-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, SvHQJUQv8ffrrskr40//Jvlk2+F6596EQYY055/dfGtf3KK1PyYptLtqi/oLBYbd oVwKTWeJMlexQH5WJcGJYQ== 0000025354-94-000008.txt : 19940505 0000025354-94-000008.hdr.sgml : 19940505 ACCESSION NUMBER: 0000025354-94-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940206 FILED AS OF DATE: 19940504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CPI CORP CENTRAL INDEX KEY: 0000025354 STANDARD INDUSTRIAL CLASSIFICATION: 7200 IRS NUMBER: 431256674 STATE OF INCORPORATION: DE FISCAL YEAR END: 0203 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10204 FILM NUMBER: 94525992 BUSINESS ADDRESS: STREET 1: 1706 WASHINGTON AVE CITY: ST LOUIS STATE: MO ZIP: 63103-1790 BUSINESS PHONE: 3142311575 MAIL ADDRESS: STREET 1: 1706 WASHINGTON AVE CITY: ST LOUIS STATE: MO ZIP: 63103 10-K 1 CPI CORP ANNUAL REPORT FORM 10K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended February 5, 1994 Commission file number 1-10204 ------------------------------ CPI CORP. (Exact name of registrant as specified in its charter) DELAWARE 43-1256674 (State of Incorporation) (I.R.S. Employer Identification No.) 1706 Washington Avenue St. Louis, Missouri 63103-1790 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 231-1575 ------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ------------------------------ ----------------------- Common Stock $.40 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes _____ No __X__. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____. Aggregate market value of the Registrant's voting stock held by non-affiliates, based upon the closing price of said stock on the New York Stock Exchange - Composite Transaction Listing on May 2, 1994 ($14.625 per share): $203,705,775. As of May 2, 1994, 14,443,702 shares of the Common Stock, $0.40 par value, of the Registrant were outstanding. Documents Incorporated by Reference: Portions of the Annual Report to Shareholders for the year ended February 5, 1994, are incorporated by reference into Parts I and II of this Report. Portions of the Proxy Statement relating to the Annual Meeting of Shareholders to be held June 7, 1994, are incorporated by reference into Part III of this Report. PAGE 1 OF 184 PAGES 13-19 OF THIS TRANSMISSION FILING CONTAINS THE EXHIBIT INDEX PAGE TABLE OF CONTENTS
Page ---- Part I - ------ Item 1. Business 3 Item 2. Properties 7 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 Part II - ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 8. Financial Statements and Supplementary Data 9 Item 9. Disagreements on Accounting and Financial Disclosure 9 Part III - -------- Item 10. Directors and Executive Officers of the Registrant 10 Item 11. Executive Compensation 12 Item 12. Security Ownership of Certain Beneficial Owners and Management 12 Item 13. Certain Relationships and Related Transactions 12 Part IV - ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 13 Signatures 21
2 PAGE PART I ITEM I. BUSINESS The Company - ----------- CPI Corp. is a holding company engaged, through its subsidiaries, in developing and marketing consumer services and related products through a network of centrally-managed, small retail locations. The Company operates professional portrait studios, photographic finishing laboratories, electronic publishing stores and wall decor locations. The Company started up its photo finishing business in 1982. On August 19, 1991, the Company acquired Fox Photo, Inc., and on December 1, 1992, the Company purchased the operational assets of Pemtom, Inc., a Minneapolis-based company operating under the name Proex. At February 5, 1994, the Company operated 670 photo-finishing locations under the names of CPI Photo Finish, Fox Photo and Proex. On May 30, 1993, CPI Corp. entered the wall decor business with the acquisition of Prints Plus, Inc. from the Melville Corporation. Prints Plus is a poster, print and custom framing retail chain with 103 stores located in malls throughout the United States. For the fiscal year ended February 5, 1994, approximately 49.90% of net sales and 76.92% of operating earnings (before deduction of general corporate expenses, interest expense and provision for income taxes) were derived from the Sears Portrait Studio business. The Company has operated portrait studios as a Sears licensee since 1961, when it was one of more than 15 Sears portrait photography licensees. Today, the Company is the only operator of Sears Portrait Studios in the United States. The Company is materially dependent upon the continued goodwill of Sears and the integrity of the Sears name in the retail marketplace. The Company believes that its relationship with Sears is excellent and that it has been beneficial to both companies. See "Business-Relationship With Sears." The executive office is located at 1706 Washington Avenue, St. Louis, Missouri, 63103-1790, and its telephone number is (314) 231-1575. Unless the context otherwise requires, references herein to the "Company" or "CPI Corp." mean CPI Corp., its consolidated subsidiaries and their predecessor companies. 3 PAGE Relationship With Sears - ----------------------- The Company operates its Sears Portrait Studio business under a license agreement. The agreement is terminable by either the Company or Sears with respect to any or all studios upon 90-days notice. Early in 1993, Sears announced plans to close 113 stores, which included 38 Sears stores with portrait studios. The Company has relocated some of these studios to new sites in the same market areas. Except in connection with store closings, Sears has never terminated the operation of any Company studio under any license agreement. The relationship with Sears is long-standing and the Company has no reason to believe that Sears will exercise its rights under the agreement to reduce materially the scope of the Company's business with Sears. The Company and Sears entered into its current license agreement for fixed location studios as of January 1, 1994. This agreement expires on December 31, 1998. The agreement provides that the Company pay Sears a license fee of 15% of total annual net sales per studio. Net sales are defined as gross sales less customer returns, allowances and sales taxes. The total commission paid is subject to adjustment to reflect the mutual commitments of Sears and the Company to cooperate in implementation of their respective strategic plans for expansion, renovation, technological innovation and marketing over the five year term of the Agreement. The Company provides all studio furniture, equipment and fixtures and conducts advertising at its own expense. The Company is responsible for hiring, training and compensating the Company employees and must indemnify Sears against all said employee claims. The Company's freestanding studios in retail malls that operate under the Sears name pay a license fee of 7.5% of total annual net sales per studio and benefit from advertising under the Sears name. Customers may use their Sears credit cards at these studios as well. All of the Company's Canadian studios operate under an April 6, 1977, nonexclusive license agreement with Sears Canada, Inc., which is a subsidiary of Sears. The agreement renews automatically on a year-to-year basis but is terminable by either party on 60 days' notice. The license fee is 15% of net sales. The Company provides all studio furniture, equipment and fixtures and conducts all advertising at its own expense. As a Sears licensee, the Company enjoys the benefits of its use of the Sears name, Sears' daily cashiering and bookkeeping system, store security services and customers' ability to use their Sears credit cards to purchase the Company's products or services, for which Sears bears the credit risk of authorized credit card use. The Company is also able to place its portrait studio print media advertising under the Sears name at rates lower than those 4 PAGE the Company could otherwise obtain. Competition - ----------- The Company competes in the portrait photography business with a number of companies that operate fixed location, traveling and freestanding photography studios. Independent professional photographers also compete with the Company in various locations. The Company believes that its portrait photography products are competitive in terms of price, quality and convenience of purchase with comparable products of its competitors. Other national, regional and local companies operate rapid photographic finishing laboratories that compete in local markets with the laboratories that the Company is operating. The Company has identified two principal kinds of competitors - independent entrepreneur/franchisees who own their minilabs and other major photofinishers. The Company believes that the quality of its products enables it to compete successfully and that its marketing strategy permits effective competition with the other major photofinishers. The Company enhances the quality of its products by carefully training and supervising minilab technicians and by using quality control checks during the photo development and printing process. While it is felt that the Company competes successfully in terms of quality, photofinishers who use the services of a mass production lab are able to finish photographs in large volume which enables them to sell their photofinishing services at a lower price. To compete with the other major photofinishers, the Company has developed a marketing strategy of locating minilabs in regional retail malls and strip shopping centers convenient to their target customers, quality conscious 35mm camera users. In addition, by locating these minilabs in a number of locations in selected metropolitan areas, the Company also benefits from area-wide marketing and supervision. The Company's primary competition in the electronic publishing business is highly fragmented among franchise locations and numerous individual, owner-operated locations which provide printing and copy services throughout the United States. The Company feels it provides efficient, personal service because of more convenient access to its full range of state-of-the-art copying equipment. The Company competes with numerous national, regional and local framing retailers serving the wall decor segment of the home furnishings market. The primary competitors in this business are franchise locations, small regional chains and many individual stores which focus on custom framing. Other competitors in this segment include mass merchants and other specialty home furnishings stores which offer a fixed selection of pre-framed prints. The Company believes it competes successfully in this segment by offering a large selection of prints and frames, fast custom 5 PAGE framing service and very competitive pricing. Supplier Relationships - ---------------------- The Company purchases photographic paper and film for its studio and minilab operations primarily from one major manufacturer. The Company purchases camera, printing, minilab, reprographic and other equipment and supplies from a number of suppliers and is not dependent upon any supplier for any specific kind of equipment. The Company has had no difficulty in the past obtaining sufficient material to conduct its businesses. The Company believes that its relations with its suppliers are good. Seasonality - ----------- The Company's professional portrait photography business is seasonal, with the largest volume of sales occurring in the third and fourth fiscal quarters during the periods preceding and including the Thanksgiving/Christmas season. The photofinishing business seasonality is reflected in sales increases in the second quarter of the fiscal year, in the Thanksgiving/Christmas season and in sales decreases in the first quarter of the fiscal year. The seasonality of the wall decor business is exhibited by increased sales in the third and fourth fiscal quarters as well. Employees - --------- At February 5, 1994, the Company had approximately 10,700 employees, of whom approximately 5,200 were part-time. The Company's employees significantly increase in number during peak periods and, at December 18, 1993, the Company had approximately 15,500 employees. The Company's employees are not members of any union and the Company has experienced no work stoppages. The Company believes that its relations with its employees are good. Additional information required under this Item is contained in the Registrant's 1993 Annual Report to Shareholders, pages 107 through 118 of this document. 6 PAGE ITEM 2. PROPERTIES The following table sets forth certain information concerning the Company's principal facilities: Principal Facilities
Approximate area in Primary Ownership Location square feet Uses or lease - ------------------- ------------ ------------------ ---------- St. Louis, Missouri 312,600 Administration and Owned Photoprocessing St. Louis, Missouri 79,000 Warehousing Leased (1) St. Louis, Missouri 45,000 Warehousing Leased (2) Brampton, Ontario 40,000 Administration and Owned Photoprocessing Las Vegas, Nevada 12,200 Photoprocessing Leased (3) Thomaston, Connecticut 25,000 Administration and Owned Photoprocessing Edina, Minnesota 29,000 Administration, Leased (4) Warehousing and Photoprocessing Concord, California 43,000 Administration, Leased (5) Warehousing and Manufacturing (1) Lease term expires on June 30, 1997. (2) Lease term expires on February 28, 1997. (3) Lease term expires on July 31, 1996. (4) Lease term expires on March 30, 1999. (5) Lease term expires on March 31, 2002.
The Company operates its portrait studios in Sears stores pursuant to the license agreement with Sears. See "Relationship with Sears." The Company's other portrait studios, which are located in shopping centers, are generally leased for at least three years with some having renewal options. The Company's minilab locations generally are leased for terms of three to seven years and some have one or more renewal options. The electronic publishing locations are generally leased for terms of five to seven years with one or more renewal options and are commonly situated in office buildings, multi-use complexes or downtown 7 PAGE locations. The wall decor locations are generally in enclosed regional malls with lease terms of ten years without renewal options. On an ongoing basis, the Company analyzes the use of its facilities to assure operating economies, effective servicing of its customers and necessary flexibility to meet present and future demands of its businesses. ITEM 3. LEGAL PROCEEDINGS There are various suits pending against the Company, none of which is material in nature. It is the opinion of management that the ultimate liability, if any, resulting from such suits will not materially affect the consolidated financial position or results of operations of the Company. ITEM 4. 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 1993. 8 PAGE PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information required under this Item is contained in the Registrant's 1993 Annual Report to Shareholders, pages 174-177 of this document, and will be contained in the Registrant's 1994 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1993, and incorporated herein by reference. As of April 15, 1994, the market price of the Registrant's common stock was $14.875 per share with 14,433,704 shares outstanding and approximately 2,645 holders of record. ITEM 6. SELECTED FINANCIAL DATA Information required under this Item is contained in the Registrant's 1993 Annual Report to Shareholders, pages 127-134 of this document, and incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required under this Item is contained in the Registrant's 1993 Annual Report to Shareholders, pages 135 through 144 of this document, and incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required under this Item is contained in the Registrant's 1993 Annual Report to Shareholders, pages 145 through 177 of this document, and incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 9 PAGE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors - --------- Information required under this Item will be contained in the Registrant's 1994 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1993, and is incorporated herein by reference. Executive and Other Principal Officers - -------------------------------------- David E. April (51) Senior Executive Vice President. Mr. April joined the Company in 1963 as a supervisor trainee and subsequently became Vice President of Laboratory Operations. In 1981, he became Vice President and General Manager of Laboratory Operations, in February 1984, he became President of the Laboratory Operations, and in February 1987, he was named President of Manufacturing. Effective February 1992, Mr. April was appointed Senior Executive Vice President and is a member of the Office of the President and of the Executive Committee. Patrick J. Morris (54) Senior Executive Vice President. Mr. Morris joined the Company in May 1985 as its Executive Vice President - Marketing. Effective February 1992, he was appointed Senior Executive Vice President, and is a member of the Office of the President and of the Executive Committee. Barry C. Arthur (51) Executive Vice President - Finance and Chief Financial Officer. Mr. Arthur joined the Company in 1965 as an accountant and subsequently became Controller. In 1981, he was appointed Treasurer, and in July 1983, he was named Vice President - Finance. He was appointed to his current position effective February 1992 and is a member of the Executive Committee. 10 PAGE Jane E. Nelson (44)* Secretary and General Counsel. Ms. Nelson joined the Company in 1988 as Assistant General Counsel and served as Associate General Counsel and Assistant Secretary. She was promoted to her current position in February 1993 and is a member of the Corporate Development Council. Prior to coming to CPI, Ms. Nelson was an associate with the St. Louis law firm of Husch and Eppenberger. Fran Scheper (48) Executive Vice President - Human Resources. Ms. Scheper joined the Company in 1967 as Personnel Assistant. She was promoted to Assistant Personnel Director in 1982 and in January 1987 became Vice President - Human Resources. She was appointed to her current position in February 1992 and is a member of the Executive Committee. The Company's officers serve at the pleasure of the Board of Directors. There are no family relationships among the Company's directors and executive and other principal officers. * Pursuant to becoming an insider of the Company as of February 6, 1993, Jane E. Nelson timely filed a Form 3, however, through clerical error the Form 3 failed to disclose 79 shares of stock held indirectly in the Company's Profit Sharing Plan. The omission was included in an Amendment to Form 3 filed ten days late on February 26, 1994. No other incidents of late filing occurred during the fiscal year to the best of the Company's knowledge. 11 PAGE ITEM 11. EXECUTIVE COMPENSATION Information required under this Item will be contained in the Registrant's 1993 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1993, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required under this Item will be contained in the Registrant's 1994 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1993, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not Applicable. 12 PAGE PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Index to Certain Documents Index to Certain Documents
Document Page Number ------------- Annual Report To Shareholders* ------------- (1) Independent Auditor's Report 178** (2) Financial Statements: (a) Consolidated Balance Sheets 145-146 as of February 5, 1994 and February 6, 1993 (b) Consolidated Statements of 147 Earnings for the fiscal years ended February 5, 1994, February 6, 1993 and February 1, 1992 (c) Consolidated Statements of 148-150 Changes in Stockholder's Equity for the fiscal years ended February 5, 1994, February 6, 1993 and February 1, 1992 (d) Consolidated Statements of 151-152 Cash Flows for the fiscal years ended February 5, 1994, February 6, 1993 and February 1, 1992 (3) Notes to Consolidated Financial Statements 153-173 * Which pages are incorporated herein by reference. ** Also on Page 20 of this Form 10-K.
13 PAGE Index to Certain Documents
Page Number Form 10-K ----------- (4) Financial Statement Schedules *** I. Consolidated Short-Term Investments 22-28 V. Consolidated Property and Equipment 29-30 VI. Consolidated Accumulated Depreciation of Property and Equipment 31-32 VIII. Consolidated Allowance for Uncollectible Receivables 33 X. Supplementary Consolidated Earnings Statement Information 34 *** All other schedules and notes under Regulation S-X are omitted because they are either not applicable, not required, or the information called for therein appears in the consolidated financial statements of notes thereto.
(b) Reports on Form 8-K On December 23, 1993, the Company filed a Report on Form 8-K with an attached press release announcing: a third quarter decrease in earnings per share; a third quarter increase in sales mainly due to acquisitions; expected fourth quarter results below last year's and a $50 million investment in new portrait studio technology and renovation. 14 PAGE (c) Index to Exhibits Index to Exhibits
Page Number Form 10-K ----------- 3) Articles of Incorporation and Bylaws. ------------------------------------- (a) Articles of Incorporation Incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K, dated April 27, 1990 (Commission File No. 1-10204) (b) Bylaws Incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K, dated April 27, 1990 (Commission File No. 1-10204) Amendment to Bylaws dated 35 February 3, 1994 4) Instruments Defining the Rights of ---------------------------------- Security Holders, Including Debentures. --------------------------------------- (a) Articles of Incorporation and Bylaws. Incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K, dated April 27, 1990 (Commission File No. 1-10204) (b) Note Agreement for Series A Senior Notes Due August 31, 2000 ($33,000,000) and Series B Senior Notes due August 31, 2000 ($27,000,000). Incorporated by reference to Exhibit 4 to Form 10-Q, filed September 3, 1993. (Commission File No. 1-10204)
15 PAGE Index to Exhibits
Page Number Form 10-K ----------- (c) Pledge Agreement. Incorporated by reference to Exhibit 4 to Form 10-Q, filed September 3, 1993. (Commission File No. 1-10204) (d) Collateral Agency and Intercreditor Agreement. Incorporated by reference to Exhibit 4 to Form 10-Q, filed September 3, 1993. (Commission File No. 1-10204) (e) Series A Senior Note Due August 31, 2000. No. R-A1 $33,000,000. Incorporated by reference to Exhibit 4 to Form 10-Q, filed September 3, 1993. (Commission File No. 1-10204) (f) Series B Senior Note Due August 31, 2000. No. R-B1 $22,500,000. Incorporated by reference to Exhibit 4 to Form 10-Q, filed September 3, 1993. (Commission File No. 1-10204) (g) Series B Senior Note Due August 31, 2000. No. R-B2 $4,500,000. Incorporated by reference to Exhibit 4 to Form 10-Q, filed September 3, 1993. (Commission File No. 1-10204) (h) Revolving Credit Agreement. Incorporated by reference to Exhibit 4 to Form 10-Q, filed September 3, 1993. (Commission File No. 1-10204) (i) Revolving Credit Note. Incorporated by reference to Exhibit 4 to Form 10-Q, filed September 3, 1993. (Commission File No. 1-10204)
16 PAGE Index to Exhibits
Page Number Form 10-K ----------- (j) First Amendment to Rights Agreement. Incorporated by reference to Exhibit 4 to Form 10-Q, filed September 3, 1993. (Commission File No. 1-10204) (k) CPI Corp. Shareholder Rights Plan. Incorporated by reference to Exhibit 8 to Form 8-A, filed May 2, 1989. (l) Amendment to CPI Corp. Shareholder 36-37 Rights Plan 10) Material Contracts ------------------ (a) Contract With Sears, Roebuck and Co. 38-87
17 PAGE Index to Exhibits
Additional information required by this Item 10 is incorporated by reference to the below listed documents with corresponding filing date and registration or Commission file numbers where applicable. Registration/ Information Incorporated Document Filing Commission by Reference Referred to Date File Numbers - --------------------------- ------------- -------- ------------ (b) Employment Agreements- Annual Report 5/5/93 1-10204 A. Essman, R. Isaak, on Form 10-K D. April, P. Morris, dated 4/30/93 B. Arthur (c) CPI Corp. 1981 Stock Annual Report 5/5/93 1-10204 Bonus Plan (As Amended on Form 10-K, and Restated on 2/3/91) dated 4/30/93 (d) Deferred Compensation Annual Report 5/1/92 1-10204 and Stock Appreciation on Form 10-K, Rights dated 4/24/92 (e) Employment Termination Annual Report 5/1/92 1-10204 Agreement - S. Coovert on Form 10-K, dated 4/24/92 (f) CPI Corp. Restricted Annual Report 5/1/92 1-10204 Stock Plan on Form 10-K, dated 4/24/92 (g) Deferred Compensation Annual Report 5/1/92 1-10204 and Retirement Plan on Form 10-K, for Non-Management dated 4/24/92 Directors (h) Stock Purchase Form 8-K 3/25/91 - Agreement - M. Bohm (i) CPI Corp. Stock Option Form S-8 7/28/92 33-50082 Plan (As Amended and Restated effective 2/2/92) (j) Registration of Form 8-A 3/21/89 - Securities on the New York Stock Exchange (k) CPI Corp. Shareholder Exhibit to 5/2/89 - Rights Plan Form 8-A (l) CPI Voluntary Stock Form D 3/31/93 - Option Plan
18 PAGE Index to Exhibits
Page Number Form 10-K ----------- 11) Computation of Earnings Per Common Share 88 13) 1992 Annual Report to Shareholders 89-181 21) Subsidiaries of the Registrant 182-183 23) Accountants' Consent 184
19 PAGE INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors and Stockholders CPI Corp.: Under date of April 6, 1994, we reported on the consolidated balance sheets of CPI Corp. and subsidiaries as of February 5, 1994 and February 6, 1993, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the fiscal years in the three-year period ended February 5, 1994, as contained in the 1993 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K of CPI Corp. for the 1993 fiscal year. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG PEAT MARWICK St. Louis, Missouri April 6, 1994 20 PAGE SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CPI CORP. BY: /s/ Alyn V. Essman Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. Signatures of Directors and Principal Officers
Signature Title Date - ------------------- ------------------------ ------------- /s/ Alyn V. Essman Chairman of the Board, April 6, 1994 Chief Executive Officer and Director (Principal Executive Officer) /s/ Milford Bohm Director April 6, 1994 /s/ Lee Liberman Director April 6, 1994 /s/ Nicholas L. Reding Director April 6, 1994 /s/ Robert L. Virgil Director April 6, 1994 /s/ Russell Isaak President April 6, 1994 /s/ Patrick J. Morris Senior Executive April 6, 1994 Vice President /s/ David E. April Senior Executive April 6, 1994 Vice President /s/ Barry C. Arthur Vice President and April 6, 1994 Treasurer (Principal Financial and Accounting Officer)
21 PAGE Schedule I CPI CORP. CONSOLIDATED SHORT-TERM INVESTMENTS FEBRUARY 5, 1994 CPI Corp. Consolidated Short-Term Investments February 5, 1994
Balance Principal Market Sheet Title of Issue Amount Cost Value Value - ------------------ ----------- ----------- ----------- ----------- Barclays De Zoete $ 8,277,173 $ 8,277,173 $ 8,277,173 $ 8,277,173 Wedd Repurchase Agreements due February 7, 1994 3.11% Barclays De Zoete 2,786,685 2,786,685 2,786,685 2,786,685 Wedd Repurchase Agreements due February 7, 1994 3.11% United States 2,050,000 2,050,000 2,050,000 2,050,000 Government Agency Repurchase Agreement due February 7, 1994 3.25% United States 110,000 110,000 110,000 110,000 Government Agency Repurchase Agreement due February 7, 1994 3.25% Trust for Federal 7 7 7 7 Securities Fed Fund due February 7,1994 2.57% Associates 3,500,000 3,500,000 3,500,000 3,500,000 Commercial Paper due February 7, 1994 3.17%
22 PAGE CPI Corp. Consolidated Short-Term Investments February 5, 1994
Balance Principal Market Sheet Title of Issue Amount Cost Value Value - ------------------ ----------- ----------- ----------- ----------- Government of 522,060 519,194 521,804 521,804 Canada Treasury Bills due February 10, 1994 3.58% Government of 149,160 147,815 148,982 148,982 Canada Treasury Bills due February 17, 1994 3.62% Royal Bank of 149,160 149,160 149,160 149,160 Canada Term Deposit due February 17, 1994 3.00% Smith Barney 1,000,000 1,000,000 1,000,000 1,000,000 Commercial Paper due February 22, 1994 3.25% American Express 850,000 850,000 850,000 850,000 Commercial Paper due February 24, 1994 3.09% Government of 298,320 296,247 297,780 297,780 Canada Treasury Bills due February 24, 1994 3.48% Bank of Montreal 745,800 740,095 744,258 744,258 Bankers' Acceptance due February 25, 1994 3.77%
23 PAGE CPI Corp. Consolidated Short-Term Investments February 5, 1994
Balance Principal Market Sheet Title of Issue Amount Cost Value Value - ------------------ ----------- ----------- ----------- ----------- Federal National 1,500,000 1,483,046 1,496,846 1,496,846 Mortgage Association Discount Notes due March 1, 1994 3.13% Government of 745,800 740,684 743,900 743,900 Canada Treasury Bills due March 3, 1994 3.58% Government of 745,800 742,481 743,518 743,518 Canada Treasury Bills due March 10, 1994 3.38% Bank of Nova 745,800 741,668 743,022 743,022 Scotia Bankers' Acceptance due March 14, 1994 3.68% Federal Home 2,000,000 1,968,973 1,993,173 1,993,173 Loan Bank Discount Notes due March 15, 1994 3.12% Smith Barney 3,000,000 3,000,000 3,000,000 3,000,000 Commercial Paper due March 16, 1994 3.07% Government of 5,388,405 5,339,155 5,366,757 5,366,757 Canada Treasury Bills due March 17, 1994 3.67%
24 PAGE CPI Corp. Consolidated Short-Term Investments February 5, 1994
Principal Market Balance Sheet Title of Issue Amount Cost Value Value - ------------------ ----------- ----------- ----------- ----------- Government of 1,006,830 997,748 1,002,139 1,002,139 Canada Treasury Bills due March 24, 1994 3.62% Associates 850,000 850,000 850,000 850,000 Corporation Commercial Paper due March 28, 1994 3.05% Federal National 1,500,000 1,476,357 1,493,057 1,493,057 Mortgage Association Discount Notes due March 29, 1994 3.13% Government of 820,380 814,752 816,159 816,159 Canada Treasury Bills due March 31, 1994 3.48% Government of 596,640 593,311 593,786 593,786 Canada Treasury Bills due March 31, 1994 3.23% Federal National 500,000 493,918 495,438 495,438 Mortgage Association Discount Notes due April 1, 1994 3.22% American Express 250,000 250,000 250,000 250,000 Commercial Paper due April 4, 1994 3.30%
25 PAGE CPI Corp. Consolidated Short-Term Investments February 5, 1994
Balance Principal Market Sheet Title of Issue Amount Cost Value Value - ------------------ ----------- ----------- ----------- ----------- Government of 820,380 815,663 815,813 815,813 Canada Treasury Bills due April 7, 1994 3.33% Federal National 1,000,000 980,276 992,076 992,076 Mortgage Discount Notes due May 4, 1994 3.17% American Express 3,500,000 3,500,000 3,500,000 3,500,000 Commercial Paper May 16, 1994 3.29% Federal Home Loan 1,000,000 978,999 990,099 990,099 Bank Discount Notes due May 25, 1994 3.18% General Electric 250,000 250,000 250,000 250,000 Commercial Paper due June 1, 1994 3.30% Federal National 500,000 489,533 494,033 494,033 Mortgage Association Discount Notes due June 1, 1994 3.18% Federal National 850,000 836,761 839,661 839,661 Mortgage Association Discount Notes due June 20, 1994 3.26%
26 CPI Corp. Consolidated Short-Term Investments February 5, 1994
Balance Principal Market Sheet Title of Issue Amount Cost Value Value - ------------------ ----------- ----------- ----------- ----------- Federal National 1,000,000 977,320 982,260 982,260 Mortgage Association Discount Notes due August 16, 1994 3.36% Federal National 1,000,000 972,387 982,067 982,067 Mortgage Association Discount Notes due August 25, 1994 3.27% Federal National 2,000,000 1,944,773 1,963,773 1,963,773 Mortgage Association Discount Notes due August 25, 1994 3.27% Federal National 2,000,000 1,937,154 1,957,754 1,957,754 Mortgage Association Discount Notes due September 19, 1994 3.29% Federal National 1,000,000 968,577 978,877 978,877 Mortgage Association Discount Notes due September 19, 1994 3.26% Federal National 1,000,000 975,871 978,871 978,871 Mortgage Association Discount Notes due September 19, 1994 3.38%
27 PAGE CPI Corp. Consolidated Short-Term Investments February 5, 1994
Balance Principal Market Sheet Title of Issue Amount Cost Value Value - ------------------ ----------- ----------- ----------- ----------- Federal National 750,000 734,235 734,535 734,535 Mortgage Association Discount Notes due September 20, 1994 3.29% General Electric 4,000,000 4,000,000 4,000,000 4,000,000 Commercial Paper due October 5, 1994 3.32% General Electric 600,000 600,000 600,000 600,000 Commercial Paper due October 11, 1994 3.37% Government of the 1,000,000 967,378 968,278 968,278 United States Treasury Bills due January 12, 1995 3.37% ----------- ----------- ----------- ----------- $62,358,400 $61,847,396 $62,051,741 $62,051,741 =========== =========== =========== ===========
28 PAGE Schedule V CPI CORP. CONSOLIDATED PROPERTY AND EQUIPMENT FISCAL YEARS ENDED FEBRUARY 5, 1994, FEBRUARY 6, 1993 AND FEBRUARY 1, 1992 CPI Corp. Consolidated Property and Equipment for Fiscal Years Ended February 5, 1994 and February 6, 1993
Balance at Balance at Beginning Additions End of of Year at Cost Retirements Year ------------ ------------ ------------ ------------ 52 Weeks Ended February 5, 1994: - ----------------- Land $ 2,856,197 $ 216,241 $ - $ 3,072,438 Building and improvements 46,042,870 17,047,480 2,866,544 60,223,806 Machinery and equipment 112,226,654 20,150,881 3,802,114 128,575,421 Furniture and fixtures 50,305,468 7,944,825 2,681,896 55,568,397 ------------ ------------ ------------ ------------ $211,431,189 $ 45,359,427 $ 9,350,554 $247,440,062 ============ ============ ============ ============ 53 Weeks Ended February 6, 1993: - ----------------- Land $ 2,830,345 $ 25,852 $ - $ 2,856,197 Building and improvements 51,537,312 3,444,315 8,938,757 46,042,870 Machinery and equipment 107,630,093 6,683,528 2,086,967 112,226,654 Furniture and fixtures 34,410,630 17,111,959 1,217,121 50,305,468 ------------ ------------ ------------ ------------ $196,408,380 $ 27,265,654 $ 12,242,845 $211,431,189 ============ ============ ============ ============
29 PAGE CPI Corp. Consolidated Property and Equipment for Fiscal Year Ended February 1, 1992
Balance at Balance at Beginning Additions End of of Year at Cost Retirements Year ------------ ------------ ------------ ------------ 52 Weeks Ended February 1, 1992: - ----------------- Land $ 2,349,126 $ 481,219 $ - $ 2,830,345 Building and improvements 37,358,599 16,220,659 2,041,946 51,537,312 Machinery and equipment 94,122,130 17,463,844 3,955,881 107,630,093 Furniture and fixtures 29,285,109 6,432,218 1,306,697 34,410,630 ------------ ------------ ------------ ------------ $163,114,964 $ 40,597,940 $ 7,304,524 $196,408,380 ============ ============ ============ ============
30 PAGE Schedule VI CPI CORP. CONSOLIDATED ACCUMULATED DEPRECIATION OF PROPERTY AND EQUIPMENT FISCAL YEAR ENDED FEBRUARY 5, 1994, FEBRUARY 6, 1993 AND FEBRUARY 1, 1992 CPI Corp. Consolidated Accumulated Depreciation of Property and Equipment Fiscal Year Ended February 5, 1994 and February 6, 1993
Additions Balance at Charged Balance at Beginning to Costs End of of Year and Expenses Retirements Year ------------ ------------ ------------ ------------- 52 Weeks Ended February 5, 1994: - ----------------- Building and improvements $ 12,885,629 $ 12,021,374 $ 2,327,846 $ 22,579,157 Machinery and equipment 76,640,403 8,737,439 3,505,930 81,871,912 Furniture and fixtures 24,332,226 6,478,003 2,150,009 28,660,220 ------------ ------------ ------------ ------------ $113,858,258 $ 27,236,816 $ 7,983,785 $133,111,289 ============ ============ ============ ============ 53 Weeks Ended February 6, 1993: - ----------------- Building and improvements $ 16,452,311 $ 4,542,460 $ 8,109,142 $ 12,885,629 Machinery and equipment 63,658,503 13,734,605 752,705 76,640,403 Furniture and fixtures 18,624,648 6,154,095 446,517 24,332,226 ------------ ------------ ------------ ------------ $ 98,735,462 $ 24,431,160 $ 9,308,364 $113,858,258 ============ ============ ============ ============
31 PAGE CPI Corp. Consolidated Accumulated Depreciation of Property and Equipment Fiscal Year Ended February 1, 1992
Additions Balance at Charged Balance at Beginning to Costs End of of Year and Expenses Retirements Year ------------ ------------ ------------ ------------- 52 Weeks Ended February 1, 1992: - ----------------- Building and improvements $ 15,892,193 $ 4,046,634 $ 3,486,516 $ 16,452,311 Machinery and equipment 51,548,670 13,946,524 1,836,691 63,658,503 Furniture and fixtures 15,016,257 4,664,335 1,055,944 18,624,648 ------------ ------------ ------------ ------------ $ 82,457,120 $ 22,657,493 $ 6,379,151 $ 98,735,462 ============ ============ ============ ============
32 PAGE Schedule VIII CPI CORP. CONSOLIDATED ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES FISCAL YEARS ENDED FEBRUARY 5, 1994, FEBRUARY 6, 1993 and FEBRUARY 1, 1992 CPI Corp. Consolidated Allowance for Uncollectible Receivables Fiscal Years Ended February 5, 1994, February 6, 1993 and February 1, 1992
February 5, February 6, February 1, 1994 1993 1992 ------------ ------------ ------------ Balance at beginning of year $ 1,042,101 $ 1,070,092 $ 1,055,268 ============ ============ ============ Balance at end of year $ 918,346 $ 1,042,101 $ 1,070,092 ============ ============ ============
The majority of receivable amounts are due from Sears, Roebuck and Co. for amounts collected or to be collected by it, for which Sears assumes all credit risks. The receivable balances for which an allowance for uncollectible receivables is established relate primarily to sales recorded through use of Company commercial charge accounts for photofinishing and copy services. The majority of the allowance for uncollectible receivables is computed and adjusted every four weeks based on a predetermined percentage of the related receivable balances. These percentages are determined using historical results adjusted for current economic conditions. As a result, the Company does not record separate additions or deductions to the allowance for individual accounts but rather adjusts every four weeks for the net change in the computed allowance based on gross receivable balances. 33 PAGE Schedule X CPI CORP. SUPPLEMENTARY CONSOLIDATED EARNINGS STATEMENT INFORMATION FISCAL YEARS ENDED FEBRUARY 5, 1994, FEBRUARY 6, 1993 AND FEBRUARY 1, 1992 CPI Corp. Supplementary Consolidated Earnings Statement Information (In Thousands) Fiscal Years Ended February 5, 1994, February 6, 1993 and February 1, 1992
Fiscal Year ------------------------------------ 1993 1992 1991 --------- --------- --------- Advertising Costs $ 50,993 $ 53,654 $ 47,528 ========= ========= ========= Maintenance and Repairs $ 5,754 $ 5,452 $ 4,459 ========= ========= =========
34 PAGE Exhibit (3)b ARTICLES OF INCORPORATION AND BYLAWS On February 3, 1994, the Board of Directors of CPI Corp. amended the corporate bylaws as follows: RESOLUTION ---------- RESOLVED, that the first sentence of Section 3.2 of the By-Laws of the Corporation be, and hereby is, amended to read as follows: "SECTION 3.2. NUMBER, TERM AND ELECTION. The number of directors constituting the full Board of Directors of the corporation shall be no more than eight (8), or such other number not less than three (3), as may from time to time be established by amendment of these By-Laws." 35 PAGE Exhibit (4)l INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING DEBENTURES AMENDMENT TO CPI CORP. SHAREHOLDER RIGHTS PLAN The following Amendment to CPI Corp.'s Shareholder Rights Plan was adopted August 26, 1993: FIRST AMENDMENT TO RIGHTS AGREEMENT FIRST AMENDMENT (The "Amendment"), dated as of August 26, 1993, to the Rights Agreement, dated as of May 1, 1989 (the "Rights Agreement"), between CPI CORP., a Delaware corporation (the "Company"), and CONTINENTAL STOCK TRANSFER AND TRUST COMPANY, a New York corporation (the "Rights Agent"). W I T N E S S E T H WHEREAS, the Company and Ameritrust Company, National Association, as the predecessor to the Rights Agent, entered into the Rights Agreement specifying the terms of the Rights (as defined in the Rights Agreement); WHEREAS, the rights and obligations of the Rights Agent as such were assigned by Ameritrust Company, National Association to Continental Stock Transfer and Trust Company, as successor Rights Agent; WHEREAS, pursuant to Section 27 of the Rights Agreement the Company and the Rights Agent may from time to time supplement or amend the Rights Agreement in accordance with the provisions of such Section 27; WHEREAS, the Company and the Rights Agent desire to amend the Rights Agreement as set forth herein; WHEREAS, all actions necessary to make this First Amendment a valid agreement, enforceable according to its terms, have been taken, and the execution and delivery of this First Amendment by the Company and the Rights Agent have been in all respects duly authorized by the Company and the Rights Agent; and WHEREAS, no person has become an Acquiring Person (as defined in the Rights Agreement) as of the date hereof; 36 PAGE NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the Company and the Rights Agent hereby amend the Rights Agreement as follows: 1. The definition of "Acquiring Person" in Section 1(a) is hereby amended by deleting the number "20" therein and inserting in lieu thereof the number "15". 2. Section 11(a) (ii) is hereby amended by deleting each occurrence of the term "20%" therein and inserting in lieu thereof the term "15%" in each such instance. This Amendment shall be effective as of the date hereof and, except as set forth herein, the Rights Agreement shall remain in full force and effect and shall be otherwise unaffected hereby. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. ATTEST: CPI CORP. By: /s/ Jane E. Nelson By: /s/ Alyn V. Essman --------------------- ------------------------- Secretary and Chairman of the Board General Counsel and Chief Executive Officer ATTEST: CONTINENTAL STOCK TRANSFER AND TRUST COMPANY By: /s/ Thomas Jennings By: /s/ Steven G. Nelson ----------------------- ------------------------- Assistant Secretary Chairman of the Board and Secretary 37 PAGE Exhibit (10)a MATERIAL CONTRACT The following pages reflect the contract the Company has with Sears, Roebuck and Co. 38 PAGE LICENSE AGREEMENT PORTRAIT STUDIO FINITE 195-020 THIS LICENSE AGREEMENT (hereinafter referred to as "Agreement") is entered into as of the 1st day of January, 1994, by SEARS, ROEBUCK AND CO., a New York corporation ("Sears") and CONSUMER PROGRAMS INCORPORATED a Missouri corporation, ("Licensee"). Sears and Licensee hereby agree as follows: LICENSE 1. Licensee is in the business described in this paragraph, and has expertise in that business and has a marketing plan for that business. Sears hereby grants Licensee the non-exclusive privilege of conducting and operating, and Licensee shall conduct and operate, pursuant to the terms, provisions and conditions contained in this Agreement, a licensed business for the purpose of producing photographic portraits, passport photographs, photographic copy, video transfers and restoration work (hereinafter referred to as "Licensed Business"), at the Sears locations designated below or in Location Riders: ("Designated Sears Store(s)"). Dst. AcCtr. Store/Location ---- ------ -------------- To be provided LISTED ON THE ATTACHED LOCATION RIDER DATED JANUARY l, 1994. TERM 2. The term ("Term") of this Agreement shall be for a period beginning on January 1, 1994 and ending at the close of business on December 31, 1998 unless sooner terminated under any of the provisions of this Agreement. REPRESENTATION TO LICENSEE 3. Sears makes no promises or representations whatsoever as to the potential amount of business Licensee can expect at any time during operation of the Licensed Business. Licensee is solely responsible for any expenses it incurs related to this Agreement, including any increase in the number of Licensee's employees or any expenditures for additional facilities or equipment. 39 UNAUTHORIZED SALES 4. Licensee shall use the Licensed Business area only for the purpose authorized in this Agreement, and will offer for sale only those services and merchandise expressly authorized by this Agreement. SEARS COMMISSION 5. (a) Licensee shall pay to Sears a commission ("Sears Commission") which shall be a sum equal to ten percent (10%) of total annual net sales if less than $50,000 and fifteen percent (15%) of total annual net sales if annual net sales are equal to or over $50,000 - retroactive to the first dollar. Accounting Centers are to deduct commission rate at fifteen percent (15%). Licensee will bill Sears annually for any excess commissions taken from any units with annual net sales of less than $50,000. NET SALES (b) "Net Sales" means gross sales from operation of the Licensed Business, less sales taxes, returns and allowances. GROSS SALES (c) "Gross Sales" means all of Licensee's direct or indirect sales of services and merchandise from the Licensed Business including, but not limited to, sales arising out of referrals, contacts, or recommendations obtained through the operation of the Licensed Business. [DELETED PURSUANT TO REQUEST FOR CONFIDENTIALITY TREATMENT] 40 [DELETED PURSUANT TO REQUEST FOR CONFIDENTIALITY TREATMENT] USE OF SEARS NAME 7. (a) Licensee shall operate the Licensed Business under the name SEARS PORTRAIT STUDIOS. Licensee shall use the name of Sears only in connection with the operation of the Licensed Business. Licensee shall not begin any business activity under this Agreement without Sears prior written approval of any and all names that Licensee intends to use in conjunction with the Licensed Business. (b) Licensee shall only use the name of Sears, or any Sears trademark, service mark or trade name (Sears Marks), when communicating with customers or potential customers of the Licensed Business. Licensee shall not use Sears Marks either orally or in writing, including, but not limited to, use of any letterhead, checks, business cards, or contracts, when communicating with persons or entities other than customers or potential customers of the Licensed Business. All such communications shall be done solely in Licensee's own name. (c) Licensee shall not question, contest or challenge, either during or after the Term of this Agreement, Sears ownership of any Sears Marks Sears may license Licensee to use in connection with the Licensed Business. Licensee will claim no right, title or interest in any Sears Mark or 41 Sears Information (mailing lists/names), except the right to use the same pursuant to the terms and conditions of this Agreement, and will not register or attempt to register any Sears Mark. (d) Licensee recognizes and acknowledges that the use of any Sears Mark shall not confer upon Licensee any proprietary rights to any Sears Mark. Upon termination of this Agreement, Licensee shall immediately stop using any licensed Sears Mark, and will execute all necessary or appropriate documents to confirm Sears ownership, or to transfer to Sears any rights Licensee may have acquired from Sears in any Sears Mark. (e) Nothing in this Agreement shall be construed to bar Sears, after expiration or termination of this Agreement, from protecting its right to the exclusive use of its trademarks, service marks or trade names against infringement by any party or parties, including Licensee. (f) Sears may register in its own name any and all of the trademarks, service marks or trade names used in operation of the Licensed Business, and Licensee's use of such names and marks shall inure to the benefit of Sears for such purposes as well as for all other purposes and such marks shall be included in the term "Sears Marks." Licensee shall cooperate in any such registration or application for registration by Sears. (g) Sears Marks and Sears Information licensed under this Agreement possess a special, unique and extraordinary character which makes it difficult to assess the monetary damage Sears would sustain in the event of unauthorized use. Irreparable injury would be caused to Sears by such unauthorized use, and Licensee agrees that preliminary or permanent injunctive relief would be appropriate in the event of breach of this Paragraph 7 by Licensee. (h) If Licensee learns of any manufacture or sale by any third party of products and/or services similar to those offered by Licensee that would be confusingly similar to those sold by Licensee in the minds of the public and which bear or are promoted in association with Sears Marks or any names, symbols, emblems, or designs or colors which would be confusingly similar in the minds of the public to Sears Marks, Licensee will promptly notify Sears. Sears shall, at its sole expense, take such action as it determines, in its sole discretion, is appropriate. Licensee will cooperate and assist in such protest or legal action at Sears expense. If demanded 42 by Sears, Licensee shall join in such protest or legal action at Sears expense. Licensee shall not undertake any protest or legal action on its own behalf without first securing Sears written permission to do so. If Sears permits Licensee to undertake such protest or legal action, such protest or legal action shall be at Licensee's sole expense. Sears shall cooperate and assist Licensee at Licensee's expense. For the purposes of this paragraph, expenses shall include reasonable attorneys' fees. All recovery in the form of legal damages or settlement shall belong to the party bearing the expense of such protest or legal action. (i) Licensee shall not file suit using Sears name or undertake any legal proceeding against any customer without Sears prior written approval. ADVERTISING 8. (a) Licensee shall advertise and actively promote the Licensed Business authorized by this Agreement. It is expressly understood and agreed that all signs, advertising copy including but not limited to sales brochures, newspaper advertisements, radio and television commercials, and all sales promotional plans and devices, and all customer contract forms, guarantee certificates and other forms and materials which may be utilized with respect to said Licensed Business, shall be first submitted for approval to Sears Marketing Manager Licensed Businesses in Hoffman Estates, Illinois and Licensee further agrees that it will not issue any such advertising material or conduct any such sales promotional plan or device without such prior approval. Sears shall have the right to disapprove all the aforesaid advertising forms and other materials insofar as it does not properly use Sears trademarks, service marks or trade names; may subject Sears to liability, loss of good will, damage to Sears reputation or Sears customer relations; may fail to adhere to the requirements or any Federal, State or Local governmental rules, regulations and laws; or may fail to conform to community or Sears standards of good taste and honest dealing. At Licensee's option and request, Sears may purchase newspaper advertising and/or electronic media time for Licensee at Licensee's expense for said concession, provided that Licensee provides Sears with all necessary information for any requested advertising at least seven days prior to the date such advertising is to be run. 43 REIMBURSEMENT (b) Licensee hereby agrees to reimburse Sears for all expenses, including but not limited to advertising, incurred by Sears on behalf of Licensee and requested by Licensee, within thirty (30) days after the invoice for said expense(s) is sent by Sears to Licensee. If Sears does not receive reimbursement prior to the expiration of said thirty (30) days, then Sears shall have the right, but not the obligation, to retain out of Licensee's sales receipts described in Paragraph 29 the amount of said expense(s) with interest, if any, due to Sears. PUBLICITY 9. Licensee will not issue any publicity or press release regarding its contractual relations with Sears or regarding the Portrait Business in Sears stores, and will refrain from making any reference to this Agreement or to Sears in any prospectus, annual report or other filing required by Federal or state law, or in the solicitation of business, without obtaining Sears prior written approval of such action. RELATIONSHIP 10. Licensee is an independent contractor. Nothing contained in or done pursuant to this Agreement shall be construed as creating a partnership, agency or joint venture; and neither party shall become bound by any representation, act or omission of the other party. PRICES 11. Sears has no right or power to establish or control the prices at which Licensee offers service and/or merchandise in the Licensed Business. Such right and power is retained by Licensee. LICENSEE'S OBLIGATIONS 12. (a) Licensee will not make purchases or incur any obligation or expense of any kind in the name of Sears. Prior to any purchases involving the Licensed Business, Licensee shall inform its vendors that Sears is not responsible for any obligations incurred by Licensee. At Sears request, Licensee shall furnish to Sears the names of all parties from whom Licensee purchases merchandise or with whom Licensee may have any business or contractual relations in connection with the Licensed Business. 44 (b) Licensee shall promptly pay all its obligations, including those for labor and material, and will not allow any liens to attach to any Sears or customer's property as a result of Licensee's failure to pay such sums. LICENSEE'S EMPLOYEES 13. (a) Licensee shall employ all management and other personnel necessary for the efficient operation of the Licensed Business. The Licensed Business shall be operated solely by Licensee's employees, and not by independent contractors, sub-contractors, sub-licensees or by any other such arrangement. (b) Licensee has no authority to employ persons on behalf of Sears and no employees of Licensee shall be deemed to be employees or agents of Sears. Licensee has sole and exclusive control over its labor and employee relations policies, and its policies relating to wages, hours, working conditions, or conditions of its employees. Licensee has the sole and exclusive right to hire, transfer, suspend, lay off, recall, promote, assign, discipline, adjust grievances and discharge its employees, provided, however, that at any time Sears so requests, Licensee will consider transferring from the Licensed Business any employee who is objectionable to Sears because of risk of harm to the health, safety and/or security of Sears customers, employees or merchandise and/or whose manner impairs Sears customer relations. If Sears objects to any of Licensee's employees, and Licensee refuses to remove such employee and the conditions which caused Sears to object continue, Sears may terminate any affected location by giving thirty (30) days notice to Licensee. (c) Licensee is solely responsible for all salaries and other compensation of its employees and will make all necessary salary deductions and withholdings from its employees' salaries and other compensation. Licensee is solely responsible for so paying any and all contributions, taxes and assessments and all other requirements of the Federal Social Security, Federal and state unemployment compensation and Federal, state and local withholding of income tax laws on all salary and other compensation of its employees. (d) Licensee will comply with any other contract, Federal, state or local law, ordinance, rule, or regulation regarding its employees, including Federal or state laws or regulations regarding minimum compensation, overtime and equal opportunities for employment, and, in particular, Licensee 45 will comply with the terms of the Federal Civil Rights Acts, Age Discrimination in Employment Act, Occupational Safety and Health Act, and the Federal Fair Labor Standards Act, whether or not Licensee may otherwise be exempt from such acts because of its size or the nature of its business or for any other reason whatsoever. LICENSEE'S EQUIPMENT 14. (a) Entirely at its own expense, Licensee shall install furniture, fixtures, and equipment, including cash registers as necessary for the efficient operation of the Licensed Business ("Licensee's Equipment"). Licensee's Equipment, and its size, design and location, shall at all times be subject to Sears approval. PROHIBITED LIENS (b) Licensee shall not allow any liens, claims or encumbrances to attach to Sears premises. In the event any lien, claim or encumbrance attaches to Sears premises, Licensee shall immediately take all necessary action to cause such lien, claim or encumbrance to be released, or Sears, at its option, may take such action and charge Licensee or withhold from sales receipts all expenses, including attorneys' fees, incurred by Sears in removing such liens. MERCHANDISE STOCK 15. Licensee shall maintain a stock of good quality merchandise as necessary to assure efficient operation of the Licensed Business. STANDARDS 16. Licensee shall provide Sears with copies of its written procedures and policies establishing minimum standards of quality and/or performance. Licensee shall immediately advise Sears of any changes in its standards. Without limiting Paragraph 26, Licensee shall observe no less than such minimum standards of quality and/or performance. Sears may visit Licensee's offices, work sites and/or other place of business at any reasonable time for the purpose of verifying Licensee's compliance with its standards of quality and/or performance. CONDITION OF LICENSED BUSINESS AREA 17. (a) Licensee shall be primarily responsible for any preparations necessary for the operation of the Licensed Business. 46 (b) Licensee shall, at its expense, keep the Licensed Business area in a thoroughly clean and neat condition and shall maintain Licensee's Equipment in good order and repair. Sears shall provide routine janitorial service in the Licensed Business area, consistent with the janitorial services regularly performed in the Designated Sears Store. HOURS, RULES 18. (a) The Licensed Business shall be kept open for business and operated during the same business hours that the Designated Sears Store is open for business, or by specific agreement with store management, except to the extent prevented by circumstances beyond the control of Sears or Licensee. (b) Licensee shall conduct its operations in an honest, courteous and efficient manner and abide by safety and security rules and regulations of Sears in effect from time to time. ACCESS TO LICENSED BUSINESS AREA 19. Licensee shall have access to the Licensed Business area at all times that the Designated Sears Store is open to customers for business and at all other times as the appropriate Store Manager approves. Sears shall be furnished with keys to the Licensed Business area and shall have access to the Licensed Business area at all times. PHYSICAL INVENTORY 20. Sears may, solely at Sears discretion, not open any Designated Sears Store at any time to take a physical inventory of Sears property. Licensee waives any claim it may have against Sears for damages resulting from such closing. CHANGES OF LOCATION 21. (a) Sears shall have the right to change the location, dimensions and square footage of the Licensed Business from time to time during the Term of this Agreement in accordance with Sears judgment as to what arrangements will be most satisfactory for the general good of the Designated Sears Store(s). Consistent with the parties strategic development plans set forth in Paragraph 6, Licensee shall bear all expenses involved in moving Licensee's Equipment and all expenses for preparing the new space for occupancy by Licensee. Such expenses shall be allocated by Sears to 47 Licensee based on the average cost per square foot each year as set forth in the Means Building Construction Costs Data - Annual Edition. (b) Notwithstanding the above, if Sears at its sole discretion decides that the Licensed Business' location should be changed, Sears will move Licensee's Equipment to the new location and prepare the new space for occupancy by Licensee. Sears shall bear all expense involved in such change of the Licensed Business' location, including the reasonable cost of new fixtures if the Licensed Business' then existing fixtures reasonably adapted to the new location. The provision of this Paragraph shall be applicable only to a second move of the Licensed Business' location and/or any subsequent move(s) during the term of this Agreement. UTILITIES 22. (a) Sears shall furnish, at reasonable hours, and except as otherwise provided, without expense to Licensee, a reasonable amount of heat, light and electric power for the operation of the Licensed Business, except when prevented by strikes, accidents, breakdowns, improvements and repairs to the heating, lighting and electric power systems or other causes beyond the control of Sears. Sears shall not be liable for any injury or damage whatsoever which may arise by reason of Sears failure to furnish such heat, light and electric power, regardless of the cause of such failure, all claims for such injury or damage are expressly waived by Licensee. (b) The expense of installing light and power lines which may be required in order to bring such utilities up to the Licensed Business area shall paid by Licensee. The expense of purchasing and installing all fixtures and equipment within the area occupied by the Licensed Business, including all necessary electrical connections for the Licensed Business, and also including the subsequent maintenance of fixtures and equipment, shall be paid by Licensee. TELEPHONE 23. (a) If requested by Licensee, Sears will arrange for telephone service for the Licensed Business, and Licensee shall pay the entire cost of the installation of the telephone equipment necessary to provide such service. Licensee shall also pay the entire cost of the telephone service furnished to the Licensed Business, including the pro rata cost of the operation, maintenance, expense, property taxes, insurance 48 expense, corporate interest expense, and/or payment charges of the switchboard or telephone communication system at the Designated Sears Store(s). Such charges shall be consistent with Sears charges to its own merchandising departments for similar service. (b) All telephone numbers used in connection with the Licensed Business shall be separate from phone numbers used by Licensee in its other business operations and such numbers shall be deemed to be the property of Sears. Upon expiration or termination of this Agreement, Licensee shall immediately cease to use such numbers and shall transfer such numbers to Sears or to any party Sears designates, and Licensee shall immediately notify the telephone company of any such transfer. (c) Sears shall have the right to approve, before placement, all yellow and white page telephone listings for the Licensed Business. Sears may, at its sole option, require that any telephone number listed in any telephone directory using Sears name be billed through a Sears store or office. BILLING OF CUSTOMERS 24. Customers will not be billed, and no settlement will be made between the parties with respect to any cash or credit transaction until Licensee has completed the sale or service for the customer, or until Licensee and the customer have executed an agreement whereby Licensee will provide future services for the customer. QUOTATIONS, ORDERS 25. All quotations for Licensee's service made to customer by Licensee shall be in writing, or by telephone authorization from the customer, and such service shall be performed only upon receipt of a written order signed by such customer. The content of the forms used for making quotations and for taking orders shall be satisfactory to both parties. Licensee shall not charge customers for estimates or proposals. CUSTOMER ADJUSTMENT 26. All of the work and services performed by Licensee in connection with the Licensed Business shall be of a high standard of workmanship, and all of the merchandise sold in the Licensed Business shall be of high quality. Licensee shall at all times maintain a general policy of "Satisfaction Guaranteed" to customers and shall adjust all complaints of and controversies with customers arising out of the operation 49 of the Licensed Business. In any case in which an adjustment is unsatisfactory to the customer, Sears shall have the right, at Licensee's expense, to make such further adjustment as Sears deems necessary under the circumstances, and any adjustment made by Sears shall be conclusive and binding upon Licensee. Licensee shall maintain files pertaining to customer complaints and their adjustment and make such files available to Sears. Sears may deduct the amounts of any such adjustments from the sales receipts held by Sears as described in Paragraph 29. CHECKS 27. (a) All checks or money orders which Licensee accepts from customers shall be made payable to Sears, Roebuck and Co.. Licensee shall make certain that all checks are filled out correctly, having the customer's signature, date, and the correct amount (in both locations), and be verified in accordance with Sears policies in effect from time to time. Checks which are deficient in any of the above areas may be charged back to Licensee, and Licensee shall reimburse Sears for any of Sears Commission lost as a result of Licensee's failure to obtain a properly filled out and verified check. (b) Sears shall not be entitled to Sears Commission for those checks that have all of the above information but which are not paid upon presentment. Any and all losses which may be sustained by reason of nonpayment of any checks upon presentment shall be borne by Licensee, and Sears shall have no liability with respect to such checks, provided that Sears will make whatever effort it deems reasonable to collect all such checks prior to charging back such checks to Licensee. BAD CHECKS (c) After Sears has made at least one attempt to collect any bad or returned checks a photocopy of the check will be made and kept on file in each Sears store. On a monthly basis, each Sears store will return the checks to Licensee in the pre-addressed, postage paid envelopes provided by Licensee. Attached to the checks will be a tape total, to include the store number, the charge back month, and the total being deducted from the settlement. Licensee assumes responsibility for checks lost in the mail. Each Sears store will maintain a file of duplicate copies for ninety (90) days and Sears will assume liability for the duplicate totals that do not balance to the deductions on the monthly settlement report. Such liability ceases in ninety (90) days. 50 CREDIT SALES 28. (a) With the approval of the Credit Central designated by Sears, sales may be made by Licensee on such of Sears regularly established credit plans, including Discover Card, Visa, Mastercard and American Express, as may be first approved by such Credit Central. The approval of such Credit Central is required for each individual credit sale, and approval shall be granted in the sole discretion of the Credit Central. No part of the finance charge which may be earned by Sears in connection with any credit sale shall be payable to or credited in any way to Licensee. All losses sustained by Sears as a result of non-payment of a Sears credit account shall be borne by Sears, provided that Licensee has complied with Sears credit policies and procedures. Except for non- payment of a Sears credit account, Sears shall have no liability whatsoever to Licensee for Sears failure to properly accept or reject a customer's charge. (b) Licensee will comply with all provisions of Federal and state laws governing credit sales, and their solicitation, including but not limited to provisions dealing with disclosures to customers and finance charges. Licensee shall not modify, in any way, the terms and conditions of Sears credit plans. SALES RECEIPTS 29. At the close of each business day, Licensee shall submit an accounting of the gross sales and the returns, allowances and customer adjustments made during such day by Licensee to the cashier office of the Sears unit designated by Sears, together with the gross amount, in cash, of all cash sales, and all credit sales documents for transactions completed that day. An account shall be kept by both Licensee and Sears. Sears may retain out of such receipts the proper amount of the Sears Commission payable under this Agreement together with any other sums due Sears from Licensee. The remaining balance shall be payable to Licensee at the regular settlement. Sears shall maintain in each location, complete register tapes of Licensee's transactions for a sixty (60) day period. SETTLEMENT 30. (a) A settlement between the parties shall be made promptly each month for all cash and credit transactions of Licensee during such period, in accordance with Sears 51 customary accounting procedures. Such settlement will be done through the Sears Accounting Center designated by Sears. Sears will advance Licensee eighty-five percent (85%) of net sales weekly. (b) Licensee shall reimburse Sears at each settlement for all invoiced expenses, including any advertising expense, incurred by Sears at Licensee's request, outstanding at the time of such settlement. If Sears is not reimbursed at such settlement, then Sears shall have the right, but not the obligation, to retain out of Licensee's sales receipts the amount of such expenses with interest, if any, due Sears. AUDIT 31. Licensee shall keep and maintain books and records which accurately reflect the sales made by Licensee under this License Agreement and the expenses which Licensee incurs in performing under this License Agreement. Sears shall have the right at any reasonable time to review and audit the books and records of Licensee regarding this License Agreement. Such books and records shall be kept and maintained according to generally accepted accounting principles. REPORTS 32. (a) Licensee shall provide to Sears a monthly report of sales and income in the manner and form prescribed by Sears, together with any other information Sears may require for its records or auditing purposes. (b) Licensee shall submit its financial report to Sears annually within ninety (90) days after the close of Licensee's fiscal year. Such report shall be certified by an accountant, or by an officer of Licensee in the event that no audit is performed. Such report shall include, but shall not be limited to, Licensee's profit and loss statement and balance sheet, and shall be prepared in accordance with generally accepted accounting principles. This requirement may be fulfilled by submission of Licensee's Annual Report. Sears shall not disclose any such information which is not available to the public to any third parties without Licensee's prior consent. 52 WAIVER 33. Licensee waives any and all claims it may have against Sears for damage to Licensee, for the safekeeping or safe delivery or damage to any property whatsoever of Licensee or of any customer of Licensee in or about the Licensed Business area, because of the actual or alleged negligence, act or omission of any tenant, licensee or occupant of the premises at which the Licensed Business may be located; or because of any damage caused by any casualty from any cause whatsoever, excluding Sears sole negligence, including but not limited to, fire, water, snow, steam, gas or odors in or from such store or store premises, or because of the leaking of any plumbing, or because of any accident or event which may occur in such store or upon store premises; or because of the actual or alleged acts or omissions of any janitors or other persons in or about such store or store premises or from any other such cause whatsoever beyond Sears Control. INDEMNITY BY LICENSEE 34. Licensee covenants that it will protect, defend, hold harmless and indemnify Sears, its directors, officers and employees, from and against any and all expenses, claims, actions, liabilities, penalties, attorneys' fees, damages and losses of any kind whatsoever (including, without limitation of the foregoing, death of or injury to persons and damage to property), actually or allegedly resulting from or connected with the operation of the Licensed Business (including, without limitation of the foregoing, goods sold, work done, services rendered, or products utilized in therein, lack of repair in or about the area occupied by the Licensed Business, operation of or defects in any machinery, motor vehicles, or equipment used in connection with the Licensed Business, or located in or about the Licensed Business area; or arising out of any actual or alleged infringement of any patent or claim of patent, copyright or non-Sears trademark, service mark, or trade name); or from the omission or commission of any act, lawful or unlawful by Licensee or its agents or employees, whether or not such act is within the scope of the employment of such agents or employees. This indemnity shall not apply to the extent any injury or damage is caused solely by Sears negligence. Licensee's indemnity shall survive the termination of this Agreement. 53 INSURANCE 35. (a) Licensee shall, at its sole expense, obtain and maintain during the Term of this Agreement the following policies of insurance from companies satisfactory to Sears and containing provisions satisfactory to Sears and adequate to fully protect Sears as well as Licensee from and against all expenses, claims, actions, liabilities and losses related to the subjects covered by the policies of insurance below: (1) Worker's Compensation Insurance containing a waiver of subrogation in favor of Sears (where permitted by state law) executed by the insurance company and covering all costs, benefits and liability under state Worker's Compensation and similar laws which may accrue in favor of any person employed by Licensee; and Employer's Liability Insurance with limits of not less than $100,000. (2) Commercial General Liability Insurance, including but not limited to coverage for product liability and completed operations insurance, and containing a Contractual Liability Endorsement specifically covering the indemnity provisions in this Agreement, with limits of not less than $500,000 for bodily injury per occurrence and $100,000 for property damage per occurrence. (3) Motor Vehicle Liability insurance with an Employer's Non-Ownership Liability Endorsement in Licensee's name covering all vehicles used by Licensee in connection with the Licensed Business, with limits of not less than $500,000 combined single limit for bodily injury and property damage per occurrence. (4) Fire and Extended Coverage Insurance upon Licensee's property, equipment and merchandise used in the Licensed Business for the full insurable value thereof and containing a waiver of subrogation in favor of Sears executed by the insurance company. (b) In order to avoid conflicts between insurance companies, Licensee shall use its best efforts to have all policies of insurance required by this Paragraph issued by one (l) insurance company. Each policy shall name Sears as an additional insured and shall contain a severability of interest/cross liability endorsement. (c) Licensee's policies of insurance shall expressly provide that they shall not be subject to material change or cancellation without at least thirty (30) days' prior notice to Sears. 54 (d) Licensee shall furnish Sears with certificates of insurance or, at Sears request, copies of policies, prior to execution of this Agreement. If, in Sears opinion, such policies do not afford adequate protection for Sears, Sears will so advise Licensee, and if Licensee does not furnish evidence of acceptable coverage within fifteen (15) days, Sears shall have the right, at its option, to obtain additional insurance at the expense of Licensee and deduct the cost of such insurance from the sales receipts held by Sears as described in Paragraph 29 of this Agreement. (e) Any approval by Sears of any of Licensee's insurance policies or additional insurance obtained by Sears shall not relieve Licensee of any responsibility under this Agreement, including liability for claims in excess of described limits. MUTUAL RIGHT OF TERMINATION 36. Either party may terminate this Agreement, or any location, without cause, without penalty, and without liability for any damages as a result of such termination, at any time hereafter by giving the other party at least ninety (90) days' prior notice. The notice shall specify the termination date. ASSIGNMENT BY LICENSEE 37. Notwithstanding any other provision contained in this Agreement, this Agreement is not transferable by Licensee in whole or in part without Sears prior written consent. Any transfer or attempt to transfer by Licensee whether expressly or by operation of law, and without Sears prior written consent, shall, at the option of Sears, without notice, immediately terminate this Agreement. The sale of Licensee's business or any other transaction (including sales of stock) which shifts the rights or liabilities of Licensee to another controlling interest shall be such a transfer. RIGHT TO TERMINATION ON DEFAULT BY LICENSEE 38. If any property of Licensee passes into the hands of any receiver, assignee, officer of the law or creditor, or if Licensee vacates, abandons, or ceases to operate under this Agreement, or if Licensee fails to comply with any material provision or condition of this Agreement, then Sears may terminate this Agreement immediately by giving notice to Licensee. 55 RIGHT TO TERMINATION ON CLOSING OF STORE 39. Sears may, solely at Sears discretion, terminate this Agreement in any affected Licensed Business location without notice, due to the closing of the Designated Sears Store. Licensee shall not be entitled to any notice of such store closing prior to a public announcement of such closing. Licensee waives any claim it may have against Sears for damages, if any, incurred as a result of such closing. RIGHT OF TERMINATION AFTER FIRE 40. If any Designated Sears Store is damaged by fire or any other casualty so that the Licensed Business area becomes untenantable, this Agreement may be terminated with respect to such Licensed Business location, effective as of the date of such casualty, by either party giving the other party written notice of such termination within twenty (20) days after the occurrence of such casualty. If such notice is not given, then this Agreement shall not terminate, but shall remain in full force and effect and the parties shall cooperate with each other so that Licensee may resume the conduct of business as soon as possible. SUBJECT TO STORE LEASES 41. If any Designated Sears Store is leased to Sears this Agreement shall be subject to all of the terms, agreements and conditions contained in such lease. In the event of the termination of any such lease by expiration of time or otherwise, this Agreement shall immediately terminate with respect to affected Licensed Business locations. FUTURE OBLIGATIONS 42. After the termination of this Agreement by expiration of time or otherwise, Licensee shall have no right or interest in future contracts with Sears relating to any operation similar to that under this Agreement, and Sears may, without incurring any liability to Licensee: (1) enter into an agreement for the operation of a similar business with any person or organization Sears chooses, including, but not limited to, Licensee or any of Licensee's counterparts, or (2) directly operate a similar business itself. 56 GOODWILL 43. Licensee acknowledges that the commission rate established by this Agreement takes into consideration that all good will generated by the operation of the Licensed Business inures completely to the benefit of Sears and that Licensee has no right or interest in such good will. "Good will" includes all ownership rights in any information regarding the customers of the Licensed Business. DATA 44. Any customer list developed by Licensee, its employees or agents from the operation of, or from records generated as a result of the operation of the Licensed Business, are deemed exclusively owned by Sears. Licensee shall not use or permit use of such customer information for any purpose except the performance of this Agreement. Licensee shall at all times maintain any such customer information, including lists, physically separate and distinct from any customer information Licensee may maintain that is unrelated to the Licensed Business. Licensee shall not reproduce, release or in any way make available or furnish, either directly or indirectly, to any person, firm, corporation, association or organization at any time, any such customer information which will or may be used to solicit sales or business from such customers, including but not limited to the type of sales or business covered by this License Agreement. Upon termination of this Agreement for any reason, Licensee shall immediately deliver all copies of lists of customers and copies of all other such customer information to Sears; and Licensee, its officers, employees, successors and assigns, shall not use any such customer information to solicit any of such customers. Licensee shall protect all such customer information from destruction, loss or theft during the term of this Agreement, and until all copies of customer lists and copies of all other customer information are turned over to Sears. SEARS OPTION TO PURCHASE LICENSEE'S EQUIPMENT 45. In the event of the termination of this Agreement by expiration of time or otherwise, Sears shall have the right, but not the obligation, to purchase from Licensee, and Licensee shall convey and sell to Sears, such items of Licensee's Equipment excluding Licensee's software as Sears may designate in a written notice given to Licensee at least twenty (20) days prior to the effective date of such 57 termination. Sears shall pay Licensee the fair market value of such items as of the effective date of such termination. In the event that Licensee and Sears are unable to agree upon such fair market value, Sears may waive its right to purchase and have no obligation to Licensee, or, at Sears option, such fair market value shall be ascertained by an independent appraiser mutually acceptable to Licensee and Sears. Any fee of such appraiser shall be borne equally by Licensee and Sears. REMOVAL OF LICENSEE'S EQUIPMENT 46. Upon the termination of this Agreement by expiration of time or otherwise, Licensee shall, at its expense, immediately remove all of Licensee's Equipment (except such of Licensee's Equipment as may be purchased by Sears as provided in Paragraph 45) from Sears premises and shall, without delay and at Licensee's expense, repair any damage to Sears premises caused by such removal. SURVIVAL OF OBLIGATIONS 47. No termination of this Agreement, by expiration of time or otherwise, shall relieve the parties of liability for obligations arising out of the operation of the Licensed Business before termination. LICENSES, LAWS, ORDINANCES 48. Licensee shall, at its expense, obtain all permits and licenses which may be required under any applicable Federal, state, or local law, ordinance, rule or regulation by virtue of any act performed in connection with the operation of the Licensed Business. Licensee shall comply fully with all applicable Federal, state and local laws, ordinances, rules and regulations, including all rules and regulations of the Federal Trade Commission. FEES, TAXES 49. Licensee shall, at its expense, pay and discharge all license fees, business, use, sales, gross receipts, income, property or other applicable taxes or assessments which may be charged or levied by reason of any act performed in connect ion with the operation of the Licensed Business, excluding, however, all taxes and assessments applicable to Sears income from Sears Commission or applicable to Sears property. 58 REMEDIES CUMULATIVE 50. The remedies provided in this Agreement are cumulative, and shall not affect in any manner any other remedies that either party may have for any default or breach by the other party. The exercise of any right or remedy shall not constitute a waiver of any other right or remedy under this Agreement or provided by law or equity. No waiver of any such right or remedy shall be implied from failure to enforce any such right or remedy other than that to which the waiver is applicable, and only for that occurrence. ASSIGNS 51. The provisions of this Agreement shall be binding upon Licensee and upon Licensee's successors and assigns and shall be binding upon and inure to the benefit of Sears, its successors and assigns. NOTICES 52. All notices provided for or which may be given in connection with this Agreement shall be in writing and given by personal delivery or certified or registered mail with postage prepaid and return receipt requested or its equivalent, such as private express courier. Notices given by Licensee to Sears shall be addressed to: SEARS, ROEBUCK AND CO. Attention:Divisional Vice-President, Sears, Roebuck and Co. 3333 Beverly Road Hoffman Estates, Illinois 60179 with a copy to: SEARS, ROEBUCK AND CO., D/725 Attention:Portrait Studio Licensing Manager addressed to: CONSUMER PROGRAMS INCORPORATED 1706 Washington Ave St. Louis, MO 63103 Attention:C.E.O. and President Telephone:(314) 231-1575 Notices if so sent by mail shall be deemed to have been given when deposited in the mail or with the private courier. 59 ILLEGAL PROVISION 53. If any provision in this Agreement is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been included. GOVERNING LAWS 54. This Agreement shall be interpreted and governed by laws of the State of Illinois. ENTIRE AGREEMENT 55. This Agreement sets forth the entire agreement and understanding between the parties with respect to the Licensed Business. This Agreement shall not be supplemented, modified or amended except by a written instrument signed by Licensee (or duly authorized officer if Licensee is a corporation) and by a duly authorized-officer or agent of Sears, and no person has or shall have the authority to supplement, modify or amend this Agreement in any other manner. PARAGRAPH TITLES 56. The paragraph titles in this Agreement are for the mere convenience of the parties, and shall not be considered in any construction or interpretation of this Agreement. AGREEMENT SUPERSEDED 57. This Agreement supersedes the License Agreement made and entered into as of January l, 1991, by and between Sears and CONSUMER PROGRAMS INCORPORATED (Superseded Agreement). Such Superseded Agreement shall be deemed terminated as of the close of business on December 31, 1993, provided, however, that Licensee shall be responsible for any and all obligations of the licensee under the Superseded Agreement arising out of the operation of the Licensed Business prior to the termination of the Superseded Agreement. 60 IN WITNESS WHEREOF, the parties hereto have this day set their hands, the corporate party or parties by its or their duly authorized officers or agents. SEARS, ROEBUCK AND CO. By: /s/ Kenneth E. Hux ----------------------------- Divisional Vice-President, Licensed Businesses CONSUMER PROGRAMS INCORPORATED By: /s/ Russell Isaak ----------------------------- 61 DESIGNATED SEARS STORES AS OF JANUARY 1, 1994 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- C-02 BAYSHORE NY 01 1324 C-03 WHITE PLAINS NY 01 1444 C-04 LIVINGSTON NJ 01 1614 C-05 BROOKLYN NY 01 1114 C-06 HICKSVILLE NY 01 1264 C-07 E. NORTHPORT NY 01 1794 C-08 STATEN ISLAND NY 01 1624 C-09 NEW BRUNSWICK NJ 01 1314 C-10 WAYNE NJ 01 1434 C-11 ARLINGTON TX 01/SSD 1177 C-12 CHULA VISTA CA 11 1358 C-13 EL CAJON CA 11 1438 C-16 BUENA PARK CA 11 1268 C-17 TORRANCE CA 11 1278 C-18 SAN BRUNO CA 11 1478 C-19 CUPERTINO CA 11 1468 C-20 ESCONDIDO CA 11 1758 C-21 FAIRVIEW HEIGHTS IL 11/SSD 1640 C-23 HAMPTON VA 01 1575 C-27 STERLING HEIGHTS MI 11 1720 C-28 COSTA MESA CA 11 1388 C-29 DEARBORN MI 11 1700 C-30 HOUSTON TX 01 1237 C-31 TULSA OK 01 1151 C-32 CHESTERFIELD MO 11/SSD 1690 C-33 PASADENA CA 11 1048 C-34 ORANGE CA 11 1378 C-36 NORTHRIDGE CA 11 1508 C-37 SAN BERNARDINO CA 11 1398 C-38 RIVERSIDE CA 11 1298 C-39 ORLANDO FL 01 1225 C-40 COLUMBUS GA 01 1145 C-41 AURORA CO 11 1141 C-42 DENVER CO 11 1031 ** Deleted Pursuant to Request for Confidentiality Treatment.
62 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- C-43 DENVER CO 11 1291 C-44 LAKEWOOD CO 11 1071 C-45 LITTLETON CO 11 1131 C-46 WATERFORD MI 11 1180 C-47 HONOLULU HI 11 1158 C-48 AIEA OAHU HI 11 1578 C-50 INDIO CA 11 2058 C-51 EL CENTRO CA 11 2228 C-52 HACKENSACK NJ 01 1094 C-53 MIDDLETOWN NJ 01 1574 C-54 WATCHUNG NJ 01 1294 C-55 JERSEY CITY NJ 01 1044 C-56 LAKE GROVE NY 01 1364 C-57 MASSAPEQUA NY 01 1724 C-58 NANUET NY 01 1414 C-59 GLEN BRUNIE MD 01 1394 C-60 BRONX NY 01 2764 C-61 PARAMUS NJ 01 1664 C-62 LUBBOCK TX 01 1247 C-64 MODESTO CA 11 1618 C-65 SAN JOSE CA 11 1488 C-67 ORLAND PARK IL 11 1750 C-70 SAN ANTONIO TX 01 1047 C-71 WICHITA KS 11 1161 C-72 FT. WORTH TX 01/SSD 1267 C-74 ANCHORAGE AK 11 1089 C-77 CHESAPEAKE VA 01 1615 C-78 TEXAS CITY TX 01 2197 C-81 LAWRENCEVILLE NJ 01 1734 C-83 CORPUS CHRISTI TX 01 1217 C-84 ANN ARBOR MI 11 1390 C-85 BALTIMORE MD 01 1634 C-86 CALUMET CITY IL 11 1510 C-87 BURLINGTON NJ 01 1874 C-88 COVINA CA 11 1418 ** Deleted Pursuant to Request for Confidentiality Treatment.
63 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- C-89 LOS ANGELES CA 11 1008 C-92 FRESNO CA 11 1208 C-93 SACRAMENTO CA 11 1228 C-94 CARSON CA 11 1568 C-95 BAKERSFIELD CA 11 1318 C-96 HAYWARD CA 11 1248 C-97 CONCORD CA 11 1368 C-98 GLENDALE CA 11 1088 C-99 SANTA FE SPRINGS CA 11 1428 D-47 W. BURLINGTON IA 12 *2760 D-48 ALTON IL 12/SSD *6340 D-49 ST. LOUIS MO 12/SSD *1500 EA-1 SALT LAKE CITY UT 11 1118 EA-2 MURRAY UT 11 1558 EA-3 OGDEN UT 11 1718 EA-5 PROVO UT 11 2118 EA-6 POCATELLO ID 11 3139 EA-7 IDAHO FALLS ID 11 2278 EA-8 TWIN FALLS ID 11 2109 EA-9 BOISE ID 11 1229 EB-2 MIAMI(AVENTURA) FL 01 1655 EB-3 MIAMI FL 01 1365 EB-4 POMPANO BEACH FL 01 1205 EB-5 HIALEAH FL 01 1345 EB-6 PEMBROKE PINES FL 01 1775 EB-7 WEST PALM BEACH FL 01 1705 EB-8 JACKSONVILLE FL 01 1635 EB-9 ABILENE TX 01 1307 EC-1 CHARLESTON WV 01 1954 EC-2 YUBA CITY CA 11 2238 EC-3 LAWTON OK 01 2381 EC-4 TALLAHASSEE FL 01 1585 EC-5 SAN ANGELO TX 01 2517 EC-7 OMAHA NE 11 1041 EC-8 CINCINNATI OH 11 1810 ** Deleted Pursuant to Request for Confidentiality Treatment. * Remote Studios
64 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- EC-9 CINCINNATI OH 11 1610 ED-2 DAYTON OH 11 1560 ED-3 DAYTON OH 11 2060 ED-5 SPRINGDALE OH 11 1280 ED-6 CLARKSVILLE IN 11 2160 ED-7 FRANKFORT KY 11 2090 ED-8 LEXINGTON KY 11 1580 ED-9 FRANKLIN OH 11 2940 EE-1 MERIDIAN MS 01 2096 EE-2 LAKE CHARLES LA 01 2217 EE-3 GREENWOOD IN 11 1470 EE-5 INDIANAPOLIS IN 11 1540 EE-6 INDIANAPOLIS IN 11 1600 EE-7 INDIANAPOLIS IN 11 1680 EE-8 ALBANY OR 11 2419 EE-9 TOPEKA KS 11/SS 1642 EF-1 ST. JOSEPH MO 11/SSD 2713 EF-2 LAS VEGAS NV 11 1668 EF-5 MILWAUKKE WI 11 1102 EF-6 MILWAUKEE WI 11 2272 EF-7 BROOKFIELD WI 11 1062 EF-8 GREENDALE WI 11 1082 EF-9 KENOSHA WI 11 2342 EG-1 RACINE WI 11 2200 EG-2 ST. PAUL MN 11 1052 EG-3 BROOKLYN CENTER MN 11 1032 EG-4 MINNEAPOLIS MN 11 1002 EG-5 MINNETONKA MN 11 1112 EG-6 MAPLEWOOD MN 11 1122 EG-7 BURNSVILLE MN 11 1132 EG-8 EDEN PRAIRIE MN 11 1142 EG-9 LAS VEGAS NV 11 1328 EH-2 FLORENCE AL 01 2316 EH-3 AUGUSTA GA 01 1035 EH-4 HAMMOND LA 01 2016 EH-5 BILOXI MS 01 2256 ** Deleted Pursuant to Request for Confidentiality Treatment.
65 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- EH-7 HOUMA LA 01 2696 EH-8 TOLEDO OH 11 1220 EH-9 TOLEDO OH 11 2020 EJ-1 SARASOTA FL 01 1625 EJ-2 WATERLOO IA 11 1072 EJ-3 RAPID CITY SD 11 2412 EJ-4 REDDING CA 11 2338 EJ-5 WICHITA FALLS TX 01 2177 EJ-6 LAKEWOOD NY 01 2584 EJ-7 NEWARK OH 11 2830 EJ-8 CARLSBAD CA 11 1678 EJ-9 RENO NV 11 2098 EK-1 MEDFORD OR 11 2179 EK-2 ANTIOCH CA 11 2288 EK-3 PALMDALE CA 11 1068 EK-4 STOCKTON CA 11 1288 EK-6 THOUSAND OAKS CA 11 2318 EK-7 PARKERSBURG WV 01 2354 EK-8 FORT GRATIOT MI 11 2482 EK-9 SAGINAW MI 11 1590 EL-2 EVANSVILLE IN 11 1330 EL-3 OWENSBORO KY 11 2950 EL-4 MANSFIELD OH 11 2010 EL-5 LIMA OH 11 2450 EL-6 MISHAWAKA IN 11 1800 EL-7 BENTON HARBOR MI 11 2960 EL-8 ODESSA TX 01 1397 EL-9 SANTA MARIA CA 11 2088 E-01 BRYAN COLLEGE STATION TX 01 2547 E-04 HOLLYWOOD CA 11 1028 E-05 CERRITOS CA 11 1518 E-07 SANTA MONICA CA 11 1178 E-08 BREA CA 11 1638 E-09 CITY OF INDUSTRY CA 11 1598 E-10 GAITHERSBURG MD 01 1754 ** Deleted Pursuant to Request for Confidentiality Treatment.
66 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- E-11 FREINDSWOOD TX 01 1257 E-12 SAN ANTONIO TX 01 1277 E-13 TEXARKANA TX 01 2567 E-14 HURST TX 01/SSD 1297 E-15 ROCKAWAY NJ 01 1764 E-16 OKOLONA KY 11 1790 E-17 ANTIOCH TN 01 1316 E-18 PLANTATION FL 01 1535 E-19 MEMPHIS TN 01 1216 E-21 MEMPHIS TN 01 1186 E-22 MEMPHIS TN 01 1026 E-23 UNIONTOWN PA 01 2614 E-24 ALEXANDRIA VA 01 1284 E-25 FT. MYERS FL 01 1495 E-27 RICHMOND VA 01 1135 E-28 RICHMOND VA 01 1445 E-29 RICHMOND VA 01 2285 E-31 JOLIET IL 11 1740 E-32 SAN RAFAEL CA 11 1528 E-36 GADSDEN AL 01 2306 E-37 BAYTOWN TX 01 1327 E-38 ERIE PA 01 1694 E-39 BELLINGHAM WA 11 2149 E-41 ALTOONA PA 01 2494 E-43 LAKE JACKSON TX 01 2227 E-44 CHEHALIS WA 11 2089 E-45 BURLINGTON WA 11 2389 E-46 JOHNSON CITY NY 01 1784 E-48 VISALIA CA 11 2068 E-49 MERCED CA 11 2298 E-50 OXNARD CA 11 1448 E-51 SANTA BARBARA CA 11 2138 E-52 SANTA CRUZ CA 11 2308 E-53 VICTORVILLE CA 11 2829 E-54 ABERDEEN WA 11 2299 ** Deleted Pursuant to Request for Confidentiality Treatment.
67 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- E-55 E. WENATCHEE WA 11 2069 E-56 KELSO WA 11 2319 E-57 LACEY WA 11 2219 E-58 KENNEWICK WA 11 2329 E-59 GREENSBORO NC 01 1335 E-60 BELOIT WI 11 2322 E-61 SPRINGFIELD OR 11 2339 E-62 JOHNSTOWN PA 01 1863 E-63 CLARKSVILLE TN 01 2335 E-64 SHARON PA 01 2544 E-65 WICHITA KS 11 1401 E-66 HUTCHINSON KS 11 2590 E-67 BROWNSVILLE TX 01 2497 E-68 LAFAYETTE LA 01 1347 E-69 CHARLOTTE NC 01 1515 E-70 WILMINGTON NC 01 1455 E-71 LONGVIEW TX 01 2557 E-72 ROCK HILL SC 01 2807 E-73 HICKORY NC 01 2515 E-74 GASTONIA NC 01 2465 E-75 SPARTANBURG SC 01 1545 E-76 CHARLOTTE NC 01 1245 E-77 CONCORD NC 01 2075 E-78 PINE BLUFF AR 01 2216 E-79 LINCOLN NE 11 2191 E-80 LANSING MI 11 1170 E-81 DURHAM NC 01 1045 E-82 RALEIGH NC 01 1425 E-83 BURLINGTON NC 01 2105 E-84 ASHEVILLE NC 01 1185 E-85 FAYETTEVILLE NC 01 1405 E-86 WINSTON-SALEM NC 01 1375 E-87 DANVILLE VA 01 2625 E-88 LYNCHBURG VA 01 2835 E-89 ROANOKE VA 01 1974 ** Deleted Pursuant to Request for Confidentiality Treatment.
68 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- E-90 CEDAR RAPIDS IA 11 2212 E-91 YUMA AZ 11 2078 E-92 PANAMA CITY FL 01 2805 E-93 ORANGE PARK FL 01 1485 E-94 MACON GA 01 1435 E-95 CHARLESTON HEIGHTS SC 01 1325 E-96 ST. CLAIRSVILLE OH 01 2104 E-97 HARLINGEN TX 01 2537 E-98 MC ALLEN TX 01 2507 E-99 BELLEVUE NE 11 2051 KA-1 ORANGE TX 02 *1407 KA-2 CARLISLE PA 02 *2224 KA-3 HYATTSVILLE MD 02 *1604 KA-4 COUNCIL BLUFFS IA 12 *1041 KA-5 ATLANTA GA 02 *2865 KA-6 EDWARDSVILLE IL 12/SSD *1640 KA-7 WOODLAND CA 12 *1228 KA-8 STEVENS POINT WI 12 *3022 KA-9 PANORAMA CITY CA 12 *1168 KB-1 HARRISONBURG VA 02 * KB-2 OSHKOSH WI 12 * KB-3 ST. LOUIS MO 12/SSD *1270 KB-4 FREEPORT IL 12 * KB-5 NEW ORLEANS LA 02 * KB-6 LEMON GROVE CA 12 * KB-7 NORTH RIVERSIDE IL 12 * KB-8 BARSTOW CA 12 * KB-9 KANSAS CITY KS 12/SSD * KC-1 FONTANA CA 12 * KC-2 HAMDEN CT 02 * KC-3 ALHAMBRA CA 12 * KC-4 SIMI VALLEY CA 12 * KC-5 REDLANDS CA 12 * KC-6 PHOENIX AZ 12/SSD * KC-7 LANCASTER CA 12 * ** Deleted Pursuant to Request for Confidentiality Treatment. * Remote Studios
69 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- KC-8 CINCINNATI OH 12 * KC-9 TUSTIN CA 12 * KD-1 ROLLING HILLS ESTATES CA 12 * KD-2 DOWNER'S GROVE IL 12 * KD-3 LIVERMORE CA 12 * KD-4 BRISTOL CT 02 * KD-5 REDWOOD CITY CA 12 * KD-6 LA MIRADA CA 12 * KD-7 E. PROVIDENCE RI 02 * KD-8 LOUISVILLE KY 12 * KD-9 PITTSBURGH PA 02 * KE-1 GARDEN CITY KS 12 * KE-2 LONG BEACH CA 12 * KE-3 LAS VEGAS NV 12 * KE-5 BAKERSFIELD CA 12 * K-02 LAUREL MD 02 *1304 K-04 KANSAS CITY MO 12/SSD *2301 K-06 LIVONIA MI 12 *1460 K-07 ST. LOUIS MO 12/SSD *1500 K-08 WESTMINSTER CO 12 *1291 K-10 TULSA OK 02 *1021 K-11 LOCKPORT NY 02 *1514 K-12 TOLEDO OH 12 *1220 K-13 ALLENTOWN PA 02 *1154 K-14 LEESBURG FL 02 *2745 K-15 ENFIELD CT 02 *1093 K-16 CLOVIS CA 12 *8516 K-17 MATTESON IL 12 *1750 K-19 TOWSON MD 02 *1814 K-20 BALTIMORE MD 02 *1634 K-21 READING PA 02 *1484 K-22 ST. LOUIS MO 12/SSD *1500 K-23 PORTLAND OR 12 *1079 K-24 LAKEWOOD WA 12 *1129 K-26 PERU IL 12 *1740 ** Deleted Pursuant to Request for Confidentiality Treatment. * Remote Studios
70 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- K-27 HAZELTON PA 02 *2684 K-29 FERGUSON MO 12/SSD *1500 K-30 ORLANDO FL 02 *1225 K-31 OTTUMWA IA 12 *2392 K-32 LANSING MI 12 *1170 K-33 CLIFTON PARK NY 02 *1103 K-34 MUSCATINE IA 12 *2760 K-35 HAWTHORNE CA 12 *1278 K-36 DOWNEY CA 12 *1518 K-37 MOUNT PROSPECT IL 12 *1570 K-38 TAMPA FL 02 *1465 K-39 LEXINGTON KY 12 *1580 K-40 YONKER NY 02 *1114 K-41 NASHVILLE TN 02 *1316 K-42 PHILADELPHIA PA 02 *1084 K-422 CHICAGO IL 12 *1840 K-428 KALAMAZOO MI 12 *1380 K-43 NEWPORT NEWS VA 02 *1575 K-433 WAUKEGAN IL 12 *1290 K-436 PEORIA IL 12 *1480 K-44 BEL AIR MD 02 *1854 K-446 WYOMING MI 12 *1140 K-45 PHOENIX AZ 12/SSD *1588 K-46 SPRINGFIELD MO 02 *1171 K-460 JOPLIN MO 02 *2141 K-47 HAMILTON OH 12 *1280 K-48 BURTON MI 12 *1100 K-49 EL PASO TX 12 *1317 M-01 ATHENS GA 01 2845 M-02 MIAMI FL 01 1125 M-03 FT. LAUDERDALE FL 01 1195 M-04 KILLEEN TX 01 2487 M-05 FREDRICK MD 01 2664 M-06 S.E. PORTLAND OR 11 1119 M-07 ZANESVILLE OH 11 2550 ** Deleted Pursuant to Request for Confidentiality Treatment. * Remote Studios
71 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- M-08 MARION IL 11/SSD 2220 M-09 GRAND FORKS ND 11 2332 M-10 MINOT ND 11 2152 M-11 GALESBURG IL 11 2910 M-12 PIQUA OH 11 2610 M-13 FINDLAY OH 11 2790 M-14 MARION OH 11 2420 M-15 RICHMOND IN 11 2800 M-16 GREAT FALLS MT 11 2808 M-17 MELBOURNE FL 01 2245 M-18 FLAGSTAFF AZ 11/SSD 2358 M-19 HANFORD CA 11 2198 M-20 SANDUSKY OH 11 2510 M-21 BILLINGS MT 11 2242 M-22 GRAND JUNCTION CO 11 2361 M-23 CHILLICOTHE OH 11 2850 M-24 BRISTOL VA 01 2425 M-25 W. LAFAYETTE IN 11 2000 M-26 WINTER HAVEN FL 01 2325 M-28 ANDERSON IN 11 2140 M-29 MUNCIE IN 11 2570 M-30 DANVILLE IL 11 2362 M-31 JOPLIN MO 01 2141 M-32 PLANO TX 01/SSD 1337 M-33 CHARLESTON SC 01 2855 M-34 AUSTIN TX 01 1357 M-35 CHICAGO RIDGE IL 11 1840 M-36 COLUMBIA MD 01 1844 M-37 MEMPHIS TN 01 2806 M-38 DAVENPORT IA 11 2760 M-39 PARKSVILLE MD 01 1854 M-40 OXFORD AL 01 2186 M-41 OCALA FL 01 1006 M-42 SAVANNAH GA 01 1305 M-43 MERRITT ISLAND FL 01 1175 ** Deleted Pursuant to Request for Confidentiality Treatment.
72 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- M-44 GAINESVILLE FL 01 1665 M-45 HATTIESBURG MS 01 2116 M-46 HOUSTON TX 01 1377 M-47 COCKEYSVILLE MD 01 1864 M-48 BUTLER PA 01 2724 M-49 TUCSON AZ 11 1728 M-50 MOUNT HOPE WV 01 2704 M-51 BLUEFIELD WV 01 2714 M-52 LAREDO TX 01 2247 M-53 PHOENIX AZ 11/SSD 1708 M-54 PHOENIX AZ 11/SSD 1588 M-55 SCOTTSDALE AZ 11/SSD 1458 M-56 PHOENIX AZ 11/SSD 1768 M-57 MESA AZ 11/SSD 1628 M-58 BRADENTON FL 01 2565 M-59 NAPLES FL 01 2695 M-60 CRANBERRY PA 01 2734 M-61 COLORADO SPRINGS CO 11 1221 M-62 KANEOHE OAHU HI 11 1738 M-63 WAUSAU WI 11 2470 M-64 FREDRICKSBURG VA 01 2694 M-65 COLUMBUS IN 11 2070 M-66 ADRIAN MI 11 2150 M-67 LOGANSPORT IN 11 2460 M-68 LAS CRUCES NM 11 2527 M-69 PORT RICHEY FL 01 2885 M-70 TUPELO MS 01 2786 M-71 STATE COLLEGE PA 01 2344 M-72 INDIANA PA 01 2674 M-73 CHARLOTTESVILLE VA 01 2435 M-74 GOLDSBORO NC 01 2225 M-75 JACKSONVILLE NC 01 2755 M-76 FLORENCE SC 01 2705 M-77 FARMINGTON NM 11 2597 M-78 KINGSPORT TN 01 2825 ** Deleted Pursuant to Request for Confidentiality Treatment.
73 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- M-79 STAMFORD CT 01 3154 M-80 DOTHAN AL 01 2025 M-82 JOHNSON CITY TN 01 2265 M-83 HOT SPRINGS AR 01 2126 M-84 CUMBERLAND MD 01 2774 M-85 HAGERSTOWN MD 01 2414 M-86 LITTLETON CO 11 1271 M-87 MARYVILLE TN 01 2156 M-88 VALDOSTA GA 01 2125 M-89 ENID OK 01 2291 M-90 BRUNSWICK GA 01 2065 M-91 DECATUR AL 01 2236 M-92 ROCKY MOUNT NC 01 2635 M-93 LAUREL MS 01 2566 M-94 SHEBOYGAN WI 11 2372 M-95 GREENVILLE MS 01 2326 M-96 MIAMI FL 01 1715 M-97 KEY WEST FL 01 2215 N-01 SIOUX CITY IA 11 2422 N-02 DAYTONA BEACH FL 01 1075 N-03 JACKSON TN 01 2036 N-04 JONESBORO AR 01 2046 N-05 GAUTIER MS 01 2196 N-06 JACKSON MI 11 2050 N-07 PORTAGE MI 11 1110 N-08 BAY CITY MI 11 2380 N-09 ST. CLOUD MN 11 2352 N-10 CANTON OH 01 1410 N-11 ROCHESTER MN 11 2602 N-12 APPLETON WI 11 2092 N-13 GREEN BAY WI 11 2112 N-14 MADISON WI 11 2382 N-15 MADISON WI 11 2232 N-16 SANTA ROSA CA 11 1658 N-17 GRAND RAPIDS MI 11 1140 ** Deleted Pursuant to Request for Confidentiality Treatment.
74 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- N-18 ELKHART IN 11 2130 N-19 MISSOULA MT 11 2259 N-20 BISMARCK ND 11 2402 N-21 ANNAPOLIS MD 01 2024 N-22 TUSCALOOSA AL 01 2796 N-23 VICTOR NY 01 1584 N-24 BUFFALO NY 01 1984 N-25 NIAGARA FALLS NY 01 1514 N-26 ROCHESTER NY 01 1894 N-27 ROCHESTER NY 01 1524 N-28 WILLIAMSVILLE NY 01 1504 N-29 HORSEHEADS NY 01 2744 N-30 BRIDGEPORT WV 01 2826 N-31 FAIRFAX VA 01 1814 N-32 GREENVILLE SC 01 1595 N-33 LYNNWOOD WA 11 1109 N-34 LA CROSSE WI 11 2432 N-35 SALINAS CA 11 1688 N-36 NEW CASTLE PA 01 2274 N-37 YOUNGSTOWN OH 01 1474 N-38 NILES OH 01 1564 N-39 STEUBENVILLE OH 01 2324 N-40 WASHINGTON PA 01 2114 N-42 ATLANTA GA 01 1275 N-43 ATLANTA GA 01 1385 N-46 MORROW GA 01 1565 N-47 IOWA CITY IA 11 2282 N-48 DUBUQUE IA 11 2122 N-49 FT. DODGE IA 11 2052 N-50 MASON CITY IA 11 2252 N-51 SIOUX FALLS SD 11 2872 N-52 MOLINE IL 11 1050 N-53 MIDLAND TX 01 2657 N-54 VICTORIA TX 01 2617 N-55 SAN LUIS OBISPO CA 11 2258 ** Deleted Pursuant to Request for Confidentiality Treatment.
75 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- N-56 KOKOMO IN 11 2710 N-57 FT. WAYNE IN 11 2730 N-58 FT. WAYNE IN 11 1830 N-60 ROCKFORD IL 11 2990 N-61 SPRINGFIELD IL 11 1780 N-62 COLORADO SPRINGS CO 11 1111 N-63 PUEBLO CO 11 2281 N-64 EUREKA CA 11 2628 N-65 BOURBONNAIS (KANKAKEE) IL 11 2802 N-66 BLOOMINGTON IL 11 2840 N-67 PEORIA IL 11 1480 N-68 EAU CLAIRE WI 11 2002 N-69 DECATUR IL 11 1320 N-70 CHAMPAIGN IL 11 2920 N-71 TERRE HAUTE IN 11 2600 N-72 BLOOMINGTON IN 11 2820 N-73 MICHIGAN CITY IN 11 2290 N-74 BATTLE CREEK MI 11 2040 N-75 MUSKEGAN MI 11 2930 N-76 SPRINGFIELD OH 11 2390 N-77 SHERMAN TX 01/SSD 2627 N-78 ANDERSON SC 01 2305 N-79 W. DUNDEE IL 11 1820 N-80 NEWARK CA 11 1698 N-81 ALBANY GA 01 2815 N-82 QUINCY IL 11 2360 N-83 LAKELAND FL 01 1955 N-84 CHATTANOOGA TN 01 1315 N-85 UNION CITY GA 01 2865 N-86 FT. COLLINS CO 11 2271 N-87 FAYETTEVILLE AR 01 2241 N-88 BARBOURSVILLE WV 01 1804 N-89 NORTH WALES PA 01 1834 N-90 ROSEBURG OR 11 2289 N-91 OKLAHOMA CITY OK 01 1211 ** Deleted Pursuant to Request for Confidentiality Treatment.
76 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- N-92 BOCA RATON FL 01 1645 N-93 HEMET CA 11 2248 N-94 GREELEY CO 11 2451 N-95 COLONIAL HEIGHTS VA 01 2064 N-96 KNOXVILLE TN 01 1675 N-97 KNOXVILLE TN 01 1395 N-98 SPRINGFIELD MO 01 1171 N-99 BEND OR 11 2279 P-02 CAPE GIRARDEAU MO 11/SSD 2146 P-03 PADUCAH KY 11/SSD 2176 P-04 FT. SMITH AR 01 2231 P-05 WACO TX 01 1367 P-06 COLUMBUS MS 01 2086 P-07 JEFFERSON MO 11/SSD 2331 P-08 SALINA KS 11 2131 P-09 CASPER WY 11 2341 P-10 FARGO ND 11 2082 P-11 AUBURN AL 01 2595 P-12 CHEYENNE WY 11 2371 P-13 MYRTLE BEACH SC 01 2785 P-14 COLUMBIA MO 11/SSD 2480 P-15 GRAND ISLAND NE 11 2421 P-16 KANSAS CITY MO 11/SSD 1181 P-18 MANHATTAN KS 11/SSD 2430 Q-01 COEUR D'ALENE ID 11 2349 Q-02 ATTLEBORO MA 01 1033 Q-03 KINGSTON MA 01 2043 Q-04 PHILLIPSBURG NJ 01 2574 Q-05 TITUSVILLE FL 01 2195 Q-06 PARIS TX 01/SSD 2097 Q-07 CHESAPEAKE VA 01 2454 Q-08 COLUMBIA TN 01 2375 Q-09 BOWIE MD 01 2004 Q-10 JENSEN BEACH FL 01 2315 Q-11 MOREHEAD CITY NC 01 2165 ** Deleted Pursuant to Request for Confidentiality Treatment.
77 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- Q-12 LANGHORNE PA 01 1064 Q-13 BOULDER CO 11 2108 Q-14 SUMTER SC 01 2365 Q-15 MARTINSVILLE VA 01 2094 Q-16 CORAL SPRINGS FL 01 1055 Q-17 MIAMI FL 01 2155 Q-18 AIKEN SC 01 2095 R-01 HIGH POINT NC 01 2545 R-02 DALTON GA 01 2615 R-03 KING OF PRUSSIA PA 01 1884 R-05 ROME GA 01 2895 R-07 GREENVILLE NC 01 2175 R-08 VALLEY STREAM NY 01 1924 R-09 PRESCOTT AZ 11/SSD 2348 R-10 YORKTOWN HEIGHTS NY 01 1944 R-11 CLOVIS NM 11 2888 R-12 ROSWELL NM 11 2207 R-13 SIERRA VISTA AZ 11 2328 R-15 SANTA FE NM 11 2208 R-16 DULUTH GA 01 1685 R-17 FT. PIERCE FL 01 2005 R-18 LUFKIN TX 01 2577 R-19 MANKATO MN 11 2142 R-20 WINCHESTER VA 01 2784 R-21 ASHLAND KY 01 2854 R-23 HUMBLE TX 01 1417 R-25 WALLA WALLA WA 11 2599 R-27 HILO HI 11 2388 R-30 HUNTSVILLE AL 01 2166 R-31 CINCINNATI OH 12 *1610 R-32 KAHULUI MAUI HI 11 2148 R-33 BARTLESVILLE OK 01 2221 R-34 MARION IN 11 2072 R-35 FAIRFIELD CA 11 2378 R-37 SLIDELL LA 01 2026 ** Deleted Pursuant to Request for Confidentiality Treatment. * Remote Studios
78 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- R-38 MONTCLAIR CA 11 1748 R-40 KENNESAW GA 01 1155 R-41 ORLANDO FL 01 1285 R-43 WATERTOWN NY 01 2683 R-44 LEAVENWORTH KS 11/SSD 2650 R-46 LONGMONT CO 11 2398 R-47 PALM BEACH GARDENS FL 01 1765 R-48 PLATTSBURG NY 01 2533 R-49 MUSKOGEE OK 01 2045 R-50 DULUTH MN 11 2500 R-51 BOWLING GREEN KY 01 2546 R-52 GAINESVILLE GA 01 2505 R-53 PITTSBURGH PA 01 1034 R-54 FLUSHING NY 01 3244 R-56 LEWISTON ID 11 2209 R-57 WESTMINSTER MD 01 2963 R-59 LIHUE HI 11 2368 R-60 MORRISTOWN TN 01 2055 R-61 ARLINGTON TX 01/SSD 1437 R-63 TRAVERSE CITY MI 11 2180 R-66 MONROE MI 11 2012 R-67 CHATTANOOGA TN 01 1105 R-70 MANASSAS VA 01 2044 R-71 HATO REY PR 03 1905 R-72 CAROLINA PR 03 1925 R-73 BAYAMON PR 03 1915 R-75 PONCE PR 03 1945 R-76 MAYAGUEZ PR 03 2925 R-77 CAGUAS PR 03 2915 R-80 SAN ANTONIO TX 01 1427 R-81 HOLLAND MI 11 2032 R-82 CHICO CA 11 2048 R-84 CHRISTIANBURG VA 01 2985 R-85 SCHENECTADY NY 01 2113 R-86 NEW PHILADELPHIA OH 01 2080 ** Deleted Pursuant to Request for Confidentiality Treatment.
79 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- R-87 BLOOMSBURG PA 01 2284 R-88 AMES IA 11 2092 R-89 LOS ANGELES CA 11 1018 R-91 ASHEBORO NC 01 2645 R-92 DU BOIS PA 01 2124 R-94 CHEEKTOWAGA NY 01 2134 R-95 CHICAGO IL 11 2980 R-96 SHAWNEE OK 01 2057 R-97 ITHACA NY 01 2564 R-98 PORT CHARLOTTE FL 01 2145 R-99 LEWISVILLE TX 01/SSD 1076 S-414 ST. ANN MO 11/SSD 1500 S-426 VIRGINIA BEACH VA 01 1265 S-427 DALLAS TX 01/SSD 1057 S-467 OVERLAND PARK KS 11/SSD 1101 S-475 HOUSTON TX 01 1197 S-477 MESQUITE TX 01/SSD 1187 S-480 FT. WORTH TX 01/SSD 1117 S-482 HOUSTON TX 01 1017 S-483 HOUSTON TX 01 1067 S-484 HOUSTON TX 01 1127 S-487 PHILADELPHIA PA 01 1084 S-492 PASADENA TX 01 1107 S-493 CRESTWOOD MO 11/SSD 1270 S-494 SILVER SPRINGS MD 01 1304 S-495 BETHESDA MD 01 1424 S-752 UPPER DARBY PA 01 1174 S-756 DALLAS TX 01/SSD 1227 S-758 ALBUQUERQUE NM 11 1287 S-760 TULSA OK 01 1021 S-761 AUSTIN TX 01 1137 S-762 SAN ANTONIO TX 01 1167 S-767 LANDOVER MD 01 1604 S-768 WILLOW GROVE PA 01 1354 S-769 TAMPA FL 01 1505 ** Deleted Pursuant to Request for Confidentiality Treatment.
80 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- S-771 LIVONIA MI 11 1460 S-772 TROY MI 11 1490 S-773 FLINT MI 11 1100 S-774 ROSEVILLE MI 11 1450 S-778 LOUISVILLE KY 11 1850 S-779 COLUMBUS OH 11 1370 S-781 COLUBUS OH 11 1440 S-784 FRANKLIN TN 01 2875 S-785 GOODLETTSVILLE TN 01 1386 S-786 MEDIA PA 01 1654 S-787 FLORISSANT MO 11/SSD 1630 S-788 RICHARDSON TX 01/SSD 1207 S-790 TIGARD OR 11 1079 S-791 MOBILE AL 01 1056 S-792 ALTAMONTE SPRINGS FL 01 1355 S-793 TUCSON AZ 11 1338 S-794 SPOKANE WA 11 1029 S-795 METAIRIE LA 01 1226 S-797 GRETNA LA 01 1286 S-798 INDEPENDENCE MO 11/SSD 1121 S-799 KANSAS CITY MO 11/SSD 2301 S-800 WESTMINISTER CA 11 1608 S-801 LAGUNA HNILLS CA 11 1548 S-802 LINCOLN PARK MI 11 1250 S-803 COLUMBUS OH 11 1150 S-804 AURORA IL 11 1660 S-805 IRVING TX 01/SSD 2147 S-806 SACRAMENTO CA 11 1408 S-807 CITRUS HEIGHTS CA 11 1538 S-808 BIRMINGHAM AL 01 1266 S-810 BIRMINGHAM AL 01 2746 S-812 CORNWELL HEIGHTS PA 01 1454 S-814 WILMINGTON DE 01 1853 S-815 WILMINGTON DE 01 1254 S-816 DEPTFORD NJ 01 1464 ** Deleted Pursuant to Request for Confidentiality Treatment.
81 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- S-817 MOORESTOWN NJ 01 1494 S-818 LITTLE ROCK AR 01 1016 S-819 N. LITTLE ROCK AR 01 2066 S-820 COLUMBIA SC 01 1525 S-821 N. SAN DIEGO CA 11 1648 S-822 NOVI MI 11 1760 S-823 NORMAN OK 01 2311 S-825 OKLAHOMA CITY OK 01 1091 S-826 MT. VIEW CA 11 1238 S-827 EL PASO TX 11 1317 S-829 AMARILLO TX 01 1387 S-830 PARK FOREST IL 11 1420 S-832 SCHAUMBURG IL 11 1570 S-833 MERRILLVILLE IN 11 1650 S-836 DES MOINES IA 11 1012 S-837 N. HOLLYWOOD CA 11 1168 S-838 CLEARWATER FL 01 1415 S-839 TAMPA FL 01 1465 S-840 MONACA PA 01 1594 S-842 PITTSBURGH PA 01 1334 S-844 PITTSBURGH PA 01 1344 S-845 WEST MIFFLIN PA 01 1824 S-846 GREENSBURG PA 01 1714 S-847 SEATTLE WA 11 1009 S-848 TACOMA WA 11 1129 S-849 TUKWILA WA 11 1139 S-850 SEATTLE WA 11 1059 S-851 REDMOND WA 11 1069 S-852 FEDERAL WAY WA 11 1099 S-853 SILVERDALE WA 11 2309 S-855 EVERETT WA 11 2049 S-856 ST. PETERSBURG FL 01 1295 S-857 VANCOUVER WA 11 2239 S-858 SALEM OR 11 2119 S-859 CHICAGO IL 11 1010 ** Deleted Pursuant to Request for Confidentiality Treatment.
82 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- S-860 JACKSON MS 01 1106 S-861 MIDWEST CITY OK 01 1261 S-862 BATON ROUGE LA 01 1086 S-863 MONROE LA 01 1116 S-864 BOSSIER CITY LA 01 2677 S-865 MONTGOMERY AL 01 1126 S-866 PENSACOLA FL 01 1096 S-867 FLORENCE KY 11 1730 S-868 CHICAGO IL 11 1020 S-869 CHICAGO IL 11 1030 S-870 CHICAGO IL 11 1090 S-872 CHICAGO IL 11 1380 S-874 NILES IL 11 1290 S-876 OAK BROOK IL 11 1300 S-877 VERNON HILLS IL 11 1620 S-879 SHREVEPORT LA 01 1077 S-880 DES MOINES IA 11 2392 S-881 UNION GAP WA 11 2029 S-883 BEAUMONT TX 01 1407 S-884 PORT ARTHUR TX 01 2637 S-887 AKRON OH 01 1520 S-888 AKRON OH 01 1670 S-889 DENTON TX 01/SSD 2587 S-892 CLEVELAND OH 01 1430 S-893 ELYRIA OH 01 1310 S-894 MENTOR OH 01 1350 S-895 NORTH RANDALL OH 01 1770 S-896 RICHMOND HEIGHTS OH 01 1530 S-897 NORTH OLMSTEAD OH 01 1710 S-898 ALEXANDRIA LA 01 2087 S-899 MARY ESTHER FL 01 2056 V-12 W. HARTFORD CT 01 1063 V-13 ALBANY NY 01 1103 V-14 FAYETTEVILLE NY 01 2223 V-15 CLAY NY 01 1623 ** Deleted Pursuant to Request for Confidentiality Treatment.
83 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- V-16 NEW HARTFORD NY 01 2603 V-18 WATERBURY CT 01 1183 V-19 GLEN FALLS NY 01 2453 V-20 LEWISTON ME 01 2463 V-21 ALLENTOWN PA 01 1154 V-22 MAY'S LANDING NJ 01 1554 V-23 BANGOR ME 01 2583 V-24 WILKES-BARRE PA 01 2604 V-25 LANCASTER PA 01 1644 V-26 BURLINGTON VT 01 2053 V-27 CAMP HILL PA 01 2624 V-29 WARWICK RI 01 1083 V-30 SWANSEA MA 01 2283 V-31 TOM'S RIVER NJ 01 2524 V-32 N. DARTMOUTH MA 01 2373 V-33 S. PORTLAND ME 01 2183 V-34 READING PA 01 1484 V-35 HOLYOKE MA 01 1273 V-36 MANCHESTER NH 01 2443 V-37 WATERFORD CT 01 1193 V-39 HARRISBURG PA 01 1224 V-40 POTTSTOWN PA 01 2484 V-41 DEDHAM MA 01 1123 V-42 ORANGE CT 01 1113 V-43 BROCKTON MA 01 2233 V-44 NEWBURGH NY 01 2593 V-45 POUGHKEEPSIE NY 01 1333 V-46 KINGSTON NY 01 2353 V-47 MIDDLETOWN NY 01 1323 V-48 SALISBURY MD 01 1773 V-49 HANOVER PA 01 2244 V-50 SCRANTON PA 01 1534 V-51 SPRINGFIELD MA 01 1093 V-53 MUNCY PA 01 2644 V-54 FRACKVILLE PA 01 2684 ** Deleted Pursuant to Request for Confidentiality Treatment.
84 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- V-55 BRAINTREE MA 01 1283 V-56 CAMILLUS NY 01 2164 V-57 YORK PA 01 1244 V-58 AUGUSTA ME 01 2293 V-59 LEBANON PA 01 2254 V-60 BRUNSWICK ME 01 2203 V-61 PRESQUE ISLE ME 01 2143 V-62 DOVER DE 01 2654 V-63 WOONSOCKET RI 01 2073 V-64 LANESBOROUGH MA 01 2343 V-65 MERIDEN CT 01 1043 V-67 VINELAND NJ 01 2374 V-68 MANCHESTER CT 01 1443 V-69 DANBURY CT 01 1303 V-70 HYANNIS MA 01 2323 V-71 NEWINGTON NH 01 2663 V-72 NATICK MA 01 1403 V-74 CONCORD NH 01 2023 V-75 AUBURN NY 01 2473 V-76 NASHUA NH 01 1313 V-77 HANOVER MA 01 1243 V-78 PEABODY MA 01 1253 V-79 AUBURN MA 01 1213 V-80 OCEAN NJ 01 1744 V-81 SAUGUS MA 01 1053 V-82 LEOMINSTER MA 01 1133 V-83 BURLINGTON MA 01 1163 Y-02 LANCASTER OH 11 2750 Y-03 ELIZABETHTOWN KY 11 2030 Y-04 MERAUX LA 01 2385 Y-06 CHAMBERSBURG PA 01 2224 Y-08 IRONDEQUOIT NY 01 2003 ** Deleted Pursuant to Request for Confidentiality Treatment.
85 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- Y-09 NEW HYDE PARK NY 01 2933 Y-12 SOUTH WALDORF MD 01 1074 Y-13 MURFREESBORO TN 01 2226 Y-17 FAIRFIELD AL 01 2206 Y-18 SARATOGA SPRINGS NY 01 2173 Y-19 COLUMBIA SC 01 2035 Y-21 FREEHOLD NJ 01 1204 Y-22 MASSENA NY 01 2033 Y-23 HOUSTON TX 01 5011 Y-24 ST. PETERS MO 11/SSD 1182 Y-25 JACKSONVILLE FL 01 1066 Y-26 WESTOVE WV 01 2304 Y-27 COON RAPIDS MN 11 2902 Y-28 GUAYAMA PR 03 2675 Y-29 CRYSTAL RIVER FL 01 2555 Y-30 CAMBRIDGE MA 01 1343 Y-31 OAKRIDGE TN 01 2376 Y-36 ST. CHARLES IL 11 2041 Y-37 MESA AZ 11/SSD 1078 Y-38 BURBANK CA 11 1838 Y-39 RICHMOND CA 11 1788 Y-40 PINEVILLE NC 01 1646 Y-41 BLOOMINGDALE IL 11 1172 Y-43 CARY NC 01 2824 Y-44 MARTINSBURG WV 01 2814 Y-46 BALTIMORE MD 01 2823 Y-47 MIDLAND MI 11 2642 Y-48 FAIRBANKS AK 11 2819 Y-50 SALEM NH 01 1003 Y-51 TAUNTON MA 01 2934 Y-52 MONTEBELLO CA 11 1998 Y-53 CLEVELAND TN 01 2345 Y-54 ASHTABULA OH 01 2932 Y-55 BLOOMINGTON MN 11 1722 Y-56 BOYNTON BEACH FL 01 1755 ** Deleted Pursuant to Request for Confidentiality Treatment.
86 Schedule Of Locations
STUDIO STORE SQUARE NO. CITY STATE DIV NO. FOOTAGE** - ----- ---------------- ----- ------- ----- --------- Y-57 VALENCIA CA 11 1999 Y-58 MORENO VALLEY CA 11 1868 Y-61 HOMESTEAD FL 01 2235 Y-62 ALPHARETTA GA 01 1695 Y-63 BEAVER CREEK OH 11 1202 Y-64 PUYALLUP WA 11 2330 ** Deleted Pursuant to Request for Confidentiality Treatment.
1. [Deleted Pursuant to Request for Confidentiality Treatment.] 2. [Deleted Pursuant to Request for Confidentiality Treatment.] 3. [Deleted Pursuant to Request for Confidentiality Treatment.] 87 PAGE Exhibit (11) CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE FISCAL YEARS ENDED FEBRUARY 5, 1994, FEBRUARY 6, 1993 AND FEBRUARY 1, 1992 Computation of Earnings Per Common Share Fiscal Years Ended February 5, 1994, February 6, 1993 and February 1, 1992
1993 1992 1991 ---------- ---------- ---------- Common shares outstanding at beginning of fiscal period 16,955,730 16,929,102 16,859,600 Shares issued during the period - weighted average 18,624 23,338 53,139 Shares issuable under employee stock plans - weighted average 26,670 26,403 28,609 Dilutive effect of exercise of certain stock options 0 5,858 19,903 Less: Treasury stock - weighted average (2,335,070) (2,308,918) (1,854,079) ------------ ------------ ------------ Weighted average number of common and common equivalent shares 14,665,954 14,675,783 15,107,172 ============ ============ ============ Net earnings applicable to common shares $13,236,456 $22,614,861 $27,134,744 ============ ============ ============ Earnings per common share $ .90 $ 1.54 $ 1.80 ============ ============ ============
88 PAGE Exhibit (13) 1993 ANNUAL REPORT TO SHAREHOLDERS On the following pages is CPI Corp. 1993 Annual Report to Shareholders. 89 PAGE (Front cover of Annual Report to Shareholders) "Growth becomes most apparent when viewed over the long term." CPI Corp. 1993 Annual Report to Shareholders (Pictures: five pictures of a boy from birth to early teens) 90 PAGE CPI AT A GLANCE CPI Corp.'s cash flow has remained strong, even as profits have declined over the past three years. The profit decline is primarily the result of significantly increased competition in the portrait photography industry, causing margin deterioration. While this competitive environment has not abated, management believes that the next few years will show improved performance in operating earnings because of marketing innovations and expansion of the Company's various divisions. CPI primarily operates businesses that provide reasonably priced, professionally performed consumer services-portrait photography, photofinishing and electronic publishing-throughout the U.S. and Canada through over 1,800 retail locations, including a newly entered fourth business-posters, prints and framing retailing. A brief review of the divisions follows: Leading position in the highly competitive preschool portrait photography market - -As the exclusive Sears Portrait Studios operator, CPI continues a 33-year partnership, with 900 studios in all major Sears stores in the U.S. and Canada, and 92 studios in non-Sears shopping centers. - -Despite a dramatic increase in competition in the last three years, the Company has maintained its market position while concurrently developing new marketing programs employing digital imaging technology to significantly enhance products and services. In the next two years CPI will install this technology in all studios as the first phase of a 5-year, $75 million development program, in which studio capability to serve customers will be elevated to a new level. Leading position in the competitive, fragmented photofinishing market - -From a start-up venture in 1982, this business has developed into CPI's second major segment. - -Through a combination of new store openings and acquisitions, the most significant of which was over 300 Fox Photo labs in 1991, the division has expanded to its present 670 locations, the largest such operation in the U.S. - -While photofinishing is the primary customer service, significant revenues are generated from additional services and products provided to those customers. Full service to serious photographers is the hallmark of this enterprise. 91 - -The segment recorded significant operating earnings in 1993 despite increased competition from supermarkets, drug stores and mass merchants, and continues to generate consistently strong cash flow. Entry into new industry with acquisition of profitable retail chain - -Prints Plus is the leading non-franchise posters, prints and framing retailer in the U.S., offering unparalleled product selection tailored to each market's tastes, and "while-you-wait" framing service. - -Acquired in late May, the new business contributed significantly to CPI's 1993 operating earnings. - -Plans call for the addition of 15 locations per year to the chain's 1993 year-end 103 stores in prime mall locations. Conceptual development in digital graphics industry - -Applying its skill in managing remote retail locations, CPI is developing a chain of high-tech copy stores. - -Two experimental concept stores are exploring digital graphics technology that could have ongoing impact on CPI's present businesses. Growth Resources Capital for the expansion and upgrading of CPI's various businesses will come from operating cash flow, which has averaged $47.9 million over the past five years, with supplemental funding provided by the 1993 $60 million private note placement. 92 ACCOMPLISHMENTS AND HIGHLIGHTS 1993 Accomplishments - -Maintained Portrait Studio market position through aggressive promotional campaign, despite continuing increase in competition. - -Developed highly attractive new portrait studio products that utilize new digital imaging technology. Complete rollout expected by end of 1995. - -Entered into new five-year license agreement with Sears, Roebuck and Co. - -Continued expansion of Photofinishing segment, with increased sales and healthy cash flow, although earnings declined in the face of growing competition. - -Acquired Prints Plus, the nation's leading non-franchised prints, poster and framing service retailer. - -Secured $60 million in long-term capital for development of businesses, both technologically and geographically. 93 PAGE Financial Highlights--Continuing Operations: In millions of dollars, except percents and per share data
One Year Five Year 1993 1992 %Change 1988 %Change* Sales Portrait Studios $237.9 $264.4 (10.0) $241.2 Photofinishing 187.2 169.2 10.6% 69.3 Other Products and Services 50.4 15.8 218.3% 7.6 Total $475.5 $449.4 5.8% $318.1 8.4% Operating Income** Portrait Studios $ 30.0 $ 48.4 (38.1)% $ 63.1 Photofinishing 7.0 9.6 (27.4)% 0.6 Other Products and Services 1.1 (4.1) 127.6% (2.2) Earnings After Taxes*** $ 11.1 $ 22.6 (50.8)% $ 31.9 (19.0)% Average Shares Outstanding (millions) 14.7 14.7 (0.1)% 16.7 Per Share Earnings from Continuing Operations $ 0.76 $ 1.54 (50.6)% $ 1.91 (16.8)% Dividends 0.56 0.56 - 0.25 Tangible Book Value 7.84 7.33 7.0% 7.68 Price High $ 20.75 $ 26.38 - $ 22.25 Low 13.88 15.00 - 17.25 * compound annual rate 1988-1993 ** 1992 and prior results restated: see explanation on page 139 of this document (Management's Discussion and Analysis of Financial Condition and Results of Operation--Operating Income). *** Excluding $2.1 million credit from accounting change in 1993
94 PAGE Financial Highlights: Segment Results in Millions of Dollars
Portrait Studios Photofinishing Other 1993 Sales 238 187 50 1992 Sales 264 169 16 1988 Sales 241 69 8 1993 Operating Income** 30.0 7.0 1.1 1992 Operating Income** 48.4 9.6 -4.1 1988 Operating Income** 63.1 0.6 -2.2 ** 1992 and prior results restated: see explanation on page 139 of this document (Management's Discussion and Analysis of Financial Condition and Results of Operation--Operating Income).
Financial Highlights: Cash Flow in Millions of Dollars (See tables on pages 127-134 of this document.)
Cash from Operations OCECE* 1993 39 9 1992 37 24 1988 50 31 * OCECE: Operating Cash in Excess of Capital Expenditures (Excluding Acquisitions)
Tables: Although portrait studio sales declined in 1993 because of competitive and economic conditions, photofinishing and other sales increased, primarily due to revenues from recent acquisitions. Portrait studio earnings were significantly lower. A decline in photofinishing results was more than offset by other gains. Cash flow from operations was relatively strong, despite a significant drop in total operating earnings. 95 PAGE OVERVIEW A Management Company CPI is a retail management company, not a collection of separate enterprises. How they are run and what is required to run them is more important than what they do. Over CPI's history of more than 50 years, a particular management method has evolved to encompass: - - functional organizational structure - - highly quantitative marketing techniques - - effective hiring, training and motivation programs - - specialized statistical and accounting controls These tools are all employed with relative comfort by a pool of professionals who are able to transfer their special skills to new, but related venues of service retailing. Business Philosophy The depth of experience and leadership skills of senior management have helped develop CPI's philosophy of concentration on long-term progress, rather than focusing on short-term achievements or setbacks. Results over the past three years have tested this principle. Although the Company has experienced profit erosion over this period, its philosophy has been validated over the long-term by solid earnings per share, the traditional measure of performance. Furthermore, strong cash flow, even in the recent period, has enabled CPI to protect shareholder value through expansion, acquisitions, dividends and repurchase of shares. Distinct Differences CPI differs from typical retailers in several significant aspects: - --Whereas most retailers focus on the display and resale of products, CPI's businesses focus more on providing high value-added services. These services employ state-of-the-art technology and yield gross margins significantly above industry norms. That technology has required a significant investment in production equipment, much of it developed internally on a proprietary basis. - --The management of inventory is a continuing challenge for most retailers. The three typical problems in this area are onerous working capital requirements, obsolescence and shrinkage. Three of CPI's businesses have significant freedom from each of these. Inventory consists primarily of production materials related to work in progress and is relatively small compared to that of typical retailers. Therefore it is less burdensome on working capital. Obsolescence is not a factor because CPI's services take the form of personalized products, i.e., a customer's vacation pictures, or portraits of a customer's baby. Finally, shrinkage is non-existent because the pictures are valuable only to the purchaser. 96 PAGE - --While CPI's recent performance has been hampered by intensified competition, particularly in the preschool portrait market, the economic climate of the last few years was also an adverse influence. However, the Company's two major businesses are probably less negatively affected by general economic downturns than are many retailers. This is because much of the Company's activity is driven by time-specific personal events, such as birthdays, graduations, vacations or holidays. Customers do not casually defer such purchases. The Company, however, has an open mind to investment in more traditional retail businesses if they offer high profit potential and can employ complementary management abilities. In May 1993, CPI made such an investment with the acquisition of the Prints Plus chain of wall decor stores that offer prints, posters and custom framing. While inventory is more of a factor, the business still offers high value-added margin potential. Much of CPI's success has been the result of identifying high-growth, high-margin consumer businesses that are: - - responsive to promotional marketing - - easily taught to employees - - controllable through data monitoring - - repeatable through small-scale operating units - - expandable geographically on a broad scale By adding these proven CPI skills to the existing management expertise in other more traditional retail organizations, the Company can continue to build on its existing solid base and extend itself more broadly. Ten Years of Sales From Continuing Operations (in millions of dollars)
Dollars 1983 131 1984 169 1985 198 1986 254 1987 283 1988 318 1989 351 1990 374 1991 415 1992 449 1993 476
97 PAGE Ten Years of Earnings From Continuing Operations and Dividends (in dollars per share)
Earnings Dividends 1983 0.69 0.000 1984 0.67 0.000 1985 0.90 0.050 1986 1.18 0.085 1987 1.54 0.165 1988 1.91 0.250 1989 1.97 0.420 1990 2.19 0.500 1991 1.80 0.560 1992 1.54 0.560 1993 0.76 0.560
Tables: Since 1983, the compound annual sales growth rate has averaged 13.7% through 1993, although earnings per share from continuing operations have declined in the past three years. 98 PAGE FINANCIAL HIGHLIGHTS (Pictures: a chart showing Stock Trading Price and Volume provided by Standard and Poor's as of April 15, 1994 is shown on this page) Symbol/Market: CPY (NYSE) Market Price: 14 7/8 (4/15/94) Price Range: 18 1/4-13 7/8 (12 months ended 4/15/94) Market Capitalization: $214.7 million (4/15/94) Shares Outstanding: 14,433,704 (4/15/94) 12 Months Net Earnings Per Share: $0.90 (FY '93) Dividend Rate: $0.56 per share Current P/E: 16.5 (4/15/94) Financial Ratios For Year-End
2/5/94 2/6/93 Income from Operations 4.0% 7.8% Tax Rate 40.0% 38.1% Net Earnings 2.8% 5.0% Return on Assets 5.6% 9.5% Return on Equity 7.7% 14.1%
Sales and Earnings From the initial public offering in 1982 through fiscal 1990, CPI averaged a compound annual growth in sales of 16.2% and in earnings per share from continuing operations of 19.1%. Net earnings as a percentage of sales averaged 8.1% during this period, and the average return on equity was 30.2%. The growth was due primarily to the aggressive expansion of the Sears Portrait Studios operation and, secondarily, to the 1982 launch and subsequent development of the CPI Photo Finish division. Although sales have continued to increase to the present, primarily due to acquisitions, earnings have declined each of the past three years as a result of an increasingly competitive retail environment and, to a lesser degree, the nation's continuing economic malaise. Fiscal 1993 CPI's net sales for the 52-week period increased 5.8% to $475.5 million from $449.4 million for the 53 weeks of 1992, primarily due to expansion of the photofinishing segment, plus revenues from the Prints Plus acquisition. On a comparable 52-week basis, sales increased 7.4%. Earnings from continuing operations were $11.1 million versus the prior year's $22.6 million, while net earnings, 99 PAGE including a $2.1 million credit from an accounting change, were $13.2 million. Net earnings per share, including a $0.14 credit from the accounting change, declined to $0.90 from $1.54 in 1992. Portrait Studios sales in 1993 were down 10.0% to $237.9 million from $264.4 million, while operating earnings declined to $30.0 million from $48.4 million (1992 and prior results restated: see explanation on page 139 of this document (Management's Discussion and Analysis of Financial Condition and Results of Operation-- Operating Income)). Management believes the segment managed to maintain its leading position in the preschool portrait market, although total sittings declined slightly due to the previously mentioned competitive and economic conditions. Even with these decreases, the Portrait Studio segment still delivered 12.6% operating margin on sales. Photofinishing sales increased by 10.6%, to $187.2 million from $169.2 million, with most of the gain due to the full-year contribution of the Proex labs, which were acquired in late 1992, combined with marginal growth in the CPI and Fox Photo labs. Operating earnings declined to $7.0 million from $9.6 million (1992 and prior results restated: see explanation on page 139 of this document (Management's Discussion and Analysis of Financial condition and Results of Operation--Operating Income)), partly due to a shift in sales mix from photofinishing services to lower margin products. Sales in the Other Products and Services segment were $50.4 million, up from $15.8 million. Most of the increase was the result of sales growth in the Prints Plus acquisition, although more recently opened electronic publishing markets recorded small gains. The segment recorded operating earnings of $1.1 million, mainly due to the Prints Plus contribution, versus a 1992 loss of $4.1 million (1992 and prior results restated: see explanation on page 139 of this document (Management's Discussion and Analysis of Financial Condition and Results of Operation--Operating Income)). Financial Strength Cash and cash equivalents on February 5, 1994 stood at $66.4 million, bolstered primarily by a mid-year $60 million private note placement, compared to $21.0 million at the prior year's end. Cash disbursements in 1993 included $14.7 million in acquisitions, $30.4 million in capital expenditures, $8.2 million paid out in dividends and $0.7 million in stock repurchases. Cash reserves at year end represented 37.8% of shareholders' equity and long-term debt was 34.1%. Shareholders' Equity From $22.8 million at the end of fiscal 1982, shareholders' equity reached $175.5 million in 1993, primarily through retained earnings. Cash returned to shareholders consisted of cumulative dividends of $48.1 million since the initiation of a regular 100 PAGE quarterly payment in December 1985, and $58.6 million used to purchase Company stock since the stock repurchase plan was authorized in September 1988. Corporate Cash and Equity Compared to Cash Flow (in millions of dollars)
Cash Flow Cash+Equity Cash only Equity 1983 17 34 13 21 1984 18 45 2 43 1985 33 61 15 46 1986 33 94 30 64 1987 48 117 60 57 1988 50 137 66 71 1989 56 133 70 63 1990 53 152 88 64 1991 54 160 31 129 1992 37 172 21 151 1993 39 176 66 110
Table: At the end of fiscal 1993, the Company's equity totaled $175.5 million, and cash and cash equivalents totaled $66.4 million. Cash flow from operations in 1993 was $39.4 million (See Consolidated Statements of Cash Flows on page 151-152 of this document), or 8.3% of sales and 22.9% of beginning equity. 101 PAGE (Pictures: on this page are two pictures, one a line drawing showing a photographer using the Company's VideoVision equipment in 1982 and the second, an inset with calligraphy stating: Trust is the coin of the realm . . .) TO OUR SHAREHOLDERS Having just sent to all shareholders a comprehensive letter, the text of which is printed on page 119-121 of this report, it would be redundant to spend our time describing 1993 and 1994 operations. Instead, if you'll bear with my stepping outside of the Chairman's role, I'd like to tell you how I, as a long-term shareholder, view our company. I believe CPI's current stock price is less than the underlying values of the operating businesses, even considering their less-than-satisfactory performance of the last three years. This leads to the logical conclusion that the additional qualities of trust and confidence are not being valued-an understandable result of normal shareholder turnover. During the last four years management has drawn on a reserve of shareholder confidence that should naturally arise from clear historical perspective, but since many of our shareholders are relatively new, that reserve may need to be supplemented. Let me offer some perspective through a short review of past annual reports in light of promises made and goals achieved: Goal Setting This management has been candid in establishing goals and, from time to time, defining expected achievements. They've successfully developed a profitable chain of almost a thousand Sears Portrait Studios and a high quality national photofinishing business with strong cash flows. Their failures include the Tender Sender experiment and the venture into department store portrait studios, both discontinued because of the difficulty in working through the turbulent department store channel. Management also took a shot at the business telephone industry which never quite got off the ground. So one might say that CPI has more failures than successes unless, of course, you tally the dollar values, which are very significantly on the positive side. In such analysis, one has to think twice about the classification of Sears Carpet Cleaning, which never turned into a successful operating business, but yielded almost $6 million pre-tax profit when sold. In an operating context, management promised improvements with the introduction of the Sears Studio VideoVision System and then successfully proved that the system could increase productivity beyond expectations. VideoVision has not only served well for almost twelve years, but some of what was learned has opened new technological avenues. It was also about 1982 when management suggested that a successful photofinishing business would grow out 102 PAGE (Pictures: on this page are two pictures, one, a picture of the Company's 1986 Annual Report to Shareholders and the second, an inset with calligraphy stating: . . . and price is its valuation) of the small existing nucleus. Early expectations for profit growth were more optimistic than realized. The 20% operating profit goal was achieved in many of the older locations, but with tighter competition and recessions to deal with, operating earnings on over 450 established stores (before goodwill and intangible write-offs) have been closer to the 13-16% range. In 1983 management projected 200 operating labs by 1988, but actually reached 276, and by 1993 year end numbered 670. The Company has repeatedly called attention to the strong cash flow generated by the Photofinishing segment, explaining that the growth through acquisition and first-time installation of new retail units causes much larger reserves for depreciation and amortization than is necessary to replace and refurbish existing units. For example, the 1993 levels of depreciation and amortization are more than three times the expected maintenance capital for refurbishment and replacement, and even though 1993 was one of the most difficult in recent years, divisional results would indicate an excess of $12.7 million in net cash available. (Segment operating income plus segment depreciation and amortization, less allocated corporate overhead and appropriate income taxes, less reserve for replacement of photofinishing equipment at $10,000 a unit per year equals net cash available.) This represents over 10% of identifiable assets. Even in a good year most of us would probably be satisfied with those results. Planning for Growth As cash balances started to grow in the 1980s, many were fearful of diversionary investments. Management promised a soundly based acquisition policy following established principles and consistent with announced business philosophies. We should judge those commitments now by considering the acquisition of Fox Photo in 1991, Proex in 1992, and Prints Plus-the newest forward-looking adventure-in 1993. Looks like a pretty good record. When accumulating cash exceeded management's needs for investment, the board authorized a stock repurchase program in 1988 of 2.5 million shares which was virtually completed by 1992, and then expanded by another 2 million shares. We can criticize those repurchases in terms of today's stock pricing, but the goal was not to beat the market. Management's objective was to return excess cash to shareholders who chose to sell their holdings. In a 1986 essay, management told us that "growth should be carefully controlled in a well-defined, rational atmosphere, and managed in proportion to existing businesses and to overall size and capabilities." At the same time, they built a model on the 103 PAGE (Pictures: on this page are two pictures, one, a picture of the Company's 1988 Annual Report to Shareholders and the second, an inset stating: ". . . we might envision a return to double-digit compound growth.") premise of 20% compound growth over a five-year time frame. That model essentially maintained its integrity through 1990, but the three years ending in 1993 have followed a different pattern. Although we've analyzed that three-year period as it happened, let's look at it in hindsight. Redefining Sears Portrait Studios In 1991, as the competition was ramping up in the portrait photography business, management announced a two-phase program for assuring long-term viability of its Sears Portrait Studios. They described phase one as an aggressive market share battle until structural changes were possible. Shareholders recognized the potential costs of such activity, knowing that the question was not one of choice, but rather of execution. During that phase the Company shed its department store studios and its Wal-Mart relationship to concentrate fully on the health of Sears Portrait Studios. They told us of the valuable Sears relationship and how important it was to focus single-mindedly on the tasks at hand. Phase two is based on the fundamental concept advanced in 1988's Annual Report-that "premium margins could be achieved through premium services." We were advised during 1993 that testing was in process for the purpose of introducing a new operating mode by the end of the year. True to its promises, the Company announced full commitment to that "new mode" (phase two) in the form of specially designed systems which will allow CPI to serve its customers better. That commitment of $50 million for new technology and another $25 million for studio enhancement and enlargement represents the core of the program that will occupy most of management's attention during 1994. They are now telling us that the portrait photography segment is expected to show improvement in 1994, despite the huge costs of installation, training and additional depreciation. Coupling that with an expected rebound in the photofinishing segment and continuing growth and development of Prints Plus, management advises us to expect a 12% to 38% improvement in 1994 earnings per share from continuing operations-in spite of expected first half decreases. On that basis we might envision a return to double-digit compound growth. Dare we again expect a 20% growth rate? New Developments The answer derives from an evaluation of the way management uses its resources. An interesting example, though certainly not significant in short-term dollar returns, is the merger of two approaches to the imaging business. For the last four years CPI has 104 PAGE (Picture: on this page is an insert stating: "This is an imperfect world and not all goals have been met, but we can use history to gauge the integrity of future promises.") been developing pioneering applications in digital imaging through a partnership with Canon. The research project is now over and it's time for each to go its own way. This presents an opportunity to incorporate digital imaging techniques learned through Imageland into the copy service stores in an effort to turn these unprofitable operations into successful income producers. In 1988 and 1989, management described copy services as a venture that would not quickly pay off. We were advised that, depending on the rate of future expansion, we should not expect break-even operation until at least late 1991. Through 1993, progress has been excruciatingly slow. However, we must pay some credence to the economic disruption experienced through much of this period. It remains to be seen how successful that business might become in a healthy economic environment. Summary This catalogue of promises gleaned from previous annual reports may be viewed as a wandering discussion of various disconnected events, or as a testament to the integrity of a management that is prepared to make promises, establish principles and live within its guidelines. This is an imperfect world, and not all goals have been met, but we can use history to gauge the integrity of future promises. We are telling you now that the long-cultivated relationship with Sears will support the creation of a completely new image to portrait customers and a high-value reputation for an increasingly profitable enterprise. Our time horizon is still long-term. The new acquisitions are performing very well and will continue to offer excellent returns on capital invested. Earnings for 1994 are currently projected in a range of $0.85 to $1.05 per share. With known depreciation and amortization, cash flows would exceed $50 million for 1994. If these programs are successful, significant future growth should result. How much confidence and trust should shareholders place in these promises? Looking at historical performance, I, as a substantial shareholder and key member of the management team, set aside in each of the past two years 25% of my salary to invest in stock options. In years past, I've been happy also to invest 50% of my bonus dollars through the deferred compensation plan, but when the shareholders are not doing well we don't pay bonuses to top management-witness the past three years. I guess that's the way it ought to be, but you should be the judge. You'll find a lot of additional information in the accompanying report; we hope you find it informative and helpful. On behalf of management, I can tell you that we appreciate the support of our loyal shareholders and are dedicated to performance that engenders 105 PAGE trust and confidence translatable into enhanced shareholder value. I'm proud to be a member of both classes. Thanks for listening. April 15, 1994 Alyn V. Essman Chairman, Chief Executive Officer 106 PAGE (Pictures: on this page is a picture of a young child with the caption "CPI's major business is professional portrait photography of babies, children, adults and family groups in 992 permanent studios, which CPI operates in the U.S., Puerto Rico and Canada as Sears' exclusive portrait photography concessionaire.") SEARS PORTRAIT STUDIOS The Preschool Portrait Market The Company believes it is the largest participant in the over $1 billion portrait market of children under six years old. Although earlier U.S. Census Bureau population projections predicted a decline in the preschool population through the year 2000, recent increases in the birth rate indicate that the market over the next several years should remain strong. The Company gains access to this market through the children's mothers, who usually make the decision to purchase portraits. The typical customer is a mother under 35 years old, with one or two preschool children, and is a member of a middle-income family. Research indicates that she values photographers who are friendly and work well with children, taking the time to make sure each photograph is of high quality. CPI-Sears Relationship CPI is Sears' exclusive portrait service and its leading concessionaire, with the over 30-year relationship benefiting both companies. Throughout this long period, CPI and Sears have worked together in creating the mass portrait market, progressing from traveling photographers to permanent studios, developing pre-printed full-color portrait packages, and introducing technical innovations such as Video Vision. In recognition of its contributions and importance to Sears, CPI has received the prestigious "Partners in Progress" award from Sears for nine of the past eleven years. The trust and integrity that the Sears name confers is a powerful asset in CPI's dealings with customers. Also, using Sears' daily cash management and accounting systems offers CPI valuable control mechanisms, and the Sears and Discover credit cards, along with other national credit cards, are convenient to studio customers. Through its relationship with CPI, Sears enjoys substantial license fees and significant advertising exposure of the Sears name, with only minimal investment of its own capital and management resources. Sears provides floor space and basic services, while CPI recruits, trains and manages its own personnel, develops and executes its own advertising and marketing plans and provides all studio furniture, equipment and fixtures. In 1993, CPI spent $41.5 million, representing 17.5% of sales, in advertising the Sears name in connection with the portrait studios, primarily directed to women with young children, a highly valued customer base for Sears. CPI's marketing staff places much of the advertising under the same low media rates that Sears pays. 107 (Pictures: on this page is a picture of two of the Company's advertising coupon offers.) Recent Developments With CPI's Sears program as a model, competition in the U.S. preschool photography market started to increase dramatically in 1990. Concessionaires to other large chain retailers began converting their traveling photography operations to permanent studios, while also installing studios in new stores being opened by the retailers. The competitive proliferation continued unabated through 1993, resulting in an increase in the number of permanent directly competing studios of almost 1,700 locations, from just over 600 to about 2,300 studios. During the same 1990 through 1993 period, the number of Sears studios in the U.S. only increased from 840 to 872, including studios added in malls without a Sears store. The competitive expansion has been supported by increasingly aggressive price promotions offering more and more portraits at very low prices, with the large advertised packages decreasing the probability that a customer would purchase additional portraits, thereby significantly capping the profit potential from additional sales. These "high content/low price" promotions take little account of the customer's actual desires for service and product selection, and have resulted in reduced profit margins throughout the industry. In the face of such competition, CPI chose to respond with aggressive promotional campaigns to maintain its leading position in the preschool photography market. 1993 Operating Results Sales in the Sears Portrait Studios declined 7.3%, to $237.2 million from $255.9 million, due primarily to the increasingly competitive environment, combined with the continuing economic uncertainty. Portrait sittings were somewhat lower than the record level of 1992, and the Company's aggressive promotion and pricing in defense of its market position caused a drop in the average customer sale, lower division earnings, and a decline in operating margins to 12.3% from 18.9% (1992 and prior results restated: see explanation on page 139 of this document (Management's Discussion and Analysis of Financial Condition and Results of Operation-- Operating Income)) in the prior year. Outlook In mid-1992, CPI formed a Studio Strategic Development (SSD) Task Force and gave it the assignment of developing new strategies to allow the Sears Portrait Studios to better respond to customers' desires for quality products at a fair value, delivered in the friendliest possible environment, in order to provide a lasting competitive advantage. The SSD group, drawing on CPI's 5-year experience in digital imaging, embarked on an extensive series of marketing tests using new tools and processes to provide customers with a better, more rewarding studio experience. 108 PAGE Based on positive results of these tests, conducted throughout 1993, the Company has made the decision to install new digital imaging technology in all studios as the first phase in a 5-year upgrade program of the studios. Through 1994, CPI expects to have spent about $50 million on the project; by the end of the decade the investment including studio renovation should total $75 million, funded from the August 1993 $60 million private placement and continuing cash flow from operations. The new digital technology provides ultimate flexibility that enables the photographer to get the customer involved in the selection of her favorite poses and expressions. After the sitting she can make an immediate selection from the video screen or take home a set of full-color proofs of the selected poses. This allows the customer to exercise her own opinion and choices, clearly understand her options in a comfortable environment and to share her experiences with her friends and family. To further enhance the total portrait experience, the Company plans to significantly improve the environment by remodeling the studios, increasing their size and installing new custom fixtures and furniture. The decor will feature softer, warmer colors and dramatic lighting that highlights the new studio atmosphere. Recognizing the importance of this endeavor, Sears and CPI have entered into a new 5-year licensing agreement and are working together to coordinate the studio remodeling with Sears' previously announced $4 billion capital expenditure program in which the retailer is upgrading and remerchandising its stores. The upgraded design will also be incorporated in new studios located in five to ten new Sears stores scheduled to open in 1994, and in 25 to 30 new studios in malls without a Sears store. The division's capability will be further expanded by the installation of 50 to 60 additional camera rooms in existing studios, primarily those that are being remodeled. Although competition in the industry may very well continue at an intense level in the foreseeable future, CPI management believes that the Company's marketing innovation, supported by its financial strength, technological capability and emphasis on enhanced customer service, will enable it to endure and overcome the current difficulties. 109 PAGE Comparative Growth in Permanent Studio Locations from 1989 to 1993
K-Mart JCPenney Wal-Mart Sears Locations Locations Locations Location 1989 344 270 4 840 1990 461 350 10 867 1991 669 470 26 877 1992 1040 500 190 885 1993 1262 517 440 872
Cumulative Portrait Studio Growth-Others vs. Sears
Combined K-Mart, JCPenney Sears and Wal-Mart Locations Locations 1989 618 840 1990 821 867 1991 1165 877 1992 1730 885 1993 2219 872
Tables above: In the four years from the end of 1989 through 1993, the number of Sears Portrait Studios increased by about 5%, while the number of competitive permanent locations almost quadrupled, primarily due to the conversion of traveling photography operations to permanent studios. 110 PAGE Revenue Growth (in millions of dollars)
Dollars 1983 112 1984 127 1985 142 1986 178 1987 195 1988 219 1989 235 1990 253 1991 251 1992 256 1993 237
Operating Earnings as a percent of sales (1992 and prior results restated: see explanation on page 139 of this document (Management's Discussion and Analysis of Financial Condition and Results of Operation--Operating Income)
Percent of Sales 1983 25.3 1984 24.0 1985 26.7 1986 27.1 1987 27.7 1988 28.2 1989 26.7 1990 25.1 1991 23.1 1992 18.9 1993 12.3
The Sears Portrait Studios have recorded a long history of growth in total revenues as a result of added locations combined with increases in average sales per location. Over the past three years, however, revenues have been hampered by an increasingly competitive environment and the sluggish economy. Those negative factors, combined with management's aggressive promotional response to them, have caused operating margins to slip from the mid-to-upper 20% range to 12.3% in 1993. 111 PAGE (Pictures: on this page are four pictures showing the picture taking process with the caption "The new digital technology provides ultimate flexibility that enables the photographer to get the customer involved in the selection of her favorite poses and expressions. After the sitting, the customer can make an immediate selection from the video screen or take home a set of full-color proofs of the selected poses. 112 PAGE (Pictures: on this page is a picture collage with the caption "CPI, the nation's largest owner/operator of photofinishing minilabs, entered the business in 1982, and through a combination of new store openings and acquisitions, has expanded the operation to its present size and sales volume. The most significant acquisition, that of Fox Photo, Inc. in 1991, added over 300 locations and almost doubled the business' size. Subsequent openings and acquisitions, including Proex in 1992 and 21 Fotomat labs in 1993, brought the 1993 year-end total to 670 locations.") PHOTO FINISH The Minilab Market In 1992, the most recent full year reported by the Photo Marketing Association, total retail photofinishing sales were $5.5 billion, down from $5.7 billion in 1991. Stand-alone minilabs held an approximate 26% share, down slightly based on revised data, with 1992 revenues of $1.4 billion, a 6.2% decline from the prior year's $1.5 billion. Although 1993 totals are not yet available, PMA surveys indicate that the total industry rolls processed grew by about 2.5% in the first half of the year, suggesting a turnaround from the 3.3% decline in the 1992 full year. In the past few years, the one-hour retail photofinishing industry has become increasingly competitive as mass merchandisers, supermarkets and drug store chains have added one-hour photofinishing service. In 1992, each of these three segments recorded slight gains in share of the somewhat smaller market. Wal-Mart and Eckerd Drug have been especially active in expanding one-hour service, and Qualex, the dominant wholesale lab operator, had by year-end 1993 placed over 900 one-hour microlabs in supermarkets and mass merchant outlets throughout the nation. In the face of this increased competition, CPI is conspicuous among stand-alone minilab operators in its sustained success. In only eleven years, the business has grown from a start-up venture into a healthy, profitable segment with revenues approaching the $200 million level. The success validates CPI's vision in identifying and nurturing an emerging consumer market to which its managers could apply their proven operational skills. 1993 Operating Results The segment's revenues in 1993 increased 10.6%, to $187.2 million from $169.2 million in 1992, with the gain due to the full-year contribution of the Proex labs, which were acquired in late 1992. Operating earnings declined to $7.0 million from $9.6 million (1992 and prior results restated: see explanation on page 139 of this document (Management's Discussion and Analysis of Financial Condition and Results of Operation--Operating Income)), partly due to a shift in the sales mix from photofinishing services into lower margin products, such as film, cameras and accessories. Considering that the division absorbed non-cash expenses totaling $19.7 million 113 PAGE (Pictures: on this page are two pictures with the caption "Custom cropping and enlargements are among the popular services offered in CPI minilabs.") in 1993, the resulting cash flow continues to confirm the real value of the business, as discussed in the September 1990 analysis, "Perspectives on CPI's Investment in Minilabs." Outlook In 1993, 34 minilabs were closed when, as their leases came up for renewal, their long-term profit outlook was judged to be marginal. During the same 1993 period, 21 new labs were opened. Equipment from the closed locations was relocated to the new minilabs, minimizing the need for new capital investment and contributing to the division's continuing progress. Plans call for opening approximately 30 new minilabs in 1994, primarily in existing markets to take advantage of economies of scale in advertising and field management. With continuing consolidation in the minilab industry, the Company is also in a good position to invest in further acquisitions should the opportunities arise. Significant marketing activities in 1994 will be devoted to increasing revenues from existing customers, both through a greater share of an individual customer's rolls processed, and by the sale of more ancillary products and services to that customer. Other efforts will be directed toward gaining roll-processing market share from other competing types of photofinishers. In selected markets, tests are being conducted of a variety of new programs, each presenting a strategy believed to be appropriate to the competitive environment in a particular market. Based on positive results of a given test, other markets with similar competitive characteristics to the test market will be identified for roll-out of the successful strategy. The ultimate objective is to look at each market individually, and prepare a plan that best responds to its situation. In a further step toward developing more focused marketing, a sales promotion team established in early 1993 has produced positive test results. Media expense was reduced and sales promotion funding was added, with the net effect being improved efficiency. Additionally, there were positive effects on employee morale due to the involvement of store personnel and field staff. Based on these results, similar allocations in the media and sales promotion budgets are planned for 1994. Given these considerations, plus continuing development of the Proex operation, CPI management is confident that, in spite of the present competitive environment, the Photofinishing segment will improve its position as a significant contributor to long-term corporate earnings. 114 PAGE CPI Photofinishing Revenue Growth (in millions of dollars)
Dollars 1983 6 1984 28 1985 41 1986 51 1987 61 1988 69 1989 76 1990 82 1991 121 1992 169 1993 187
Since 1983, revenues have grown from less than $6.0 million to $187.2 million in 1993. 115 PAGE (Pictures: on this page is a picture of a Prints Plus retail store.) PRINTS PLUS CPI's strategic acquisition in May 1993 of the Prints Plus chain provides another vehicle through which the Company can offer affordable, quality products and services to consumers. Prints Plus is the leading non-franchise poster, print and framing retailer in the U.S., operating 103 locations in prime regional shopping malls throughout the country. It is a well-run company with a strong continuing management team whose operational criteria and practices parallel those of CPI. As such, the new business represents a good strategic fit with CPI's existing capabilities and provides an advantageous investment of the Company's resources. The Prints Plus business is expected to add over $50 million in annual revenues to CPI's total sales. Due to the seasonal nature of the retail industry, a majority of the sales and profits are generated in the fourth quarter surrounding the holiday season. Accordingly, it should be pointed out that the Prints Plus 1993 earnings contribution was disproportionately high due to the partial year, which did not include the early, seasonally slow period. Nevertheless, it is gratifying that the new business turned in positive results almost immediately, producing operating profits in both the third and fourth quarters. Each store offers an unparalleled selection of posters and prints that reflect current decorating trends. While Prints Plus offers products for all age groups, artistic taste among age groups and geographic regions are different. Consequently, the merchandise mix of each location is tailored to a customer profile for each area that reflects trends, artistic tastes and buying characteristics within each age group. Marketing efforts center around in-store programs strongly supported by visual displays. In providing framing service, Prints Plus holds a significant edge over most competitors located in regional malls and strip shopping centers. Prints Plus provides instant custom framing for everyday value pricing that few competitors can match. Prints Plus has invested in a new point-of-sale system which is menu-driven and simplifies the sales transaction and supports additional sales efforts. The system will also provide capabilities to relieve administrative burdens and enhance marketing efforts. With a strong, experienced Prints Plus management team in place, CPI plans to actively expand its newest business by adding approximately fifteen new locations in 1994 and a like number in subsequent years. Like the existing stores, the additions will be in prime locations within regional malls, access to which will be facilitated by the Company's ongoing contacts with mall developers through the CPI photofinishing division. The expansion will be funded by ongoing cash flow. 116 PAGE (Pictures: on this page is a picture of a person taking a color photocopy on some electronic publishing equipment.) ELECTRONIC PUBLISHING CPI entered the electronic publishing segment of the quick print industry in the second quarter of 1988 with the acquisition of a group of copy stores in California. In the past five to ten years the electronic publishing business has evolved, through new technology, from simple black-and-white photocopying into a wide range of services, including digital color copying, binding and desktop publishing. The business fits all of CPI's criteria for identifying new ventures, described in the Overview section of this report, and offers good growth potential. New locations have been added in California, and the division has been expanded under CPI's proprietary Copy USA(registered trademark) identity in other regions. 1993 Operating Results Revenues in 1993 were essentially even with the $15.8 million recorded in 1992, as growth in the division's newer markets offset the further decline in certain of the acquired California locations, whose results were hampered by that state's sustained economic problems. Profit reductions in those California locations were more than offset by a combination of improving performance in the newer markets and a significant reduction in depreciation expense. Outlook CPI's electronic publishing business may continue to experience operating losses for some time to come due to the continuing softness in the California economy. The newer locations are expected to continue their development in the coming year, with further reduction of losses as a result of continuing sales growth and increased operating efficiencies. Probing the Future of Digital Imaging In order to maintain a leadership position in all of its businesses, CPI is investing in research and development in the exploration of digital imaging technology. The Company is exploring new consumer and business services that employ digital technology to scan, modify and print diverse graphic elements in the creation of new composite graphics products. A retail location, called Imageland(trademark), is operating in Chicago as a pilot test in which staff designers assist customers in creative projects. Three distinct markets are being addressed: - --Businesses-by providing full creative service in the design and production of high quality full-color brochures, slide presentations, posters and other products that were previously too expensive or time consuming using conventional production methods. This concept is especially applicable on limited-quantity projects. 117 PAGE - --Graphics Professionals-by providing access to state-of-the-art workstations and output devices, plus technical and design assistance. - --Consumers-by scanning, modifying and combining photos, slides, drawings and text in the creation of highly personalized products, such as posters, greeting cards and t-shirts, at affordable prices. CPI is exploring other business, professional and consumer services through the Fox Imaging Center, a service bureau in Houston. The facility is also working with major manufacturers in the development of new applications of digital imaging technology. Through these and other ventures yet to be established, CPI, with its understanding of ongoing advances in technology and its network of 1,800-plus stores that are known for imaging services, will be in the forefront of meeting consumer demand. 118 PAGE (Reprinted from March 17, 1994 press release on CPI Corp. letterhead.) March 17, 1994 TO: CPI Shareholders RE: AN OVERVIEW OF 1994 As we enter 1994, we look back over three consecutive years of a pitched competitive battle in our portrait photography segment, coupled with a generally soft economy and capped off by a January fraught with natural disasters that shook up the West Coast, froze the Midwest and dumped tons of snow and ice on the East Coast. Of the three years, 1993 was the most trying, but in terms of progress for the future, was the most satisfying. We accomplished our basic objective of maintaining our market share over the three years, even though the cost in foregone profits was great. Second, and even more important, we reached a decision, based on comprehensive testing during 1993, to install new technology in all portrait studios as the first step in a program that will greatly alter, if not change completely, the mode in which we attract and serve portrait customers. During this transition, we expect to maintain our competitive posture and achieve reasonable profit performance. We believe the studio enhancement program upon which we have embarked is well-conceived and based on sound market and technical research. Not only the concept, but also the implementation has been the subject of comprehensive planning with Sears, which endorses our efforts in a number of ways: 1. They have entered into a new five-year agreement with us that further solidifies our mutual interest in the portrait studio business. 2. They have endorsed our program of studio renovation and space expansion to better serve our mutual customers. 3. They will cooperate in marketing programs to introduce new products and services and to provide consistent messages and value offerings at Sears. Our decision to commit approximately $75 million to this program was carefully considered at every level, including a rigorous examination by the company's board of directors and appropriate, objective, independent consultation. We anticipate strong returns on our investment. With that background, it's time to look at 1994. Bluntly, while we believe 1994 will be a better earnings year than 1993, it will not achieve a satisfactory level. However, we owe our loyal shareholders a better explanation than that. We fully recognize the patience and confidence we have asked of you over the last three years. We understand the discomfort that arises from uncertainty, and in consideration of your patience we will, for 119 PAGE 1994 only, outline our planning in some detail. We will not provide statistics, specific marketing plans or other information which might weaken our competitive posture, but we will give you our best estimate of results for the coming year with the caution that earnings estimates are highly uncertain in this transition phase. If we find, as the year unfolds, that our outlook has changed in any major way, we will inform you as promptly as possible. Let's first deal with the least complex issues: PHOTOFINISHING - Though we still envision a highly competitive environment, we expect some help from the cost-reduction efforts of 1993. Proex continues to perform well and there will be some reduction in the amortization of acquisition expenses. We anticipate an improvement in segment operating earnings and a continuation of very strong cash flows. OTHER PRODUCTS AND SERVICES - Prints Plus will be included in the operating results for the full year. Though we expect earnings growth, the results will be muted by seasonal losses expected in the early, non-comparable months. We expect some improvement in Copy Services, but the net result will be continued losses in 1994. So for the segment, management expects earnings to decrease in the first half, but to increase for the year as a whole. CORPORATE EXPENSE should be relatively consistent except for the inevitable increase in health care in the 6% range and an increase in net interest expense of approximately $1.5 million resulting from 1993's mid-year note placement. PORTRAIT STUDIOS - The major uncertainty in 1994's earnings outlook relates to the massive changes-in-progress in our core portrait photography segment. On the one hand, we have the benefit of our new long-term contractual relationship with Sears and Sears' endorsement of the changes we are making. The costs of installation, training, and initial depreciation of the new equipment will, however, all affect the first half disproportionately. Though we expect positive results to follow the installation, most of those advantages will occur in the second half of the year and relate primarily to the marketing of the benefits emanating from the technology. Given the considerations addressed above, we expect a significant reduction in portrait studio earnings for the first two quarters and a turnaround in the second half, leading to an increase for the year which is totally dependent on the second half earnings increase. Should these plans materialize as expected, we anticipate achieving continuing earnings improvement for future years. It's important to recognize that the substantial capital 120 PAGE investment will increase the proportion of fixed costs for at least the next five years, thereby tightening profit margins during the seasonally slower first half of each year. But it is also important to realize that the cash flow emanating from future earnings will be much greater than in the past due to the increased depreciation charges. Based on the foregoing discussion, our current 1994 estimate is earnings per share in the $0.85 to $1.05 range. Achieving the midpoint projection would produce approximately $14 million of net income, which, when combined with known depreciation and amortization, yields $54 million in gross cash flow after taxes. We expect capital expenditures to approximate $60 million, primarily a result of the major investment in the studios, and as we know of no extraordinary working capital changes, 1994 fiscal year end cash would be projected at approximately $50 million prior to any share repurchase. Shareholders must remain aware that these projected earnings are subject to the uncertainties of estimating in a year of rapid change and cannot be gauged until the company experiences its peak sales period in November and December. With these thoughts in mind, we should focus our attention on cash management. Our company is very strong and we are confident of the wisdom and effectiveness of the path we have chosen. Management has demonstrated their confidence for the second consecutive year by significant participation in the salary reduction stock option plan. Our responsibility is to manage CPI's resources in such a way as to reward loyal shareholders and managers through stock performance. We believe the current valuation of the stock by the market presents an attractive opportunity for the company to increase shareholder value through share repurchases. We therefore have decided to mount a consistent and continuing repurchase program as long as loan covenants and cash resources permit and the stock price justifies purchase. We believe this is an effective way to contribute to long-term shareholder returns. We hope you will find this information helpful and constructive. Thanks for your time and your support. Sincerely, Alyn V. Essman Chairman, Chief Executive Officer 121 INDEX-FINANCIAL REVIEW Index-Financial Review
Page(s) Financial Background and Trends 123-134 Management's Discussion and Analysis of Financial Condition and Results of Operations 135-144 Consolidated Balance Sheets 145-146 Consolidated Statements of Earnings 147 Consolidated Statement of Changes in Stockholders' Equity 148-150 Consolidated Statements of Cash Flows 151-152 Notes to Consolidated Financial Statements 153-173 Selected Quarterly Financial Data and Stock Price and Volume 174 Independent Auditors' Report 178 Company Directors and Officers 179 Investor Information 180
122 PAGE FINANCIAL BACKGROUND AND TRENDS In the planning, execution and evaluation of its long-term strategies to maximize shareholder value, CPI management focuses on: - --the cash flow generated internally; - --the reinvestment of that cash in existing and new businesses; - --the achievement of a rate of return on the assets and equity employed in comfortable excess of the cost of capital; - --maintenance of significant cash balances, which both reduces financial risk and affords a high level of flexibility. In order to provide an overview of the Company's performance, this analysis examines (1) the rates at which sales, assets and equity have grown, and (2) the rates of return earned on those earnings sources. The objective herein is to provide shareholders with the same perspective used by management in its planning and also used by various analysts in their evaluations. The commentary should be read in connection with the table on pages 127-134, from which the data discussed is derived. 10 Year Overview The decade 1984-1993 reflects management's assessment and testing of new businesses; the investment of ample cash flow in the expansion of those which looked promising; and management's resolve to offset competition, protecting and strengthening its market franchise by the persistent upgrading of products or services. The period's financial results are summarized in Table I. Table I--Selected Financial Results From 1984-1993
1984-1993 Growth Rate Net Earnings*** Sales 13.7% 7.2% Total Assets 17.8 15.1 Total Equity 17.7 23.4 Employed Assets* 17.9 20.3 Employed Equity** 17.9 38.3 * Total assets less cash and cash equivalents ** Total equity less cash and cash equivalents *** Excluding $2.1 million credit from accounting change in 1993.
123 PAGE Sales compounded at 13.7% annually to $475.5 million from $131.2 million, while other earnings sources gained at a compound rate of almost 18%. Changing Competitive Framework Since dramatic changes in the competitive framework occurred in 1990, the further evaluation of the decade's performance is in two parts. The financial data and analyses show the period 1984-1990 to have been one of rapid and profitable growth in the face of normal competition, while the years 1991-1993 mark the advent of explosive growth in portrait studio competition and the Company's actions to counteract it, while continuing to fund development projects, undertake acquisitions, expand the Photofinishing segment and repurchase stock. 1984-1990--Profitable Growth The 1984-1990 period was one of high earnings and cash flow growth, driven by vigorous and sustained expansion of Sears Portrait Studios and by the launch and rapid development of the Photofinishing segment. Earnings sources multiplied during the seven-year span, with sales expanding at a 16.1% compound annual rate to $373.9 million. Total assets and equity rose somewhat more quickly to $218.7 million and $151.7 million, respectively. Table II--Selected Financial Results From 1984-1990
Growth Average Return 1984-90 Rate Net Earnings Sales 16.1% 8.2% Total Assets 20.5 17.8 Total Equity 23.7 27.9 Employed Assets* 16.0 23.7 Employed Equity** 17.1 45.1 * Total assets less cash and cash equivalents ** Total equity less cash and cash equivalents
As shown in Table II above, the average rates of return on the earnings sources-8.2% on sales, 17.8% on assets and 27.9% on equity-were well above the 10-year averages. Average return on employed assets was 23.7%, and 45.1% on employed equity. 124 PAGE Net earnings per share also increased at an 18% compound rate to $2.19 from $0.69. The cash dividend, initiated in 1985, was raised to $0.50 from $0.05, reflecting an increase in the payout ratio to 23%. For the entire period, total operating cash flow accumulated to $290.6 million, funding $113.2 million in replacement capital expenditures, $58.9 million in acquisitions, $23.3 million in cash dividends and $43.8 million in stock repurchases and adding $75.1 million to cash balances-all accomplished with virtually no long-term debt. Three Years of Transition The 1991-1993 period has been one of adjustment and transition, characterized by declining margins in the core portrait business because of defensive and offensive tactics to offset competition, and general economic weakness. Although the period was difficult, earnings sources continued to increase, albeit at reduced rates. Sales gained at 8.3% to $475.5 million, largely due to acquisitions. Total assets rose at 11.8% to $305.8 million and equity at a more modest 5.0% to $175.5 million. See Table III below. Table III-Selected Financial Results From 1991-1993
Growth Average Return 1991-93 Rate Net Earnings*** Sales 8.3% 4.6% Total Assets 11.8 8.9 Total Equity 5.0 12.8 Employed Assets* 22.4 12.3 Employed Equity** 19.8 22.6 * Total assets less cash and cash equivalents ** Total equity less cash and cash equivalents ***Excluding $2.1 million credit from accounting change in 1993.
Employed assets expanded at 22.4% and returned on average 12.3%, while employed equity gained at 19.8% and produced a 22.6% average return. The uniformly adverse trend in rates of return was reflected in net earnings, which declined to $11.1 million (excluding a $2.1 million credit from an accounting change in 1993), or $0.76 per share, from the 1990 high of $33.6 million, or $2.19 per share. The cash dividend was increased to $0.56 from $0.50 per share. 125 PAGE Even in this troublesome three-year period, cumulative operating cash flow was $130.2 million. Combining that with $60 million from privately placed notes, the Company financed $108.9 million in acquisitions, $24.8 million in cash dividends, and $14.7 million in stock repurchases, leaving a comfortable $66.4 million in cash and equivalents and a modest debt ratio of 34.1%. Although other operating intelligence can be gleaned from the tables on pages 127-134, the summary analysis provided here shows that even in a most difficult period, such as the past three years, the Company has been able to achieve highly acceptable operating results. 126 PAGE Selected Financial Data From 1993-1991
1993 1992 1991 Per Share: Sales $ 32.42 $ 30.62 $ 27.44 Assets 20.92 16.25 16.25 Equity 12.01 11.75 10.90 Earnings 0.90 1.54 1.80 Dividends 0.56 0.56 0.56 Prices: high 20.75 26.38 34.75 low 13.88 15.00 21.88 P/E range: high 23.06 17.13 19.31 low 15.42 9.74 12.15 Dividend yield 3.23% 2.71% 1.98% Income Data (million $): Net sales $475.5 $449.4 $414.5 Income from operations 18.8 34.8 39.2 Net interest & other income(expense) (0.3) 1.7 4.1 Pre-tax earnings 18.5 36.5 43.3 Income taxes 7.4 13.9 16.2 Accounting change 2.1 - - Net earnings from continuing operations 13.2 22.6 27.1 Avg. shares outstanding (in million shares) 14.7 14.7 15.1 Balance Sheet (million $): Current assets $127.8 $ 73.2 $ 83.6 Cash and equivalents 66.4 21.0 31.2 Net fixed assets 114.3 97.6 97.7 Total assets 305.8 237.8 238.9 Employed assets 239.4 216.8 207.7 Current liabilities 65.2 56.8 67.0 Long-term debt 59.8 0.3 0.6 Stockholders' equity 175.5 171.9 160.3 Employed equity 109.2 151.0 129.0
127 PAGE Selected Financial Data From 1993-1991
1993 1992 1991 Funds Flow Data (million $): From operations $ 39.4 $ 36.9 $ 53.9 Used for investments (45.1) (36.9) (92.2) From (used for) financing 51.1 (10.2) (18.7) Change in cash & cash equivalents 45.4 (10.2) (57.0) Capital expenditures* (excluding acquisitions) 30.4 13.3 22.3 Acquisitions 14.7 23.9 70.2 OCECE** 9.0 23.6 31.6 Ratio Analysis: Net margin (1) 2.8 5.0 6.5 Asset turnover (2)*** 2.00x 1.88x 1.90x Return on assets (3)*** 5.56% 9.46% 12.35% Financial leverage (4)*** 1.38x 1.49x 1.44x Return on equity (5)*** 7.67% 14.10% 17.78% Retention rate (6) .381 .637 .689 Implied growth rate (7) 2.92% 8.98% 12.25% OCECE Ratios (8): % of revenues 1.90% 5.25% 7.63% % of assets*** 3.80% 9.87% 14.46% % of equity *** 5.25% 14.72% 20.85% % of employed assets (9) 4.16% 11.36% 24.25% % of employed equity (10) 5.98% 18.28% 49.87% * To maintain capacity ** Operating cash in excess of capital expenditures *** Beginning fiscal year (1) Net margin: Net earnings/net sales (2) Asset turnover: Net sales/total assets (beginning) (3) Return on assets: Net margin x asset turnover (4) Financial leverage: Total assets (beginning)/stockholders' equity (beginning) (5) Return on equity: Return on assets x financial leverage (6) Retention rate: Net earnings less dividends on common stock (1993-1985)/net earnings (7) Implied growth rate: Return on equity x retention rate (8) OCECE: Operating cash in excess of capital expenditures (9) Employed assets: Total assets less cash and cash equivalents (10) Employed equity: Stockholders' equity less cash and cash equivalents
128 PAGE Selected Financial Data From 1990-1988
1990 1989 1988 Per Share: Sales $ 24.31 $ 22.33 $ 19.02 Assets 14.48 12.74 12.03 Equity 10.04 8.63 8.34 Earnings 2.19 1.97 1.91 Dividends 0.50 0.42 0.25 Prices: high 32.88 33.88 22.25 low 24.25 21.00 17.25 P/E range: high 15.01 18.51 12.29 low 11.07 11.48 9.53 Dividend yield 1.75% 1.53% 1.27% Income Data (million $): Net sales $373.9 $350.5 $318.1 Income from operations 47.0 42.7 47.0 Net interest & other income(expense) 6.5 5.6 5.7 Pre-tax earnings 53.5 48.3 52.7 Income taxes 19.9 17.4 20.8 Accounting change - - - Net earnings from continuing operations 33.6 30.9 31.9 Avg. shares outstanding (in million shares) 15.4 15.7 16.7 Balance Sheet (million $): Current assets $130.2 $106.4 $104.5 Cash and equivalents 88.3 70.0 65.5 Net fixed assets 80.7 81.4 78.0 Total assets 218.7 196.5 197.0 Employed assets 130.4 126.5 131.5 Current liabilities 51.4 47.8 47.3 Long-term debt 0.5 0.3 0.5 Stockholders' equity 151.7 133.1 136.6 Employed equity 63.4 63.1 71.1
129 PAGE Selected Financial Data From 1990-1988
1990 1989 1988 Funds Flow Data (million $): From operations $ 53.3 $ 55.9 $ 50.1 Used for investments (19.7) (19.3) (34.4) From (used for) financing (15.3) (32.1) (9.7) Change in cash & cash equivalents 18.3 4.5 6.0 Capital expenditures* (excluding acquisitions) 18.1 21.1 19.3 Acquisitions 1.2 0.8 11.0 OCECE** 35.2 34.8 30.8 Ratio Analysis: Net margin (1) 9.0 8.8 10.0 Asset turnover (2)*** 1.90x 1.78x 1.89x Return on assets (3)*** 17.10% 15.66% 18.90% Financial leverage (4)*** 1.48x 1.44x 1.44x Return on equity (5)*** 25.31% 22.55% 27.22% Retention rate (6) .773 .771 .863 Implied growth rate (7) 19.57% 17.39% 23.52% OCECE Ratios (8): % of revenues 9.42% 9.92% 9.71% % of assets*** 17.93% 17.64% 18.31% % of equity *** 26.46% 25.45% 26.45% % of employed assets (9) 27.84% 26.43% 28.30% % of employed equity (10) 55.80% 48.92% 54.01% * To maintain capacity ** Operating cash in excess of capital expenditures *** Beginning fiscal year (1) Net margin: Net earnings/net sales (2) Asset turnover: Net sales/total assets (beginning) (3) Return on assets: Net margin x asset turnover (4) Financial leverage: Total assets (beginning)/stockholders' equity (beginning) (5) Return on equity: Return on assets x financial leverage (6) Retention rate: Net earnings less dividends on common stock (1993-1985)/net earnings (7) Implied growth rate: Return on equity x retention rate (8) OCECE: Operating cash in excess of capital expenditures (9) Employed assets: Total assets less cash and cash equivalents (10) Employed equity: Stockholders' equity less cash and cash equivalents
130 PAGE Selected Financial Data From 1987-1985
1987 1986 1985 Per Share: Sales $ 16.92 $ 15.50 $ 12.85 Assets 10.14 8.45 6.47 Equity 7.02 5.69 4.01 Earnings 1.54 1.18 0.90 Dividends 0.165 0.085 0.050 Prices: high 27.75 21.88 12.75 low 12.75 11.88 7.88 P/E range: high 19.01 19.71 14.17 low 8.73 10.70 8.76 Dividend yield 0.81% 0.50% 0.48% Income Data (million $): Net sales $283.2 $254.4 $198.3 Income from operations 43.0 38.3 26.7 Net interest & other income(expense) 3.2 1.0 0.2 Pre-tax earnings 46.2 39.3 26.9 Income taxes 20.4 19.9 13.0 Accounting change - - - Net earnings from continuing operations 25.8 19.4 13.9 Avg. shares outstanding (in million shares) 16.7 16.4 15.4 Balance Sheet (million $): Current assets $ 90.5 $ 60.2 $ 36.6 Cash and equivalents 59.6 29.5 14.7 Net fixed assets 68.8 68.0 55.6 Total assets 168.7 139.3 98.7 Employed assets 109.1 109.7 84.1 Current liabilities 39.9 36.1 30.5 Long-term debt 0.2 0.4 0.4 Stockholders' equity 116.7 93.8 61.2 Employed equity 57.2 64.2 46.5
131 PAGE Selected Financial Data From 1987-1985
1987 1986 1985 Funds Flow Data (million $): From operations $ 47.5 $ 32.8 $ 33.1 Used for investments (16.8) (30.6) (13.8) From (used for) financing (0.7) 12.7 (6.6) Change in cash & cash equivalents 30.0 14.9 12.7 Capital expenditures* (excluding acquisitions) 13.6 16.4 9.8 Acquisitions 3.2 15.5 3.9 OCECE** 33.9 16.4 23.3 Ratio Analysis: Net margin (1) 9.1 7.6 7.0 Asset turnover (2)*** 2.03x 2.58x 2.46x Return on assets (3)*** 18.47% 19.61% 17.22% Financial leverage (4)*** 1.49x 1.61x 1.81x Return on equity (5)*** 27.52% 31.57% 31.17% Retention rate (6) .888 .924 .945 Implied growth rate (7) 24.44% 29.17% 29.46% OCECE Ratios (8): % of revenues 12.00% 6.46% 11.74% % of assets*** 24.39% 16.64% 28.91% % of equity *** 36.22% 26.86% 52.25% % of employed assets (9) 30.96% 19.54% 29.64% % of employed equity (10) 52.55% 35.33% 54.68% * To maintain capacity ** Operating cash in excess of capital expenditures *** Beginning fiscal year (1) Net margin: Net earnings/net sales (2) Asset turnover: Net sales/total assets (beginning) (3) Return on assets: Net margin x asset turnover (4) Financial leverage: Total assets (beginning)/stockholders' equity (beginning) (5) Return on equity: Return on assets x financial leverage (6) Retention rate: Net earnings less dividends on common stock (1993-1985)/net earnings (7) Implied growth rate: Return on equity x retention rate (8) OCECE: Operating cash in excess of capital expenditures (9) Employed assets: Total assets less cash and cash equivalents (10) Employed equity: Stockholders' equity less cash and cash equivalents
132 PAGE Selected Financial Data From 1984-1983
1984 1983 Per Share: Sales $ 10.98 $ 8.53 Assets 5.33 3.96 Equity 2.95 2.28 Earnings 0.67 0.69 Dividends - - Prices: high 11.88 17.12 low 7.06 10.50 P/E range: high 17.73 24.81 low 10.54 15.22 Dividend yield - - Income Data (million $): Net sales $168.9 $131.2 Income from operations 19.1 18.4 Net interest & other income(expense) (0.7) 0.8 Pre-tax earnings 18.4 19.2 Income taxes 8.1 8.6 Accounting change - - Net earnings from continuing operations 10.3 10.6 Avg. shares outstanding (in million shares) 15.4 15.4 Balance Sheet (million $): Current assets $ 21.5 $ 29.7 Cash and equivalents 2.0 13.2 Net fixed assets 51.9 28.2 Total assets 80.5 59.4 Employed assets 78.5 46.2 Current liabilities 31.1 22.5 Long-term debt 0.7 0.1 Stockholders' equity 44.6 34.3 Employed equity 42.6 21.0
133 PAGE Selected Financial Data From 1984-1983
1984 1983 Funds Flow Data (million $): From operations $ 17.9 $ 16.7 Used for investments (37.1) (17.4) From (used for) financing 7.9 0.4 Change in cash & cash equivalents (11.3) (0.3) Capital expenditures* (excluding acquisitions) 14.9 14.5 Acquisitions 23.2 1.7 OCECE** 3.0 2.2 Ratio Analysis: Net margin (1) 6.1 8.1 Asset turnover (2)*** 2.84x 3.09x Return on assets (3)*** 17.32% 25.03% Financial leverage (4)*** 1.73x 1.86x Return on equity (5)*** 29.96% 46.56% Retention rate (6) 1.00 1.00 Implied growth rate (7) 29.96% 46.56% OCECE Ratios (8): % of revenues 1.76% 1.66% % of assets*** 5.00% 5.11% % of equity *** 8.67% 9.51% % of employed assets (9) 6.43% 7.50% % of employed equity (10) 14.12% 23.31% * To maintain capacity ** Operating cash in excess of capital expenditures *** Beginning fiscal year (1) Net margin: Net earnings/net sales (2) Asset turnover: Net sales/total assets (beginning) (3) Return on assets: Net margin x asset turnover (4) Financial leverage: Total assets (beginning)/stockholders' equity (beginning) (5) Return on equity: Return on assets x financial leverage (6) Retention rate: Net earnings less dividends on common stock (1993-1985)/net earnings (7) Implied growth rate: Return on equity x retention rate (8) OCECE: Operating cash in excess of capital expenditures (9) Employed assets: Total assets less cash and cash equivalents (10) Employed equity: Stockholders' equity less cash and cash equivalents
134 PAGE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's three business segments are Portrait Studios, Photofinishing and Other Products and Services. The Other Products and Services segment consists of the newly acquired wall decor operation and the electronic publishing operation. To establish a framework for discussion, financial data has been selected which summarizes the Company's operating results for fiscal years 1993, 1992 and 1991. The 1992 fiscal year ended February 6, 1993 included a 53 week period, whereas fiscal years 1993 and 1991, ended February 5, 1994 and February 1, 1992, respectively, covered 52 week periods. 135 PAGE Selected Financial Data 1993 Versus 1992 (In thousands except per share amounts)
FY '93 Amount Percent FY '92 52 weeks Change Change 53 weeks Net sales: Portrait Studios $237,937 $(26,421) (10.0)% $264,358 Photofinishing 187,210 18,014 10.6 169,196 Other Products and Services 50,373 34,547 218.3 15,826 --------- --------- ------- --------- Total net sales $475,520 $ 26,140 5.8% $449,380 ========= ========= ======= ========= Operating earnings: Portrait Studios $ 29,970 $(18,471) (38.1)% $ 48,441 Photofinishing 6,972 (2,637) (27.4) 9,609 Other Products and Services 1,142 5,275 127.6 (4,133) --------- --------- ------- --------- Total operating earnings 38,084 (15,833) (29.4) 53,917 General corporate expenses 19,299 217 1.1 19,082 --------- --------- ------- --------- Income from operations 18,785 (16,050) (46.1) 34,835 Net interest income (expense) (789) (1,803) (177.9) 1,014 Other income 524 (150) (22.2) 674 --------- --------- ------- --------- Earnings before income taxes and cumulative effect of accounting change 18,520 (18,003) (49.3) 36,523 Income tax expense 7,404 (6,504) (46.8) 13,908 --------- --------- ------- --------- Earnings before cumulative effect of accounting change $ 11,116 $(11,499) (50.8)% $ 22,615 Cumulative effect of accounting change 2,120 2,120 100.0 - --------- --------- ------- --------- Net earnings $ 13,236 $ (9,379) (41.5)% $ 22,615 ========= ========= ======= ========= Earnings per common share: Earnings before cumulative effect of accounting change $ 0.76 $ (0.78) (50.6)% $ 1.54 Cumulative effect of accounting change 0.14 0.14 100.0 - --------- --------- ------- --------- Net earnings $ 0.90 $ (0.64) (41.6)% $ 1.54 ========= ========= ======= ========= Weighted average number of common and common equivalent shares outstanding 14,666 (10) (0.1)% 14,676 ========= ========= ======= ========= Dividends per share $ 0.56 $ - - $ 0.56 ========= ========= ======= =========
136 PAGE Selected Financial Data 1992 Versus 1991 (In thousands except per share amounts)
FY '92 Amount Percent FY '91 53 weeks Change Change 52 weeks Net sales: Portrait Studios $264,358 $(14,647) (5.2)% $279,005 Photofinishing 169,196 47,818 39.4 121,378 Other Products and Services 15,826 1,690 12.0 14,136 --------- --------- ------- --------- Total net sales $449,380 $ 34,861 8.4% $414,519 ========= ========= ======= ========= Operating earnings: Portrait Studios $ 48,441 $ (8,502) (14.9)% $ 56,943 Photofinishing 9,609 1,942 25.3 7,667 Other Products and Services (4,133) 615 13.0 (4,748) --------- --------- ------- --------- Total operating earnings 53,917 (5,945) (9.9) 59,862 General corporate expenses 19,082 (1,608) (7.8) 20,690 --------- --------- ------- --------- Income from operations 34,835 (4,337) (11.1) 39,172 Net interest income (expense) 1,014 (2,409) (70.4) 3,423 Other income 674 (6) (0.9) 680 --------- --------- ------- --------- Earnings before income taxes and cumulative effect of accounting change 36,523 (6,752) (15.6) 43,275 Income tax expense 13,908 (2,232) (13.8) 16,140 --------- --------- ------- --------- Earnings before cumulative effect of accounting change $ 22,615 $ (4,520) (16.7)% $ 27,135 Cumulative effect of accounting change - - - - --------- --------- ------- --------- Net earnings $ 22,615 $ (4,520) (16.7)% $ 27,135 ========= ========= ======= ========= Earnings per common share: Earnings before cumulative effect of accounting change $ 1.54 $ (0.26) (14.4)% $ 1.80 Cumulative effect of accounting change - - - - --------- --------- ------- --------- Net earnings $ 1.54 $ (0.26) (14.4)% $ 1.80 ========= ========= ======= ========= Weighted average number of common and common equivalent shares outstanding 14,676 (431) (2.9)% 15,107 ========= ========= ======= ========= Dividends per share $ 0.56 $ - - $ 0.56 ========= ========= ======= =========
137 PAGE Significant events that affected operating results in the last two fiscal years are described as follows: Prints Plus Acquisition On May 30, 1993, the Company acquired Prints Plus, a wall decor chain, from Melville Corporation for approximately $14.7 million. The acquisition included 102 stores, located in malls throughout the United States, operating a prints, posters and framing business with annual sales in excess of $40.0 million. In addition, the Company entered into a non-compete agreement with Melville Corporation for cash consideration aggregating approximately $1.0 million. The acquisition was recorded using the purchase method of accounting and, accordingly, the results of operations have been included in the Company's consolidated financial statements effective May 30, 1993. Proex Acquisition On December 1, 1992, the Company purchased the operational assets of Pemtom, Inc., a Minneapolis-based company operating under the name Proex, for cash consideration amounting to approximately $19.0 million. The fair value in excess of the net assets acquired was approximately $6.7 million, which is being amortized on a straight-line basis over a forty-year period. Under separate agreements, the company secured the services of the seven-member Pemtom management team for an aggregate amount of $4.8 million. The acquired company now operates 19 portrait studios and 28 photo-finishing locations, which together had annual sales of $22.3 million in fiscal year 1993. The acquisition was recorded as a purchase and, accordingly, the results of operations have been included in the Company's consolidated financial statements effective December 1, 1992. Results of Operations Revenues Sales were $475.5 million in fiscal 1993, a 5.8% increase over 1992. The increase is mainly due to the added sales from the newly acquired Prints Plus and Proex operations, partially offset by one less week of sales in 1993 and by a decline in Portrait Studio sales caused by lower comparable sales in the Sears Portrait Studios operation and the absence of sales from the Wal-Mart traveling studio business and Portraits of Distinction Studios. Sales in 1992 increased 8.4% to $449.4 million from $414.5 million in 1991. Photofinishing expansion, including the acquisition of Fox Photo and Proex, accounted for a major portion of the sales increase. During fiscal year 1992, the Company withdrew from the Wal-Mart traveling studio business and the Portraits of Distinction studios. Combined sales from these businesses amounted to $7.3 million and $26.8 million in fiscal years 1992 and 1991, respectively. 138 PAGE Sears Portrait Studios sales were $237.3 million, $255.9 million and $251.0 million for fiscal years 1993, 1992 and 1991, respectively, declining 7.3% in 1993 after increasing 2.0% in 1992. Eliminating the effect of the 53-week year in 1992, Sears Portrait Studio sales, on a comparable 52-week basis, declined 5.9% in 1993 after being virtually level in 1992 with the prior year. In the last three fiscal years, the Company has experienced increasing competition from others who have continued to add permanent studio locations. In an effort to maintain market share, the Company has used price promotions more aggressively during the last two fiscal years, resulting in lower customer averages. Additionally, the Company closed 42 portrait studios during the year, the majority as a result of Sears planned store closing program announced early in 1993. During the 1993 fiscal year, the Company opened 33 portrait studios, 29 of which are not in Sears stores. Photofinishing sales in 1993 rose 10.6% to $187.2 million from $169.2 million in 1992, following a 39.4% gain from $121.4 million in 1991. Photofinishing includes the sales and operating results of CPI Photo Finish, Fox Photo from August 18, 1991 and Proex from December 1, 1992, the effective dates of these acquisitions. These acquisitions during this two-year period accounted for most of the sales increases. Stores in operation experienced a net increase of 12 and 19 locations in 1993 and 1992, respectively, bringing the total locations in operation to 670, 658 and 639 at the end of 1993, 1992 and 1991, respectively. Other Products and Services includes the electronic publishing business operating under two trade names, Copy Mat and Copy USA, and the newly acquired wall decor business operating under the names Prints Plus and Prints and Posters. Sales increased more than 200% in 1993 to $50.4 million from $15.8 million due to the acquired wall decor operation in 1993. Sales increased 12.0% in 1992 due to the maturing of the electronic publishing locations opened in the last three years. Operating Income Segment operating earnings for prior years have been restated to conform with the current year's presentation. Certain employee benefit costs, which in prior years were recorded as part of corporate expense, have now been reclassified to the operating segments to better reflect the operating contribution of the segments. Income from operations declined 46.1% in 1993 to $18.8 million from $34.8 million in 1992 primarily due to a 38.1% reduction in Portrait Studio operating earnings. Additionally, Photofinishing experienced a 27.4% decline in operating earnings, primarily due to lower gross profit margins. Other Products and Services operating earnings increased substantially, primarily due to the contribution to operating earnings from the acquired wall decor operation. Corporate expense increased due to a $1.4 million expense for severance and early retirement benefits under a voluntary early retirement program, which were offset by the 139 PAGE Company's previously announced cost cutting program. In 1992, income from operations declined 11.1% resulting from a decline in Sears Portrait Studio operating income, which was partially offset by higher Photofinishing operating income and reduced losses in the electronic publishing business. Sears Portrait Studios operating margins expressed as a percent of sales were 12.3%, 18.9% and 23.1% for fiscal years 1993, 1992 and 1991, respectively, declining sharply in each of the last two fiscal years. After a slight sales increase in 1992, a 53-week year, Sears Portrait Studios experienced a 7.3% sales decline in 1993 or a 5.9% sales decline on a comparable 52-week year basis. In an effort to maintain market share, the Company has aggressively priced products. Coupled with increased content in advertised promotions, this pricing has led to a deterioration of profit margins. Additionally, operating earnings were penalized by the extensive testing of products, services and pricing in an effort to better understand customer needs. The Company should begin to see the benefit of this testing as new marketing concepts are introduced and the new freeze-frame digital imaging systems are installed in the portrait studios. Our testing indicates customers' response to these changes will have a positive effect both in terms of customer satisfaction and increased sales. Photofinishing operating earnings declined 27.4% in 1993 to $7.0 million from $9.6 million in 1992, after increasing 25.3% from $7.7 million in 1991. Operating earnings declined in 1993 primarily due to lower gross profit margins resulting from an unfavorable sales mix, as sales of high margin products declined while sales of low margin products increased. Generally, the sales of value added products and services, such as photographic prints and processing, have high margins, whereas sales of film, accessories and ancillary products carry lower profit margins. Competitive pricing reduced the sales of value added products and services, reducing profit margins. Profit margins were further reduced by increased sales and related costs of low profit margin products. Operating earnings in 1992 increased 25.3% primarily due to the full year inclusion of Fox Photo. Other Products and Services improved operating earnings reflect the inclusion of the newly acquired wall decor business in operating results. The electronic publishing business also showed improvement in operating performance as operating losses were reduced in both 1993 and 1992. In the wall decor operation, a majority of the sales and profits are generated in the fourth quarter surrounding the holiday season. Accordingly, the operating earnings for the wall decor operation were disproportionately high due to the partial year, which did not include the early, seasonally slow period. Net Earnings Net earnings declined 41.5% to $13.2 million in 1993 and 16.7% to $22.6 million in 1992 from $27.1 million in 1991. Included in net 140 PAGE earnings in 1993 is a $2.1 million benefit from the cumulative effect of a change in accounting principles discussed below under Income Taxes. Before the benefit, net earnings declined 50.8% to $11.1 million. The decline in net earnings in each of the last two fiscal years resulted from lower operating earnings coupled with interest expense in 1993 and reduced interest income in 1992, and a higher effective income tax rate in each of the last two fiscal years. The decline in interest income and the subsequent increase in interest expense resulted from the Company's recent acquisitions of Fox Photo, Proex and Prints Plus. Additionally, the Company entered into a $60.0 million long-term debt agreement in 1993 which has substantially increased borrowing costs. Earnings per share before the change in accounting decreased 50.6% in 1993 to $0.76 from $1.54 in 1992, following a 14.4% decrease from $1.80 in 1991. After the cumulative effect of the change in accounting principles, net earnings decreased 41.6% to $0.90 in 1993. Income Taxes The effective income tax rate was 40.0% in 1993 compared to 38.1% in 1992 and 37.3% in 1991. The increase in the 1993 effective income tax rate resulted primarily from an increase in nondeductible amortization expense related to the intangible assets resulting from acquisitions, the Omnibus Budget Reconciliation Act of 1993 and reduced tax credits from the restoration of the Company's corporate headquarters. Current year earnings include a $2.1 million cumulative benefit from a change in accounting principles. The accounting change, recorded in the first quarter of 1993, resulted from adoption of the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," on a prospective basis. In adopting SFAS No. 109, the Company has changed its method of accounting for income taxes from the deferred method to the asset and liability method. Liquidity and Capital Resources On August 31, 1993, the Company entered into an agreement with two insurance companies for the private placement of senior notes in the amount of $60.0 million (the Note Agreement). The notes, issued pursuant to the Note Agreement, mature over a seven-year period with an average maturity of 5.42 years and with the first principal payment due at the end of the third year. Interest on the notes is payable semi-annually at an average effective rate of 6.44%. The Note Agreement requires the Company to maintain certain financial ratios and to comply with certain restrictive covenants. The Company incurred approximately $0.5 million in costs related to the notes, which will be amortized proportionately over the seven-year term of the notes. Concurrently, the Company negotiated to reduce its available line of credit with a local bank from $40.0 million to $25.0 million. A portion of the proceeds from the notes was used to pay off the outstanding balance of the Company's line of credit. 141 PAGE The remaining proceeds will be used to fund the Company's planned capital expenditure program in 1994 and for other corporate purposes. Included in the capital expenditure program is the continuation of the long-range program involving the application of digital imaging technology to products and services in the Sears Portrait Studios. Total assets were $305.8 million, $237.8 million and $238.9 million for 1993, 1992 and 1991, respectively. Cash and cash equivalents increased in 1993 due to the cash received on the $60.0 million Senior Notes, after declining in 1992 and 1991 as a result of the acquisition of Fox Photo and Proex. Cash and cash equivalents amounted to $66.4 million, $21.0 million and $31.2 million, representing 21.7%, 8.8% and 13.1% of total assets at the end of 1993, 1992 and 1991, respectively. Working capital increased to $62.6 million in 1993 from $16.3 million in 1992. The table below shows assets by line of business. Corporate assets consist primarily of the Company's headquarters and surrounding property, cash and marketable securities. Identifiable Assets (dollars in thousands)
1993 % Total 1992 % Total Portrait Studios $ 62,694 20.5% $ 49,353 20.8% Photofinishing 125,044 40.9 133,156 56.0 Other Products and Services 31,491 10.3 12,607 5.3 Corporate: Cash and cash equivalents 66,356 21.7 20,978 8.8 Other 20,211 6.6 21,657 9.1 -------- ------ -------- ------ Total $305,796 100.0% $237,751 100.0% ======== ====== ======== ======
Stockholders' equity increased 2.1% and 7.3% to $175.5 million and $171.9 million at the end of 1993 and 1992, respectively, net of treasury stock repurchases of $0.7 million and $2.3 million in 1993 and 1992, respectively. The 9.5% increase in stockholders' equity since 1991 is primarily due to a $17.1 million increase in retained earnings after consideration of dividends, which was partially offset by the purchase of treasury stock. On September 28, 1988, the Company's Board of Directors authorized the Company to purchase up to 2,500,000 shares of CPI Corp. common stock, or approximately 15% of the then outstanding common stock. On April 2, 1992, the Company's Board of Directors authorized the purchase of an additional 2,000,000 shares of CPI Corp. common stock. Under its 142 PAGE stock repurchase program, the Company has acquired 2,363,808 shares for $58.6 million as of February 5, 1994. In fiscal year 1993, 1992 and 1991, 40,655 shares, 101,210 shares and 480,792 shares were purchased for $0.7 million, $2.3 million and $11.7 million, respectively. The following table sets forth selected financial data regarding capital resources and liquidity for the Company's last three fiscal years: Selected Financial Data Regarding Capital Resources and Liquidity for 1993, 1992 and 1991 (in thousands of dollars)
1993 1992 1991 Net cash flow provided by operations $39,389 $ 36,867 $ 53,902 -------- --------- --------- Investing activities: Capital expenditures (30,363) (13,274) (22,271) Acquisitions (14,732) (23,942) (70,233) Other (47) 295 274 -------- --------- --------- Net investing (45,142) (36,921) (92,230) -------- --------- --------- Financing activities: Proceeds from issuance of common stock 439 599 1,574 Net increase (decrease) in debt 59,547 (275) (139) Dividends (8,198) (8,206) (8,443) Treasury stock purchases (657) (2,332) (11,717) -------- --------- --------- Net financing 51,131 (10,214) (18,725) -------- --------- --------- Increase (decrease) in cash and cash equivalents $45,378 $(10,268) $(57,053) ======= ========= ========= During the period 1991 through 1993, the Company generated $130.2 million in internal funds from operations. Investments during this period amounted to $174.3 million, including capital expenditures of $65.9 million and acquisitions amounting to $108.9 million. Acquisitions consist primarily of the Fox Photo, Proex and Prints Plus businesses with acquired property and equipment amounting to $42.1 million and intangible assets resulting from purchase transactions amounting to $66.8 million. Financing activities included $59.1 million in additional debt primarily due to the placement of Senior Notes for $60.0 million, the repurchase of 143 PAGE treasury stock amounting to $14.7 million and dividends paid amounting to $24.8 million. The net result of these transactions amounted to a $21.9 million decrease in cash and cash equivalents during the three-year period. Future Operations The Company expects fiscal year 1994 to be one of significant change, especially for Sears Portrait Studios. After a great deal of testing, planning and design, the Company has embarked on a five-year program to provide customers a new level of service at Sears Portrait Studios. In addition, the Company will benefit from a renewed relationship with Sears under a new five-year license agreement. The agreement reflects Sears' and the Company's mutual commitment to contribute to the implementation of each other's strategic development plans. In addition, the Company anticipates cooperative marketing programs with Sears and studio expansion and renovation to complement Sears' previously announced store renovation program. The Company also plans to install its new freeze-frame digital imaging system in most Sears Portrait Studio locations by the third quarter of 1994. This new system allows both the photographer and the customer to view images at the time the photograph is taken. The Company believes these changes will have a positive effect on earnings in 1994 but not until the second fiscal half, as the first half will be penalized by the cost of training and additional depreciation related to the new system. 144 PAGE
CONSOLIDATED BALANCE SHEETS--ASSETS FOR FEBRUARY 5, 1994 AND FEBRUARY 6, 1993
February 5, 1994 February 6, 1993 ---------------- ---------------- Current assets: Cash $ 4,304,171 $ 4,438,233 Short-term investments 62,051,741 16,539,845 Receivables, less allowance of $918,346 and $1,042,101, respectively 21,057,245 19,720,745 Inventories 28,530,382 20,326,254 Deferred costs applicable to unsold portraits 2,822,123 3,772,717 Prepaid expenses and other current assets 9,005,393 8,356,692 ------------- ------------- Total current assets 127,771,055 73,154,486 Net property and equipment 114,328,773 97,572,931 Other assets: Intangible assets 60,944,867 64,749,556 Other long-term assets 2,751,641 2,273,713 ------------- ------------- $305,796,336 $237,750,686 ============= =============
See accompanying notes to consolidated financial statements. 145 PAGE CONSOLIDATED BALANCE SHEETS--LIABILITIES AND STOCKHOLDER'S EQUITY FOR FEBRUARY 5, 1994 AND FEBRUARY 6, 1993
February 5, 1994 February 6, 1993 ---------------- ---------------- Current liabilities: Current maturities of long-term obligations $ 292,468 $ 178,248 Accounts payable 32,849,291 27,202,692 Accrued expenses and other liabilities 21,046,068 17,467,273 Income taxes 8,767,222 8,782,043 Deferred income taxes, net 2,232,429 3,196,995 ------------- ------------- Total current liabilities 65,187,478 56,827,251 ------------- ------------- Long-term obligations, less current maturities 59,810,789 341,563 Other liabilities 4,848,151 5,495,339 Deferred income taxes, net 441,445 3,140,751 Stockholders' equity: Preferred stock, no par value, 1,000,000 shares authorized, no shares outstanding - - Preferred stock, Series A, no par value - - Common stock, $0.40 par value, 50,000,000 shares authorized; 16,978,869 and 16,955,730 shares outstanding at February 5, 1994 and February 6, 1993, respectively 6,791,548 6,782,292 Additional paid-in capital 29,262,531 28,833,326 Retained earnings 198,166,276 194,419,868 ------------- ------------- 234,220,355 230,035,486 Treasury stock at cost, 2,363,808 and 2,323,153 shares at February 5, 1994 and February 6, 1993, respectively (58,556,032) (57,898,854) Unamortized deferred compensation - restricted stock (155,850) (190,850) ------------- ------------- Total stockholders' equity 175,508,473 171,945,782 ------------- ------------- $305,796,336 $237,750,686 ============= =============
See accompanying notes to consolidated financial statements. 146 PAGE CONSOLIDATED STATEMENT OF EARNINGS-- FOR FISCAL YEARS ENDED FEBRUARY 5, 1994, FEBRUARY 6, 1993, AND FEBRUARY 1, 1992
FISCAL YEAR FISCAL YEAR FISCAL YEAR 1993 1992 1991 ------------- ------------- ------------- Net sales $475,520,119 $449,379,933 $414,518,827 Cost and expenses: Cost of sales (exclusive of depreciation expense shown below) 135,794,817 115,390,384 96,754,637 Selling, administrative and general expenses 287,479,408 270,395,184 252,072,281 Depreciation 27,236,816 24,431,160 22,657,493 Amortization 6,223,898 4,327,873 3,862,175 ------------- ------------- ------------- 456,734,939 414,544,601 375,346,586 ------------- ------------- ------------- Income from operations 18,785,180 34,835,332 39,172,241 Net interest income (expense) (789,213) 1,013,524 3,422,547 Other income 524,489 674,005 679,956 ------------- ------------- ------------- Earnings before income taxes and cumulative effect of accounting change 18,520,456 36,522,861 43,274,744 Income tax expense 7,404,000 13,908,000 16,140,000 ------------- ------------- ------------- Earnings before cumulative effect of accounting change 11,116,456 22,614,861 27,134,744 Cumulative effect of accounting change 2,120,000 - - ------------- ------------- ------------- Net earnings $ 13,236,456 $ 22,614,861 $ 27,134,744 ============= ============= ============= Earnings per common share: Earnings before cumulative effect of accounting change $ 0.76 $ 1.54 $ 1.80 Cumulative effect of accounting change 0.14 - - ------------- ------------- ------------- Net earnings $ 0.90 $ 1.54 $ 1.80 ============= ============= =============
See accompanying notes to consolidated financial statements. 147 PAGE CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Common Paid-In Stock Capital ------------ ------------ Balance at February 2, 1991: $ 6,743,840 $ 26,698,436 Issuance of common stock: Profit sharing plan and trust 6,667 451,176 Stock bonus plan 6,682 544,583 Employee stock plans 14,452 550,369 Foreign currency translation --- --- Dividends ($0.56 per common share) --- --- Net earnings --- --- Purchase of treasury stock, at cost --- --- Amortization of deferred compensation-restricted stock --- --- ------------- ------------ Balance at February 1, 1992: $ 6,771,641 28,244,564 Issuance of common stock: Profit sharing plan and trust 4,838 282,977 Stock bonus plan 2,729 173,973 Employee stock plan 3,084 131,812 Foreign currency translation --- --- Dividends ($0.56 per common share) --- --- Net earnings --- --- Purchase of treasury stock, at cost --- --- Amortization of deferred compensation-restricted stock --- --- ------------- ------------- Balance at February 6, 1993: $ 6,782,292 $ 28,833,326 Issuance of common stock: Profit sharing plan and trust 6,190 303,000 Stock bonus plan 1,466 71,805 Employee stock plans 1,600 54,400 Foreign currency translation --- --- Dividends ($0.56 per common share) --- --- Net earnings --- --- Purchase of treasury stock, at cost --- --- Amortization of deferred compensation- restricted stock --- --- ------------- ------------- Balance at February 5, 1994: $ 6,791,548 $ 29,262,531 ============= =============
See accompanying notes to consolidated financial statements. 148 PAGE CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Treasury Retained Stock Earnings At Cost ------------- ------------- Balance at February 2, 1991: $162,466,642 $(43,849,876) Issuance of common stock: Profit sharing plan and trust --- --- Stock bonus plan --- --- Employee stock plans --- --- Foreign currency translation (91,219) --- Dividends ($0.56 per common share) (8,442,742) --- Net earnings 27,134,744 --- Purchase of treasury stock, at cost --- (11,716,619) Amortization of deferred compensation-restricted stock --- --- ------------- ------------- Balance at February 1, 1992: $181,067,425 $(55,566,495) Issuance of common stock: Profit sharing plan and trust --- --- Stock bonus plan --- --- Employee stock plan --- --- Foreign currency translation (1,056,558) --- Dividends ($0.56 per common share) (8,205,860) --- Net earnings 22,614,861 --- Purchase of treasury stock, at cost --- (2,332,359) Amortization of deferred compensation-restricted stock --- --- ------------- ------------- Balance at February 6, 1993: $194,419,868 $(57,898,854) Issuance of common stock: Profit sharing plan and trust --- --- Stock bonus plan --- --- Employee stock plans --- --- Foreign currency translation (1,291,923) --- Dividends ($0.56 per common share) (8,198,125) --- Net earnings 13,236,456 --- Purchase of treasury stock, at cost --- (657,178) Amortization of deferred compensation - restricted stock --- --- ------------- ------------- Balance at February 5, 1994: $198,166,276 $(58,556,032) ============= =============
See accompanying notes to consolidated financial statements. 149 PAGE CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Deferred Compensation- Restricted Stock Total ------------- ------------- Balance at February 2, 1991: $ (329,326) $151,729,716 Issuance of common stock: Profit sharing plan and trust --- 457,843 Stock bonus plan --- 551,265 Employee stock plans (203,061) 361,760 Foreign currency translation --- (91,219) Dividends ($0.56 per common share) --- (8,442,742) Net earnings --- 27,134,744 Purchase of treasury stock, at cost --- (11,716,619) Amortization of deferred compensation - restricted stock 289,822 289,822 ------------- ------------- Balance at February 1, 1992: $ (242,565) $160,274,570 Issuance of common stock: Profit sharing plan and trust --- 287,815 Stock bonus plan --- 176,702 Employee stock plan (45,786) 89,110 Foreign currency translation --- (1,056,558) Dividends ($0.56 per common share) --- (8,205,860) Net earnings --- 22,614,861 Purchase of treasury stock, at cost --- (2,332,359) Amortization of deferred compensation - restricted stock 97,501 97,501 ------------- ------------- Balance at February 6, 1993: $ (190,850) $171,945,782 Issuance of common stock: Profit sharing plan and trust --- 309,190 Stock bonus plan --- 73,271 Employee stock plans (56,000) --- Foreign currency translation --- (1,291,923) Dividends ($0.56 per common share) --- (8,198,125) Net earnings --- 13,236,456 Purchase of treasury stock, at cost --- (657,178) Amortization of deferred compensation - restricted stock 91,000 91,000 ------------- ------------- Balance at February 5, 1994: $ (155,850) $175,508,473 ============= =============
See accompanying notes to consolidated financial statements. 150 PAGE CONSOLIDATED STATEMENTS OF CASH FLOWS-- FOR FISCAL YEARS ENDED: FEBRUARY 5, 1994, FEBRUARY 6, 1993 AND FEBRUARY 1, 1992
FISCAL YEAR FISCAL YEAR FISCAL YEAR 1993 1992 1991 ------------- ------------- ------------- Cash flows provided by operating activities $ 39,389,209 $ 36,866,797 $ 53,901,903 Cash flows provided by (used in) financing activities: Proceeds from issuance of long-term debt 59,913,356 - 305,178 Repayment of long-term debt (366,418) (275,480) (444,731) Issuance of common stock to employee stock plans 438,461 599,413 1,573,929 Cash dividends (8,198,125) (8,205,860) (8,442,742) Purchase of treasury stock (657,178) (2,332,359) (11,716,619) ------------- ------------- ------------- Cash flows provided by (used in) financing activities 51,130,096 (10,214,286) (18,724,985) ------------- ------------- ------------- Cash flows before investing activities 90,519,305 26,652,511 35,176,918 ------------- ------------- ------------- Cash flows provided by (used in) investing activities: Additions to property and equipment, net (30,362,715) (13,274,473) (22,271,472) Acquisitions: Property and equipment (13,629,943) (11,056,700) (17,401,095) Intangible assets (1,101,639) (12,885,268) (52,831,924) Long-term investments 8,826 340,783 477,456 Restricted stock (56,000) (45,786) (203,061) ------------- ------------- ------------- Cash flows used in investing activities (45,141,471) (36,921,444) (92,230,096) ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents 45,377,834 (10,268,933) (57,053,178) Cash and cash equivalents at beginning of year 20,978,078 31,247,011 88,300,189 ------------- ------------- ------------- Cash and cash equivalents at end of year $ 66,355,912 $ 20,978,078 $ 31,247,011 ============= ============= =============
See accompanying notes to consolidated financial statements. 151 PAGE CONSOLIDATED STATEMENTS OF CASH FLOWS--RECONCILIATION OF NET EARNINGS TO CASH FLOWS PROVIDED BY OPERATING ACTIVITIES FOR FISCAL YEARS ENDED: FEBRUARY 5, 1994, FEBRUARY 6, 1993 AND FEBRUARY 1, 1992
FISCAL YEAR FISCAL YEAR FISCAL YEAR 1993 1992 1991 ------------- ------------- ------------- Net earnings $ 13,236,456 $ 22,614,861 $ 27,134,744 Adjustments for items not requiring cash: Depreciation and amortization 33,460,714 28,759,033 26,519,668 Deferred income taxes (3,663,872) (2,193,923) (2,228,159) Deferred compensation (647,188) (908,539) (2,354,090) Other (2,968,739) (2,103,615) (1,155,238) Decrease (increase) in current assets: Receivables and inventories (9,540,628) (1,161,292) (9,078,219) Deferred costs applicable to unsold portraits 950,594 761,130 20,726 Prepaid expenses and other current assets (648,701) 568,911 (1,341,188) Increase (decrease) in current liabilities: Accounts payable, accrued expenses and other liabilities 9,225,394 (9,143,019) 17,404,811 Income taxes (14,821) (326,750) (1,021,152) ------------- ------------- ------------- Cash flows provided by operating activities $ 39,389,209 $ 36,866,797 $ 53,901,903 ============= ============= ============= Supplemental cash flow information: Interest paid $ 302,486 $ 166,044 $ 195,114 ============= ============= ============= Income taxes paid $ 9,828,416 $ 14,934,061 $ 19,628,031 ============= ============= =============
See accompanying notes to consolidated financial statements. 152 PAGE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements of CPI Corp. (the Company) include the accounts of CPI Corp. and all of its majority or wholly owned subsidiaries, partnerships and joint ventures. All significant intercompany transactions have been eliminated. Fiscal Year The Company's fiscal year ends on the first Saturday in February. The Company designates its fiscal year by the calendar year in which the fiscal year begins. Accordingly, fiscal year 1993 ended February 5, 1994, fiscal year 1992 ended February 6, 1993 and fiscal year 1991 ended February 1, 1992. The 1993 and 1991 fiscal years are comprised of 52 weeks, while the 1992 fiscal year is comprised of 53 weeks. Translation of Foreign Currency Assets and liabilities of foreign operations are translated into U.S. dollars at the exchange rate in effect on the balance sheet date, while equity accounts are translated at historical rates. Income and expense accounts are translated at the average rates in effect during each fiscal period. Cash, Cash Equivalents and Short-Term Investments For purpose of reporting cash flows, cash and cash equivalents include cash on hand and short-term investments. Short-term investments consist of treasury bills, bankers acceptances, commercial paper, term deposits, government agency notes, repurchase agreements and government money market funds which mature less than one year from year-end and which are stated at cost, adjusted for discount accretion and premium amortization. The government money market funds include obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities, as well as repurchase agreements fully collateralized by such obligations, which may have a long-term maturity greater than one year but a short-term option to liquidate the investment. Based on the short-term nature of the Company's investments, the carrying value approximated estimated fair value at February 5, 1994. Total interest income for years 1993, 1992 and 1991 was $1,210,193, $1,182,630 and $3,575,897, respectively. Inventories Inventories are stated at the lower of cost or market, with cost of the majority of inventories being determined by the first-in, first-out (FIFO) method and the remainder by the last-in, first-out (LIFO) method. 153 PAGE Photographic Sales Processed portraits initially ordered by the customer are recognized as sales when shipped from the processing lab to the studio for customer pickup. Processed portraits not initially ordered by the customer are recognized as sales at the time the portraits are purchased by the customer. Deferred Costs Applicable to Unsold Portraits Deferred costs applicable to unsold portraits consist of photographic salaries and employment costs, advertising and other costs directly associated with the photography function. Such costs are charged to selling, general and administrative expense when the customer accepts or declines the portraits. Depreciation Depreciation is computed principally using the straight-line method over estimated service lives of the respective assets. Retirement Plan The Company has a noncontributory defined benefit retirement plan covering substantially all full-time employees. Pension expense, which is funded as accrued, includes current costs and amortization of prior service costs over a period of ten years. Intangible Assets Intangible assets acquired through acquisitions were accounted for by the purchase method of accounting and include the excess of cost over fair value of net assets acquired, favorable lease rights and covenants not to compete. The excess of cost over fair value of net assets acquired and favorable lease rights are being amortized on a straight-line basis over periods ranging from five to forty years. The covenants not to compete are being amortized on a straight-line basis over the respective periods of the agreements, which range from three to five years. Accumulated amortization of intangible assets was $10,060,786 and $6,408,061 at February 5, 1994 and February 6, 1993, respectively. Income Taxes Deferred income taxes are recognized to reflect the effect of timing differences in the recognition of income and expense items for income tax and financial reporting purposes. Investment tax credits are recognized by the flow through method, which recognizes the benefits of such credits in the year realized. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting For Income Taxes," in 1993 on a prospective basis. Statement No. 109 requires the Company to account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial 154 PAGE reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognized the cumulative effect as of February 7, 1993 of $2.12 million in net earnings as a cumulative change in accounting principle. United States income taxes have not been provided on $14,202,535 of undistributed earnings of the Canadian subsidiary because of the Company's intention to reinvest these earnings. The determination of unrecognized deferred U.S. tax liability for the undistributed earnings of international subsidiaries is not practicable. However, it is estimated that foreign withholding taxes of $1,420,254 may be payable if such earnings were distributed. Earnings Per Common Share and Other Share Information Earnings per common share are computed by dividing net earnings by the sum total of the weighted average number of shares of common stock outstanding plus contingently issuable shares under the employee stock plans. Fully diluted earnings per common share are not presented as the differences between primary and fully diluted earnings per common share are not material. Reclassification Certain 1992 and 1991 accounts have been reclassified to conform with the presentation in 1993. Fair Value of Financial Instruments SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires the Company to disclose estimated fair values for its financial instruments. A financial instrument is defined as cash or a contract that both imposes on one entity a contractual obligation to deliver cash or another financial instrument to a second entity and conveys to that second entity a contractual right to receive cash or another financial instrument from the first entity. Fair value estimates, methods and assumptions are set forth for the Company's financial instruments, short-term investments and long-term obligations in Notes 1 and 7, respectively. 2. Acquisitions On August 19, 1991, a wholly owned subsidiary of the Company acquired all the outstanding common and preferred stock of FPI Holding Corporation and its subsidiary, Fox Photo, Inc. (Fox Photo), with an effective date of August 18, 1991. The cash consideration of the acquisition of common and certain series of outstanding preferred stock amounted to $27.9 million. Payment to debt holders of Fox Photo and holders of exchangeable preferred stock amounted to approximately $26.0 million and other costs of 155 PAGE the transaction aggregated $7.4 million. The total cash consideration of $61.3 million was provided by the Company's then available cash. The acquisition has been recorded using the purchase method of accounting and the results of operations of Fox Photo have been included in the Company's consolidated financial statements since the effective date of the acquisition. The excess of the purchase price over the net liabilities assumed (goodwill) was approximately $49.9 million and is being amortized using a straight-line method over a 40-year period. In addition, the Company entered into a consulting and non-compete agreement with certain employees of Fox Photo for cash consideration of $2,292,000 which is being amortized over a four-year period. Additionally, prior to the acquisition, Fox Photo purchased certain photographic processing equipment from a third party for $2,500,000 which was reimbursed by the Company. The unaudited proforma results of operations for the fiscal year ended February 1, 1992, assuming the acquisition occurred as of the beginning of the fiscal year, were net sales of $453.7 million, net earnings of $28.3 million and earnings per share of $1.88. These proforma results were prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the combination been in effect. On December 1, 1992, the Company acquired the operating assets of Pemtom, Inc., a Minneapolis-based company consisting of 25 photofinishing locations operating under the name Proex, 15 of which offer added services through adjacent Proex Portrait Studios, for approximately $19.0 million. In a separate, but related transaction, the Company secured the services of the Pemtom, Inc. management team for $4.8 million. The acquisition was recorded as a purchase and, accordingly, the results of operations of Proex have been included in the Company's consolidated financial statements since the effective date of the acquisition. The excess of the purchase price over the net liabilities assumed (goodwill) was approximately $6.7 million and is being amortized using a straight-line method over a 40-year period. The unaudited proforma results of operations for the fiscal year ended February 6, 1993, assuming the acquisition occurred as of the beginning of the fiscal year, were not material. On May 30, 1993, CPI Corp. acquired Prints Plus from the Melville Corporation. The 103 store chain, located in malls throughout the United States, operates a prints, posters and framing business with annual sales in excess of $40.0 million. Prints Plus was acquired for approximately $14.7 million. In conjunction with the acquisition, the Company entered into a non-compete agreement with Melville Corporation for cash consideration aggregating $1,050,000. Stores will continue to be operated under the trade name "Prints Plus" and "Prints and Posters". The acquisition was recorded as a purchase and, accordingly, the results of operations of Prints Plus 156 PAGE have been included in the Company's consolidated financial statements since the effective date of the acquisition. The unaudited proforma results of operations for the fiscal year ended February 5, 1994, assuming the acquisition occurred as of the beginning of the fiscal year, were not material. 3. Discontinued Businesses On February 3, 1992, the Company announced its intention not to renew existing contracts between the Portraits of Distinction Studios and the host department store chains. The Company also announced that it was not renewing its existing contract with Wal- Mart, Inc., which allowed the Company to provide portrait photography service through regional Wal-Mart stores. The Company completed the closedown of the Portraits of Distinction Studios and Wal-Mart Pictureland operations in fiscal year 1992. A provision of approximately $1.1 million was made for asset write-offs and severance pay in fiscal year 1991. There were no sales for the discontinued businesses in fiscal year 1993. Net sales of the discontinued businesses for fiscal year 1992 and 1991 were $7,333,223 and $26,846,059, respectively. 4. Property and Equipment The following table sets forth a summary of the Company's property and equipment: Summary of Property and Equipment for Year-End 1993 and 1992
1993 1992 Property and equipment, at cost: Land and land improvements $ 3,072,438 $ 2,856,197 Building improvements 26,788,651 23,244,107 Leasehold improvements 33,435,155 22,798,763 Machinery and equipment 128,575,421 112,226,654 Furniture and fixtures 55,568,397 50,305,468 ------------ ------------ 247,440,062 211,431,189 Less accumulated depreciation 133,111,289 113,858,258 ------------ ------------ Net property and equipment $114,328,773 $ 97,572,931 ============ ============
157 PAGE 5. Inventories Inventories consist of the following components: Components of Inventories for Year-End 1993 and 1992
1993 1992 Raw materials and supplies $27,981,589 $19,577,140 Portraits-in-process 548,793 749,114 ----------- ----------- $28,530,382 $20,326,254 =========== ===========
The Company accounts for certain raw material inventories of film, paper, chemicals and portraits-in-process under the LIFO method. Such inventories aggregated approximately $1,660,000 and $1,464,000 at February 5, 1994 and February 6, 1993, respectively. The excess of replacement cost of these inventories over their stated LIFO value was approximately $425,000 and $473,000 at February 5, 1994 and February 6, 1993, respectively. Portraits-in-process include the cost of film, laboratory labor, paper, processing chemicals and supplies and other items directly associated with the production of portraits that have not been recognized as sales. 158 PAGE 6. Intangible Assets Intangible assets and related amortization are as follows: Intangible Assets and Related Amortization for Year-End 1993, 1992 and 1991
Unamortized Balance at February 5, ------Amortization------ 1994 1993 1992 1991 Excess of cost over fair value of net assets acquired $55,632,556 $1,598,486 $1,501,997 $1,344,433 Favorable lease rights 332,226 193,964 328,697 458,131 Covenants not to compete 2,535,640 1,113,878 912,842 746,247 Signing bonus 2,444,445 2,000,000 355,555 - ----------- ---------- ---------- ---------- $60,944,867 $4,906,328 $3,099,091 $2,548,811 =========== ========== ========== ==========
7. Credit Agreements and Outstanding Debt On August 31, 1993, the Company entered into an agreement with two insurance companies for the private placement of senior notes in the amount of $60.0 million (the "Note Agreement"). The notes, issued pursuant to the Note Agreement, mature over a seven year period with an average maturity of 5.42 years and with the first principal payment due at the end of the third year. Interest on the notes is payable semi-annually at an average effective rate of 6.44%. The Note Agreement requires the Company to maintain certain financial ratios and comply with certain restrictive covenants. The Company incurred $459,304 in issuance costs associated with the private placement of the notes. These costs are being amortized ratably over the seven-year life of the notes. Under a concurrently negotiated agreement with a domestic bank, the Company reduced its existing line of credit from $40.0 million to $25.0 million. The Line of Credit Agreement contains the same financial covenants as those set forth in the Note Agreement and has interest rates set at the prevailing prime interest rate or at a lower rate quoted by the bank. This Line of Credit Agreement expires July 30, 1994. As of February 5, 1994, the Company had outstanding letters of credit for the principal amount of $5,466,454. There were no borrowings under this line of credit as of fiscal year end. 159 PAGE The Company's performance of the conditions of the Note Agreement and the Line of Credit Agreement and the underlying notes issued under both agreements is secured by a pledge of the stock of the Company's direct subsidiaries. The pledged stock will be released if the Company achieves certain stipulated financial ratios, but not prior to the end of fiscal year 1994. The Company's long-term obligations consist of the following: Long-Term Obligations as of February 5, 1994 and February 6, 1993
February 5, 1994 February 6, 1993 Senior notes, net of issuance costs $59,577,204 $ - Notes payable and obligations under capital leases 526,053 519,811 Less current maturities 292,468 178,248 ----------- -------- $59,810,789 $341,563 =========== ========
The fair value of the Company's long-term debt is estimated based on quoted market prices for similar debt issues with the same remaining maturities. On February 5, 1994, the carrying value and estimated fair market value of the Company's long-term debt was $59,810,789 and $59,507,789, respectively. To manage its exposure to fluctuations in interest rates, the Company has also entered into an interest rate swap agreement for a notional principal amount of $40 million, maturing August 28, 1995. Interest rate swap agreements involve the exchange of interest obligations on fixed and floating interest rate debt without the exchange of the underlying principal amount. The differential paid or received on the interest rate swap agreement is recognized as an adjustment to interest expense. The fair value of the Company's swap agreement, representing the estimated amount the Company would receive or pay to terminate the agreement, was obtained from dealer quotes. The carrying value, which represents accrued income arising from the swap agreement, and estimated fair market value for the swap agreement were $86,539 and $109,991, respectively, on February 5, 1994. Interest expense for fiscal years 1993, 1992 and 1991 was $1,999,406, $169,106 and $153,350, respectively. 160 PAGE 8. Operating Leases The Company leases various premises and equipment under noncancelable operating lease agreements with initial terms of one or more years and expiring at various dates. Substantially all leases require the Company to pay maintenance, insurance and taxes. At February 5, 1994, minimum rental payments under operating leases with initial terms in excess of one year are as follows: Minimum Rental Payments Under Operating Leases With Initial Terms in Excess of One Year at February 5, 1994
Year Dollar 1994 $ 39,877,626 1995 31,329,819 1996 23,505,275 1997 17,019,755 1998 11,195,237 1999-2003 12,745,380 ------------ $135,673,092 ============
Rental expense during fiscal years 1993, 1992 and 1991 on all operating leases was $30,048,454, $24,304,248 and $18,621,554, respectively. 9. Income Taxes Earnings before income taxes by U.S. and Canadian sources (dollars in thousands): Earnings Before Income Taxes by U.S. and Canadian Sources (Dollars in Thousands)
1993 1992 1991 U.S. $15,163 $31,427 $38,224 Canada 3,357 5,096 5,051 ------- ------- ------- $18,520 $36,523 $43,275 ======= ======= =======
161 PAGE Income taxes from continuing operations consist of the following components (dollars in thousands): Components of Income Taxes From Continuing Operations For Fiscal Year-End 1993, 1992 and 1991 (Dollars in Thousands)
Federal Canadian State Total 1993: Current $ 7,567 $ 926 $ 963 $ 9,456 Deferred (1,744) (63) (245) (2,052) -------- ------- ------- -------- $ 5,823 $ 863 $ 718 $ 7,404 ======== ======= ======= ======== 1992: Current $ 9,602 $1,833 $2,528 $13,963 Deferred 53 (122) 14 (55) -------- ------- ------- -------- $ 9,655 $1,711 $2,542 $13,908 ======== ======= ======= ======== 1991: Current $14,642 $1,467 $2,659 $18,768 Deferred (2,182) (71) (375) (2,628) -------- ------- ------- -------- $12,460 $1,396 $2,284 $16,140 ======== ======= ======= ========
The source of timing differences which gave rise to deferred income taxes and the related tax effects are as follows (dollars in thousands): Timing Differences for Taxes for Fiscal Year-End 1992 and 1991
1992 1991 Difference between tax and book depreciation $(1,919) $(2,772) Cash basis adjustment for certain income items (252) 124 Cash basis adjustment for certain expense items 2,116 20 -------- -------- $ (55) $(2,628) ======== ========
162 PAGE The following is a reconciliation between income tax expense related to continuing operations at the Federal statutory rate and actual income tax expense (dollars in thousands): Reconciliation Between Income Taxes For Fiscal Year-End 1993, 1992 and 1991 (Dollars in Thousands)
1993 1992 1991 Taxes at Federal statutory rate $6,583 $12,622 $14,915 Increase resulting from state income taxes, net of Federal tax benefit 467 1,678 1,507 Other, net 354 (392) (282) ------ -------- -------- $7,404 $13,908 $16,140 ====== ======== ========
163 PAGE The sources of the tax effect for temporary differences that give rise to the deferred tax assets and liabilities were as follows: Sources of Tax Effects
Dollars Deferred tax assets: Deferred compensation and other employee benefits, due to accrual for financial reporting purposes $ 2,245,972 Expense accruals, due to accrual for financial reporting purposes 250,357 Accounts receivable, due to allowance for doubtful accounts 249,248 Inventory costs capitalized 172,475 Other 94,206 ------------ Total deferred tax assets 3,012,258 ------------ Deferred tax liabilities: Property and equipment, due to depreciation (2,746,152) Deferred cost of unsold portraits (1,098,325) Employee pension plan, due to accrual for financial reporting purposes (827,431) Revenue recognition (685,878) Intangible assets, due to period of amortization (107,108) Other (221,238) ------------ Total deferred tax liability $(5,686,132) ------------ Net deferred tax liability $(2,673,874) ============ Current deferred income taxes $(2,232,429) ============ Long-term deferred income taxes $ (441,445) ============
Pursuant to SFAS 109, a valuation allowance would be provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. The Company has not established a valuation allowance as of February 5, 1994, due to management's belief that all criteria for recognition have been met, including the existence of a history of taxes paid sufficient to support the realization of deferred tax assets. 164 PAGE 10. Retirement Plan The Company maintains a qualified, noncontributory pension plan that covers all full-time employees meeting certain age and service requirements. The plan provides pension benefits based on an employee's length of service and the average compensation earned from the later of the hire date or January 1, 1985 to the retirement date. The Company's funding policy is to contribute annually at least the minimum amount required by government funding standards, but not more than is tax deductible. Pension expense included in the consolidated statement of earnings for 1993, 1992 and 1991 was $1,010,259, $721,656 and $748,231, respectively. Net periodic pension expense of the defined benefit plan for 1993, 1992 and 1991 was as follows: Net Periodic Pension Expense of the Defined Benefit Plan for 1993, 1992 and 1991
1993 1992 1991 Service cost-benefits earned during the period $ 934,662 $701,154 $663,012 Interest cost on projected benefit obligation 1,052,115 911,010 831,977 Return on plan assets (921,101) (811,323) (862,427) Net amortization and deferral (55,417) (79,185) 115,669 ----------- --------- --------- Net periodic pension expense $1,010,259 $721,656 $748,231 =========== ========= =========
Plan assets consist primarily of cash equivalents, a marketable equity securities fund, guaranteed interest contracts (GIC), immediate participation guarantee contracts (IPG) and government bonds. 165 PAGE The following table sets forth the funded status at December 31, 1993, December 31, 1992 and December 31, 1991: Funded Status at December 31, 1993, December 31, 1992 and December 31, 1991
1993 1992 1991 Actuarial present value of vested benefit obligation $ 12,809,526 $ 10,350,912 $ 9,224,425 ============= ============= ============= Accumulated benefit obligation $ 14,334,743 $ 11,357,402 $ 9,752,351 ============= ============= ============= Projected benefit obligation $(16,703,055) $(12,343,792) $(11,032,948) Plan assets at fair value 14,598,490 13,249,626 11,836,939 ------------- ------------- ------------- Plan assets in excess of (less than) projected benefit obligations (2,104,565) 905,834 803,991 Unrecognized net (gain) loss 3,165,383 (195,393) (600,475) Unrecognized prior service cost 560,676 672,811 784,946 Net transition obligation 28,273 31,807 35,341 ------------- ------------- ------------- Prepaid pension cost recognized in the consolidated balance sheet $ 1,649,767 $ 1,415,059 $ 1,023,803 ============= ============= =============
166 PAGE Assumptions used in the previous determinations were as follows: Assumptions on Funded Status at December 31, 1993, December 31, 1992 and December 31, 1991
1993 1992-91 Discount rate in determining benefit obligations 7.0% 8.0% Rate of increase in compensation levels 6.0% 6.0% Expected long-term rate of return on assets 8.0% 8.0%
11. Employee Stock Plans Deferred Compensation and Stock Appreciation Rights Plan In January 1986, the Company's Board of Directors approved a deferred compensation and stock appreciation rights plan designed to attract and retain certain key employees. Under the deferred compensation plan, eligible employees are granted the opportunity to defer the payment of a portion of their compensation. Under the stock appreciation rights plan, eligible employees are granted the right to receive a cash payment from the Company equal to the excess of the market value of a share of common stock of the Company at the payment date over the initial value at the issuance date. The rights become payable after five years following the effective date of the grant. The stock appreciation rights plan was amended on November 7, 1991 such that the outstanding rights as of November 6, 1991 shall not be higher than the excess of $22.38 per share over the initial value at the issuance date. In the event an employee retires, their rights under the deferred compensation plan and the stock appreciation rights plan may become payable. There were no stock appreciation rights granted during fiscal years 1993 and 1992. For the 1991 fiscal year, approximately 23,700 stock appreciation rights were granted under this plan. For 1993, 1992 and 1991 fiscal years, approximately $7,070, $9,500 and $1,254,000, respectively, were paid under this plan. Restricted Stock Plan In January 1988, the Company's Board of Directors adopted the CPI Corp. Restricted Stock Plan with an effective date of February 7, 1988. Under the plan, 250,000 shares of CPI common stock are reserved for issuance to key employees. Awards will usually be made at the beginning of each fiscal year, and will range from 20% to 40% of a recipient's annual compensation in that fiscal year. In 167 PAGE fiscal year 1992, 1,761 grants were issued and were vested in fiscal 1993. In fiscal year 1993 and 1991, 4,000 and 7,022 grants, respectively, were issued and are to be vested over a four-year period. Of the grants issued in fiscal year 1988, no grants were forfeited in fiscal years 1993 and 1992 and 662 grants were forfeited during fiscal year 1991. As of February 5, 1994, 179,497 shares are reserved for issuance under this plan. Profit Sharing Plan Under the Company's profit sharing plan, eligible employees may elect to invest from 1% to 10% of their base compensation in a trust fund, the assets of which are invested in securities other than Company stock. The Company matches up to 70% of the employee's investment, up to a maximum of 5% of the employee's base compensation, based on attainment of predefined earnings levels by the Company. The Company's matching contributions are made in shares of its common stock which vest over a maximum of five years, depending on the employee's length of service with the Company. The difference between the market value of forfeited shares at the dates of their original contribution and their market value at the dates used to satisfy subsequent requirements have been charged to expense, with a corresponding credit to additional paid-in-capital. The Company provided 15,473 and 12,093 shares to satisfy its obligations under the plan for fiscal years 1992 and 1991, respectively, and estimates that 19,536 shares will be required to satisfy its obligations under the plan for fiscal year 1993. For fiscal years 1992 and 1991, the Company matched the employee's investment at a rate of 30%. For fiscal year 1993, the Company estimates the match will also be 30%. Stock Bonus Plan Under the Company's stock bonus plan, shares of the Company's common stock are reserved for issuance to key employees, based on attainment by the Company of predefined earnings levels established annually. Each year, employees receive one-third of the shares which were awarded in each of the previous three years. For the 1993 and 1992 fiscal years, 3,678 and 2,890 shares, respectively, were issuable under this plan. No original awards were made under this plan in fiscal 1991 and 1993. In fiscal 1992, there was a discretionary award of 6,355 shares. As of February 5, 1994, 63,493 shares are reserved for issuance under this plan. Expenses related to the profit sharing and stock bonus plans are accrued in the year to which the awards relate, based on the fair market value of the Company's common stock to be issued, determined as of the date earned. The cumulative appreciation related to stock appreciation rights, determined at the end of each period, is allocated on a ratable basis over the five-year vesting period. Expenses related to the restricted stock plan are accrued periodically, based on fair market value of the Company's common 168 PAGE stock on the grant date. Expenses recognized for fiscal years 1993, 1992 and 1991 with respect to these plans were $370,111, $596,855 and $1,181,415, respectively. Incentive Stock Option Plan The Company has a non-qualified incentive stock option plan, under which certain key officers may receive options to acquire shares of the Company's common stock. Twenty-five percent of options granted become exercisable at the end of each of the second through fifth years of continuous employment from the date of the grant, and unexercised options expire after six years. No compensation expense is recognized under the plan, since the exercise price equals or exceeds the fair market value of the Company's common stock at the date of grant. Activity in the plan is summarized as follows: Activity in Incentive Stock Option Plan
----1992---- Number of Per Share Shares Option Price Outstanding at beginning of year 5,950 $14.38-$15.80 Exercised (5,950) $14.38-$15.80 ------- Outstanding at end of year - $14.38-$15.80 ======= Exercisable at end of year - $14.38-$15.80 =======
There was no activity under the Incentive Stock Option Plan in 1993. As of February 5, 1994, there were 306,177 shares reserved for issuance under this plan. Stock Option Plan The Company has a non-qualified stock option plan, under which certain officers and key employees may receive options to acquire shares of the Company's common stock. Awards of stock options and the terms and conditions of such awards are subject to the discretion of the Stock Option Committee created under the plan and consisting of disinterested directors of the Company. The plan was approved by stockholders on June 11, 1991 and the issuance of additional shares was ratified by stockholders on June 13, 1992. A total of 1,700,000 shares has been authorized for issuance under the plan. As of February 5, 1994, the Stock Option Committee has awarded options on the terms set forth as follows: 169 PAGE Options Awarded Under the Stock Option Plan For 1993 and 1992
-------1993------- -------1992------- Number of Per Share Number of Per Share Shares Option Price Shares Option Price Outstanding at beginning of year 1,156,620 $15.63-$35.00 270,780 $22.38-$29.00 Granted 62,992 $15.63-$35.00 885,840 $21.75-$35.00 Cancelled (7,458) $15.63-$35.00 - $21.75-$35.00 ---------- --------- Outstanding at end of year 1,212,154 $15.63-$35.00 1,156,620 $21.75-$35.00 ========== ========= Under the plan, 432,154 options granted become exercisable from one-fourth to one-third a year commencing one year after award and expiring from four to five years after award. An additional 780,000 options granted under the plan are cliff vested and become exercisable from four to five years after award and expire six to seven years after award. As of February 5, 1994, there were 1,700,000 shares reserved for issuance under this plan and 215,326 shares exercisable. Voluntary Stock Option Plan The Company has a non-qualified voluntary stock option plan, under which certain key officers may receive options to acquire shares of the Company's common stock. The plan was approved by stockholders on June 11, 1993 and was effective March 18, 1993. Options are granted as a participant elects, pursuant to their Stock Option Agreement, to reduce their compensation for the fiscal year beginning February 7, 1993. A total of 1,000,000 shares has been authorized for issuance. As of February 5, 1994, 240,284 options at an exercise price of $18.75 have been awarded. Options granted are exercisable after three years and expire at the end of eight years. The terms and conditions of the plan, for one or more fiscal years after the fiscal year beginning February 7, 1993, are amendable by the Board of Directors at its discretion. The plan has been extended to the fiscal year beginning February 6, 1994. 12. Industry Segment Information The Company is engaged in developing and marketing products and services for consumers in the United States and Canada through a 170 PAGE network of centrally managed retail locations. The Company classifies its operations into three major industry segments of Portrait Studios, Photofinishing and Other Products and Services. The Company's Portrait Studios segment operates a professional portrait photography business, primarily through fixed location studios. The Company's Photofinishing segment provides photofinishing, primarily for amateur photographers, and also sells film and other photo-related accessories. The Company's Other Products and Services industry segment consists of the electronic publishing business and Prints Plus, a wall decor business. Sales and operating earnings industry segment information is included in "Management Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated by reference herein from the table on pages 136-137 of this document. The following table sets forth certain information about each of these industry segments (dollars in thousands):
Selected Industry Segment Information for 1993, 1992, and 1991 (Dollars in Thousands)
1993 1992 1991 Depreciation and amortization: Portrait Studios $ 6,332 $ 6,015 $ 6,712 Photofinishing 19,655 17,019 14,285 Other Products and Services 4,411 2,784 2,938 Corporate 3,063 2,941 2,585 -------- -------- -------- $ 33,461 $ 28,759 $ 26,520 ======== ======== ======== Identifiable assets: Portrait Studios $ 62,694 $ 49,353 $ 54,028 Photofinishing 125,044 133,156 115,097 Other Products and Services 31,491 12,607 13,835 Corporate 86,567 42,635 55,967 -------- -------- -------- $305,796 $237,751 $238,927 ======== ======== ======== Capital expenditures: Portrait Studios $ 18,960 $ 2,378 $ 8,881 Photofinishing 10,147 18,688 23,853 Other Products and Services 15,627 1,640 2,515 Corporate 625 4,560 5,349 -------- -------- -------- $ 45,359 $ 27,266 $ 40,598 ======== ======== ========
171 PAGE Substantially all the Company's portrait studio business operates in the United States under a Sears, Roebuck and Co., ("Sears") license agreement that is terminable by either the Company or Sears upon 90 days' notice. Except in connection with store closings, Sears has never terminated the operations of any of the Company's portrait studios. The Company's relationship with Sears is long-standing, and management has no reason to believe that Sears will exercise its rights under the agreements to reduce materially the scope of the Company's business with Sears. 13. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consist of the following (dollars in thousands): Accrued Expenses and Other Liabilities as of February 5, 1994 and February 6, 1993
February 5, February 6, 1994 1993 Accrued employment costs $ 9,247 $ 6,480 Sales taxes payable 3,005 2,655 Accrued advertising expense 3,640 4,847 Accrued license fees 2,380 2,635 Accrued interest 1,728 30 Other 1,046 820 ------- ------- $21,046 $17,467 ======= =======
14. Stock Repurchase Plan The Company's Board of Directors announced on September 29, 1988, that it had authorized the Company to purchase up to 2,500,000 shares, or approximately 15%, of its outstanding common stock. In addition, on April 2, 1992, the Company's Board also authorized the purchase of an additional 2,000,000 shares of Company common stock. The Board has authorized purchases at management's discretion from time to time at acceptable market prices. Acquired shares are held as treasury stock and will be available for general corporate purposes. As of February 5, 1994, the Company had purchased 2,363,808 shares of stock for $58,556,032 at an average stock price of $24.77. Subsequent to fiscal year end and as of April 6, 1994, the Company had purchased an additional 204,855 shares of stock for $3,329,272 at an average stock price of $16.25. 172 PAGE 15. Stockholder Rights Plan On May 1, 1989, the Board of Directors of the Company declared a dividend distribution of one preferred stock purchase right for each outstanding share of common stock. The rights were issued under a Rights Plan, which entitles holders of common stock to purchase one one-hundredth of a share of Series A Participating Preferred Stock in the Company, or an acquirer of the Company, in the event of certain hostile efforts, as defined in the Rights Plan, to gain control of the Company. The rights issued expire on May 11, 1999, unless redeemed earlier. On August 26, 1993, the Board of Directors of the Company amended the Company's Stockholder Rights Plan. As a result of the amendment, the rights will be exercisable if any person or group (other than certain entities affiliated with CPI) becomes the beneficial owner of 15 percent or more of CPI common stock. Under the original Stockholder Rights Plan the rights were exercisable at 20 percent of CPI common stock. 16. Contingencies The Company is the defendant in various lawsuits arising in the normal course of business. It is the opinion of management that the ultimate liability, if any, resulting from the resolution of such lawsuits will not have a material effect on the consolidated financial position or the results of operations of the company. 173 PAGE SELECTED QUARTERLY FINANCIAL DATA The Company's portrait photography business is seasonal, with the largest sales volume during the third and fourth quarters, the period preceding and including the Thanksgiving and Christmas seasons. The following table sets forth selected financial data for the quarters of the Company's fiscal years ended February 5, 1994, February 6, 1993 and February 1, 1992. Although this information is unaudited, in the opinion of the Company, it reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for such periods. Since April 17, 1989, the Company's common stock has been traded on the New York Stock Exchange under the symbol CPY. Prior to that time it was traded on the National Association of Securities Dealers Automated Quotation ("NASDAQ") under the symbol CPIC. The table below sets forth the high and low last sale prices of the common stock reported by the New York Stock Exchange or NASDAQ during the Company's last three fiscal years. 174 PAGE Selected Quarterly Financial Data for Fiscal Year 1993 (In Thousands, Except Per Share Amounts)
-------------- Quarter Ended ------------- May 1, July 24, Nov. 13, Feb. 5, 1993 1993 1993 1994 (12 wks.) (12 wks.) (16 wks.) (12 wks.) FISCAL YEAR 1993: Net sales $ 88,790 $ 95,386 $145,320 $146,024 Earnings (loss) before income taxes and cumulative effect of accounting change$ (4,246) $ 3,459 $ 5,588 $ 13,718 Earnings (loss) before cumulative effect of accounting change $ (2,538) $ 2,067 $ 3,353 $ 8,235 Net earnings (loss) $ (418) $ 2,067 $ 3,353 $ 8,235 Earnings per common share: Cumulative effect of accounting change $ 0.14 - - - Net earnings $ (0.03) $ 0.14 $ 0.23 $ 0.56 Weighted average number of common and common equivalent shares 14,663 14,680 14,673 14,645 Dividends $ 0.14 $ 0.14 $ 0.14 $ 0.14 STOCK PRICE AND VOLUME: High $ 20.75 $ 16.75 $ 18.25 $ 17.88 Low $ 16.00 $ 14.00 $ 13.88 $ 14.38 Volume (thousands) 1,790 3,153 1,731 2,309
175 PAGE Selected Quarterly Financial Data for Fiscal Year 1992 (In Thousands, Except Per Share Amounts)
-------------- Quarter Ended ------------- Apr. 25, July 18, Nov. 7, Feb. 6, 1992 1992 1992 1993 (12 wks.) (12 wks.) (16 wks.) (13 wks.) FISCAL YEAR 1992: Net sales $ 92,636 $ 92,637 $126,468 $137,639 Earnings before income taxes $ 3,491 $ 5,968 $ 9,907 $ 17,156 Net earnings $ 2,181 $ 3,646 $ 6,180 $ 10,608 Earnings per common share $ 0.15 $ 0.25 $ 0.42 $ 0.72 Weighted average number of common and common equivalent shares 14,727 14,672 14,655 14,658 Dividends $ 0.14 $ 0.14 $ 0.14 $ 0.14 STOCK PRICE AND VOLUME: High $ 25.88 $ 26.38 $ 19.75 $ 21.63 Low $ 22.50 $ 19.50 $ 15.00 $ 16.00 Volume (thousands) 1,991 2,014 2,280 4,019
176 PAGE Selected Quarterly Financial Data for Fiscal Year 1991 (In Thousands, Except Per Share Amounts)
-------------- Quarter Ended ------------- Apr. 27, July 20, Nov. 9, Feb. 1, 1991 1991 1991 1992 (12 wks.) (12 wks.) (16 wks.) (12 wks.) FISCAL YEAR 1991: Net sales $ 80,552 $ 79,656 $129,900 $124,411 Earnings before income taxes $ 7,141 $ 8,685 $ 10,904 $ 16,545 Net earnings $ 4,492 $ 5,486 $ 6,835 $ 10,322 Earnings per common share $ 0.30 $ 0.36 $ 0.45 $ 0.69 Weighted average number of common and common equivalent shares 15,199 15,237 15,181 14,784 Dividends $ 0.14 $ 0.14 $ 0.14 $ 0.14 STOCK PRICE AND VOLUME: High $ 34.63 $ 34.75 $ 31.50 $ 26.75 Low $ 28.88 $ 30.00 $ 21.88 $ 22.63 Volume (thousands) 1,532 3,593 5,038 2,689
177 PAGE INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders CPI Corp.: We have audited the accompanying consolidated balance sheets of CPI Corp. and subsidiaries as of February 5, 1994 and February 6, 1993, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for each of the fiscal years in the three-year period ended February 5, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CPI Corp. and subsidiaries at February 5, 1994 and February 6, 1993, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended February 5, 1994, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for income taxes to conform with the provisions of Statement of Financial Accounting Standards No. 109. /s/ KPMG PEAT MARWICK St. Louis, Missouri April 6, 1994 178 PAGE DIRECTORS AND OFFICERS Directors Milford Bohm* Retired founder and former Chairman, CPI Corp. Alyn V. Essman Chairman of the Board and Chief Executive Officer, CPI Corp. Russell Isaak President, CPI Corp. Lee Liberman* Former Chairman, Laclede Gas Company Nicholas L. Reding Vice Chairman, Monsanto Company Robert L. Virgil* Partner, Edward D. Jones & Co. Officers Chairman, Chief Executive Officer Alyn V. Essman Office of the President Russell Isaak-President David E. April-Senior Executive Vice President Patrick J. Morris-Senior Executive Vice President Secretary and General Counsel Jane E. Nelson Corporate Officers Barry Arthur-Executive Vice President, Finance -Chief Financial Officer Edmund J. Chase-Executive Vice President, Studio Strategic Development William F. Cronin-Executive Vice President, Marketing Fran Scheper-Executive Vice President, Human Resources Richard Tarpley-Executive Vice President, Manufacturing Division Presidents R. L. Beck-CPI/Fox Photo Finish W. G. Blossfield-Sears Portrait Studios, Eastern Retail Operations Theodore deBuhr II-CPI Electronic Publishing Arthur Padovese-Prints Plus Harry Stecher-Sears Portrait Studios, Western Retail Operations and Canadian Operations * Member of the Audit Committee of the Board of Directors 179 PAGE INVESTOR INFORMATION Most Recent Analyst Reports: Forbes Investors Advisory Institute, William D. Curtin, November 1, 1993 Morgan Keegan & Co. , Craig T. Weichmann, March 25,1994 Smith Barney, Peter J. Enderlin, March 21, 1994 Value Line, Philip M. Seligman, March 4, 1994 Stock Transfer Agent and Registrar: Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004 Automatic Dividend Reinvestment: The automatic dividend reinvestment plan is a convenient way for shareholders to increase their investment in the Company, with all brokerage commissions and service charges paid by CPI Corp. Cash contributions in the amount of $10 to $10,000 per quarter can also be made toward the purchase of additional shares. For a plan description, enrollment card or other information, write or call the Shareholder Service Department at CPI Corporate Headquarters. At the Company: Alyn V. Essman Chairman CPI Corp., 1706 Washington Avenue, St. Louis, MO 63103 (314) 231-1575, Extension 3240 At the Financial Relations Board, Inc.: LeRoy A. Glasner, Jr. C.F.A. Assistant Managing Partner John Hancock Center 875 N. Michigan Avenue Chicago, IL 60611 (312) 266-7800 Kathy Phelan Partner, Manager-East Coast MID 675 Third Avenue New York, NY 10017 (212) 661-8030 Annual Meeting/Corporate Headquarters: The annual meeting of stockholders' will convene at 10:00 a.m., Tuesday, June 7, 1994 at the Corporate Headquarters, 1706 Washington Avenue, St. Louis, MO 63103-1717. 180 PAGE (Back cover of Annual Report to Shareholders) CPI Corp. 1706 Washington Avenue, St. Louis, Missouri 63103-1717 NYSE:CPY 181 PAGE Exhibit (21) SUBSIDIARIES OF THE REGISTRANT AS OF FEBRUARY 7, 1994 Subsidiaries of the Registrant as of February 7, 1994
State/Province Country -------------- ------------ CPI Corp. Delaware United States Consumer Programs Holding, Inc. Delaware United States Consumer Programs, Incorporated Missouri United States d/b/a Sears Portrait Studios d/b/a Pictureland CPI Brands, Inc. Delaware United States Consumer Programs Partner,Inc. Delaware United States Fox Photo, Inc. Delaware United States d/b/a Fox Photo d/b/a CPI Photo Finish d/b/a CPI One-Hour Lab d/b/a CPI One-Hour Photo d/b/a Studio Express d/b/a Portraits By You d/b/a Fox Imaging Center Fox Photo Partner, Inc. Delaware United States Proex Photo Systems, Inc. Missouri United States d/b/a Proex Portrait & Photo d/b/a Proex Photo & Lab d/b/a Proex Photo CPI Prints Plus, Inc. Delaware United States Ridgedale Prints Plus, Inc. Minnesota United States d/b/a Prints Plus Prints Plus, Inc. California United States d/b/a Prints Plus d/b/a Prints & Posters
182 Subsidiaries of the Registrant as of February 7, 1994
State/Province Country -------------- ------------ Color Laser Corp. Delaware United States d/b/a Imageland CPI Photo Finish, Inc. Delaware United States CPI Copy Services, Inc. Missouri United States d/b/a CopyMat d/b/a Copy USA d/b/a Raging Fingers CPI Technology Corp. Missouri United States CPI Corp. Canada Ontario Canada d/b/a Sears Portrait Studios
183 PAGE Exhibit (23) ACCOUNTANTS' CONSENT The Board of Directors and Stockholders CPI Corp.: We consent to incorporation by reference in the Registration Statements (No. 2-86403, No. 33-19981 and No. 33-50082) on Form S-8 of CPI Corp. of our report dated April 6, 1994, relating to the consolidated balance sheets of CPI Corp. and subsidiaries as of February 5, 1994 and February 6, 1993 and the related consolidated statements of earnings, changes in stockholders' equity and cash flows and related schedules for each of the fiscal years in the three-year period ended February 5, 1994, which report appears in the 1993 annual report on Form 10-K of CPI Corp. /s/ KPMG PEAT MARWICK St. Louis, Missouri April 6, 1994 184 -----END PRIVACY-ENHANCED MESSAGE-----