-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NiOXZpLdg7OkWeSfn8OIZZzEKy58sc0Hwk6PMG7J//FbUi6nr+BNZ+2mu3yYwi4b h7p0CVP+5w5doS2zuR9psg== 0000025354-96-000004.txt : 19960503 0000025354-96-000004.hdr.sgml : 19960503 ACCESSION NUMBER: 0000025354-96-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960203 FILED AS OF DATE: 19960502 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CPI CORP CENTRAL INDEX KEY: 0000025354 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 431256674 STATE OF INCORPORATION: DE FISCAL YEAR END: 0203 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10204 FILM NUMBER: 96555040 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-K405 1 UNITED STATES SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K405 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended February 3, 1996 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 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 _____. 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 __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 April 30, 1996 ($16.88 per share): $223,818,216. As of April 30, 1996, 13,914,244 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 3, 1996, are incorporated by reference into Parts I, II and IV of this Report. Portions of the Proxy Statement relating to the Annual Meeting of Shareholders to be held June 6, 1996, are incorporated by reference into Part III of this Report. TABLE OF CONTENTS PART I - ------ Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II - ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Item 9. Disagreements on Accounting and Financial Disclosure PART III - -------- Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV - ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K Signatures 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, and posters, prints and framing outlets throughout the United States, Canada and Puerto Rico. 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 3, 1996, the Company operated 611 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 Ridgedale Prints Plus, Inc. ("Prints Plus") from the Melville Corporation. Prints Plus is a posters, prints and custom framing retail chain with 144 stores located in malls throughout the United States. On April 4, 1996, the Company announced its intention to sell certain assets of its Electronic Publishing operations for approximately $5.0 million. Additionally, the purchaser will assume certain liabilities of the Electronic Publishing operation which aggregate approximately $900,000. The Company expects to have completed the transfer by April 30, 1996. A provision of $3.8 million has been made to reflect the discontinued business at its estimated realizable value. The Company has classified the Electronic Publishing operation as a discontinued operation and has reclassified the prior years' financial statements to reflect this change. For the fiscal year ended February 3, 1996, approximately 53% of net sales and 83% of operating earnings (before deduction of general corporate expenses, net interest income (expense), other income and income tax expense) were derived from the Sears Portrait Studio business. The Company has operated portrait studios as a Sears Roebuck and Company ("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, Canada and Puerto Rico. 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. RELATIONSHIP WITH SEARS - ----------------------- The Company operates its 1015 Sears Portrait Studio locations 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 for studios located in a Sears store. Net sales are defined as gross sales less customer returns, allowances and sales taxes. The Company provides all studio furniture, equipment and fixtures, conducts advertising at its own expense, and is responsible for hiring, training and compensating the Company employees and must indemnify Sears against all 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. 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, conducts all advertising at its own expense and is responsible for its Canadian employees. 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 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 photo- graphers 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 similar 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 select metropolitan areas, the Company also benefits from area-wide marketing and supervision. 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 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 fourth fiscal quarter as well. EMPLOYEES - --------- At February 3, 1996, the Company had approximately 11,300 employees, 219 of which were employed in discontinued operations. Approximately 6,000 of these employees were part-time, with 55 employed in discontinued operations. The Company's employees significantly increase in number during peak periods and, at December 16, 1995, the Company had approximately 15,000 employees, including 242 in discontinued operations. 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 1995 ANNUAL REPORT TO SHAREHOLDERS, EXHIBIT 13 OF THIS FILING, IN THE DISCUSSION OF THE COMPANY'S BUSINESS SEGMENTS AND KEY OPERATING UNITS. 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 300,000 Administration and Owned Photoprocessing St. Louis, Missouri 78,312 Warehousing Leased (1) St. Louis, Missouri 49,364 Warehousing Leased (2) St. Louis, Missouri 13,140 Printing Leased (3) St. Louis, Missouri 21,200 Warehousing Leased (4) Brampton, Ontario 40,000 Administration, Owned Warehousing and Photoprocessing Las Vegas, Nevada 12,200 Photoprocessing Leased (5) Thomaston, Connecticut 25,000 Administration and Owned Photoprocessing Edina, Minnesota 28,848 Administration, Leased (6) Warehousing and Photoprocessing Concord, California 43,088 Administration, Leased (7) Warehousing and Manufacturing (1) Lease term expires on June 30, 1997. (2) Lease term expires on February 28, 1997. (3) Lease term expires on November 30, 1996. (4) Lease term expires on June 19, 1996. (5) Lease term expires on July 31, 1998. (6) Lease term expires on April 30, 1999. (7) 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 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 1995. 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 1995 Annual Report to Shareholders, Exhibit 13 of this filing, in the section titled "Selected Quarterly Financial Data," and will be contained in the Registrant's 1996 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1995, and is incorporated herein by reference. As of April 4, 1996, the market price of the Registrant's common stock was $16.000 per share with 13,866,854 shares outstanding and approximately 2,109 holders of record. ITEM 6. SELECTED FINANCIAL DATA Information required under this Item is contained in the Registrant's 1995 Annual Report to Shareholders, Exhibit 13 of this filing, in the section titled "Financial Background and Trends," and is 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 1995 Annual Report to Shareholders, Exhibit 13 of this filing, in the sections titled "Management's Discussion and Analysis - Overview," "Management's Discussion and Analysis - Financial Condition," "Management's Discussion and Analysis - Results of Operations," and "Management's Discussion and Analysis of Cash Flows," and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required under this Item is contained in the Registrant's 1995 Annual Report to Shareholders, Exhibit 13 of this filing, in the sections titled "Consolidated Balance Sheets," "Consolidated Statements of Earnings," "Consolidated Statement of Changes in Stockholders' Equity," "Consolidated Statement of Cash Flows," "Notes to Consolidated Financial Statements" and "Selected Quarterly Financial Data," and is incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required under this Item will be contained in the Registrant's 1996 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1995, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required under this Item will be contained in the Registrant's 1996 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1995, 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 1996 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1995, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not Applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Index to Certain Documents (1) Independent Auditor's Reports These reports are included in this filing under the sections titled "Independent Auditors' Report" in this Form 10-K and "Exhibit 13" (under the title "Independent Auditors' Report" in the Registrant's 1995 Annual Report to Shareholders), and are incorporated herein by reference. (2) Financial Statements: (a) Consolidated Balance Sheets as of as of February 3, 1996 and February 4, 1995 (b) Consolidated Statements of Earnings for the fiscal years ended February 3, 1996, February 4, 1995 and February 5, 1994 (c) Consolidated Statements of Changes in Stockholder's Equity for the fiscal years ended February 3, 1996, February 4, 1995 and February 5, 1994 (d) Consolidated Statements of Cash Flows for the fiscal years ended February 3, 1996, February 4, 1995 and February 5, 1994 Information required under these items is contained in the Registrant's 1995 Annual Report to Shareholders, Exhibit 13 of this filing, under the sections titled "Consolidated Balance Sheets," "Consolidated Statements of Earnings," "Consolidated Statement of Changes in Stockholders' Equity," and "Consolidated Statements of Cash Flows," and is incorporated herein by reference. (3) Notes to Consolidated Financial Statements This information is included in the Registrant's 1995 Annual Report to Shareholders, Exhibit 13 of this filing, under the section titled "Notes to Consolidated Financial Statements," and is incorporated herein by reference. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (4) Financial Statement Schedules II. Valuation and Qualifying Accounts This information is included in this filing under the section titled "Schedule II" in this Form 10-K, and is incorporated herein by reference. 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 or notes thereto. (b) Reports on Form 8-K On December 22, 1995, the Company filed a report on Form 8-K with an attached press release announcing: a third quarter decrease in sales of 2.2%; a third quarter decrease in earnings per share; continuing margin improvements for the Company's portrait studios; and the Company expects to achieve a double-digit earnings per share increase for the full year. (c) Index to Exhibits EXHIBIT 3. ARTICLES OF INCORPORATION AND BYLAWS Information required by this Exhibit 3 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 NO. - ----------------------------- ------------- -------- ----------- (a) Articles of Incorporation Annual Report 4/30/90 1-10204 on Form 10-K dated 4/27/90 (b) Bylaws Annual Report 4/30/90 1-10204 on Form 10-K dated 4/27/90 (c) Amendment to Bylaws Annual Report 5/4/94 1-10204 on Form 10-K dated 4/6/94 (d) Amendment to Bylaws Form 8-K 8/3/95 0-11227
EXHIBIT 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING DEBENTURES Information required by this Exhibit 4 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 NO. - ----------------------------- ------------- -------- ----------- (a) Articles of Incorporation Annual Report 4/30/90 1-10204 and Bylaws on Form 10-K dated 4/27/90 (b) Note Agreement for Series Form 10-Q 9/3/93 1-10204 A Senior Notes Due August 31, 2000 and Series B Notes Due August 31, 2000
EXHIBIT 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING DEBENTURES (CONTINUED)
REGISTRATION INFORMATION INCORPORATED DOCUMENT FILING COMMISSION BY REFERENCE REFERRED TO DATE FILE NO. - ----------------------------- ------------- -------- ----------- (c) Pledge Agreement Form 10-Q 9/3/93 1-10204 (d) Series A Senior Note Due Form 10-Q 9/3/93 1-10204 August 31, 2000, No. R-A1 (e) Series B Senior Note Due Form 10-Q 9/3/93 1-10204 August 31, 2000, No. R-B1 (f) Series B Senior Note Due Form 10-Q 9/3/93 1-10204 August 31, 2000, No. R-B2 (g) CPI Corp. Shareholder Form 8-A 5/2/89 - Rights Plan (h) First Amendment to CPI Form 10-Q 9/3/93 1-10204 Corp. Shareholder Rights Plan (i) Second Amendment to CPI Form 8-K 8/3/95 0-11227 Corp. Shareholder Rights Plan (j) First Amendment to Note Form 10-Q 9/2/94 1-10204 Agreement dated 2/24/94 (k) Second Amendment to Note Form 10-Q 9/2/94 1-10204 Agreement dated 6/14/94
EXHIBIT 10. MATERIAL CONTRACTS (10.1) CPI Consent to Assignment and Assumption of $15 Million Revolving Credit Note (10.2) Notification of Assignment and Assumption of $15 Million Revolving Credit Note Agreement EXHIBIT 10. MATERIAL CONTRACTS (CONTINUED) Additional information required by this Exhibit 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 NO. - ----------------------------- ------------- -------- ----------- (a) 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 (b) Deferred Compensation Annual Report 5/1/92 1-10204 and Stock Appreciation on Form 10-K, Rights dated 4/24/92 (c) CPI Corp. Restricted Annual Report 5/1/92 1-10204 Stock Plan on Form 10-K, dated 4/24/92 (d) Deferred Compensation Annual Report 5/1/92 1-10204 and Retirement Plan for on Form 10-K, Non-Management Directors dated 4/24/92 (e) CPI Corp. Stock Option Form S-8 7/28/92 33-50082 Plan (As Amended and Restated effective 2/2/92) (f) Registration of Form 8-A 3/21/89 - Securities on the New York Stock Exchange (g) CPI Corp. Shareholder Exhibit to 5/2/89 - Rights Plan Form 8-A (h) CPI Voluntary Stock Form D 3/31/93 - Option Plan (i) First Amendment to CPI Form 10-Q 9/3/93 1-10204 Corp. Shareholder Rights Plan (j) Second Amendment to CPI Form 8-K 8/3/95 0-11227 Corp. Shareholder Rights Plan
EXHIBIT 10. MATERIAL CONTRACTS (CONTINUED)
REGISTRATION INFORMATION INCORPORATED DOCUMENT FILING COMMISSION BY REFERENCE REFERRED TO DATE FILE NO. - ----------------------------- ------------- -------- ----------- (k) $60 Million Revolving Form 10-Q 9/1/95 1-10204 Credit Agreement (l) $25 Million Revolving Form 10-Q 9/1/95 1-10204 Credit Note with Mercantile Bank (m) $20 Million Revolving Form 10-Q 9/1/95 1-10204 Credit Note with Harris Trust & Savings (n) $15 Million Revolving Form 10-Q 9/1/95 1-10204 Credit Note with The Daiwa Bank (o) License Agreement - Annual Report 5/3/95 1-10204 Sears, Roebuck & Co. on Form 10-K dated 4/6/95 (p) Employment Contract - Annual Report 5/3/95 1-10204 Alyn V. Essman * on Form 10-K dated 4/6/95 (q) Employment Contract - Annual Report 5/3/95 1-10204 Russell H. Isaak * on Form 10-K dated 4/6/95 (r) Employment Contract - Annual Report 5/3/95 1-10204 Patrick J. Morris * on Form 10-K dated 4/6/95 (s) Employment Contract - Annual Report 5/3/95 1-10204 David E. April * on Form 10-K dated 4/6/95 * Employment contracts are automatically renewed and extended for one year unless terminated by the Board of Directors or the employee.
EXHIBIT 10. MATERIAL CONTRACTS (CONTINUED)
REGISTRATION INFORMATION INCORPORATED DOCUMENT FILING COMMISSION BY REFERENCE REFERRED TO DATE FILE NO. - ----------------------------- ------------- -------- ----------- (t) Employment Contract - Annual Report 5/3/95 1-10204 Barry C. Arthur * on Form 10-K dated 4/6/95 (u) Employment Contract - Annual Report 5/3/95 1-10204 Jane E. Nelson * on Form 10-K dated 4/6/95 (v) Employment Contract - Annual Report 5/3/95 1-10204 Fran Scheper * on Form 10-K dated 4/6/95 * Employment contracts are automatically renewed and extended for one year unless terminated by the Board of Directors or the employee.
EXHIBIT 11. COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 13. 1995 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT EXHIBIT 23. INDEPENDENT AUDITORS' CONSENT EXHIBIT 27. FINANCIAL DATA SCHEDULE 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 ------------------------- (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 4, 1996 - ----------------------- Chief Executive Officer (Alyn V. Essman) and Director (Principal Executive Officer) /s/ Milford Bohm Director April 4, 1996 - ----------------------- (Milford Bohm) /s/ Mary Ann Krey Director April 4, 1996 - ----------------------- (Mary Ann Krey) /s/ Lee Liberman Director April 4, 1996 - ----------------------- (Lee Liberman) /s/ Nicholas L. Reding Director April 4, 1996 - ----------------------- (Nicholas L. Reding) /s/ Martin Sneider Director April 4, 1996 - ----------------------- (Martin Sneider) /s/ Robert L. Virgil Director April 4, 1996 - ----------------------- (Robert L. Virgil) /s/ Russell Isaak President April 4, 1996 - ----------------------- (Russell Isaak) /s/ Patrick J. Morris Senior Executive April 4, 1996 - ----------------------- Vice President (Patrick J. Morris) /s/ David E. April Senior Executive April 4, 1996 - ----------------------- Vice President (David E. April) /s/ Barry C. Arthur Vice President and April 4, 1996 - ----------------------- Treasurer (Principal (Barry C. Arthur) Financial and Accounting Officer)
INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders CPI Corp.: Under date of April 4, 1996, we reported on the consolidated balance sheets of CPI Corp. and subsidiaries as of February 3, 1996 and February 4, 1995, 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 3, 1996, as contained in the 1995 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 1995 fiscal year. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related financial statement schedule as listed in the accompanying index. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP - ------------------------- KPMG PEAT MARWICK LLP St. Louis, Missouri April 4, 1996 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS CPI CORP. CONSOLIDATED ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES FISCAL YEARS ENDED FEBRUARY 3, 1996, FEBRUARY 4, 1995 AND FEBRUARY 5, 1994
FEBRUARY 3, FEBRUARY 4, FEBRUARY 5, 1996 1995 1994 ----------- ----------- ----------- Balance at beginning of year $ 1,277 $ 918 $ 1,042 ========= ========= ========= Balance at end of year $ 1,216 $ 1,277 $ 918 ========= ========= =========
The majority of receivable amounts are due from Sears 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 other products and 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. EX-10.1 2 Exhibit (10.1) (Letterhead) DAIWA BANK The Daiwa Bank, Ltd. U.S. Commercial Banking Division 450 Lexington Avenue Suite 1700 New York, NY 10017 Tel: (212) 808-2300 Fax: (212) 818-0866 CPI Corporation - 2437B January 11, 1996 CPI Corporation 1706 Washington Avenue St. Louis, Missouri 63103 Attn: Chief Financial Officer Fax: (314) 878-4537 Revolving Credit Agreement, dated the 13th day of July, 1995, among CPI Corp., and the Banks named therein, including Mercantile Bank of St. Louis National Association, as Agent (the "Agreement") Dear Sir or Madam: As you may know, The Daiwa Bank, Limited ("Daiwa") and The Sumitomo Bank, Limited ("Sumitomo") are in the final stages of discussions relating to the purchase by Sumitomo of, among other things, the business and operations of the U.S. Commercial Banking Division of Daiwa. Specifically, it is contemplated that Daiwa would sell, assign, convey and set over to Sumitomo all of its rights, title and interest to and under the Agreement and documents related thereto to the extent related to the obligations thereunder and Sumitomo would assume all of the obligations thereunder of Daiwa, such assignment and assumption to be pursuant to an assignment and assumption, between Daiwa and Sumitomo, substantially in the form attached hereto (the "Assignment and Assumption"). We will notify you when Daiwa and Sumitomo have executed definitive documentation, and of the effectiveness of the transfer pursuant to the Assignment and Assumption and, if requested, we will deliver to you a counterpart of the Assignment and Assumption. Please acknowledge your (a) consent and agreement to the assignment and assumption effectuated pursuant to the Assignment and Assumption, (b) agreement to look only to Sumitomo for the performance of the obligations assumed pursuant to the Assignment and Assumption, and (c) agreement to release and discharge Daiwa from any and all obligations under the Agreement (to be effective contemporaneously with the effectiveness of the transfer pursuant to the Assignment and Assumption) by countersigning and dating one executed copy of this letter and sending it on or before January 18, 1996 by overnight delivery to Debevoise & Plimpton, 875 Third Avenue, New York, NY 10022 Attention: Pamela J. Sackmann. Please retain one original copy of this letter for your files. If you have any questions about this letter please contact the account executive at Daiwa or the Vice President and Manager, Ms. Jayleen R. Hague, immediately by telephone at (314) 241-0373. Alternatively, you may contact or have your attorneys contact Daiwa's attorneys at Debevoise & Plimpton, David Chalfin, Pamela Sackmann or Harriet Whiting by telephone at (212) 909-6000 to answer any questions or concerns you may have. Information regarding Sumitomo, including Sumitomo's address for purpose of providing notice to Sumitomo under the terms of the Agreement, the address of Sumitomo's U.S. and non-U.S. lending office, if applicable, and payment information, including bank routing and account number is set forth on Schedule A hereto. Thank you very much for your prompt attention to this matter. Very truly yours, THE DAIWA BANK, LIMITED By:/s/ B.P. Maddams ---------------------------------- Name: B.P. Maddams Title: Executive Vice President & Assistant General Manager Acknowledged and Agreed: By: /s/ Barry Arthur -------------------- Name: BARRY ARTHUR Title: CHIEF FINANCIAL OFFICER AND TREASURER Dated: 1/17/96 ------- EXHIBIT A --------- [USCBD] ASSIGNMENT AND ASSUMPTION AGREEMENT AND ASSUMPTION dated as of __________, 1996 between The Daiwa Bank, Limited, a bank organized under the laws of Japan ("Assignor") and The Sumitomo Bank, Limited, a bank organized under the laws of Japan ("Assignee"). W I T N E S S E T H: WHEREAS, Assignor desires to assign all of its right, title and interest in and to the loan agreements (the "Loan Agreements") set forth on Schedule A hereto and the other agreements set forth on Schedule A hereto and all documents related to the Loan Agreements to the extent related to obligations under the Loan Agreements (collectively, the "Agreements") and all of its liabilities and obligations under the Agreements, and Assignee desires to accept the assignment of such right, title and interest and to assume such liabilities and obligations; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, Assignor and Assignee agree as follows: 1. Assignment. As of the Effective Date. Assignor hereby sells, assigns, transfers and sets over to Assignee all of its right, title and interest in and to, and obligations under, the Agreements, including without limitation Assignor's commitments to extend credit pursuant to the Agreements, as in effect on the Effective Date, and the amounts owing to Assignor on the Effective Date pursuant to the Agreements. 2. Assumption. As of the Effective Date, Assignee hereby accepts the assignment by Assignor of Assignor's right, title and interest in and to, and obligations under, the Agreements, and hereby fully and unconditionally assumes all of Assignor's liabilities and obligations under the Agreements. As of the Effective Date, (a) Assignee shall be a party to the Agreements and, to the extent provided in this Assignment and Assumption, have the rights and obligations of Assignor thereunder and (b) Assignor shall, to the extent provided in this Assignment and Assumption, relinquish its rights and be released from its obligations under the Agreements. 3. Effectiveness. This Assignment and Assumption shall become effective on __________, 1996 (the "Effective Date"). 4. Governing Law. This Assignment and Assumption shall be governed by and construed in accordance with the laws of the State of New York. 5. Counterparts. This Assignment and Assumption may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have caused this Assignment and Assumption to be duly executed in their respective corporate names by their respective duly authorized officers, all as of the day and year first above written. THE DAIWA BANK, LIMITED By ---------------------------------- Name: Title: THE SUMITOMO BANK, LIMITED By ---------------------------------- Name: Title: SCHEDULE A AGREEMENTS ---------- Name Parties Date ---- ------- ---- SCHEDULE A The Sumitomo Bank, Ltd., Chicago Branch, Assignee Notice Information Notice: Institution Name The Sumitomo Bank, Ltd., Chicago Branch Address: 233 South Wacker Drive Suite 4800 Chicago, Illinois 60606-6448 Payment Instructions: ABA#: First National Bank Chicago Branch ABA 071000013 For Fed Wire: Credit to Sumitomo Bank Chicago Branch 15-01208 Contact: Ms. Kwan Park Loan Administration Section Chief Euro Lending 233 South Wacker Drive Office: Suites 4800 Chicago, Illinois 60606-6448 EX-10.2 3 Exhibit (10.2) (Letterhead) DAIWA BANK The Daiwa Bank, Ltd. U.S. Commercial Banking Division 450 Lexington Avenue Suite 1700 New York, NY 10017 Tel: (212) 808-2300 Fax: (212) 818-0866 February 2, 1996 VIA FEDERAL EXPRESS - ------------------- To Whom It May Concern: This is to inform you that The Daiwa Bank, Limited ("Daiwa") and The Sumitomo Bank, Limited ("Sumitomo") have executed definitive documentation pursuant to which Daiwa has agreed to sell and Sumitomo has agreed to purchase certain assets and assume certain liabilities of Daiwa's U.S. commercial banking division, including the rights, title and interest to and obligations under the credit agreement or note, and, in certain cases, certain related documents, to which you are a party. Such transfer, which is pursuant to an assignment and assumption, a copy of which is attached hereto, is effective as of February 2, 1996. Please note that the notice and payment information for Sumitomo, set forth on Schedule A, attached hereto, is different from the Schedule A which was attached to the assignment and assumption previously sent to you. Very truly yours, THE DAIWA BANK, LIMITED By: /s/ B. P. Maddams __________________________ B. P. MADDAMS EVP & AGM U.S.C.B.D. SCHEDULE A The Sumitomo Bank, Limited USCBD Assignee Notice Information Notice: The Sumitomo Bank, Limited USCBD St. Louis Office 200 North Broadway, Suite 1625 St. Louis, MO 63102 Attn: Manager Tel: (314) 241-0373 Fax: (314) 241-0736 Payment Instructions: Wire payments to Federal Reserve Bank of Chicago, for the account of The Sumitomo Bank, Limited, Chicago Branch, Account No. 071001850 Lending Office: The Sumitomo Bank, Limited USCBD 233 South Wacker Drive Chicago, Illinois 60606-6448 Attn: Vice President & Manager-Operations ENDORSEMENT FOR VALUE RECEIVED, THE DAIWA BANK, LIMITED ("The Assignor") hereby sells, assigns and transfers unto THE SUMITOMO BANK, LIMITED (the "Assignee"), one Promissory Note dated July 13, 1995 of CPI Corp. made payable to the Assignor, having an original principal amount of $15,000,000, herewith, and do hereby irrevocably constitute and appoint the Assignee attorney to transfer the said Promissory Note with full power of substitution in the premises. Dated: February 2, 1996 The Daiwa Bank Limited By: /s/ BP Maddams /s/ Brian M. Smith --------------------------------- BP MADDAMS BRIAN M. SMITH EVP & AGM SENIOR VICE USCBD PRESIDENT & REGIONAL MANAGER (EAST) [USCBD] ASSIGNMENT AND ASSUMPTION AGREEMENT AND ASSUMPTION dated as of February 2, 1996 between The Daiwa Bank, Limited, a bank organized under the laws of Japan ("Assignor") and The Sumitomo Bank, Limited, a bank organized under the laws of Japan ("Assignee"). W I T N E S S E T H: WHEREAS, Assignor desires to assign all of its right, title and interest in and to the loan agreements (the "Loan Agreements") set forth on Schedule A hereto and the other agreements set forth on Schedule A hereto and all documents related to the Loan Agreements to the extent related to obligations under the Loan Agreements (collectively, the "Agreements") and all of its liabilities and obligations under the Agreements, and Assignee desires to accept the assignment of such right, title and interest and to assume such liabilities and obligations; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, Assignor and Assignee agree as follows: 1. Assignment. As of the Effective Date. Assignor hereby sells, assigns, transfers and sets over to Assignee all of its right, title and interest in and to, and obligations under, the Agreements, including without limitation Assignor's commitments to extend credit pursuant to the Agreements, as in effect on the Effective Date, and the amounts owing to Assignor on the Effective Date pursuant to the Agreements. 2. Assumption. As of the Effective Date, Assignee hereby accepts the assignment by Assignor of Assignor's right, title and interest in and to, and obligations under, the Agreements, and hereby fully and unconditionally assumes all of Assignor's liabilities and obligations under the Agreements. As of the Effective Date, (a) Assignee shall be a party to the Agreements and, to the extent provided in this Assignment and Assumption, have the rights and obligations of Assignor thereunder and (b) Assignor shall, to the extent provided in this Assignment and Assumption, relinquish its rights and be released from its obligations under the Agreements. 3. Effectiveness. This Assignment and Assumption shall become effective on February 2, 1996 (the "Effective Date"). 4. Governing Law. This Assignment and Assumption shall be governed by and construed in accordance with the laws of the State of New York. 5. Counterparts. This Assignment and Assumption may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have caused this Assignment and Assumption to be duly executed in their respective corporate names by their respective duly authorized officers, all as of the day and year first above written. THE DAIWA BANK, LIMITED By /s/ B.P. Maddams ---------------------------------- Name: B.P. Maddams Title: Executive Vice President & Assistant General Manager By /s/ Brian M. Smith ---------------------------------- Name: Brian M. Smith Title: Senior Vice President & Regional Manager THE SUMITOMO BANK, LIMITED By /s/ Yukoh Araya ---------------------------------- Name: Yukoh Araya Title: Vice President [REDACTED] SCHEDULE A ---------- CPI Corporation Revolving Credit Agreement, dated the 13th day of July, 1995, among CPI Corp., and the Banks named therein, including Mercantile Bank of St. Louis National Association, as Agent. REVOLVING CREDIT NOTE $15,000,000.00 St. Louis, Missouri July 13, 1995 FOR VALUE RECEIVED, on the last day of the Revolving Credit Period, the undersigned, CPI CORP., a Delaware corporation ("Borrower"), hereby promises to pay to the order of THE DAIWA BANK, LIMITED ("Bank"), the principal sum of Fifteen Million Dollars ($15,000,000.00), or such lesser sum as may then constitute the aggregate unpaid principal amount of all Revolving Credit Loans made by Bank to Borrower pursuant to the Revolving Credit Agreement referred to below. The aggregate principal amount of Revolving Credit Loans which Bank shall be committed to have outstanding hereunder at any time shall not exceed Fifteen Million Dollars ($15,000,000.00), which amount may be borrowed, paid, reborrowed and repaid, in whole or in part, subject to the terms and conditions hereof and of the Revolving Credit Agreement referred to below. Borrower further promises to pay to the order of Bank interest on the aggregate unpaid principal amount of such Revolving Credit Loans on the dates and at the rate or rates provided for in the Revolving Credit Agreement. All such payments of principal and interest shall be made in lawful currency of the United States in Federal or other immediately available funds at the office of Mercantile Bank of St. Louis National Association, 721 Locust Street, St. Louis, Missouri 63101. All Revolving Credit Loans made by Bank and all repayments of the principal thereof shall be recorded by Bank and, prior to any transfer hereof, endorsed by Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided, however, that the obligation of Borrower to repay each Revolving Credit Loan made hereunder shall be absolute and unconditional, notwithstanding any failure of Bank to record or endorse or any mistake by Bank in connection with recordation or endorsement on the schedules attached to this Note. Bank's books and records (including, without limitation, the schedules attached to this Note) showing the account between Bank and Borrower shall be admissible in evidence in any action or proceeding and shall constitute prima facie proof of the items therein set forth. This Note is one of the "Notes" referred to in the Revolving Credit Agreement dated the date hereof by and among Borrower, the banks listed on the signature pages thereof and Mercantile Bank of St. Louis National Association, as agent (as the same may from time to time be amended, modified, extended or renewed, the "Revolving Credit Agreement"). The Revolving Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the occurrence of certain stated events and also for prepayments on account of principal hereof and interest hereon prior to the maturity hereof upon the terms and conditions specified therein. All capitalized terms used and not otherwise defined in this Note shall have the respective meanings ascribed to them in the Revolving Credit Agreement. Upon the occurrence of any Event of Default under the Revolving Credit Agreement, Bank's obligation to make additional Revolving Credit Loans under this Note may be terminated in the manner and with the effect as provided in the Revolving Credit Agreement and the entire outstanding principal balance of this Note and all accrued and unpaid interest thereon may be declared to be immediately due and payable in the manner and with the effect as provided in the Revolving Credit Agreement. In the event that any payment due hereunder shall not be paid when due, whether by reason of maturity, acceleration or otherwise, and this Note shall be placed in the hands of an attorney or attorneys for collection, or if this Note shall be placed in the hands of an attorney or attorneys for representation of Bank in connection with bankruptcy or insolvency proceedings relating hereto, Borrower hereby agrees to pay to the order of Bank, in addition to all other amounts otherwise due hereon, the costs and expenses of such collection and representation, including, without limitation, reasonable attorneys' fees and expenses (whether or not litigation shall be commenced in aid thereof). Borrower hereby waives presentment for payment, demand, protest, notice of protest and notice of dishonor. This Note shall be governed by and construed in accordance with the substantive laws of the State of Missouri (without reference to conflict of law principles). CPI CORP. By /s/ Barry Arthur ---------------------------- Barry Arthur Title: Treasurer/CFO EX-11 4 EXHIBIT (11) CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE FISCAL YEARS ENDED FEBRUARY 3, 1996, FEBRUARY 4, 1995 AND FEBRUARY 5, 1994 (in thousands of dollars)
1995 1994 1993 --------- --------- --------- Common shares outstanding at beginning of fiscal period 17,124 16,979 16,956 Shares issued during the period - weighted average 44 23 18 Shares issuable under employee stock plans - weighted average 40 18 27 Dilutive effect of exercise of certain stock options 84 0 0 Less: Treasury stock - weighted average (3,303) (2,919) (2,335) -------- --------- --------- Weighted average number of common and common equivalent shares 13,989 14,101 14,666 ======== ========= ========= Net earnings applicable to common shares: From continuing operations $17,659 $16,640 $15,127 From discontinued operations (3,326) (1,818) (1,891) -------- --------- --------- Net earnings $14,333 $14,822 $13,236 ======== ========= ========= Earnings per common share: From continuing operations $1.26 $1.18 $1.03 From discontinued operations (0.24) (0.13) (0.13) --------- --------- --------- Net earnings $1.02 $1.05 $0.90 ========= ========= =========
EX-13 5 EXHIBIT (13) ANNUAL REPORT TO SHAREHOLDERS Following is CPI Corp.'S 1995 Annual Report to Shareholders required by Item 601 of Regulation S-K. The original Report was prepared in paper format and has been reformatted here to comply with the electronic filing requirements of the Securities and Exchange Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. (Front cover of Annual Report to Shareholders) CPI Corp. 1995 Annual Report (Pictures: three pictures of a small girl going from an unfocused presentation to a focused presentation imposed over a picture of several CD ROM disks) Blending technology, ingenuity and customer service to define our direction for tomorrow AT A GLANCE - ----------- With almost 1,800 retail locations, CPI is the market leader in two segments of the photography industry--preschool portrait photography and one-hour photofinishing--and the leader in the wall decor industry. Following three years of declining profits due mainly to intense competition in CPI's core business, portrait photography, the Company recorded a turnaround in operating earnings in 1994 and 1995. Management believes that long-term profits will show increasing gains as a result of the following: LEADING POSITION IN THE HIGHLY COMPETITIVE PRESCHOOL PORTRAIT PHOTOGRAPHY MARKET * As the exclusive Sears Portrait Studios operator, CPI continues a 35-year partnership, with 910 studios in all major Sears stores in the U.S., Puerto Rico and Canada, and 105 studios in non-Sears shopping centers. * Despite the high level of competition, the Company has maintained market share while concurrently improving its market position by developing new marketing programs employing digital imaging technology to enhance products significantly and elevate customer service. By mid-year 1995, the technology-based programs were installed in all U.S. and Canadian studios as the first phase of a $147 million development program that is repositioning the business. * Enthusiastic customer response to the new programs has resulted in significant gains in segment sales and earnings. Further growth is anticipated as a result of continuing enhancement and expansion of the programs. LEADING POSITION IN THE INCREASINGLY COMPETITIVE ONE-HOUR 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 611 locations, the largest stand-alone minilab operation in the U.S. While photofinishing is the primary customer service, significant revenues are generated by providing additional services and products to those customers. * Responding to significantly increased competition from mass merchants, management has initiated a strategy to reposition its photofinishing business, through the application of advanced imaging technology, by developing unique new high-appeal consumer services and products that competitors either cannot offer or choose not to offer. CONTINUED GROWTH IN THE WALL DECOR RETAIL BUSINESS * Prints Plus is the leading company-owned retailer of posters, prints and framing service in the U.S., offering unparalleled product selection tailored to each market's tastes, plus "while-you-wait" framing service. * Acquired in May 1993, the new business has contributed significantly to CPI's operating earnings each year since. * Plans call for aggressively developing the operation of CPI's third major segment, adding 15 to 20 stores annually in prime mall locations over the next several years. Capital for the expansion and upgrading of CPI's various businesses will come from operating cash flow, which has averaged $44.1 million over the past five years, with supplemental funding provided by the 1993 private note placement and available short-term bank financing. ACCOMPLISHMENTS AND HIGHLIGHTS - ------------------------------ 1995 ACCOMPLISHMENTS * Following three-year decline, earnings from continuing operations recorded second consecutive annual increase, with 6.1% gain over 1994 results. * Completed installation of new digital imaging technology and associated marketing programs in all Sears Portrait Studios, including those in Canada. Very favorable customer acceptance to new product offerings resulted in continuing gains in division sales, earnings and margins. Continued program of enlarging and remodeling studios. Continued development of new technology-based products and services for introduction in 1996 and beyond. * Began testing new photofinishing products and services based on applications of digital technology in order to gain competitive advantage over mass merchant photofinishers. * Expanded Prints Plus operation with the net addition of 24 new locations, making a total of 144, with further expansion planned for 1996 and beyond. The division, which is now the Company's third major segment, made a significant contribution to corporate profits for the third consecutive year since acquisition. FINANCIAL HIGHLIGHTS (in millions of dollars, except percents and per share data)
One Year Five Year 1995 1994 % Change 1990 % Change* Sales (continuing operations): Portrait Studios $279.6 $276.4 1.1 % $279.1 0.0 % Photofinishing 188.4 191.2 (1.5)% 81.6 18.2 % Wall Decor 58.7 49.9 17.6 % -- -- Total $526.7 $517.5 1.8 % $360.7 7.9 % Operating earnings (continuing operations): Portrait Studios $ 42.6 $ 38.5 10.8 % $ 66.2 Photofinishing 3.3 4.5 (27.8)% 3.7 Wall Decor 5.4 5.5 (2.4)% -- Total 51.3 48.5 5.6 % 69.9 Income from continuing operations 31.7 30.3 4.5 % 49.3 (8.5)% Net earnings, continuing operations 17.6 16.6 6.1 % 35.0 (12.8)% Discontinued operations (3.3) (1.8) (83.0)% (1.4) ------- ------- ------- Net earnings 14.3 14.8 (3.3)% 33.6 (15.7)% Average shares outstanding (millions) 14.0 14.1 (0.8)% 15.4 Per Share: Earnings, continuing operations $ 1.26 $ 1.18 6.8 % $ 2.28 (11.2)% Discontinued operations (0.24) (0.13) (84.6)% (0.09) ------- ------- ------- Net earnings 1.02 1.05 (2.9)% 2.19 (14.2)% Dividends 0.56 0.56 -- 0.50 Tangible book value 8.88 8.00 11.0 % 9.66 Price: High $ 22.13 $ 21.88 -- $ 32.88 Low 14.25 13.88 -- 24.25 * compound annual rate 1990-1995
Charts: Portrait Studio sales and earnings increased in 1995 with the continuing success of new marketing programs, while Photofinishing results reflected an increasingly competitive retail environment. The Wall Decor segment recorded increased sales and positive contributions to corporate earnings. SEGMENT RESULTS IN MILLION OF DOLLARS - SALES
Portrait Photo- Wall Studios finishing Decor 1995 $ 280 $ 188 $ 59 1994 276 191 50 1990 279 82 --
SEGMENT RESULTS IN MILLIONS OF DOLLARS - OPERATING INCOME
Portrait Photo- Wall Studios finishing Decor 1995 $ 42.6 $ 3.3 $ 5.4 1994 38.5 4.5 5.5 1990 66.2 3.7 --
OVERVIEW - -------- A FOCUSED APPROACH TO SPECIALTY RETAILING Over CPI's retailing history of more than 50 years, a focused management philosophy has evolved consisting of: * pursuit of market leadership; * innovative marketing programs; * partnering with leaders in retailing and technology; * performance incentives for top managers; and * reinvestment of cash flows to support growth initiatives. BUSINESS PHILOSOPHY The depth of experience and leadership skills of senior management are focused on producing long-term results for CPI. Although profits declined over the three years prior to 1994, the Company successfully responded in the context of maintaining market leadership and improving its competitive advantage--both aimed at generating sustainable growth in earnings per share. Strong cash flows continue to be a cornerstone of CPI. Management strives to produce higher returns to shareholders through a combination of expansion, acquisitions, dividends and repurchase of shares. DISTINCT DIFFERENCES CPI differs from typical retailers in several significant aspects: * CPI has historically been at the forefront in developing and implementing new consumer marketing programs that enhance products and services through the application of advanced technology, much of which has been developed internally. * 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 above industry norms. This has required a significant investment in both software and production hardware, much of which was 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. Two 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 almost non-existent because these pictures are valuable only to the purchaser. * CPI's two major businesses--portrait studios and one-hour photofinishing--may be 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 purchases for such occasions. 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. CPI will continue to pursue new avenues of growth in high-margin consumer businesses which are: * responsive to promotional marketing; * expandable on a broad geographic scale; * operated as small retail units; * controllable with system-wide monitoring; and * focused on high value-added services. By adding its operating experience and financial strength to new retailing opportunities, the Company can continue to build on its solid base while ensuring long-term growth. Charts below: Since 1984, the compound annual sales growth rate has averaged 10.9% through 1995. Dividend payout is expected to return to less than 40% of earnings with continued improving performance. SALES IN MILLIONS OF DOLLARS
Dollars 1986 $ 254 1987 283 1988 311 1989 337 1990 361 1991 400 1992 434 1993 460 1994 518 1995 527
EARNINGS* AND DIVIDENDS IN MILLIONS OF DOLLARS
Earnings Dividends 1986 $ 19.4 $ 1.4 1987 25.8 2.7 1988 32.6 4.1 1989 33.8 6.6 1990 35.0 7.7 1991 29.7 8.4 1992 24.8 8.2 1993 13.0 8.2 1994 16.6 7.9 1995 17.6 7.8 *Excluding $2.1 Million credit for 1993 accounting change.
FINANCIAL HIGHLIGHTS - -------------------- (Pictures: on this page is a picture of a chart showing Stock Trading Price and Volume provided by Standard and Poors as of April 15, 1996 captioned: "Stock Trading Price and Volume Reprinted by permission of Standard & Poors." Symbol/ Market: CPY (NYSE) Market Price: 15 7_8 (4/15/96) Price Range: 22 1_8-14 1_8 (12 months ended 4/15/96) Market Capitalization: $220.8 million (4/15/96) Shares Outstanding: 13,907,579 (4/15/96) 12 Months Earnings Per Share: $1.26 (FY '95)* Dividend Rate: $0.56 per share Current P/E: 12.60 (4/15/96) *continuing operations
FINANCIAL RATIOS FYE
2/3/96 2/4/95 Income from Operations* 6.0% 5.9% Tax Rate 36.1% 37.0% Net Earnings* 3.4% 3.2% Return on Assets* 5.9% 5.4% Return on Equity* 10.6% 9.5% *continuing operations
SALES AND EARNINGS: From the initial public offering in 1982 through fiscal 1990, CPI averaged a compound annual growth in sales of 15.7% and in earnings per share from continuing operations of 19.7%. Net earnings as a percentage of sales averaged 8.3% during this period, and the average return on equity was 30.7%. 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 Photofinish division. Although sales continued to increase from 1991 through 1993, primarily due to acquisitions, net earnings slipped in each of the three years as a result of an increasingly competitive retail environment. The earnings decline was reversed in 1994, primarily due to significant sales and profit growth in the Portrait Studio segment with the introduction of new technology-based marketing programs, plus the full-year contribution of the Prints Plus business. Excluding the net losses from discontinuing the electronic publishing business, the earnings rebound continued in 1995. FISCAL 1995: CPI's net sales from continuing operations increased 1.8% to $526.7 million from $517.5 million. Net earnings from continuing operations were $17.6 million in 1995 versus the prior year's $16.6 million, and earnings per share from continuing operations were $1.26 versus $1.18. Including total losses from discontinued operations, 1995 net earnings and net earnings per share were $14.3 million and $1.02, respectively, compared to $14.8 million and $1.05 in 1994. Portrait Studios sales in 1995 increased 1.1% to $279.6 million from $276.4 million, as positive consumer response to the new technology-based marketing programs drove the average sale higher, more than offsetting an expected decline in portrait sittings. Operating earnings increased to $42.6 million from $38.5 million, while operating margins as a percentage of sales expanded to 15.2%, from last year's 13.9%. Photofinishing sales decreased by 1.5%, to $188.4 million from $191.2 million, primarily the result of a 5.2% reduction in operating weeks as some unprofitable locations were closed during the year. Operating earnings declined to $3.3 million from $4.5 million, partly due to the ongoing highly competitive environment in the industry. Sales in the Wall Decor segment were $58.7 million, up from $49.9 million, in the company's second full year operating the Prints Plus chain since its 1993 acquisition. The growth was mainly from new stores opened in the year. Operating earnings were down slightly to $5.4 million from $5.5 in 1994, mainly due to reduced same-store sales from the weak fourth quarter retail activity, in addition to start-up expenses related to the new stores. FINANCIAL STRENGTH: Cash flows from operations have historically been strong, even in the recent down period, and have enabled CPI to pursue growth through expansion and acquisitions, and increase shareholder value through dividends and repurchase of shares. Cash disbursements in 1995 included $48.8 million in capital expenditures and $7.8 million in dividends. STOCKHOLDERS' EQUITY: From $22.8 million at the end of fiscal 1982, shareholders' equity reached $174.2 million in 1995, primarily through retained earnings. Cash returned to shareholders consisted of cumulative dividends of $63.8 million since the initiation of a regular quarterly payment in December 1985 and $74.5 million used to purchase Company stock since the stock repurchase plan was authorized in September 1988. Chart: At the end of fiscal 1995, the Company's equity totaled $174.2 million. Through the repurchase of 3.3 million shares beginning in 1988, continuing shareholders' proportionate ownership has increased by 23.8%. Cash flows have historically remained strong, even in periods of declining earnings. EQUITY AND CASH FLOW FROM OPERATIONS IN MILLIONS OF DOLLARS
Cash Flow Equity 1986 $ 33 $ 94 1987 47 117 1988 43 137 1989 53 133 1990 50 152 1991 52 160 1992 37 172 1993 38 176 1994 40 166 1995 54 174
TO OUR SHAREHOLDERS - ------------------- (pictures: on this page is a picture of Alyn V. Essman captioned: "Alyn V. Essman, CPI Chairman of the board and Chief Executive Officer.") In 1992, embarking on the tumultuous beginning of an excursion into the second 50 years of CPI's development, we spoke of valleys to cross and hills to climb and the need for confidence and support to assure a successful journey out of the competitive morass then prevailing. That year's annual report made the first mention of plans to leverage our expertise in digital imaging technology--embodied in the Strategic Development (SD) task force--as a means of achieving that objective. No one thought the road would be easy, but we felt that by 1994 we would be able to lay a foundation in our portrait studio business that ultimately would lead to enduring success. In closing 1995, we can attest to the successful implementation of the programs that brought about revolutionary changes in the operation of the Sears Portrait Studios. In the midst of that effort, we recognized the need to reposition our photofinishing segment in a similar manner, with a time-line focused on 1996 implementation. In some respects, the challenge facing our second-largest business is even greater than the one our portrait studio segment successfully countered. The large discount and drug store chain operations are more numerous, have deeper pockets and, most important, have different strategic objectives for their photofinishing business than our portrait studio competitors, and many elements of the latest photofinishing technology are available to them. We believe, however, that we may be able to take similar technology, shape it to our own purposes, and apply it in a way that will enable us to bring to market unique, highly appealing products and services that actively involve our customers. The following statement by Alyn V. Essman is inserted here in offsetting type: "Our customers experience satisfaction through their active physical and emotional involvement in the transaction--and in the process, derive significant value from the product or service." To that end, we are testing a variety of new image management systems, one of which offers the customer the ability to review on a color video monitor a roll of film prior to printing, then have any combination of quantity and sizes printed of each exposure. Other test programs include one offering around-the-clock film drop-off, with automated order entry plus credit card payment--convenience similar to that of an ATM banking facility. Initial results from these tests indicate that customers assign a higher value to such special services. Their reaction is similar to that of our portrait studio customers, who have willingly invested more, on average, for the expanded selection of the Portrait Preview System(SM) than for a basic low-price advertised portrait package. In both the portrait studio and the photofinishing operations, we are engaged in a merger of disparate basic processes, as digital imaging technology is being combined with conventional silver-halide photography methods to provide enhanced products and services to current customers and attract new ones. A likely longer-term result will be the total integration of our various businesses in our corporate consciousness, and ultimately in our customers' eyes, as well. This structural transformation is being facilitated in part by strategic alliances we are forming with leading-edge players in the realm of imaging technology, combining their vast developmental resources with CPI's retail management and marketing expertise. Our mutual objective is to develop means by which we can bring satisfaction to our customers through their active physical and emotional involvement in the transaction--and in the process, add significant value to the product or service. In 1992 we spoke of our technical competence and a strong balance sheet as valued resources. We are now postured to apply both to the job at hand. As we enter 1996, we have announced a well-focused program to shed all diversions and focus ever more tightly on our core businesses. We know how strong emotional ties can be to personal images. Recognizing this bond, we are concentrating our resources and efforts in the areas that offer the highest potential to satisfy our customers' needs to capture and preserve their memorable events, making the images available for multiple uses throughout their lifetime, to be then handed down from generation to generation. Those efforts entail the synergistic combination of all our endeavors in achieving what we have determined to be our mission: to preserve personal memories through creative imaging for families--a mission we undertake with enthusiasm. The following statement by Alyn V. Essman is inserted here in offsetting type: "Our mission--to preserve personal memories through creative imaging for families." Vision is sometimes obscured from the valley, but as we move farther along and can see the future better, we know it's time to act--and act we will! April 15, 1996 /s/ Alyn V. Essman Alyn V. Essman SEARS PORTRAIT STUDIOS - ---------------------- (Pictures: on this page is a picture of a young child captioned: "CPI's major business is professional portrait photography of babies, children, adults and family groups in 1,015 permanent studios, which CPI operates in the U.S., Puerto Rico and Canada as Sears' exclusive portrait photography concessionaire.") THE PRE-SCHOOL 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 declining preschool population through the year 2000, for the past six years the birth rate has been in the four million range annually, supporting what should be a strong market over the next several years. Moreover, the population of grandparents, the most common recipients of photos, is growing as Americans live longer. The Company gains access to the preschool 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 satisfies her needs. CPI-SEARS RELATIONSHIP CPI is Sears' exclusive portrait service and its leading concessionaire, with the over 35-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 services based on state-of-the-art technology such as the new Portrait Preview System(SM). As evidence of its ongoing contributions and importance to Sears, CPI was again in 1995 awarded the prestigious "Partners in Progress" award, marking the eleventh time in the past thirteen years, and in Canada in 1995, Sears bestowed on CPI the first "Partners in Progress" award ever accorded a Sears concessionaire. Still more noteworthy, in 1994 Sears honored CPI with the first "Chairman's Award" ever to be awarded to a Sears Licensed Business in recognition of the significance of CPI's new ground-breaking, technology-based marketing program. The trust and integrity of the Sears name is a powerful asset in CPI's dealings with customers. The value of this asset has been strengthened with the recent resurgence of Sears as a formidable competitor in the department store arena. Also, using Sears' daily cash management and accounting systems offers CPI valuable control mechanisms. Through its relationship with CPI, Sears enjoys substantial license fees and additional 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 makes its own investment in improvements and equipment. In 1995, CPI spent $42.4 million, representing 15.2% 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. (Pictures: on this page are four pictures of portraits of two young children captioned: "Although the filmless technology used to create both the original and digitally enhanced portraits above is presently in the testing stage, they illustrate but one of many directions that digital imaging opens for CPI in the future.") RECENT DEVELOPMENTS With CPI's Sears program as a model, competition in the U.S. preschool photography market began increasing dramatically in 1990. Concessionaires to other large chain retailers--JCPenney, Kmart and Wal-Mart--began converting their traveling photography operations to permanent studios, while also installing studios in new stores being opened by the retailers. The expansion continued unabated through 1995, as the number of permanent, directly competing studios increased from just over 600 to about 3,600 over the six-year period. During the same time span, the number of Sears studios in the U.S. increased only from 840 to 896 including studios added in malls without a Sears store. The competitive expansion was supported by increasingly aggressive 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. CPI responded to this competition with aggressive promotional campaigns to maintain its leading position, and concurrently developed new technology-based marketing programs that could provide a significant, lasting competitive advantage to the company. The architecture of the computer system operating the programs--with software created almost entirely by CPI engineers and software writers--was designed to allow for expansion far into the future. The new programs were developed by a special Strategic Development (SD) Task Force which was charged with achieving a full understanding of customers' desires and motivating influences. Extensive consumer research revealed that while some customers at certain times are in the market for a large number of portraits at a low price, at other times those same customers base their decision on other factors such as freedom of choice, and flexibility in poses, sizes and quantity. The SD group, drawing on CPI's 5-year experience in digital imaging technology, embarked on extensive marketing tests that led to the development of new tools and processes to provide customers with a more rewarding, friendlier studio experience and new products to heighten customer interest. The resulting technology-based program was designated the Portrait Preview System(SM). Based on positive results of these tests, the Company committed to the installation of the Portrait Preview System(SM) in all studios as the first phase in a 5-year upgrade program. The rollout in the U.S. studios, which was accomplished from March to October 1994, was supported by the most comprehensive employee training program in CPI's history. Installation in all 1,000-plus studios was completed in only 18 months. 1995 OPERATING RESULTS In 1995, promotional activity was focused on the benefits to the customer offered by the new technology. The result was a higher average sale, more than offsetting an anticipated decline in customer traffic, with sales increasing 1.1% to $279.6 million from the prior year's $276.4 million. Operating income was up 10.8%, to $42.6 million from $38.5 million, the second consecutive annual increase after a three-year decline, as operating margin grew to 15.2% from 13.9%. (Pictures: on this page is a picture showing a customer, her child and pictures and a customer, her child, an employee and the Portrait Preview System(SM). OUTLOOK The Portrait Preview System(SM) provides great flexibility that enables the photographer to involve the customer in the selection of her favorite expressions and poses of her child. In this process, which takes place in the studio camera room, the photographer is a creative partner working in the interests of the customer. After the camera room sitting, the customer can make an immediate selection from the video screen or take home a set of full-color proofs of selected poses and order later. She can choose a large, pre-set assortment of portraits of the first acceptable single pose at a very competitive advertised price, or choose the Custom Portraits by Sears option, which offers virtually any number and combination of poses and sizes. As a result of the relaxed studio environment and the wide range of product choices, the vast majority of CPI's customers--free of any sales pressure--are now placing an order at the time of the sitting. Customer and employee response to the new portrait experience has been extremely favorable, mainly due to the friendlier, low-stress transaction, combined with the strong appeal of the new technology-based products. The majority of customers participating in research focus groups indicated that the system is very easy to use and that the portraits portrayed on the screen are representative of their finished portraits. Most said they prefer being left alone at the monitor while selecting their portraits. Positive customer reaction to the Portrait Preview System(SM) is the result of much more than just the technology-based products and the ease with which they can be selected and ordered. As a result of intensive training programs, the very culture of the studio process has been changed. An environment that many customers felt was filled with sales pressure has been supplanted by one of support and cooperation, as employee attitudes have refocused on total customer satisfaction. (Pictures: on this page are two Portrait Creations(TM) captioned: "Portrait Creations represent a new product choice for Sears Portrait Studio customers--one that many customers have chosen to make." In 1995, CPI continued its tradition of innovative product development through applied technology with a series of new offerings--some of which are still evolving. One of the most exciting of these is Portrait Creations(TM)--collages of multiple portraits, with each grouping framed in an attractive colorful mat with a unifying graphic theme, such as a personal event (birthday), a holiday (Christmas), an activity (sports, for example) plus a variety of other attractive designs. The customer chooses three poses from the sitting and views them on the video monitor in several digitized formats, then selects the design she prefers, which is immediately printed for her to take home. In addition to the generic thematic designs, tie-ins to specific attractions are being developed, such as the Ringling Bros. Barnum & Bailey Circus, which is currently being co-sponsored by Sears, as well as designs that feature regional themes. Portrait Creations(TM) products were introduced after mid-year 1995, and have met with immediate customer approval. (Pictures: on this page are three pictures showing a remodeled Sears Portrait Studio.) Other new products include customized slimline greeting cards, available in an expanding selection of designs suitable for many occasions and situations, with French or Spanish captions available (in addition to English) in selected markets where appropriate. Another new program features graduation portraits for seniors. A collection of new designer frames has also met with favorable response. Longer-range developments currently in the test phase include a new digital camera, as well as digitized portrait backgrounds that are viewed and selected at the video proofing stage following the sitting. To enhance the total portrait experience further, the Company is significantly improving the functionality and ambiance of the studios, increasing their size and installing new custom fixtures and furniture. The decor features rich, vibrant colors, bold graphics and dramatic lighting. A selection of fresh posing backgrounds, new camera room lighting and new child-themed props has also been added. Recognizing the importance of this endeavor, Sears and CPI in 1994 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. Over the 1994-95 period, almost 300 studios were remodeled and upgraded, and about 120 more are scheduled for 1996. The upgraded design will also be incorporated in 20 to 25 new studios that are scheduled to open in 1996. Capacity is being further expanded by the installation of additional camera rooms in existing studios, primarily those that are being remodeled. Remodeling of the remaining U.S. locations will be completed in conjunction with the Sears store-remodeling schedule. Through 1995, CPI's investment, including new technology, training, studio remodeling,and added enhancements, has totaled over $95 million.The project is being funded by the August 1993 private note placement, plus continuing cash flow from operations. Although competition is expected to continue at an intense level in the foreseeable future, CPI management believes that, within the portrait studio industry, the Company represents a unique combination of marketing expertise, financial strength, technological capability and in-depth understanding of customer needs that will enable it to continue to build on recent achievements and significantly increase its contribution to overall corporate profits. Charts: 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. Following a period of declining results, due primarily to an increasingly competitive environment, sales and operating margin improved somewhat in 1995 with the introduction of new marketing programs. REVENUE GROWTH IN MILLIONS OF DOLLARS
Dollars 1986 $ 178 1987 195 1988 219 1989 235 1990 253 1991 251 1992 256 1993 237 1994 275 1995 278
OPERATING EARNINGS AS A PERCENT OF SALES
Percent 1986 27.0% 1987 27.7% 1988 28.2% 1989 26.7% 1990 25.1% 1991 23.1% 1992 18.9% 1993 12.6% 1994 13.9% 1995 15.2%
CPI PHOTO/ FOX PHOTO (Pictures: on this page is a picture showing various photographs developed at the Company's CPI Photo/Fox Photo stores with various products also available for sale at the stores such as photo albums and frames.) CPI, the nation's largest owner/operator of stand-alone photofinishing minilabs, entered the business in 1982, and through a combination of new store openings and acquisitions, 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 size of the business. With the closing of a number of marginal labs in 1995, the division's year-end total stood at 611 locations. THE MINILAB MARKET In 1994, the most recent full year reported by the Photo Marketing Association, total retail amateur photofinishing sales were $5.54 billion, 1% above the 1993 total of $5.48 billion. Stand-alone minilabs held a 23% share of sales, down from the prior year's 25%, with revenues of $1.3 billion. Total industry rolls processed increased by 3%, while the stand-alone minilab segment's share of rolls declined to 14% from 15%. Although 1995 totals are not yet available, PMA preliminary results indicate that industry roll processing showed a slight decline in the first nine months. 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. While all three groups saw growth in roll share through 1992, only the discount store category has recorded increases since then. Wal-Mart, Eckerd Drug, and Qualex (Eastman Kodak's subsidiary and the dominant wholesale lab operator now offering one-hour service in Kmart, Walgreens and numerous grocery chains) have been especially active in expanding one-hour service. As a partial consequence of this expansion, the industry has undergone a consolidation process over the past several years. In just the two-year 1992-93 period, specialty retailers--primarily stand-alone minilab operators--closed about 1,500 locations, while mass merchandise retailers opened a like number over the same period. In 1994 there was a net increase of about 1,500 mass merchant outlets throughout the nation, while the number of specialty retailers remained fairly constant. In the face of this increased competition, CPI's minilab business has maintained sales levels fairly well, but suffered margin declines. 1995 OPERATING RESULTS Revenues in 1995 slipped 1.5% to $188.4 million from $191.2 million in 1994--the reduction primarily due to 5.2% fewer operating weeks, as 64 unprofitable locations were closed during the year. Same-store sales actually increased marginally, although same-store roll volume was slightly lower. Operating earnings declined to $3.3 million from $4.5 million, reflecting the increasingly competitive environment in the industry. Earnings were also negatively affected by a continuing slight shift in the sales mix from photofinishing services into lower margin products, such as film, cameras and accessories. In 1995, the division absorbed non-cash expenses totaling $16.2 million, which, when added to $3.3 million in operating earnings, produced cash flow of $19.5 million before capital expenditures, versus $22.1 million in 1994. OUTLOOK In 1994, a new task force was formed within the existing Strategic Development (SD) group and charged with the objective--similar to that previously given to the original portrait studio group--of developing applications of digital imaging technology to provide customers with new options in film processing. In particular, the task force is active in the development of personalized services with strong consumer appeal, but which mass merchants, for various reasons, cannot offer or choose not to offer. In conjunction with this developmental activity, the division is investing in new technology to enhance currently offered services. New digital scanners, which improve product quality and customer service, were installed in over 180 of the division's locations in 1995, with about 220 more scheduled in 1996. The scanners use state-of-the-art computer programs to analyze and adjust color values, density and contrast to produce prints of superior quality. The application of this new technology, which is totally supportive of the programs being developed by the new SD task force, is called Smart Color(SM). One such program, called Photo Preview, scans and digitally stores in the system's computer memory all the exposures on the customer's roll, allowing the customer to view the individual exposures on a large color video monitor, decide which ones to have printed, and order prints in the quantity and sizes desired of each exposure. The customer pays only for those selected and receives the proof sheet at no charge. Developed internally by the SD group, the system is unique and exclusive to the Company's minilabs. The Photo Preview system's development has followed CPI's time-tested process in which a concept is first worked out, then carefully tested in prototype form--the system's current phase. At the next level, planned for later in 1996, the program will be further tested in a major market prior to any rollout that would require aggressive capital investment. CPI's photofinishing division will also be active in another form of new technology--the Advanced Photo System (APS) developed by a consortium of photo industry leaders. This totally new system offers a wide range of enhanced consumer benefits--some never before available--and is expected to have a strong appeal to upscale amateur photographers--typical CPI minilab customers. The new system will also be available in a low-cost, single-use format to reach the broader market. As soon as the new cameras, film and processing are available, all of the Company's minilabs will feature the APS concept prominently. Chart: Since 1983, revenues have grown from less than $6.0 million to $188.4 million in 1995. CPI PHOTOFINISHING REVENUE GROWTH IN MILLIONS OF DOLLARS
Dollars 1986 $ 51 1987 61 1988 69 1989 76 1990 82 1991 121 1992 169 1993 187 1994 191 1995 188
In 1995, 64 minilabs were closed when, as their leases came up for renewal, their long-term profit outlook was carefully reviewed and judged to be marginal. During the same 1995 period, 15 new labs were opened. Equipment from the closed locations was relocated to other minilabs. Up to 10 new minilabs are scheduled for 1996--all in existing core markets to take advantage of economies of scale in advertising and field management. To serve the needs of customers better, the new labs will be larger than current locations to accommodate additional equipment and many will offer drive-through service for added convenience. At mid-year 1995, a new operations management team accepted the challenge of infusing the division with new energy and improving structural efficiency, while developing programs in conjunction with CPI's marketing and technology teams. An intensive customer-focused training program was implemented in all of the division's locations just prior to the 1995 fourth quarter holiday season, and trainers are being added in all major markets to ensure continuing concentration on the delivery of high-level service. This is a key component of CPI's value-added strategy. Also, at the beginning of the new fiscal year, the top level of field supervision was consolidated in an action designed to improve both efficiency and internal communications. While ongoing expansion of one-hour service by aggressive mass merchants will continue to increase that segment's share of the amateur photofinish market, CPI, through the development of unique new products and services, plans to satisfy a significant latent need that cannot be easily accessed by those competitors. With these programs beginning to bear fruit by late 1996 or early 1997, management believes the division can be repositioned relative to competition, leading to the restoration of profit margins to a more rewarding range. (Pictures: on this page is a picture of a customer using the Photo Preview System captioned: "Currently in the test stage, the Photo Preview System (left) allows the customer to indicate cropping instructions by simply touching the monitor screen, then selecting the print quantity and size--whether standard or enlarged." PRINTS PLUS - ----------- (Pictures: on this page is a picture of a framed print and of a Prints Plus retail store.) CPI's 1993 acquisition of Prints Plus represents the development of a third strong operating segment. Prints Plus is the leading non-franchise posters, prints and framing retailer in the U.S., operating 144 locations in prime regional shopping malls throughout the country. It is a well-run company with a strong, experienced management team whose operational criteria and practices parallel those of CPI. As such, the new business represents a strategic fit with CPI's existing capabilities and provides an opportunity for advantageous investment of the Company's resources. In 1995, Prints Plus recorded sales of $58.7 million, 17.6% above the prior year's $49.9 million, with most of the growth due to the addition of new locations. Operating earnings declined to $5.4 million from $5.5 million, mainly due to reduced same-store sales and margins from the weak fourth quarter retail activity, plus start-up expenses associated with the new stores. Due to the seasonal nature of the wall decor industry, a majority of the sales and profits are generated in the fourth quarter surrounding the holiday season. CPI's newest venture has performed up to management's expectations from the time of acquisition. Each store displays an unparalleled selection of posters and prints reflecting 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 its particular trends and preferences. The Company is engaged in ongoing research in order to identify and respond to changes in customer taste regarding products. In providing immediate framing service, Prints Plus holds a significant edge over most competitors located in regional malls and strip shopping centers. Prints Plus provides "while-you-wait" custom framing for everyday value pricing that few competitors can match. The selection of frames is also being expanded, and various new styles and finishes are being added. With a strong, experienced Prints Plus management team in place, CPI, in its first full year of operating the business, immediately expanded it by opening a net of 18 new locations in 1994 and another 24 in 1995. Like the original stores, the additions are in prime locations within regional malls, access to which is aided by the Company's ongoing contacts with mall developers. In addition to scheduling approximately 15 new stores of the current format in 1996, the division is planning to explore other retailing venues to expand its customer base. Based on the positive results Prints Plus has delivered to date, plus increasing returns expected as a result of economies of scale, management plans to increase investment in the business through the continuing addition of new locations, funding the expansion with ongoing cash flow. FINANCIAL BACKGROUND AND TRENDS - ------------------------------- In the planning, execution and evaluation of its long-term strategies to maximize shareholder value, CPI management focuses on: * maximizing cash flow generated internally. * reinvestment of a portion of excess cash into new and existing businesses at a rate of return which exceeds the Company's cost of capital. * returning a portion of cash to shareholders through stock repurchases and dividends. * raising additional capital only when it can meet or exceed shareholder return expectations. The following comments should be used in conjunction with the table below and the summary on page 16. (Page reference is for published paper copy of the Annual Report. This summary shows 11 years of financial history and is found at the end of the "Financial Background and Trends" section and before the "Management's Discussion and Analysis - Overview" section.) THE TRANSITION FROM PAST PERFORMANCE TO THE FUTURE During the past decade, there have been numerous changes in the overall business environment, as well as in CPI's capital structure and business strategies. CPI's 10-year performance was characterized by double-digit growth rates in sales, total assets and total equity. That time period reflected the analysis of new business opportunities; the investment of cash flow to fund expansion; management's resolve to offset competition; and a program to protect and strengthen its market franchise. During that period, profit margins on continuing operations averaged 6.9%, return on assets averaged 13.3% and return on equity averaged 20.1%. GROWTH RATE
1986-1995 1986-90 1991-93 1994-95 Sales 10.3% 12.7% 8.4% 7.0 % Total assets 11.8% 17.2% 11.8% (0.9)% Total equity 11.0% 19.9% 5.0% (0.4)%
AVERAGE NET RETURNS
1986-1995 1986-90 1991-93* 1994-95 Sales 6.9% 9.4% 5.3% 3.3% Total assets 13.3% 18.5% 9.8% 5.7% Total equity 20.1% 27.6% 14.2% 10.1% * Excluding $2.1 million credit for 1993 accounting change
5-YEAR REVENUE GROWTH IN MILLIONS OF DOLLARS
Portrait Photo- Wall Studios finishing Decor 1991 $ 279 $ 121 $ -- 1992 265 169 -- 1993 238 187 35 1994 276 191 50 1995 280 188 59
Caption on the above chart: - -1994 marked a reversal in Portrait Studio revenue decline with a gain of 16.0% and 1.1% in 1995. - -New Wall Decor segment accounted for most of the balance of 1994 and 1995 growth. - -Upward trend in overall revenues expected to continue in 1996. EARNINGS* FROM CONTINUING OPERATIONS AND DIVIDENDS PER SHARE
Earnings Per Share Dividends 1991 $ 1.97 $ 0.56 1992 1.69 0.56 1993 .89* 0.56 1994 1.18 0.56 1995 1.26 0.56 *Excluding $2.1 million credit for 1993 accounting change
Caption on the above chart: - -Earnings per share increased to $1.18 and $1.26 in 1994 and 1995 respectively, reversing a three-year decline. - -CPI maintained a constant dividend of $0.56 since 1991. - -With improving profitability, long-term dividend payout ratio should return to less than 40% of earnings. RETURN ON EQUITY*
Return on Equity* 1991 19.6% 1992 15.5% 1993 7.6%* 1994 9.5% 1995 10.6% *Excluding $2.1 million credit for 1993 accounting change
Caption on the above chart: - -Return on equity turned up in 1994 to approximately 9.5%, and in 1995 returned to double-digit level as a result of new marketing programs and reinvestment of cash flows in expanding operations. 1986-1990 - HIGH GROWTH, HIGH PROFIT The period between 1986 and 1990 was one of rapid and profitable growth, driven by aggressive expansion of Sears Portrait Studios and the rapid development of the Photofinishing segment. During this five-year period, sales grew at a compound rate of 12.7% and net margins increased to an average of 9.4%. CPI's average returns on assets and equity, of 18.5% and 27.6%, respectively, were well above the 10-year averages. Earnings per share also increased at a compound annual rate of 20.4% to $2.28 from $0.90. 1991-1993 - EXPLOSIVE GROWTH IN PORTRAIT STUDIO COMPETITION The years 1991 through 1993 marked the advent of explosive growth in portrait studio competition. Facing new competitive pressures in its core business, the Company continued to fund development projects, make acquisitions, expand the Photofinishing segment and repurchase stock. Declining profit margins in Portrait Studios were mainly responsible for lower average growth rates and returns. For the three-year period, sales compounded at an 8.4% rate, largely due to acquisitions. Growth of total assets averaged 11.8% and equity grew at a more modest rate of 5.0%. Equity growth would have averaged 7.8% if the Company had not purchased 623,000 shares of stock. Net profit margins averaged 5.3%* of sales. The adverse business environment resulted in a decline in net earnings to $1.03 per share in 1993 from $2.28 per share in 1990. During this same period, cumulative operating cash flow was $126.6 million. Combined with $60.0 million from a private placement of notes, the Company financed $108.9 million in acquisitions, $60.6 million in capital expenditures, $24.8 million in cash dividends, and $14.7 million in stock repurchases, leaving $66.4 million in cash, cash equivalents and short-term investments and a modest debt ratio of 34.1%. 1994-1995 - THE REBOUND Although still faced with competitive challenges in its two main businesses, in 1994 CPI produced the first gain in earnings from continuing operations in four years and recorded a second year of growth in 1995, driven mainly by improved sales and profitability in portrait studios. The associated charts on these two pages illustrate the Company's transition over the past several years, with increasing resources being focused on expansion of the new portrait studio photography system and further development of the Prints Plus retail concept, both of which can be expected to contribute to increasing profit margins in the years ahead. The Company remains committed to improving profitability in Photofinishing. * Excluding $2.1 million credit for 1993 accounting change IDENTIFIABLE ASSETS IN MILLIONS OF DOLLARS
Portrait Photo- Wall Studios finishing Decor Cash* Corp. 1991 $ 54 $ 115 $ -- $ 31 $ 39 1992 49 133 -- 21 35 1993 63 125 20 67 31 1994 111 119 27 14 29 1995 119 114 35 8 24 * Cash, cash equivalents and short-term investments
Caption on the above chart: - -Growth in Portrait Studios continued in 1995, with further expansion planned for 1996. - -Prints Plus (Wall Decor) will continue to receive additional resources. CAPITAL EXPENDITURES IN MILLIONS OF DOLLARS, INCLUDING ACQUISITIONS
Portrait Photo- Wall Studios finishing Decor Corp. 1991 $ 9 $ 24 $ -- $ 5 1992 2 19 -- 5 1993 19 10 14 1 1994 58 10 8 1 1995 25 15 10 1
Caption on the above chart: - -Although Portrait Studios now command the majority of capital expenditures, Prints Plus and Photofinishing will also require significant investments. WEIGHTED AVERAGE SHARES OUTSTANDING IN MILLIONS OF SHARES
Shares Outstanding 1991 15.1 1992 14.7 1993 14.7 1994 14.1 1995 14.0
Caption on the above chart: - -To date, 3.3 million shares have been repurchased since 1988, leaving 1.2 million shares available under the current authorized program. - -Management will continue to repurchase shares as appropriate to return excess cash to shareholders. Selected Financial Data From 1995-1994
Continuing Operations 1995 1994 Per Share: Sales $ 37.65 $ 36.70 Assets 21.67 21.93 Equity 12.56 12.12 Earnings 1.26 1.18 Dividends 0.56 0.56 Prices: high 22.13 21.88 low 14.25 13.88 P/E range: high 21.70 20.83 low 13.97 13.21 Dividend yield 3.08% 3.13% Income Data (million $): Net sales $526.7 $517.5 Income from operations 31.7 30.3 Net interest & other income(expense) (4.1) (3.9) Earnings before income taxes, cumulative effect of accounting change and discontinued operations 27.6 26.4 Income taxes 10.0 9.8 Earnings before accounting change and discontinued operations 17.6 16.6 Accounting change - - Net earnings from continuing operations 17.6 16.6 Avg. shares outstanding (in million shares) 14.0 14.1 Balance Sheet (million $): Current assets $ 72.8 $ 82.0 Cash and equivalents 8.3 9.2 Net fixed assets 167.9 159.1 Total assets 300.5 300.5 Employed assets 292.2 291.3 Current liabilities 64.0 69.8 Long-term debt 54.8 59.7 Stockholders' equity 174.2 166.0 Employed equity 165.9 156.8 Funds Flow Data (million $): From operations $ 53.7 $ 40.4 Used for investments (43.7) (51.7) From (used for) financing (11.1) (15.3) Effect of exchange rate changes 0.2 (0.3) Change in cash & cash equivalents (0.9) (26.9) Capital expenditures* (excluding acquisitions) 48.8 75.1 Acquisitions* - - Ratio Analysis: Net margin (1) 3.4 3.2 Asset turnover (2)** 1.75x 1.69x Return on assets (3)** 5.88% 5.44% Financial leverage (4)** 1.81x 1.74x Return on equity (5)** 10.64% 9.47% Retention rate (6) 0.459 0.465 Implied growth rate (7) 4.88% 4.40% * To maintain capacity ** 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 (1995-1985)/net earnings (7) Implied growth rate: Return on equity x retention rate
Selected Financial Data From 1993-1991
Continuing Operations 1993 1992 1991 Per Share: Sales $ 31.36 $ 29.56 $ 26.50 Assets 20.92 16.25 16.25 Equity 12.01 11.75 10.90 Earnings 1.03 1.69 1.97 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 $460.0 $433.8 $400.4 Income from operations 22.0 38.5 43.4 Net interest & other income(expense) (0.3) 1.6 4.0 Earnings before income taxes, cumulative effect of accounting change and discontinued operations 21.7 40.1 47.4 Income taxes 8.7 15.3 17.7 Earnings before accounting change and discontinued operations 13.0 24.8 29.7 Accounting change 2.1 - - Net earnings from continuing operations 15.1 24.8 29.7 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 36.1 21.0 30.0 Net fixed assets 114.3 97.6 97.7 Total assets 305.8 237.8 238.9 Employed assets 269.7 216.8 208.9 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 139.4 151.0 130.3 Funds Flow Data (million $): From operations $ 38.2 $ 36.9 $ 51.6 Used for investments (73.9) (34.4) (87.2) From (used for) financing 51.6 (10.2) (18.7) Effect of exchange rate changes (0.8) (1.3) (0.2) Change in cash & cash equivalents 15.1 (9.0) (54.5) Capital expenditures* (excluding acquisitions) 28.9 12.0 19.8 Acquisitions* 14.7 23.9 70.2 Ratio Analysis: Net margin (1) 3.3 5.7 7.4 Asset turnover (2)** 1.93x 1.82x 1.83x Return on assets (3)** 6.36% 10.39% 13.59% Financial leverage (4)** 1.38x 1.49x 1.44x Return on equity (5)** 8.78% 15.47% 19.57% Retention rate (6) 0.381 0.637 0.689 Implied growth rate (7) 3.35% 9.86% 13.48% * To maintain capacity ** 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 (1995-1985)/net earnings (7) Implied growth rate: Return on equity x retention rate
Selected Financial Data From 1990-1988
Continuing Operations 1990 1989 1988 Per Share: Sales $ 23.45 $ 21.46 $ 18.56 Assets 14.48 12.74 12.03 Equity 10.04 8.63 8.34 Earnings 2.28 2.15 1.95 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 $360.7 $336.9 $310.5 Income from operations 49.3 47.3 48.1 Net interest & other income(expense) 6.4 5.5 5.7 Earnings before income taxes, cumulative effect of accounting change and discontinued operations 55.7 52.8 53.8 Income taxes 20.7 19.0 21.2 Earnings before accounting change and discontinued operations 35.0 33.8 32.6 Accounting change - - - Net earnings from continuing operations 35.0 33.8 32.6 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 84.5 68.7 62.5 Net fixed assets 80.7 81.4 78.0 Total assets 218.7 196.5 197.0 Employed assets 134.2 127.8 134.5 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 67.3 64.4 74.1 Funds Flow Data (million $): From operations $ 50.0 $ 53.3 $ 42.5 Used for investments (19.2) (15.0) (23.7) From (used for) financing (15.3) (32.1) (9.7) Effect of exchange rate changes 0.3 - 0.4 Change in cash & cash equivalents 15.8 6.2 9.5 Capital expenditures* (excluding acquisitions) 15.1 18.5 12.1 Acquisitions* 1.2 0.8 11.0 Ratio Analysis: Net margin (1) 9.7 10.0 10.5 Asset turnover (2)** 1.84x 1.71x 1.84x Return on assets (3)** 17.83% 17.17% 19.30% Financial leverage (4)** 1.48x 1.44x 1.44x Return on equity (5)** 26.39% 24.72% 27.79% Retention rate (6) 0.773 0.771 0.863 Implied growth rate (7) 20.40% 19.06% 23.99% * To maintain capacity ** 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 (1995-1985)/net earnings (7) Implied growth rate: Return on equity x retention rate
Selected Financial Data From 1987-1985
Continuing Operations 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 Earnings before income taxes, cumulative effect of accounting change and discontinued operations 46.2 39.3 26.9 Income taxes 20.4 19.9 13.0 Earnings before accounting change and discontinued operations 25.8 19.4 13.9 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 53.1 29.5 14.7 Net fixed assets 68.8 68.0 55.6 Total assets 168.7 139.3 98.7 Employed assets 115.6 109.7 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 63.7 64.2 46.5 Funds Flow Data (million $): From operations $ 47.4 $ 32.7 $ 33.2 Used for investments (23.3) (30.6) (13.8) From (used for) financing (0.7) 12.7 (6.6) Effect of exchange rate changes 0.1 0.1 (0.1) Change in cash & cash equivalents 23.5 14.9 12.7 Capital expenditures* (excluding acquisitions) 13.6 16.4 9.8 Acquisitions* 3.2 15.5 3.9 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) 0.888 0.924 0.945 Implied growth rate (7) 24.44% 29.17% 29.46% * To maintain capacity ** 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 (1995-1985)/net earnings (7) Implied growth rate: Return on equity x retention rate
MANAGEMENT'S DISCUSSION AND ANALYSIS-OVERVIEW - --------------------------------------------- To enhance understanding of the Company's financial results, the various components of the Management's Discussion and Analysis are presented near the pertinent financial data. Accordingly, in addition to this overview, separate analyses of the results of operations, financial condition and cash flows appear on pages 19-21, 23 and 25, respectively. Also, the analysis of each business segment's net sales and operating earnings is included on pages 19 and 20. (Page reference is for published paper copy of the Annual Report. These analyses appear in the sections titled "Management's Discussion and Analysis - Results of Operations," "Management's Discussion and Analysis - Financial Condition" and "Management's Discussion and Analysis - Cash Flows.") FISCAL YEARS The Company's fiscal year ends the first Saturday of February. Accordingly, fiscal years 1995, 1994 and 1993 ended February 3, 1996, February 4, 1995 and February 5, 1994, respectively, and each consisted of 52 weeks. Throughout the Management's Discussion and Analysis and Notes to Consolidated Financial Statements, reference to 1995, 1994 or 1993 will mean the fiscal year end 1995, 1994 and 1993, respectively. BUSINESS SEGMENTS The Company has continuing operations in three business segments: Portrait Studio, Photofinishing and Wall Decor. The Portrait Studio segment, which functions as the exclusive operator of Sears Portrait Studios, has 1,015 locations in the United States, Canada and Puerto Rico. The Photofinishing segment, which is the Company's second largest segment, operates under the Fox Photo, CPI Photo Finish, and Proex names and has 611 locations in shopping centers and independent locations throughout the United States. The Wall Decor segment, which operates under the name Prints Plus and offers value-priced posters, prints and frames, operates in 144 locations throughout the United States. During 1995, the Company decided to pursue the sale of its Electronic Publishing business segment, which was included in previous years' Other Products and Services segment discussion and operated under the names CopyMat and CopyUSA in 38 locations in California, Texas, Missouri and Georgia. STUDIO ENHANCEMENT PROGRAM In March 1994, the Company announced a five-year Studio Enhancement Program to provide customers an improved level of service at Sears Portrait Studios. The total estimated cost of the program has been increased to $147.4 million, with $23.9 million, $54.9 million and $16.5 million spent in 1995, 1994 and 1993, respectively. This program includes: an estimated $78.9 million for the introduction and modification of a freeze-frame digital imaging camera system, which allows both the photographer and the customer to view high quality video for approval of images and has the capability of providing color proofs to customers at the time of photography; an estimated $39.7 million for the enlargement and renovation of studios; an estimated $14.3 million for the implementation and modification of point-of-sale systems; and an estimated $14.5 million for the installation of new backgrounds, lighting equipment and props. The program, which is 65% complete, is designed to enhance the quality of the studio experience and the photographic portraits available to customers and has subsequently allowed the Company to introduce the Portrait Preview System (SM) and Custom Portraits by Sears programs. 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 acquired chain, which included 103 stores located in malls throughout the United States, operates a retail business selling prints, posters and custom framing. 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. INCOME TAXES In 1993, net earnings included a $2.1 million cumulative benefit from a change in accounting principles resulting from the 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 had changed its method of accounting for income taxes from the deferred method to the asset and liability method. The effective income tax rate was 36.1% in 1995 compared to 37.0% in 1994 and 40.0% in 1993. The decrease in the 1995 effective income tax rate resulted primarily from a decline in the effective state income tax rate. The decrease in the 1994 effective income tax rate resulted primarily from an increase in targeted job and foreign tax credits. CONSOLIDATED STATEMENTS OF EARNINGS (in thousands of dollars except per share amounts) Fifty-two weeks ended Feb. 3, 1996, Feb. 4, 1995, and Feb. 5, 1994
1995 1994 1993 Net sales $526,651 $517,521 $459,988 Costs and expenses: Cost of sales (exclusive of depreciation expense shown below) 135,559 142,343 126,324 Selling, administrative and general expenses 318,413 309,144 279,334 Depreciation 35,457 30,282 24,852 Amortization 5,550 5,444 6,120 Severance and early retirement expense - - 1,400 --------- --------- --------- 494,979 487,213 438,030 --------- --------- --------- Income from operations 31,672 30,308 21,958 Net interest expense 4,597 4,338 789 Other income 563 443 501 --------- --------- --------- Earnings before income taxes, cumulative effect of accounting change and discontinued operations 27,638 26,413 21,670 Income tax expense 9,979 9,773 8,663 --------- --------- --------- Earnings before cumulative effect of accounting change and discontinued operations 17,659 16,640 13,007 Cumulative effect-accounting change - - 2,120 --------- --------- --------- Net earnings from continuing operations 17,659 16,640 15,127 --------- --------- --------- Discontinued operations: Losses from operations, net of income tax benefit of $507, $1,068 and $1,259, respectively (898) (1,818) (1,891) Loss on disposal, net of tax benefit of $1,372 (2,428) - - --------- --------- --------- Net losses from discontinued operations (3,326) (1,818) (1,891) --------- --------- --------- Net earnings $ 14,333 $ 14,822 $ 13,236 ========= ========= ========= Earnings per common share: Earnings before cumulative effect of accounting change and discontinued operations $ 1.26 $ 1.18 $ 0.89 Cumulative effect of accounting change - - 0.14 --------- --------- --------- Net earnings from continuing operations 1.26 1.18 1.03 Net losses from discontinued operations (0.24) (0.13) (0.13) --------- --------- --------- Net earnings $ 1.02 $ 1.05 $ 0.90 ========= ========= ========= Weighted average number of common and common equivalent shares outstanding 13,989 14,101 14,666 ========= ========= ========= See accompanying notes to consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS-RESULTS OF OPERATIONS - ---------------------------------------------------------- SELECTED FINANCIAL DATA (in thousands of dollars) Fifty-two weeks ended February 3, 1996 and February 4, 1995
1995 Versus 1994 1995 Amount Percent 1994 Change Change Total operating earnings $51,270 $ 2,738 5.6% $48,532 General corporate expenses 19,598 (1,375) (7.5) 18,224 Severance and early retirement benefits - - - - Interest expense 5,108 188 3.5 5,295 Interest income 511 (446) (46.6) 957 Other income 563 120 27.1 443 -------- -------- ------- Earnings before income taxes, cumulative effect of accounting change and discontinued operations $27,638 $ 1,225 4.6% $26,413 ======= ======== =======
SELECTED FINANCIAL DATA (in thousands of dollars) Fifty-two weeks ended February 4, 1995 and February 5, 1994
1994 Versus 1993 1994 Amount Percent 1993 Change Change Total operating earnings $48,532 $ 7,275 17.6% $41,257 General corporate expenses 18,224 (325) (1.8) 17,899 Severance and early retirement benefits - 1,400 100.0 1,400 Interest expense 5,295 (3,296) (164.9) 1,999 Interest income 957 (253) (20.9) 1,210 Other income 443 (58) (11.6) 501 ------- -------- ------- Earnings before income taxes, cumulative effect of accounting change and discontinued operations $26,413 $ 4,743 21.9% $21,670 ======= ======== =======
NET EARNINGS Net earnings from continuing operations increased 6.1% to $17.6 million in 1995 over the $16.6 million recorded in 1994, reflecting improved operating earnings offset by increased corporate expenses resulting from higher employee benefit costs. In 1994, net earnings from continued operations increased 10.0% to $16.6 million from $15.1 million recorded in 1993, due primarily to increased operating earnings and the absence of the $1.4 million charge for severance and early retirement benefits recorded in 1993, partially offset by higher interest expense. In 1993, net earnings were affected by a $2.1 million cumulative benefit from a change in accounting principles discussed in the Management's Discussion and Analysis-Overview. Over the last three years, interest expense has been higher than the Company's historical levels due to increased borrowings to fund capital expenditure programs, the Prints Plus acquisition and the Company's stock repurchase program discussed in the Management's Discussion and Analysis-Financial Condition section. In 1993, the Company entered into a $60.0 million long-term debt agreement, which substantially increased borrowing costs. The Company also entered into an interest rate swap agreement in 1993 which, due to the changes in short-term interest rates, resulted in a decrease in interest expense in 1995 and 1993 of $76,000 and $87,000, respectively, and an increase in interest expense in 1994 of $927,000. The swap agreement expired on August 28, 1995. Earnings per share before the change in accounting principles and discontinued operations were $1.26, $1.18 and $0.89 for 1995, 1994 and 1993, respectively. After the cumulative effect of the change in accounting principles discussed in the Management's Discussion and Analysis-Overview, net earnings per share from continuing operations were $1.03 in 1993. After the losses from the discontinued Electronic Publishing operations, net earnings were $14.3 million, $14.8 million and $13.2 million and net earnings per common share were $1.02, $1.05 and $0.90 for 1995, 1994 and 1993, respectively. Net earnings per share in 1994 reflect a reduction in the number of shares outstanding as a result of the stock repurchase program and a reduction in the effective income tax rate. DISCONTINUED OPERATIONS On April 4, 1996, the Company announced its intention to sell certain assets of its Electronic Publishing operations for approximately $5.0 million. Additionally, the purchaser will assume certain liabilities of the Electronic Publishing operation which aggregate approximately $900,000. The Company expects to have completed the transfer by April 30, 1996. A provision of $3.8 million has been made to reflect the discontinued business at its estimated realizable value. The Company has classified the Electronic Publishing operation as a discontinued operation and has reclassified the prior years' financial statements to reflect this change. Net sales of the discontinued business for 1995, 1994 and 1993 were $16.7 million, $15.6 million and $15.5 million, respectively. In addition, total assets were $8.9 million and $11.0 million for February 3, 1996 and February 4, 1995, respectively. NET SALES (in thousands of dollars) Fifty-two weeks ended February 3, 1996 and February 4, 1995
1995 Versus 1994 1995 Amount Percent 1994 Change Change Portrait Studio $279,518 $ 3,128 1.1% $276,390 Photofinishing 188,408 (2,779) (1.5) 191,187 Wall Decor 58,725 8,781 17.6 49,944 -------- -------- -------- Total net sales $526,651 $ 9,130 1.8% $517,521 ======== ======== ========
NET SALES (in thousands of dollars) Fifty-two weeks ended February 4, 1995 and February 5, 1994
1994 Versus 1993 1994 Amount Percent 1993 Change Change Portrait Studio $276,390 $38,225 16.0% $238,165 Photofinishing 191,187 3,977 2.1 187,210 Wall Decor 49,944 15,331 44.3 34,613 -------- ------- -------- Total net sales $517,521 $57,533 12.5% $459,988 ======== ======= ========
NET SALES Sales increased 1.8% to $526.7 million in 1995 from $517.5 million in 1994. This increase is attributable to increased sales in the Portrait Studio and Wall Decor segments, while the Photofinishing segment sales declined slightly when compared to the prior year's results. The 12.5% sales increase in 1994 over 1993 sales of $460.0 million was mainly due to Portrait Studio achieving then-record sales levels, reversing a three-year decline for that segment, and the inclusion of an entire year's sales results in the Wall Decor segment. Portrait Studio sales were $279.6 million, $276.4 million and $238.2 million for 1995, 1994 and 1993, respectively, increasing 1.1% in 1995 and 16.0% in 1994. The Company believes the implementation of the Studio Enhancement Program, and the resulting Portrait Preview System (SM) and Custom Portraits by Sears programs, was largely responsible for the increased sales during the last two fiscal years. In 1995, higher customer sales averages were partially offset by decreased customer volume experienced during the important Christmas season and during the subsequent month of January due to adverse weather conditions. In 1994, both customer sales averages and sittings increased over 1993. Additionally, in 1994, the sales process was accelerated to the time of photography, since most customers now approve proofs and order portraits from the new freeze-frame video monitors during the photography session rather than at the time of delivery of portraits, making direct comparison of 1995, 1994 and 1993 results difficult. In the Photofinishing segment, sales decreased 1.5% in 1995 to $188.4 million from $191.2 million in 1994, following a 2.1% increase from $187.2 million in 1993. A decrease in the number of locations due to the net closure of 49 stores, partially offset by a higher average sales per roll, accounted for the sales decrease in 1995. The sales increase in 1994 over the previous year resulted from a slight increase in both roll volume and average sales per roll. Sales in the Wall Decor segment increased 17.6% to $58.7 million in 1995 from $49.9 million in 1994. This increase resulted from the net addition of 24 locations during 1995 and the addition of full-year sales of 18 locations opened in 1994. Actual same store sales were down 1.5% due to a soft retail environment experienced during the latter part of 1995. Sales in 1993 were $34.6 million, reflecting only partial-year sales results, as the Wall Decor segment was acquired in May of 1993 and sales were included as of that date. OPERATING EARNINGS (in thousands of dollars) Fifty-two weeks ended February 3, 1996 and February 4, 1995
1995 Versus 1994 1995 Amount Percent 1994 Change Change Portrait Studio $ 42,612 $ 4,142 10.8% $ 38,470 Photofinishing 3,301 (1,270) (27.8) 4,571 Wall Decor 5,357 (134) (2.4) 5,491 -------- -------- -------- Total operating earnings $ 51,270 $ 2,738 5.6% $ 48,532 ======== ======== ========
OPERATING EARNINGS (CONTINUED) (in thousands of dollars) Fifty-two weeks ended February 4, 1995 and February 5, 1994
1994 Versus 1993 1994 Amount Percent 1993 Change Change Portrait Studio $ 38,470 $ 9,166 31.3% $ 29,304 Photofinishing 4,571 (2,401) (34.4) 6,972 Wall Decor 5,491 510 10.2 4,981 -------- -------- -------- Total operating earnings $ 48,532 $ 7,275 17.6% $ 41,257 ======== ======== ========
INCOME FROM OPERATIONS AND OPERATING EARNINGS Income from operations increased 4.5% to $31.7 million in 1995 from $30.3 million recorded in 1994. This increase is attributable to an increase in the Portrait Studio segment, while the Photofinishing and Wall Decor segments' operating earnings decreased. In 1994, income from operations increased 38.0% to $30.3 million, reversing a three-year decline. This turnaround was primarily due to increased Portrait Studio and Wall Decor operating earnings and the absence of the $1.4 million provision for severance and early retirement benefits recorded in 1993, partially offset by a decline in Photofinishing operating earnings. Portrait Studio operating earnings were $42.6 million, $38.5 million and $29.3 million, with operating margins of 15.2%, 13.9% and 12.3% for 1995, 1994 and 1993, respectively. The Company believes the implementation of the Studio Enhancement Program has played a major role in increased operating earnings in 1995 and 1994. Under the new Portrait Preview System(SM) and Custom Portraits by Sears programs introduced through the Studio Enhancement Program, the Company substantially reduced the number of portraits produced, thereby reducing manufacturing costs, since the customer now approves proofs and orders portraits at the time of photography rather than evaluating and selecting portraits from the finished products. Additionally, the Company has been able to sell other products for immediate delivery to customers, leading to higher average sales per customer. However, as a result of the Studio Enhancement Program and the resulting heavy investment in capital and service, a fixed charge has been created that has affected 1995 and 1994 operating earnings and will disproportionately penalize operating earnings in low activity periods such as the upcoming 1996 first and second fiscal quarters. This fixed change includes increases in depreciation and amortization of $5.4 million in 1995 over 1994 levels and $5.8 million in 1994 over 1993 levels. Training costs also increased $870,000 in 1994 over 1993 levels. Additionally, operating earnings were penalized in 1995 by the higher costs associated with one-time advertising awareness campaigns run to introduce the new Custom Portraits by Sears program. Photofinishing operating earnings for 1995, 1994 and 1993 were $3.3 million, $4.5 million and $7.0 million, reflecting declines of 27.8% and 34.4% from 1995 to 1994 and 1994 to 1993, respectively. The three-year decline in operating earnings resulted primarily from the continuing competitive pricing of photographic prints and processing services and a decline in roll processing volume. Additionally, operating earnings were penalized by the net closure of 49 stores in 1995. The Company will continue to evaluate the operations and results of each of its locations and close marginal stores in the future. The Wall Decor segment experienced a slight drop in operating earnings, decreasing to $5.4 million in 1995 from $5.5 million in 1994. The decrease is attributed to increased start-up costs associated with the net opening of 24 stores in 1995, a slight decrease in same-store sales and a soft fourth quarter retail market. Traditionally, the wall decor business is seasonally slow in the earlier quarters of the year, with a much higher level of sales generated during the fourth quarter surrounding the holiday season. The seasonality of the business allowed for disproportionately high 1993 earnings of $5.0 million due to the partial-year inclusion of the Wall Decor segment acquired in May 1993. CONSOLIDATED BALANCE SHEETS - ASSETS
February 3, February 4, 1996 1995 Current assets: Cash $ 3,815 $ 4,023 Short-term investments 4,516 10,326 Receivables, less allowance of $1,216 and $1,277, respectively 17,994 23,120 Inventories 33,937 33,943 Deferred cost applicable to unsold portraits - 173 Deferred income taxes, net 1,830 245 Prepaid expenses and other current assets 10,733 10,152 --------- --------- Total current assets 72,825 81,982 --------- --------- Net property and equipment 167,944 159,126 Net assets of business held for sale 5,055 - Other assets: Intangible assets, net 51,071 56,362 Other long-term assets 3,593 3,011 --------- --------- Total assets $300,488 $300,481 ========= ========= See accompanying notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS-LIABILITIES AND STOCKHOLDERS' EQUITY
February 3, February 4, 1996 1995 Current liabilities: Short-term borrowings $ 2,875 $ 6,850 Current maturities of long-term obligations 5,000 128 Accounts payable 22,783 27,137 Accrued expenses and other liabilities 25,710 25,884 Income taxes 7,645 9,768 --------- --------- Total current liabilities 64,013 69,767 --------- --------- Long-term obligations, less current maturities 54,804 59,742 Other liabilities 5,476 4,346 Deferred income taxes, net 2,027 626 Stockholders' equity: Preferred stock, no par value, 1,000,000 shares authorized, no shares issued and outstanding - - Preferred stock, Series A, no par value - - Common stock, $0.40 par value, 50,000,000 shares authorized; 17,169,402 and 17,123,599 shares outstanding at February 3, 1996 and February 4, 1995, respectively 6,868 6,849 Additional paid-in capital 32,071 31,278 Retained earnings 213,015 206,440 Cumulative foreign currency translation adjustment (2,109) (2,279) --------- --------- 249,845 242,288 Treasury stock at cost, 3,302,548 and 3,302,463 shares at February 3, 1996 and February 4, 1995, respectively (74,533) (74,531) Unamortized deferred compensation- restricted stock (1,144) (1,757) --------- --------- Total stockholders' equity 174,168 166,000 --------- --------- Total liabilities and stockholders' equity $300,488 $300,481 ========= ========= See accompanying notes to consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS-FINANCIAL CONDITION - -------------------------------------------------------- IDENTIFIABLE ASSETS (in thousands of dollars)
Feb. 3, Feb. 4, 1996 % Total 1995 % Total Portrait Studios $118,649 39.5% $111,326 37.0% Photofinishing 113,983 37.9 118,593 39.5 Wall Decor 35,577 11.9 27,094 9.0 Discontinued Electronic Publishing 5,055 1.7 10,703 3.6 Corporate: Cash and marketable securities 8,331 2.7 14,350 4.8 Other 18,893 6.3 18,415 6.1 --------- ------ --------- ------ Total $300,488 100.0% $300,481 100.0% ========= ====== ======== ======
ASSETS Total assets increased slightly in 1995, including a decrease in the assets of the discontinued Electronic Publishing operation which reflects the write down of assets to estimated realizable values through a $3.8 million provision for estimated losses. The Company also had decreases in cash, cash equivalents and short- term investments of $6.0 million and a reduction of locations in the Photofinishing segment. These decreases in assets were offset by increases in property and equipment of $8.8 million brought about by the Studio Enhancement Program in the Portrait Studio segment and by the net opening of 24 new locations in the Wall Decor segment. In 1994, total assets decreased $5.3 million, reflecting an increase in property and equipment of $44.8 million primarily attributable to the Studio Enhancement Program and decreases in cash, cash equivalents and short-term investments of $52.0 million brought about by funding the Company's capital expenditure programs. LIABILITIES Total liabilities decreased $8.2 million in 1995 from 1994, reflecting decreases in both short-term borrowings and accounts payable. In 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 notes mature over a seven-year period with an average maturity of 5.42 years, with the first principal payment in 1996. 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. Future dividend payments could be restricted if the Company does not meet certain earnings requirements. Additionally, the Company has negotiated a new $60.0 million revolving credit agreement replacing all existing revolving credit agreements in 1995. Short-term borrowings amounted to $2.9 million at 1995 year-end under the new revolving credit agreement. STOCKHOLDERS' EQUITY Stockholders' equity increased 4.9% to $174.2 million in 1995 after declining 5.4% to $166.0 million in 1994, net of treasury stock repurchases of $16.0 million in 1994. This increase is due primarily to an increase in retained earnings of $6.6 million and limited treasury stock activity. In 1988, the Company's Board of Directors authorized the Company to purchase up to 2,500,000 shares of CPI Corp. common stock. In 1992, the Company's Board of Directors authorized the purchase of an additional 2,000,000 shares of CPI Corp. common stock. Under the stock repurchase programs, the Company has acquired 3,302,548 shares for $74.5 million as of the end of 1995. In 1994 and 1993, 938,655 shares and 40,655 shares were purchased for $16.0 million and $657,000, respectively. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) Fifty-two weeks ended February 3, 1996, February 4, 1995, and February 5, 1994
1995 1994 1993 Cash flows provided by operating activities $53,675 $40,425 $38,174 Cash flows provided by (used in) financing activities: Proceeds from the issuance of short-term borrowings (3,975) 6,850 - Proceeds from issuance of long-term borrowings - - 60,373 Repayment of long-term obligations (150) (318) (367) Issuance of common stock to employee stock plans 812 2,073 438 Cash dividends (7,758) (7,930) (8,198) Purchase of treasury stock (2) (15,975) (657) -------- -------- -------- Cash flows provided by (used in) financing activities (11,073) (15,300) 51,589 -------- -------- -------- Cash flows provided by (used in) investing activities: Purchases of short-term investments (10,134) (9,172) (43,732) Proceeds from maturing of short-term investments 15,270 34,303 13,447 Additions to property and equipment (48,794) (75,117) (28,858) Acquisitions: Property and equipment - - (13,630) Intangible assets - - (1,102) Long-term investments - - 9 Issuance of restricted stock - (1,684) (56) -------- -------- -------- Cash flows used in investing activities (43,658) (51,670) (73,922) -------- -------- -------- Effect of exchange rate changes on cash and equivalents 173 (311) (749) -------- -------- -------- Net increase (decrease) in cash and cash equivalents (883) (26,856) 15,092 Cash and cash equivalents at beginning of year 9,214 36,070 20,978 -------- -------- -------- Cash and cash equivalents at end of year $ 8,331 $ 9,214 $36,070 ======== ======== ======== Supplemental cash flow information: Interest paid $ 5,120 $ 4,513 $ 302 ======== ======== ======== Income taxes paid $10,421 $ 9,318 $ 9,828 ======== ======== ======== See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS RECONCILIATION OF NET EARNINGS TO CASH FLOWS PROVIDED BY OPERATING ACTIVITIES (in thousands of dollars) Fifty-two weeks ended February 3, 1996, February 4, 1995, and February 5, 1994
1995 1994 1993 Net earnings from continuing operations $17,659 $16,640 $15,127 Adjustments for items not requiring cash: Depreciation and amortization 41,007 35,726 30,972 Deferred income taxes 1,187 (2,294) (3,664) Deferred compensation 1,129 (502) (647) Other (1,812) (1,622) (2,679) Decrease (increase) in current assets: Receivables and inventories 2,627 (7,310) (9,308) Deferred costs applicable to unsold portraits 173 2,650 951 Prepaid expenses and other current assets (2,633) (937) (992) Increase (decrease) in current liabilities: Accounts payable, accrued expenses and other liabilities (4,026) (814) 9,328 Income taxes (2,124) 1,001 (15) -------- -------- -------- Cash flows from continuing operations 53,187 42,538 39,073 Cash flows from discontinued operations 488 (2,113) (899) -------- -------- -------- Cash flows provided by operating activities $53,675 $40,425 $38,174 ======== ======== ======== See accompanying notes to consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS-CASH FLOWS - ----------------------------------------------- During the period 1993 through 1995, the Company generated $132.3 million in internal funds from operations. Investing activities during this period amounted to $169.3 million including acquisitions amounting to $14.7 million and capital expenditures of $152.8 million. Acquisitions consisted primarily of the Prints Plus business with acquired property and equipment amounting to $13.6 million and intangible assets resulting from purchase transactions amounting to $1.1 million. The Studio Enhancement Program accounted for $95.3 million or 62.4% of the capital expenditures. Financing activities during this period included short-term debt increases of $2.9 million, additional long-term debt of $59.5 million due to the placement of Senior Notes for $60.0 million, the repurchase of $16.6 million in treasury stock and the payment of $23.9 million in dividends. The effect of exchange rate changes on cash and cash equivalents amounted to $887,000. The net result of these transactions was a $12.6 million decrease in cash and cash equivalents during the three-year period. Planned capital expenditures for fiscal year 1996 are expected to continue at the same level as 1995. Included in fiscal year 1996 capital spending plans are: the continuation of the Studio Enhancement Program, the addition of stores to the Wall Decor segment and equipment upgrades and enhancements in the photofinishing operation. The Company believes it has sufficient liquidity over the course of the year to fund the planned capital expenditure program through borrowings under the revolving credit agreement and operating cash flows. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands of dollars) Fifty-two weeks ended February 3, 1996, February 4, 1995, and February 5, 1994
Add'l Common Paid-In Retained Stock Capital Earnings Balance at February 6, 1993 $6,782 $28,833 $194,510 ------- -------- --------- Issuance of common stock: Profit sharing plan and trust (15,475 shares) 6 303 - Stock bonus plan (3,664 shares) 1 72 - Employee stock plans (4,000 shares) 2 54 - Foreign currency translation - - - Dividends ($0.56 per common share) - - (8,198) Net earnings - - 13,236 Purchase of treasury stock, at cost - - - Amortization of deferred compensation-restricted stock - - - ------- -------- --------- Balance at February 5, 1994 $6,791 $29,262 $199,548 ------- -------- --------- Issuance of common stock: Profit sharing plan and trust (19,887 shares) 8 328 - Stock bonus plan (3,694 shares) 2 55 - Employee stock plans (121,150 shares) 48 1,633 - Foreign currency translation - - - Dividends ($0.56 per common share) - - (7,930) Net earnings - - 14,822 Purchase of treasury stock, at cost - - - Amortization of deferred compensation-restricted stock - - - ------- -------- --------- Balance at February 4, 1995 $6,849 $31,278 $206,440 ------- -------- --------- Issuance of common stock: Profit sharing plan and trust (40,459 shares) 16 707 - Stock bonus plan (1,429 shares) 1 20 - Employee stock plans (3,915 shares) 2 66 - Foreign currency translation - - - Dividends ($0.56 per common share) - - (7,758) Net earnings - - 14,333 Purchase of treasury stock, at cost - - - Amortization of deferred compensation-restricted stock - - - ------- -------- --------- Balance at February 3, 1996 $6,868 $32,071 $213,015 ======= ======== ========= See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED) (in thousands of dollars) Fifty-two weeks ended February 3, 1996, February 4, 1995, and February 5, 1994
Cumulative Foreign Currency Treasury Translation Stock Adjustment At Cost Balance at February 6, 1993 $ (89) $(57,899) -------- --------- Issuance of common stock: Profit sharing plan and trust (15,475 shares) - - Stock bonus plan (3,664 shares) - - Employee stock plans (4,000 shares) - - Foreign currency translation (1,291) - Dividends ($0.56 per common share) - - Net earnings - - Purchase of treasury stock, at cost - (657) Amortization of deferred compensation-restricted stock - - -------- --------- Balance at February 5, 1994 $(1,380) $(58,556) -------- --------- Issuance of common stock: Profit sharing plan and trust (19,887 shares) - - Stock bonus plan (3,694 shares) - - Employee stock plans (121,150 shares) - - Foreign currency translation (899) - Dividends ($0.56 per common share) - - Net earnings - - Purchase of treasury stock, at cost - (15,975) Amortization of deferred compensation-restricted stock - - -------- --------- Balance at February 4, 1995 $(2,279) $(74,531) -------- --------- Issuance of common stock: Profit sharing plan and trust (40,459 shares) - - Stock bonus plan (1,429 shares) - - Employee stock plans (3,915 shares) - - Foreign currency translation 170 - Dividends ($0.56 per common share) - - Net earnings - - Purchase of treasury stock, at cost - (2) Amortization of deferred compensation-restricted stock - - -------- --------- Balance at February 3, 1996 $(2,109) $(74,533) ======== ========= See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED) (in thousands of dollars) Fifty-two weeks ended February 3, 1996, February 4, 1995, and February 5, 1994
Deferred Compensation- Restricted Stock Total Balance at February 6, 1993 $ (191) $171,946 -------- --------- Issuance of common stock: Profit sharing plan and trust (15,475 shares) - 309 Stock bonus plan (3,664 shares) - 73 Employee stock plans (4,000 shares) (56) - Foreign currency translation - (1,291) Dividends ($0.56 per common share) - (8,198) Net earnings - 13,236 Purchase of treasury stock, at cost - (657) Amortization of deferred compensation-restricted stock 91 91 -------- --------- Balance at February 5, 1994 $ (156) $175,509 -------- --------- Issuance of common stock: Profit sharing plan and trust (19,887 shares) - 336 Stock bonus plan (3,694 shares) - 57 Employee stock plans (121,150 shares) (1,681) - Foreign currency translation - (899) Dividends ($0.56 per common share) - (7,930) Net earnings - 14,822 Purchase of treasury stock, at cost - (15,975) Amortization of deferred compensation-restricted stock 80 80 -------- --------- Balance at February 4, 1995 $(1,757) $166,000 -------- --------- Issuance of common stock: Profit sharing plan and trust (40,459 shares) - 723 Stock bonus plan (1,429 shares) - 21 Employee stock plans (3,915 shares) - 68 Foreign currency translation - 170 Dividends ($0.56 per common share) - (7,758) Net earnings - 14,333 Purchase of treasury stock, at cost - (2) Amortization of deferred compensation-restricted stock 613 613 -------- --------- Balance at February 3, 1996 $(1,144) $174,168 ======== ========= See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS OF THE COMPANY AND PRINCIPLES OF CONSOLIDATION CPI Corp. (the Company) is a holding company engaged, through its majority or wholly owned subsidiaries, partnerships and joint ventures, 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 and posters, prints and framing outlets throughout the United States, Canada and Puerto Rico. Company management has made a number of estimates and assumptions related to the reporting of assets and liabilities in the preparation of financial statements. Actual results could differ from these estimates. All significant intercompany transactions have been eliminated. 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. The Company recognizes its Canadian operating results are subject to variability arising from foreign exchange rate movements. The Company does not believe such risk is material to the results of operations or the financial position of the Company and as such does not engage in derivative activities in order to hedge against the foreign currency fluctuations. CASH AND CASH EQUIVALENTS For the purpose of reporting cash flows, cash and cash equivalents consist primarily of cash on hand and highly liquid investments with insignificant interest-rate risk and original maturities of three months or less at date of acquisition. Remaining short-term investments consist of investments with original maturities beyond three months but less than twelve months. 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 are stated at cost, adjusted for discount accretion and premium amortization. The securities in the Company's portfolio are short-term in nature and are classified as "held-to-maturity," as management has the intent and ability to hold those securities to maturity. Total interest income for fiscal years 1995, 1994 and 1993 was $.5 million, $1.0 million, and $1.2 million 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. REVENUE RECOGNITION Portrait Studio sales revenue is recognized at the time the customer approves photographic proofs and makes a firm commitment for a portrait order. Incremental costs of production are accrued at the time sales revenue is recognized. Appropriate reserves for cancelability are maintained by the Company. DEFERRED COSTS APPLICABLE TO UNSOLD PORTRAITS Deferred costs applicable to unsold portraits consist of direct costs associated with the photography function for portraits produced and not approved or firmly committed to by the customer at the time of portrait sitting. Such costs are charged to selling, general and administrative expense when the customer accepts or declines the portraits. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost when acquired. Expenditures for improvements are capitalized while normal repair and maintenance are expensed as incurred. When properties are disposed of, the related cost and accumulated depreciation are removed from the accounts, and gains or losses on the dispositions are reflected in results of operations. Depreciation is computed principally using the straight-line method over estimated service lives of the respective assets. A summary of estimated useful lives is as follows: Building improvements 15 to 19 years Leasehold improvements 5 to 15 years Machinery and equipment 3 to 10 years Furniture and fixtures 5 to 8 years
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, covenants not to compete and a signing bonus. 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 and signing bonus not to compete have been amortized on a straight-line basis over the respective one to five year periods of the agreements. The Company analyzes excess of cost over fair-value of net assets acquired periodically to determine whether any impairment has occurred in the value of such assets. Based upon the anticipated future income and cash flow from operations, in the opinion of Company management, there has been no impairment. INCOME TAXES The Company adopted the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 109 (SFAS 109), "Accounting For Income Taxes," in 1993 on a prospective basis. SFAS 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 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 $2.1 million in net earnings as a cumulative change in accounting principle. 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. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the 1995 presentation. FAIR VALUE OF 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. IMPACT OF NEW ACCOUNTING STANDARDS In March 1995, the FASB issued SFAS No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and For Long- Lived Assets To Be Disposed Of." SFAS 121 is effective for fiscal years beginning after December 15, 1995 and will require, among other things, that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management will adopt the provisions of SFAS 121 on February 4, 1996, but believes that the adoption of SFAS 121 will not have a material impact on the Company's financial statements. In addition, during October 1995, the FASB also issued SFAS No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans and also applies to transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. SFAS 123 defines a fair value-based method of accounting for an employee stock option or similar equity instruments and encourages all entities to adopt that method of accounting. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). SFAS 123 is effective for transactions entered into in fiscal years beginning after December 15, 1995. Pro forma disclosures required for entities that elect to continue to measure compensation cost using APB 25 must include the effect of all awards granted in fiscal years that begin after December 15, 1994. The Company plans to continue to measure compensation cost using APB 25, therefore the adoption of SFAS 123 will not have any impact on the Company's financial condition or results of operations. 2. ACQUISITIONS On May 30, 1993, the Company finalized the acquisition of the Prints Plus wall decor chain from the Melville Corporation for approximately $14.7 million. The acquired 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. In addition, the Company entered into a non-compete agreement with Melville Corporation for cash consideration aggregating $1.1 million which is being amortized over the three-year term. The stores will continue to be operated under the trade name Prints Plus. The acquisition was recorded using the purchase method of accounting and the results of operations of Prints Plus have been included in the Company's consolidated financial statements since the effective date of the acquisition. 3. PROPERTY AND EQUIPMENT PROPERTY AND EQUIPMENT (in thousands of dollars)
February 3, February 4 1996 1995 Land and land improvements $ 2,911 $ 2,913 Building improvements 26,452 26,460 Leasehold improvements 43,467 37,955 Furniture and fixtures 72,251 61,505 Machinery and equipment 187,355 180,054 --------- --------- 332,436 308,887 Less accumulated depreciation 164,492 149,761 --------- --------- Net property and equipment $167,944 $159,126 ========= =========
The Company leases various premises and equipment under noncancellable operating lease agreements with initial terms in excess of one year and expiring at various dates through fiscal 2006. Substantially all leases require the Company to pay maintenance, insurance and taxes. MINIMUM RENTAL PAYMENTS UNDER OPERATING LEASES WITH INITIAL TERMS IN EXCESS OF ONE YEAR AT FEBRUARY 3, 1996 (in thousands of dollars)
Fiscal Year 1996 $ 38,984 1997 29,621 1998 22,518 1999 15,646 2000 10,829 Thereafter 25,423 --------- $143,021 =========
Rental expense during 1995, 1994 and 1993 on all operating leases was $32.3 million, $31.5 million and $27.6 million, respectively. 4. INVENTORIES The Company's inventory is comprised of raw material inventories of film, paper, chemicals and portraits-in-process. Certain inventories are accounted for under the LIFO method. Such inventories aggregated approximately $1.1 million and $1.5 million at February 3, 1996 and February 4, 1995, respectively. The excess of replacement cost of these inventories over their stated LIFO value was $316,000 and $413,000 at February 3, 1996 and February 4, 1995, 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 approved or committed to by the customer and have not been recognized as sales. 5. ADVERTISING The Company expenses the production costs of advertising the first time the advertising takes place, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of direct mail advertisements that include order coupons for the Company's products. The capitalized costs of the advertising are amortized over the expected period of future benefits following the delivery of the direct mail in which it appears. Total advertising reported as a capitalized cost for direct-response advertising and classified with other assets for 1995 and 1994 was $1.9 million and $941,000, respectively. Advertising expense for 1995 and 1994 was $52.3 million and $50.9 million, respectively. 6. INTANGIBLE ASSETS Intangible Assets and Related Amortization (in thousands of dollars)
Unamortized Balance at Amortization Feb. 3, 1996 1995 1994 1993 Excess of cost over fair value of net assets acquired $ 50,710 $1,467 $1,471 $1,591 Favorable lease rights 2 57 93 167 Covenants not to compete 359 990 1,049 1,047 Signing bonus - 1,111 1,333 2,000 -------- ------ ------ ------ $ 51,071 $3,625 $3,946 $4,805 ======== ====== ====== ======
Accumulated amortization of intangible assets was $17.6 million and $14.0 million at February 3, 1996 and February 4, 1995, respectively. 7. CREDIT AGREEMENTS AND OUTSTANDING DEBT On August 31, 1993, the Company privately placed Senior Notes in the amount of $60.0 million (the Note Agreement) with two insurance companies. 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 fixed rate of 6.44%. The Note Agreement requires the Company maintain certain financial ratios and comply with certain restrictive covenants including a limitation on dividend payments, purchase of treasury stock and certain restricted investments, the total of which is not to exceed $25.0 million plus 50% of net earnings (or less 100% of net losses) credited at the end of each fiscal year. The Company incurred $459,000 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. On July 13, 1995, the Company terminated its existing $50.0 million revolving credit agreement and two separate $5.0 million credit agreements of its wholly-owned subsidiary, Consumer Programs Incorporated, and entered into a new, $60.0 million revolving credit agreement (the Credit Agreement) with three domestic banks. The Credit Agreement, which will expire on August 31, 1997, has interest charged at the lower of a quoted interest rate or the banks' prime lending rate. A commitment fee of 0.1875% per annum is payable on the unused portion of the Credit Agreement. The Company is not required to maintain compensating balances in connection with the Credit Agreement and has substantially the same financial covenants in the Credit Agreement as those set forth in the Company's $60.0 million Note Agreement. Under a covenant of the Credit Agreement, the Company is required to reduce the balance held under the Credit Agreement to $5.0 million for 30 consecutive days during the year. As of February 3, 1996, the Company had outstanding letters of credit for the principal amount of $5.5 million. The Company's performance of the conditions of the Note Agreement and the previous $50.0 million Credit Agreement and the underlying notes issued under both agreements was secured by a pledge of the stock of the Company's direct subsidiaries. As the Company achieved the stipulated financial ratios required by both agreements to release the stock, on June 5, 1995, all pledged stock of the Company's direct subsidiaries was released. DEBT OBLIGATIONS OUTSTANDING (in thousands of dollars)
February 3, February 4, 1996 1995 Senior notes, net of unamortized issuance costs $ 59,747 $ 59,662 Revolving credit agreement 2,875 6,850 Notes payable and obligations under capital leases 57 208 Less current maturities 7,875 6,978 --------- --------- $ 54,804 $ 59,742 ========= =========
AGGREGATE LONG-TERM DEBT MATURITIES AS OF FEBRUARY 3, 1996 (in thousands of dollars) 1996 $ 5,000 1997 10,000 1998 15,000 1999 15,000 2000 15,000 Thereafter 57 -------- $60,057 ========
Interest expense for fiscal years 1995, 1994 and 1993 was $5.1 million, $5.3 million and $2.0 million, respectively. 8. FINANCIAL INSTRUMENTS To manage its exposure to fluctuations in interest rates, in fiscal year 1993, the Company entered into an interest rate swap agreement (the "swap agreement") for a notional principal amount of $40.0 million, which matured August 28, 1995. 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 swap agreement was recognized as an adjustment to interest expense. The swap agreement provided a fixed rate of 4.54% with a floating rate payment equal to the 6-month London Interbank Offered Rate (LIBOR) determined on a semi-annual basis with settlement occurring on a specific date. For fiscal years 1995, 1994 and 1993, the rate realized averaged 6.04%, 5.70% and 4.00%, respectively. Net interest expense on the swap agreement was $927,000 for fiscal year 1994 while the swap agreement resulted in income of $76,000 and $87,000 in fiscal years 1995 and 1993, respectively. The $927,000 in interest expense recorded in fiscal year 1994 included an unrealized loss as the Company recorded the swap agreement at its market value in that year. The Company has not entered into any other derivative instruments or off-balance-sheet transactions. 9. ACCRUED EXPENSES AND OTHER LIABILITIES ACCRUED EXPENSES AND OTHER LIABILITIES (in thousands of dollars)
February 3, February 4, 1996 1995 Accrued employment costs $ 13,023 $ 13,732 Sales taxes payable 2,674 2,690 Accrued advertising expense 3,204 2,222 Accrued license fees 2,879 3,163 Accrued interest 1,688 2,473 Other 2,242 1,604 --------- --------- $ 25,710 $ 25,884 ========= =========
10. Income Taxes In the first fiscal quarter of 1993, the Company adopted SFAS 109, "Accounting for Income Taxes," on a prospective basis, resulting in an increase to net income for the fiscal year ended February 5, 1994 of $2.1 million. EARNINGS BEFORE INCOME TAXES BY U.S. AND CANADIAN SOURCES (in thousands of dollars)
1995 1994 1993 U.S $ 23,382 $ 21,619 $ 15,163 Canada (949) 1,908 3,357 --------- --------- --------- $ 22,433 $ 23,527 $ 18,520 ========= ========= =========
COMPONENTS OF INCOME TAXES (in thousands of dollars)
1995 1994 1993 Current: Federal $ 8,336 $ 9,144 $ 7,567 State and local 594 1,684 963 Canada (645) 171 926 -------- -------- -------- 8,285 10,999 9,456 Deferred (185) (2,294) (2,052) -------- -------- -------- $ 8,100 $ 8,705 $ 7,404 ======== ======== ========
RECONCILIATION BETWEEN INCOME TAXES (in thousands of dollars)
1995 1994 1993 Taxes at U.S. federal corporate statutory rate $ 7,852 $ 8,235 $ 6,482 State and local income taxes, net of federal tax benefit 461 933 467 Other (213) (463) 455 -------- -------- -------- $ 8,100 $ 8,705 $ 7,404 ======== ======== ========
SOURCES OF TAX EFFECTS (in thousands of dollars)
1995 1994 1993 Deferred tax assets: Deferred compensation and other employee benefits $ 1,785 $ 1,631 $ 2,144 Expense accruals 461 240 197 Allowance for doubtful accounts 470 483 249 Inventory costs capitalized - - 172 Net operating loss carryforward 1,164 752 - Reserve for discontinued operations 1,373 - - Intangible assets 1,795 1,278 - Other - 126 94 -------- -------- -------- Total deferred tax assets 7,048 4,510 2,856 -------- -------- -------- Deferred tax liabilities: Property and equipment (5,273) (3,373) (2,746) Deferred cost of unsold portraits - - (1,098) Employee pension plan (1,557) (1,150) (828) Revenue recognition - - (686) Intangible assets (327) (214) (107) Other (88) (153) (65) -------- -------- -------- Total deferred tax liabilities (7,245) (4,890) (5,530) -------- -------- -------- Net deferred tax liabilities $ (197) $ (380) $(2,674) ======== ======== ======== Current deferred income taxes $ 1,830 $ 245 $(2,232) ======== ======== ======== Long-term deferred income taxes $(2,027) $ (625) $ (442) ======== ======== ========
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 3, 1996, 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. At February 3, 1996, the Company has available net operating loss carryforwards of approximately $1.9 million for federal income tax purposes that expire beginning in 2005 and ending in 2010. The Company also has $7.5 million of total net operating loss carryforwards available for state income tax purposes. United States income taxes have not been provided on $13.5 million 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 undistributed earnings of international subsidiaries is not practicable. However, it is estimated that foreign withholding taxes of $1.4 million may be payable if such earnings were distributed. 11. 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 earlier of the hire date or January 1, 1985 (if January 1, 1985 precedes the hire date) 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. NET PERIODIC PENSION EXPENSE OF THE DEFINED BENEFIT PLAN (in thousands of dollars)
1995 1994 1993 Service cost-benefits earned during the period $ 962 $ 1,064 $ 935 Interest cost on projected benefit obligation 1,261 1,148 1,052 Return on plan assets (3,298) (351) (921) Net amortization and deferral 2,220 (611) (56) -------- -------- -------- Net periodic pension expense $ 1,145 $ 1,250 $ 1,010 ======== ======== ========
Plan assets consist primarily of cash equivalents, a marketable equity securities fund, guaranteed interest contracts, immediate participation guarantee contracts and government bonds. FUNDED STATUS OF DEFINED BENEFIT PLAN AS OF DECEMBER 31, 1995, DECEMBER 31, 1994 AND DECEMBER 31, 1993 (in thousands of dollars)
1995 1994 1993 Actuarial present value of vested benefit obligation $ 14,950 $ 12,174 $ 12,810 ========= ========= ========= Accumulated benefit obligation $ 16,942 $ 12,675 $ 14,335 ========= ========= ========= Projected benefit obligation (19,366) (14,247) (16,703) Plan assets at fair value 19,431 15,371 14,599 --------- --------- --------- Plan assets in excess of (less than) projected benefit obligations 65 1,124 (2,104) Unrecognized net loss 1,513 172 3,165 Unrecognized prior service cost 867 449 561 Net transition obligation 21 25 28 --------- --------- --------- Prepaid pension cost recognized in the consolidated balance sheet $ 2,466 $ 1,770 $ 1,650 ========= ========= =========
ASSUMPTIONS ON FUNDED STATUS AT DECEMBER 31, 1995, DECEMBER 31, 1994 AND DECEMBER 31, 1993
1995 1994 1993 Discount rate in determining benefit obligations 7.5% 8.5% 7.0% Rate of increase in compensation levels 5.0% 6.0% 6.0% Expected long-term rate of return on assets 8.0% 8.0% 8.0%
12. EMPLOYEE STOCK PLANS 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. In 1992, 1,761 restricted shares were issued and were vested in 1993. In 1993, 4,000 restricted shares were issued and vest ratably over a four-year period. In 1994, 121,419 restricted shares were issued and vest over a three-year period. Of the grants issued, no shares were forfeited in 1995, 1994 and 1993. As of February 3, 1996, 58,347 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 15% of their base compensation in a trust fund, the assets of which are invested in securities other than Company stock. Effective January 1, 1994, the Company amended the Plan to set the Company match at 50% of the employee's investment contributions, equal to a maximum of 5% of the employee's base compensation, as long as the Company remains profitable. An additional 10% match was granted for 1994 fourth-quarter contributions up to a maximum of 5% of a participating employee's fourth-quarter base compensation for employees who increased, joined or rejoined the plan during the 1994 fourth quarter. The Company's matching contributions are made in shares of its common stock which vest 100% once an employee has five years 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 40,725, 40,459 and 19,887 shares to satisfy its obligations under the plan for 1995, 1994 and 1993, respectively. For 1995 and 1994, the Company matched the employee's investment at a rate of 50%. For 1993, the Company match was 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 1995 and 1994, 1,429 and 3,694 shares, respectively, were distributed under this plan. No original awards were made under this plan in fiscal year 1993. In fiscal year 1994 there were discretionary awards of 725 shares. Of the 725 shares awarded in 1994, 475 shares were forfeited due to terminations. As of February 3, 1996, 58,370 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 the fair market value of the Company's common stock on the grant date. Expenses recognized for 1995, 1994 and 1993 with respect to these plans were $2.2 million, $1.3 million and $370,000, respectively. 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 members of the Compensation Committee of the Board of Directors, all of whom are disinterested directors. A total of 1,700,000 shares has been authorized for issuance under the plan. OPTIONS AWARDED UNDER THE STOCK OPTION PLAN
1995 1994 Number of Per Share Number of Per Share Shares Option Price Shares Option Price Outstanding at beginning of year 1,502,011 $13.88-$35.00 1,212,154 $15.63-$35.00 Granted 100,139 $14.75-$21.63 597,108 $13.88-$18.63 Cancelled (309,274) $14.75-$29.00 (307,251) $17.00-$35.00 Exercised (3,915) $15.50-$17.75 - - ---------- ---------- At end of year: Total outstanding 1,288,961 $13.88-$35.00 1,502,011 $13.88-$35.00 ========== ========== Total exercisable 391,454 345,283 ========== ==========
Under the plan, 371,524 options granted become exercisable at a rate of one-fourth to one-third a year commencing one year after award and expiring from four to five years after award. An additional 677,437 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 3, 1996, there were 411,039 shares reserved for issuance under this plan. 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 in exchange for a voluntary reduction in base salary. Options were granted as participants elected, pursuant to their Stock Option Agreement, to reduce their compensation for fiscal years 1993 and 1994. A total of 1,000,000 shares has been authorized for issuance. As of February 3, 1996, 240,284 options at an exercise price of $18.38 for 1993 salary reduction and 263,883 options at an exercise price of $15.50 for 1994 salary reduction. For 1995 this plan was not offered. Options granted are exercisable after three years and expire at the end of eight years. KEY EXECUTIVE DEFERRED COMPENSATION PLAN On April 6, 1995, CPI Corp. established a deferred base compensation plan for key executives which allows deferral of salary on substantially the same terms bonus compensation may be deferred under the Deferred Compensation and Stock Appreciation Rights Plan. On July 14, 1995, this plan was amended and restated. Under this plan, a participant may elect by written notice to the Company, to defer up to 50% of his base salary for the fiscal year, but not less than $5,000 in the aggregate. Payment shall not commence earlier than six months and one day after the initial year of deferral. The participant may choose to have payments made either in a lump sum or in a specified number of annual installments, not to exceed ten installments. For 1995, certain key executives elected to participate in this plan. 13. INDUSTRY SEGMENT INFORMATION The Company is engaged in developing and marketing products and services for consumers in the United States and Canada through a network of centrally managed retail locations. The Company operates in three business segments: Portrait Studios, Photofinishing, and Wall Decor. The Portrait Studios segment operates a professional portrait photography business, primarily through fixed location studios. The Photofinishing segment provides photofinishing services, primarily for amateur photographers, and sells film and other camera accessories. The Wall Decor segment markets an assortment of custom print reproductions and related accessories and provides custom framing services. Sales and operating earnings segment information is included in "Management's Discussion and Analysis-Results of Operations" and is incorporated by reference herein from pages 19 and 20 of this document. (Page reference is for published paper copy of the Annual Report. This information is included in the section titled "Management's Discussion and Analysis - Results of Operations.") SELECTED INDUSTRY SEGMENT INFORMATION (in thousands of dollars)
1995 1994 1993 DEPRECIATION AND AMORTIZATION: Portrait Studio $ 17,553 $ 12,256 $ 6,440 Photofinishing 16,231 17,557 19,655 Wall Decor 3,556 2,918 1,833 Corporate 3,668 2,995 3,043 Discontinued Electronic Publishing 1,820 2,170 2,490 --------- --------- --------- $ 42,828 $ 37,896 $ 33,461 ========= ========= ========= IDENTIFIABLE ASSETS: Portrait Studio $118,649 $111,326 $ 63,160 Photofinishing 113,983 118,593 125,044 Wall Decor 35,577 27,094 20,214 Corporate 27,224 32,765 86,544 Discontinued Electronic Publishing 5,055 10,703 10,834 --------- --------- --------- $300,488 $300,481 $305,796 ========= ========= ========= CAPITAL EXPENDITURES: Portrait Studio $ 24,817 $ 57,723 $ 19,024 Photofinishing 14,732 10,347 10,147 Wall Decor 9,627 8,030 14,057 Corporate 1,005 884 625 Discontinued Electronic Publishing 472 2,029 1,506 --------- --------- --------- $ 50,653 $ 79,013 $ 45,359 ========= ========= =========
Substantially all of 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 agreement to materially reduce the scope of the Company's business with Sears. 14. STOCK REPURCHASE PLAN The Company's Board of Directors has authorized the Company to purchase up to 4,500,000 shares of its outstanding common stock through 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 3, 1996, the Company had purchased 3,302,548 shares of stock for $74.5 million at an average stock price of $22.57. 15. SHAREHOLDER RIGHTS PLAN The Board of Directors of the Company established a Shareholders Rights Plan (Rights Plan) through the declaration of a dividend distribution of one preferred stock purchase right for each outstanding share of common stock. The Rights Plan 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. In addition, the rights will be exercisable if any person or group (other than certain entities affiliated with the Company) becomes the beneficial owner of 15% or more of the Company's common stock. On August 3, 1995, the Board of Directors adopted an amendment to the Rights Plan to clarify that no person would be deemed an "Acquiring Persons" as defined in the Rights Plan if that person acquired beneficial ownership of 15% or more of the Company's stock solely as a result of the Company's repurchase of stock, provided that the person did not subsequently acquire additional shares. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, RECEIVABLES, ACCOUNTS PAYABLE AND ACCRUED EXPENSES The carrying amounts approximate fair value at February 3, 1996 and February 4, 1995 due to the short maturity of these financial instruments. SHORT-TERM BORROWINGS AND LONG-TERM DEBT The fair value of the Company's debt is estimated based on quoted market prices for similar debt issues with the same remaining maturities. On February 3, 1996, the carrying value and estimated fair market value of the Company's debt was $62.7 million and $62.8 million, respectively. On February 4, 1995, the carrying value and estimated fair market value of the Company's debt was $66.7 million and $61.9 million, respectively. 17. CONTINGENCIES The Company is a defendant in various lawsuits arising in the natural 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. 18. DISCONTINUED OPERATIONS AND SUPPLEMENTAL CASH FLOW INFORMATION On April 4, 1996, the Company announced its intention to sell certain assets of its Electronic Publishing operations for approximately $5.0 million. Additionally, the purchaser will assume certain liabilities of the Electronic Publishing operation which aggregate approximately $900,000. The Company expects to have completed the transfer by April 30, 1996. A provision of $3.8 million has been made to reflect the discontinued business at its estimated realizable value. The Company has classified the Electronic Publishing operation as a discontinued operation and has reclassified the prior years' financial statements to reflect this change. Net sales of the discontinued business for 1995, 1994 and 1993 were $16.7 million, $15.6 million and $15.5 million, respectively. In addition, total assets were $8.9 million and $11.0 million for February 3, 1996 and February 4, 1995, respectively. SUPPLEMENTAL CASH FLOW INFORMATION FROM DISCONTINUED OPERATIONS (in thousands of dollars)
1995 1994 1993 Losses from discontinued operations, net of income tax benefit of $507, $1,068 and $1,259, respectively $ (898) $(1,818) $(1,891) Net loss on disposal, net of tax benefit of $1,372 (2,428) - - Adjustments for items not requiring cash: Depreciation and amortization 1,821 2,170 2,489 Decrease (increase) in current assets: Receivables and inventories 19 (165) (232) Prepaid expenses and other current assets 520 (210) 343 Reserve for closing 3,800 - - Increase (decrease) in current liabilities: Accounts payable, accrued expenses and other liabilities (502) (61) (102) Deferred tax benefit (1,372) - - Capital expenditures (472) (2,029) (1,506) -------- -------- -------- Cash flows from discontinued operations $ 488 $(2,113) $ (899) ======== ======== ========
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 3, 1996 and February 4, 1995. 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. The adjacent table sets forth the high and low last-sale prices of the common stock reported by the New York Stock Exchange during the Company's last three fiscal years. SELECTED QUARTERLY FINANCIAL DATA (In thousands except per share amounts)
Quarter Ended : April 29, 1995 July 22, 1995 (12 wks) (12 wks) FISCAL YEAR 1995 Net sales from continuing operations $ 103,394 $ 107,056 Earnings from continuing operations before income taxes $ (688) $ 4,067 Net earnings (loss) from continuing operations $ (433) $ 2,562 Net losses from discontinued operations $ (241) $ (310) Net earnings (loss) $ (674) $ 2,252 Earnings (loss) per common share: From continuing operations $ (0.03) $ 0.18 From discontinued operations $ (0.02) $ (0.02) Net earnings (loss) $ (0.05) $ 0.16 Weighted average number of common and common equivalent shares 13,897 13,930 Dividends $ 0.14 $ 0.14 STOCK PRICE AND VOLUME High $ 17.75 $ 21.75 Low $ 14.25 $ 16.88 Volume (thousands) 3,214 2,007
SELECTED QUARTERLY FINANCIAL DATA (CONTINUED) (In thousands except per share amounts)
Quarter Ended : Nov. 11, 1995 Feb. 3, 1996 (16 wks) (12 wks) FISCAL YEAR 1995 Net sales from continuing operations $ 166,156 $ 150,046 Earnings from continuing operations before income taxes $ 5,193 $ 19,066 Net earnings (loss) from continuing operations $ 3,270 $ 12,260 Net losses from discontinued operations $ (94) $ (2,681) Net earnings (loss) $ 3,176 $ 9,579 Earnings (loss) per common share: From continuing operations $ 0.24 $ 0.88 From discontinued operations $ (0.01) $ (0.19) Net earnings (loss) $ 0.23 $ 0.69 Weighted average number of common and common equivalent shares 14,090 14,005 Dividends $ 0.14 $ 0.14 STOCK PRICE AND VOLUME High $ 22.13 $ 21.13 Low $ 17.75 $ 14.50 Volume (thousands) 2,529 1,869
SELECTED QUARTERLY FINANCIAL DATA (CONTINUED) (In thousands except per share amounts)
Quarter Ended : April 30, 1994 July 23, 1994 (12 wks) (12 wks) FISCAL YEAR 1994 Net sales from continuing operations $ 96,167 $ 101,210 Earnings from continuing operations before income taxes $ (3,809) $ 3,377 Net earnings (loss) from continuing operations $ (2,284) $ 2,025 Net losses from discontinued operations $ (203) $ (393) Net earnings (loss) $ (2,487) $ 1,632 Earnings (loss) per common share: From continuing operations $ (0.16) $ 0.14 From discontinued operations $ (0.01) $ (0.03) Net earnings (loss) $ (0.17) $ 0.11 Weighted average number of common and common equivalent shares 14,581 14,342 Dividends $ 0.14 $ 0.14 STOCK PRICE AND VOLUME High $ 16.63 $ 18.13 Low $ 14.50 $ 14.25 Volume (thousands) 1,361 1,922
SELECTED QUARTERLY FINANCIAL DATA (CONTINUED) (In thousands except per share amounts)
Quarter Ended : Nov. 12, 1994 Feb. 4, 1995 (16 wks) (12 wks) FISCAL YEAR 1994 Net sales from continuing operations $ 170,568 $ 149,576 Earnings from continuing operations before income taxes $ 7,024 $ 19,821 Net earnings (loss) from continuing operations $ 4,347 $ 12,553 Net losses from discontinued operations $ (515) $ (707) Net earnings (loss) $ 3,832 $ 11,846 Earnings (loss) per common share: From continuing operations $ 0.32 $ 0.91 From discontinued operations $ (0.04) $ (0.05) Net earnings (loss) $ 0.28 $ 0.86 Weighted average number of common and common equivalent shares 13,829 13,744 Dividends $ 0.14 $ 0.14 STOCK PRICE AND VOLUME High $ 21.88 $ 20.50 Low $ 17.25 $ 13.88 Volume (thousands) 2,376 1,313
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 3, 1996 and February 4, 1995, 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 3, 1996 appearing on pages 18, 22, 24, 25 and 26 through 36. (Page reference is for published paper copy of the Annual Report. This information is included in the sections titled "Consolidated Statements of Earnings," "Consolidated Balance Sheets," "Consolidated Statements of Cash Flows, "Consolidated Statements of Changes in Stockholders' Equity" and "Notes to Consolidated Financial Statements.") 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 3, 1996 and February 4, 1995, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended February 3, 1996, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP St. Louis, Missouri April 4, 1996 DIRECTORS AND OFFICERS - ---------------------- MILFORD BOHM* Retired founder and Chairman Emeritus, CPI Corp. ALYN V. ESSMAN Chairman of the Board and Chief Executive Officer, CPI Corp. RUSSELL ISAAK President, CPI Corp. MARY ANN KREY* Chief Executive Officer, Krey Distributing Co. LEE LIBERMAN Chairman Emeritus, Laclede Gas Company NICHOLAS L. REDING Vice Chairman, Monsanto Company MARTIN SNEIDER Former President, Edison Brothers Stores, Inc. ROBERT L. VIRGIL* Principal, Edward D. Jones & Co. *Member of the Audit Committee of the Board of Directors ALYN V. ESSMAN Chairman, Chief Executive Officer OFFICE OF THE PRESIDENT RUSSELL ISAAK-President DAVID E. APRIL-Senior Executive Vice President PATRICK J. MORRIS-Senior Executive Vice President JANE E. NELSON Secretary and General Counsel CORPORATE OFFICERS BARRY ARTHUR-Executive Vice President, Finance-Chief Financial Officer EDMUND J. CHASE-Executive Vice President, Strategic Development WILLIAM F. CRONIN-Executive Vice President, Marketing FRAN SCHEPER-Executive Vice President, Human Resources RICHARD TARPLEY-Executive Vice President, Manufacturing DIVISION PRESIDENTS THEODORE DE BUHR II-CPI Photo/Fox Photo and CPI Electronic Publishing ARTHUR PADOVESE-Prints Plus HARRY STECHER-Sears Portrait Studios and Canadian Operations INVESTOR INFORMATION - -------------------- MOST RECENT ANALYST REPORTS First Honolulu Securities, Inc., John Roberts, March 20, 1996 McDonald & Company, Jeffrey S. Stein, December 28, 1995 Value Line, Jacob Arbitman, March 1, 1996 STOCK TRANSFER, REGISTRAR, DIVIDEND REINVESTMENT AND RIGHTS AGENT Boatmen's Trust Company, 510 Locust Street, P. O. Box 14768, St. Louis, MO 63178-4768, (314) 466-1357, or (800) 456-9852 10-K REPORT Single copies of the Company's Form 10-K, filed with the Securities and Exchange Commission, are available at no charge to shareholders upon written request. ANNUAL MEETING/CORPORATE HEADQUARTERS The annual meeting of stockholders' will convene at 10:00 a.m., Thursday, June 6, 1996 at the Corporate Headquarters, 1706 Washington Avenue, St. Louis, MO 63103-1717. INDEPENDENT AUDITORS KPMG Peat Marwick LLP St. Louis, MO 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. (This page is an insert to the annual report) NOTICE TO SHAREHOLDERS For many years, we have published a quarterly earnings report to shareholders at an annual cost of tens of thousands of dollars. That report, because it was prepared separately and printed on multi-color press, lagged the media news release by several weeks. Beginning this year, we will no longer publish that formal report, offering you instead the option of three new formats by which you can receive that information on a much more timely basis. Moreover, we will all benefit from the reduced corporate expense. The scheduled news release dates are: 1st quarter - May 29, 1996; 2nd quarter - August 27, 1996; 3rd quarter - December 10, 1996. Your options - which you will be given the opportunity to revise annually are: 1. You can access the news release on the Internet via the CPI Corp. home page address: http://www.cpicorp.com 2. We can automatically E-Mail to you the day of the media release. 3. We can mail you a printed copy of the quarterly news release within 7 working days after its release to the media. Please indicate your choice of formats 2 or 3 by completing the information in the appropriate space below: E-MAIL TRANSMISSION Name ......................................................... E-Mail Address ............................................... PRINTED COPY OF NEWS RELEASE Name ......................................................... Address...............City.............State..........Zip..... PLEASE MAIL THIS FORM TO: CPI Corp., Shareholder Relations, 1706 Washington Ave., St. Louis, MO 63103 ADDITIONAL INFORMATION - ---------------------- AT THE COMPANY Alyn V. Essman Chairman CPI Corp., 1706 Washington Avenue, St. Louis, MO 63103-1717 (314) 231-1575, Extension 3240 AT THE FINANCIAL RELATIONS BOARD, INC. George Zagoudis Senior Vice President and Account Division Manager John Hancock Center, 875 N. Michigan Avenue, Chicago, IL 60611 (312) 266-7800 Direct line: (312) 640-6663 David Mandy Associate and Market Intelligence Executive 675 Third Avenue, New York, NY 10017, (212) 661-8030 FOR INFORMATION ON THE INTERNET CPI Corp.: http://www.cpicorp.com CPI Human Resources: http://www.cpicorp.com/jobs CPI Photo: http://www.cpiphoto.com Fox Photo: http://www.foxphoto.com Prints Plus: http://www.printsplus.com Sears Portrait Studio: http://www.searsportrait.com and George Zagoudis at the Financial Relations Board, Inc.: grz@chi.frbd.com (Back cover of Annual Report to Shareholders) CPI Corp., now on the Internet (Picture of Sears Portrait Studio website) Sears Portrait Studios http://www.searsportrait.com (Picture of CPI Photo/Fox Photo website) CPI Photo/Fox Photo http://www.foxphoto.com (Picture of CPI Corp. corporate website) CPI Corporate http://www.cpicorp.com (Picture of Prints Plus website) Prints Plus http://www.printsplus.com (Picture of CPI Human Resources website) CPI Human Resources http://www.cpicorp.com/jobs CPI Corp., 1706 Washington Avenue, St. Louis, Missouri 63103-1717 EX-21 6 EXHIBIT (21) SUBSIDIARIES OF THE REGISTRANT AS OF APRIL 4, 1996
STATE/PROVINCE COUNTRY -------------- ------------ CPI Corp. Delaware United States Consumer Programs Holding, Inc. Delaware United States Consumer Programs, Incorporated Missouri United States CPI Images L.L.C. Missouri United States d/b/a Sears Portrait Studios CPI Management Services L.L.C. Missouri United States d/b/a Sears Portrait Studios d/b/a Image Explosion CPI Properties L.L.C. Missouri United States Consumer Programs Partner,Inc. Delaware United States Fox Photo, Inc. Delaware United States d/b/a CPI Photo Finish One Hour Photo d/b/a CPI Photo Finish One Hour Photo, Inc. d/b/a Fox Photo 1-Hour Lab d/b/a Fox Photo 1-Hour Lab, Inc. 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 d/b/a Mainstreet Portraits 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
SUBSIDIARIES OF THE REGISTRANT AS OF APRIL 4, 1996 (CONTINUED)
STATE/PROVINCE COUNTRY -------------- ------------- CPI Technology Corp. Missouri United States CPI Corp. Canada Ontario Canada d/b/a Sears Portrait Studios
EX-23 7 EXHIBIT (23) INDEPENDENT AUDITORS' CONSENT The Board of Directors and Stockholders CPI Corp.: We consent to incorporation by reference in the registration statement No. 33-50082 on Form S-8 of CPI Corp. of our report dated April 4, 1996, relating to the consolidated balance sheets of CPI Corp. and subsidiaries as of February 3, 1996 and February 4, 1995 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 3, 1996, and all related schedules, which report appears in the 1995 annual report on Form 10-K of CPI Corp. /s/ KPMG Peat Marwick LLP - ------------------------- KPMG PEAT MARWICK LLP St. Louis, Missouri April 4, 1996 EX-27 8
5 YEAR FEB-03-1996 FEB-03-1996 3,815 4,516 19,210 1,216 33,937 72,825 332,436 164,492 300,488 64,013 0 6,868 0 0 167,300 300,488 526,651 526,651 135,559 494,979 0 0 5,108 27,638 9,979 17,659 (3,326) 0 0 14,333 1.02 1.02
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