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.
<PAGE>
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
<PAGE>
PART I
ITEM I. BUSINESS
THE COMPANY
- -----------
CPI Corp. is a holding company engaged, through its
subsidiaries, in developing and marketing consumer services and
related products through a network of centrally-managed, small
retail locations. The Company operates professional portrait
studios, photographic finishing laboratories, 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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
ITEM 2. PROPERTIES
The following table sets forth certain information concerning
the Company's principal facilities:
<TABLE>
Principal Facilities
<CAPTION>
APPROXIMATE
AREA IN PRIMARY OWNERSHIP
LOCATION SQUARE FEET USES OR LEASE
- ------------------- ------------ ------------------ ----------
<S> <C> <C> <C>
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
<FN>
(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.
</FN>
</TABLE>
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
<PAGE>
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.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information required under this Item is contained in the
Registrant's 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- ----------------------------- ------------- -------- -----------
<S> <C> <C> <C>
(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
</TABLE>
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.
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- ----------------------------- ------------- -------- -----------
<S> <C> <C> <C>
(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
</TABLE>
<PAGE>
EXHIBIT 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING DEBENTURES (CONTINUED)
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- ----------------------------- ------------- -------- -----------
<S> <C> <C> <C>
(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
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- ----------------------------- ------------- -------- -----------
<S> <C> <C> <C>
(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
</TABLE>
<PAGE>
EXHIBIT 10. MATERIAL CONTRACTS (CONTINUED)
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- ----------------------------- ------------- -------- -----------
<S> <C> <C> <C>
(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
<FN>
* Employment contracts are automatically renewed and extended for
one year unless terminated by the Board of Directors or the
employee.
</FN>
</TABLE>
<PAGE>
EXHIBIT 10. MATERIAL CONTRACTS (CONTINUED)
<TABLE>
<CAPTION>
REGISTRATION
INFORMATION INCORPORATED DOCUMENT FILING COMMISSION
BY REFERENCE REFERRED TO DATE FILE NO.
- ----------------------------- ------------- -------- -----------
<S> <C> <C> <C>
(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
<FN>
* Employment contracts are automatically renewed and extended for
one year unless terminated by the Board of Directors or the
employee.
</FN>
</TABLE>
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
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CPI CORP.
BY: /s/ Alyn V. Essman
-------------------------
(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.
<TABLE>
Signatures of Directors and Principal Officers
<CAPTION>
Signature Title Date
- ------------------- ------------------------ -------------
<S> <C> <C>
/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)
</TABLE>
<PAGE>
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
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
CPI CORP. CONSOLIDATED ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES
FISCAL YEARS ENDED FEBRUARY 3, 1996, FEBRUARY 4, 1995
AND FEBRUARY 5, 1994
<CAPTION>
FEBRUARY 3, FEBRUARY 4, FEBRUARY 5,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning
of year $ 1,277 $ 918 $ 1,042
========= ========= =========
Balance at end
of year $ 1,216 $ 1,277 $ 918
========= ========= =========
</TABLE>
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.
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
<PAGE>
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
-------
<PAGE>
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.
<PAGE>
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:
<PAGE>
SCHEDULE A
AGREEMENTS
----------
Name Parties Date
---- ------- ----
<PAGE>
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
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.
<PAGE>
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
<PAGE>
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)
<PAGE>
[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").
<PAGE>
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
<PAGE>
[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.
<PAGE>
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
<PAGE>
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
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)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
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.
<PAGE>
(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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (in millions of dollars, except percents and
per share data)
<CAPTION>
One Year Five Year
1995 1994 % Change 1990 % Change*
<S> <C> <C> <C> <C> <C>
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
<FN>
* compound annual rate 1990-1995
</FN>
</TABLE>
<PAGE>
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.
<TABLE>
SEGMENT RESULTS IN MILLION OF DOLLARS - SALES
<CAPTION>
Portrait Photo- Wall
Studios finishing Decor
<S> <C> <C> <C>
1995 $ 280 $ 188 $ 59
1994 276 191 50
1990 279 82 --
</TABLE>
<TABLE>
SEGMENT RESULTS IN MILLIONS OF DOLLARS - OPERATING INCOME
<CAPTION>
Portrait Photo- Wall
Studios finishing Decor
<S> <C> <C> <C>
1995 $ 42.6 $ 3.3 $ 5.4
1994 38.5 4.5 5.5
1990 66.2 3.7 --
</TABLE>
<PAGE>
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
<PAGE>
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.
<TABLE>
SALES IN MILLIONS OF DOLLARS
<CAPTION>
Dollars
<S> <C>
1986 $ 254
1987 283
1988 311
1989 337
1990 361
1991 400
1992 434
1993 460
1994 518
1995 527
</TABLE>
<PAGE>
<TABLE>
EARNINGS* AND DIVIDENDS IN MILLIONS OF DOLLARS
<CAPTION>
Earnings Dividends
<S> <C> <C>
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
<FN>
*Excluding $2.1 Million credit for 1993 accounting change.
</FN>
</TABLE>
<PAGE>
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."
<TABLE>
<S> <C> <C>
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)
<FN>
*continuing operations
</FN>
</TABLE>
<TABLE>
FINANCIAL RATIOS FYE
<CAPTION>
2/3/96 2/4/95
<S> <C> <C>
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%
<FN>
*continuing operations
</FN>
</TABLE>
<PAGE>
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
<PAGE>
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.
<TABLE>
EQUITY AND CASH FLOW FROM OPERATIONS IN MILLIONS OF DOLLARS
<CAPTION>
Cash Flow Equity
<S> <C> <C>
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
</TABLE>
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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,
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<TABLE>
REVENUE GROWTH IN MILLIONS OF DOLLARS
<CAPTION>
Dollars
<S> <C>
1986 $ 178
1987 195
1988 219
1989 235
1990 253
1991 251
1992 256
1993 237
1994 275
1995 278
</TABLE>
<TABLE>
OPERATING EARNINGS AS A PERCENT OF SALES
<CAPTION>
Percent
<S> <C>
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%
</TABLE>
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<TABLE>
CPI PHOTOFINISHING REVENUE GROWTH IN MILLIONS OF DOLLARS
<CAPTION>
Dollars
<S> <C>
1986 $ 51
1987 61
1988 69
1989 76
1990 82
1991 121
1992 169
1993 187
1994 191
1995 188
</TABLE>
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
<PAGE>
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."
<PAGE>
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
<PAGE>
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.
<PAGE>
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%.
<TABLE>
GROWTH RATE
<CAPTION>
1986-1995 1986-90 1991-93 1994-95
<S> <C> <C> <C> <C>
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)%
</TABLE>
<PAGE>
<TABLE>
AVERAGE NET RETURNS
<CAPTION>
1986-1995 1986-90 1991-93* 1994-95
<S> <C> <C> <C> <C>
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%
<FN>
* Excluding $2.1 million credit for 1993 accounting change
</FN>
</TABLE>
<TABLE>
5-YEAR REVENUE GROWTH IN MILLIONS OF DOLLARS
<CAPTION>
Portrait Photo- Wall
Studios finishing Decor
<S> <C> <C> <C>
1991 $ 279 $ 121 $ --
1992 265 169 --
1993 238 187 35
1994 276 191 50
1995 280 188 59
</TABLE>
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.
<PAGE>
<TABLE>
EARNINGS* FROM CONTINUING OPERATIONS AND DIVIDENDS PER SHARE
<CAPTION>
Earnings
Per Share Dividends
<S> <C> <C>
1991 $ 1.97 $ 0.56
1992 1.69 0.56
1993 .89* 0.56
1994 1.18 0.56
1995 1.26 0.56
<FN>
*Excluding $2.1 million credit for 1993 accounting change
</FN>
</TABLE>
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.
<TABLE>
RETURN ON EQUITY*
<CAPTION>
Return on
Equity*
<S> <C>
1991 19.6%
1992 15.5%
1993 7.6%*
1994 9.5%
1995 10.6%
<FN>
*Excluding $2.1 million credit for 1993 accounting change
</FN>
</TABLE>
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.
<PAGE>
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
<PAGE>
<TABLE>
IDENTIFIABLE ASSETS IN MILLIONS OF DOLLARS
<CAPTION>
Portrait Photo- Wall
Studios finishing Decor Cash* Corp.
<S> <C> <C> <C> <C> <C>
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
<FN>
* Cash, cash equivalents and short-term investments
</FN>
</TABLE>
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.
<TABLE>
CAPITAL EXPENDITURES IN MILLIONS OF DOLLARS, INCLUDING ACQUISITIONS
<CAPTION>
Portrait Photo- Wall
Studios finishing Decor Corp.
<S> <C> <C> <C> <C>
1991 $ 9 $ 24 $ -- $ 5
1992 2 19 -- 5
1993 19 10 14 1
1994 58 10 8 1
1995 25 15 10 1
</TABLE>
Caption on the above chart:
- -Although Portrait Studios now command the majority of capital
expenditures, Prints Plus and Photofinishing will also require
significant investments.
<PAGE>
<TABLE>
WEIGHTED AVERAGE SHARES OUTSTANDING IN MILLIONS OF SHARES
<CAPTION>
Shares
Outstanding
<S> <C>
1991 15.1
1992 14.7
1993 14.7
1994 14.1
1995 14.0
</TABLE>
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.
<PAGE>
<TABLE>
Selected Financial Data From 1995-1994
<CAPTION>
Continuing Operations 1995 1994
<S> <C> <C>
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%
<FN>
* 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
</FN>
</TABLE>
<PAGE>
<TABLE>
Selected Financial Data From 1993-1991
<CAPTION>
Continuing Operations 1993 1992 1991
<S> <C> <C> <C>
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%
<FN>
* 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
</FN>
</TABLE>
<PAGE>
<TABLE>
Selected Financial Data From 1990-1988
<CAPTION>
Continuing Operations 1990 1989 1988
<S> <C> <C> <C>
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%
<FN>
* 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
</FN>
</TABLE>
<PAGE>
<TABLE>
Selected Financial Data From 1987-1985
<CAPTION>
Continuing Operations 1987 1986 1985
<S> <C> <C> <C>
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%
<FN>
* 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
</FN>
</TABLE>
<PAGE>
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
<PAGE>
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.
<PAGE>
<TABLE>
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
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
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
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS-RESULTS OF OPERATIONS
- ----------------------------------------------------------
<TABLE>
SELECTED FINANCIAL DATA (in thousands of dollars)
Fifty-two weeks ended February 3, 1996 and February 4, 1995
<CAPTION>
1995 Versus 1994
1995 Amount Percent 1994
Change Change
<S> <C> <C> <C> <C>
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
======= ======== =======
</TABLE>
<TABLE>
SELECTED FINANCIAL DATA (in thousands of dollars)
Fifty-two weeks ended February 4, 1995 and February 5, 1994
<CAPTION>
1994 Versus 1993
1994 Amount Percent 1993
Change Change
<S> <C> <C> <C> <C>
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
======= ======== =======
</TABLE>
<PAGE>
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.
<PAGE>
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.
<TABLE>
NET SALES (in thousands of dollars)
Fifty-two weeks ended February 3, 1996 and February 4, 1995
<CAPTION>
1995 Versus 1994
1995 Amount Percent 1994
Change Change
<S> <C> <C> <C> <C>
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
======== ======== ========
</TABLE>
<TABLE>
NET SALES (in thousands of dollars)
Fifty-two weeks ended February 4, 1995 and February 5, 1994
<CAPTION>
1994 Versus 1993
1994 Amount Percent 1993
Change Change
<S> <C> <C> <C> <C>
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
======== ======= ========
</TABLE>
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
<PAGE>
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.
<TABLE>
OPERATING EARNINGS (in thousands of dollars)
Fifty-two weeks ended February 3, 1996 and February 4, 1995
<CAPTION>
1995 Versus 1994
1995 Amount Percent 1994
Change Change
<S> <C> <C> <C> <C>
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
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
OPERATING EARNINGS (CONTINUED) (in thousands of dollars)
Fifty-two weeks ended February 4, 1995 and February 5, 1994
<CAPTION>
1994 Versus 1993
1994 Amount Percent 1993
Change Change
<S> <C> <C> <C> <C>
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
======== ======== ========
</TABLE>
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,
<PAGE>
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.
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS - ASSETS
<CAPTION>
February 3, February 4,
1996 1995
<S> <C> <C>
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
========= =========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS-LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
February 3, February 4,
1996 1995
<S> <C> <C>
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
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS-FINANCIAL CONDITION
- --------------------------------------------------------
<TABLE>
IDENTIFIABLE ASSETS (in thousands of dollars)
<CAPTION>
Feb. 3, Feb. 4,
1996 % Total 1995 % Total
<S> <C> <C> <C> <C>
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%
========= ====== ======== ======
</TABLE>
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
<PAGE>
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.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Fifty-two weeks ended February 3, 1996, February 4, 1995, and
February 5, 1994
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
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
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
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
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
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
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
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
<PAGE>
$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.
<PAGE>
<TABLE>
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
<CAPTION>
Add'l
Common Paid-In Retained
Stock Capital Earnings
<S> <C> <C> <C>
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
======= ======== =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
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
<CAPTION>
Cumulative
Foreign
Currency Treasury
Translation Stock
Adjustment At Cost
<S> <C> <C>
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)
======== =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
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
<CAPTION>
Deferred
Compensation-
Restricted
Stock Total
<S> <C> <C>
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
======== =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
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.
<PAGE>
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:
<TABLE>
<S> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
3. PROPERTY AND EQUIPMENT
<TABLE>
PROPERTY AND EQUIPMENT (in thousands of dollars)
<CAPTION>
February 3, February 4
1996 1995
<S> <C> <C>
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
========= =========
</TABLE>
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.
<TABLE>
MINIMUM RENTAL PAYMENTS UNDER OPERATING LEASES WITH INITIAL TERMS
IN EXCESS OF ONE YEAR AT FEBRUARY 3, 1996
(in thousands of dollars)
<CAPTION>
Fiscal Year
<S> <C>
1996 $ 38,984
1997 29,621
1998 22,518
1999 15,646
2000 10,829
Thereafter 25,423
---------
$143,021
=========
</TABLE>
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
<PAGE>
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
<TABLE>
Intangible Assets and Related Amortization
(in thousands of dollars)
<CAPTION>
Unamortized
Balance at Amortization
Feb. 3, 1996 1995 1994 1993
<S> <C> <C> <C> <C>
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
======== ====== ====== ======
</TABLE>
Accumulated amortization of intangible assets was $17.6 million
and $14.0 million at February 3, 1996 and February 4, 1995,
respectively.
<PAGE>
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.
<PAGE>
<TABLE>
DEBT OBLIGATIONS OUTSTANDING (in thousands of dollars)
<CAPTION>
February 3, February 4,
1996 1995
<S> <C> <C>
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
========= =========
</TABLE>
<TABLE>
AGGREGATE LONG-TERM DEBT MATURITIES AS OF FEBRUARY 3, 1996
(in thousands of dollars)
<S> <C>
1996 $ 5,000
1997 10,000
1998 15,000
1999 15,000
2000 15,000
Thereafter 57
--------
$60,057
========
</TABLE>
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
<PAGE>
$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
<TABLE>
ACCRUED EXPENSES AND OTHER LIABILITIES (in thousands of dollars)
<CAPTION>
February 3, February 4,
1996 1995
<S> <C> <C>
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
========= =========
</TABLE>
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.
<TABLE>
EARNINGS BEFORE INCOME TAXES BY U.S. AND CANADIAN SOURCES
(in thousands of dollars)
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
U.S $ 23,382 $ 21,619 $ 15,163
Canada (949) 1,908 3,357
--------- --------- ---------
$ 22,433 $ 23,527 $ 18,520
========= ========= =========
</TABLE>
<PAGE>
<TABLE>
COMPONENTS OF INCOME TAXES (in thousands of dollars)
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
<TABLE>
RECONCILIATION BETWEEN INCOME TAXES (in thousands of dollars)
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
<TABLE>
SOURCES OF TAX EFFECTS (in thousands of dollars)
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
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)
======== ======== ========
</TABLE>
<PAGE>
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.
<TABLE>
NET PERIODIC PENSION EXPENSE OF THE DEFINED BENEFIT PLAN
(in thousands of dollars)
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
Plan assets consist primarily of cash equivalents, a marketable
equity securities fund, guaranteed interest contracts, immediate
participation guarantee contracts and government bonds.
<PAGE>
<TABLE>
FUNDED STATUS OF DEFINED BENEFIT PLAN AS OF DECEMBER 31, 1995,
DECEMBER 31, 1994 AND DECEMBER 31, 1993 (in thousands of dollars)
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
<TABLE>
ASSUMPTIONS ON FUNDED STATUS AT DECEMBER 31, 1995, DECEMBER 31,
1994 AND DECEMBER 31, 1993
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
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%
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<TABLE>
OPTIONS AWARDED UNDER THE STOCK OPTION PLAN
<CAPTION>
1995 1994
<S>
Number of Per Share Number of Per Share
Shares Option Price Shares Option Price
<S> <C> <C> <C> <C>
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
========== ==========
</TABLE>
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
<PAGE>
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.")
<PAGE>
<TABLE>
SELECTED INDUSTRY SEGMENT INFORMATION (in thousands of dollars)
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION FROM DISCONTINUED OPERATIONS
(in thousands of dollars)
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
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)
======== ======== ========
</TABLE>
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
- ---------------------------------
The Company's portrait photography business is seasonal, with the
largest sales volume during the third and fourth quarters, the
period preceding and including the Thanksgiving and Christmas
seasons.
The following table sets forth selected financial data for the
quarters of the Company's fiscal years ended February 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.
<PAGE>
<TABLE>
SELECTED QUARTERLY FINANCIAL DATA
(In thousands except per share amounts)
<CAPTION>
Quarter Ended :
April 29, 1995 July 22, 1995
(12 wks) (12 wks)
<S> <C> <C>
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
</TABLE>
<TABLE>
SELECTED QUARTERLY FINANCIAL DATA (CONTINUED)
(In thousands except per share amounts)
<CAPTION>
Quarter Ended :
Nov. 11, 1995 Feb. 3, 1996
(16 wks) (12 wks)
<S> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
SELECTED QUARTERLY FINANCIAL DATA (CONTINUED)
(In thousands except per share amounts)
<CAPTION>
Quarter Ended :
April 30, 1994 July 23, 1994
(12 wks) (12 wks)
<S> <C> <C>
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
</TABLE>
<TABLE>
SELECTED QUARTERLY FINANCIAL DATA (CONTINUED)
(In thousands except per share amounts)
<CAPTION>
Quarter Ended :
Nov. 12, 1994 Feb. 4, 1995
(16 wks) (12 wks)
<S> <C> <C>
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
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
The Board of Directors and Stockholders
CPI Corp.:
We have audited the accompanying consolidated balance sheets of
CPI Corp. and subsidiaries as of February 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
<PAGE>
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
<PAGE>
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.
<PAGE>
(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
<PAGE>
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.:
[email protected]
<PAGE>
(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
EXHIBIT (21)
<TABLE>
SUBSIDIARIES OF THE REGISTRANT AS OF APRIL 4, 1996
<CAPTION>
STATE/PROVINCE COUNTRY
-------------- ------------
<S> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
SUBSIDIARIES OF THE REGISTRANT AS OF APRIL 4, 1996 (CONTINUED)
<CAPTION>
STATE/PROVINCE COUNTRY
-------------- -------------
<S> <C> <C>
CPI Technology Corp. Missouri United States
CPI Corp. Canada Ontario Canada
d/b/a Sears Portrait Studios
</TABLE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-END> FEB-03-1996
<CASH> 3,815
<SECURITIES> 4,516
<RECEIVABLES> 19,210
<ALLOWANCES> 1,216
<INVENTORY> 33,937
<CURRENT-ASSETS> 72,825
<PP&E> 332,436
<DEPRECIATION> 164,492
<TOTAL-ASSETS> 300,488
<CURRENT-LIABILITIES> 64,013
<BONDS> 0
6,868
0
<COMMON> 0
<OTHER-SE> 167,300
<TOTAL-LIABILITY-AND-EQUITY> 300,488
<SALES> 526,651
<TOTAL-REVENUES> 526,651
<CGS> 135,559
<TOTAL-COSTS> 494,979
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,108
<INCOME-PRETAX> 27,638
<INCOME-TAX> 9,979
<INCOME-CONTINUING> 17,659
<DISCONTINUED> (3,326)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,333
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.02
</TABLE>
