially offset by a decline in depreciation and amortization related to the Company’s non-PMPS assets.
 

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Other charges and impairments totaled $2.0 million during the fourth quarter of 2007 and represent severance accruals and other integration-related costs relative to the PMPS acquisition.

Fiscal 2007 Results

The Company also reported net income for the fiscal year ended February 2, 2008 of $3.6 million, or $0.56 per diluted share, compared to net income of $16.3 million, or $2.56 per diluted share, for the 2006 fiscal year ended February 3, 2007.  The Company’s full year 2007 results were significantly negatively impacted by transitional expenses associated with the PictureMe Portrait Studio acquisition and increased interest expense associated with the funding of the PCA acquisition.

Net sales for fiscal 2007 increased $130.2 million to $424.0 million from the $293.8 million reported in 2006 as a result of the inclusion of net sales of $148.8 million attributable to the Company’s PMPS brand from its June 8, 2007 date of acquisition.  Sears Portrait Studios net sales for fiscal 2007 declined $18.5 million, or approximately 6%, to $275.3 million from the $293.8 million reported in fiscal 2006.  The SPS 2007 sales performance was the result of an approximate 14% decline in sittings, partially offset by an approximate 9% increase in average sale per customer sitting.

Cost of sales was $43.9 million in fiscal 2007 compared to $28.1 million in fiscal 2006.  The increase in cost of sales is attributable to the inclusion of the PMPS brand cost of sales from the June 8, 2007 date of acquisition.  This increase was partially offset by decreased production costs resulting from lower overall manufacturing production levels, additional gains in manufacturing productivity and an improved product mix.

Selling, general and administrative expenses were $333.3 million in fiscal 2007 compared to $221.3 million in fiscal 2006.  The increase in 2007 SG&A costs is attributable to the inclusion of the PMPS brand costs from the June 8, 2007 date of acquisition.  This increase was partially offset by the net effect of lower studio and corporate employment costs, reduced host sales commissions, reductions in various other operating expense categories resulting from ongoing cost reduction efforts, increased professional service costs, increased advertising spending and increased restricted stock amortization expense associated with past performance awards.  The reduction in studio and employment costs included approximately $3.9 million resulting from a change in the Company’s vacation and sick pay policy announced in the first quarter of 2007.

Depreciation and amortization expense was $27.3 million in fiscal 2007 compared to $16.9 million in fiscal 2006.  This increase is attributable to the inclusion of PMPS depreciation and amortization from the June 8, 2007 date of acquisition and includes $2.8 million of amortization resulting from the allocation of the purchase price to certain amortizable intangible assets.  The increase from the inclusion of the PMPS depreciation and amortization was partially offset by a decline in depreciation and amortization related to the Company’s non-PMPS assets.
 
 
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Other charges and impairments totaled $5.2 million during fiscal 2007 and represent principally severance accruals and other integration-related costs relating to the PMPS acquisition.

# # # # # # # #

CPI is the leading portrait studio operator in North America offering photography services in approximately 3, 100 locations in the United States, Puerto Rico, Canada and Mexico, principally in Sears and Wal-Mart stores.

The statements contained in this press release that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve risks and uncertainties.  We try to identify forward-looking statements by using words such as “preliminary,” “plan,” “expect,” “looking ahead,” “anticipate,” “estimate,” “believe,” “should,” “intend,” and other similar expressions.  Management wishes to caution the reader that these forward-looking statements, such as our outlook for the integration of the PCA Acquisition, portrait studios, net income, future cash requirements, cost savings, compliance with debt covenants, valuation allowances, reserves for charges and impairments and capital expenditures, are only predictions or expectations; actual events or results may differ materially as a result of risks facing us.  Such risks include, but are not limited to:  the Company’s dependence on Sears and Wal-Mart, the approval of our business practices and operations by Sears and Wal-Mart, the termination, breach or increase of the Company’s expenses by Sears or Wal-Mart under our license agreements, customer demand for the Company’s products and services, manufacturing interruptions, dependence on certain suppliers, competition, dependence on key personnel, fluctuations in operating results, a significant increase in piracy of the Company’s photographs, widespread equipment failure, compliance with debt covenants, increased debt level due to the acquisition of Portrait Corporation of America, Inc (“PCA”), the ability to successfully integrate the PCA acquisition, implementation of marketing and operating strategies, 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, 2007 and its Form 10-Q for the 40 weeks ended November 10, 2007.  The Company does not undertake any obligations to update any of these forward-looking statements.


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Financial tables to follow . . .
 
 
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CPI CORP.
CORRECTION TO FOURTH QUARTER AND FISCAL YEAR 2007 PRESS RELEASE
(In thousands except per share amounts)

 
   
12 Weeks Ended February 2, 2008
   
52 Weeks Ended February 2, 2008
 
   
Per Original Press Release
   
Correction and Reclassifications
   
Corrected Totals
   
Per Original Press Release
   
Correction and Reclassifications
   
Corrected Totals
 
                                     
Selling, general and administrative expenses
    109,743       (1,132 )     108,611       334,397       (1,132 )     333,265  
                                                 
Other charges and impairments
    1,701       266       1,967       4,929       266       5,195  
                                                 
Income from continuing operations
    27,515       866       28,381       13,501       866       14,367  
                                                 
Earnings from continuing operations
                                               
  before income tax expense
    22,942       866       23,808       4,858       866       5,724  
                                                 
Income tax expense
    7,761       318       8,079       1,471       480       1,951  
                                                 
Net earnings from continuing operations
    15,181       548       15,729       3,387       386       3,773  
                                                 
Net loss from discontinued operations
                                               
   net of income tax benefit
    (85 )     85       -       (372 )     175       (197 )
                                                 
Net earnings
  $ 15,096       633     $ 15,729     $ 3,015       561     $ 3,576  
                                                 
Net earnings (loss) per common share - diluted
                                               
   From continuing operations
  $ 2.36     $ 0.08     $ 2.44     $ 0.53     $ 0.06     $ 0.59  
   From discontinued operations
    (0.01 )     0.01       -       (0.06 )     0.03       (0.03 )
      Net earnings  - diluted
  $ 2.35     $ 0.09     $ 2.44     $ 0.47     $ 0.09     $ 0.56  
                                                 
Net earnings (loss) per common share - basic
                                               
   From continuing operations
  $ 2.37     $ 0.08     $ 2.45     $ 0.53     $ 0.06     $ 0.59  
   From discontinued operations
    (0.01 )     0.01       -       (0.06 )     0.03       (0.03 )
      Net earnings  - basic
  $ 2.36     $ 0.09     $ 2.45     $ 0.47     $ 0.09     $ 0.56  
                                                 
 

   
As of February 2, 2008
 
   
Per Original Press Release
   
Correction and Reclassifications
   
Corrected Totals
 
                   
Cash and cash equivalents
  $ 59,637       (460 )   $ 59,177  
                         
Other current assets
    33,580       62       33,642  
                         
Intangible assets
    64,242       (1,286 )     62,956  
                         
Other assets
    23,003       1,459       24,462  
                         
Total assets
    236,742       (225 )     236,517  
                         
Current liabilities
    82,659       392       83,051  
                         
Long-term debt obligations
    104,190       (1,168 )     103,022  
                         
Stockholders' equity
    16,423       551       16,974  
                         
Total liabilities and stockholders' equity
    236,742       (225     236,517  
 
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CPI CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
 

   
12 Weeks
 
Vs.
 
12 Weeks
   
52 Weeks
 
Vs.
 
52 Weeks
 
   
Feb. 02, 2008
     
Feb. 03, 2007
   
Feb. 02, 2008
     
Feb. 03, 2007
 
                             
Net sales
  $ 162,770       $ 100,738     $ 424,026       $ 293,803  
                                     
Cost and expenses:
                                   
  Cost of sales (exclusive of depreciation and
                                   
    amortization shown below)
    16,152         8,910       43,871         28,128  
  Selling, general and administrative expenses
    108,611         64,985       333,265         221,295  
  Depreciation and amortization
    7,659         3,604       27,328         16,922  
  Other charges and impairments
    1,967         28       5,195         1,240  
      134,389         77,527       409,659         267,585  
                                     
Income from continuing operations
    28,381         23,211       14,367         26,218  
                                     
Interest expense
    5,279         512       10,652         2,380  
                                     
Interest income
    579         304       1,834         565  
                                     
Impairment (recovery) and related obligations
                                   
    of preferred security interest
    -         -       -         (887 )
                                     
Other income (expense), net
    127         52       175         144  
                                     
Earnings from continuing operations
                                   
  before income tax expense
    23,808         23,055       5,724         25,434  
                                     
Income tax expense
    8,079         8,261       1,951         9,107  
                                     
Net earnings from continuing operations
    15,729         14,794       3,773         16,327  
                                     
Net income (loss) from discontinued operations
                                   
   net of income tax benefit
    -         -       (197 )       -  
                                     
Net earnings
  $ 15,729       $ 14,794     $ 3,576       $ 16,327  
                                     
Net earnings (loss) per common share - diluted
                                   
   From continuing operations
  $ 2.44       $ 2.32     $ 0.59       $ 2.56  
   From discontinued operations
    -         -       (0.03 )       -  
      Net earnings  - diluted
  $ 2.44       $ 2.32     $ 0.56       $ 2.56  
                                     
Net earnings (loss) per common share - basic
                                   
   From continuing operations
  $ 2.45       $ 2.33     $ 0.59       $ 2.57  
   From discontinued operations
    -         -       (0.03 )       -  
      Net earnings  - basic
  $ 2.45       $ 2.33     $ 0.56       $ 2.57  
                                     
Weighted average number of common and
                                   
 common equivalent shares outstanding:
                                   
   Diluted
    6,434         6,382       6,416         6,376  
                                     
   Basic
    6,409         6,355       6,391         6,353  

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CPI CORP.
ADDITIONAL CONSOLIDATED OPERATING INFORMATION
(In thousands)
 
   
12 Weeks
 
Vs.
 
12 Weeks
   
52 Weeks
 
Vs.
 
52 Weeks
 
   
Feb. 02, 2008
     
Feb. 03, 2007
   
Feb. 02, 2008
     
Feb. 03, 2007
 
                             
Capital expenditures
  $ 4,609       $ 135     $ 17,113       $ 2,760  
                                     
EBITDA is calculated as follows:
                                   
  Net earnings from continuing operations
  $ 15,729       $ 14,794     $ 3,773       $ 16,327  
  Income tax expense
    8,079         8,261       1,951         9,107  
  Interest expense
    5,279         512       10,652         2,380  
  Depreciation and amortization
    7,659         3,604       27,328         16,922  
  Other non-cash charges
    -         17       79         42  
                                     
EBITDA (1) & (5)
  $ 36,746       $ 27,188     $ 43,783       $ 44,778  
                                     
Adjusted EBITDA (2)
  $ 38,713       $ 27,216     $ 48,978       $ 45,131  
                                     
EBITDA margin (3)
    22.58 %       26.99 %     10.33 %       15.24 %
                                     
Adjusted EBITDA margin (4)
    23.78 %       27.02 %     11.55 %       15.36 %
 
 (1)
EBITDA represents net earnings from continuing operations before interest expense, income taxes, depreciation and amortization and other non-cash charges. EBITDA is included because it is one liquidity measure used by certain investors to determine a company's ability to service its indebtedness.  EBITDA is unaffected by the debt and equity structure of the company. EBITDA does not represent cash flow from operations as defined by GAAP, is not necessarily indicative of cash available to fund all cash flow needs and should not be considered an alternative to net income under GAAP for purposes of evaluating the Company's results of operations. EBITDA is not necessarily comparable with similarly-titled measures for other companies.
 
(2)
Adjusted EBITDA is calculated as follows:

EBITDA
  $ 36,746     $ 27,188     $ 43,783     $ 44,778  
   EBITDA adjustments:
                               
     Impairment charges
    249       -       256       179  
     Reserves for severance and related costs
    -       -       1       707  
     Executive retirements/repositioning
    -       28       6       171  
     Cost associated with acquisition
    1,659       -       4,846       -  
     Contract terminations and settlements
    -       -       -       -  
     Cost associated with strategic alternative review
    -       -       -       183  
     Impairment (recovery) and related obligations
                               
         of preferred security interest
    -       -       -       (887 )
     Other
    59       -       86       -  
                                 
Adjusted EBITDA
  $ 38,713     $ 27,216     $ 48,978     $ 45,131  
                                 
 
(3)
EBITDA margin represents EBITDA, as defined in (1), stated as a percentage of sales.
   
(4)
Adjusted EBITDA margin represents Adjusted EBITDA, as defined in (2), stated as a percentage of sales.
   
(5)
As required by the SEC's Regulation G, a reconciliation of EBITDA, a non-GAAP liquidity measure, with the
 
most directly comparable GAAP liquidity measure, cash flow from continuing operations follows:
 
   
12 Weeks
 
Vs.
 
12 Weeks
   
52 Weeks
 
Vs.
 
52 Weeks
 
   
Feb. 02, 2008
     
Feb. 03, 2007
   
Feb. 02, 2008
     
Feb. 03, 2007
 
                             
EBITDA
  $ 36,746       $ 27,188     $ 43,783       $ 44,778  
Income tax expense
    (8,079 )       (8,261 )     (1,951 )       (9,107 )
Interest expense
    (5,279 )       (512 )     (10,652 )       (2,380 )
Adjustments for items not requiring cash:
                                   
   Deferred income taxes
    6,793         8,479       1,455         9,357  
   Deferred revenues and related costs
    (7,546 )       (5,700 )     2,655         (3,118 )
   Impairment (recovery) and related obligations
                                   
       of preferred security interest
    -         -       -         (887 )
   Other, net
    3,905         (164 )     9,675         2,357  
Decrease (increase) in current assets
    11,952         11,986       562         (119 )
Increase (decrease) in current liabilities
    (8,826 )       (7,709 )     (2,633 )       (2,558 )
Increase (decrease) in current income taxes
    1,370         (470 )     (1,001 )       (373 )
                                     
Cash flows from continuing operations
  $ 31,036       $ 24,837     $ 41,893       $ 37,950  
                                     
 
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CPI CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 2, 2008 AND FEBRUARY 3, 2007
(In thousands)
 

   
Feb. 02, 2008
   
Feb. 03, 2007
 
Assets
           
             
Current assets:
           
Cash and cash equivalents
  $ 59,177     $ 27,294  
Other current assets
    33,642       27,777  
Net property and equipment
    56,280       26,693  
Intangible assets
    62,956       512  
Other assets
    24,462       10,886  
                 
Total assets
  $ 236,517     $ 93,162  
                 
Liabilities and stockholders' equity
               
                 
Current liabilities
  $ 83,051     $ 49,407  
Long-term debt obligations
    103,022       7,747  
Other liabilities
    33,470       23,209  
Stockholders' equity
    16,974       12,799  
                 
Total liabilities and stockholders' equity
  $ 236,517     $ 93,162  
                 
 
###
 

 
 
 
 
 

The following information was filed by Cpi Corp (CPICQ) on Tuesday, May 13, 2008 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-K Annual Report statement of earnings and operation as management may choose to highlight particular information in the press release.


 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended February 2, 2008
or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________

Commission file number 1-10204

CPI Corp.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)
 
1706 Washington Ave., St. Louis, Missouri
(Address of principal executive offices)
43-1256674
(I.R.S. Employer Identification No.)
 
63103
(Zip Code)

Registrant’s telephone number, including area code: 314/231-1575

Securities registered pursuant to Section 12(b) of the Act:
 

(Title of each class)
Common Stock $.40 Par Value
 (Name of each exchange on which Registered)
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:    None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    o Yes    x No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    o Yes    x No
 
Note:
Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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.    x Yes    o No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.        o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,  a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,”  “ accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:  (Check one):
 
   Large accelerated filer o   
 Accelerated filer x
 
  Non-accelerated filer o 
 
Smaller reporting company   o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).           o
 
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the New York Stock Exchange on July 21, 2007, of  $63.55, was approximately $339.0 million.

The number of shares outstanding of each of the registrant’s classes of Common Stock, as of May 2, 2008 was:  Common Stock, par value $.40 – 6,459,834.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the Annual Meeting Of Shareholders to be held June 25, 2008 are incorporated by reference into Part III of this Report.
 
 
 


 
 
 
 

























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2
 


EXPLANATORY NOTE
 
On April 10, 2008, management and the Audit Committee of the Board of Directors of CPI Corporation (the “Company”) concluded that it is necessary to restate the Company’s previously issued consolidated financial statements for the fiscal year 2005. This Annual Report on Form 10-K contains the restatement of our previously issued consolidated financial statements for the fiscal year ended February 4, 2006.  The previously filed Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the fiscal year and fiscal quarters of 2005 will not be amended to reflect the restatement.  The items of CPI Corporation's ("the Company") Form 10-K for the fifty-two weeks ended February 2, 2008 are restated as follows: Part II, Financial Information Item 6 Selected Consolidated Financial Data, Item 7 Management's Discussion and Analysis of Financial Condition and Item 8 Financial Statements and Supplemental Data.
 
The Company is restating its 2005 financial statements to give effect to certain errors which have been identified in its tax accounting records.  The errors in the tax accounting records resulted in a tax liability that was effectively settled, but not recorded, in the financial statements in 2005.  As a result of these errors, tax benefits of approximately $2.5 million were not recognized within the appropriate period, which led to the overstatement of deferred tax liabilities and an overstatement of income tax expense during the 2005 fiscal year by the same amount.  The restatement impacted certain line items within cash flows from operations, but had no effect on total cash flows from operations and did not impact cash flows from investing activities or financing activities. 
 
This amendment does not reflect events occurring after the filing of the Form 10-K for the fifty-two weeks ended February 4, 2006 (the Original Form 10-K) and does not modify or update the disclosures therein in any way other than as required to reflect the adjustments described above.  Such events include, among others, the events described in our Original Form 10-K and the events described in our reports on Form 8-K, Form 10-K and Form 10-Q filed after the filing of the Original Form 10-K.

Management also has determined that as of February 2, 2008, we had material weaknesses in our internal control over financial reporting related to the accounting for income taxes, the accounting for derivatives and the accounting for advertising.  As described in more detail in Item 9A of this Annual Report on Form 10-K, the Company has undertaken measures designed to remedy those material weaknesses.


























 
3
 

 
TABLE OF CONTENTS

       
         
Item 1.
 
Business
 
5
Item 1A.
 
Risk Factors
 
10
Item 1B.
 
Unresolved Staff Comments
 
13
Item 2.
 
Properties
 
14
Item 3.
 
Legal Proceedings
 
15
Item 4.
 
Submission of Matters to a Vote of Security Holders
 
15
         
       
         
Item 5.
 
Market for Registrant's Common Equity, Related Stockholder
   
     
Matters and Issuer Purchases of Equity Securities
 
15
 
Selected Consolidated Financial Data
 
16
 
Management's Discussion and Analysis of
   
     
Financial Condition and Results of Operations
 
18
Item 7A.
 
Quantitative and Qualitative Disclosures About
   
     
Market Risk
 
31
 
Financial Statements and Supplementary Data
 
32
Item 9.
 
Changes in and Disagreements with Accountants
   
     
on Accounting and Financial Disclosure
 
70
Item 9A.
 
Controls and Procedures
 
70
Item 9B.
 
Other Information
 
74
         
       
         
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
74
Item 11.
 
Executive Compensation
 
74
Item 12.
 
Security Ownership of Certain Beneficial Owners
   
     
and Management and Related Stockholder Matters
 
74
Item 13.
 
Certain Relationships and Related Transactions, and Director
   
     
Independence
 
75
Item 14.
 
Principal Accounting Fees and Services
 
75
         
       
         
Item 15.
 
Exhibits and Financial Statement Schedules
 
75
     
82

 
4
 

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  with respect to the integration of the acquisition of the operating assets and certain liabilities of PCA portrait studios (the “PCA Acquisition”), its relationship with Sears and Wal-Mart, future cash requirements, cost savings, compliance with debt covenants, valuation allowances, reserves for charges and impairments and capital expenditures, are only predictions or expectations; actual events or results may differ materially as a result of risks facing the Company.  A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” beginning on page 10 of this report.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 1.              Business

An Overview of the Company

CPI Corp. (“CPI”, the “Company” or “we”), a Delaware corporation formed in 1982, is a long-standing leader in the professional portrait photography of young children and families.  At February 2, 2008, we operated 3,108 studios throughout the United States, Canada, Mexico and Puerto Rico principally under license agreements with Sears, Roebuck and Co. (“Sears”) and Wal-Mart Stores, Inc. (“Wal-Mart”).

We have provided professional portrait photography for Sears customers since 1959 and have been the only Sears portrait studio operator since 1986.  On June 8, 2007 we completed the acquisition of substantially all of the assets and certain liabilities of Portrait Corporation of America (“PCA”).  The operations acquired from PCA are operating within CPI Corp. as the PictureMe Portrait Studio brand (“PMPS brand”) which includes studios operating as PictureMe! Portrait Studios® in the U.S. and as Wal-Mart Portrait Studios in Canada and Mexico.  PictureMe Portrait Studio is the sole operator of portrait studios in Wal-Mart stores and supercenters.  Studios are located in all fifty states, Canada, Mexico and Puerto Rico. Operations in the United States and Puerto Rico are conducted through the Company’s subsidiaries, Consumer Programs Incorporated and CPI Images, LLC, and a partnership, Texas Portraits, L.P. (owned by Consumer Programs Incorporated and another subsidiary, Consumer Programs Partner, Inc.), pursuant to license and lease agreements with Sears and Wal-Mart, respectively. Approximately $115.5 million of long-lived assets are used in our domestic operations as of February 2, 2008.

In Canada, we operate 112 portrait studios in Sears through CPI Corp., which is organized under the laws of Nova Scotia and 253 studios in Wal-Mart through CPI Canadian Images, a partnership, which is organized under the laws of Ontario.  With 2007 sales of $49.7 million, our Canadian studios accounted for 11.7% of our revenues.  Long-lived assets employed in the Company’s Canadian operations at February 2, 2008 amounted to $25.0 million.

We operate a website which supports and complements our studio operations. Searsphotos.com serves as a vehicle to archive, share portraits via email (after a portrait session), and order additional portraits and products.  In 2007, revenues from on-line sales and services were approximately $3.2 million.

The Company’s Products and Services

Our portrait studio brands each offer customers a wide range of products, services and portrait choices. A package sitting consists of a fixed number of portraits, all of the same pose for a relatively low price. Package customers may buy additional portrait sheets for a fee. A custom sitting consists of portraits purchased by the sheet and allows for a variety of sizes, poses and backgrounds. A collection sitting consists of a predetermined number of portraits bundled together at significant savings.  None limit the number of people allowed in the portrait.

 
 
5
 

Our PictureMe Portrait Studio brand focuses on the sales of packages and portrait collections. Our package is a studio-wide, low-priced advertised “introductory” offer and provides a high volume of portraits with less customization and more limited selections. Our associates offer customers the opportunity to upgrade to a Portrait Collection whereby they receive more variety in terms of poses, sizes and customization.  Customization is currently available only in the digital studios. Our Sears brand focuses on customized portrait solutions that provide a wide variety of selection and customization. Due to the wide variety and customization allowed within our Sears studios, the customer is charged a $14.99 session fee. There are no session fees in our PictureMe Portrait Studio studios.
.
Each brand offers customers the opportunity to join a portrait savings club. Each club requires a one-time fee for a one-year membership. PictureMe Portrait Studio’s Portrait Smiles Club members receive 10% off their entire purchase and a free portrait sheet on each returning visit. Sears’ Smile Saver® Program members receive savings on products and services and pay no session fees for the enrollment period.  Both of these plans were designed to promote customer loyalty while encouraging frequent return visits to the studio.

Once a customer has selected their preferred backgrounds, they enter the camera room where the photographer captures images of multiple poses. Once the photographer is finished, the images are transferred to a monitor at a sales table. It is here where a studio associate reviews all the images with the customer and describes various product options.

As of April 11, 2008, all of our Sears Portrait Studios, with the exception of Canada, are digital and approximately 37% of PictureMe Portrait Studios in the U.S. are as well.  The Company plans to convert all of the remaining U.S. studios to digital by the fall of 2008. PMPS brand, Canada, Mexico and Puerto Rico studios will convert to the digital platform following the U.S. conversion.  In Sears’ digital studios, customer orders are either printed immediately in the studio and/or high-resolution images are transmitted electronically to one of our processing centers for fulfillment. PictureMe Portrait Studio digital studios do not offer on-site printing. In our PictureMe Portrait Studio film studios, film is shipped to  our Charlotte, North Carolina facility. Our processing centers complete the customer’s orders to their specifications and return them to the customer’s studio for pick-up. Orders placed in digital studios are generally available for pick-up within 10 days from the time of order; orders placed in film studios take approximately 2½ weeks.

Sears Portrait Studios have the ability to upload images from any portrait session to our safe and secure searsphotos.com website. With a code and individualized passwords, our customers can view their images from home, share them via email with family and friends, and place orders online for portraits or gifts such as personalized t-shirts, mugs, mouse pads and more.

Financial and Other Business Information

We operate and manage our business as a single operating segment.  See Item 8 – Financial Statements and Supplementary Data for information on our financial condition, including revenues and net earnings for each of the last three fiscal years.  For geographic related information, see Note 1 – Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements.

The Company’s Host Relationships

Sears

We have enjoyed a strong relationship with Sears for more than 40 years under a series of license agreements.  Over that period, except in connection with Sears store closings, Sears has never terminated the operation of any of our studios. While we are materially dependent on a continuing relationship with Sears and are currently negotiating the renewal of our license with Sears, we do not believe that Sears will terminate or materially reduce the scope of our license.  As a Sears licensee, we enjoy the benefits of using the Sears name, access to prime retail locations, Sears' daily cashiering and bookkeeping system, store security services and Sears’ assumption of credit card fees and credit and check authorization risks.  Our customers also have the convenience of using their Sears credit cards to purchase our products or services.
 
 
6
 
 
As of February 2, 2008, the Company operated 893 studios, which are located in Sears stores in the United States under a license agreement that runs through December 31, 2008. Under this agreement, we pay Sears a license fee of 15% of total annual net sales for studios located in Sears stores. We provide all studio furniture, equipment, fixtures and advertising, and we are responsible for hiring, training and compensating our employees.  We have agreed to indemnify Sears against claims arising from our operation of Sears Portrait Studios except to the extent any injury or damage is caused solely by Sears’ negligence.

The Company, upon certain conditions, has agreed to provide Sears with certain commission adjustments (the “Contingent Payments”) through 2008, the remaining term of the current United States agreement.  The Contingent Payments are triggered only if the Company operates more than 24 domestic non-Sears portrait studios and the rate of growth in total contractual commissions paid to Sears does not exceed levels specified in the agreement.  If both of these conditions occur, the Contingent Payments are determined by a formula included in the agreement, however, in no event shall such payments exceed $2.5 million annually or $7.5 million cumulatively through 2008.  As a result of the addition of PictureMe Portrait Studios in 2007, this provision applies and the related commission adjustments have been accrued in the accompanying 2007 consolidated financial statements.

As of February 2, 2008, we operated 30 freestanding studios in the United States under the Sears name in locations not within a Sears store.  The Company pays Sears a license fee of 7.5% of total annual net sales per studio in these locations.  We pay rent and utilities at each of these locations and provide all studio furniture, equipment, fixtures, leasehold improvements and advertising. We are also responsible for hiring, training and compensating our employees.  These studios benefit from the use of the Sears name and Sears’ payment for credit card fees and check clearance systems.

Under a license agreement with Sears Canada, Inc., a subsidiary of Sears, the Company operates 112 Canadian studios as of February 2, 2008.  This agreement, dated January 1, 2003, expired December 31, 2006.  We continue to operate our Canadian studios under the terms of the aforementioned agreement as discussions continue with Sears Canada to arrive at a mutually satisfactory extension or new agreement.  In 2005, 2006 and 2007, the license fee in Canadian dollars that we pay to Sears was 13% of the first C$30 million of annual net sales and 8% for annual net sales greater than C$30 million.   We provide all studio furniture, equipment, fixtures and advertising and are responsible for hiring, training and compensating our employees.

Under the terms of our existing license agreement with Sears in the United States, Sears is under no contractual obligation to invite us to open portrait studios in new Sears or Sears Grand stores.    Once we do establish a portrait studio in a new Sears store, that studio is then governed by the terms of our existing license agreement.

While Sears has not indicated to us any specific intentions to close a significant number of its existing full-line, mall-based stores that contain our portrait studios, there can be no assurance that some such closures may not occur in the future thus resulting in the concurrent closure of some of our existing portrait studios.  The closure of a significant number of Sears full-line, mall-based stores that result in the closing of related portrait studios, to the extent such closures are not offset by openings of portrait studios in new Sears stores or other formats or venues could have an adverse impact on the Company’s operations.

Wal-Mart

Upon acquisition of the PCA assets on June 8, 2007, the Company became the sole operator of portrait studios in Wal-Mart Stores and Supercenters in the U.S., Puerto Rico, Canada and Mexico.  The Company operates under the trade names PictureMe Portrait Studios™ in the U.S. and Wal-Mart Portrait Studios in Canada and Mexico.  As of February 2, 2008, the Company operated 2,070 studios worldwide and approximately 35% of our fiscal 2007 revenue was derived from sales within Wal-Mart. While we are materially dependent on a continuing relationship with Wal-Mart, we do not believe that Wal-Mart will terminate or materially reduce the scope of our licenses.   As part of the PCA transaction, we assumed certain preexisting license agreements between PCA and Wal-Mart.  These license agreements are summarized below.
 
 
7
 
 
Effective June 8, 2007, the Company has a U.S. Master Lease Agreement with Wal-Mart Stores East LP, Wal-Mart Stores, Inc., Wal-Mart Louisiana, LLC and Wal-Mart Stores Texas, LLC (the “U.S. Lease Agreement”).   The U.S. Lease Agreement, negotiated by PCA and Wal-Mart during PCA’s bankruptcy proceedings, requires us to pay a rental fee to Wal-Mart based upon a percentage of  sales of our studios operating in Wal-Mart’s U.S. stores.  The agreement has an initial term of three years but automatically extends for an additional two years for each studio from which Wal-Mart receives rental fees for the period July 1, 2008 through June 30, 2009 at a minimum specified rate per square foot.  For each studio for which Wal-Mart receives less than the specified rate per square foot, the Company and Wal-Mart may mutually agree to extend the individual studio license for an additional two years by written agreement.

The assumed U.S. agreement also contains a provision calling for the closure of 500 PictureMe Portrait Studios (the rebranded name of the former PCA Wal-Mart studios) every fiscal year in which our PictureMe Portrait Studio comparable studio sales are both negative and more than 50 basis points below Wal-Mart’s comparable U.S. store sales.  After the first fiscal year the PictureMe Portrait Studios achieve positive comparable studio sales, this provision is no longer applicable.  The Company and Wal-Mart recently executed an amendment to the U.S. agreement which provides for the closure of 51 of the Company’s existing studios by July 31, 2008 or later if agreed to in writing by the parties, eliminates a section of the original agreement that required a specified number of studio closures if specified comparable store sales targets are not met, and provides for a reduction in minimum studio hours of operation.  The closure of 51 studios is expected to have an impact of approximately $1,000 per studio which is immaterial to the Company’s future results of operation.

Our relationship with Wal-Mart Canada Corp. is governed by an amended and restated licence agreement effective January 1, 2006.  We are required to pay Wal-Mart Canada a licence fee based on a percentage of the  sales of our portrait studios operated in Wal-Mart’s Canadian stores.  The agreement has a five-year term, and Wal-Mart Canada has an option to renew for two renewal periods of two years.  Studios that were in operation on the effective date of this agreement are subject to a licence schedule, which specifies expiration dates for those specific studios.  Based on this licence schedule, our Canadian studios licences expire as follows:  94 in 2008, 112 in 2009, 20 in 2010, 15 in 2011, 10 in 2012 and 2 in 2013.  Although we anticipate that these agreements will renew, there is no assurance of such.  As of February 2, 2008, we operate 253 studios under the agreement with Wal-Mart Canada.

Within Mexico, our relationship with Nueva Wal-Mart De Mexico, S de R.L. de C.V. ("Nueva Wal-Mart De Mexico") is governed by an agreement dated as of June 1, 2002 for the first 44 studios. New agreements, with the same terms, are entered into as additional studios are added in Mexico. The agreements run for an undefined period of time. Neither party may terminate an agreement for a studio during the studio's first year of operation; thereafter, either party may terminate the agreement with respect to a studio by giving the other party written notice 30 days prior to the termination date. Under these agreements, Nueva Wal-Mart De Mexico is compensated based upon a percentage of our total sales in all Wal-Mart studios in Mexico. As of February 2, 2008, we operated in 115 Nueva Wal-Mart De Mexico studios.

Industry Background and Competition

We compete in a highly fragmented $8 billion domestic professional portrait photography industry. The primary segments within the industry are babies, preschoolers, school-age children (including youth sports and graduation portraits), adults, families/groups, weddings, passports and churches. Other segments include: cruise ships, conventions/events, glamour and executive portraits. Our competitors include large studio chains operating in national retailers, other national free-standing portrait studio companies, numerous regional start-ups aided by the advancements in digital photographic technology, national school and church photographers and a large number of independent portrait photography providers. The majority of the industry is comprised of small, independent photography companies and individual photographers.

Like CPI, several other portrait photography companies provide services in retail hosts. These companies and their retail hosts include: LifeTouch (JC Penney and Target), Olan Mills (K-Mart, Belk’s, Meijer’s and Macy’s) and Kiddie Kandids (Babies R Us). We believe that we are the largest of these competitors based on revenues generated in the respective retail hosts.

A number of other companies in the professional portrait photography industry operate freestanding studios on a national, regional or local basis. Among the more sizeable of these companies is Picture People, which operates independent, mall-based locations. In addition, with the advancements in digital photographic technology, we have witnessed numerous regional start-ups within the industry.
 
 
8
 
 
Industry players generally compete on the basis of the following: price, service, quality, location, product mix and convenience, including the immediate fulfillment of finished portraits at the time of the portrait session. Many competitors focus heavily on price and commonly feature large portrait packages at aggressively low prices in mass marketing promotions. Some of these same competitors have eliminated all sitting or session fees.

Our PictureMe Portrait Studio brand focuses on the sales of packages and portrait collections. Our package is a low-priced advertised “introductory” offer and provides a high volume of portraits with less customization and more limited selections. Our associates offer customers an opportunity to upgrade to a Portrait Collection whereby they receive more variety in terms of poses, sizes and customization. Customization is currently available only in the digital studios. While our products and services are some of the lowest priced in the industry, we do not feel that we are offering lesser value. In fact, it is our lower price that enables the PictureMe Portrait Studio customer to get some of the same products and services and professionalism that higher priced studios offer. It is an added benefit to the PictureMe Portrait Studio customer that session fees do not apply. The Sears brand focuses on customized portrait solutions that provide a wide variety of selection and customization.  The Sears customer is charged a session fee. Except for promotions at key times of the year, the Sears brand has not followed the “no session fee ever” practice because we believe a session fee is justified by the professionalism of our photographers, the quality of our equipment, our commitment to service and overall studio experience.  Furthermore, while our products and services are competitively priced, they are not generally the lowest priced in the industry as we focus on offering a better value proposition. Other competitors, notably Picture People, have emphasized convenience and experience over low price and also the immediate fulfillment of orders in the studio as opposed to longer lead times of central lab fulfillment.

The industry remains in constant transformation today brought about by significant advances in digital photographic technology. These technologies have made it possible to capture, manipulate, store and print high-resolution digital images in a decentralized environment. It is this digital evolution that has required industry incumbents to review and adjust their business models while fostering a number of new digital start-ups.  The digital evolution has generated photographic experimentation with the consumer and a “do-it-yourself” mentality that did not exist in years past. This has impacted overall portrait studio activity and frequency.

Seasonality and Inflation

Our business is highly seasonal, with the largest volume occurring in the fourth fiscal quarter, between Thanksgiving and Christmas.  For fiscal years 2007, 2006 and 2005, fourth quarter sales accounted for 38%, 34%, 35%, respectively, of total net sales for the year. Historically most, if not all, of the net earnings for the year are generated in the fourth fiscal quarter.   The timing of Easter, another seasonally important time for portraiture sales, can have a significant impact on the timing of recognition of sales revenues between the Company’s first and second fiscal quarters.  Historically, earlier Easters translate into lower sales due to the closer proximity of the earlier Easter date to the preceding Christmas holiday season during which customers are most portrait-active.  Most of the Company’s Easter-related sales in 2007, 2006 and 2005, years with earlier Easters, were recognized as revenues, in accordance with the Company’s revenue recognition policies reflected in Note 1 in the accompanying Notes to Consolidated Financial Statements, in the first fiscal quarter.  The moderate rate of inflation over the past three years has not had a significant effect on the Company’s revenues and profitability.

Suppliers

We purchase photographic paper and processing chemistry from three major manufacturers.  Eastman Kodak provides photographic paper for all central lab fulfillment for Sears Portrait Studios pursuant to an agreement in effect through June 30, 2008.  Dye sublimation paper used for proof sheets, portrait collages and portrait orders delivered at the end of a sitting in digital studios is provided primarily by Sony.  Fuji Hunt provides photographic paper for fulfillment of orders in PictureMe Portrait Studios and Wal-Mart Portrait Studios as well as processing chemistry.  We purchase camera and lens components, monitors, computers, printers and other equipment and materials from a number of leading suppliers.

Typically, we do not encounter difficulty in obtaining equipment and materials in the quantity and quality we require and we do not anticipate any problems in obtaining our requirements in the future.  We believe that we enjoy good relationships with our vendors.
 
 
9
 
 
For film locations, primarily in PictureMe Portrait Studios and Sears Canada, we have internalized most repairs and have built an internal knowledge base and repair capability to support our studio equipment.  Additionally, retirements of analog studio equipment have added to our store of replacement parts.  The computer and digital equipment used by us in the digital format consists of standard components that are readily available from multiple suppliers.

CPI has successfully converted all of its U.S. Sears Portrait Studios, 20 of its Sears Canada Studios and 632 of its U.S. PictureMe Portrait Studios as of April 11, 2008 to the full digital platform utilizing the software of a single vendor for our studio photography and manufacturing fulfillment digital systems.  Our contract with our software vendor allows CPI to scale the use of the software as necessary to support all of our current and prospective studios and labs.  Our vendor successfully met our peak season 2007 and 2006 volume requirements while we continue working with them to improve workflow efficiency.

Intellectual Property

We own certain registered service marks and trademarks, including Portrait Creations®, and Smile Savers Plan®, PictureMe! Portrait Studios® and The Portrait Gallery, which have been registered with the United States Patent and Trademark Office.  Our rights to these trademarks will continue as long as we comply with the usage, filing and other legal requirements relating to the renewal of trademarks.

The Company’s Employees

As of February 2, 2008, we had approximately 12,854 employees, including approximately 5,462 part-time and temporary employees.

The Company Website and Periodic Reports

Our Annual Reports on Form 10-K, including this Form 10-K, as well as our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports are available, free of charge, on the Investor Relations portion of our website, www.cpicorp.com.  These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.  References to the Company’s website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.

Environmental Regulation

Our operations are subject to commonly applicable environmental protection statutes and regulations.  We do not expect that compliance with federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment will have a material effect on our capital expenditures, earnings, or competitive position.  At present, we have not been identified as a potentially responsible party under the Comprehensive Environmental Responses, Compensation and Liability Act and have not established any reserves or liabilities relating to environmental matters.

Item 1A.                 Risk Factors

We wish to caution readers that in addition to the important factors described elsewhere in this Annual Report on Form 10-K, the following important factors, among others, sometimes have affected, or in the future could affect, our actual results and could cause our actual consolidated results during fiscal 2007, and beyond, to differ materially from those expressed in any forward-looking statements made by us or on our behalf.

We are materially dependent upon Sears and Wal-Mart.

Substantially all of our sales are derived from sales in Sears or Wal-Mart stores. Therefore, we are materially dependent upon our relationship with both Sears and Wal-Mart, the continued goodwill of Sears and Wal-Mart and the integrity of their brand names in the retail marketplace. Any deterioration in our host relationships could have a material adverse effect on us.

Because we represent only a small fraction of Sears and Wal-Mart revenues, any deterioration of either host relationship would have a far greater effect on us than on the host.

In addition, our competitive posture could be weakened with negative changes in Sears’ or Wal-Mart’s competitive posture.

 
10
 

Our business practices and operations need to be acceptable to our hosts.

Because of the importance of our Sears and Wal-Mart relationships, our business practices and procedures must at all times be acceptable to the host.  In addition, under our  agreements there are substantial contractual rights, which the host can exercise in a manner that can have a material adverse effect on us.  Consequently, in the future, we may make changes to our business practices and procedures, including with regards to advertising and promotions, product offerings, studio facilities and technology in response to host requests that would not be in our best interests and could materially and adversely affect our sales, costs, margins, business development or other aspects of our business.

Our hosts may terminate, breach, otherwise limit or increase our expenses under our license agreements.

Our Sears and Wal-Mart studios in the U.S., Canada and Mexico are operated pursuant to license and lease agreements, respectively.  As of February 2, 2008, our license agreements have the following expiration dates: for our U.S. and Puerto Rico Sears studios, December 2008; for our U.S. and Puerto Rico Wal-Mart studios, June 2010; for our Canadian Wal-Mart Studios, 94 in 2008, 112 in 2009, 20 in 2010, 15 in 2011, 10 in 2012 and 2 in 2013; and for our Mexican Wal-Mart studios, with 30-day notice after one year of operation. For our Canadian Sears studios, the agreement has expired and we are currently operating our studios under the terms of such agreement as discussions continue with Sears Canada to arrive at a mutually satisfactory extension or new agreement.  The U.S. Sears agreement is currently in negotiation and the termination of this agreement or the inclusion of unfavorable terms could have a material adverse impact on us.   There can be no assurance that we will be able to reach an acceptable agreement.  These agreements are more fully described in “Item 1. The Company’s Host Relationships.”

Sears and Wal-Mart are under no obligation to renew these agreements.  They may also seek to increase the fees we pay under our agreements upon renewal of the agreements. In addition, license fees under our Sears Canadian agreement increase periodically if certain sales or other conditions are met. We do not have the contractual right to close any poorly performing locations without Sears or Wal-Mart’s consent.  In addition, our license agreements do not prohibit Sears and Wal-Mart from selling many of the tangible goods we sell, or from processing film or digital photos, in other departments within its stores. Furthermore, there is always the risk that Sears or Wal-Mart might breach our agreements. The loss or breach of the agreements could have a material adverse effect on us. An adverse change in any other aspects of our business relationship with Sears or Wal-Mart, including the reduction of the number of studios operated pursuant to such arrangements or a decision by Sears or Wal-Mart to license studios to other persons could have a material adverse effect on us.

The Company may not be able to realize the anticipated benefits from the acquisition of the PictureMe Portrait Studio brand.

Achieving the anticipated benefits of the acquisition of the PictureMe Portrait Studio brand depends on the timely, efficient and successful execution of a number of events, including integrating the PictureMe Portrait Studio business into the Company.  Factors that could affect the Company’s ability to achieve these benefits include:

·  
Difficulties in integrating and managing personnel, financial reporting and other systems used by the PictureMe Portrait Studio business into the Company;
·  
The failure of the PictureMe Portrait Studio business to perform in accordance with the Company’s expectations;
·  
Any future goodwill impairment charges that the Company may incur with respect to the assets of PictureMe Portrait Studio;
·  
Failure to achieve anticipated synergies between the Company’s business units and the business units of PictureMe Portrait Studio; and
·  
The inability to maintain Wal-Mart as a host.

If the PictureMe Portrait Studio business does not operate as anticipated, it could materially harm the Company’s business, financial condition and results of operations.  The integration of PictureMe Portrait Studio will place significant demands on administrative, operational and financial resources, and there is no assurance that the Company will be able to successfully integrate the PictureMe Portrait Studio business.  Failure to successfully integrate PictureMe Portrait Studio with CPI, and to successfully manage the challenges presented by the integration process, may prevent the Company from achieving the anticipated benefits of the acquisition and could have a material adverse effect on the business.
 
 
11
 
 
We have a high level of indebtedness which may impair our ability to operate effectively and impair future performances.

After the completion of the PCA Acquisition, CPI has significantly higher amounts of debt which require significant interest and principal payments. The level of debt and the limitations imposed by these debt agreements could adversely affect operating flexibility and put the Company at a competitive disadvantage. The Company’s debt level may adversely affect future performance.  The ability to make scheduled payments of principal of, to pay interest on, or to refinance indebtedness and to satisfy other debt and lease obligations will depend upon future operating performance, which may be affected by factors beyond the Company’s control. In addition, there can be no assurance that future borrowings or equity financing will be available to the Company on favorable terms or at all for the payment or refinancing of indebtedness. If the Company is unable to service indebtedness, the business, financial condition and results of operations would be materially adversely affected.

An economic downturn, a reduction in consumer spending or decreased customer traffic in our host stores could materially adversely affect our business.

Portrait photography services may be affected by negative trends in the general economy. Any reduction in consumer confidence or disposable income in general may affect companies in this specialty retail service industry. In addition, our portrait studios are somewhat dependent on customer traffic generated by the host stores. The host stores, as part of the retail industry, may be affected by a downturn in the economy and a decrease in discretionary income of potential customers. A reduction in host store traffic could adversely affect us.

If our key suppliers become unable to continue to provide us supplies under our current contracts, we will need to obtain an alternative source of supplies. If we enter into an agreement to obtain such supplies at less desirable terms, our financial condition and results of operations could be materially adversely affected.

As described in “Item 1. Suppliers,” the Company purchases photographic paper, dye sublimation paper and chemistry from several suppliers.  Additionally, the Company utilizes the software of a single vendor for our studio photography and manufacturing fulfillment for digital systems.   If these companies become unable to continue to provide us supplies or services under our current arrangements or if prices are increased dramatically, we will need to obtain alternative sources of supplies or services.

Although management believes that the available alternative sources of supplies are adequate, there can be no assurance we would be able to obtain such supplies at the same or similar terms to those we currently have in place. If we enter into an agreement to obtain such supplies at less desirable terms, our financial condition and results of operations could be materially adversely affected.

Should the Company be forced to replace its digital software vendor, related costs could increase and production could be disrupted for a period of time, which could have a material adverse impact on the results of operations.

Our inability to remain competitive could have a detrimental impact on our results of operations.

The professional portrait photography industry is highly competitive. Evolving technology and business relationships may make it easier and cheaper for our competitors and potential competitors to develop products or services similar to ours or to sell competing products or services in our markets.

The companies in our industry compete on the basis of price, service, quality, location, product mix and convenience of retail distribution channel.  If the Company cannot continue to provide perceived value for our customers, this could have a material adverse impact on sales and profitability.  To compete successfully, we must continue to remain competitive in areas of price, service, quality, location, product mix and convenience of distribution. Likewise, the proliferation of amateur digital photography is making customers more discerning and demanding and has adversely affected overall portrait activity/frequency.

If we lose our key personnel, our business may be adversely affected.

Our continued success depends upon, to a large extent, the efforts and abilities of our key employees, particularly our executive management team. We cannot assure you of the continued employment of any members of management. Competition for qualified management personnel is intense. The loss of the services of our key employees or the failure to retain qualified employees when needed could materially adversely affect us.

 
12
 
 
Our fourth quarter sales and income are disproportionately high and we are vulnerable to downturns in consumer holiday spending that can adversely affect our business.

Our business is highly seasonal, with the largest volume occurring in the fourth fiscal quarter, between Thanksgiving and Christmas. The fourth quarters in fiscal 2007 and 2006  accounted for approximately 38% and 34% of our annual sales, respectively.  As a result, fourth quarter operating results significantly impact annual operating results.  Our fourth quarter operating results may fluctuate significantly based on many factors, including holiday spending patterns, prevailing economic conditions and weather conditions.

A significant increase in piracy of our photographs could materially adversely affect our business, financial condition or results of operations.

We rely on copyright laws to protect our proprietary rights in our photographs. However, our ability to prevent piracy and enforce our proprietary rights in our photographs is limited. We are aware that unauthorized copying of photographs occurs within our industry. A significant increase in the frequency of unauthorized copying of our photographs could materially adversely affect our business, financial condition and results of operations by reducing revenues from photograph sales.

Any disruption in our manufacturing process could have a material adverse impact on our business.

We are dependent upon the efficient operation of our portrait processing facilities to maintain our portrait quality, timeliness of delivery and low cost operation. Our digital platform utilizes the software of a single vendor for our studio photography and manufacturing fulfillment digital systems.   Any material delay in the vendor’s networking environment, coupled with a failure to identify and implement alternative solutions, could have an adverse effect upon the operations of the business.  Additionally, should this vendor no longer operate, the Company may be forced to find another source of this support, which could be more costly and could delay digital production for a period of time.  Although on-site printing is an available alternative to central printing in the Sears’ digital environment, it currently would be difficult and costly for on-site printing to replace central fulfillment during the holiday busy season. Our PictureMe Portrait Studio brand is still primarily on an analog film system which operates from customized equipment that is not readily available in the marketplace.  Although we plan to convert PictureMe Portrait Studio to digital in 2008, any lengthy disruption in our film processing system before the successful conversion of the majority of the PictureMe Portrait Studio business to the digital environment would have an adverse impact on the business. Any disruption of our processing systems for any reason could adversely impact our business, financial condition and results of operations.

The agreements governing our debt impose restrictions on our business.

Our credit agreement contains covenants and requires financial ratios and tests, which impose restrictions on our business.  These covenants, ratios and tests are summarized in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”  Our ability to comply with these restrictions may be affected by events beyond our control, including, but not limited to, prevailing economic, financial and industry conditions. The breach of any of these covenants or restrictions, as well as any failure to make a payment of interest or principal when due, could result in a default under the credit agreement. Such a default would permit our lenders to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest, and the ability to borrow under this agreement could be terminated. If we are unable to repay debt to our lenders, these lenders could proceed against the collateral securing that debt.

Item 1B.                 Unresolved Staff Comments

None.


 
 
13
 
 
Item 2.              Properties

The following table sets forth certain information concerning the Company’s principal facilities:
 
   
APPROXIMATE
         
   
AREA IN
     
OWNERSHIP
 
LOCATION
 
SQUARE FEET
 
PRIMARY USES
 
OR LEASE
 
Charlotte, NC
 
348,000
 
Office Park
 
Owned
 
St. Louis, MO
 
300,000
 
Administration and Portrait processing
 
Owned
 
Charlotte, NC
 
160,000
 
Administration and Portrait processing
 
Owned
 
St. Louis, MO
 
155,000
 
Parking Lots
 
Owned
 
Charlotte, NC
 
60,000
 
Administration and Portrait processing
 
Owned
 
Charlotte, NC
 
60,000
 
Warehousing
 
Leased
(2)
Brampton, Ontario
 
40,000
 
Administration, Warehousing and Portrait processing
 
Owned
 
St. Louis, MO
 
34,100
 
Warehousing
 
Leased
(1)
Charlotte, NC
 
30,300
 
Warehousing
 
Owned
 
Thomaston, CT
 
25,000
 
Administration and Portrait processing
 
Owned
 
 
(1)  
Lease term expires on June 30, 2008.
(2)  
Lease term expires on April 30, 2008.

Studio license/lease agreements

As of February 2, 2008, the Company operates portrait studios in host stores under license and lease agreements as shown below:
 
NUMBER
       
OF STUDIOS
 
COUNTRY
 
LICENSOR/LESSOR
                   893
 
United States and Puerto Rico
 
Sears
                1,702
 
United States and Puerto Rico
 
Wal-Mart
                   112
 
Canada
 
Sears Canada, Inc.
                   253
 
Canada
 
Wal-Mart Canada Corp.
                   115
 
Mexico
 
Nueva Wal-Mart de Mexico, S de R.L. de C.V.
                     33
 
United States studios not in Sears or Wal-Mart
 
Third parties - generally leased for at least 3 years with some having renewal options
 
The Company pays each host a  fee based on annual sales within the respective host stores.  This license fee covers the Company’s use of space in the host stores, the use of Sears’ name and the use of the Wal-Mart name in Canada and Mexico.  No separate amounts are paid to hosts expressly for the use of space.  See Part I, Item 1.  "BUSINESS, The Company’s Host Relationships" for more information on the license agreements.

The Company believes that the facilities used in its operations are in satisfactory condition and adequate for its present and anticipated future operations.

The Company's physical properties owned or leased are all considered commercial property.
 
 
14
 
 
Item 3.              Legal Proceedings

The Company and two of its subsidiaries are defendants in a lawsuit entitled Shannon Paige, et al. v. Consumer Programs, Inc., filed March 8, 2007, in the Superior Court of the State of California for the County of Los Angeles, Case No. BC367546.  The case was subsequently removed to the United States District Court for the Central District of California, Case No. CV 07-2498-FMC (RCx).  The Plaintiff alleges that the Company failed to pay him and other hourly associates for “off the clock” work and that the Company failed to provide meal and rest breaks as required by law.  The Plaintiff is seeking damages and injunctive relief for himself and others similarly situated.  The case is in preliminary stages of discovery.  Class certification has yet to be addressed, but the Company intends to contest class certification at the earliest opportunity. The Company believes the claim is without merit and intends to vigorously defend itself and its subsidiaries against these claims.

The Company is a defendant in a lawsuit entitled Picture Me Press LLC v. Portrait Corporation of America, et al., Case No. 5:08cv32, which was filed in the United States District Court for the Northern District of Ohio on January 4, 2008. The suit alleges that the Company’s operation of PictureMe! Portrait Studios infringes on Plaintiff’s trademark for its picture books and seeks damages and injunctive relief.  The Company believes the case is without merit and will vigorously defend itself against these claims.   The Company has denied the claims and filed counterclaims against the Plaintiff.

The Company is also a defendant in other routine litigation, but does not believe these lawsuits, individually or in combination with the cases described above, will have a material adverse effect on its financial condition. The Company cannot, however, give assurances that these legal proceedings will not have a material adverse effect on its business or financial condition.

Item 4.              Submission of Matters to a Vote of Security Holders

No matters were submitted to stockholders for a vote during the fourth quarter of fiscal year 2007.



Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock and Cash Dividends

Since April 17, 1989, the Company's common stock has been traded on the New York Stock Exchange under the symbol CPY.

The following tables set forth the high and low closing prices of the common stock reported by the New York Stock Exchange and the dividends declared for each full quarterly period during the Company's last two fiscal years.


FISCAL YEAR 2007
                 
(ending February 2, 2008)
 
HIGH
   
LOW
   
DIVIDEND
 
First Quarter
  $ 58.20     $ 50.00     $ 0.16  
Second Quarter
    84.40       57.51       0.16  
Third Quarter
    65.78       30.36       0.16  
Fourth Quarter
    30.84       17.11       0.16  
                         
FISCAL YEAR 2006
                       
(ending February 3, 2007)
 
HIGH
   
LOW
   
DIVIDEND
 
First Quarter
  $ 21.19     $ 16.49     $ 0.16  
Second Quarter
    34.85       21.20       0.16  
Third Quarter
    50.00       28.50       0.16  
Fourth Quarter
    54.65       41.06       0.16  
 
 
15
 
 
Shareholders of Record

As of May 2, 2008, the closing sales price of the Company's common stock was $19.25 per share with 6,459,834 shares outstanding and 1,259 holders of record.

Dividends

The Company intends, from time to time, to pay cash dividends on its common stock, as its Board of Directors deems appropriate, after consideration of the Company's operating results, financial condition, cash requirements, restrictions imposed by credit agreements, general business conditions and such other factors as the Board of Directors deems relevant.

Issuer Repurchases of Equity Securities

The Company did not repurchase any equity securities during the fourth quarter of fiscal year 2007.  On February 8, 2006, the Company purchased 1,658,607 shares at $19.50 per share or a total consideration of approximately $32.4 million as a result of a Dutch Auction self-tender offer.

Item 6.                        Selected Consolidated Financial Data

The summary historical consolidated financial data as of and for each of the fiscal years in the five-year period ended February 2, 2008 set forth below have been derived from the Company’s audited consolidated financial statements. The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included herein.  Certain of this data has been restated to reflect adjustments described in Note 2 to the consolidated financial statements included in Item 8 of this Form 10-K.
 
thousands except per share data              
2005
             
 
2007
   
2006
   
(restated)
   
2004
   
2003
 
                               
STATEMENT OF OPERATIONS (1)
                             
Net sales
  $ 424,026     $ 293,803     $ 291,984     $ 281,865     $ 299,044  
Cost of sales
    43,871       28,128       32,651       33,855       37,742  
Selling, general and administrative expenses
    333,265       221,295       224,457       222,398       229,475  
Depreciation and amortization
    27,328       16,922       19,952       16,377       16,793  
Other charges and impairments (2)
    5,195       1,240       2,767       15,679       5,515  
                                         
Income (loss) from operations
    14,367       26,218       12,157       (6,444 )     9,519  
Interest expense, net (3)
    8,818       1,815       1,098       981       1,344  
Impairment (recovery) and related obligations of
                                       
preferred security interest (4)
    -       (887 )     -       9,789       -  
Loss from debt extinguishment (5)
    -       -       529       -       -  
Other income, net  (6)
    175       144       247       263       850  
Income tax expense (benefit)
    1,951       9,107       1,905       (2,189 )     3,183  
                                         
Income (loss) from continuing operations
    3,773       16,327       8,872       (14,762 )     5,842  
Net loss from discontinued operations (1)
    (197 )     -       -       (3,746 )     (4,624 )
                                         
Net earnings (loss)
  $ 3,576     $ 16,327     $ 8,872     $ (18,508 )   $ 1,218  
                                         
SHARE AND PER SHARE DATA (1)
                                       
Net earnings (loss) from continuing operations - diluted (7)
  $ 0.59     $ 2.56     $ 1.13     $ (1.87 )   $ 0.72  
Net earnings (loss) from continuing operations - basic (7)
    0.59       2.57       1.13       (1.87 )     0.72  
Net earnings (loss) - diluted
    0.56       2.56       1.13       (2.35 )     0.15  
Net earnings (loss) - basic
    0.56       2.57       1.13       (2.35 )     0.15  
                                         
Dividends
  $ 0.64     $ 0.64     $ 0.64     $ 0.64     $ 0.60  
Average shares outstanding - diluted
    6,416       6,376       7,881       7,888       8,148  
Average shares outstanding - basic
    6,391       6,353       7,854       7,888       8,082  
                                         
CASH FLOW DATA (continuing operations only)
                                       
Net cash provided by operating activities
  $ 41,696     $ 37,950     $ 18,697     $ 16,477     $ 32,118  
Net cash provided by (used in) financing activities (7)
  $ 90,788     $ (43,567 )   $ (1,223 )   $ (24,827 )   $ (13,929 )
Net cash used in investing activities
  $ (99,883 )   $ (2,358 )   $ (17,633 )   $ (6,597 )   $ (14,840 )
                                         
Capital expenditures (8)
  $ 17,113     $ 2,760     $ 20,235     $ 15,157     $ 19,405  
 
 
16
 
 
Item 6.                        Selected Consolidated Financial Data (continued)
 
thousands
       
 
   
2005
             
   
2007
   
2006
   
(restated)
   
2004
   
2003
 
BALANCE SHEET
                             
  Cash and cash equivalents
  $ 59,177     $ 26,294     $ 34,269     $ 33,883     $ 51,011   
  Current assets
    92,819       55,071       69,629       72,868       93,215  
  Net fixed assets
    56,280       26,693       41,282       41,658       52,735  
  Assets of business transferred under contractual arrangements (9)
    -       -       -       -       8,975  
  Assets of supplemental retirement plan (10)
    3,508       3,588       3,706       6,141       11,491  
  Goodwill and intangible assets (11)
    62,956       512       512       512       512  
  Other assets
    20,954       7,298       11,015       13,921       1,540  
  Total assets
    236,517       93,162