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
For the fiscal year ended February 1, 1997
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, 1997 ($16.13 per share): $178,800,579.
As of April 30, 1997, 11,730,165 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 1, 1997, 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 12, 1997, are incorporated by
reference into Part III of this Report.
<PAGE>
PAGE NUMBERS REFER TO PAPER DOCUMENT
<TABLE>
TABLE OF CONTENTS
PAGE
<S> <C>
PART I
- ------
Item 1. Business 3-6
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of
Security Holders 8
PART II
- -------
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 9
Item 9. Disagreements on Accounting and Financial
Disclosure 9
PART III
- --------
Item 10. Directors and Executive Officers of the
Registrant 10
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial
Owners and Management 10
Item 13. Certain Relationships and Related Transactions 10
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 11-17
Signatures 18-19
Independent Auditors Report 20
<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 throughout the United States, Canada and Puerto Rico and
posters, prints and framing outlets throughout the United States.
Unless the context otherwise requires, references herein to the
"Company" or "CPI Corp." mean CPI Corp., its consolidated
subsidiaries and their predecessor companies.
For the fiscal year ended February 1, 1997, approximately 62%
of net sales and 91% of operating earnings (before deduction of
general corporate expenses, net interest income (expense), other
income and income tax expense) were derived from the Sears Portrait
Studio business. The Company has operated portrait studios as a
Sears Roebuck and Company ("Sears") licensee since 1961, when it
was one of more than 15 Sears portrait photography licensees.
Today, the Company is the only operator of Sears Portrait Studios
in the United States, Canada and Puerto Rico. The Company is
materially dependent upon the continued goodwill of Sears and the
integrity of the Sears name in the retail marketplace. The Company
believes that its relationship with Sears is excellent and that it
has been beneficial to both companies. See "Business-Relationship
With Sears."
CPI Corp. has operated in the wall decor business through
the acquisition of Prints Plus, Inc. ("Prints Plus") since 1993.
Prints Plus is a posters, prints and custom framing retail chain
with 156 stores located in malls throughout the United States.
Until October 1996, the Company also operated photographic
finishing laboratories throughout the United States. 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. On
June 3, 1996, the Company announced the sale to Wolf Camera, Inc.
of 50 one-hour photofinishing stores located in Florida, Georgia,
Illinois and Tennessee. On October 4, 1996, the Company entered
into a joint venture with Eastman Kodak Company. The new Joint
Venture now owns and operates the Company's retail photofinishing
business previously conducted by the Company's Fox Photo, Inc. and
Proex Photo Systems, Inc. subsidiaries and operated under the trade
names of Fox Photo, CPI Photo Finish and Proex. Proex is a wholly
3
<PAGE>
owned subsidiary of Fox. As of February 1, 1997, the Joint Venture
operated 484 photo-finishing locations under the names of CPI Photo
Finish, Fox Photo and Proex.
On April 4, 1996, the Company announced its intention to sell
certain assets of its Electronic Publishing operations. On May 3,
1996, the Company completed the transaction for $4.8 million.
Additionally, the purchaser assumed certain liabilities of the
Electronic Publishing operation which aggregate approximately
$900,000. A provision of $3.8 million was made in 1995 to reflect
the discontinued business at its estimated realizable value. The
Company has classified the Electronic Publishing operation as a
discontinued operation in 1995 and has reclassified the prior
years' financial statements to reflect this change.
The executive offices are located at 1706 Washington Avenue,
St. Louis, Missouri, 63103-1790. CPI Corp.'s telephone number is
(314) 231-1575 and address on the world-wide web is
http://www.cpicorp.com.
RELATIONSHIP WITH SEARS
- -----------------------
The Company operates its 1032 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, fixtures and
leasehold improvements and 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.
4
<PAGE>
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, fixtures and leasehold
improvements and conducts all advertising at its own expense and is
responsible for its Canadian employees.
As a Sears licensee, the Company enjoys the benefits of its
use of the Sears name, Sears' daily cashiering and bookkeeping
system, store security services and customers' ability to use their
Sears credit cards to purchase the Company's products or services,
for which Sears bears the credit risk of authorized credit card
use.
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.
The Company competes with numerous national, regional and
local framing retailers serving the wall decor segment of the home
furnishings market. The primary competitors in this business are
franchise locations, small regional chains and many individual
stores which focus on custom framing. Other competitors in this
segment include mass merchants and other specialty home furnishings
stores which offer a fixed selection of pre-framed prints. The
Company believes it competes successfully in this segment by
offering a large selection of prints and frames, fast custom
framing service and very competitive pricing.
SUPPLIER RELATIONSHIPS
- ----------------------
The Company purchases photographic paper and film for its
studio operations primarily from one major manufacturer. The
Company purchases other equipment and supplies used in its studios
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 its relations with suppliers are
good.
5
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SEASONALITY
- -----------
The Company's professional portrait photography and wall decor
businesses are 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.
EMPLOYEES
- ---------
At February 1, 1997, the Company had approximately 10,569
employees. Approximately 7,599 of these employees were part-time
or temporary employees. The Company's employees are not members of
any union and the Company has experienced no work stoppages. The
Company believes that its relations with its employees are good.
ADDITIONAL INFORMATION REQUIRED UNDER THIS ITEM I IS CONTAINED IN
THE REGISTRANT'S 1996 ANNUAL REPORT TO SHAREHOLDERS, EXHIBIT 13 OF
THIS FILING, IN THE DISCUSSION OF THE COMPANY'S BUSINESS SEGMENTS
AND KEY OPERATING UNITS.
6
<PAGE>
ITEM 2. PROPERTIES
The following table sets forth certain information concerning
the Company's principal facilities:
</TABLE>
<TABLE>
Principal Facilities - CPI Corp.
<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)
Brampton, Ontario 40,000 Administration, Owned
Warehousing and
Photoprocessing
Las Vegas, Nevada 12,200 Photoprocessing Leased (4)
Thomaston, Connecticut 25,000 Administration and Owned
Photoprocessing
Concord, California 43,088 Administration, Leased (5)
Warehousing and
Manufacturing
<FN>
(1) Lease term expires on June 30, 1999.
(2) Lease term expires on February 28, 1998.
(3) Lease term expires on November 30, 1999.
(4) Lease term expires on July 31, 1998.
(5) 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 also operates Sears Portrait studios
located in shopping centers, which are generally leased for at
least three years with some having renewal options. The wall
decor locations are generally in enclosed regional malls with
lease terms of ten years without renewal options.
7
<PAGE>
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 1996.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information required under this Item is contained in the
Registrant's 1996 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 1997 Proxy
Statement, to be dated within 120 days of the end of the
Registrant's fiscal year 1996, and is incorporated herein by
reference.
As of April 3, 1997, the market price of the Registrant's
common stock was $17.25 per share with 11,730,333 shares
outstanding and approximately 2,166 holders of record.
ITEM 6. SELECTED FINANCIAL DATA
Information required under this Item is contained in the
Registrant's 1996 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 1996 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 1996 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.
9
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this Item will be contained in the
Registrant's 1997 Proxy Statement, to be dated within 120 days of
the end of the Registrant's fiscal year 1996, and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item will be contained in the
Registrant's 1997 Proxy Statement, to be dated within 120 days of
the end of the Registrant's fiscal year 1996, 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 1997 Proxy Statement, to be dated within 120 days of
the end of the Registrant's fiscal year 1996, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
10
<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 1996 Annual Report to Shareholders), and
are incorporated herein by reference.
(2) Financial Statements:
(a) Consolidated Balance Sheets as of February 1, 1997
and February 3, 1996
(b) Consolidated Statements of Earnings for the fiscal years
ended February 1, 1997, February 3, 1996 and
February 4, 1995
(c) Consolidated Statements of Changes in Stockholder's
Equity for the fiscal years ended February 1, 1997,
February 3, 1996 and February 4, 1995
(d) Consolidated Statements of Cash Flows for the fiscal
years ended February 1, 1997, February 3, 1996 and
February 4, 1995
Information required under these items is contained in the
Registrant's 1996 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 1996 Annual
Report to Shareholders, Exhibit 13 of this filing, under
the section titled "Notes to Consolidated Financial
Statements," and is incorporated herein by reference.
(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 (page
21), and is incorporated herein by reference.
11
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (Continued)
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 November 12, 1996, the Company filed a Form 8-K Current
Report disclosing the issuance of a press release which
announced the final results of the Company's Dutch Auction
tender offer, which had expired on November 4, 1996. Of the
4,436,388 shares tendered under the Dutch Auction, 2,250,000
shares were purchased by the Company at $19.00 per share.
On December 4, 1996, the Company filed a report on Form 8-KA
amending the previously filed October 18, 1996 Form 8-K
Current Report concerning the formation of the Fox Photo,
Inc. Joint Venture with Eastman Kodak and Company. The
amendment stated pro forma financial information required
by item 7(B) would be filed by amendment to the Form 8-K
dated October 18, 1996 on or before December 17, 1996.
On December 9, 1996, the Company filed a report on Form 8-KA
amending the previously filed October 18, 1996 Form 8-K
Current Report concerning the formation of the Fox Photo,
Inc. Joint Venture with Eastman Kodak and Company. The
amendment provided the following financial information:
historical and pro forma Consolidated Statements of
Earnings for the twenty-four weeks ended July 20, 1996
and the fifty-two weeks ended February 3, 1996; historical
and pro forma Consolidated Balance Sheet-Assets for
July 20, 1996; historical and pro forma Consolidated
Balance Sheet-Liabilities and Stockholders' Equity for
July 20, 1996; and Notes to Pro Forma Consolidated
Financial Statements.
On December 10, 1996, the Company filed a Form 8-K Current
Report disclosing the issuance of a press release which
announced: operating earnings for the third quarter declined
36.3% from prior year levels and earnings from continuing
operations increased 54.3% due to a gain on the formation of
the Fox Photo, Inc. Joint Venture with Eastman Kodak and
Company.
12
<PAGE>
(c) Index to Exhibits
EXHIBIT 3. ARTICLES OF INCORPORATION AND BYLAWS
Page Number
Form 10-K
-----------
(3.1) Amendment to Bylaws 22
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>
13
<PAGE>
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
(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>
14
<PAGE>
EXHIBIT 10. MATERIAL CONTRACTS
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.
[CAPTION]
<TABLE>
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>
15
<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.
# Per an agreement dated January 24, 1997, David E. April
retired from service at CPI Corp. effective February 2, 1997.
</FN>
</TABLE>
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<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
(10.1) CPI Consent to Assignment Annual Report 5/2/96 1-10204
and Assumption of on Form 10-K
$15 Million Revolving dated 4/4/96
Credit Note
(10.2) Notification of Assignment Annual Report 5/2/96 1-10204
and Assumption of on Form 10-K
$15 Million Revolving dated 4/4/96
Credit Note Agreement
<FN>
* Employment contracts are automatically renewed and extended for
one year unless terminated by the Board of Directors or the
employee.
</FN>
</TABLE>
Page Number
Form 10-K
-----------
EXHIBIT 11. COMPUTATION OF EARNINGS PER COMMON SHARE 23
EXHIBIT 13. 1996 ANNUAL REPORT TO SHAREHOLDERS 24
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT 25
EXHIBIT 23. INDEPENDENT AUDITORS' CONSENT 26
EXHIBIT 27. FINANCIAL DATA SCHEDULE
17
<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 3, 1997
- ----------------------- Chief Executive Officer
(Alyn V. Essman) and Director (Principal
Executive Officer)
/s/ Milford Bohm Director April 3, 1997
- -----------------------
(Milford Bohm)
/s/ Mary Ann Krey Director April 3, 1997
- -----------------------
(Mary Ann Krey)
/s/ Lee Liberman Director April 3, 1997
- -----------------------
(Lee Liberman)
/s/ Nicholas L. Reding Director April 3, 1997
- -----------------------
(Nicholas L. Reding)
/s/ Martin Sneider Director April 3, 1997
- -----------------------
(Martin Sneider)
/s/ Robert L. Virgil Director April 3, 1997
- -----------------------
(Robert L. Virgil)
</TABLE>
18
<PAGE>
<TABLE>
SIGNATURES OF DIRECTORS AND PRINCIPAL OFFICERS (continued)
<CAPTION>
Signature Title Date
- ------------------- ------------------------ -------------
<S> <C> <C>
/s/ Russell Isaak President April 3, 1997
- -----------------------
(Russell Isaak)
/s/ Patrick J. Morris Senior Executive April 3, 1997
- ----------------------- Vice President
(Patrick J. Morris)
/s/ Barry C. Arthur Vice President and April 3, 1997
- ----------------------- Treasurer (Principal
(Barry C. Arthur) Financial and
Accounting Officer)
</TABLE>
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CPI Corp.:
Under date of April 3, 1997, we reported on the consolidated
balance sheets of CPI Corp. and subsidiaries as of February 1, 1997
and February 3, 1996, 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 1,
1997, as contained in the 1996 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 1996 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 this 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 3, 1997
20
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
CPI CORP. CONSOLIDATED ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES
FISCAL YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996
AND FEBRUARY 4, 1995
<CAPTION>
FEBRUARY 1, FEBRUARY 3, FEBRUARY 4,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning
of year $ 1,216 $ 1,277 $ 918
========= ========= =========
Balance at end
of year $ 382 $ 1,216 $ 1,277
========= ========= =========
</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.
21
EXHIBIT (3.1)
AMENDMENT TO BY-LAWS
On April 3, 1997, the Board of Directors voted to accept the
following change to CPI Corp.'s By-Laws:
RESOLVED, that the first sentence of section 3.2 of the
By-Laws of the Corporation be, and hereby is, amended to read
as follows:
The number of directors constituting the full
Board of Directors shall be no more than nine
(9), or such other number, not less that three
(3), as may from time to time be established
by amendment of these By-Laws.
22
EXHIBIT (11)
CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE
FISCAL YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996
AND FEBRUARY 4, 1995 (in thousands of dollars)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Common shares outstanding
at beginning of
fiscal period 17,169 17,124 16,979
Shares issued during
the period -
weighted average 60 44 23
Shares issuable under
employee stock plans -
weighted average 45 40 18
Dilutive effect of
exercise of certain
stock options 53 84 --
Less: Treasury stock -
weighted average (3,809) (3,303) (2,919)
-------- --------- ---------
Weighted average number
of common and common
equivalent shares 13,518 13,989 14,101
======== ========= =========
Net earnings applicable
to common shares:
From continuing operations $14,363 $17,659 $16,640
From discontinued operations -- (3,326) (1,818)
-------- --------- ---------
Net earnings $14,363 $14,333 $14,822
======== ========= =========
Earnings per common share:
From continuing operations $1.06 $1.26 $1.18
From discontinued operations -- (0.24) (0.13)
--------- --------- ---------
Net earnings $1.06 $1.02 $1.05
========= ========= =========
</TABLE>
23
EXHIBIT (13)
1996 ANNUAL REPORT TO SHAREHOLDERS
24
<PAGE>
(Front cover of Annual Report to Shareholders)
(Pictures: on this page are four picture groups. Starting in
the left hand corner and continuing counter-
clockwise are: pictures of a small girl with a bow
in her hair being displayed on studio monitor for
customer selection through the Portrait Preview
System(SM); three pictures of various sizes
selected from the monitor display for framing; near
completed Portrait Creation; and a completed
Portrait Creation on display.)
CPI CORP.
1996 ANNUAL REPORT
Blending technology, ingenuity and customer service to define
our direction for tomorrow
<PAGE>
AT A GLANCE
- -----------
With almost 1,200 retail locations, CPI is the market leader
in two industries-preschool portrait photography and wall
decor retailing. Following three years of declining profits
due mainly to intense competition in its core business,
portrait photography, the Company recorded a turnaround in
operating earnings in 1994 and 1995. Although earnings again
fell in 1996, primarily due to increased expenses associated
with repositioning the portrait studios, management believes
that long-term profits will show increasing growth as a result
of the following:
CONTINUING INVESTMENT TO MAINTAIN ITS LEADING POSITION IN THE
PRESCHOOL PORTRAIT PHOTOGRAPHY MARKET
- - As the exclusive Sears Portrait Studios operator, CPI
continues a 36-year partnership, with over 1,000 studios
(925 in all major Sears stores in the U.S. and Canada, and
103 in non-Sears shopping centers).
- - Despite the high level of competition, the Company has
maintained market share while concurrently improving its
position by developing new marketing programs employing
digital imaging technology to significantly enhance products
and elevate customer service. CPI has invested approximately
$108 million thus far in a phased $150 million development
program. New technology has been installed in all studios,
and almost half have been enlarged and remodeled. Completion
of the development program will involve additional remodels
and technology upgrades.
- - Further growth is anticipated as a result of enthusiastic
customer response to the new programs, which continue to be
enhanced and expanded.
CONTINUING INVESTMENT TO MAINTAIN ITS LEADING POSITION IN THE
RETAIL WALL DECOR BUSINESS
- - Prints Plus is the leading company-owned retailer of
posters, prints and framing service in the U.S., offering a
very wide product selection tailored to local market
preferences, plus "while-you-wait" framing service.
- - Acquired in May 1993, the new business has contributed to
CPI's operating earnings each year since then.
- - Management is developing a program of upgraded products and
services, some of which may employ new applications of
digital imaging technology.
- - Plans call for continuing development of this business,
adding stores in prime mall locations over the next several
years.
JOINT VENTURE WITH EASTMAN KODAK COMPANY IN THE INCREASINGLY
COMPETITIVE ONE-HOUR PHOTOFINISHING MARKET
- - Kodak purchased a 51% share of CPI's Fox Photo, Inc.
subsidiary in October 1996 with a cash payment of $56.1
million, while CPI retained a 49% interest in the business.
<PAGE>
- - The objective of the joint venture is to move the
photofinishing business from a routine photo processing
procedure to a creative imaging operation offering a broad
spectrum of specialized imaging services, combining Kodak's
and CPI's diverse expertise in digital imaging technology
and retail marketing.
- - The Fox joint venture is developing a proven business model
with a strong retail identity-Fox Photo/Kodak Image Center
Solutions. After this is achieved, Kodak management intends
to make the basic concepts available through trade licenses
to other specialty retailers.
A COMPANY-WITHIN-THE-COMPANY BRINGING THE LATEST IN DIGITAL
IMAGING TECHNOLOGY TO THE MARKET PLACE
- - A deep reservoir of highly skilled software analysts,
spearheaded by the Strategic Development marketing
application group, is actively engaged in translating the
latest technology into consumer benefits. This development
group has mainly benefitted CPI's portrait studios and
Photofinish labs thus far, but it embodies a technical
foundation capable of supporting other related imaging
efforts outside the Company's current endeavors.
Capital for the expansion and upgrading of CPI's various
businesses will come from cash flow, with supplemental funding
from available short-term bank financing.
<PAGE>
ACCOMPLISHMENTS AND HIGHLIGHTS
- ------------------------------
1996 ACCOMPLISHMENTS
- - In Sears Portrait Studios, new product offerings resulted in
moderate gains in customer traffic and division sales.
Operating earnings, however, declined due to higher levels
of expenses, along with continued investment related to
enlarging and remodeling studios and continued development
of new technology-based products and services for
introduction in 1997 and beyond.
- - The Company expanded its Prints Plus operation with the net
addition of 12 new locations, bringing the total to 156,
with further expansion planned for 1997 and beyond. For the
fourth consecutive year since acquisition, the division made
a contribution to corporate profits, although less than in
prior years. Prints Plus began tests of new products and
services with the objective of repositioning and upgrading
the business relative to competition.
- - CPI entered a photofinishing joint venture with Kodak,
selling a 51% share in the Fox Photo division for $56.1
million, while retaining a 49% share. This venture allows
CPI to continue its participation in the rapidly evolving
photofinishing business, enjoying upside rewards while
minimizing risk.
- - The Company repurchased 2.25 million shares of common stock
with proceeds from the joint venture, increasing the
proportionate value of continuing shareholders' interest.
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (millions of dollars, except percents and
per share data, continuing operations only)
<CAPTION>
One Year
1996 1995 % Change 1991
------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales
- ------
Portrait Studios $289.8 $279.6 3.7 % $279.0
Photofinishing 114.5 188.4 (39.2)% 121.4
Wall Decor 62.7 58.7 6.7 % -
Total $467.0 $526.7 (11.3)% $400.4
- ------------------------------------------------------------
Operating earnings
Portrait Studios $ 35.7 $ 42.6 (16.3)% $ 56.5
Photofinishing 0.1 3.3 (97.5)% 7.7
Wall Decor 3.2 5.4 (39.3)% -
Total 39.0 51.3 (24.0)% 64.2
Net earnings,
continuing operations 14.4* 17.6 (18.7)% 29.7
- ------------------------------------------------------------
Average shares
outstanding (millions) 13.5 14.0 (3.4)% 15.1
- ------------------------------------------------------------
Per Share:
Earnings, continuing
operations $ 1.06* $ 1.26 (15.9)% $ 1.97
Dividends 0.56 0.56 - 0.56
Tangible book value 11.90 8.88 34.0 % 7.09
Price:
High $ 21.13 $ 22.13 - $ 34.75
Low 13.88 14.25 - 21.88
- ------------------------------------------------------------
<FN>
* includes $3.9 million after-tax gain ($0.29/share) on joint
venture sale.
</FN>
</TABLE>
Caption on the above table:
- - Portrait Studio and Wall Decor sales increased slightly in
1996, although both divisions experienced declines in
operating earnings. Photofinishing results are for first 35
weeks of FY 1996 and do not include minority interest in
joint venture for balance of the year.
<PAGE>
<TABLE>
SEGMENT RESULTS IN MILLIONS OF DOLLARS - SALES
<CAPTION>
Portrait Photo- Wall
Studios finishing Decor
<S> <C> <C> <C>
1996 $ 290 $ 114 $ 63
1995 280 188 59
1991 279 121 -
</TABLE>
<TABLE>
SEGMENT RESULTS IN MILLIONS OF DOLLARS - OPERATING INCOME
<CAPTION>
Portrait Photo- Wall
Studios finishing Decor
<S> <C> <C> <C>
1996 $ 35.7 $ .1 $ 3.3
1995 42.6 3.3 5.4
1991 56.5 7.7 -
</TABLE>
Caption on the above charts:
- - Portrait Studio and Wall Decor sales increased slightly in
1996, although both divisions experienced declines in
operating earnings. Photofinishing results are for first 35
weeks of FY 1996 and do not include minority interest in
joint venture for balance of the year.
page 1
<PAGE>
OVERVIEW
- --------
A FOCUSED APPROACH TO SPECIALTY RETAILING - CPI's success over
its more than 50 years of retailing history is the result of
applying operating principles based on:
- - aggressive maintenance of market leadership;
- - innovative marketing programs;
- - strategic partnering with industry leaders;
- - significant performance incentives for management; and
- - heavy reinvestment of cash flow to support growth
initiatives.
BUSINESS PHILOSOPHY - The depth of experience and leadership
skills of CPI's senior management have helped develop a
philosophy of concentrating on long-term results, rather than
focusing on short-term achievements or setbacks. That
philosophy has been validated by the Company's repositioning
of its Portrait Studio division over the past several years, a
period in which it maintained market leadership-at the cost of
temporarily reduced earnings-in a sustained competitive
struggle. Strong cash flow, even in this period, has enabled
CPI to protect shareholder value 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 and operating
programs that enhance products and services through the
application of advanced technology.
- - Whereas most retailers focus on the acquisition, 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 unusually high gross
margins. The technology represents 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. CPI's primary business-Portrait Studios-has
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., photographs of a customer's baby. Finally, shrinkage
is non-existent because those photos are of value only to
the purchaser.
- - CPI's Portrait Studios may be less negatively affected by
general economic downturns than are many retailers. This is
because much of the activity is driven by time-specific
<PAGE>
personal events, such as birthdays, graduations, or holidays.
Customers do not tend to defer purchases for such occasions.
CPI will continue to pursue new avenues of growth in
high-margin consumer businesses which are positioned (or can
be repositioned) at the high end of the market and 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 technology-based services.
By applying its operating experience and financial strength to
new retailing opportunities, the Company hopes to continue to
build on its solid base, ensuring long-term growth.
<TABLE>
SALES IN MILLIONS OF DOLLARS
<CAPTION>
Dollars
<S> <C>
1987 $ 283
1988 311
1989 337
1990 361
1991 400
1992 434
1993 460
1994 518
1995 527
1996* 467
<FN>
* 1996 includes only 35 weeks of Photofinishing revenues.
</FN>
</TABLE>
Caption on the above chart:
Since 1986, the compound annual sales growth rate has
averaged 6.3% through 1996.
<PAGE>
<TABLE>
EPS - CONTINUING OPERATIONS AND DIVIDENDS PER SHARE
<CAPTION>
Earnings Dividends
<S> <C> <C>
1987 $ 1.54 $ 0.17
1988 1.95 0.25
1989 2.15 0.42
1990 2.28 0.50
1991 1.97 0.56
1992 1.69 0.56
1993 1.03 0.56
1994 1.18 0.56
1995 1.26 0.56
1996 1.06 0.56
</TABLE>
Caption on the above chart:
Since 1986, the compound annual sales growth rate has
averaged 6.3% through 1996.
page 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
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 of 19.7% from
continuing operations. 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. After peaking in 1990, net
earnings declined in each of the following three years as a
result of an increasingly competitive environment in the
portrait industry. The earnings decline was reversed in 1994
and 1995, 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 wall decor business in 1994.
FISCAL 1996 - CPI's net sales from continuing operations
declined 11.3% to $467.0 million from $526.7 million due to the
inclusion of only partial-year photofinishing revenues in 1996.
Net earnings from continuing operations declined to $14.4
million in 1996 from the prior year's $17.6 million, and
earnings per share from continuing operations were $1.06
compared to $1.26. The 1996 earnings included a gain of $3.9
million, or $0.29 per share, from the sale of a 51% share of
the Photofinishing division. Including losses from discontinued
operations, 1995 net earnings and net earnings per share were
$14.3 million and $1.02, respectively.
Portrait Studios sales in 1996 increased 3.7% to $289.8 million
from $279.6 million, primarily as a result of aggressive
promotion, positive consumer response to the new technology-
based marketing programs, and the studio remodeling program.
Operating earnings declined to $35.7 million from $42.6
million, however, due mainly to high expenses related to the
new technology, plus increased studio labor costs. Operating
margin as a percentage of sales was 12.3% compared to the prior
year's 15.2%.
Photofinishing sales for the 35 weeks through the October 4,
1996 consummation of the joint venture with Kodak were $114.5
million compared to the full prior-year total of $188.4
million. CPI's pre-venture operating earnings were $82,000,
and its minority share of post-venture operations was a
$485,000 loss. In fiscal 1995, full-year earnings were $3.3
million.
Sales in the Wall Decor segment were $62.7 million, up from
$58.7 million, in the company's third full year operating the
Prints Plus chain since its 1993 acquisition. The growth was
primarily from new stores opened in the year. Operating
<PAGE>
earnings declined to $3.3 million from $5.4 million in 1995,
mainly due to reduced same-store sales from the weak fourth
quarter retail activity, plus start-up expenses related to the
new stores.
FINANCIAL STRENGTH - EBITDA-earnings before interest, income
taxes, depreciation and amortization-is a measure commonly used
and is presented to assist in understanding operating results.
EBITDA has historically remained strong, even in periods of
lower earnings, averaging over $65 million during the last ten
years. This, along with a strong balance sheet, has enabled CPI
to pursue growth through enhancement of its product and service
offerings and location expansion, and increase shareholder
value through dividends and repurchase of shares. Cash
disbursements in 1996 included $34.7 million in capital
expenditures and $7.5 million in dividends.
STOCKHOLDERS' EQUITY - From $22.8 million at the end of fiscal
1982, stockholders' equity reached $139.5 million in 1996,
primarily through retained earnings. Cash returned to
stockholders consisted of cumulative dividends of $71.3 million
since the initiation of a regular quarterly payment in December
1985 and $74.5 million used to purchase Company stock under
stock repurchase plans authorized in September 1988 and 1992.
Unrelated to those plans, another $43.6 million in cash
received from the sale of 51% interest in the Photofinishing
division to Kodak was used in 1996 to repurchase 2.25 million
shares.
<TABLE>
<S> <C> <C>
Symbol/ Market: CPY (NYSE)
Market Price: 17 1/8 (4/14/97)
Price Range: 13 5/8 - 21 1/4 (12 months ended 4/14/97)
Market
Capitalization: $200.9 million (4/14/97)
Shares Outstanding: 11,730,333 (4/14/97)
12 Months Earnings
Per Share: $1.06 (FY '96)*
Dividend Rate: $0.56 per share
Current P/E: 16.16 (4/14/97)
<FN>
* Continuing operations
</FN>
</TABLE>
<PAGE>
<TABLE>
FINANCIAL RATIOS FYE
<CAPTION>
2/1/97 2/3/96
<S> <C> <C>
Income from operations* 4.4% 6.0%
Tax rate 37.0% 36.1%
Net earnings* 3.1% 3.4%
Return on assets* 4.8% 5.9%
Return on equity* 8.2% 10.6%
<FN>
* Continuing operations
</FN>
</TABLE>
<TABLE>
EBITDA AND NET EARNINGS IN MILLIONS OF DOLLARS
<CAPTION>
EBITDA Net Earnings
<S> <C> <C>
1987 $ 61.7 $ 25.8
1988 67.8 32.6
1989 67.0 33.8
1990 68.6 35.0
1991 67.6 29.7
1992 65.0 24.8
1993 53.4 15.1
1994 66.5 16.6
1995 73.2 17.6
1996 64.5 14.4
</TABLE>
Caption on the above chart:
- - EBITDA has historically remained strong, even in periods of
lower earnings.
page 3
<PAGE>
(Picture: on this page is a picture of Alyn V. Essman
captioned: "Alyn V. Essman, CPI Chairman of the
Board and Chief Executive Officer.")
TO OUR SHAREHOLDERS
- -------------------
The past year was a tumultuous one in which we continued the
major repositioning effort that has consumed our attention for
the past five years. While continuing the development of the
new portrait studio culture, we also restructured our interest
in photofinishing by creating with Eastman Kodak a new
partnership that provides the opportunity to rigorously test
new retail service concepts without straining capital resources
or risking serious loss.
The net result of the venture was a significant improvement in
our balance sheet, as we effectively monetized over $50 million
of goodwill and established a firm valuation on our remaining
49% ownership. We now have the opportunity to participate in a
successful development of this business or exit profitably,
depending on the situation.
As a further result of this initiative, we applied much of the
cash received from Kodak to repurchase a large block of common
shares in a tender offer, which served our often-stated
objective of returning value to our shareholders as it is
created.
Following our exit last year from the copy services business,
these activities characterize an attitude of focused attention
on the businesses that represent the foundation of CPI's
future. Although the 1996 operating results in the Sears
Portrait Studios were somewhat disappointing, the direction is
not. The failure to achieve a level of revenue growth that
would have absorbed the extraordinary development expenses
is a temporary interruption in the profit recovery pattern,
but it is not a setback in our long-range plan. During 1997
we will continue to address our attention to improving top
line results and controlling expenses that tend to grow out of
proportion in times of dramatic change. We are confident in
our ability to make significant progress on those fronts.
page 4
The analysis of 1996 expenses - and even the planning for
1997 - must take into account the substantial investments we
continue to make in technology that will benefit the Portrait
Studios in the future. These investments are embodied in a
virtual company-within-the-company: a highly skilled group
of software specialists pioneering new retail applications
of digital imaging technology, radically changing the ways
we conduct our business and how our customers view us.
This group has mainly benefitted our Portrait Studios and
<PAGE>
Photofinishing labs thus far, but it represents a technical
foundation capable of supporting other related imaging
efforts outside our current endeavors.
We recognize the difficulties in the Wall Decor business and
the necessity to overcome them in 1997. We will moderate our
investment programs as we carefully examine opportunities and
obstacles. None of us expect to run businesses without
encountering problems. In fact, management's charge is not
to ride the waves of success, but rather to navigate the
shoals effectively. CPI's management has demonstrated the
capacity to manage difficult situations effectively. There
is no reason to expect any less of us in this case.
The past five years have been a trying time as we have
redirected our efforts to the protection of existing values,
while providing ample opportunity for the development of new
values to the long-term benefit of our shareholders. As we
move to implement the technology in support of our viable
ongoing businesses, we are looking for ways to commercialize
that same technology to develop new revenue and profit
opportunities. Development expenses will continue to be
significant during 1997 and into 1998, but we are already
beginning to see where we can realize the fruit of our
efforts.
We do not mean to imply that with the developments of the
past few years we will solve all problems, present and
future. We are living in an age in which virtually all
industries are experiencing rapid evolution in basic
processes, sometimes causing structural changes. In the
realm of digital imaging, new developments unfold with
breathtaking speed, so it is almost certain that we will
never be able to sit back and say, "We have arrived."
However, our journey to new performance heights will be
significantly enhanced by these initiative.
April 14, 1997
Alyn V. Essman
Alyn V. Essman
CPI Chairman of the Board and Chief Executive Officer
page 5
<PAGE>
(Pictures: on this page are two pictures. One picture is of
a small girl holding a stuffed animal. The second
picture is of the Sears "Golden Opportunities"
award, which CPI was awarded in 1996.
SEARS PORTRAIT STUDIOS
- ----------------------
CPI's major business is professional portrait photography of
babies, children, adults and family groups in 1,028 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 several years the birth
rate has been in the four million range annually, supporting
what should be a strong market for some time to come. Lending
further support, the population of grandparents-the most common
recipients of photos-is growing as Americans live longer.
CPI's typical customer is a mother under 35 years old, with one
or two preschool children, and is a member of a middle-income
household. 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 Portrait Preview System(SM). As evidence
of its ongoing contributions and importance to Sears, CPI has
been awarded the prestigious "Partners in Progress" award in
eleven of the past fourteen years, and in 1995, Sears bestowed
on CPI the first "Partners in Progress" award ever accorded a
concessionaire in Canada. Still more noteworthy, in 1994 Sears
honored CPI with the first "Chairman's Award" ever to be
awarded to a Sears
page 6
(Pictures: on this page are seven pictures. Beginning at the
top of the page and descending are six pictures
of various sizes showing a small boy's portrait
with different backdrops or poses. The seventh
picture shows a mother holding her small boy while
an employee displays the portraits on the Portrait
Preview System(SM).)
<PAGE>
Licensed Business in recognition of the significance of CPI's
ground-breaking, technology-based marketing program. Most
recently, in 1996 CPI was the sole recipient of the newly
created Sears "Golden Opportunities" award for the most
responsive handling of customer complaints of all Sears
concessionaires.
The trust and integrity that the Sears name confers are
powerful assets in CPI's dealings with customers. The value of
these assets has been further strengthened by the resurgence of
Sears as a formidable competitor in the department store arena.
Through its relationship with CPI, Sears receives substantial
license fees, but makes only minimal investment of its own
capital and management resources. Sears provides floor space
and basic services, and Sears' daily cash management and
accounting systems provide CPI with valuable control
mechanisms. 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
1996, CPI spent $39.4 million, representing 13.7% of sales, in
advertising the Sears name in connection with the portrait
studios. The advertising was primarily directed to women with
young children, a highly valued customer base for Sears.
RECENT DEVELOPMENTS - With CPI's Sears program as a model,
competition in the U.S. preschool photography market began
increasing dramatically in 1990. Concessionaires of 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
those retailers. The expansion continued unabated through 1996,
with the number of directly competing permanent studios
increasing from just over 600 to about 3,600 over the seven-
year period. During the same time span, the number of Sears
studios in the U.S. only increased from 840 to 909, 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. The large advertised packages decreased the
probability that a customer would purchase additional
portraits, and thereby significantly capped the profit
potential from additional sales. CPI responded to this
challenge 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 was designed to
allow for expansion far into the future. CPI engineers and
programmers created almost all of the software for the
programs.
<PAGE>
The new marketing programs were developed by a special
Strategic Development (SD) task force which was charged with
achieving a full understanding of customers' desires and
influences motivating them. Extensive consumer research
revealed that while some customers at certain times are in the
market for a large number of portraits at a low price, at other
times those same customers base their decision on other factors
such as freedom of choice, and flexibility in poses, sizes and
quantity. The SD group, drawing on CPI's five-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, CPI committed to the
installation of the system in all studios in a five-year
upgrade program. The rollout in
page 7
(Pictures: on this page are six pictures of various multiple
portrait collages designed from the Portrait
Creations product line.)
the U.S. studios, which was accomplished from March to October
1994, was supported by the most comprehensive employee training
program in the Company's history. Installation in all 1,000-
plus studios, including those in Canada, was completed in only
18 months.
1996 OPERATING RESULTS - Throughout the year, advertising
focused on customer benefits provided by the new technology,
offering customers the choice of a large, pre-set assortment of
portraits at a competitive price, or a custom, personalized
selection with open-end unit pricing. Total revenues increased
3.7% to $289.8 million from the prior year's $279.6 million.
However, operating earnings declined to $35.7 million from
$42.6 million due to increased operating expenses and lower
than anticipated second-half sales, and operating margin fell
to 12.3% from 15.2%.
OUTLOOK - The Portrait Preview System 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 and take home a set of full-color proofs of selected
poses.
<PAGE>
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 have indicated that the
system is very easy to use and that the portraits shown on the
screen are representative of their finished portraits. Most
said they prefer being left alone at the monitor while
selecting their portraits.
Positive customer reaction 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 previously felt was
uncomfortable has been supplanted by one of support and
cooperation, as employee attitudes have refocused on total
customer satisfaction.
In 1995-96, 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 these is
Portrait Creations-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 Portrait Creations 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, as well as designs
that feature regional themes. Portrait Creations products were
introduced after mid-year 1995, and met with immediate customer
approval.
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
page 8
(Pictures: on this page are three pictures showing a
remodeled Sears Portrait Studio.)
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.
<PAGE>
To further enhance the total portrait experience, the Company
is significantly improving the functionality and ambiance of
the studios, increasing their size and installing new custom
fixtures and furniture. The decor features rich, vibrant
colors, bold graphics and dramatic lighting. A selection of
fresh posing backgrounds, new camera room lighting and new
child-themed props has also been added.
Recognizing the importance of this endeavor, Sears and CPI in
1994 entered into a new five-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 1994-96 period, almost 400 of the 800-plus U.S.
studios were remodeled and upgraded, and about 120 more are
scheduled for 1997. The new design will also be incorporated in
all studios in new Sears stores that open in 1997. 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 1996, CPI's capital investment, including new
technology, training, studio remodeling and added enhancements,
has totaled over $108 million. While depreciation and
amortization expense from these investments has penalized
earnings in the past two years, management expects those
expenses to peak in 1998 and then decline. Going forward from
that date, capital investment should be limited to maintenance
of existing facilities, comfortably funded by continuing cash
flow from operations.
One other consideration relates to potential earnings
improvement. In recent research regarding portrait studio
market position, Sears Portrait Studio customers reported a
significant increase in overall satisfaction when compared to
previous benchmarks and compared to primary competitors. With
this perception of a higher level of satisfaction, management
is cautiously introducing tactical price increases as a means
of enhancing revenues.
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>
<TABLE>
REVENUE GROWTH IN MILLIONS OF DOLLARS
<CAPTION>
<S> <C>
1987 $ 195
1988 219
1989 235
1990 253
1991 251
1992 256
1993 237
1994 275
1995 278
1996 288
</TABLE>
<TABLE>
OPERATING EARNINGS AS A PERCENT OF SALES
<CAPTION>
<S> <C>
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
1996 12.3
</TABLE>
Caption on the above charts:
- - The Sears Portrait Studios have recorded a long history of
sales growth with few interruptions. Following a period of
declining earnings, operating margins recorded a turnaround
in 1994 and 1995. Management anticipates future improvement
as a result of enthusiastic customer response to new
programs, which continue to be enhanced and expanded.
page 9
<PAGE>
(Pictures: on this page are three pictures of various sizes
from the Fox Pet Photo Contest captioned: "Fox
customers are serious about photography. Several
of the top winning photos from the 1996 annual Fox
Pet Photo Contest are featured on left.")
FOX PHOTO
- ---------
CPI entered the photofinishing business in 1982 and, through a
combination of new store openings and acquisitions, expanded
the operation into the nation's largest specialty owner/
operator of stand-alone photofinishing minilabs. The most
significant acquisition, that of Fox Photo in 1991, added over
300 locations and almost doubled the business' size. At the end
of fiscal 1993, the business peaked at 670 locations. With the
closing of a number of marginal labs in 1994 and 1995, and the
sale of still others in the first half of 1996, the total stood
at 554 locations at mid-year 1996.
Since October 5, 1996 the business has been operated as a joint
venture, 51% of which is owned by Kodak and 49% by CPI Corp.
Kodak acquired its majority interest with a cash payment of
$56.1 million to CPI. The new business, Fox Photo, Inc.,
operates under a joint board of directors headed by Alyn V.
Essman, CPI chairman. Ted de Buhr is president-the position he
previously held with the CPI subsidiary-and chief executive
officer.
THE CHANGING MINILAB MARKET - In recent years, the one-hour
retail photofinishing industry has become increasingly
competitive as mass merchandisers, supermarkets and drug store
chains have added one-hour service, using in-store minilabs, to
their next-day service from central labs. Wal-Mart, Kmart and
Walgreens plus several large grocery store chains have been
especially active in the expansion. These chains have typically
promoted one-hour service at very competitive prices,
compounding the effect of the proliferation of locations, and
depressing profit margins throughout the industry.
As a partial consequence of the heightened competitive climate,
the industry has undergone a consolidation process over the
past several years. For example, 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 the face of this increased competition, CPI's minilab
business maintained sales levels fairly well, but suffered
margin declines. Looking to achieve a turnaround in
profitability, CPI drew on its
page 10
<PAGE>
(Pictures: on this page are five pictures of various sizes
captioned: "With the Photo Preview system, the
customer can view each exposure on a monitor, make
cropping decisions, size selections and order
decisions, then receive a proof sheet of the entire
roll for future reference.")
recent experience with Sears, in which the two companies were
able to reposition the Sears Portrait Studios through a
partnership effort employing technology-based marketing
programs. CPI recognized the need for a similar initiative with
a strategic partner who shared the vision of re-energizing the
photofinishing industry through the development and marketing
of unique new consumer imaging services. Building on a 40-year
relationship, CPI formed the joint venture with Kodak, the
industry-leading innovator in technology.
1996 OPERATING RESULTS - Revenues for the 35 weeks through the
October 4, 1996 consummation of the joint venture were $114.5
million compared to the full prior-year total of $188.4
million. CPI recorded pre-venture operating earnings of
$82,000, and its minority share of post-venture operations
resulted in a loss of $485,000. In fiscal 1995, full-year
earnings were $3.3 million.
A LOOK TO THE FUTURE - The objective of the joint venture is to
move the photofinishing business from a routine photo
processing operation to a creative imaging operation offering a
broad spectrum of specialized imaging services, combining
Kodak's and CPI's diverse expertise in digital imaging
technology and retail marketing. After developing a proven
business model with a strong retail identity, Kodak then
intends to make the basic concepts available through trade
licenses to other specialty retailers.
Prototype stores, called Fox Photo/Kodak Image Center
Solutions, have been developed based on these concepts, and a
full market test involving seven locations began in Austin,
Texas in the fourth quarter of 1996. In addition to a broad
selection of attractively displayed merchandise, including
cameras (35mm, Advanced Photo System and digital), frames,
batteries, albums and other accessories, the stores offer a
unique array of state-of-the-art digital work stations that
provide a wide variety of graphic products and services.
One such service developed by a CPI task force, 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, crop and modify the individual exposures on a
large color video monitor. The customer can then decide which
ones to have printed, and order prints in the quantity and
sizes desired of each exposure-mixing standard prints, wallet
<PAGE>
photos, panoramics and enlargements. The customer pays only for
those selected and receives a proof sheet of the entire roll.
page 11
(Pictures: on this page are four pictures of various sizes
showing Kodak Custom Creation multi-photo
collages.)
The stores also feature Kodak's Image Magic CopyPrint and
Enhancement stations that offer a variety of other digital
imaging services. Also, a Kodak Digital Enhancement Station
facilitates repair and restoration of damaged pictures, color
and contrast adjustment, and removal of reflections. Due to the
technical nature of such projects, the actual image
manipulation is usually performed by a highly trained associate
technician.
With the Kodak Custom Creation station, a customer can create
multi-photo collages, family photo-trees, wine bottle labels
and cassette boxes, choose from varied backgrounds, create
enlargements up to 11x14, and select from a variety of
seasonal card templates, adding imprinted personalized
messages. The templates and backgrounds are changed
periodically to maintain variety and freshness.
Preliminary results in the Austin market test show that sales
could increase by as much as 25 to 30% per store as a result of
positive response to the unique new products and services
presented by highly trained personnel. Roll volume has also
increased significantly, apparently due to customers
correlating store employees' skills in operating the digital
imaging systems with expertise in superior quality film
processing. As a result of the favorable outlook, other markets
are scheduled for broader testing of the new store prototype in
1997. To serve the needs of customers better, the new labs will
be enlarged as well as remodeled to accommodate the additional
equipment and expanded merchandising efforts.
<PAGE>
<TABLE>
FOX PHOTO, INC. PHOTOFINISHING REVENUE GROWTH* (in millions of
dollars)
<CAPTION>
<S> <C>
1987 $ 61
1988 69
1989 76
1990 82
1991 121
1992 169
1993 187
1994 191
1995 188
1996* 114
<FN>
* 1996 results are for 35 weeks prior to formation of joint
venture.
</FN>
</TABLE>
Caption on the above chart:
- - Through a combination of new store openings and acquisitions,
the business has recorded significant growth in revenues.
page 12
<PAGE>
(Pictures: on this page are two pictures of different sizes
showing a Prints Plus Studio.)
PRINTS PLUS
- -----------
The acquisition of Prints Plus in 1993 provided CPI with an
additional strong operating segment. As the leading company
owned-and-operated posters, prints and framing retailer in the
U.S., Prints Plus operates 156 locations in prime regional
shopping malls throughout the country. Instrumental to the
acquisition was the continuing direction of a strong,
experienced management team whose operational criteria and
practices parallel those of CPI. As such, the business
represents a good strategic fit with CPI's existing
capabilities and provides an opportunity for rewarding
investment of the Company's resources.
Since acquiring Prints Plus, CPI has expanded the business by
opening 54 new locations. 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. The division has scheduled approximately six new
stores to open in 1997.
1996 RESULTS - Prints Plus recorded sales of $62.7 million in
1996, 6.7% above the prior year's $58.7 million. Most of the
growth was due to the addition of new locations, as same-store
results were hampered by the soft retail environment during the
late-year holiday season-the period in which mall-based stores
typically generate the bulk of their sales and profits.
Operating earnings declined to $3.3 million from $5.4 million,
mainly due to reduced same-store sales, plus start-up expenses
associated with new stores and the conversion of selected
stores to an expanded custom framing format.
EXPANDING POTENTIAL - At present, each store displays a very
wide 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. In view of this variety, management
tailors the merchandise mix of each location to a customer
profile for each area, considering its particular trends and
preferences.
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.
However, the lack of growth in same-store sales has prompted
management to examine a repositioning of the business through
an upgrade of its product and service offerings. This decision
<PAGE>
was strengthened when the broader home furnishings industry
reported gains in the 1996 year-end holiday season, contrary to
Prints Plus' lagging performance over the same period.
In the first phase of repositioning, the selection of frames
and mats is being greatly expanded, to include a full line of
frame designs using new materials as well as a variety of woods
and metals. In an initial test, revenues have increased as a
result of positive customer response to the new offerings.
The company is also contemplating tests of other services that
employ new technology in a variety of ways. In one service
being considered, a small photo would be scanned using digital
imaging, greatly enlarged, then printed on canvas and
framed-resulting in a high quality presentation at a very
competitive price. The same process could be used to feature a
child's first kindergarten art work or other personal images.
Based on positive results from the expanded framing tests, plus
increasing returns expected as a result of economies of scale,
management plans to continue to invest in the Prints Plus
business through the continuing addition of new locations,
funding the expansion with ongoing cash flow.
page 13
<PAGE>
FINANCIAL BACKGROUND AND TRENDS
- -------------------------------
In the planning, execution and evaluation of its long-term
strategies to create 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 above the Company's
cost of capital;
- - returning a portion of cash to shareholders through stock
repurchases and dividends; and
- - raising additional capital only when it can meet or exceed
shareholder return expectations.
The following comments describe how these strategies have been
applied, with special reference to the past five years. The
comments should be read in conjunction with the accompanying
tables and charts and the financial summary on page 16.
THE TRANSITION FROM PAST PERFORMANCE TO FUTURE OPPORTUNITY
During the 1986-1995 decade there were significant economic
changes, as well as changes in CPI's business strategies and
capital structure. CPI's 10-year performance was characterized
by double-digit growth rates in sales, total assets and total
equity. That time period reflected entry into new businesses;
the investment of cash flow to fund expansion; and management's
response to competitive forces, including programs to
strengthen the Company's market franchise. During the time
period from 1986 through 1995, profit margins on continuing
operations averaged 6.9%, return on assets averaged 13.3% and
return on equity averaged 20.1%.
During the five-year period 1991-1995, CPI's financial history
was influenced by unprecedented growth in portrait studio
competition. Facing pricing pressures in its core business, the
Company continued to fund development projects, make
acquisitions, significantly expand the Photofinishing segment
and repurchase stock. Declining profit margins in Portrait
Studios were mainly responsible for lower average growth rates
and returns on sales.
The 1996 fiscal year was a significant turning point for CPI,
marking a major transition from the past to the future with the
sale of an interest in its Photofinishing segment to Kodak.
<PAGE>
<TABLE>
GROWTH RATE
<CAPTION>
1986-1995 1991-95
<S> <C> <C>
Sales 10.3% 7.9%
Total assets 11.8% 6.6%
Total equity 11.0% 2.8%
</TABLE>
<TABLE>
GROWTH IN REVENUES PER SHARE
<CAPTION>
<S> <C>
1992 $ 29.56
1993 31.36
1994 36.70
1995 37.65
1996* 34.55
<FN>
* 1996 sales included only 35 weeks of Fox Photo, Inc. results
prior to formation of the joint venture.
</FN>
</TABLE>
Caption on the above chart:
- - Revenues per share increased by 16.9% over the past five
years, partly due to stock repurchases. Total corporate
sales were up 7.7% over the same period, from $433.8
million to $467.0 million.*
<TABLE>
EBITDA AND NET EARNINGS IN MILLIONS OF DOLLARS
<CAPTION>
Net Earnings,
EBITDA Continuing Operations
<S> <C> <C>
1992 $ 65.0 $ 24.8
1993 53.4 15.1
1994 66.5 16.6
1995 73.2 17.6
1996 64.5 14.4
</TABLE>
Caption on the above chart:
- - Over the past five years, EBITDA (net income, before
interest, income taxes, depreciation and amortization) has
averaged over $64 million, even though earnings have varied
significantly.
<PAGE>
<TABLE>
BALANCE SHEET COMPARISON REFLECTS CORE FOCUS (% Of Total
Assets)
<CAPTION>
February 3, February 1,
1996* 1997**
----------- -----------
<S> <C> <C>
Property/equipment 56% 53%
Other 3% 2%
Intangibles 17% -
JV minority interest - 19%
Current assets 24% 26%
<FN>
* Before Fox Photo, Inc. transaction.
** After Fox Photo, Inc. transaction.
</FN>
</TABLE>
Caption on the above chart:
- - With the Fox Photo, Inc. transaction, CPI converted
substantially all of its $51 million in intangible assets,
while retaining a minority interest in the photofinishing
business.
page 14
<TABLE>
GROWTH IN TOTAL AND REMODELED PORTRAIT STUDIO SPACE
<CAPTION>
To Be Remodeled-
Remodeled-Sq. Ft (000) Sq. Ft (000)
<S> <C> <C>
1992 592 -
1993 612 -
1994 481 206
1995 382 405
1996 284 564
</TABLE>
Caption on the above chart:
- - Nearly 400 studios were remodeled through 1996. The average
studio size and total studio space increased significantly
in the process, which is continuing.
<PAGE>
<TABLE>
INVESTMENT IN TECHNOLOGY RESOURCES LABOR AND OVERHEAD (Index:
1992=100)
<CAPTION>
Index
<S> <C>
1992 100
1993 117
1994 165
1995 224
1996 411
</TABLE>
Caption on the above chart:
- - CPI's investment in evolving technology, embodied in a deep
reservoir of highly skilled software analysts, has increased
4-fold since 1992. The development group provides a technical
foundation capable of supporting imaging efforts outside the
Company's current endeavors.
<TABLE>
STUDIO CAPITAL EXPENDITURES (in millions of dollars)
<CAPTION>
<S> <C>
1992 2.4
1993 19.0
1994 57.7
1995 24.8
1996 17.8
</TABLE>
Caption on the above chart:
- - Portrait studio capital expenditures peaked in 1994 with the
rapid roll-out of the technology-based Sears Portrait Preview
System. Current investment is focused on the remodeling and
expansion of studio facilities.
REBALANCING CORPORATE RESOURCES . . .
During the past year, CPI's management took advantage of the
opportunity to realize a return on assets in its Photofinishing
segment, while retaining a significant interest in a Kodak
joint venture to explore digital imaging in a new retail
format. As a result of the transaction, the Company:
- - sold a 51% interest in Fox Photo to Kodak for $56.1 million,-
converting substantially all of the $51 million in intangible
assets
- - returned approximately $44 million to shareholders in a
tender offer
<PAGE>
. . .TO REFOCUS ON THE CORE BUSINESS
CPI is proud of its growth and the market shares of its
businesses. However, these measures by themselves do not ensure
continuing success. Management realized that to improve the
Company's competitive position in its core business-portrait
photography-it must achieve a quantum leap in the value
delivered to customers. Achieving a true transformation of the
Portrait Studio operation required a significant capital
expansion program, comprised of technology installation and
studio enhancements. Over the past five years, CPI's technology
development program has been marked by a number of milestones:
- - 1992-Formation of the Strategic Development task force and
development of the computerized freeze-frame Sears Portrait
Preview system
- - 1993-Installation of a new point-of-sale system and
multiple-market test of the Sears Portrait Preview system in
100 studios
- - 1994-Installation of the Sears Portrait Preview system in all
1,000 Sears Portrait Studios
- - 1995-Technology enhancements and product expansion called
Portrait Creations installed in all studios
- - 1996-Development of a suite of software to create a flexible
platform capable of being adapted to many businesses'
requirements
Going forward, with a realigned balance sheet and renewed focus
on portrait studios, CPI anticipates improving performance
based on the continuous expansion in studio space; further
capital investment, although at a reduced rate; and high levels
of technology development and support services, now a
significant component of the Company's marketing efforts.
As the Company pursues revenue growth in the Portrait Studios,
management anticipates improving profit margins based on the
following factors:
- - higher volumes will contribute to better coverage of overhead
costs;
- - growing acceptance of value-added services could result in
higher average pricing;
- - opportunities exist for further cost control; and
- - depreciation expenses should have a diminishing impact.
In addition, with fewer shares outstanding, the Company is
positioned to report rising earnings per share.
page 15
<PAGE>
<TABLE>
CONTINUING OPERATIONS
- ---------------------
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Per Share:
Sales $ 34.55 $ 37.65 $ 36.70
Assets 21.11 21.67 21.93
Equity 11.94 12.56 12.12
Earnings 1.06 1.26 1.18
Dividends 0.56 0.56 0.56
Prices: high 21.13 22.13 21.88
low 13.88 14.25 13.88
P/E range: high 19.93 21.70 20.83
low 13.09 13.97 13.21
Dividend yield 3.20% 3.08% 3.13%
Income Data (million $):
Net sales $467.0 $526.7 $517.5
Income from operations 20.4 31.7 30.3
Net interest & other income(expense) (3.3) (4.1) (3.9)
Gain on sale of interest in Photo-
finishing segment 6.2 - -
Interest in joint venture (0.5) - -
Earnings before income taxes,
cumulative effect of accounting
change and discontinued operations 22.8 27.6 26.4
Income taxes 8.4 10.0 9.8
Earnings before accounting change
and discontinued operations 14.4 17.6 16.6
Accounting change - - -
Net earnings from
continuing operations 14.4 17.6 16.6
Avg. shares outstanding
(in million shares) 13.5 14.0 14.1
Balance Sheet (million $):
Current assets $ 63.7 $ 72.8 $ 82.0
Cash and equivalents 21.9 8.3 9.2
Net fixed assets 130.8 167.9 159.1
Total assets 246.7 300.5 300.5
Employed assets 224.8 292.2 291.3
Current liabilities 50.8 64.0 69.8
Long-term debt 44.9 54.8 59.7
Stockholders' equity 139.5 174.2 166.0
Employed equity 117.6 165.9 156.8
</TABLE>
<PAGE>
<TABLE>
CONTINUING OPERATIONS (continued)
- ---------------------
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Funds Flow Data (million $):
From operations $ 53.8 $ 53.7 $ 40.4
From (used for) investments 17.4 (43.7) (51.7)
From (used for) financing 57.7 (11.1) (15.3)
Effect of exchange rate changes 0.1 0.2 (0.3)
Change in cash & cash equivalents 13.6 (0.9) (26.9)
Capital expenditures*
(excluding acquisitions) 34.7 48.8 75.1
Acquisitions* - - -
Ratio Analysis:
Net margin (1) 3.1 3.4 3.2
Asset turnover (2)** 1.55x 1.75x 1.69x
Return on assets (3)** 4.78% 5.88% 5.44%
Financial leverage (4)** 1.73x 1.81x 1.74x
Return on equity (5)** 8.25% 10.64% 9.47%
Retention rate (6) 0.480 0.459 0.465
Implied growth rate (7) 3.96% 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/net earnings
(7) Implied growth rate: Return on equity x retention rate
</FN>
</TABLE>
<PAGE>
<TABLE>
CONTINUING OPERATIONS (continued)
- ---------------------
<CAPTION>
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
Gain on sale of interest in Photo-
finishing segment - - -
Interest in joint venture - - -
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
</TABLE>
<PAGE>
<TABLE>
CONTINUING OPERATIONS (continued)
- ---------------------
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Funds Flow Data (million $):
From operations $ 38.2 $ 36.9 $ 51.6
From (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/net earnings
(7) Implied growth rate: Return on equity x retention rate
</FN>
</TABLE>
<PAGE>
<TABLE>
CONTINUING OPERATIONS (continued)
- ---------------------
<CAPTION>
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
Gain on sale of interest in Photo-
finishing segment - - -
Interest in joint venture - - -
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
</TABLE>
<PAGE>
<TABLE>
CONTINUING OPERATIONS (continued)
- ---------------------
<CAPTION>
1990 1989 1988
<S> <C> <C> <C>
Funds Flow Data (million $):
From operations $ 50.0 $ 53.3 $ 42.5
From (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/net earnings
(7) Implied growth rate: Return on equity x retention rate
</FN>
</TABLE>
<PAGE>
<TABLE>
CONTINUING OPERATIONS (continued)
- ---------------------
<CAPTION>
1987 1986
<S> <C> <C>
Per Share:
Sales $ 16.92 $ 15.50
Assets 10.14 8.45
Equity 7.02 5.69
Earnings 1.54 1.18
Dividends 0.165 0.085
Prices: high 27.75 21.88
low 12.75 11.88
P/E range: high 19.01 19.71
low 8.73 10.70
Dividend yield 0.81% 0.50%
Income Data (million $):
Net sales $283.2 $254.4
Income from operations 43.0 38.3
Net interest & other income(expense) 3.2 1.0
Gain on sale of interest in Photo-
finishing segment - -
Interest in joint venture - -
Earnings before income taxes,
cumulative effect of accounting
change and discontinued operations 46.2 39.3
Income taxes 20.4 19.9
Earnings before accounting change
and discontinued operations 25.8 19.4
Accounting change - -
Net earnings from
continuing operations 25.8 19.4
Avg. shares outstanding
(in million shares) 16.7 16.4
Balance Sheet (million $):
Current assets $ 90.5 $ 60.2
Cash and equivalents 53.1 29.5
Net fixed assets 68.8 68.0
Total assets 168.7 139.3
Employed assets 115.6 109.7
Current liabilities 39.9 36.1
Long-term debt 0.2 0.4
Stockholders' equity 116.7 93.8
Employed equity 63.7 64.2
</TABLE>
<PAGE>
<TABLE>
CONTINUING OPERATIONS (continued)
- ---------------------
<CAPTION>
1987 1986
<S> <C> <C>
Funds Flow Data (million $):
From operations $ 47.4 $ 32.7
From (used for) investments (23.3) (30.6)
From (used for) financing (0.7) 12.7
Effect of exchange rate changes 0.1 0.1
Change in cash & cash equivalents 23.5 14.9
Capital expenditures*
(excluding acquisitions) 13.6 16.4
Acquisitions* 3.2 15.5
Ratio Analysis:
Net margin (1) 9.1 7.6
Asset turnover (2)** 2.03x 2.58x
Return on assets (3)** 18.47% 19.61%
Financial leverage (4)** 1.49x 1.61x
Return on equity (5)** 27.52% 31.57%
Retention rate (6) 0.888 0.924
Implied growth rate (7) 24.44% 29.17%
<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/net earnings
(7) Implied growth rate: Return on equity x retention rate
</FN>
</TABLE>
page 16
<PAGE>
<TABLE>
INDEX
FINANCIAL REVIEW
<S> <C>
Management's Discussion and Analysis Overview 18-19
Consolidated Statements of Earnings 20
Management's Discussion and Analysis -
Results of Operation 21-23
Consolidated Balance Sheets 24
Management's Discussion and Analysis -
Financial Condition 25
Consolidated Statements of Cash Flows 26
Management's Discussion and Analysis -
Cash Flows 27
Consolidated Statement of Changes in
Stockholders' Equity 28
Notes to Consolidated Financial Statements 29-41
Independent Auditors' Report 42
Selected Quarterly Financial Data and
Stock Price and Volume 43
Company Directors and Officers 44
Investor Information 45
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS-OVERVIEW
- ---------------------------------------------
To enhance understanding of CPI Corp.'s (the Company's)
financial results, the various components of 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 21-23, 25 and 27,
respectively. Also, the analysis of each business segment's
net sales and operating earnings is included on pages 22 and
23, respectively.
FISCAL YEARS
The Company's fiscal year ends the first Saturday of February.
Accordingly, fiscal years 1996, 1995 and 1994 ended February 1,
1997, February 3, 1996 and February 4, 1995, respectively, and
each consisted of 52 weeks. Throughout Management's Discussion
and Analysis and Notes to Consolidated Financial Statements,
reference to 1996, 1995 or 1994 will mean the fiscal year end
1996, 1995 and 1994, respectively.
BUSINESS SEGMENTS
The Company has continuing operations in two business segments:
Portrait Studios and Wall Decor. The Portrait Studios segment,
which functions as the exclusive operator of Sears Portrait
Studios, has 1,032 locations in the United States, Canada and
Puerto Rico. The Wall Decor segment, which operates under the
name Prints Plus and offers value-priced posters, prints,
frames and framing services, operates in 156 locations
throughout the United States. In addition, until the October 4,
1996 formation of a joint venture with Eastman Kodak Company,
the Company operated a third business segment, Photofinishing,
which operated under the Fox Photo, CPI Photo Finish, and Proex
names. As of February 1, 1997, this joint venture had 484
locations in shopping centers and independent locations
throughout the United States. (see JOINT VENTURE for further
discussion.) Effective in 1995, the Company recorded the sale
of a fourth business segment, Electronic Publishing, which was
included in 1994's Other Products and Services segment
discussion. (See DISCONTINUED OPERATIONS for further
discussion.)
STOCK REPURCHASE
In November 1996, the Company, as authorized by the Board of
Directors, completed a "Dutch Auction" tender offer by
purchasing 2,250,000 shares of the Company's common stock at
$19.00 per share for $43.6 million. The Company used the
proceeds from the sale of common stock in the formation of the
joint venture to finance the tender offer.
<PAGE>
JOINT VENTURE
In October 1996, the Company entered into a joint venture with
Eastman Kodak Company ("Kodak"). The joint venture, which was
announced by the Company on August 8, 1996, now owns and
operates the retail photofinishing business previously
conducted by the Company's Fox Photo, Inc. ("Fox") and Proex
Photo Systems, Inc. ("Proex") subsidiaries. Proex is a wholly
owned subsidiary of Fox.
In executing the Subscription Agreement, dated August 8, 1996,
by and among Kodak, the Company, Consumer Programs Holding,
Inc. (a wholly owned subsidiary of the Company) ("Holding") and
Fox, Kodak agreed to purchase at closing new shares of Fox
constituting 51% of the then outstanding common stock of Fox
for a cash purchase price of $56.1 million. The Company
recognized a gain, net of taxes, of $3.9 million or $0.29 per
share. On a prospective basis, the joint venture will be
reflected as an investment in Fox joint venture within the
financial statements. (See NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS for further discussion and pro forma
information.)
Pursuant to the terms of the Stockholders' Agreement (the
"Stockholders' Agreement") executed October 4, 1996 by Kodak,
the Company, Holding and Fox, at any time from and after
January 1, 1999, Kodak can require the Company to sell its
interest in Fox and the Company can require Kodak to purchase
the Company's interest in Fox for a price equal to 49% of (A)
Fox's "fair market value" (as determined pursuant to the
Stockholders' Agreement at the time such "put" or "call" right
is exercised) less (B) $30 million. In no event, however, will
such purchase price for the Company's remaining interest in Fox
be less than $53.9 million. Additionally, prior to January 1,
1999, the Stockholders'
18
Agreement entitles Kodak to require the Company to sell its
remaining interest in Fox to Kodak for a purchase price of not
less than $53.9 million upon a "change in control" of the
Company as defined in the Stockholders' Agreement.
The Stockholders' Agreement also provides that Kodak designate
four members and the Company designate three members of Fox's
seven-member Board of Directors. Alyn V. Essman, the Company's
Chairman and Chief Executive Officer, is the Chairman of Fox's
Board of Directors. Certain specified significant actions will
require the consent of both Kodak and the Company.
PHOTOFINISHING STORE SALE
In June 1996, the Company announced the sale to Wolf Camera,
Inc. of 50 one-hour photofinishing stores located in Florida,
Georgia,
<PAGE>
Illinois and Tennessee for $1.9 million. The Company did not
recognize a material gain or loss on the sale of these assets.
DISCONTINUED OPERATIONS
In May 1996, the Company completed the sale of certain assets
of its Electronic Publishing operations for $4.8 million.
Additionally, the purchaser assumed certain liabilities of the
Electronic Publishing operation which aggregated approximately
$900,000. A provision of $3.8 million was made in 1995 to
reflect the discontinued business at its estimated realizable
value. The Company has classified the Electronic Publishing
operation as a discontinued operation in 1995 and reclassified
1994 financial statements to reflect the transaction.
Net sales of the discontinued business for 1995 and 1994 were
$16.7 million and $15.6 million, respectively. Net assets held
for sale were $5.1 million at February 3, 1996.
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. Through 1996, $108.2 million
has been spent on the program, with $12.9 million, $23.9
million, and $54.9 million spent in 1996, 1995 and 1994,
respectively. This program, which management believes is over
70% complete, includes: the introduction and modification of a
freeze-frame digital imaging camera system, the enlargement and
renovation of studios, the development and implementation of a
new store automation system and the installation of new
backgrounds, lighting equipment and props.
FORWARD LOOKING STATEMENTS
The statements contained in this report which are not
historical facts are forward-looking statements that involve
risks and uncertainties. Management wishes to caution the
reader that these forward-looking statements, such as the
Company's outlook for Sears Portrait Studios, Fox Photo and
Prints Plus, are only predictions; actual events or results may
differ materially as a result of risks facing the Company.
Such risks include, but are not limited to: customer demand for
the Company's products and services, the overall level of
economic activity in the Company's major markets, competitors'
actions and other risks described in the Company's filings with
the Securities and Exchange Commission, including its Form 10-K
for the year ended February 1, 1997.
19
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of dollars except per share amounts)
Fifty-two weeks ended February 1, 1997, February 3, 1996 and
February 4, 1995
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net sales $467,034 $526,651 $517,521
Costs and expenses:
Cost of sales (exclusive of
depreciation expense shown
below) 110,013 135,559 142,343
Selling, administrative and
general expenses 298,703 318,413 309,144
Depreciation 34,454 35,457 30,282
Amortization 3,492 5,550 5,444
--------- --------- ---------
446,662 494,979 487,213
--------- --------- ---------
Income from operations 20,372 31,672 30,308
Net interest expense 3,769 4,597 4,338
Interest in joint venture loss (485) - -
Gain on sale of interest in
Photofinishing segment 6,180 - -
Other income 501 563 443
--------- --------- ---------
Earnings before income taxes
and discontinued operations 22,799 27,638 26,413
Income tax expense 8,436 9,979 9,773
--------- --------- ---------
Net earnings from continuing
operations 14,363 17,659 16,640
--------- --------- ---------
Discontinued operations:
Losses from operations, net
of income tax benefit of
$507 and $1,068,
respectively - (898) (1,818)
Loss on disposal, net of tax
benefit of $1,372 - (2,428) -
--------- --------- ---------
Net losses from discontinued
operations - (3,326) (1,818)
--------- --------- ---------
Net earnings $ 14,363 $ 14,333 $ 14,822
========= ========= =========
Earnings per common share:
Net earnings from continuing
operations $ 1.06 $ 1.26 $ 1.18
Net losses from discontinued
operations - (0.24) (0.13)
--------- --------- ---------
Net earnings $ 1.06 $ 1.02 $ 1.05
========= ========= =========
Weighted average number of
common and common equivalent
shares outstanding 13,518 13,989 14,101
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS-RESULTS OF OPERATIONS
- ----------------------------------------------------------
<TABLE>
SELECTED FINANCIAL DATA (in thousands of dollars)
Fifty-two weeks ended February 1, 1997 and February 3, 1996
<CAPTION>
1996 Versus 1995
1996 Amount Percent 1995
Change Change
<S> <C> <C> <C> <C>
Total operating earnings $38,990 $(12,280) (24.0)% $51,270
General corporate
expenses 18,618 980 5.0 19,598
Interest in joint
venture loss (485) (485) (100.0) -
Gain on sale of interest
in Photofinishing
segment 6,180 6,180 100.0 -
Interest expense 4,278 830 16.2 5,108
Interest income 509 (2) (0.3) 511
Other income 501 (62) (11.0) 563
-------- -------- -------
Earnings before income
taxes and discontinued
operations $22,799 $(4,839) (17.5)% $27,638
======== ======== =======
</TABLE>
<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
Interest in joint
venture loss - - - -
Gain on sale of interest
in Photofinishing
segment - - - -
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 and discontinued
operations $27,638 $ 1,225 4.6% $26,413
======= ======== =======
</TABLE>
<PAGE>
NET EARNINGS AND EARNINGS PER SHARE
Net earnings from continuing operations were $14.4 million in
1996, a decrease of 18.7% from the $17.6 in net earnings from
continuing operations recorded in 1995. Before the considera-
tion of the $3.9 million (net of taxes) gain attributable to
the sale of 51% of the Company's interest in its Photofinishing
segment and the resulting joint venture formation, net
earnings from continuing operations declined 40.7% to $10.5
million in 1996 from 1995. This decline reflects decreased
operating earnings and a loss recorded for the Company's
interest in the joint venture, offset slightly by lower
corporate expense, reflecting allocation through service and
consulting contracts with the joint venture of administrative
salaries and overhead costs, and lower net interest expense
due to a portion of the proceeds of the sale of Fox common
stock being used to pay down existing lines of credit. In
1995, net earnings from continuing operations increased 6.1%
to $17.6 million over the $16.6 million recorded in 1994,
reflecting improved operating earnings offset by increased
corporate expenses resulting from higher employee benefit
costs. After the losses from the discontinued Electronic
Publishing operations, net earnings in 1995 and 1994 were
comparable at $14.3 million and $14.8 million, respectively.
Over the last several years, interest expense has been higher
than the Company's historical levels due to increased
borrowings to fund capital expenditure programs. In addition,
the Company 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 of $76,000
and an increase in interest expense in 1994 of $927,000. The
swap agreement expired in August 1995.
The effective income tax rates were 37.0%, 36.1% and 37.0% in
1996, 1995 and 1994, respectively. The increase in the 1996
effective income tax rate resulted primarily from the loss of
tax credits caused by the partial suspension of the targeted
job tax credits program. The decrease in the 1995 effective
income tax rate resulted primarily from a decline in the
effective state income tax rate.
Net earnings per share from continuing operations were $1.06
per share in 1996, including a $0.29 per share gain
attributable to the joint venture formation, as compared to
the $1.26 per share recorded in 1995. In addition, net
earnings per share in 1996 reflects a reduction in the number
of shares outstanding as a result of the stock repurchase of
2,250,000 shares in November 1996. In 1995, net earnings per
share, including net losses from discontinued operations of
$0.24, were $1.02 per share. In 1994, net earnings per share,
<PAGE>
including net losses from discontinued operations of $0.13,
were $1.05 per share.
21
<TABLE>
NET SALES (in thousands of dollars)
Fifty-two weeks ended February 1, 1997 and February 3, 1996
<CAPTION>
1996 Versus 1995
1996 Amount Percent 1995
Change Change
<S> <C> <C> <C> <C>
Portrait Studios $289,840 $ 10,322 3.7% $279,518
Photofinishing 114,518 (73,890) (39.2) 188,408
Wall Decor 62,676 3,951 6.7 58,725
-------- --------- --------
Total net sales $467,034 $(59,617) (11.3)% $526,651
======== ========= ========
</TABLE>
<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 Studios $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>
NET SALES
In 1996, sales decreased 11.3% to $467.0 million from $526.7
million in 1995. This decrease is primarily due to the
formation of the joint venture with Kodak in October 1996,
which resulted in only 35 weeks of Photofinishing sales being
included in total net sales compared to 52 weeks of
Photofinishing sales included in the prior year. This sales
decrease was partially offset by increased sales in the
Portrait Studios and Wall Decor segments for 1996. In 1995,
sales increased 1.8% to $526.7 million from $517.5 million in
1994. This increase is attributable to increased sales in the
Portrait Studios and Wall Decor segments, while the
Photofinishing segment sales declined slightly when compared to
the prior year's results.
Portrait Studios sales were $289.8 million, $279.6 million
and $276.4 million for 1996, 1995 and 1994, respectively,
increasing 3.7% in 1996 and 1.1% in 1995. In 1996, both
<PAGE>
Portrait Studios' customer volume and sales per customer
increased slightly while in 1995, higher sales per customer
were partially offset by decreased customer volume during the
important Christmas season and during the subsequent month of
January due to adverse weather conditions.
Sales for the Photofinishing segment decreased to $114.5
million in 1996 compared to $188.4 million recorded in 1995
primarily due to the formation of the joint venture in
October 1996. Sales decreased 7.5% during the comparable
weeks of 1996 reflecting the sale of 50 locations in June of
1996 and the net closure of 10 locations from the end of 1995
until the joint venture formation. Sales also declined in
comparable stores due to decreases in the number of rolls of
film developed, offset slightly by higher average sales per
roll. In 1995, Photofinishing sales decreased 1.5% to $188.4
million from $191.2 million in 1994. 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.
Wall Decor sales were $62.7 million, $58.7 million and $49.9
million for 1996, 1995 and 1994, respectively, increasing 6.7%
in 1996 and 17.6% in 1995. These increases resulted from the
net addition of 12 locations during 1996 and 24 locations
during 1995. Actual same store sales decreased 2.9% and 1.5%
in 1996 and 1995, respectively, due to decreased transaction
counts offset slightly by higher average ticket prices.
22
<TABLE>
OPERATING EARNINGS (in thousands of dollars)
Fifty-two weeks ended February 1, 1997 and February 3, 1996
<CAPTION>
1996 Versus 1995
1996 Amount Percent 1995
Change Change
<S> <C> <C> <C> <C>
Portrait Studios $ 35,656 $ (6,956) (16.3)% $ 42,612
Photofinishing 82 (3,219) (97.5) 3,301
Wall Decor 3,252 (2,105) (39.3) 5,357
-------- --------- --------
Total operating
earnings $ 38,990 $(12,280) (24.0)% $ 51,270
======== ========= ========
</TABLE>
<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 Studios $ 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>
INCOME FROM OPERATIONS AND OPERATING EARNINGS
Income from operations decreased 35.7% to $20.4 million in
1996 from $31.7 million recorded in 1995, resulting from
decreases in operating earnings in each of the Company's
business segments. Income from operations increased 4.5% to
$31.7 million in 1995 from $30.3 million recorded in 1994.
The 1995 increase was attributable to an increase in the
Portrait Studio segment operating earnings, while the
<PAGE>
Photofinishing and Wall Decor segments' operating earnings
decreased.
Portrait Studios operating earnings were $35.7 million, $42.6
million and $38.5 million for 1996, 1995 and 1994,
respectively. The 16.3% decrease in operating earnings in
1996 was due primarily to increased fixed charges and
increased cost of sales resulting from the costs associated
with maintaining the newer, more sophisticated technologies
introduced in the Company's Studio Enhancement Program. For
1996, depreciation and amortization costs increased $3.5
million over 1995. In addition, due to the higher customer
volume in Portrait Studios and the increased service levels
associated with the development and maintenance of the new
technologies, employment costs were up $3.8 million in 1996
compared to 1995. These increases were offset slightly as
advertising costs for 1996 decreased $2.9 million as a result
of not repeating a one-time advertising awareness campaign
conducted in 1995 for the Custom Portraits by Sears program.
The 10.8% increase in operating earnings in 1995 was the
result of the implementation of the Portrait Preview System
(SM) and Custom Portraits by Sears programs introduced through
the Studio Enhancement Program. These programs resulted in
reducing manufacturing costs and the increased sale of other
products for immediate delivery to customers.
In the Photofinishing segment, primarily as a result of the
formation of the new joint venture in October 1996, operating
earnings of $82,000 representing 35 weeks are shown against
full year operating earnings of $3.3 million recorded in 1995.
In addition, a decrease in same store operating earnings for
1996 from the comparable 35 week period in 1995 was due to an
unfavorable sales mix and a decrease in roll volume, which was
partially offset by higher average sales per roll in comparable
stores. In 1995, operating earnings of $3.3 million were down
27.8% from the $4.5 million recorded in 1994 as a result of
continuing competitive pricing of photographic prints and
processing services, a decline in roll processing volume and
the closure of 49 stores in 1995.
In the Wall Decor segment, operating earnings were $3.3
million, $5.4 million and $5.5 million for 1996, 1995 and
1994, respectively, decreasing 39.3% in 1996 and 2.4% in 1995.
The decreases are attributed to a decrease in same-store
sales.
23
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS - ASSETS
(in thousands of dollars except per share amounts)
<CAPTION>
February 1, February 3,
1997 1996
<S> <C> <C>
Current assets:
Cash $ 5,226 $ 3,815
Short-term investments 16,697 4,516
Receivables, less allowance of
$382 and $1,216, respectively 13,378 17,994
Inventories 19,280 33,937
Deferred income taxes, net - 1,830
Prepaid expenses and other
current assets 9,104 10,733
----------- -----------
Total current assets 63,685 72,825
----------- -----------
Net property and equipment 130,762 167,944
Investment in Fox joint venture 48,105 -
Net assets of business held for sale - 5,055
Other assets:
Intangible assets, net 491 51,071
Other long-term assets 3,677 3,593
----------- -----------
Total assets $246,720 $300,488
=========== ===========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS-LIABILITIES AND STOCKHOLDERS'
EQUITY
(in thousands of dollars except per share amounts)
<CAPTION>
February 1, February 3,
1997 1996
<S> <C> <C>
Current liabilities:
Short-term borrowings $ - $ 2,875
Current maturities of long-term
obligations 10,000 5,000
Accounts payable 15,263 22,783
Accrued expenses and other
liabilities 21,394 25,710
Income taxes 3,926 7,645
Deferred income taxes, net 264 -
--------- ---------
Total current liabilities 50,847 64,013
--------- ---------
Long-term obligations, less current
maturities 44,888 54,804
Other liabilities 5,473 5,476
Deferred income taxes, net 5,987 2,027
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;
17,238,873 and 17,169,402 shares
outstanding at February 1, 1997
and February 3, 1996, respectively 6,896 6,868
Additional paid-in capital 33,283 32,071
Retained earnings 219,905 213,015
Cumulative foreign currency
translation adjustment (1,860) (2,109)
--------- ---------
258,224 249,845
Treasury stock at cost, 5,552,548
and 3,302,548 shares at February
1, 1997 and February 3, 1996,
respectively (118,136) (74,533)
Unamortized deferred compensation-
restricted stock (563) (1,144)
--------- ---------
Total stockholders' equity 139,525 174,168
--------- ---------
Total liabilities and stockholders'
equity $246,720 $300,488
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS-FINANCIAL CONDITION
- --------------------------------------------------------
<TABLE>
IDENTIFIABLE ASSETS (in thousands of dollars)
<CAPTION>
February 1, % February 3, %
1997 Total 1996 Total
<S> <C> <C> <C> <C>
Portrait Studios $ 115,591 46.9% $ 118,649 39.5%
Photofinishing - - 113,983 37.9
Wall Decor 42,557 17.2 35,577 11.9
Discontinued Electronic
Publishing - - 5,055 1.7
Corporate:
Cash and marketable
securities 20,867 8.5 8,331 2.7
Other 19,600 7.9 18,893 6.3
Investment in Fox
joint venture 48,105 19.5 - -
---------- ------ ---------- ------
Total Assets $ 246,720 100.0% $ 300,488 100.0%
========== ====== ========== ======
</TABLE>
ASSETS
In 1996, total assets decreased from 1995 due in part to the
sale of 51% of the Fox Photo, Inc. stock from the Company to
the new joint venture. As the Company owns a 49% interest in
the joint venture, such assets are now excluded from the
Company's consolidated financial statements. In addition,
total assets reflect the transfer of assets held for sale from
the 1995 balance sheet. The balance of cash and short-term
investments increased in 1996 from 1995 due primarily to
investing the remaining proceeds from the sale of Fox Photo,
Inc. common stock.
LIABILITIES
In 1996, total liabilities decreased from 1995 due mainly to
the sale of Fox Photo, Inc. stock from the Company to the new
joint venture. In addition, short-term borrowings decreased in
1996 due in part to the use of proceeds from the sale of Fox
Photo, Inc. stock and the scheduled repayment of senior debt.
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 made in 1996. Interest on the notes
is payable semi-annually at an average effective rate of
6.44%. The Note Agreement requires the Company to maintain
certain financial ratios and to comply with certain restrictive
covenants. Future dividend payments could be restricted if the
<PAGE>
Company does not meet certain earnings requirements.
Additionally, the Company has a $60.0 million revolving Credit
Agreement with three domestic banks which has substantially
the same financial ratios and restrictive covenants as those
set forth in the Note Agreement. The Company is in the
process of restructuring its financing to modify the
restrictive covenants.
STOCKHOLDERS' EQUITY
Stockholders' equity decreased 19.9% to $139.5 million in 1996
due mainly to the purchase of 2,250,000 shares of the
Company's common stock for $43.6 million in November 1996, as
approved by the Company's Board of Directors. This repurchase
was in addition to the 3,302,548 shares of the Company's
common stock purchased for $74.5 million under the 1992 and
1988 stock repurchase programs authorized by the Company's
Board of Directors. Total shares of the Company's common
stock authorized by the 1992 and 1988 programs were 4,500,000
shares.
25
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Fifty-two weeks ended February 1, 1997, February 3, 1996 and
February 4, 1995
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows provided by
operating activities $53,840 $53,675 $40,425
Cash flows used in financing
activities:
Proceeds (repayment) of
short-term borrowings (2,875) (3,975) 6,850
Repayment of long-term
obligations (5,000) (150) (318)
Issuance of common stock to
employee stock plans 1,240 812 2,073
Cash dividends (7,473) (7,758) (7,930)
Purchase of treasury stock (43,603) (2) (15,975)
-------- -------- --------
Cash flows used in
financing activities (57,711) (11,073) (15,300)
-------- -------- --------
Cash flows provided by (used
in) investing activities:
Purchases of short-term
investments - (10,134) (9,172)
Proceeds from maturing of
short-term investments - 15,270 34,303
Additions to property and
equipment (34,728) (48,794) (75,117)
Advance to venture (4,000) - -
Proceeds from sale of Fox
common stock 56,100 - -
Issuance of restricted stock - - (1,684)
-------- -------- --------
Cash flows provided by (used
in) investing activities 17,372 (43,658) (51,670)
-------- -------- --------
Effect of exchange rate changes
on cash and equivalents 91 173 (311)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 13,592 (883) (26,856)
Cash and cash equivalents at
beginning of year 8,331 9,214 36,070
-------- -------- --------
Cash and cash equivalents at
end of year $21,923 $ 8,331 $ 9,214
======== ======== ========
Supplemental cash flow
information:
Interest paid $ 4,468 $ 5,120 $ 4,513
======== ======== ========
Income taxes paid $ 9,366 $10,421 $ 9,318
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
26
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Fifty-two weeks ended February 1, 1997, February 3, 1996 and
February 4, 1995
RECONCILIATION OF NET EARNINGS TO CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net earnings from continuing
operations $14,363 $17,659 $16,640
Adjustments for items not
requiring cash:
Depreciation and amortization 37,946 41,007 35,726
Deferred income taxes 3,351 1,187 (2,294)
Deferred compensation (2) 1,129 (502)
Interest in joint venture loss 485 - -
Gain on sale of interest in
Photofinishing segment (6,180) - -
Other (1,886) (1,812) (1,622)
Decrease (increase) in current
assets:
Receivables and inventories (509) 2,627 (7,310)
Deferred costs applicable to
unsold portraits - 173 2,650
Assets held for resale 5,055 - -
Prepaid expenses and other
current assets (631) (2,633) (937)
Increase (decrease) in current
liabilities:
Accounts payable, accrued
expenses and other
liabilities 5,566 (4,026) (814)
Income taxes (3,718) (2,124) 1,001
-------- -------- --------
Cash flows from continuing
operations 53,840 53,187 42,538
Cash flows from discontinued
operations - 488 (2,113)
-------- -------- --------
Cash flows provided by
operating activities $53,840 $53,675 $40,425
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS-CASH FLOWS
- -----------------------------------------------
During the period 1994 through 1996, the Company generated
$147.9 million in internal funds from operations. Investing
activities, including capital expenditures of $158.6 million
which were offset by proceeds from the joint venture of $56.1
million, amounted to $78.0 million during this three year
period. The Studio Enhancement Program accounted for $91.7
million or 57.8% of the capital expenditures. Financing
activities during this period included the repurchase of $59.6
million in treasury stock, the payment of $23.2 million in
dividends and the payment of $5.5 million in repayment of
long-term obligations. The net result of these transactions
was a $14.1 million decrease in cash and cash equivalents
during the three-year period.
Planned capital expenditures for fiscal year 1997 are expected
to be lower than 1996 levels. Included in fiscal year 1997
capital spending plans are: the continuation of the Studio
Enhancement Program, the addition of stores to the Wall Decor
and Portrait Studios segments and equipment upgrades and
enhancements in the Company's information systems. 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.
27
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands of dollars except per share amounts) Fifty-two
weeks ended February 1, 1997, February 3, 1996 and
February 4, 1995
<CAPTION>
Add'l
Common Paid-In Retained
Stock Capital Earnings
<S> <C> <C> <C>
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
------- -------- ---------
Issuance of common stock:
Profit sharing plan and trust
(40,725 shares) 16 754 -
Stock bonus plan (6,825 shares) 3 96 -
Employee stock plans
(21,921 shares) 9 362 -
Foreign currency translation - - -
Dividends ($0.56 per common
share) - - (7,473)
Net earnings - - 14,363
Purchase of treasury stock, at
cost - - -
Amortization of deferred
compensation-restricted stock - - -
------- -------- ---------
Balance at February 1, 1997 $6,896 $33,283 $219,905
======= ======== =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Continued) (in thousands of dollars except per share
amounts) Fifty-two weeks ended February 1, 1997,
February 3, 1996 and February 4, 1995
<CAPTION>
Cumulative
Foreign
Currency Treasury
Translation Stock
Adjustment At Cost
<S> <C> <C>
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)
-------- ----------
Issuance of common stock:
Profit sharing plan and trust
(40,725 shares) - -
Stock bonus plan (6,825 shares) - -
Employee stock plans (21,921 shares) - -
Foreign currency translation 249 -
Dividends ($0.56 per common share) - -
Net earnings - -
Purchase of treasury stock, at cost - (43,603)
Amortization of deferred
compensation-restricted stock - -
-------- ----------
Balance at February 1, 1997 $(1,860) $(118,136)
======== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Continued) (in thousands of dollars except per share
amounts) Fifty-two weeks ended February 1, 1997,
February 3, 1996 and February 4, 1995
<CAPTION>
Deferred
Compensation-
Restricted
Stock Total
<S> <C> <C>
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
-------- --------
Issuance of common stock:
Profit sharing plan and trust
(40,725 shares) - 770
Stock bonus plan (6,825 shares) - 99
Employee stock plans
(21,921 shares) - 371
Foreign currency translation - 249
Dividends ($0.56 per common share) - (7,473)
Net earnings - 14,363
Purchase of treasury stock, at cost - (43,603)
Amortization of deferred
compensation-restricted stock 581 581
-------- ---------
Balance at February 1, 1997 $ (563) $139,525
======== =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
28
<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 and posters, prints and framing outlets
throughout the United States, Canada and Puerto Rico. Also,
through the Fox Photo, Inc. joint venture, the Company operates
photographic finishing laboratories throughout the United
States. The Company holds a 49% interest in the joint venture.
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 that 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 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.
<PAGE>
Total interest income for 1996, 1995 and 1994 was $509,000,
$511,000, and $957,000, respectively.
INVENTORIES
Inventories are stated at the lower of cost or market, with
cost of the majority of inventories being determined by the
first-in, first-out (FIFO) method and the remainder by the
last-in, first-out (LIFO) method.
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
Furniture and fixtures 5 to 8 years
Machinery and equipment 3 to 10 years
</TABLE>
29
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.
RETIREMENT PLAN
The Company has a noncontributory defined-benefit retirement
plan covering substantially all full-time employees. Pension
expense, which is funded as accrued, includes current costs and
amortization of prior service costs over a period of ten years.
INTANGIBLE ASSETS
Intangible assets acquired through acquisitions were accounted
for by the purchase method of accounting and include the excess
of cost over fair-value of net assets acquired, favorable lease
rights, covenants not to compete and a signing bonus. The
excess of cost over fair value of net assets acquired and
favorable lease rights are being amortized on a straight-line
basis over periods ranging from five to forty years. The
covenants not to compete and signing bonus have been amortized
on a straight-line basis over the respective one to five year
<PAGE>
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.
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 1996 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
Prior to February 4, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related interpretations. As such,
compensation expense would be recorded on the date of grant
only if the current market price of the underlying stock
exceeded the exercise price. On February 4, 1996, the Company
adopted Statement of Financial Accounting Standards (SFAS) No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits
entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro
forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years
as if the fair-value based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
The Company adopted the provisions of SFAS No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, on February 4, 1996. This Statement
<PAGE>
requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment
30
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Adoption of
this Statement did not have a material impact on the Company's
financial statements.
In June 1996, the Financial Accounting Standards Board issued
SFAS No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. SFAS No.
125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after
December 31, 1996 and is to be applied prospectively. This
Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments
of liabilities based on consistent application of a financial
components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers
that are secured borrowings. Management of the Company does
not expect that adoption of SFAS No. 125 will have a material
impact on the Company's financial statements.
2. JOINT VENTURE
On October 4, 1996, the Company entered into a joint venture
with Eastman Kodak Company ("Kodak"). The joint venture, plans
for which were announced by the Company on August 8, 1996, now
owns and operates the retail photofinishing business previously
conducted by the Company's Fox Photo, Inc. ("Fox") and Proex
Photo Systems, Inc. ("Proex") subsidiaries. Proex is a wholly
owned subsidiary of Fox.
In executing the Subscription Agreement, dated August 8, 1996,
by and among Kodak, the Company, Consumer Programs Holding,
Inc. (a wholly owned subsidiary of the Company) ("Holding") and
Fox, Kodak agreed to purchase at closing new shares of Fox
constituting 51% of the then outstanding common stock of Fox
for a cash purchase price of $56.1 million. The Company
recognized a gain, net of taxes, of $3.9 million or $0.29 per
share. On a prospective basis, the joint venture will be
reflected as an investment in Fox joint venture within the
financial statements.
<PAGE>
The information below summarizes the unaudited pro forma
results of operation for 1996 and 1995 assuming the joint
venture results had been prepared for comparative purposes only
and do not purport to be indicative of the results of
operations which actually would have resulted had the
combination been in effect on the dates indicated, or which may
result in the future.
<TABLE>
PRO FORMA RESULTS
(in thousands of dollars except per share amounts)
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net sales $ 352,516 $ 338,243
=========== ===========
Earnings from continuing $ 15,690 $ 18,703
operations =========== ===========
Net earnings $ 15,690 $ 15,377
=========== ===========
Earnings per common share:
Continuing operations $ 1.16 $ 1.34
=========== ===========
Net earnings $ 1.16 $ 1.10
=========== ===========
</TABLE>
31
Going forward, the Company's 49% ownership of the combined
joint venture will be accounted for under the equity method.
The summarized financial information for the joint venture for
the 17 weeks from October 5, 1996 through January 31, 1997 is:
<TABLE>
FOX PHOTO, INC. SELECTED FINANCIAL INFORMATION,
OCTOBER 5, 1996 - JANUARY 31, 1997 (in thousands of dollars)
<S> <C>
Net sales $ 55,543
========
Operating loss $ 1,490
========
Assets $111,554
========
Liabilities $ 21,975
========
</TABLE>
<PAGE>
3. PROPERTY AND EQUIPMENT
<TABLE>
PROPERTY AND EQUIPMENT (in thousands of dollars)
<CAPTION>
February 1, February 3,
1997 1996
<S> <C> <C>
Land and land improvements $ 2,803 $ 2,911
Building improvements 26,544 26,452
Leasehold improvements 26,857 43,467
Furniture and fixtures 63,293 72,251
Machinery and equipment 107,946 187,355
--------- ---------
227,443 332,436
Less accumulated depreciation 96,681 164,492
--------- ---------
Net property and equipment $130,762 $167,944
========= =========
</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
2007. 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 1, 1997
(in thousands of dollars)
<CAPTION>
<S> <C>
1997 $ 15,759
1998 14,271
1999 12,180
2000 10,271
2001 8,809
Thereafter 24,549
---------
$ 85,839
=========
</TABLE>
Rental expense during 1996, 1995 and 1994 on all operating
leases was $27.8 million, $32.3 million and $31.5 million,
respectively.
<PAGE>
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 $835,000 and $1.1
million at February 1, 1997 and February 3, 1996, respectively.
The excess of replacement cost of these inventories over their
stated LIFO value was $269,000 and $316,000 at February 1, 1997
and February 3, 1996, 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.
32
Direct-response advertising consists of direct mail
advertisements that include coupons for the Company's products
and, in interim financial reporting periods, of certain
broadcast costs. 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 1996
and 1995 was $1.6 million and $1.9 million respectively.
Advertising expense for 1996 and 1995 was $45.5 million and
$52.3 million, respectively.
6. INTANGIBLE ASSETS
<TABLE>
Intangible Assets and Related Amortization
(in thousands of dollars)
<CAPTION>
Unamortized
Balance at Amortization
Feb. 1, 1997 1996 1995 1994
<S> <C> <C> <C> <C>
Excess of cost over fair
value of net assets
acquired $ 491 $ 935 $1,467 $1,471
Favorable lease rights - 10 57 93
Covenants not to compete - 250 990 1,049
Signing bonus - - 1,111 1,333
-------- ------ ------ ------
$ 491 $1,195 $3,625 $3,946
======== ====== ====== ======
</TABLE>
Accumulated amortization of intangible assets was $18.8 million
and $17.6 million at February 1, 1997 and February 3, 1996,
respectively.
7. CREDIT AGREEMENTS AND OUTSTANDING DEBT
On August 31, 1993, the Company privately placed Senior Notes
in the amount of $60.0 million (the Note Agreement) with two
insurance companies. The notes, issued pursuant to the Note
Agreement, mature over a seven-year period with an average
maturity of 5.42 years and with the first principal payment due
at the end of the third year. Interest on the notes is payable
semi-annually at an average effective fixed rate of 6.44%. The
Note Agreement requires the Company maintain certain financial
ratios and comply with certain restrictive covenants including
<PAGE>
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 1, 1997, the Company had outstanding letters of
credit for the principal amount of $3.9 million.
33
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.
<TABLE>
DEBT OBLIGATIONS OUTSTANDING (in thousands of dollars)
<CAPTION>
February 1, February 3,
1997 1996
<S> <C> <C>
Senior notes, net of unamortized
issuance costs $ 54,831 $ 59,747
Revolving credit agreement - 2,875
Notes payable and obligations
under capital leases 57 57
Less current maturities 10,000 7,875
--------- ---------
$ 44,888 $ 54,804
========= =========
</TABLE>
<TABLE>
AGGREGATE LONG-TERM DEBT MATURITIES AS OF FEBRUARY 1, 1997
(in thousands of dollars)
<S> <C>
1997 $ 10,000
1998 15,000
1999 15,000
2000 15,057
---------
55,057
Unamortized issuance costs (169)
---------
$ 54,888
=========
</TABLE>
<PAGE>
Interest expense for 1996, 1995 and 1994 was $4.3 million, $5.1
million and $5.3 million, respectively.
8. FINANCIAL INSTRUMENTS
To manage its exposure to fluctuations in interest rates, in
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 1995 and 1994,
the rate realized averaged 6.04% and 5.70%, respectively. Net
interest expense on the swap agreement was $927,000 for 1994
while the swap agreement resulted in income of $76,000 in 1995.
The $927,000 in interest expense recorded in 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 1, February 3,
1997 1996
<S> <C> <C>
Accrued employment costs $ 10,297 $ 13,023
Sales taxes payable 2,556 2,674
Accrued advertising expense 3,064 3,204
Accrued license fees 1,015 2,879
Accrued interest 1,480 1,688
Other 2,982 2,242
--------- ---------
$ 21,394 $ 25,710
========= =========
34
10. INCOME TAXES
</TABLE>
<TABLE>
EARNINGS BEFORE INCOME TAXES BY U.S. AND CANADIAN SOURCES
(in thousands of dollars)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
U.S. $ 23,597 $ 23,382 $ 21,619
Canada (798) (949) 1,908
--------- --------- ---------
$ 22,799 $ 22,433 $ 23,527
========= ========= =========
</TABLE>
<PAGE>
<TABLE>
COMPONENTS OF INCOME TAXES (in thousands of dollars)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ 5,399 $ 8,336 $ 9,144
State and local 1,010 594 1,684
Canada (1,324) (645) 171
-------- -------- --------
5,085 8,285 10,999
Deferred 3,351 (185) (2,294)
-------- -------- --------
$ 8,436 $ 8,100 $ 8,705
======== ======== ========
</TABLE>
<TABLE>
RECONCILIATION BETWEEN INCOME TAXES (in thousands of dollars)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Taxes at U.S. federal
corporate statutory rate $ 7,980 $ 7,852 $ 8,235
State and local income
taxes, net of federal tax
benefit 849 461 933
Other (393) (213) (463)
-------- -------- --------
$ 8,436 $ 8,100 $ 8,705
======== ======== ========
</TABLE>
<TABLE>
SOURCES OF TAX EFFECTS (in thousands of dollars)
<CAPTION>
February 1, February 3,
1997 1996
<S> <C> <C>
Deferred tax assets:
Deferred compensation and other
employee benefits $ 2,131 $ 1,785
Expense accruals 1,385 461
Allowance for doubtful accounts 132 470
Net operating loss carryforward 209 1,164
Reserve for discontinued operations 85 1,373
Intangible assets 832 1,795
Other 364 -
-------- --------
Total deferred tax assets 5,138 7,048
-------- --------
</TABLE>
<PAGE>
<TABLE>
SOURCES OF TAX EFFECTS (in thousands of dollars) (Continued)
<CAPTION>
February 1, February 3,
1997 1996
<S> <C> <C>
Deferred tax liabilities:
Property and equipment (7,597) (5,273)
Gain on interest in Photofinishing
segment (2,287) -
Employee pension plan (1,420) (1,557)
Intangible assets - (327)
Other (85) (88)
-------- --------
Total deferred tax liabilities (11,389) (7,245)
-------- --------
Net deferred tax liabilities $(6,251) $ (197)
======== ========
Current deferred income taxes $ (264) $ 1,830
======== ========
Long-term deferred income taxes $(5,987) $(2,027)
======== ========
</TABLE>
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 1, 1997, 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. The Company
has $3.3 million of total net operating loss carryforwards
available for state income tax purposes.
United States income taxes have not been provided on $13.9
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.
35
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.
Plan assets consist primarily of cash equivalents, a marketable
equity securities fund, guaranteed interest contracts,
immediate participation guarantee contracts and government
bonds.
In 1996, the Company recognized a $295,000 curtailment gain in
conjunction with the sale of 51% of the Fox Photo, Inc. stock
in the formation of the Fox joint venture.
<PAGE>
<TABLE>
NET PERIODIC PENSION EXPENSE OF THE DEFINED BENEFIT PLAN
(in thousands of dollars)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 1,124 $ 962 $ 1,064
Interest cost on projected
benefit obligation 1,432 1,261 1,148
Return on plan assets (2,802) (3,298) (351)
Net amortization and deferral 1,435 2,220 (611)
Curtailment (gain) loss (295) - -
-------- -------- --------
Net periodic pension expense $ 894 $ 1,145 $ 1,250
======== ======== ========
</TABLE>
<TABLE>
FUNDED STATUS OF DEFINED BENEFIT PLAN AS OF DECEMBER 31, 1996
AND DECEMBER 31, 1995 (in thousands of dollars)
<CAPTION>
1996 1995
<S> <C> <C>
Actuarial present value of
vested benefit obligation $ 15,747 $ 14,950
========= =========
Accumulated benefit obligation $ 16,797 $ 16,942
========= =========
Projected benefit obligation $(18,827) $(19,366)
Plan assets at fair value 22,635 19,431
--------- ---------
Plan assets in excess of
(less than) projected
benefit obligations 3,808 65
Unrecognized net loss (1,113) 1,513
Unrecognized prior service cost 487 867
Net transition obligation 15 21
--------- ---------
Prepaid pension cost recognized
in the consolidated balance
sheet $ 3,197 $ 2,466
========= =========
</TABLE>
<PAGE>
<TABLE>
ASSUMPTIONS ON FUNDED STATUS AT DECEMBER 31, 1996, DECEMBER 31,
1995 AND DECEMBER 31, 1994
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Discount rate in determining
benefit obligations 8.0% 7.5% 8.5%
Rate of increase in
compensation levels 5.5% 5.0% 6.0%
Expected long-term rate of
return on assets 8.0% 8.0% 8.0%
</TABLE>
12. EMPLOYEE STOCK PLANS
Expenses recognized for 1996, 1995 and 1994 with respect to
these plans were $1.5 million, $2.2 million and $1.3 million,
respectively
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 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 1996, 1995 and 1994. As of
February 1, 1997, 58,347 shares are reserved for issuance under
this plan. 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.
36
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, up 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
<PAGE>
charged to expense, with a corresponding credit to additional
paid-in capital. Expenses related to the profit-sharing plan
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 Company provided
41,439, 40,725 and 40,459 shares to satisfy its obligations
under the plan for 1996, 1995 and 1994, respectively. For 1996,
1995 and 1994, the Company matched the employee's investment at
a rate of 50%.
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 1996,1995 and 1994, 6,825,1,429 and 3,694 shares,
respectively, were distributed under this plan. In 1994 there
were discretionary awards of 725 shares. Of the 725 shares
awarded in 1994, 558 shares were forfeited due to terminations.
As of February 1, 1997, 51,545 shares are reserved for issuance
under this plan. Expenses related to the stock-bonus plan 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.
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.
<PAGE>
<TABLE>
OPTIONS AWARDED UNDER THE STOCK OPTION PLAN - 1996
<CAPTION>
1996
Number of Per Share
Shares Option Price
<S> <C> <C>
Outstanding at beginning of year 808,961 $13.88-$21.75
480,000 30.00- 35.00
---------- -------------
Total outstanding at beginning
of year 1,288,961 13.88- 35.00
Granted 13,704 14.38- 15.00
Cancelled (35,075) 14.75- 24.50
Exercised (20,285) 14.75- 18.88
----------
At end of year:
Total outstanding 1,247,305 $13.88-$35.00
==========
Total exercisable 452,695
==========
</TABLE>
<TABLE>
OPTIONS AWARDED UNDER THE STOCK OPTION PLAN - 1995
<CAPTION>
1995
Number of Per Share
Shares Option Price
<S> <C> <C>
Outstanding at beginning of year 1,022,011 $13.88-$21.75
480,000 30.00- 35.00
---------- --------------
Total outstanding at beginning
of year 1,502,011 13.88- 35.00
Granted 100,139 14.75- 21.63
Cancelled (309,274) 14.75- 29.00
Exercised (3,915) 15.50- 17.75
----------
At end of year:
Total outstanding 1,288,961 $13.88-$35.00
==========
Total exercisable 391,454
==========
</TABLE>
<PAGE>
<TABLE>
OPTIONS AWARDED UNDER THE STOCK OPTION PLAN - 1994
<CAPTION>
1994
Number of Per Share
Shares Option Price
<S> <C> <C>
Outstanding at beginning of year 432,154 $15.63-$29.00
780,000 30.00- 35.00
---------- -------------
Total outstanding at beginning
of year 1,212,154 15.63- 35.00
Granted 597,108 13.88- 18.63
Cancelled (307,251) 17.00- 35.00
Exercised - -
----------
At end of year:
Total outstanding 1,502,011 $13.88-$35.00
==========
Total exercisable 345,283
==========
</TABLE>
37
Under the plan, 339,920 options granted become exercisable at a
rate of one-fourth a year commencing one year after award and
expiring from four to eight years after award. An additional
667,385 options granted under the plan are cliff-vested and
become exercisable from four to five years after award and
expire six to eight years after award. As of February 1, 1997,
there were 448,579 shares reserved for issuance under this
plan.
The Company has adopted the disclosure-only provisions of SFAS
No. 123. Accordingly, no compensation cost has been recognized
for the stock option plans. Had compensation cost for the
Company's stock option plan been determined based on the fair
value at the grant date for awards in 1996 and 1995 consistent
with the provisions of SFAS No. 123, the Company's net earnings
and earnings per common share would have been:
<TABLE>
<CAPTION>
(in thousands of dollars except per share amounts)
1996 1995
<S> <C> <C>
Net earnings - as reported $ 14,363 $ 14,333
======== ========
Net earnings - pro forma $ 14,324 $ 14,303
======== ========
Earnings per common share -
as reported $ 1.06 $ 1.02
======== ========
Earnings per common share -
pro forma $ 1.06 $ 1.02
======== ========
</TABLE>
Pro forma net income reflects only options granted in 1996 and
1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS 123 is not reflected in the
pro forma net income amounts presented above because
compensation cost is reflected over the options' vesting period
of four years and compensation cost for options granted prior
to January 1, 1995 is not considered.
The fair value of each option grant for 1996 and 1995 is
estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted average assumptions
<PAGE>
used for the grants: expected volatility of 30.0%, risk-free
interest rate of 6%, expected lives of four to five years,
and an expected dividend yield of between 2.6% and 3.9%.
The pro forma information is provided for informational
purposes only and is not necessarily indicative of the results
of operations that would have occurred or of the future
anticipated results of operations of the Company.
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 1993 and 1994. A total of
1,000,000 shares has been authorized for issuance. As of
February 1, 1997, 240,284 options at an exercise price of
$18.38 for 1993 salary reduction and 262,247 options at an
exercise price of $15.50 for 1994 salary reduction have been
issued. For 1996 and 1995, this plan was not offered. Options
granted are exercisable after three years and expire at the end
of eight years.
DEFERRED COMPENSATION AND STOCK APPRECIATION RIGHTS PLAN
On February 1, 1986, the Company's Board of Directors approved
a Deferred Compensation and Stock Appreciation Rights Plan
designed to attract and retain certain key employees. Under
the Deferred Compensation Plan, as amended and restated, within
thirty days prior to the beginning of the fiscal year, eligible
employees may irrevocably elect by written notice to the
Company to defer the payment of a portion (not to exceed 50% or
less than $5,000 in the aggregate) of an incentive bonus. 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. For 1996, 1995 and 1994, certain key executives
elected to participate in this plan. All stock appreciation
rights previously granted under the Plan have expired.
38
KEY EXECUTIVE DEFERRED COMPENSATION PLAN
On April 6, 1995, the Board of Directors established a deferred
base salary plan for key executives which allows deferral of
base salary on substantially the same terms as bonus
compensation may be deferred under the Deferred Compensation
and Stock Appreciation 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
<PAGE>
sum or in a specified number of annual installments, not to
exceed ten. For 1996 and 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 two business segments: Portrait Studios and Wall
Decor. In addition, the Company operated a third business
segment, Photofinishing, until October 4, 1996. This segment,
comprised of Fox Photo, CPI Photo Finish and Proex, was made
part of a joint venture with Kodak on October 4, 1996. Also,
in May 1996, the Company sold its Electronic Publishing segment
(CopyMat and CopyUSA).
The Portrait Studios segment operates a professional portrait
photography business, primarily through fixed location studios.
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 22 and 23 of this document.
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. For 1996, approximately 62% of net sales
and 91% 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.
<PAGE>
<TABLE>
SELECTED INDUSTRY SEGMENT INFORMATION (in thousands of dollars)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION:
Portrait Studio $ 21,081 $ 17,553 $ 12,256
Photofinishing 9,494 16,231 17,557
Wall Decor 4,181 3,556 2,918
Corporate 3,190 3,668 2,995
Discontinued Electronic Publishing - 1,820 2,170
-------- -------- --------
$ 37,946 $ 42,828 $ 37,896
======== ======== ========
IDENTIFIABLE ASSETS:
Portrait Studio $115,591 $118,649 $111,326
Photofinishing - 113,983 118,593
Wall Decor 42,557 35,577 27,094
Corporate 40,467 27,224 32,765
Discontinued Electronic Publishing - 5,055 10,703
Investment in Fox Joint Venture 48,105 - -
-------- -------- --------
$246,720 $300,488 $300,481
======== ======== ========
CAPITAL EXPENDITURES:
Portrait Studio $ 17,820 $ 24,817 $ 57,723
Photofinishing 9,098 14,732 10,347
Wall Decor 9,085 9,627 8,030
Corporate 1,050 1,005 884
Discontinued Electronic Publishing - 472 2,029
-------- -------- --------
$ 37,053 $ 50,653 $ 79,013
======== ======== ========
</TABLE>
39
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 1, 1997, the Company had purchased
3,302,548 shares of stock for $74.5 million at an average stock
price of $22.57.
On November 12, 1996, the Company announced the completion of
the previously announced "Dutch Auction" tender offer. The
Company, as authorized by the Board of Directors, purchased
2,250,000 shares of the Company's common stock at $19.00 per
share. The total cost incurred was $43.6 million. The Company
<PAGE>
used the proceeds from the sale of Fox's common stock to
finance the tender offer.
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 Person" 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 1, 1997
and February 3, 1996 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 1, 1997, the carrying value
and estimated fair market value of the Company's debt was $54.9
million and $53.7 million, respectively. 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.
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
<PAGE>
resolution of such lawsuits will not have a material effect on
the consolidated financial position or the results of
operations of the Company.
40
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. On May
3, 1996, the Company completed the transaction for $4.8
million. Additionally, the purchaser assumed certain
liabilities of the Electronic Publishing operation which
aggregate approximately $900,000. A provision of $3.8 million
was made in 1995 to reflect the discontinued business at its
estimated realizable value. The Company classified the
Electronic Publishing operation as a discontinued operation and
reclassified the prior years' financial statements to reflect
this transaction.
Net sales of the discontinued business for 1995 and 1994 were
$16.7 million and $15.6 million, respectively. Net assets held
for sale were $5.1 million at February 3, 1996.
<TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION FROM DISCONTINUED OPERATIONS
(in thousands of dollars)
<CAPTION>
1995 1994
<S> <C> <C>
Losses from discontinued
operations, net of income tax
benefit of $507 and $1,068, respectively $ (898) $(1,818)
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
Decrease (increase) in current assets:
Receivables and inventories 19 (165)
Prepaid expenses and other current
assets 520 (210)
Reserve for closing 3,800 -
Increase (decrease) in current
liabilities:
Accounts payable, accrued
expenses and other liabilities (502) (61)
Deferred tax benefit (1,372) -
Capital expenditures (472) (2,029)
-------- --------
Cash flows from discontinued operations $ 488 $(2,113)
======== ========
</TABLE>
41
<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 1, 1997 and February
3, 1996, 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 1, 1997
appearing on pages 20, 24, 26, 27 and 28 through 41. 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 1,
1997 and February 3, 1996, and the results of their operations
and their cash flows for each of the fiscal years in the
three-year period ended February 1, 1997, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
April 3, 1997
42
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ---------------------------------------------
The Company's 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.
Additionally, in October 1996, the Company recorded a $6.2
million gain before taxes ($3.9 million gain after taxes) on
the sale of its interest in the Photofinishing segment. The
Company also recorded the repurchase of 2,250,000 shares of
common stock for $43.6 million in November 1996.
The tables presented set forth selected financial data for the
quarters of the Company's fiscal years ended February 1, 1997
and February 3, 1996. 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 tables set forth the high and low last-sale prices
of the common stock reported by the New York Stock Exchange
during the Company's last two fiscal years.
<PAGE>
<TABLE>
SELECTED QUARTERLY FINANCIAL DATA - F.Y. 1996 (UNAUDITED)
<CAPTION>
Quarter Ended:
(in thousands except per share amounts)
---------------------------------------
Apr. 27, July 20, Nov. 9, Feb. 1,
1996 1996 1996 1997
(12 wks) (12 wks) (16 wks) (12 wks)
<S> <C> <C> <C> <C>
Fiscal Year 1996
Net sales from
continuing operations $104,668 $105,440 $145,435 $111,491
Earnings from continuing
operations before
income taxes (3,366) (1,291) 8,007 19,449
Net earnings (loss) from
continuing operations (2,120) (813) 5,044 12,253
Net losses from
discontinued operations - - - -
Net earnings (loss) (2,120) (813) 5,044 12,253
Earnings (loss) per
common share:
From continuing
operations $ (0.15) $ (0.06) $ 0.36 $ 1.03
From discontinued
operations - - - -
Net earnings (loss) (0.15) (0.06) 0.36 1.03
Weighted average number
of common and common
equivalent shares 13,963 14,001 14,066 11,861
Dividends $ 0.14 $ 0.14 $ 0.14 $ 0.14
Stock Price and Volume
High $ 16.88 $ 18.25 $ 21.13 $ 18.50
Low 14.63 14.75 13.88 16.38
Volume (in thousands
of shares) 3,302 9,046 5,149 1,445
</TABLE>
<PAGE>
<TABLE>
SELECTED QUARTERLY FINANCIAL DATA - F.Y. 1995 (UNAUDITED)
<CAPTION>
Quarter Ended:
(in thousands except per share amounts)
---------------------------------------
Apr. 29, July 22, Nov. 11, Feb. 3,
1995 1995 1995 1996
(12 wks) (12 wks) (16 wks) (12 wks)
<S> <C> <C> <C> <C>
Fiscal Year 1995
Net sales from
continuing operations $103,394 $107,056 $166,156 $150,046
Earnings from continuing
operations before
income taxes (688) 4,067 5,193 19,066
Net earnings (loss) from
continuing operations (433) 2,562 3,270 12,260
Net losses from
discontinued operations (241) (310) (94) (2,681)
Net earnings (loss) (674) 2,252 3,176 9,579
Earnings (loss) per
common share:
From continuing
operations $ (0.03) $ 0.18 $ 0.24 $ 0.88
From discontinued
operations (0.02) (0.02) (0.01) (0.19)
Net earnings (loss) (0.05) 0.16 0.23 0.69
Weighted average number
of common and common
equivalent shares 13,897 13,930 14,090 14,005
Dividends $ 0.14 $ 0.14 $ 0.14 $ 0.14
Stock Price and Volume
High $ 17.75 $ 21.75 $ 22.13 $ 21.13
Low 14.25 16.88 17.75 14.50
Volume (in thousands
of shares) 3,214 2,007 2,529 1,869
</TABLE>
43
<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.
Chairman, Chief Executive Officer
Alyn V. Essman
President
Russell Isaak
Senior Executive Vice President
Patrick J. Morris
Secretary and General Counsel
Jane E. Nelson
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
<PAGE>
DIVISION PRESIDENTS
Arthur Padovese-Prints Plus
Harry Stecher-Sears Portrait Studios and Canadian Operations
* Member of the Audit Committee of the Board of Directors
44
<PAGE>
NOTICE TO SHAREHOLDERS
- ----------------------
Beginning with the first quarter of Fiscal Year 1996, we have not
published a formal quarterly earnings report, thereby saving your
Company tens of thousands of dollars. Instead, we offer the
option of three formats with which you can receive quarterly
earnings information on a more timely basis than with the
previous reports.
The scheduled release dates are: 1st quarter-May 28, 1997; 2nd
quarter-August 19, 1997; 3rd quarter-December 9, 1997.
Your options - on an ongoing basis as long as you remain a
shareholder - 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 news media.
Please indicate your choice of formats 2 or 3 by completing the
information in the appropriate spaces 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 63103-1717
<PAGE>
INVESTOR INFORMATION
- --------------------
MOST RECENT ANALYST REPORTS
First Honolulu Securities, Inc., John Roberts, December 16, 1996
McDonald & Company, Jeffrey S. Stein, April 7, 1997
Smith Barney, Inc., Peter J. Enderlin, December 17, 1996
Value Line, Jacob Arbitman, February 28, 1997
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 12, 1997 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.
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
<PAGE>
INVESTOR INFORMATION (continued)
- --------------------
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]
45
<PAGE>
(Back cover of Annual Report to Shareholders)
CPI CORP.
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.cppicorp.com/jobs
CPI Corp., 1706 Washington Avenue, St. Louis,
Missouri 63103-1717
314-231-1575
EXHIBIT (21)
<TABLE>
SUBSIDIARIES OF THE REGISTRANT AS OF APRIL 3, 1997
<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
d/b/a Sears Portrait Studios
CPI Images L.L.C. Missouri United States
d/b/a Sears Portrait Studios
d/b/a Mainstreet Portraits
d/b/a Image Explosion
CPI Management Services L.L.C. Missouri United States
CPI Properties L.L.C. Missouri United States
Consumer Programs Partner,Inc. Delaware United States
CPI Research and Development, Inc. Delaware United States
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
CPI Technology Corp. Missouri United States
CPI Corp. Canada Ontario Canada
d/b/a Sears Portrait Studios
</TABLE>
25
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 3, 1997, relating to the consolidated balance sheets
of CPI Corp. and subsidiaries as of February 1, 1997 and February
3, 1996 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 1, 1997, and
all related schedules, which report appears in the 1996 annual
report on Form 10-K of CPI Corp.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG PEAT MARWICK LLP
St. Louis, Missouri
April 3, 1997
26
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> FEB-01-1997
<CASH> 5,226
<SECURITIES> 16,697
<RECEIVABLES> 13,760
<ALLOWANCES> 382
<INVENTORY> 19,280
<CURRENT-ASSETS> 63,685
<PP&E> 227,443
<DEPRECIATION> 96,681
<TOTAL-ASSETS> 246,720
<CURRENT-LIABILITIES> 50,847
<BONDS> 0
<COMMON> 6,896
0
0
<OTHER-SE> 132,629
<TOTAL-LIABILITY-AND-EQUITY> 246,720
<SALES> 467,034
<TOTAL-REVENUES> 467,034
<CGS> 110,013
<TOTAL-COSTS> 446,662
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,278
<INCOME-PRETAX> 22,799
<INCOME-TAX> 8,436
<INCOME-CONTINUING> 14,363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,363
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.06
</TABLE>
