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CPI CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
Management's Discussion and Analysis of Financial Condition and Results of
Operations is designed to provide the reader of the financial statements with a
narrative on the Company's results of operations, financial position and
liquidity, significant accounting policies and critical estimates, and the
future impact of accounting standards that have been issued but are not yet
effective. Management's Discussion and Analysis is presented in the following
sections: Executive Overview; Results of Operations; Liquidity and Capital
Resources; and Accounting Pronouncements and Policies. The reader should read
Management's Discussion and Analysis of Financial Condition and Results of
Operations in conjunction with the interim consolidated financial statements and
related notes thereto contained elsewhere in this document.
All references to earnings per share relate to diluted earnings per common share
unless otherwise noted.
EXECUTIVE OVERVIEW
The Company's Operations
CPI Corp. is a long-standing leader, based on sittings, number of locations and
related revenues, in the professional portrait photography of young children,
individuals and families. From a single studio opened by our predecessor company
in 1942, we have grown to 2,701 studios, 176 of which are temporary in nature,
throughout the U.S., Canada, Mexico and Puerto Rico, principally under lease and
license agreements with Walmart and license agreements with Sears and Toys "R"
Us. CPI is the sole operator of portrait studios in Walmart stores and
supercenters in all 50 states in the U.S., Canada, Mexico and Puerto Rico, as
well as Babies "R" Us stores in the U.S. The Company has provided professional
portrait photography for Sears' customers since 1959 and has been the only Sears
portrait studio operator since 1986.
Until the second quarter of fiscal year 2012, the Company provided wedding
photography and videography services and products through its subsidiary, Bella
Pictures Holdings, LLC ("Bella Pictures®"). On December 17, 2012, the Company
sold the Bella Pictures® tradename, certain assets and all remaining customer
contracts. The sale will result in a net cash payout of approximately $195,000,
primarily related to customer deposits received on open contracts. Also in the
second quarter of 2012, the Company discontinued its Portrait Gallery from Bella
Pictures ("Portrait Gallery") operations (see Note 4 to the Notes to Interim
Consolidated Financial Statements).
Management has determined the Company operates as a single reporting segment
offering similar products and services in all locations.
As of the end of the third quarter in fiscal years 2012 and 2011, the Company's
studio counts were:
November 10, 2012 November 12, 2011
Within Walmart stores:
United States and Puerto Rico 1,350 1,535
Canada 258 255
Mexico 104 108
Within Sears stores:
United States and Puerto Rico 808 847
Canada 107 110
Within Babies "R" Us stores in the United States 44 169
Locations not within above host stores 30 73
Total 2,701 3,097
As of November 10, 2012, locations not within Walmart, Sears or Babies "R" Us
stores include 4 free-standing SPS studio locations, 8 Kiddie Kandids® mall
locations and 18 Shooting Star locations (located within Buy Buy Baby stores).
22
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In the first 40 weeks of fiscal year 2012, the Company closed 361, 17, 138, 19
and 3 underperforming PMPS, SPS, KKPS, Portrait Gallery and Shooting Stars
studios, respectively. The determination to close the PMPS, SPS, Portrait
Gallery and Shooting Stars studio locations and 35 of the KKPS studio locations
was the result of an in-depth analysis by the Company of its portfolio in an
effort to focus resources in a manner that will improve short-term cash flows.
The decision to close the additional 103 KKPS studio locations was the result of
certain minimum sales requirements not being met as stipulated by the host
agreement with Toys "R" Us. As a result of the closings, the Company incurred
$2.8 million in total exit costs in the first 40 weeks of 2012, which are
recorded in the Other charges line in the Interim Consolidated Statement of
Operations for the 40 weeks ended November 10, 2012.
A roll-forward of the Company's studio count activity during the first 40 weeks
of 2012 is as follows:
PMPS SPS KKPS Other Total
Studio Count as of February 4, 2012 1,895 936 190 37 3,058
Closures (361 ) (17 ) (138 ) (22 ) (538 )
Openings 2 - - 3 5
Temporary seasonal openings 176 - - - 176
Studio Count as of November 10, 2012 1,712 919 52 18 2,701
Going Concern
The Company's interim consolidated financial statements have been prepared
assuming that it will continue as a going concern; however, the conditions noted
below raise substantial doubt about the Company's ability to do so. The interim
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount of and
classification of liabilities that may result should the Company be unable to
continue as a going concern.
Liquidity
The Company's primary sources of liquidity have historically been cash flows
from operations and the borrowing capacity available under its Credit Agreement.
Its business is highly seasonal, with significant operating cash flow
historically being generated in the fiscal fourth quarter. Liquidity is needed
to satisfy the Company's operating cash flow needs, to meet debt service
obligations as they come due under the Credit Agreement, and to provide for any
necessary capital maintenance spending to support operations.
As a result of profit shortfalls in the third quarter of fiscal 2011, and
noncompliance with the leverage ratio covenant at the end of the third quarter
of fiscal 2011, we entered into an Amendment to the Credit Agreement on December
16, 2011 (the "First Amendment"), which suspended the leverage ratio test for
the quarter ended November 12, 2011; reduced the revolving commitment from $105
million to $90 million; and suspended dividend and other restricted payments,
including share repurchases.
The reduction in available borrowing capacity resulting from the First
Amendment, coupled with a significant reduction in earnings and operating cash
flow, has resulted in significant liquidity challenges for the Company. The
Company incurred a net loss of $60.1 million for the 40 weeks ended November 10,
2012, and used $13.0 million of cash for operations. As of November 10, 2012,
the Company's current liabilities of $136.4 million (including $79.4 million due
under its Credit Agreement) exceeded current assets of $20.8 million, and there
was a total stockholders' deficit of $118.6 million.
At February 4, 2012 and April 28, 2012, the Company was not in compliance with
several covenants under the Credit Agreement. On May 23, 2012, the Company
entered into a forbearance agreement with its lenders that, among other items,
suspended the lenders rights and remedies under the Credit Agreement through
July 21, 2012. Based on the Company's default status under the Credit Agreement,
the lenders had the right to provide the Company with notice to call the loan.
Under the forbearance agreement, that right was relinquished until July 21, 2012
and certain restrictions were placed on the Company during the forbearance
period. On June 6, 2012, the Company entered into the Second Amendment to the
Credit Agreement (the "Second Amendment"), which waived the existing defaults
and terminated the forbearance period.
The Second Amendment provided for revolving commitment limits of $90 million on
June 6, 2012, $94 million on June 12, 2012, $95 million on July 22, 2012, $94
million on September 15, 2012, $90 million on November 10, 2012 and $85 million
on December 11, 2012 and thereafter, subject to the Company's satisfaction of
certain conditions and covenants. The Credit Agreement, as amended by the Second
Amendment, matures on December 31, 2012 and bears interest at an annual base
rate of 3.25% payable
23
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in cash on a monthly basis. Additionally, under the Second Amendment, all
outstanding revolving loans (including both base-rate loans and LIBOR loans) and
all outstanding accumulated and unpaid interest other than the 3.25% cash
interest are now defined as Payment in Kind ("PIK") Obligations and accrue
interest at a rate of fourteen percent (14%) per annum ("PIK interest"). This
PIK interest accrues monthly and is due and payable in full, in cash upon
termination of the Credit Agreement. Fifteen business days after the quarters
ending July 21, 2012 and November 10, 2012, the amount by which adjusted EBITDA
(as defined, net earnings from continuing operations before interest expense,
income taxes, depreciation and amortization and other non-cash charges) exceeded
($4.8) million and $1.4 million, respectively, was to be paid in cash to reduce
the PIK Obligation. At the end of each week, any cash amounts exceeding $5.0
million must be paid to reduce the revolving loans under the Credit Agreement
within two (2) business days. In connection with the Second Amendment, the
Company is required to pay to the lenders an amendment fee of $1.8 million,
which is payable at maturity.
Other terms of the Second Amendment include, but are not limited to:
• The Company granted the lenders warrants to purchase an aggregate amount
equal to 19.9% of the common stock of the Company, calculated on a
fully-diluted basis at the time of exercise. See further discussion in
Note 9.
• The Company is required to provide financial statements for each 4-week
period, weekly 13-week cash flow statements and weekly compliance
certificates to the lenders.
• The Company engaged a Chief Restructuring Officer.
• The Company engaged an Investment Bank to solicit offers to purchase the
Company and/or the debt outstanding under the Credit Agreement. The
Company began soliciting offers during the third quarter of fiscal year
2012 and expects a targeted close during the first quarter of 2013.
Management has developed a plan for an orderly liquidation in the event
the Company is unable to execute restructuring alternatives that are
acceptable to the lenders.
• In connection with the Second Amendment, the Company executed amendments
to its host agreements with Walmart and Sears, which, among other items,
deferred payment of certain lease charges and fees.
• The financial covenants included in the Credit Agreement were replaced with:
Minimum Period Cumulative EBITDAR - assigned for each 4 week period
for periods five through 11, which totals $5.2 million;
Minimum Weekly Cumulative Gross Sales Revenue - gross sales related
to the Sears and Walmart contracts are established on a weekly basis
and total $169.8 million for the period May 27, 2012 through January
5, 2013;
Minimum Weekly Cash - not permitted to be less than $2.3million for
any calendar week.
• The Company's properties in St. Louis, Missouri, Matthews, North Carolina,
and Charlotte, North Carolina were sold during fiscal year 2012. Proceeds
from these sales were applied to pay down the revolving loans with net
proceeds obtained from the sale of the Charlotte, North Carolina facility
permanently reducing the borrowing commitment levels. Also during fiscal
year 2012, the Company transitioned all of the processing activities
formerly in Charlotte, North Carolina to its processing facility in St.
Louis, Missouri.
On August 28, 2012, the Company entered into the Third Amendment to the Credit
Agreement (the "Third Amendment"), which eliminated the excess EBITDA required
payment after the quarter ending July 21, 2012 and extended the permanent
reduction of borrowing commitment levels related to the net proceeds obtained
from the sale of the Charlotte, North Carolina facility until December 1, 2012.
On November 9, 2012, the Company entered into the Fourth Amendment to the Credit
Agreement (the "Fourth Amendment"), which extended the revolving commitment of
$94 million to November 12, 2012 and increased the revolving commitment limit
from $90 million to $91.2 million from November 13, 2012 to and including
November 20, 2012. Subsequently, the limit was reduced to $90 million as
originally stipulated in the Second Amendment.
As of November 10, 2012, the Company was not in compliance with certain
provisions of its Credit Agreement, as amended, including the Minimum Period
Cumulative EBITDAR covenant and certain studio closure and lease abandonment
provisions. Since that time, the Company has also fallen out of compliance with
several additional covenants and such noncompliance exists as of December 31,
2012.
The Credit Agreement and amounts owed thereunder are currently due and the
Company does not have sufficient resources to repay these amounts. The Company
is currently negotiating a forbearance agreement under which it is expected that
the lenders will forbear from exercising their rights and remedies under the
Credit Agreement until mid-January, subject to the Company's compliance with
certain conditions. There can be no assurances that the lenders will grant such
waivers or amendments on commercially reasonable terms, if at all. If the
Company is unable to secure these additional amendments to the Credit Agreement,
the Company may be forced into an orderly liquidation or bankruptcy. The outcome
of restructuring and sale initiatives required by the Credit Agreement, as
amended, is uncertain and involves matters that are outside of the Company's
control.
24--------------------------------------------------------------------------------RESULTS OF OPERATIONS
A summary of consolidated results of operations and key statistics follows
(unaudited):
16 Weeks Ended 40 Weeks Ended
in thousands, except share and per
share data November 10, 2012 November 12, 2011 November 10, 2012 November 12, 2011
Net sales $ 69,501 $ 94,554 $ 192,747 $ 254,023
Cost and expenses:
Cost of sales (exclusive of
depreciation and amortization) 6,951 8,626 17,423 20,949
Selling, general and administrative
expenses 67,193 92,914 180,005 233,347
Depreciation and amortization 2,031 4,609 6,084 12,363
Impairments 3,955 - 25,843 -
Other charges 3,135 699 9,837 5,043
83,265 106,848 239,192 271,702
Loss from continuing operations (13,764 ) (12,294 ) (46,445 ) (17,679 )
Interest expense, net 6,068 1,286 11,204 2,562
Other expense, net 78 281 129 228
Loss from continuing operations
before income taxes (19,910 ) (13,861 ) (57,778 ) (20,469 )
Income tax expense (benefit) 176 (7,442 ) 283 (8,803 )
Net loss from continuing operations (20,086 ) (6,419 ) (58,061 ) (11,666 )
Net loss from discontinued
operations, net of income tax
benefit (120 ) (830 ) (2,076 ) (1,220 )
Net loss (20,206 ) (7,249 ) (60,137 ) (12,886 )
Net income (loss) attributable to
noncontrolling interest 23 1 (105 ) (139 )
NET LOSS ATTRIBUTABLE TO CPI CORP. $ (20,229 ) $ (7,250 ) $ (60,032 ) $ (12,747 )
Amounts Attributable to CPI Corp.
Common Stockholders:
Net loss from continuing
operations, net of income tax
expense (benefit) $ (20,109 ) $ (6,420 ) $ (57,956 ) $ (11,527 )
Net loss from discontinued
operations, net of income tax
benefit (120 ) (830 ) (2,076 ) (1,220 )
Net loss $ (20,229 ) $ (7,250 ) $ (60,032 ) $ (12,747 )
Net Loss per Common Share
Attributable to CPI Corp.:
Net loss per share from continuing
operations $ (2.79 ) $ (0.91 ) $ (8.14 ) $ (1.64 )
Net loss per share from
discontinued operations (0.02 ) (0.12 ) (0.29 ) (0.17 )
Net loss per share $ (2.81 ) $ (1.03 ) $ (8.43 ) $ (1.81 )
Weighted average common shares
outstanding 7,200,318 7,039,858 7,118,255 7,026,855
25--------------------------------------------------------------------------------16 weeks ended November 10, 2012 compared to 16 weeks ended November 12, 2011
The Company reported a net loss of ($20.2) million and ($7.3) million, or
($2.81) and ($1.03) per diluted share, for the third quarters ended November 10,
2012, and November 12, 2011, respectively. Earnings in the period were
significantly affected by comparable store sales declines, impairments and
certain other charges. Foreign currency translation effects did not have a
material impact on the Company's net earnings in the third quarter of 2012.
Net sales totaled $69.5 million and $94.6 million in the third quarters of
fiscal 2012 and 2011, respectively.
• Net sales for the third quarter of fiscal 2012 decreased $25.1 million, or
26%, to $69.5 million from the $94.6 million reported in the fiscal 2011
third quarter. Net sales for the 2012 third quarter were negatively
impacted by net studio closings ($10.5 million), net revenue recognition
change ($2.4 million), Bella Pictures® operations ($1.9 million) and other
items ($256,000). Excluding the above impacts, comparable same-store sales
in the quarter decreased approximately 13%.
Net sales from the Company's PictureMe Portrait Studio® (PMPS) brand, on a
comparable same-store basis, excluding impacts of net revenue recognition
change, studio closures and other items totaling $4.3 million, decreased 15% in
the third quarter of 2012 to $36.8 million from $43.2 million in the third
quarter of 2011. The decrease in PMPS sales for the third quarter was the result
of a 14% decline in the average sale per customer sitting and a 1% decline in
the number of sittings.
Net sales from the Company's Sears Portrait Studio (SPS) brand, on a comparable
same-store basis, excluding impacts of net revenue recognition change, studio
closures and other items totaling $0.6 million, decreased 21% in the third
quarter of 2012 to $29.1 million from $36.9 million in the third quarter of
2011. The decrease in SPS sales for the third quarter was the result of a 14%
decline in the average sale per customer sitting and a 8% decline in the number
of sittings.
Net sales from the Company's Kiddie Kandids® (KK) studio operations, on a
comparable same-store basis, excluding impacts of net revenue recognition
change, studio closures and other items totaling $3.4 million, decreased 13% in
the third quarter of 2012 to $2.6 million from $2.9 million in the third quarter
of 2011. The decrease in KK sales for the third quarter was the result of a 12%
decline in the average sale per customer sitting and a 2% decline in the number
of sittings.
The Bella Pictures® operations contributed approximately $1.7 million in net
sales in the third quarter of 2012, down 54% from net sales of $3.6 million in
the third quarter of 2011.
Costs and expenses were $83.3 million in the third quarter of 2012, compared
with $106.8 million in the comparable prior-year period.
• Cost of sales, excluding depreciation and amortization expense, decreased
to $7.0 million in the third quarter of 2012 from $8.6 million in the
third quarter of 2011 primarily due to lower overall production levels,
offset in part by a higher-cost product mix and higher shipping charges
resulting from certain promotional events.
• Selling, general and administrative expense declined to $67.2 million in
the third quarter of 2012 from $92.9 million in the third quarter of 2011,
primarily due to net reductions in studio, field and corporate employment
costs, lower host commission expense due to lower sales levels and reduced
advertising expenses, partially offset by increased employee insurance
costs.
• Depreciation and amortization expense was $2.0 million in the third
quarter of 2012, compared with $4.6 million in the third quarter of
2011. Expense decreased in 2012 primarily as a result of significant
impairment charges recognized during the fourth quarter of fiscal year
2011 and throughout fiscal year 2012, which resulted in lowering or
eliminating the depreciable base on many of the Company's long-lived
assets. The Company also sold a number of properties during fiscal year
2012, which is contributing to the decrease in depreciation expense in the
third quarter of 2012.
• Impairment charges in the third quarter of 2012 were $4.0 million and
consisted of $0.8 million and $3.2 million in charges related to the
impairment of certain long-lived property and equipment and certain
intangible long-lived assets, respectively.
• In the third quarter of 2012, the Company recognized $3.1 million in other
charges, compared with $699,000 in the third quarter of 2011. The
current-quarter charges primarily relate to costs incurred in connection
with the debt renegotiation
26--------------------------------------------------------------------------------and costs incurred as the Company winds down its Bella Pictures® operation. The
prior-year charges primarily related to severance and certain litigation costs.
Net interest expense increased to $6.1 million in the third quarter of 2012 from
$1.3 million in the third quarter of fiscal 2011, primarily as the result of
higher average borrowings, the write-off of certain prepaid debt fees and higher
interest charges and fees resulting from the Second Amendment to the Credit
Agreement.
Income tax expense was $176,000 in the third quarter of 2012 compared to an
income tax benefit of $7.4 million in the third quarter of 2011. The resulting
effective tax rates were (1)% and 54% in 2012 and 2011, respectively. Beginning
in the fourth quarter of fiscal 2011, the Company established valuation
allowances against all of its deferred tax assets. Income tax expense in the
third quarter of 2012 is the result of current income taxes payable in certain
foreign taxing jurisdictions. In the third quarter of 2011, income taxes were
impacted by a change in the annualized effective tax rate, as well as certain
tax benefits recognized related to a previous uncertain tax position.
40 weeks ended November 10, 2012 compared to 40 weeks ended November 12, 2011
The Company reported a net loss of ($60.0) million and ($12.7) million, or
($8.43) and ($1.81) per diluted share, for the 40-week period ended November 10,
2012, and November 12, 2011, respectively. Earnings in the period were
significantly affected by comparable store sales declines, impairments and
certain other charges. Foreign currency translation effects did not have a
material impact on the Company's net earnings in the first three quarters of
2012.
Net sales totaled $192.7 million and $254.0 million in the first three quarters
of fiscal 2012 and 2011, respectively.
• Net sales for the first three quarters of fiscal 2012 decreased $61.3
million, or 24%, to $192.7 million from the $254.0 million reported in the
first three quarters of fiscal 2011. Net sales for the first three
quarters of 2012 were negatively impacted by net studio closings ($23.5
million), net revenue recognition change ($2.0 million), Bella Pictures®
operations ($1.9 million) and other items ($331,000). Excluding the above
impacts, comparable same-store sales during the period decreased
approximately 17%.
Net sales from the Company's PictureMe Portrait Studio® (PMPS) brand, on a
comparable same-store basis, excluding impacts of net revenue recognition
change, studio closures and other items totaling $12.4 million, decreased 16% in
the first three quarters of 2012 to $98.2 million from $116.2 million in the
first three quarters of 2011. The decrease in PMPS sales during the period was
the result of a 12% decline in the average sale per customer sitting and a 4%
decline in the number of sittings.
Net sales from the Company's Sears Portrait Studio (SPS) brand, on a comparable
same-store basis, excluding impacts of net revenue recognition change, studio
closures and other items totaling $3.0 million, decreased 19% in the first three
quarters of 2012 to $77.4 million from $95.8 million in the first three quarters
of 2011. The decrease in SPS sales during the period was the result of a 12%
decline in the average sale per customer sitting and a 8% decline in the number
of sittings.
Net sales from the Company's Kiddie Kandids® (KK) studio operations, on a
comparable same-store basis, excluding impacts of net revenue recognition
change, studio closures and other items totaling $6.3 million, decreased 12% in
the first three quarters of 2012 to $6.6 million from $7.5 million in the first
three quarters of 2011. The decrease in KK sales during the period was the
result of a 14% decline in the average sale per customer sitting, offset in part
by a 3% increase in the number of sittings.
The Bella Pictures® operations contributed $3.7 million in net sales in the
first three quarters of 2012, down 34% from net sales of $5.6 million in the
first three quarters of 2011.
Costs and expenses were $239.2 million in the first three quarters of 2012,
compared with $271.7 million in the comparable prior-year period.
• Cost of sales, excluding depreciation and amortization expense, decreased
to $17.4 million in the first three quarters of 2012 from $20.9 million in
the first three quarters of 2011 primarily due to lower overall production
levels, offset in part by a higher-cost product mix and higher shipping
charges resulting from certain promotional events.
• Selling, general and administrative expense declined to $180.0 million in
the first three quarters of 2012 from $233.3
27--------------------------------------------------------------------------------
million in the first three quarters of 2011, primarily due to net reductions in
studio, field and corporate employment costs, lower host commission expense due
to lower sales levels, reduced advertising expenses and lower stock compensation
expense, partially offset by increased employee insurance costs.
• Depreciation and amortization expense was $6.1 million in the first three
quarters of 2012, compared with $12.4 million in the first three quarters
of 2011. Expense decreased in 2012 primarily as a result of significant
impairment charges recognized during the fourth quarter of fiscal year
2011 and throughout fiscal year 2012, which resulted in lowering or
eliminating the depreciable base on many of the Company's long-lived
assets. The Company also sold a number of properties during fiscal year 2012, which is contributing to the decrease in depreciation expense in the
first three quarters of 2012.
• Impairment charges in the first three quarters of 2012 were $25.8 million
and consisted of $3.8 million, $9.7 million and $12.3 million in charges
related to the impairment of certain long-lived property and equipment,
goodwill, and certain intangible long-lived assets, respectively.
• In the first three quarters of 2012, the Company recognized charges of
$9.8 million in other charges, compared with $5.0 million in the first
three quarters of 2011. The current-year charges primarily relate to
studio closure costs, costs incurred in connection with the debt renegotiation and severance. The prior-year charges primarily related to
certain litigation costs, severance and costs incurred in connection with
the Bella Pictures® Acquisition.
Net interest expense increased to $11.2 million in the first three quarters of
2012 from $2.6 million in the first three quarters of fiscal 2011, primarily as
the result of higher average borrowings, the write-off of certain prepaid debt
fees and higher interest charges and fees resulting from the Forbearance
Agreement and Second Amendment to the Credit Agreement.
Income tax expense was $283,000 in the first three quarters of 2012 compared to
an income tax benefit of $8.8 million in the first three quarters of 2011. The
resulting effective tax rates were 0% and 43% in 2012 and 2011, respectively.
Beginning in the fourth quarter of fiscal 2011, the Company established
valuation allowances against all of its deferred tax assets. Income tax expense
in the first three quarters of 2012 is the result of current income taxes
payable in certain foreign taxing jurisdictions. In the first three quarters of
2011, income taxes were impacted by certain tax benefits recognized related to a
previous uncertain tax position.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of the Company's cash flows for the first
three quarters of 2012 and 2011:
40 Weeks Ended
in thousands November 10, 2012 November 12, 2011
(Unaudited) (Unaudited)
Net cash provided by (used in):
Operating activities $ (13,045 ) $ (12,046 )
Financing activities 7,332 17,551
Investing activities 1,088 (6,395 )
Effect of exchange rate changes on cash 13 116
Net decrease in cash $ (4,612 ) $ (774 )
Net Cash Used In Operating Activities
Net cash used in operating activities was $13.0 million and $12.0 million during
the first three quarters of 2012 and 2011, respectively. The change is primarily
due to an increase in cash used as a result of the change in net operating loss
and the timing of payments related to changes in the various balance sheet
accounts totaling approximately $8.7 million and increases in payments related
to studio closures of $2.1 million, debt renegotiation costs of $1.5 million,
deposits of $1.3 million and interest expense of $3.3 million. These increases
are offset in part by reductions in payments related to advertising of $8.2
million, taxes of $3.6 million, litigation of $1.1 million, pension obligations
of $1.2 million and employee commissions and bonuses of $1.8 million.
28
--------------------------------------------------------------------------------Net Cash Provided By Financing Activities
Net cash provided by financing activities was $7.3 million and $17.6 million in
the first three quarters of 2012 and 2011, respectively. In the first three
quarters of 2012, activity included net borrowings of $5.4 million on the
Company's revolving credit facility and $2.8 million from a lease financing
obligation related to the Company's property in St. Louis, Missouri, partially
offset by payments of debt issuance costs of $0.9 million. In the first three
quarters of 2011, net borrowings of $24.6 million were offset by payments for
cash dividends of $5.3 million, common stock repurchases of $1.1 million and
other items of $0.6 million.
Net Cash Provided By (Used In) Investing Activities
Net cash provided by investing activities was $1.1 million during the first
three quarters of 2012 compared to net cash used of $6.4 million during the
first three quarters of 2011. In the first three quarters of 2012, activity
included $3.8 million received on the sale of the properties in Matthews, North
Carolina and Charlotte, North Carolina, partially offset by capital spend of
$2.7 million. In the first three quarters of 2011, capital spend was $7.1
million, offset by $800,000 in proceeds received from the sale of certain assets
held for sale and the liquidation of the Rabbi Trust of $760,000. The
year-over-year decrease in capital spend is primarily due to fewer remodel
expenditures in PMPS studios and lower purchases of certain hardware and
software items.
Off-Balance Sheet Arrangements
Other than standby letters of credit primarily used to support the Company's
various large deductible insurance programs, the Company has no additional
significant off-balance sheet arrangements.
Commitments and Contingencies
Standby Letters of Credit
As of November 10, 2012, the Company had standby letters of credit outstanding
in the principal amount of $13.8 million primarily used in conjunction with the
Company's various large deductible insurance programs.
Liquidity
The Company's primary sources of liquidity have historically been cash flows
from operations and the borrowing capacity available under its Credit Agreement.
Its business is highly seasonal, with significant operating cash flow
historically being generated in the fiscal fourth quarter. Liquidity is needed
to satisfy the Company's operating cash flow needs, to meet debt service
obligations as they come due under the Credit Agreement, and to provide for any
necessary capital maintenance spending to support operations.
As a result of profit shortfalls in the third quarter of fiscal 2011, and
noncompliance with the leverage ratio covenant at the end of the third quarter
of fiscal 2011, we entered into the First Amendment to the Credit Agreement on
December 16, 2011, which suspended the leverage ratio test for the quarter ended
November 12, 2011; reduced the revolving commitment from $105 million to $90
million; and suspended dividend and other restricted payments, including share
repurchases.
The reduction in available borrowing capacity resulting from the First
Amendment, coupled with a significant reduction in earnings and operating cash
flow, has resulted in significant liquidity challenges for the Company. The
Company incurred a net loss of $60.1 million for the 40 weeks ended November 10,
2012, and used $13.0 million of cash for operations. As of November 10, 2012,
the Company's current liabilities of $136.4 million (including $79.4 million due
under its Credit Agreement) exceeded current assets of $20.8 million, and there
was a total stockholders' deficit of $118.6 million.
At February 4, 2012 and April 28, 2012, the Company was not in compliance with
several covenants under the Credit Agreement. On May 23, 2012, the Company
entered into a forbearance agreement with its lenders that, among other items,
suspended the lenders rights and remedies under the Credit Agreement through
July 21, 2012. Based on the Company's default status under the Credit Agreement,
the lenders had the right to provide the Company with notice to call the loan.
Under the forbearance agreement, that right was relinquished until July 21, 2012
and certain restrictions were placed on the Company during the forbearance
period. On June 6, 2012, the Company entered into the Second Amendment, which
waived the existing defaults and terminated the forbearance period.
The Second Amendment provided for revolving commitment limits of $90 million on
June 6, 2012, $94 million on June 12, 2012, $95 million on July 22, 2012, $94
million on September 15, 2012, $90 million on November 10, 2012 and $85 million
on December 11, 2012 and thereafter, subject to the Company's satisfaction of
certain conditions and covenants. The Credit Agreement, as amended by the Second
Amendment, matures on December 31, 2012 and bears interest at an annual base
rate of 3.25% payable
29
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in cash on a monthly basis. Additionally, under the Second Amendment, all
outstanding revolving loans (including both base-rate loans and LIBOR loans) and
all outstanding accumulated and unpaid interest other than the 3.25% cash
interest are now defined as Payment in Kind ("PIK") Obligations and accrue
interest at a rate of fourteen percent (14%) per annum ("PIK interest"). This
PIK interest accrues monthly and is due and payable in full, in cash upon
termination of the Credit Agreement. Fifteen business days after the quarters
ending July 21, 2012 and November 10, 2012, the amount by which adjusted EBITDA
(as defined, net earnings from continuing operations before interest expense,
income taxes, depreciation and amortization and other non-cash charges) exceeded
($4.8) million and $1.4 million, respectively, was to be paid in cash to reduce
the PIK Obligation. At the end of each week, any cash amounts exceeding $5.0
million must be paid to reduce the revolving loans under the Credit Agreement
within two (2) business days. In connection with the Second Amendment, the
Company is required to pay to the lenders an amendment fee of $1.8 million,
which is payable at maturity.
Other terms of the Second Amendment include, but are not limited to:
• The Company granted the lenders warrants to purchase an aggregate amount
equal to 19.9% of the common stock of the Company, calculated on a
fully-diluted basis at the time of exercise. See further discussion in
Note 9.
• The Company is required to provide financial statements for each 4-week
period, weekly 13-week cash flow statements and weekly compliance
certificates to the lenders.
• The Company engaged a Chief Restructuring Officer.
• The Company engaged an Investment Bank to solicit offers to purchase the
Company and/or the debt outstanding under the Credit Agreement. The
Company began soliciting offers during the third quarter of fiscal year
2012 and expects a targeted close during the first quarter of 2013.
Management has developed a plan for an orderly liquidation in the event
the Company is unable to execute restructuring alternatives that are
acceptable to the lenders.
• In connection with the Second Amendment, the Company executed amendments
to its host agreements with Walmart and Sears, which, among other items,
deferred payment of certain lease charges and fees.
• The financial covenants included in the Credit Agreement were replaced with:
Minimum Period Cumulative EBITDAR - assigned for each 4 week period
for periods five through 11, which totals $5.2 million;
Minimum Weekly Cumulative Gross Sales Revenue - gross sales related
to the Sears and Walmart contracts are established on a weekly basis
and total $169.8 million for the period May 27, 2012 through January
5, 2013;
Minimum Weekly Cash - not permitted to be less than $2.3million for
any calendar week.
• The Company's properties in St. Louis, Missouri, Matthews, North Carolina,
and Charlotte, North Carolina were sold during fiscal year 2012. Proceeds
from these sales were applied to pay down the revolving loans with net
proceeds obtained from the sale of the Charlotte, North Carolina facility
permanently reducing the borrowing commitment levels. Also during fiscal
year 2012, the Company transitioned all of the processing activities
formerly in Charlotte, North Carolina to its processing facility in St.
Louis, Missouri.
On August 28, 2012, the Company entered into the Third Amendment to the Credit
Agreement (the "Third Amendment"), which eliminated the excess EBITDA required
payment after the quarter ending July 21, 2012 and extended the permanent
reduction of borrowing commitment levels related to the net proceeds obtained
from the sale of the Charlotte, North Carolina facility until December 1, 2012.
On November 9, 2012, the Company entered into the Fourth Amendment to the Credit
Agreement (the "Fourth Amendment"), which extended the revolving commitment of
$94 million to November 12, 2012 and increased the revolving commitment limit
from $90 million to $91.2 million from November 13, 2012 to and including
November 20, 2012. Subsequently, the limit was reduced to $90 million as
originally stipulated in the Second Amendment.
As of November 10, 2012, the Company had a net available borrowing capacity of
$812,000.
As of November 10, 2012, the Company was not in compliance with certain
provisions of its Credit Agreement, as amended, including the Minimum Period
Cumulative EBITDAR covenant and certain studio closure and lease abandonment
provisions. Since that time, the Company has also fallen out of compliance with
several additional covenants including certain reporting covenants, Minimum
Weekly Cash Balance requirements, and the following:
30
--------------------------------------------------------------------------------
Covenant Company
Description Requirement Actual
Revolving Commitment Limit on and after December 1, $88.5 million $90.0 million
2012
Revolving Commitment Limit on and after December 10, $83.5 million $90.0 million
2012
Minimum Period Cumulative EBITDAR for the period $849,000 ($2.0 million)
October 14, 2012 to November 10, 2012
Minimum Weekly Cumulative Gross Sales Revenue for
the period December 2, 2012 to December 8, 2012 $145,000 $144,000
(PMPS and SPS only)
Minimum Weekly Cumulative Gross Sales Revenue for
the period December 9, 2012 to December 15, 2012 $154,000 $153,000
(PMPS and SPS only)
Minimum Weekly Cumulative Gross Sales Revenue for
the period December 16, 2012 to December 22, 2012 $162,000 $161,000
(PMPS and SPS only)
The Company is currently negotiating a forbearance agreement under which it is
expected that the lenders will forbear from exercising their rights and remedies
under the Credit Agreement until mid-January, subject to the Company's
compliance with certain conditions. There can be no assurances that the lenders
will grant such waivers or amendments on commercially reasonable terms, if at
all.
Because the Credit Agreement is currently due, borrowings of $79.4 million under
the revolving credit facility have been recorded as current liabilities as of
November 10, 2012. Borrowings of $74.0 million were recorded as current
liabilities as of February 4, 2012 due to non-compliance with the financial
covenants.
If sales trends do not improve, our available liquidity from cash flows from
operations will be materially adversely affected. There can be no assurance that
we will be able to improve cash flows from operations, or that we will be able
to comply with the terms of the Credit Agreement, as amended. Currently, the
Company does not have sufficient resources to repay amounts as they become due
under the Credit Agreement. Therefore, there can be no guarantee that our
existing sources of cash and our future cash flows from operations will be
adequate to meet our liquidity requirements, including cash requirements that
are due under the Credit Agreement and that are needed to fund our business
operations. If we are unable to address our liquidity shortfall or comply with
the terms of our Credit Agreement, as amended, then our business and operating
results would be materially adversely affected, and the Company may then need to
further curtail its business operations, reorganize its capital structure, or
liquidate.
The Credit Agreement and amounts owed thereunder are currently due. The Company
is currently negotiating a forbearance agreement under which it is expected that
the lenders will forbear from exercising their rights and remedies under the
Credit Agreement until mid-January, subject to the Company's compliance with
certain conditions. If the Company is unable to secure additional amendments to
the Credit Agreement, the Company may be forced into an orderly liquidation or
bankruptcy. The outcome of restructuring and sale initiatives required by the
Credit Agreement, as amended, is uncertain and involves matters that are outside
of the Company's control.
The Company's interim consolidated financial statements have been prepared
assuming that it will continue as a going concern; however, the conditions noted
above raise substantial doubt about the Company's ability to do so. The interim
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount of and
classification of liabilities that may result should the Company be unable to
continue as a going concern.
Host Agreement Amendments
On May 31, 2012, the Company entered into the Eighth Amendment to the Master
Lease Agreement, dated as of June 8, 2007, as amended, by and between the
Company and Wal-Mart Stores East, LP, a Delaware limited partnership, Wal-Mart
Stores, Inc., a Delaware Corporation, Wal-Mart Louisiana, LLC, a Delaware
limited liability company, Wal-Mart Stores Texas, LLC, a Texas limited
partnership, and Wal-Mart Stores Arkansas, LLC, an Arkansas Limited Liability
Company (collectively "Walmart"). Among other items, this amendment provided
that the Company delay lease payments due to Walmart on June 10, 2012 and July
10, 2012 until December 10, 2012. Interest on the delayed payments is charged at
a rate of 9% annually. In December 2012, the Company paid the amounts due under
the deferred payment arrangement. Subject to the Company's satisfaction of
certain other conditions and covenants, lease payments due to Walmart on June
10, 2013 and July 10, 2013 until December 10, 2013.
31
--------------------------------------------------------------------------------
On December 13, 2012, the Company entered into the Ninth Amendment to the Master
Lease Agreement, dated as of June 8, 2007, as amended, by and between the
Company and Walmart. Among other items, this amendment provided that the Company
delay lease payments due to Walmart on December 10, 2012, January 10, 2013,
February 10, 2013 and March 10, 2013 until April 10, 2013. Interest on the
delayed payments is charged at a rate of 9% annually. The amendment also
terminated the 2013 deferred payment arrangement stipulated in the Eighth
Amendment.
Effective May 18, 2012, as executed on June 4, 2012, the Company entered into
the 2nd Amendment to the License Agreement dated as of January 1, 2009, as
amended, by and between Consumer Programs Incorporated, a subsidiary of Company,
and Sears, Roebuck and Co., a New York corporation and CPI Corp.. Among other
items, this amendment provided that the Company delay payment of certain fees
related to the reduction of store hours for the first, second and third quarters
of 2012 until December 5, 2012. Interest on the delayed payments is charged at a
rate of 1% per month. In December 2012, the Company paid the amounts due under
the deferred payment arrangement. In connection with this amendment, the Company
also entered into a letter agreement with Sears on June 5, 2012 that transfered
200,000 shares of the common stock of the Company to Sears in a private
placement.
Sale-leaseback Transaction
During the third quarter of 2012, the Company completed a sale-leaseback
transaction of its properties in St. Louis, Missouri. The sale resulted in net
proceeds to the Company of $2.8 million, which was used to pay down outstanding
long-term debt in connection with certain mandatory prepayment requirements. The
lease has an initial term of twenty (20) years with two additional five (5) year
options. The Company accounted for this transaction in accordance with FASB ASC
Topic 840, "Leases". Because the lease contains forms of continuing involvement,
the transaction does not qualify for sale-leaseback accounting treatment.
Accordingly, the Company has accounted for the transaction using the financing
method and recorded an obligation equal to the amount received on the sale of
the properties. This obligation will be increased/decreased as lease payments
are made by the Company. As of November 10, 2012, the outstanding lease
financing obligation was $2.8 million and included in Other liabilities on the
Interim Consolidated Balance Sheet.
ACCOUNTING PRONOUNCEMENTS AND POLICIES
New Accounting Standards
In December 2011, the FASB issued ASU No. 2011-12, "Comprehensive Income (Topic
220): Deferral of the Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05, "Comprehensive Income (Topic 220):
Presentation of Comprehensive Income" ("ASU No. 2011-05")" ("ASU No. 2011-12").
ASU 2011-05 was issued by the FASB in June 2011 and requires entities to present
the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. The
entity is also required to present reclassification adjustments for items that
are reclassified from other comprehensive income to net income in the
statement(s). ASU 2011-05 eliminates the option to present the components of
other comprehensive income as part of the statement of changes in stockholders'
equity. ASU 2011-12 amended ASU 2011-05 as to how, when and where
reclassification adjustments are presented. While the new guidance changes the
presentation of comprehensive income, there are no changes to the components
that are recognized in net income or other comprehensive income under current
accounting guidance. The amendments in ASU 2011-12 and ASU 2011-05 were both
effective for fiscal years, and interim periods within those years, beginning
after December 15, 2011. The Company adopted the applicable requirements of ASU
No. 2011-12 and ASU 2011-05 on February 5, 2012. See the Interim Consolidated
Statements of Comprehensive Loss presented in this report.
In September 2011, the FASB issued ASU No. 2011-08, "Intangibles-Goodwill and
Other (Topic 350): Testing Goodwill for Impairment" ("ASU No. 2011-08"). ASU No.
2011-08 allows an entity to use a qualitative approach to test goodwill for
impairment. ASU 2011-08 permits an entity to first perform a qualitative
assessment to determine whether it is more likely than not that the fair value
of a reporting unit is less than its carrying amount. If it is concluded that
this is the case, it is necessary to perform the currently prescribed two-step
goodwill impairment test. Otherwise, the two-step goodwill impairment test is
not required. ASU 2011-08 was effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after December 15, 2011.
The Company adopted the applicable requirements of ASU No. 2011-08 on February
5, 2012, and there was no effect to the Company's financial statements.
In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurement (Topic
820): Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs" ("ASU No. 2011-04"). ASU No. 2011-04
provides guidance about fair value measurement and disclosure requirements. ASU
No. 2011-04 does not extend the use of fair value but, rather, provides guidance
as to how fair value should be applied where it is already required under U.S.
GAAP or permitted under International Financial Reporting Standards ("IFRS").
For U.S. GAAP, most of the changes are clarifications of existing guidance
32
--------------------------------------------------------------------------------
or wording changes to align with IFRS. ASU No. 2011-04 was effective for interim
and annual periods beginning after December 15, 2011. The Company adopted the
applicable requirements of ASU No. 2011-04 on February 5, 2012, and there was no
material effect to the Company's financial statements.
Application of Critical Accounting Policies
The application of certain of the accounting policies utilized by the Company
requires significant judgments or a complex estimation process that can affect
the results of operations and financial position of the Company, as well as the
related footnote disclosures. The Company bases its estimates on historical
experience and other assumptions that it believes are reasonable. If actual
amounts are ultimately different from previous estimates, the revisions are
included in the Company's results of operations for the period in which the
actual amounts become known. The Company's critical accounting policies are
discussed in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section in the Company's 2011 Annual Report on Form
10-K, and below.
Long-Lived Asset Recoverability
In accordance with ASC Topic 360, "Property, Plant and Equipment" ("ASC Topic
360") long-lived assets, primarily property and equipment, are tested for
recoverability whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. The impairment tests, as prescribed
under ASC Topic 360, are a two-step process. If the carrying value of the asset
exceeds the expected future cash flows (undiscounted and without interest) from
the asset, impairment is indicated. The impairment loss recognized is the excess
of the carrying value of the asset over its fair value.
During the 40 week period ended November 10, 2012, the Company recorded
impairment charges of $3.8 million in the Impairments line in the Interim
Consolidated Statements of Operations. These impairment charges related to
identified property and equipment assets whose carrying values exceeded their
fair values. See Note 5 to the Notes to Interim Consolidated Financial
Statements.
Recoverability of Goodwill and Acquired Intangible Assets
Goodwill Impairment Assessments
The Company accounts for goodwill under ASC Topic 350, "Intangibles-Goodwill and
Other" ("ASC Topic 350") which requires the Company to test goodwill for
impairment on an annual basis, and between annual tests whenever events or
changes in circumstances indicate the carrying amount may not be
recoverable. ASC Topic 350 prescribes a two-step process for impairment testing
of goodwill. The first step is a screen for impairment, which compares the
reporting unit's estimated fair value to its carrying value. If the carrying
value exceeds the estimated fair value in the first step, the second step is
performed in which the Company's goodwill is written down to its implied fair
value, which the Company would determine based upon a number of factors,
including operating results, business plans and anticipated future cash flows.
Historically, the Company has performed its annual goodwill impairment test at
the end of its second quarter, or more frequently if circumstances indicate the
potential for impairment. In view of declining operating results over the past
year, the Company has performed interim goodwill impairment tests in each of its
last five fiscal quarters. The key item of consideration is the Company's
estimates of future cash flows, the most significant assumption being the
Company's expectation of future PMPS studio sales levels, and other relevant
factors.
In the fourth fiscal quarter of 2011, the Company performed a goodwill
impairment test as of its fiscal year ended February 4, 2012, and determined the
carrying amounts of goodwill in its PMPS and SPS reporting units exceeded their
fair value. As such, the Company performed the second step and determined that
the goodwill recorded was impaired by approximately $12.1 million at that time.
As of February 4, 2012, the Company had remaining goodwill recorded in its PMPS
reporting unit of approximately $9.8 million.
At the end of its 2012 first fiscal quarter, the Company considered possible
impairment triggering events and concluded that no goodwill impairment was
indicated at that date. At the end of the Company's 2012 second fiscal quarter,
the Company completed its annual impairment test and concluded that the carrying
amount of goodwill in its PMPS reporting unit exceeded its fair value. Key items
of consideration in the annual impairment test included the Company's estimates
of future cash flows and the Second Amendment to the Credit Agreement (see Note
8 to the Notes to Interim Consolidated Financial Statements), which requires the
Company to be marketed for sale. The Company then performed the second step of
the goodwill impairment test and determined that the remaining goodwill recorded
was fully impaired and recorded a charge of $9.7 million, which was recorded in
the Impairments line in the Interim Consolidated Statements of Operations for
the 40 weeks ended November 10, 2012.
33
--------------------------------------------------------------------------------Intangible Asset Impairment Assessments
The Company reviews its intangible assets with definite useful lives, consisting
primarily of the PMPS host agreement, under ASC Topic 360, which requires the
Company to review for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be
recoverable. Recoverability of intangible assets with definite useful lives is
measured by a comparison of the carrying amount of the asset to the estimated
future undiscounted cash flows expected to be generated by such assets. If such
assets are considered to be impaired, the impairment is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the assets,
which is determined on the basis of discounted cash flows.
As of July 21, 2012, the Company determined that possible impairment triggering
events under ASC Topic 360 had occurred, particularly in light of the Second
Amendment to the Credit Agreement (see Note 8), which requires the Company to be
marketed for sale. By themselves, the cash flows generated through the expected
date of sale do not recover the assets; however, the Company also included the
estimated future cash flows resulting from the sale of its business. Upon
analysis, the Company determined that the carrying amounts of the PMPS host
agreement and Kiddie Kandids customer list exceeded their fair value, and
accordingly recognized impairment charges of $8.8 million and $47,000,
respectively, in the second fiscal quarter of 2012. In addition, the Company
determined that the carrying amount of the Bella Pictures® tradename was fully
impaired and recorded a charge of $259,000 in the second fiscal quarter of 2012.
The impairment charges are recorded in the Impairments line in the Interim
Consolidated Statements of Operations for for the 40 weeks ended November 10,
2012.
As of November 10, 2012, the Company again determined that possible impairment
triggering events under ASC Topic 360 had occurred. Information gathered during
the sale process caused the Company to reevaluate the estimated future cash
flows resulting from the sale of its business. As a result, the Company
determined that the carrying amount of the PMPS host agreement exceeded its fair
value, and accordingly recognized an impairment charge of $3.1 million in the
third fiscal quarter of 2012. In addition, the Company determined that the
carrying amounts of the PMPS and Kiddie Kandids customer lists were fully
impaired and recorded charges totaling $85,000 in the third fiscal quarter of
2012. The impairment charges are recorded in the Impairments line in the Interim
Consolidated Statements of Operations for for the 16 and 40 weeks ended
November 10, 2012.
The Company's estimates of future sale value contained several subjective
assumptions. Should the estimated sale values used to determine future cash
flows change by 5%, the value of the PMPS host agreement would be impacted by
$1.0 million.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this report 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. The Company
identifies 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 the Company's outlook
with respect to its significant liquidity challenges and ability to continue as
a going concern, portrait studios, net income, future cash requirements, cost
savings, compliance with debt covenants, valuation allowances, reserves for
charges and impairments, capital expenditures and other similar statements, 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: the Company's ability to operate as
a going concern, the Company's ability to sell or refinance its indebtedness
prior to the expiration of its Credit Agreement, the Company's need for
additional liquidity, declining sales trends in the Company's business, the
Company's dependence on Walmart, Sears and Toys "R" Us, the approval of the
Company's business practices and operations by Walmart, Sears and Toys "R" Us,
the termination, breach, limitation or increase of the Company's expenses by
Walmart under the lease and license agreements and Sears and Toys "R" Us under
the license agreements, the Company's ability to comply with its debt covenants
under its Credit Agreement, as amended, restrictions on the Company's business
imposed by agreements governing its debt, the Company's ability to generate
sufficient cash flow or raise additional capital to cover its operating
expenses, the inability of the Company to pay dividends, customer demand for the
Company's products and services, the economic recession and resulting decrease
in consumer spending, 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, implementation of marketing and operating
strategies, outcome of litigation and other claims, impact of declines in global
equity markets to the pension plan, impact of foreign currency translation and
the limited trading market of its stock 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 fiscal year ended February 4, 2012, as originally filed on May
7, 2012.
The risks described above do not include events that the Company does not
currently anticipate or that it currently deems immaterial, which may also
affect its results of operations and financial condition. A detailed discussion
of these and other risks and
34--------------------------------------------------------------------------------
uncertainties that could cause actual results and events to differ materially
from such forward-looking statements is included in the section entitled "Risk
Factors" included in the Company's 2011 Annual Report on Form 10-K for the
fiscal year ended February 4, 2012, as originally filed on May 7, 2012, with the
Securities and Exchange Commission, and in Item 1A in Part II below. The Company
undertakes no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
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