Annual Report (Form 10-K), fiscal year 1994




ITEM 2. PROPERTIES
The following table sets forth certain information concerning the Company's principal facilities:
The Company operates its portrait studios in Sears stores pursuant to the license agreement with Sears. See "Relationship with Sears." The Company's other portrait studios, which are located in shopping centers, are generally leased for at least three years with some having renewal options. The Company's minilab locations generally are leased for terms of three to seven years and some have one or more renewal options. The electronic publishing locations are generally leased for terms of five to seven years with one or more renewal options and are commonly situated in office buildings, multi-use complexes or downtown PAGE
locations. The wall decor locations are generally in enclosed regional malls with lease terms of ten years without renewal options.
On an ongoing basis, the Company analyzes the use of its facilities to assure operating economies, effective servicing of its customers and necessary flexibility to meet present and future demands of its businesses.
ITEM 3.

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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders for a vote during the fourth quarter of fiscal year 1993.
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PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information required under this Item is contained in the Registrant's 1993 Annual Report to Shareholders, pages 174-177 of this document, and will be contained in the Registrant's 1994 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1993, and incorporated herein by reference.
As of April 15, 1994, the market price of the Registrant's common stock was $14.875 per share with 14,433,704 shares outstanding and approximately 2,645 holders of record.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Information required under this Item is contained in the Registrant's 1993 Annual Report to Shareholders, pages 127-134 of this document, and incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information required under this Item is contained in the Registrant's 1993 Annual Report to Shareholders, pages 135 through 144 of this document, and incorporated herein by reference.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required under this Item is contained in the Registrant's 1993 Annual Report to Shareholders, pages 145 through 177 of this document, and incorporated herein by reference.
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
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PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors - --------- Information required under this Item will be contained in the Registrant's 1994 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1993, and is incorporated herein by reference.
Executive and Other Principal Officers - -------------------------------------- David E. April (51) Senior Executive Vice President. Mr. April joined the Company in 1963 as a supervisor trainee and subsequently became Vice President of Laboratory Operations. In 1981, he became Vice President and General Manager of Laboratory Operations, in February 1984, he became President of the Laboratory Operations, and in February 1987, he was named President of Manufacturing. Effective February 1992, Mr. April was appointed Senior Executive Vice President and is a member of the Office of the President and of the Executive Committee.
Patrick J. Morris (54) Senior Executive Vice President. Mr. Morris joined the Company in May 1985 as its Executive Vice President - Marketing. Effective February 1992, he was appointed Senior Executive Vice President, and is a member of the Office of the President and of the Executive Committee.
Barry C. Arthur (51) Executive Vice President - Finance and Chief Financial Officer. Mr. Arthur joined the Company in 1965 as an accountant and subsequently became Controller. In 1981, he was appointed Treasurer, and in July 1983, he was named Vice President - Finance. He was appointed to his current position effective February 1992 and is a member of the Executive Committee.
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Jane E. Nelson (44)* Secretary and General Counsel. Ms. Nelson joined the Company in 1988 as Assistant General Counsel and served as Associate General Counsel and Assistant Secretary. She was promoted to her current position in February 1993 and is a member of the Corporate Development Council. Prior to coming to CPI, Ms. Nelson was an associate with the St. Louis law firm of Husch and Eppenberger.
Fran Scheper (48) Executive Vice President - Human Resources. Ms. Scheper joined the Company in 1967 as Personnel Assistant. She was promoted to Assistant Personnel Director in 1982 and in January 1987 became Vice President - Human Resources. She was appointed to her current position in February 1992 and is a member of the Executive Committee.
The Company's officers serve at the pleasure of the Board of Directors. There are no family relationships among the Company's directors and executive and other principal officers.
* Pursuant to becoming an insider of the Company as of February 6, 1993, Jane E. Nelson timely filed a Form 3, however, through clerical error the Form 3 failed to disclose 79 shares of stock held indirectly in the Company's Profit Sharing Plan.
The omission was included in an Amendment to Form 3 filed ten days late on February 26, 1994. No other incidents of late filing occurred during the fiscal year to the best of the Company's knowledge.
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ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item will be contained in the Registrant's 1993 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1993, and is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item will be contained in the Registrant's 1994 Proxy Statement, to be dated within 120 days of the end of the Registrant's fiscal year 1993, and is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
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PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Certain Documents
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(b) Reports on Form 8-K
On December 23, 1993, the Company filed a Report on Form 8-K with an attached press release announcing: a third quarter decrease in earnings per share; a third quarter increase in sales mainly due to acquisitions; expected fourth quarter results below last year's and a $50 million investment in new portrait studio technology and renovation.
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(c) Index to Exhibits
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INDEPENDENT AUDITORS' REPORT ----------------------------
The Board of Directors and Stockholders CPI Corp.:
Under date of April 6, 1994, we reported on the consolidated balance sheets of CPI Corp. and subsidiaries as of February 5, 1994 and February 6, 1993, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the fiscal years in the three-year period ended February 5, 1994, as contained in the 1993 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K of CPI Corp. for the 1993 fiscal year. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK
St. Louis, Missouri April 6, 1994
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CPI CORP.
BY: /s/ Alyn V. Essman Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
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Schedule I
CPI CORP. CONSOLIDATED SHORT-TERM INVESTMENTS FEBRUARY 5, 1994
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Schedule V
CPI CORP. CONSOLIDATED PROPERTY AND EQUIPMENT FISCAL YEARS ENDED FEBRUARY 5, 1994, FEBRUARY 6, 1993 AND FEBRUARY 1, 1992
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Schedule VI
CPI CORP. CONSOLIDATED ACCUMULATED DEPRECIATION OF PROPERTY AND EQUIPMENT FISCAL YEAR ENDED FEBRUARY 5, 1994, FEBRUARY 6, 1993 AND FEBRUARY 1, 1992
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Schedule VIII
CPI CORP. CONSOLIDATED ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES FISCAL YEARS ENDED FEBRUARY 5, 1994, FEBRUARY 6, 1993 and FEBRUARY 1, 1992
The majority of receivable amounts are due from Sears, Roebuck and Co. for amounts collected or to be collected by it, for which Sears assumes all credit risks.
The receivable balances for which an allowance for uncollectible receivables is established relate primarily to sales recorded through use of Company commercial charge accounts for photofinishing and copy services.
The majority of the allowance for uncollectible receivables is computed and adjusted every four weeks based on a predetermined percentage of the related receivable balances. These percentages are determined using historical results adjusted for current economic conditions. As a result, the Company does not record separate additions or deductions to the allowance for individual accounts but rather adjusts every four weeks for the net change in the computed allowance based on gross receivable balances.
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Schedule X
CPI CORP. SUPPLEMENTARY CONSOLIDATED EARNINGS STATEMENT INFORMATION FISCAL YEARS ENDED FEBRUARY 5, 1994, FEBRUARY 6, 1993 AND FEBRUARY 1, 1992
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Exhibit (3)b
ARTICLES OF INCORPORATION AND BYLAWS
On February 3, 1994, the Board of Directors of CPI Corp. amended the corporate bylaws as follows:
RESOLUTION ----------
RESOLVED, that the first sentence of Section 3.2 of the By-Laws of the Corporation be, and hereby is, amended to read as follows:
"SECTION 3.2. NUMBER, TERM AND ELECTION. The number of directors constituting the full Board of Directors of the corporation shall be no more than eight (8), or such other number not less than three (3), as may from time to time be established by amendment of these By-Laws."
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Exhibit (4)l
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING DEBENTURES
AMENDMENT TO CPI CORP. SHAREHOLDER RIGHTS PLAN
The following Amendment to CPI Corp.'s Shareholder Rights Plan was adopted August 26, 1993:
FIRST AMENDMENT TO RIGHTS AGREEMENT
FIRST AMENDMENT (The "Amendment"), dated as of August 26, 1993, to the Rights Agreement, dated as of May 1, 1989 (the "Rights Agreement"), between CPI CORP., a Delaware corporation (the "Company"), and CONTINENTAL STOCK TRANSFER AND TRUST COMPANY, a New York corporation (the "Rights Agent").
W I T N E S S E T H
WHEREAS, the Company and Ameritrust Company, National Association, as the predecessor to the Rights Agent, entered into the Rights Agreement specifying the terms of the Rights (as defined in the Rights Agreement);
WHEREAS, the rights and obligations of the Rights Agent as such were assigned by Ameritrust Company, National Association to Continental Stock Transfer and Trust Company, as successor Rights Agent;
WHEREAS, pursuant to Section 27 of the Rights Agreement the Company and the Rights Agent may from time to time supplement or amend the Rights Agreement in accordance with the provisions of such Section 27;
WHEREAS, the Company and the Rights Agent desire to amend the Rights Agreement as set forth herein;
WHEREAS, all actions necessary to make this First Amendment a valid agreement, enforceable according to its terms, have been taken, and the execution and delivery of this First Amendment by the Company and the Rights Agent have been in all respects duly authorized by the Company and the Rights Agent; and
WHEREAS, no person has become an Acquiring Person (as defined in the Rights Agreement) as of the date hereof;
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NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the Company and the Rights Agent hereby amend the Rights Agreement as follows:
1. The definition of "Acquiring Person" in Section 1(a) is hereby amended by deleting the number "20" therein and inserting in lieu thereof the number "15".
2. Section 11(a) (ii) is hereby amended by deleting each occurrence of the term "20%" therein and inserting in lieu thereof the term "15%" in each such instance.
This Amendment shall be effective as of the date hereof and, except as set forth herein, the Rights Agreement shall remain in full force and effect and shall be otherwise unaffected hereby.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written.
ATTEST: CPI CORP.
By: /s/ Jane E. Nelson By: /s/ Alyn V. Essman --------------------- ------------------------- Secretary and Chairman of the Board General Counsel and Chief Executive Officer
ATTEST: CONTINENTAL STOCK TRANSFER AND TRUST COMPANY
By: /s/ Thomas Jennings By: /s/ Steven G. Nelson ----------------------- ------------------------- Assistant Secretary Chairman of the Board and Secretary
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Exhibit (10)a
MATERIAL CONTRACT
The following pages reflect the contract the Company has with Sears, Roebuck and Co.
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LICENSE AGREEMENT PORTRAIT STUDIO FINITE 195-020
THIS LICENSE AGREEMENT (hereinafter referred to as "Agreement") is entered into as of the 1st day of January, 1994, by SEARS, ROEBUCK AND CO., a New York corporation ("Sears") and CONSUMER PROGRAMS INCORPORATED a Missouri corporation, ("Licensee"). Sears and Licensee hereby agree as follows:
LICENSE
1. Licensee is in the business described in this paragraph, and has expertise in that business and has a marketing plan for that business. Sears hereby grants Licensee the non-exclusive privilege of conducting and operating, and Licensee shall conduct and operate, pursuant to the terms, provisions and conditions contained in this Agreement, a licensed business for the purpose of producing photographic portraits, passport photographs, photographic copy, video transfers and restoration work (hereinafter referred to as "Licensed Business"), at the Sears locations designated below or in Location Riders: ("Designated Sears Store(s)").
Dst. AcCtr. Store/Location ---- ------ -------------- To be provided
LISTED ON THE ATTACHED LOCATION RIDER DATED JANUARY l, 1994.
TERM
2. The term ("Term") of this Agreement shall be for a period beginning on January 1, 1994 and ending at the close of business on December 31, 1998 unless sooner terminated under any of the provisions of this Agreement.
REPRESENTATION TO LICENSEE
3. Sears makes no promises or representations whatsoever as to the potential amount of business Licensee can expect at any time during operation of the Licensed Business. Licensee is solely responsible for any expenses it incurs related to this Agreement, including any increase in the number of Licensee's employees or any expenditures for additional facilities or equipment.
UNAUTHORIZED SALES
4. Licensee shall use the Licensed Business area only for the purpose authorized in this Agreement, and will offer for sale only those services and merchandise expressly authorized by this Agreement.
SEARS COMMISSION
5. (a) Licensee shall pay to Sears a commission ("Sears Commission") which shall be a sum equal to ten percent (10%) of total annual net sales if less than $50,000 and fifteen percent (15%) of total annual net sales if annual net sales are equal to or over $50,000 - retroactive to the first dollar. Accounting Centers are to deduct commission rate at fifteen percent (15%). Licensee will bill Sears annually for any excess commissions taken from any units with annual net sales of less than $50,000.
NET SALES
(b) "Net Sales" means gross sales from operation of the Licensed Business, less sales taxes, returns and allowances.
GROSS SALES
(c) "Gross Sales" means all of Licensee's direct or indirect sales of services and merchandise from the Licensed Business including, but not limited to, sales arising out of referrals, contacts, or recommendations obtained through the operation of the Licensed Business.
[DELETED PURSUANT TO REQUEST FOR CONFIDENTIALITY TREATMENT]
[DELETED PURSUANT TO REQUEST FOR CONFIDENTIALITY TREATMENT]
USE OF SEARS NAME
7. (a) Licensee shall operate the Licensed Business under the name SEARS PORTRAIT STUDIOS. Licensee shall use the name of Sears only in connection with the operation of the Licensed Business. Licensee shall not begin any business activity under this Agreement without Sears prior written approval of any and all names that Licensee intends to use in conjunction with the Licensed Business.
(b) Licensee shall only use the name of Sears, or any Sears trademark, service mark or trade name (Sears Marks), when communicating with customers or potential customers of the Licensed Business. Licensee shall not use Sears Marks either orally or in writing, including, but not limited to, use of any letterhead, checks, business cards, or contracts, when communicating with persons or entities other than customers or potential customers of the Licensed Business. All such communications shall be done solely in Licensee's own name.
(c) Licensee shall not question, contest or challenge, either during or after the Term of this Agreement, Sears ownership of any Sears Marks Sears may license Licensee to use in connection with the Licensed Business. Licensee will claim no right, title or interest in any Sears Mark or
Sears Information (mailing lists/names), except the right to use the same pursuant to the terms and conditions of this Agreement, and will not register or attempt to register any Sears Mark.
(d) Licensee recognizes and acknowledges that the use of any Sears Mark shall not confer upon Licensee any proprietary rights to any Sears Mark. Upon termination of this Agreement, Licensee shall immediately stop using any licensed Sears Mark, and will execute all necessary or appropriate documents to confirm Sears ownership, or to transfer to Sears any rights Licensee may have acquired from Sears in any Sears Mark.
(e) Nothing in this Agreement shall be construed to bar Sears, after expiration or termination of this Agreement, from protecting its right to the exclusive use of its trademarks, service marks or trade names against infringement by any party or parties, including Licensee.
(f) Sears may register in its own name any and all of the trademarks, service marks or trade names used in operation of the Licensed Business, and Licensee's use of such names and marks shall inure to the benefit of Sears for such purposes as well as for all other purposes and such marks shall be included in the term "Sears Marks." Licensee shall cooperate in any such registration or application for registration by Sears.
(g) Sears Marks and Sears Information licensed under this Agreement possess a special, unique and extraordinary character which makes it difficult to assess the monetary damage Sears would sustain in the event of unauthorized use. Irreparable injury would be caused to Sears by such unauthorized use, and Licensee agrees that preliminary or permanent injunctive relief would be appropriate in the event of breach of this Paragraph 7 by Licensee.
(h) If Licensee learns of any manufacture or sale by any third party of products and/or services similar to those offered by Licensee that would be confusingly similar to those sold by Licensee in the minds of the public and which bear or are promoted in association with Sears Marks or any names, symbols, emblems, or designs or colors which would be confusingly similar in the minds of the public to Sears Marks, Licensee will promptly notify Sears. Sears shall, at its sole expense, take such action as it determines, in its sole discretion, is appropriate. Licensee will cooperate and assist in such protest or legal action at Sears expense. If demanded
by Sears, Licensee shall join in such protest or legal action at Sears expense. Licensee shall not undertake any protest or legal action on its own behalf without first securing Sears written permission to do so. If Sears permits Licensee to undertake such protest or legal action, such protest or legal action shall be at Licensee's sole expense. Sears shall cooperate and assist Licensee at Licensee's expense. For the purposes of this paragraph, expenses shall include reasonable attorneys' fees. All recovery in the form of legal damages or settlement shall belong to the party bearing the expense of such protest or legal action.
(i) Licensee shall not file suit using Sears name or undertake any legal proceeding against any customer without Sears prior written approval.
ADVERTISING
8. (a) Licensee shall advertise and actively promote the Licensed Business authorized by this Agreement. It is expressly understood and agreed that all signs, advertising copy including but not limited to sales brochures, newspaper advertisements, radio and television commercials, and all sales promotional plans and devices, and all customer contract forms, guarantee certificates and other forms and materials which may be utilized with respect to said Licensed Business, shall be first submitted for approval to Sears Marketing Manager Licensed Businesses in Hoffman Estates, Illinois and Licensee further agrees that it will not issue any such advertising material or conduct any such sales promotional plan or device without such prior approval. Sears shall have the right to disapprove all the aforesaid advertising forms and other materials insofar as it does not properly use Sears trademarks, service marks or trade names; may subject Sears to liability, loss of good will, damage to Sears reputation or Sears customer relations; may fail to adhere to the requirements or any Federal, State or Local governmental rules, regulations and laws; or may fail to conform to community or Sears standards of good taste and honest dealing. At Licensee's option and request, Sears may purchase newspaper advertising and/or electronic media time for Licensee at Licensee's expense for said concession, provided that Licensee provides Sears with all necessary information for any requested advertising at least seven days prior to the date such advertising is to be run.
REIMBURSEMENT
(b) Licensee hereby agrees to reimburse Sears for all expenses, including but not limited to advertising, incurred by Sears on behalf of Licensee and requested by Licensee, within thirty (30) days after the invoice for said expense(s) is sent by Sears to Licensee. If Sears does not receive reimbursement prior to the expiration of said thirty (30) days, then Sears shall have the right, but not the obligation, to retain out of Licensee's sales receipts described in Paragraph 29 the amount of said expense(s) with interest, if any, due to Sears.
PUBLICITY
9. Licensee will not issue any publicity or press release regarding its contractual relations with Sears or regarding the Portrait Business in Sears stores, and will refrain from making any reference to this Agreement or to Sears in any prospectus, annual report or other filing required by Federal or state law, or in the solicitation of business, without obtaining Sears prior written approval of such action.
RELATIONSHIP
10. Licensee is an independent contractor. Nothing contained in or done pursuant to this Agreement shall be construed as creating a partnership, agency or joint venture; and neither party shall become bound by any representation, act or omission of the other party.
PRICES
11. Sears has no right or power to establish or control the prices at which Licensee offers service and/or merchandise in the Licensed Business. Such right and power is retained by Licensee.
LICENSEE'S OBLIGATIONS
12. (a) Licensee will not make purchases or incur any obligation or expense of any kind in the name of Sears. Prior to any purchases involving the Licensed Business, Licensee shall inform its vendors that Sears is not responsible for any obligations incurred by Licensee. At Sears request, Licensee shall furnish to Sears the names of all parties from whom Licensee purchases merchandise or with whom Licensee may have any business or contractual relations in connection with the Licensed Business.
(b) Licensee shall promptly pay all its obligations, including those for labor and material, and will not allow any liens to attach to any Sears or customer's property as a result of Licensee's failure to pay such sums.
LICENSEE'S EMPLOYEES
13. (a) Licensee shall employ all management and other personnel necessary for the efficient operation of the Licensed Business. The Licensed Business shall be operated solely by Licensee's employees, and not by independent contractors, sub-contractors, sub-licensees or by any other such arrangement.
(b) Licensee has no authority to employ persons on behalf of Sears and no employees of Licensee shall be deemed to be employees or agents of Sears. Licensee has sole and exclusive control over its labor and employee relations policies, and its policies relating to wages, hours, working conditions, or conditions of its employees. Licensee has the sole and exclusive right to hire, transfer, suspend, lay off, recall, promote, assign, discipline, adjust grievances and discharge its employees, provided, however, that at any time Sears so requests, Licensee will consider transferring from the Licensed Business any employee who is objectionable to Sears because of risk of harm to the health, safety and/or security of Sears customers, employees or merchandise and/or whose manner impairs Sears customer relations. If Sears objects to any of Licensee's employees, and Licensee refuses to remove such employee and the conditions which caused Sears to object continue, Sears may terminate any affected location by giving thirty (30) days notice to Licensee.
(c) Licensee is solely responsible for all salaries and other compensation of its employees and will make all necessary salary deductions and withholdings from its employees' salaries and other compensation. Licensee is solely responsible for so paying any and all contributions, taxes and assessments and all other requirements of the Federal Social Security, Federal and state unemployment compensation and Federal, state and local withholding of income tax laws on all salary and other compensation of its employees.
(d) Licensee will comply with any other contract, Federal, state or local law, ordinance, rule, or regulation regarding its employees, including Federal or state laws or regulations regarding minimum compensation, overtime and equal opportunities for employment, and, in particular, Licensee
will comply with the terms of the Federal Civil Rights Acts, Age Discrimination in Employment Act, Occupational Safety and Health Act, and the Federal Fair Labor Standards Act, whether or not Licensee may otherwise be exempt from such acts because of its size or the nature of its business or for any other reason whatsoever.
LICENSEE'S EQUIPMENT
14. (a) Entirely at its own expense, Licensee shall install furniture, fixtures, and equipment, including cash registers as necessary for the efficient operation of the Licensed Business ("Licensee's Equipment"). Licensee's Equipment, and its size, design and location, shall at all times be subject to Sears approval.
PROHIBITED LIENS
(b) Licensee shall not allow any liens, claims or encumbrances to attach to Sears premises. In the event any lien, claim or encumbrance attaches to Sears premises, Licensee shall immediately take all necessary action to cause such lien, claim or encumbrance to be released, or Sears, at its option, may take such action and charge Licensee or withhold from sales receipts all expenses, including attorneys' fees, incurred by Sears in removing such liens.
MERCHANDISE STOCK
15. Licensee shall maintain a stock of good quality merchandise as necessary to assure efficient operation of the Licensed Business.
STANDARDS
16. Licensee shall provide Sears with copies of its written procedures and policies establishing minimum standards of quality and/or performance. Licensee shall immediately advise Sears of any changes in its standards. Without limiting Paragraph 26, Licensee shall observe no less than such minimum standards of quality and/or performance. Sears may visit Licensee's offices, work sites and/or other place of business at any reasonable time for the purpose of verifying Licensee's compliance with its standards of quality and/or performance.
CONDITION OF LICENSED BUSINESS AREA
17. (a) Licensee shall be primarily responsible for any preparations necessary for the operation of the Licensed Business.
(b) Licensee shall, at its expense, keep the Licensed Business area in a thoroughly clean and neat condition and shall maintain Licensee's Equipment in good order and repair. Sears shall provide routine janitorial service in the Licensed Business area, consistent with the janitorial services regularly performed in the Designated Sears Store.
HOURS, RULES
18. (a) The Licensed Business shall be kept open for business and operated during the same business hours that the Designated Sears Store is open for business, or by specific agreement with store management, except to the extent prevented by circumstances beyond the control of Sears or Licensee.
(b) Licensee shall conduct its operations in an honest, courteous and efficient manner and abide by safety and security rules and regulations of Sears in effect from time to time.
ACCESS TO LICENSED BUSINESS AREA
19. Licensee shall have access to the Licensed Business area at all times that the Designated Sears Store is open to customers for business and at all other times as the appropriate Store Manager approves. Sears shall be furnished with keys to the Licensed Business area and shall have access to the Licensed Business area at all times.
PHYSICAL INVENTORY
20. Sears may, solely at Sears discretion, not open any Designated Sears Store at any time to take a physical inventory of Sears property. Licensee waives any claim it may have against Sears for damages resulting from such closing.
CHANGES OF LOCATION
21. (a) Sears shall have the right to change the location, dimensions and square footage of the Licensed Business from time to time during the Term of this Agreement in accordance with Sears judgment as to what arrangements will be most satisfactory for the general good of the Designated Sears Store(s). Consistent with the parties strategic development plans set forth in Paragraph 6, Licensee shall bear all expenses involved in moving Licensee's Equipment and all expenses for preparing the new space for occupancy by Licensee. Such expenses shall be allocated by Sears to
Licensee based on the average cost per square foot each year as set forth in the Means Building Construction Costs Data - Annual Edition.
(b) Notwithstanding the above, if Sears at its sole discretion decides that the Licensed Business' location should be changed, Sears will move Licensee's Equipment to the new location and prepare the new space for occupancy by Licensee. Sears shall bear all expense involved in such change of the Licensed Business' location, including the reasonable cost of new fixtures if the Licensed Business' then existing fixtures reasonably adapted to the new location. The provision of this Paragraph shall be applicable only to a second move of the Licensed Business' location and/or any subsequent move(s) during the term of this Agreement.
UTILITIES
22. (a) Sears shall furnish, at reasonable hours, and except as otherwise provided, without expense to Licensee, a reasonable amount of heat, light and electric power for the operation of the Licensed Business, except when prevented by strikes, accidents, breakdowns, improvements and repairs to the heating, lighting and electric power systems or other causes beyond the control of Sears. Sears shall not be liable for any injury or damage whatsoever which may arise by reason of Sears failure to furnish such heat, light and electric power, regardless of the cause of such failure, all claims for such injury or damage are expressly waived by Licensee.
(b) The expense of installing light and power lines which may be required in order to bring such utilities up to the Licensed Business area shall paid by Licensee. The expense of purchasing and installing all fixtures and equipment within the area occupied by the Licensed Business, including all necessary electrical connections for the Licensed Business, and also including the subsequent maintenance of fixtures and equipment, shall be paid by Licensee.
TELEPHONE
23. (a) If requested by Licensee, Sears will arrange for telephone service for the Licensed Business, and Licensee shall pay the entire cost of the installation of the telephone equipment necessary to provide such service. Licensee shall also pay the entire cost of the telephone service furnished to the Licensed Business, including the pro rata cost of the operation, maintenance, expense, property taxes, insurance
expense, corporate interest expense, and/or payment charges of the switchboard or telephone communication system at the Designated Sears Store(s). Such charges shall be consistent with Sears charges to its own merchandising departments for similar service.
(b) All telephone numbers used in connection with the Licensed Business shall be separate from phone numbers used by Licensee in its other business operations and such numbers shall be deemed to be the property of Sears. Upon expiration or termination of this Agreement, Licensee shall immediately cease to use such numbers and shall transfer such numbers to Sears or to any party Sears designates, and Licensee shall immediately notify the telephone company of any such transfer.
(c) Sears shall have the right to approve, before placement, all yellow and white page telephone listings for the Licensed Business. Sears may, at its sole option, require that any telephone number listed in any telephone directory using Sears name be billed through a Sears store or office.
BILLING OF CUSTOMERS
24. Customers will not be billed, and no settlement will be made between the parties with respect to any cash or credit transaction until Licensee has completed the sale or service for the customer, or until Licensee and the customer have executed an agreement whereby Licensee will provide future services for the customer.
QUOTATIONS, ORDERS
25. All quotations for Licensee's service made to customer by Licensee shall be in writing, or by telephone authorization from the customer, and such service shall be performed only upon receipt of a written order signed by such customer. The content of the forms used for making quotations and for taking orders shall be satisfactory to both parties. Licensee shall not charge customers for estimates or proposals.
CUSTOMER ADJUSTMENT
26. All of the work and services performed by Licensee in connection with the Licensed Business shall be of a high standard of workmanship, and all of the merchandise sold in the Licensed Business shall be of high quality. Licensee shall at all times maintain a general policy of "Satisfaction Guaranteed" to customers and shall adjust all complaints of and controversies with customers arising out of the operation
of the Licensed Business. In any case in which an adjustment is unsatisfactory to the customer, Sears shall have the right, at Licensee's expense, to make such further adjustment as Sears deems necessary under the circumstances, and any adjustment made by Sears shall be conclusive and binding upon Licensee.
Licensee shall maintain files pertaining to customer complaints and their adjustment and make such files available to Sears. Sears may deduct the amounts of any such adjustments from the sales receipts held by Sears as described in Paragraph 29.
CHECKS
27. (a) All checks or money orders which Licensee accepts from customers shall be made payable to Sears, Roebuck and Co.. Licensee shall make certain that all checks are filled out correctly, having the customer's signature, date, and the correct amount (in both locations), and be verified in accordance with Sears policies in effect from time to time. Checks which are deficient in any of the above areas may be charged back to Licensee, and Licensee shall reimburse Sears for any of Sears Commission lost as a result of Licensee's failure to obtain a properly filled out and verified check.
(b) Sears shall not be entitled to Sears Commission for those checks that have all of the above information but which are not paid upon presentment. Any and all losses which may be sustained by reason of nonpayment of any checks upon presentment shall be borne by Licensee, and Sears shall have no liability with respect to such checks, provided that Sears will make whatever effort it deems reasonable to collect all such checks prior to charging back such checks to Licensee.
BAD CHECKS
(c) After Sears has made at least one attempt to collect any bad or returned checks a photocopy of the check will be made and kept on file in each Sears store. On a monthly basis, each Sears store will return the checks to Licensee in the pre-addressed, postage paid envelopes provided by Licensee. Attached to the checks will be a tape total, to include the store number, the charge back month, and the total being deducted from the settlement. Licensee assumes responsibility for checks lost in the mail. Each Sears store will maintain a file of duplicate copies for ninety (90) days and Sears will assume liability for the duplicate totals that do not balance to the deductions on the monthly settlement report. Such liability ceases in ninety (90) days.
CREDIT SALES
28. (a) With the approval of the Credit Central designated by Sears, sales may be made by Licensee on such of Sears regularly established credit plans, including Discover Card, Visa, Mastercard and American Express, as may be first approved by such Credit Central. The approval of such Credit Central is required for each individual credit sale, and approval shall be granted in the sole discretion of the Credit Central. No part of the finance charge which may be earned by Sears in connection with any credit sale shall be payable to or credited in any way to Licensee. All losses sustained by Sears as a result of non-payment of a Sears credit account shall be borne by Sears, provided that Licensee has complied with Sears credit policies and procedures. Except for non- payment of a Sears credit account, Sears shall have no liability whatsoever to Licensee for Sears failure to properly accept or reject a customer's charge.
(b) Licensee will comply with all provisions of Federal and state laws governing credit sales, and their solicitation, including but not limited to provisions dealing with disclosures to customers and finance charges. Licensee shall not modify, in any way, the terms and conditions of Sears credit plans.
SALES RECEIPTS
29. At the close of each business day, Licensee shall submit an accounting of the gross sales and the returns, allowances and customer adjustments made during such day by Licensee to the cashier office of the Sears unit designated by Sears, together with the gross amount, in cash, of all cash sales, and all credit sales documents for transactions completed that day. An account shall be kept by both Licensee and Sears. Sears may retain out of such receipts the proper amount of the Sears Commission payable under this Agreement together with any other sums due Sears from Licensee. The remaining balance shall be payable to Licensee at the regular settlement. Sears shall maintain in each location, complete register tapes of Licensee's transactions for a sixty (60) day period.
SETTLEMENT
30. (a) A settlement between the parties shall be made promptly each month for all cash and credit transactions of Licensee during such period, in accordance with Sears
customary accounting procedures. Such settlement will be done through the Sears Accounting Center designated by Sears. Sears will advance Licensee eighty-five percent (85%) of net sales weekly.
(b) Licensee shall reimburse Sears at each settlement for all invoiced expenses, including any advertising expense, incurred by Sears at Licensee's request, outstanding at the time of such settlement. If Sears is not reimbursed at such settlement, then Sears shall have the right, but not the obligation, to retain out of Licensee's sales receipts the amount of such expenses with interest, if any, due Sears.
AUDIT
31. Licensee shall keep and maintain books and records which accurately reflect the sales made by Licensee under this License Agreement and the expenses which Licensee incurs in performing under this License Agreement. Sears shall have the right at any reasonable time to review and audit the books and records of Licensee regarding this License Agreement. Such books and records shall be kept and maintained according to generally accepted accounting principles.
REPORTS
32. (a) Licensee shall provide to Sears a monthly report of sales and income in the manner and form prescribed by Sears, together with any other information Sears may require for its records or auditing purposes.
(b) Licensee shall submit its financial report to Sears annually within ninety (90) days after the close of Licensee's fiscal year. Such report shall be certified by an accountant, or by an officer of Licensee in the event that no audit is performed. Such report shall include, but shall not be limited to, Licensee's profit and loss statement and balance sheet, and shall be prepared in accordance with generally accepted accounting principles. This requirement may be fulfilled by submission of Licensee's Annual Report. Sears shall not disclose any such information which is not available to the public to any third parties without Licensee's prior consent.
WAIVER
33. Licensee waives any and all claims it may have against Sears for damage to Licensee, for the safekeeping or safe delivery or damage to any property whatsoever of Licensee or of any customer of Licensee in or about the Licensed Business area, because of the actual or alleged negligence, act or omission of any tenant, licensee or occupant of the premises at which the Licensed Business may be located; or because of any damage caused by any casualty from any cause whatsoever, excluding Sears sole negligence, including but not limited to, fire, water, snow, steam, gas or odors in or from such store or store premises, or because of the leaking of any plumbing, or because of any accident or event which may occur in such store or upon store premises; or because of the actual or alleged acts or omissions of any janitors or other persons in or about such store or store premises or from any other such cause whatsoever beyond Sears Control.
INDEMNITY BY LICENSEE
34. Licensee covenants that it will protect, defend, hold harmless and indemnify Sears, its directors, officers and employees, from and against any and all expenses, claims, actions, liabilities, penalties, attorneys' fees, damages and losses of any kind whatsoever (including, without limitation of the foregoing, death of or injury to persons and damage to property), actually or allegedly resulting from or connected with the operation of the Licensed Business (including, without limitation of the foregoing, goods sold, work done, services rendered, or products utilized in therein, lack of repair in or about the area occupied by the Licensed Business, operation of or defects in any machinery, motor vehicles, or equipment used in connection with the Licensed Business, or located in or about the Licensed Business area; or arising out of any actual or alleged infringement of any patent or claim of patent, copyright or non-Sears trademark, service mark, or trade name); or from the omission or commission of any act, lawful or unlawful by Licensee or its agents or employees, whether or not such act is within the scope of the employment of such agents or employees. This indemnity shall not apply to the extent any injury or damage is caused solely by Sears negligence. Licensee's indemnity shall survive the termination of this Agreement.
INSURANCE
35. (a) Licensee shall, at its sole expense, obtain and maintain during the Term of this Agreement the following policies of insurance from companies satisfactory to Sears and containing provisions satisfactory to Sears and adequate to fully protect Sears as well as Licensee from and against all expenses, claims, actions, liabilities and losses related to the subjects covered by the policies of insurance below:
(1) Worker's Compensation Insurance containing a waiver of subrogation in favor of Sears (where permitted by state law) executed by the insurance company and covering all costs, benefits and liability under state Worker's Compensation and similar laws which may accrue in favor of any person employed by Licensee; and Employer's Liability Insurance with limits of not less than $100,000.
(2) Commercial General Liability Insurance, including but not limited to coverage for product liability and completed operations insurance, and containing a Contractual Liability Endorsement specifically covering the indemnity provisions in this Agreement, with limits of not less than $500,000 for bodily injury per occurrence and $100,000 for property damage per occurrence.
(3) Motor Vehicle Liability insurance with an Employer's Non-Ownership Liability Endorsement in Licensee's name covering all vehicles used by Licensee in connection with the Licensed Business, with limits of not less than $500,000 combined single limit for bodily injury and property damage per occurrence.
(4) Fire and Extended Coverage Insurance upon Licensee's property, equipment and merchandise used in the Licensed Business for the full insurable value thereof and containing a waiver of subrogation in favor of Sears executed by the insurance company.
(b) In order to avoid conflicts between insurance companies, Licensee shall use its best efforts to have all policies of insurance required by this Paragraph issued by one (l) insurance company. Each policy shall name Sears as an additional insured and shall contain a severability of interest/cross liability endorsement.
(c) Licensee's policies of insurance shall expressly provide that they shall not be subject to material change or cancellation without at least thirty (30) days' prior notice to Sears.
(d) Licensee shall furnish Sears with certificates of insurance or, at Sears request, copies of policies, prior to execution of this Agreement. If, in Sears opinion, such policies do not afford adequate protection for Sears, Sears will so advise Licensee, and if Licensee does not furnish evidence of acceptable coverage within fifteen (15) days, Sears shall have the right, at its option, to obtain additional insurance at the expense of Licensee and deduct the cost of such insurance from the sales receipts held by Sears as described in Paragraph 29 of this Agreement.
(e) Any approval by Sears of any of Licensee's insurance policies or additional insurance obtained by Sears shall not relieve Licensee of any responsibility under this Agreement, including liability for claims in excess of described limits.
MUTUAL RIGHT OF TERMINATION
36. Either party may terminate this Agreement, or any location, without cause, without penalty, and without liability for any damages as a result of such termination, at any time hereafter by giving the other party at least ninety (90) days' prior notice. The notice shall specify the termination date.
ASSIGNMENT BY LICENSEE
37. Notwithstanding any other provision contained in this Agreement, this Agreement is not transferable by Licensee in whole or in part without Sears prior written consent. Any transfer or attempt to transfer by Licensee whether expressly or by operation of law, and without Sears prior written consent, shall, at the option of Sears, without notice, immediately terminate this Agreement. The sale of Licensee's business or any other transaction (including sales of stock) which shifts the rights or liabilities of Licensee to another controlling interest shall be such a transfer.
RIGHT TO TERMINATION ON DEFAULT BY LICENSEE
38. If any property of Licensee passes into the hands of any receiver, assignee, officer of the law or creditor, or if Licensee vacates, abandons, or ceases to operate under this Agreement, or if Licensee fails to comply with any material provision or condition of this Agreement, then Sears may terminate this Agreement immediately by giving notice to Licensee.
RIGHT TO TERMINATION ON CLOSING OF STORE
39. Sears may, solely at Sears discretion, terminate this Agreement in any affected Licensed Business location without notice, due to the closing of the Designated Sears Store. Licensee shall not be entitled to any notice of such store closing prior to a public announcement of such closing. Licensee waives any claim it may have against Sears for damages, if any, incurred as a result of such closing.
RIGHT OF TERMINATION AFTER FIRE
40. If any Designated Sears Store is damaged by fire or any other casualty so that the Licensed Business area becomes untenantable, this Agreement may be terminated with respect to such Licensed Business location, effective as of the date of such casualty, by either party giving the other party written notice of such termination within twenty (20) days after the occurrence of such casualty. If such notice is not given, then this Agreement shall not terminate, but shall remain in full force and effect and the parties shall cooperate with each other so that Licensee may resume the conduct of business as soon as possible.
SUBJECT TO STORE LEASES
41. If any Designated Sears Store is leased to Sears this Agreement shall be subject to all of the terms, agreements and conditions contained in such lease. In the event of the termination of any such lease by expiration of time or otherwise, this Agreement shall immediately terminate with respect to affected Licensed Business locations.
FUTURE OBLIGATIONS
42. After the termination of this Agreement by expiration of time or otherwise, Licensee shall have no right or interest in future contracts with Sears relating to any operation similar to that under this Agreement, and Sears may, without incurring any liability to Licensee:
(1) enter into an agreement for the operation of a similar business with any person or organization Sears chooses, including, but not limited to, Licensee or any of Licensee's counterparts, or
(2) directly operate a similar business itself.
GOODWILL
43. Licensee acknowledges that the commission rate established by this Agreement takes into consideration that all good will generated by the operation of the Licensed Business inures completely to the benefit of Sears and that Licensee has no right or interest in such good will. "Good will" includes all ownership rights in any information regarding the customers of the Licensed Business.
DATA
44. Any customer list developed by Licensee, its employees or agents from the operation of, or from records generated as a result of the operation of the Licensed Business, are deemed exclusively owned by Sears. Licensee shall not use or permit use of such customer information for any purpose except the performance of this Agreement. Licensee shall at all times maintain any such customer information, including lists, physically separate and distinct from any customer information Licensee may maintain that is unrelated to the Licensed Business. Licensee shall not reproduce, release or in any way make available or furnish, either directly or indirectly, to any person, firm, corporation, association or organization at any time, any such customer information which will or may be used to solicit sales or business from such customers, including but not limited to the type of sales or business covered by this License Agreement. Upon termination of this Agreement for any reason, Licensee shall immediately deliver all copies of lists of customers and copies of all other such customer information to Sears; and Licensee, its officers, employees, successors and assigns, shall not use any such customer information to solicit any of such customers. Licensee shall protect all such customer information from destruction, loss or theft during the term of this Agreement, and until all copies of customer lists and copies of all other customer information are turned over to Sears.
SEARS OPTION TO PURCHASE LICENSEE'S EQUIPMENT
45. In the event of the termination of this Agreement by expiration of time or otherwise, Sears shall have the right, but not the obligation, to purchase from Licensee, and Licensee shall convey and sell to Sears, such items of Licensee's Equipment excluding Licensee's software as Sears may designate in a written notice given to Licensee at least twenty (20) days prior to the effective date of such
termination. Sears shall pay Licensee the fair market value of such items as of the effective date of such termination. In the event that Licensee and Sears are unable to agree upon such fair market value, Sears may waive its right to purchase and have no obligation to Licensee, or, at Sears option, such fair market value shall be ascertained by an independent appraiser mutually acceptable to Licensee and Sears. Any fee of such appraiser shall be borne equally by Licensee and Sears.
REMOVAL OF LICENSEE'S EQUIPMENT
46. Upon the termination of this Agreement by expiration of time or otherwise, Licensee shall, at its expense, immediately remove all of Licensee's Equipment (except such of Licensee's Equipment as may be purchased by Sears as provided in Paragraph 45) from Sears premises and shall, without delay and at Licensee's expense, repair any damage to Sears premises caused by such removal.
SURVIVAL OF OBLIGATIONS
47. No termination of this Agreement, by expiration of time or otherwise, shall relieve the parties of liability for obligations arising out of the operation of the Licensed Business before termination.
LICENSES, LAWS, ORDINANCES
48. Licensee shall, at its expense, obtain all permits and licenses which may be required under any applicable Federal, state, or local law, ordinance, rule or regulation by virtue of any act performed in connection with the operation of the Licensed Business. Licensee shall comply fully with all applicable Federal, state and local laws, ordinances, rules and regulations, including all rules and regulations of the Federal Trade Commission.
FEES, TAXES
49. Licensee shall, at its expense, pay and discharge all license fees, business, use, sales, gross receipts, income, property or other applicable taxes or assessments which may be charged or levied by reason of any act performed in connect ion with the operation of the Licensed Business, excluding, however, all taxes and assessments applicable to Sears income from Sears Commission or applicable to Sears property.
REMEDIES CUMULATIVE
50. The remedies provided in this Agreement are cumulative, and shall not affect in any manner any other remedies that either party may have for any default or breach by the other party. The exercise of any right or remedy shall not constitute a waiver of any other right or remedy under this Agreement or provided by law or equity. No waiver of any such right or remedy shall be implied from failure to enforce any such right or remedy other than that to which the waiver is applicable, and only for that occurrence.
ASSIGNS
51. The provisions of this Agreement shall be binding upon Licensee and upon Licensee's successors and assigns and shall be binding upon and inure to the benefit of Sears, its successors and assigns.
NOTICES
52. All notices provided for or which may be given in connection with this Agreement shall be in writing and given by personal delivery or certified or registered mail with postage prepaid and return receipt requested or its equivalent, such as private express courier. Notices given by Licensee to Sears shall be addressed to:
SEARS, ROEBUCK AND CO. Attention:Divisional Vice-President, Sears, Roebuck and Co. 3333 Beverly Road Hoffman Estates, Illinois 60179
with a copy to:
SEARS, ROEBUCK AND CO., D/725 Attention:Portrait Studio Licensing Manager
addressed to:
CONSUMER PROGRAMS INCORPORATED 1706 Washington Ave St. Louis, MO 63103 Attention:C.E.O. and President Telephone:(314) 231-1575
Notices if so sent by mail shall be deemed to have been given when deposited in the mail or with the private courier.
ILLEGAL PROVISION
53. If any provision in this Agreement is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been included.
GOVERNING LAWS
54. This Agreement shall be interpreted and governed by laws of the State of Illinois.
ENTIRE AGREEMENT
55. This Agreement sets forth the entire agreement and understanding between the parties with respect to the Licensed Business. This Agreement shall not be supplemented, modified or amended except by a written instrument signed by Licensee (or duly authorized officer if Licensee is a corporation) and by a duly authorized-officer or agent of Sears, and no person has or shall have the authority to supplement, modify or amend this Agreement in any other manner.
PARAGRAPH TITLES
56. The paragraph titles in this Agreement are for the mere convenience of the parties, and shall not be considered in any construction or interpretation of this Agreement.
AGREEMENT SUPERSEDED
57. This Agreement supersedes the License Agreement made and entered into as of January l, 1991, by and between Sears and CONSUMER PROGRAMS INCORPORATED (Superseded Agreement).
Such Superseded Agreement shall be deemed terminated as of the close of business on December 31, 1993, provided, however, that Licensee shall be responsible for any and all obligations of the licensee under the Superseded Agreement arising out of the operation of the Licensed Business prior to the termination of the Superseded Agreement.
IN WITNESS WHEREOF, the parties hereto have this day set their hands, the corporate party or parties by its or their duly authorized officers or agents.
SEARS, ROEBUCK AND CO.
By: /s/ Kenneth E. Hux ----------------------------- Divisional Vice-President, Licensed Businesses
CONSUMER PROGRAMS INCORPORATED
By: /s/ Russell Isaak -----------------------------
DESIGNATED SEARS STORES AS OF JANUARY 1, 1994
1. [Deleted Pursuant to Request for Confidentiality Treatment.]
2. [Deleted Pursuant to Request for Confidentiality Treatment.]
3. [Deleted Pursuant to Request for Confidentiality Treatment.]
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Exhibit (11)
CPI CORP. COMPUTATION OF EARNINGS PER COMMON SHARE FISCAL YEARS ENDED FEBRUARY 5, 1994, FEBRUARY 6, 1993 AND FEBRUARY 1, 1992
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Exhibit (13)
1993 ANNUAL REPORT TO SHAREHOLDERS
On the following pages is CPI Corp. 1993 Annual Report to Shareholders.
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(Front cover of Annual Report to Shareholders)
"Growth becomes most apparent when viewed over the long term."
CPI Corp.
1993 Annual Report to Shareholders
(Pictures: five pictures of a boy from birth to early teens)
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CPI AT A GLANCE
CPI Corp.'s cash flow has remained strong, even as profits have declined over the past three years. The profit decline is primarily the result of significantly increased competition in the portrait photography industry, causing margin deterioration. While this competitive environment has not abated, management believes that the next few years will show improved performance in operating earnings because of marketing innovations and expansion of the Company's various divisions.
CPI primarily operates businesses that provide reasonably priced, professionally performed consumer services-portrait photography, photofinishing and electronic publishing-throughout the U.S. and Canada through over 1,800 retail locations, including a newly entered fourth business-posters, prints and framing retailing. A brief review of the divisions follows:
Leading position in the highly competitive preschool portrait photography market
- -As the exclusive Sears Portrait Studios operator, CPI continues a 33-year partnership, with 900 studios in all major Sears stores in the U.S. and Canada, and 92 studios in non-Sears shopping centers.
- -Despite a dramatic increase in competition in the last three years, the Company has maintained its market position while concurrently developing new marketing programs employing digital imaging technology to significantly enhance products and services. In the next two years CPI will install this technology in all studios as the first phase of a 5-year, $75 million development program, in which studio capability to serve customers will be elevated to a new level.
Leading position in the competitive, fragmented photofinishing market
- -From a start-up venture in 1982, this business has developed into CPI's second major segment.
- -Through a combination of new store openings and acquisitions, the most significant of which was over 300 Fox Photo labs in 1991, the division has expanded to its present 670 locations, the largest such operation in the U.S.
- -While photofinishing is the primary customer service, significant revenues are generated from additional services and products provided to those customers. Full service to serious photographers is the hallmark of this enterprise.
- -The segment recorded significant operating earnings in 1993 despite increased competition from supermarkets, drug stores and mass merchants, and continues to generate consistently strong cash flow.
Entry into new industry with acquisition of profitable retail chain
- -Prints Plus is the leading non-franchise posters, prints and framing retailer in the U.S., offering unparalleled product selection tailored to each market's tastes, and "while-you-wait" framing service.
- -Acquired in late May, the new business contributed significantly to CPI's 1993 operating earnings.
- -Plans call for the addition of 15 locations per year to the chain's 1993 year-end 103 stores in prime mall locations.
Conceptual development in digital graphics industry
- -Applying its skill in managing remote retail locations, CPI is developing a chain of high-tech copy stores.
- -Two experimental concept stores are exploring digital graphics technology that could have ongoing impact on CPI's present businesses.
Growth Resources
Capital for the expansion and upgrading of CPI's various businesses will come from operating cash flow, which has averaged $47.9 million over the past five years, with supplemental funding provided by the 1993 $60 million private note placement.
ACCOMPLISHMENTS AND HIGHLIGHTS
1993 Accomplishments
- -Maintained Portrait Studio market position through aggressive promotional campaign, despite continuing increase in competition.
- -Developed highly attractive new portrait studio products that utilize new digital imaging technology. Complete rollout expected by end of 1995.
- -Entered into new five-year license agreement with Sears, Roebuck and Co.
- -Continued expansion of Photofinishing segment, with increased sales and healthy cash flow, although earnings declined in the face of growing competition.
- -Acquired Prints Plus, the nation's leading non-franchised prints, poster and framing service retailer.
- -Secured $60 million in long-term capital for development of businesses, both technologically and geographically.
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Tables: Although portrait studio sales declined in 1993 because of competitive and economic conditions, photofinishing and other sales increased, primarily due to revenues from recent acquisitions. Portrait studio earnings were significantly lower. A decline in photofinishing results was more than offset by other gains. Cash flow from operations was relatively strong, despite a significant drop in total operating earnings. PAGE
OVERVIEW
A Management Company CPI is a retail management company, not a collection of separate enterprises. How they are run and what is required to run them is more important than what they do.
Over CPI's history of more than 50 years, a particular management method has evolved to encompass: - - functional organizational structure - - highly quantitative marketing techniques - - effective hiring, training and motivation programs - - specialized statistical and accounting controls
These tools are all employed with relative comfort by a pool of professionals who are able to transfer their special skills to new, but related venues of service retailing.
Business Philosophy The depth of experience and leadership skills of senior management have helped develop CPI's philosophy of concentration on long-term progress, rather than focusing on short-term achievements or setbacks. Results over the past three years have tested this principle. Although the Company has experienced profit erosion over this period, its philosophy has been validated over the long-term by solid earnings per share, the traditional measure of performance. Furthermore, strong cash flow, even in the recent period, has enabled CPI to protect shareholder value through expansion, acquisitions, dividends and repurchase of shares.
Distinct Differences CPI differs from typical retailers in several significant aspects:
- --Whereas most retailers focus on the display and resale of products, CPI's businesses focus more on providing high value-added services. These services employ state-of-the-art technology and yield gross margins significantly above industry norms. That technology has required a significant investment in production equipment, much of it developed internally on a proprietary basis.
- --The management of inventory is a continuing challenge for most retailers. The three typical problems in this area are onerous working capital requirements, obsolescence and shrinkage. Three of CPI's businesses have significant freedom from each of these. Inventory consists primarily of production materials related to work in progress and is relatively small compared to that of typical retailers. Therefore it is less burdensome on working capital. Obsolescence is not a factor because CPI's services take the form of personalized products, i.e., a customer's vacation pictures, or portraits of a customer's baby. Finally, shrinkage is non-existent because the pictures are valuable only to the purchaser. PAGE
- --While CPI's recent performance has been hampered by intensified competition, particularly in the preschool portrait market, the economic climate of the last few years was also an adverse influence. However, the Company's two major businesses are probably less negatively affected by general economic downturns than are many retailers. This is because much of the Company's activity is driven by time-specific personal events, such as birthdays, graduations, vacations or holidays. Customers do not casually defer such purchases.
The Company, however, has an open mind to investment in more traditional retail businesses if they offer high profit potential and can employ complementary management abilities. In May 1993, CPI made such an investment with the acquisition of the Prints Plus chain of wall decor stores that offer prints, posters and custom framing. While inventory is more of a factor, the business still offers high value-added margin potential.
Much of CPI's success has been the result of identifying high-growth, high-margin consumer businesses that are: - - responsive to promotional marketing - - easily taught to employees - - controllable through data monitoring - - repeatable through small-scale operating units - - expandable geographically on a broad scale
By adding these proven CPI skills to the existing management expertise in other more traditional retail organizations, the Company can continue to build on its existing solid base and extend itself more broadly.
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Tables: Since 1983, the compound annual sales growth rate has averaged 13.7% through 1993, although earnings per share from continuing operations have declined in the past three years.
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FINANCIAL HIGHLIGHTS
(Pictures: a chart showing Stock Trading Price and Volume provided by Standard and Poor's as of April 15, 1994 is shown on this page)
Symbol/Market: CPY (NYSE) Market Price: 14 7/8 (4/15/94) Price Range: 18 1/4-13 7/8 (12 months ended 4/15/94) Market Capitalization: $214.7 million (4/15/94) Shares Outstanding: 14,433,704 (4/15/94) 12 Months Net Earnings Per Share: $0.90 (FY '93) Dividend Rate: $0.56 per share Current P/E: 16.5 (4/15/94)
Sales and Earnings From the initial public offering in 1982 through fiscal 1990, CPI averaged a compound annual growth in sales of 16.2% and in earnings per share from continuing operations of 19.1%. Net earnings as a percentage of sales averaged 8.1% during this period, and the average return on equity was 30.2%. The growth was due primarily to the aggressive expansion of the Sears Portrait Studios operation and, secondarily, to the 1982 launch and subsequent development of the CPI Photo Finish division. Although sales have continued to increase to the present, primarily due to acquisitions, earnings have declined each of the past three years as a result of an increasingly competitive retail environment and, to a lesser degree, the nation's continuing economic malaise.
Fiscal 1993 CPI's net sales for the 52-week period increased 5.8% to $475.5 million from $449.4 million for the 53 weeks of 1992, primarily due to expansion of the photofinishing segment, plus revenues from the Prints Plus acquisition. On a comparable 52-week basis, sales increased 7.4%. Earnings from continuing operations were $11.1 million versus the prior year's $22.6 million, while net earnings, PAGE
including a $2.1 million credit from an accounting change, were $13.2 million. Net earnings per share, including a $0.14 credit from the accounting change, declined to $0.90 from $1.54 in 1992.
Portrait Studios sales in 1993 were down 10.0% to $237.9 million from $264.4 million, while operating earnings declined to $30.0 million from $48.4 million (1992 and prior results restated: see explanation on page 139 of this document (Management's Discussion and Analysis of Financial Condition and Results of Operation-- Operating Income)). Management believes the segment managed to maintain its leading position in the preschool portrait market, although total sittings declined slightly due to the previously mentioned competitive and economic conditions. Even with these decreases, the Portrait Studio segment still delivered 12.6% operating margin on sales.
Photofinishing sales increased by 10.6%, to $187.2 million from $169.2 million, with most of the gain due to the full-year contribution of the Proex labs, which were acquired in late 1992, combined with marginal growth in the CPI and Fox Photo labs. Operating earnings declined to $7.0 million from $9.6 million (1992 and prior results restated: see explanation on page 139 of this document (Management's Discussion and Analysis of Financial condition and Results of Operation--Operating Income)), partly due to a shift in sales mix from photofinishing services to lower margin products.
Sales in the Other Products and Services segment were $50.4 million, up from $15.8 million. Most of the increase was the result of sales growth in the Prints Plus acquisition, although more recently opened electronic publishing markets recorded small gains. The segment recorded operating earnings of $1.1 million, mainly due to the Prints Plus contribution, versus a 1992 loss of $4.1 million (1992 and prior results restated: see explanation on page 139 of this document (Management's Discussion and Analysis of Financial Condition and Results of Operation--Operating Income)).
Financial Strength Cash and cash equivalents on February 5, 1994 stood at $66.4 million, bolstered primarily by a mid-year $60 million private note placement, compared to $21.0 million at the prior year's end. Cash disbursements in 1993 included $14.7 million in acquisitions, $30.4 million in capital expenditures, $8.2 million paid out in dividends and $0.7 million in stock repurchases. Cash reserves at year end represented 37.8% of shareholders' equity and long-term debt was 34.1%.
Shareholders' Equity From $22.8 million at the end of fiscal 1982, shareholders' equity reached $175.5 million in 1993, primarily through retained earnings. Cash returned to shareholders consisted of cumulative dividends of $48.1 million since the initiation of a regular PAGE
quarterly payment in December 1985, and $58.6 million used to purchase Company stock since the stock repurchase plan was authorized in September 1988.
Table: At the end of fiscal 1993, the Company's equity totaled $175.5 million, and cash and cash equivalents totaled $66.4 million. Cash flow from operations in 1993 was $39.4 million (See Consolidated Statements of Cash Flows on page 151-152 of this document), or 8.3% of sales and 22.9% of beginning equity.
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(Pictures: on this page are two pictures, one a line drawing showing a photographer using the Company's VideoVision equipment in 1982 and the second, an inset with calligraphy stating: Trust is the coin of the realm . . .)
TO OUR SHAREHOLDERS
Having just sent to all shareholders a comprehensive letter, the text of which is printed on page 119-121 of this report, it would be redundant to spend our time describing 1993 and 1994 operations. Instead, if you'll bear with my stepping outside of the Chairman's role, I'd like to tell you how I, as a long-term shareholder, view our company.
I believe CPI's current stock price is less than the underlying values of the operating businesses, even considering their less-than-satisfactory performance of the last three years. This leads to the logical conclusion that the additional qualities of trust and confidence are not being valued-an understandable result of normal shareholder turnover. During the last four years management has drawn on a reserve of shareholder confidence that should naturally arise from clear historical perspective, but since many of our shareholders are relatively new, that reserve may need to be supplemented. Let me offer some perspective through a short review of past annual reports in light of promises made and goals achieved:
Goal Setting
This management has been candid in establishing goals and, from time to time, defining expected achievements. They've successfully developed a profitable chain of almost a thousand Sears Portrait Studios and a high quality national photofinishing business with strong cash flows. Their failures include the Tender Sender experiment and the venture into department store portrait studios, both discontinued because of the difficulty in working through the turbulent department store channel. Management also took a shot at the business telephone industry which never quite got off the ground. So one might say that CPI has more failures than successes unless, of course, you tally the dollar values, which are very significantly on the positive side. In such analysis, one has to think twice about the classification of Sears Carpet Cleaning, which never turned into a successful operating business, but yielded almost $6 million pre-tax profit when sold.
In an operating context, management promised improvements with the introduction of the Sears Studio VideoVision System and then successfully proved that the system could increase productivity beyond expectations. VideoVision has not only served well for almost twelve years, but some of what was learned has opened new technological avenues. It was also about 1982 when management suggested that a successful photofinishing business would grow out PAGE
(Pictures: on this page are two pictures, one, a picture of the Company's 1986 Annual Report to Shareholders and the second, an inset with calligraphy stating: . . . and price is its valuation)
of the small existing nucleus. Early expectations for profit growth were more optimistic than realized. The 20% operating profit goal was achieved in many of the older locations, but with tighter competition and recessions to deal with, operating earnings on over 450 established stores (before goodwill and intangible write-offs) have been closer to the 13-16% range. In 1983 management projected 200 operating labs by 1988, but actually reached 276, and by 1993 year end numbered 670.
The Company has repeatedly called attention to the strong cash flow generated by the Photofinishing segment, explaining that the growth through acquisition and first-time installation of new retail units causes much larger reserves for depreciation and amortization than is necessary to replace and refurbish existing units. For example, the 1993 levels of depreciation and amortization are more than three times the expected maintenance capital for refurbishment and replacement, and even though 1993 was one of the most difficult in recent years, divisional results would indicate an excess of $12.7 million in net cash available. (Segment operating income plus segment depreciation and amortization, less allocated corporate overhead and appropriate income taxes, less reserve for replacement of photofinishing equipment at $10,000 a unit per year equals net cash available.) This represents over 10% of identifiable assets. Even in a good year most of us would probably be satisfied with those results.
Planning for Growth
As cash balances started to grow in the 1980s, many were fearful of diversionary investments. Management promised a soundly based acquisition policy following established principles and consistent with announced business philosophies. We should judge those commitments now by considering the acquisition of Fox Photo in 1991, Proex in 1992, and Prints Plus-the newest forward-looking adventure-in 1993. Looks like a pretty good record.
When accumulating cash exceeded management's needs for investment, the board authorized a stock repurchase program in 1988 of 2.5 million shares which was virtually completed by 1992, and then expanded by another 2 million shares. We can criticize those repurchases in terms of today's stock pricing, but the goal was not to beat the market. Management's objective was to return excess cash to shareholders who chose to sell their holdings.
In a 1986 essay, management told us that "growth should be carefully controlled in a well-defined, rational atmosphere, and managed in proportion to existing businesses and to overall size and capabilities." At the same time, they built a model on the PAGE
(Pictures: on this page are two pictures, one, a picture of the Company's 1988 Annual Report to Shareholders and the second, an inset stating: ". . . we might envision a return to double-digit compound growth.")
premise of 20% compound growth over a five-year time frame. That model essentially maintained its integrity through 1990, but the three years ending in 1993 have followed a different pattern. Although we've analyzed that three-year period as it happened, let's look at it in hindsight.
Redefining Sears Portrait Studios
In 1991, as the competition was ramping up in the portrait photography business, management announced a two-phase program for assuring long-term viability of its Sears Portrait Studios. They described phase one as an aggressive market share battle until structural changes were possible. Shareholders recognized the potential costs of such activity, knowing that the question was not one of choice, but rather of execution. During that phase the Company shed its department store studios and its Wal-Mart relationship to concentrate fully on the health of Sears Portrait Studios. They told us of the valuable Sears relationship and how important it was to focus single-mindedly on the tasks at hand.
Phase two is based on the fundamental concept advanced in 1988's Annual Report-that "premium margins could be achieved through premium services." We were advised during 1993 that testing was in process for the purpose of introducing a new operating mode by the end of the year. True to its promises, the Company announced full commitment to that "new mode" (phase two) in the form of specially designed systems which will allow CPI to serve its customers better. That commitment of $50 million for new technology and another $25 million for studio enhancement and enlargement represents the core of the program that will occupy most of management's attention during 1994. They are now telling us that the portrait photography segment is expected to show improvement in 1994, despite the huge costs of installation, training and additional depreciation. Coupling that with an expected rebound in the photofinishing segment and continuing growth and development of Prints Plus, management advises us to expect a 12% to 38% improvement in 1994 earnings per share from continuing operations-in spite of expected first half decreases. On that basis we might envision a return to double-digit compound growth. Dare we again expect a 20% growth rate?
New Developments
The answer derives from an evaluation of the way management uses its resources. An interesting example, though certainly not significant in short-term dollar returns, is the merger of two approaches to the imaging business. For the last four years CPI has PAGE
(Picture: on this page is an insert stating: "This is an imperfect world and not all goals have been met, but we can use history to gauge the integrity of future promises.")
been developing pioneering applications in digital imaging through a partnership with Canon. The research project is now over and it's time for each to go its own way. This presents an opportunity to incorporate digital imaging techniques learned through Imageland into the copy service stores in an effort to turn these unprofitable operations into successful income producers. In 1988 and 1989, management described copy services as a venture that would not quickly pay off. We were advised that, depending on the rate of future expansion, we should not expect break-even operation until at least late 1991. Through 1993, progress has been excruciatingly slow. However, we must pay some credence to the economic disruption experienced through much of this period. It remains to be seen how successful that business might become in a healthy economic environment.
Summary
This catalogue of promises gleaned from previous annual reports may be viewed as a wandering discussion of various disconnected events, or as a testament to the integrity of a management that is prepared to make promises, establish principles and live within its guidelines. This is an imperfect world, and not all goals have been met, but we can use history to gauge the integrity of future promises. We are telling you now that the long-cultivated relationship with Sears will support the creation of a completely new image to portrait customers and a high-value reputation for an increasingly profitable enterprise. Our time horizon is still long-term. The new acquisitions are performing very well and will continue to offer excellent returns on capital invested. Earnings for 1994 are currently projected in a range of $0.85 to $1.05 per share. With known depreciation and amortization, cash flows would exceed $50 million for 1994. If these programs are successful, significant future growth should result.
How much confidence and trust should shareholders place in these promises? Looking at historical performance, I, as a substantial shareholder and key member of the management team, set aside in each of the past two years 25% of my salary to invest in stock options. In years past, I've been happy also to invest 50% of my bonus dollars through the deferred compensation plan, but when the shareholders are not doing well we don't pay bonuses to top management-witness the past three years. I guess that's the way it ought to be, but you should be the judge.
You'll find a lot of additional information in the accompanying report; we hope you find it informative and helpful. On behalf of management, I can tell you that we appreciate the support of our loyal shareholders and are dedicated to performance that engenders PAGE
trust and confidence translatable into enhanced shareholder value. I'm proud to be a member of both classes. Thanks for listening.
April 15, 1994 Alyn V. Essman Chairman, Chief Executive Officer
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(Pictures: on this page is a picture of a young child with the caption "CPI's major business is professional portrait photography of babies, children, adults and family groups in 992 permanent studios, which CPI operates in the U.S., Puerto Rico and Canada as Sears' exclusive portrait photography concessionaire.")
SEARS PORTRAIT STUDIOS
The Preschool Portrait Market The Company believes it is the largest participant in the over $1 billion portrait market of children under six years old. Although earlier U.S. Census Bureau population projections predicted a decline in the preschool population through the year 2000, recent increases in the birth rate indicate that the market over the next several years should remain strong. The Company gains access to this market through the children's mothers, who usually make the decision to purchase portraits. The typical customer is a mother under 35 years old, with one or two preschool children, and is a member of a middle-income family. Research indicates that she values photographers who are friendly and work well with children, taking the time to make sure each photograph is of high quality.
CPI-Sears Relationship CPI is Sears' exclusive portrait service and its leading concessionaire, with the over 30-year relationship benefiting both companies. Throughout this long period, CPI and Sears have worked together in creating the mass portrait market, progressing from traveling photographers to permanent studios, developing pre-printed full-color portrait packages, and introducing technical innovations such as Video Vision. In recognition of its contributions and importance to Sears, CPI has received the prestigious "Partners in Progress" award from Sears for nine of the past eleven years.
The trust and integrity that the Sears name confers is a powerful asset in CPI's dealings with customers. Also, using Sears' daily cash management and accounting systems offers CPI valuable control mechanisms, and the Sears and Discover credit cards, along with other national credit cards, are convenient to studio customers.
Through its relationship with CPI, Sears enjoys substantial license fees and significant advertising exposure of the Sears name, with only minimal investment of its own capital and management resources. Sears provides floor space and basic services, while CPI recruits, trains and manages its own personnel, develops and executes its own advertising and marketing plans and provides all studio furniture, equipment and fixtures. In 1993, CPI spent $41.5 million, representing 17.5% of sales, in advertising the Sears name in connection with the portrait studios, primarily directed to women with young children, a highly valued customer base for Sears. CPI's marketing staff places much of the advertising under the same low media rates that Sears pays.
(Pictures: on this page is a picture of two of the Company's advertising coupon offers.)
Recent Developments
With CPI's Sears program as a model, competition in the U.S. preschool photography market started to increase dramatically in 1990. Concessionaires to other large chain retailers began converting their traveling photography operations to permanent studios, while also installing studios in new stores being opened by the retailers. The competitive proliferation continued unabated through 1993, resulting in an increase in the number of permanent directly competing studios of almost 1,700 locations, from just over 600 to about 2,300 studios. During the same 1990 through 1993 period, the number of Sears studios in the U.S. only increased from 840 to 872, including studios added in malls without a Sears store.
The competitive expansion has been supported by increasingly aggressive price promotions offering more and more portraits at very low prices, with the large advertised packages decreasing the probability that a customer would purchase additional portraits, thereby significantly capping the profit potential from additional sales. These "high content/low price" promotions take little account of the customer's actual desires for service and product selection, and have resulted in reduced profit margins throughout the industry. In the face of such competition, CPI chose to respond with aggressive promotional campaigns to maintain its leading position in the preschool photography market.
1993 Operating Results Sales in the Sears Portrait Studios declined 7.3%, to $237.2 million from $255.9 million, due primarily to the increasingly competitive environment, combined with the continuing economic uncertainty. Portrait sittings were somewhat lower than the record level of 1992, and the Company's aggressive promotion and pricing in defense of its market position caused a drop in the average customer sale, lower division earnings, and a decline in operating margins to 12.3% from 18.9% (1992 and prior results restated: see explanation on page 139 of this document (Management's Discussion and Analysis of Financial Condition and Results of Operation-- Operating Income)) in the prior year.
Outlook In mid-1992, CPI formed a Studio Strategic Development (SSD) Task Force and gave it the assignment of developing new strategies to allow the Sears Portrait Studios to better respond to customers' desires for quality products at a fair value, delivered in the friendliest possible environment, in order to provide a lasting competitive advantage. The SSD group, drawing on CPI's 5-year experience in digital imaging, embarked on an extensive series of marketing tests using new tools and processes to provide customers with a better, more rewarding studio experience. PAGE
Based on positive results of these tests, conducted throughout 1993, the Company has made the decision to install new digital imaging technology in all studios as the first phase in a 5-year upgrade program of the studios. Through 1994, CPI expects to have spent about $50 million on the project; by the end of the decade the investment including studio renovation should total $75 million, funded from the August 1993 $60 million private placement and continuing cash flow from operations.
The new digital technology provides ultimate flexibility that enables the photographer to get the customer involved in the selection of her favorite poses and expressions. After the sitting she can make an immediate selection from the video screen or take home a set of full-color proofs of the selected poses. This allows the customer to exercise her own opinion and choices, clearly understand her options in a comfortable environment and to share her experiences with her friends and family.
To further enhance the total portrait experience, the Company plans to significantly improve the environment by remodeling the studios, increasing their size and installing new custom fixtures and furniture. The decor will feature softer, warmer colors and dramatic lighting that highlights the new studio atmosphere. Recognizing the importance of this endeavor, Sears and CPI have entered into a new 5-year licensing agreement and are working together to coordinate the studio remodeling with Sears' previously announced $4 billion capital expenditure program in which the retailer is upgrading and remerchandising its stores.
The upgraded design will also be incorporated in new studios located in five to ten new Sears stores scheduled to open in 1994, and in 25 to 30 new studios in malls without a Sears store. The division's capability will be further expanded by the installation of 50 to 60 additional camera rooms in existing studios, primarily those that are being remodeled.
Although competition in the industry may very well continue at an intense level in the foreseeable future, CPI management believes that the Company's marketing innovation, supported by its financial strength, technological capability and emphasis on enhanced customer service, will enable it to endure and overcome the current difficulties.
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Tables above: In the four years from the end of 1989 through 1993, the number of Sears Portrait Studios increased by about 5%, while the number of competitive permanent locations almost quadrupled, primarily due to the conversion of traveling photography operations to permanent studios.
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The Sears Portrait Studios have recorded a long history of growth in total revenues as a result of added locations combined with increases in average sales per location. Over the past three years, however, revenues have been hampered by an increasingly competitive environment and the sluggish economy. Those negative factors, combined with management's aggressive promotional response to them, have caused operating margins to slip from the mid-to-upper 20% range to 12.3% in 1993. PAGE
(Pictures: on this page are four pictures showing the picture taking process with the caption "The new digital technology provides ultimate flexibility that enables the photographer to get the customer involved in the selection of her favorite poses and expressions. After the sitting, the customer can make an immediate selection from the video screen or take home a set of full-color proofs of the selected poses.
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(Pictures: on this page is a picture collage with the caption "CPI, the nation's largest owner/operator of photofinishing minilabs, entered the business in 1982, and through a combination of new store openings and acquisitions, has expanded the operation to its present size and sales volume. The most significant acquisition, that of Fox Photo, Inc. in 1991, added over 300 locations and almost doubled the business' size. Subsequent openings and acquisitions, including Proex in 1992 and 21 Fotomat labs in 1993, brought the 1993 year-end total to 670 locations.")
PHOTO FINISH
The Minilab Market In 1992, the most recent full year reported by the Photo Marketing Association, total retail photofinishing sales were $5.5 billion, down from $5.7 billion in 1991. Stand-alone minilabs held an approximate 26% share, down slightly based on revised data, with 1992 revenues of $1.4 billion, a 6.2% decline from the prior year's $1.5 billion. Although 1993 totals are not yet available, PMA surveys indicate that the total industry rolls processed grew by about 2.5% in the first half of the year, suggesting a turnaround from the 3.3% decline in the 1992 full year.
In the past few years, the one-hour retail photofinishing industry has become increasingly competitive as mass merchandisers, supermarkets and drug store chains have added one-hour photofinishing service. In 1992, each of these three segments recorded slight gains in share of the somewhat smaller market. Wal-Mart and Eckerd Drug have been especially active in expanding one-hour service, and Qualex, the dominant wholesale lab operator, had by year-end 1993 placed over 900 one-hour microlabs in supermarkets and mass merchant outlets throughout the nation.
In the face of this increased competition, CPI is conspicuous among stand-alone minilab operators in its sustained success. In only eleven years, the business has grown from a start-up venture into a healthy, profitable segment with revenues approaching the $200 million level. The success validates CPI's vision in identifying and nurturing an emerging consumer market to which its managers could apply their proven operational skills.
1993 Operating Results The segment's revenues in 1993 increased 10.6%, to $187.2 million from $169.2 million in 1992, with the gain due to the full-year contribution of the Proex labs, which were acquired in late 1992. Operating earnings declined to $7.0 million from $9.6 million (1992 and prior results restated: see explanation on page 139 of this document (Management's Discussion and Analysis of Financial Condition and Results of Operation--Operating Income)), partly due to a shift in the sales mix from photofinishing services into lower margin products, such as film, cameras and accessories. Considering that the division absorbed non-cash expenses totaling $19.7 million PAGE
(Pictures: on this page are two pictures with the caption "Custom cropping and enlargements are among the popular services offered in CPI minilabs.") in 1993, the resulting cash flow continues to confirm the real value of the business, as discussed in the September 1990 analysis, "Perspectives on CPI's Investment in Minilabs."
Outlook In 1993, 34 minilabs were closed when, as their leases came up for renewal, their long-term profit outlook was judged to be marginal. During the same 1993 period, 21 new labs were opened. Equipment from the closed locations was relocated to the new minilabs, minimizing the need for new capital investment and contributing to the division's continuing progress.
Plans call for opening approximately 30 new minilabs in 1994, primarily in existing markets to take advantage of economies of scale in advertising and field management. With continuing consolidation in the minilab industry, the Company is also in a good position to invest in further acquisitions should the opportunities arise.
Significant marketing activities in 1994 will be devoted to increasing revenues from existing customers, both through a greater share of an individual customer's rolls processed, and by the sale of more ancillary products and services to that customer. Other efforts will be directed toward gaining roll-processing market share from other competing types of photofinishers.
In selected markets, tests are being conducted of a variety of new programs, each presenting a strategy believed to be appropriate to the competitive environment in a particular market. Based on positive results of a given test, other markets with similar competitive characteristics to the test market will be identified for roll-out of the successful strategy. The ultimate objective is to look at each market individually, and prepare a plan that best responds to its situation.
In a further step toward developing more focused marketing, a sales promotion team established in early 1993 has produced positive test results. Media expense was reduced and sales promotion funding was added, with the net effect being improved efficiency. Additionally, there were positive effects on employee morale due to the involvement of store personnel and field staff. Based on these results, similar allocations in the media and sales promotion budgets are planned for 1994.
Given these considerations, plus continuing development of the Proex operation, CPI management is confident that, in spite of the present competitive environment, the Photofinishing segment will improve its position as a significant contributor to long-term corporate earnings. PAGE
Since 1983, revenues have grown from less than $6.0 million to $187.2 million in 1993.
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(Pictures: on this page is a picture of a Prints Plus retail store.) PRINTS PLUS CPI's strategic acquisition in May 1993 of the Prints Plus chain provides another vehicle through which the Company can offer affordable, quality products and services to consumers. Prints Plus is the leading non-franchise poster, print and framing retailer in the U.S., operating 103 locations in prime regional shopping malls throughout the country. It is a well-run company with a strong continuing management team whose operational criteria and practices parallel those of CPI. As such, the new business represents a good strategic fit with CPI's existing capabilities and provides an advantageous investment of the Company's resources.
The Prints Plus business is expected to add over $50 million in annual revenues to CPI's total sales. Due to the seasonal nature of the retail industry, a majority of the sales and profits are generated in the fourth quarter surrounding the holiday season. Accordingly, it should be pointed out that the Prints Plus 1993 earnings contribution was disproportionately high due to the partial year, which did not include the early, seasonally slow period. Nevertheless, it is gratifying that the new business turned in positive results almost immediately, producing operating profits in both the third and fourth quarters.
Each store offers an unparalleled selection of posters and prints that reflect current decorating trends. While Prints Plus offers products for all age groups, artistic taste among age groups and geographic regions are different. Consequently, the merchandise mix of each location is tailored to a customer profile for each area that reflects trends, artistic tastes and buying characteristics within each age group. Marketing efforts center around in-store programs strongly supported by visual displays.
In providing framing service, Prints Plus holds a significant edge over most competitors located in regional malls and strip shopping centers. Prints Plus provides instant custom framing for everyday value pricing that few competitors can match.
Prints Plus has invested in a new point-of-sale system which is menu-driven and simplifies the sales transaction and supports additional sales efforts. The system will also provide capabilities to relieve administrative burdens and enhance marketing efforts.
With a strong, experienced Prints Plus management team in place, CPI plans to actively expand its newest business by adding approximately fifteen new locations in 1994 and a like number in subsequent years. Like the existing stores, the additions will be in prime locations within regional malls, access to which will be facilitated by the Company's ongoing contacts with mall developers through the CPI photofinishing division. The expansion will be funded by ongoing cash flow. PAGE
(Pictures: on this page is a picture of a person taking a color photocopy on some electronic publishing equipment.) ELECTRONIC PUBLISHING CPI entered the electronic publishing segment of the quick print industry in the second quarter of 1988 with the acquisition of a group of copy stores in California. In the past five to ten years the electronic publishing business has evolved, through new technology, from simple black-and-white photocopying into a wide range of services, including digital color copying, binding and desktop publishing. The business fits all of CPI's criteria for identifying new ventures, described in the Overview section of this report, and offers good growth potential. New locations have been added in California, and the division has been expanded under CPI's proprietary Copy USA(registered trademark) identity in other regions.
1993 Operating Results Revenues in 1993 were essentially even with the $15.8 million recorded in 1992, as growth in the division's newer markets offset the further decline in certain of the acquired California locations, whose results were hampered by that state's sustained economic problems. Profit reductions in those California locations were more than offset by a combination of improving performance in the newer markets and a significant reduction in depreciation expense.
Outlook CPI's electronic publishing business may continue to experience operating losses for some time to come due to the continuing softness in the California economy. The newer locations are expected to continue their development in the coming year, with further reduction of losses as a result of continuing sales growth and increased operating efficiencies.
Probing the Future of Digital Imaging In order to maintain a leadership position in all of its businesses, CPI is investing in research and development in the exploration of digital imaging technology. The Company is exploring new consumer and business services that employ digital technology to scan, modify and print diverse graphic elements in the creation of new composite graphics products. A retail location, called Imageland(trademark), is operating in Chicago as a pilot test in which staff designers assist customers in creative projects. Three distinct markets are being addressed:
- --Businesses-by providing full creative service in the design and production of high quality full-color brochures, slide presentations, posters and other products that were previously too expensive or time consuming using conventional production methods. This concept is especially applicable on limited-quantity projects.
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- --Graphics Professionals-by providing access to state-of-the-art workstations and output devices, plus technical and design assistance.
- --Consumers-by scanning, modifying and combining photos, slides, drawings and text in the creation of highly personalized products, such as posters, greeting cards and t-shirts, at affordable prices.
CPI is exploring other business, professional and consumer services through the Fox Imaging Center, a service bureau in Houston. The facility is also working with major manufacturers in the development of new applications of digital imaging technology.
Through these and other ventures yet to be established, CPI, with its understanding of ongoing advances in technology and its network of 1,800-plus stores that are known for imaging services, will be in the forefront of meeting consumer demand.
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(Reprinted from March 17, 1994 press release on CPI Corp. letterhead.)
March 17, 1994 TO: CPI Shareholders RE: AN OVERVIEW OF 1994
As we enter 1994, we look back over three consecutive years of a pitched competitive battle in our portrait photography segment, coupled with a generally soft economy and capped off by a January fraught with natural disasters that shook up the West Coast, froze the Midwest and dumped tons of snow and ice on the East Coast. Of the three years, 1993 was the most trying, but in terms of progress for the future, was the most satisfying. We accomplished our basic objective of maintaining our market share over the three years, even though the cost in foregone profits was great. Second, and even more important, we reached a decision, based on comprehensive testing during 1993, to install new technology in all portrait studios as the first step in a program that will greatly alter, if not change completely, the mode in which we attract and serve portrait customers. During this transition, we expect to maintain our competitive posture and achieve reasonable profit performance.
We believe the studio enhancement program upon which we have embarked is well-conceived and based on sound market and technical research. Not only the concept, but also the implementation has been the subject of comprehensive planning with Sears, which endorses our efforts in a number of ways:
1. They have entered into a new five-year agreement with us that further solidifies our mutual interest in the portrait studio business. 2. They have endorsed our program of studio renovation and space expansion to better serve our mutual customers. 3. They will cooperate in marketing programs to introduce new products and services and to provide consistent messages and value offerings at Sears.
Our decision to commit approximately $75 million to this program was carefully considered at every level, including a rigorous examination by the company's board of directors and appropriate, objective, independent consultation. We anticipate strong returns on our investment.
With that background, it's time to look at 1994. Bluntly, while we believe 1994 will be a better earnings year than 1993, it will not achieve a satisfactory level. However, we owe our loyal shareholders a better explanation than that. We fully recognize the patience and confidence we have asked of you over the last three years. We understand the discomfort that arises from uncertainty, and in consideration of your patience we will, for PAGE
1994 only, outline our planning in some detail. We will not provide statistics, specific marketing plans or other information which might weaken our competitive posture, but we will give you our best estimate of results for the coming year with the caution that earnings estimates are highly uncertain in this transition phase. If we find, as the year unfolds, that our outlook has changed in any major way, we will inform you as promptly as possible.
Let's first deal with the least complex issues:
PHOTOFINISHING - Though we still envision a highly competitive environment, we expect some help from the cost-reduction efforts of 1993. Proex continues to perform well and there will be some reduction in the amortization of acquisition expenses. We anticipate an improvement in segment operating earnings and a continuation of very strong cash flows.
OTHER PRODUCTS AND SERVICES - Prints Plus will be included in the operating results for the full year. Though we expect earnings growth, the results will be muted by seasonal losses expected in the early, non-comparable months. We expect some improvement in Copy Services, but the net result will be continued losses in 1994. So for the segment, management expects earnings to decrease in the first half, but to increase for the year as a whole.
CORPORATE EXPENSE should be relatively consistent except for the inevitable increase in health care in the 6% range and an increase in net interest expense of approximately $1.5 million resulting from 1993's mid-year note placement.
PORTRAIT STUDIOS - The major uncertainty in 1994's earnings outlook relates to the massive changes-in-progress in our core portrait photography segment. On the one hand, we have the benefit of our new long-term contractual relationship with Sears and Sears' endorsement of the changes we are making. The costs of installation, training, and initial depreciation of the new equipment will, however, all affect the first half disproportionately. Though we expect positive results to follow the installation, most of those advantages will occur in the second half of the year and relate primarily to the marketing of the benefits emanating from the technology.
Given the considerations addressed above, we expect a significant reduction in portrait studio earnings for the first two quarters and a turnaround in the second half, leading to an increase for the year which is totally dependent on the second half earnings increase. Should these plans materialize as expected, we anticipate achieving continuing earnings improvement for future years. It's important to recognize that the substantial capital PAGE
investment will increase the proportion of fixed costs for at least the next five years, thereby tightening profit margins during the seasonally slower first half of each year. But it is also important to realize that the cash flow emanating from future earnings will be much greater than in the past due to the increased depreciation charges.
Based on the foregoing discussion, our current 1994 estimate is earnings per share in the $0.85 to $1.05 range. Achieving the midpoint projection would produce approximately $14 million of net income, which, when combined with known depreciation and amortization, yields $54 million in gross cash flow after taxes. We expect capital expenditures to approximate $60 million, primarily a result of the major investment in the studios, and as we know of no extraordinary working capital changes, 1994 fiscal year end cash would be projected at approximately $50 million prior to any share repurchase. Shareholders must remain aware that these projected earnings are subject to the uncertainties of estimating in a year of rapid change and cannot be gauged until the company experiences its peak sales period in November and December.
With these thoughts in mind, we should focus our attention on cash management. Our company is very strong and we are confident of the wisdom and effectiveness of the path we have chosen. Management has demonstrated their confidence for the second consecutive year by significant participation in the salary reduction stock option plan. Our responsibility is to manage CPI's resources in such a way as to reward loyal shareholders and managers through stock performance. We believe the current valuation of the stock by the market presents an attractive opportunity for the company to increase shareholder value through share repurchases. We therefore have decided to mount a consistent and continuing repurchase program as long as loan covenants and cash resources permit and the stock price justifies purchase. We believe this is an effective way to contribute to long-term shareholder returns.
We hope you will find this information helpful and constructive. Thanks for your time and your support.
Sincerely,
Alyn V. Essman Chairman, Chief Executive Officer
INDEX-FINANCIAL REVIEW
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FINANCIAL BACKGROUND AND TRENDS
In the planning, execution and evaluation of its long-term strategies to maximize shareholder value, CPI management focuses on:
- --the cash flow generated internally; - --the reinvestment of that cash in existing and new businesses; - --the achievement of a rate of return on the assets and equity employed in comfortable excess of the cost of capital; - --maintenance of significant cash balances, which both reduces financial risk and affords a high level of flexibility.
In order to provide an overview of the Company's performance, this analysis examines (1) the rates at which sales, assets and equity have grown, and (2) the rates of return earned on those earnings sources.
The objective herein is to provide shareholders with the same perspective used by management in its planning and also used by various analysts in their evaluations. The commentary should be read in connection with the table on pages 127-134, from which the data discussed is derived.
10 Year Overview
The decade 1984-1993 reflects management's assessment and testing of new businesses; the investment of ample cash flow in the expansion of those which looked promising; and management's resolve to offset competition, protecting and strengthening its market franchise by the persistent upgrading of products or services. The period's financial results are summarized in Table I.
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Sales compounded at 13.7% annually to $475.5 million from $131.2 million, while other earnings sources gained at a compound rate of almost 18%.
Changing Competitive Framework
Since dramatic changes in the competitive framework occurred in 1990, the further evaluation of the decade's performance is in two parts. The financial data and analyses show the period 1984-1990 to have been one of rapid and profitable growth in the face of normal competition, while the years 1991-1993 mark the advent of explosive growth in portrait studio competition and the Company's actions to counteract it, while continuing to fund development projects, undertake acquisitions, expand the Photofinishing segment and repurchase stock.
1984-1990--Profitable Growth
The 1984-1990 period was one of high earnings and cash flow growth, driven by vigorous and sustained expansion of Sears Portrait Studios and by the launch and rapid development of the Photofinishing segment. Earnings sources multiplied during the seven-year span, with sales expanding at a 16.1% compound annual rate to $373.9 million. Total assets and equity rose somewhat more quickly to $218.7 million and $151.7 million, respectively.
As shown in Table II above, the average rates of return on the earnings sources-8.2% on sales, 17.8% on assets and 27.9% on equity-were well above the 10-year averages. Average return on employed assets was 23.7%, and 45.1% on employed equity.
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Net earnings per share also increased at an 18% compound rate to $2.19 from $0.69. The cash dividend, initiated in 1985, was raised to $0.50 from $0.05, reflecting an increase in the payout ratio to 23%. For the entire period, total operating cash flow accumulated to $290.6 million, funding $113.2 million in replacement capital expenditures, $58.9 million in acquisitions, $23.3 million in cash dividends and $43.8 million in stock repurchases and adding $75.1 million to cash balances-all accomplished with virtually no long-term debt.
Three Years of Transition
The 1991-1993 period has been one of adjustment and transition, characterized by declining margins in the core portrait business because of defensive and offensive tactics to offset competition, and general economic weakness. Although the period was difficult, earnings sources continued to increase, albeit at reduced rates. Sales gained at 8.3% to $475.5 million, largely due to acquisitions. Total assets rose at 11.8% to $305.8 million and equity at a more modest 5.0% to $175.5 million. See Table III below.
Employed assets expanded at 22.4% and returned on average 12.3%, while employed equity gained at 19.8% and produced a 22.6% average return. The uniformly adverse trend in rates of return was reflected in net earnings, which declined to $11.1 million (excluding a $2.1 million credit from an accounting change in 1993), or $0.76 per share, from the 1990 high of $33.6 million, or $2.19 per share. The cash dividend was increased to $0.56 from $0.50 per share. PAGE
Even in this troublesome three-year period, cumulative operating cash flow was $130.2 million. Combining that with $60 million from privately placed notes, the Company financed $108.9 million in acquisitions, $24.8 million in cash dividends, and $14.7 million in stock repurchases, leaving a comfortable $66.4 million in cash and equivalents and a modest debt ratio of 34.1%.
Although other operating intelligence can be gleaned from the tables on pages 127-134, the summary analysis provided here shows that even in a most difficult period, such as the past three years, the Company has been able to achieve highly acceptable operating results.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's three business segments are Portrait Studios, Photofinishing and Other Products and Services. The Other Products and Services segment consists of the newly acquired wall decor operation and the electronic publishing operation. To establish a framework for discussion, financial data has been selected which summarizes the Company's operating results for fiscal years 1993, 1992 and 1991. The 1992 fiscal year ended February 6, 1993 included a 53 week period, whereas fiscal years 1993 and 1991, ended February 5, 1994 and February 1, 1992, respectively, covered 52 week periods.
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Significant events that affected operating results in the last two fiscal years are described as follows:
Prints Plus Acquisition On May 30, 1993, the Company acquired Prints Plus, a wall decor chain, from Melville Corporation for approximately $14.7 million. The acquisition included 102 stores, located in malls throughout the United States, operating a prints, posters and framing business with annual sales in excess of $40.0 million. In addition, the Company entered into a non-compete agreement with Melville Corporation for cash consideration aggregating approximately $1.0 million. The acquisition was recorded using the purchase method of accounting and, accordingly, the results of operations have been included in the Company's consolidated financial statements effective May 30, 1993.
Proex Acquisition On December 1, 1992, the Company purchased the operational assets of Pemtom, Inc., a Minneapolis-based company operating under the name Proex, for cash consideration amounting to approximately $19.0 million. The fair value in excess of the net assets acquired was approximately $6.7 million, which is being amortized on a straight-line basis over a forty-year period. Under separate agreements, the company secured the services of the seven-member Pemtom management team for an aggregate amount of $4.8 million. The acquired company now operates 19 portrait studios and 28 photo-finishing locations, which together had annual sales of $22.3 million in fiscal year 1993. The acquisition was recorded as a purchase and, accordingly, the results of operations have been included in the Company's consolidated financial statements effective December 1, 1992.
Results of Operations
Revenues Sales were $475.5 million in fiscal 1993, a 5.8% increase over 1992. The increase is mainly due to the added sales from the newly acquired Prints Plus and Proex operations, partially offset by one less week of sales in 1993 and by a decline in Portrait Studio sales caused by lower comparable sales in the Sears Portrait Studios operation and the absence of sales from the Wal-Mart traveling studio business and Portraits of Distinction Studios. Sales in 1992 increased 8.4% to $449.4 million from $414.5 million in 1991. Photofinishing expansion, including the acquisition of Fox Photo and Proex, accounted for a major portion of the sales increase. During fiscal year 1992, the Company withdrew from the Wal-Mart traveling studio business and the Portraits of Distinction studios. Combined sales from these businesses amounted to $7.3 million and $26.8 million in fiscal years 1992 and 1991, respectively.
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Sears Portrait Studios sales were $237.3 million, $255.9 million and $251.0 million for fiscal years 1993, 1992 and 1991, respectively, declining 7.3% in 1993 after increasing 2.0% in 1992. Eliminating the effect of the 53-week year in 1992, Sears Portrait Studio sales, on a comparable 52-week basis, declined 5.9% in 1993 after being virtually level in 1992 with the prior year. In the last three fiscal years, the Company has experienced increasing competition from others who have continued to add permanent studio locations. In an effort to maintain market share, the Company has used price promotions more aggressively during the last two fiscal years, resulting in lower customer averages. Additionally, the Company closed 42 portrait studios during the year, the majority as a result of Sears planned store closing program announced early in 1993. During the 1993 fiscal year, the Company opened 33 portrait studios, 29 of which are not in Sears stores.
Photofinishing sales in 1993 rose 10.6% to $187.2 million from $169.2 million in 1992, following a 39.4% gain from $121.4 million in 1991. Photofinishing includes the sales and operating results of CPI Photo Finish, Fox Photo from August 18, 1991 and Proex from December 1, 1992, the effective dates of these acquisitions. These acquisitions during this two-year period accounted for most of the sales increases. Stores in operation experienced a net increase of 12 and 19 locations in 1993 and 1992, respectively, bringing the total locations in operation to 670, 658 and 639 at the end of 1993, 1992 and 1991, respectively.
Other Products and Services includes the electronic publishing business operating under two trade names, Copy Mat and Copy USA, and the newly acquired wall decor business operating under the names Prints Plus and Prints and Posters. Sales increased more than 200% in 1993 to $50.4 million from $15.8 million due to the acquired wall decor operation in 1993. Sales increased 12.0% in 1992 due to the maturing of the electronic publishing locations opened in the last three years.
Operating Income Segment operating earnings for prior years have been restated to conform with the current year's presentation. Certain employee benefit costs, which in prior years were recorded as part of corporate expense, have now been reclassified to the operating segments to better reflect the operating contribution of the segments. Income from operations declined 46.1% in 1993 to $18.8 million from $34.8 million in 1992 primarily due to a 38.1% reduction in Portrait Studio operating earnings. Additionally, Photofinishing experienced a 27.4% decline in operating earnings, primarily due to lower gross profit margins. Other Products and Services operating earnings increased substantially, primarily due to the contribution to operating earnings from the acquired wall decor operation. Corporate expense increased due to a $1.4 million expense for severance and early retirement benefits under a voluntary early retirement program, which were offset by the PAGE
Company's previously announced cost cutting program. In 1992, income from operations declined 11.1% resulting from a decline in Sears Portrait Studio operating income, which was partially offset by higher Photofinishing operating income and reduced losses in the electronic publishing business.
Sears Portrait Studios operating margins expressed as a percent of sales were 12.3%, 18.9% and 23.1% for fiscal years 1993, 1992 and 1991, respectively, declining sharply in each of the last two fiscal years. After a slight sales increase in 1992, a 53-week year, Sears Portrait Studios experienced a 7.3% sales decline in 1993 or a 5.9% sales decline on a comparable 52-week year basis. In an effort to maintain market share, the Company has aggressively priced products. Coupled with increased content in advertised promotions, this pricing has led to a deterioration of profit margins. Additionally, operating earnings were penalized by the extensive testing of products, services and pricing in an effort to better understand customer needs. The Company should begin to see the benefit of this testing as new marketing concepts are introduced and the new freeze-frame digital imaging systems are installed in the portrait studios. Our testing indicates customers' response to these changes will have a positive effect both in terms of customer satisfaction and increased sales.
Photofinishing operating earnings declined 27.4% in 1993 to $7.0 million from $9.6 million in 1992, after increasing 25.3% from $7.7 million in 1991. Operating earnings declined in 1993 primarily due to lower gross profit margins resulting from an unfavorable sales mix, as sales of high margin products declined while sales of low margin products increased. Generally, the sales of value added products and services, such as photographic prints and processing, have high margins, whereas sales of film, accessories and ancillary products carry lower profit margins. Competitive pricing reduced the sales of value added products and services, reducing profit margins. Profit margins were further reduced by increased sales and related costs of low profit margin products. Operating earnings in 1992 increased 25.3% primarily due to the full year inclusion of Fox Photo.
Other Products and Services improved operating earnings reflect the inclusion of the newly acquired wall decor business in operating results. The electronic publishing business also showed improvement in operating performance as operating losses were reduced in both 1993 and 1992. In the wall decor operation, a majority of the sales and profits are generated in the fourth quarter surrounding the holiday season. Accordingly, the operating earnings for the wall decor operation were disproportionately high due to the partial year, which did not include the early, seasonally slow period.
Net Earnings Net earnings declined 41.5% to $13.2 million in 1993 and 16.7% to $22.6 million in 1992 from $27.1 million in 1991. Included in net PAGE
earnings in 1993 is a $2.1 million benefit from the cumulative effect of a change in accounting principles discussed below under Income Taxes. Before the benefit, net earnings declined 50.8% to $11.1 million. The decline in net earnings in each of the last two fiscal years resulted from lower operating earnings coupled with interest expense in 1993 and reduced interest income in 1992, and a higher effective income tax rate in each of the last two fiscal years. The decline in interest income and the subsequent increase in interest expense resulted from the Company's recent acquisitions of Fox Photo, Proex and Prints Plus. Additionally, the Company entered into a $60.0 million long-term debt agreement in 1993 which has substantially increased borrowing costs.
Earnings per share before the change in accounting decreased 50.6% in 1993 to $0.76 from $1.54 in 1992, following a 14.4% decrease from $1.80 in 1991. After the cumulative effect of the change in accounting principles, net earnings decreased 41.6% to $0.90 in 1993.
Income Taxes The effective income tax rate was 40.0% in 1993 compared to 38.1% in 1992 and 37.3% in 1991. The increase in the 1993 effective income tax rate resulted primarily from an increase in nondeductible amortization expense related to the intangible assets resulting from acquisitions, the Omnibus Budget Reconciliation Act of 1993 and reduced tax credits from the restoration of the Company's corporate headquarters. Current year earnings include a $2.1 million cumulative benefit from a change in accounting principles. The accounting change, recorded in the first quarter of 1993, resulted from adoption of the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," on a prospective basis. In adopting SFAS No. 109, the Company has changed its method of accounting for income taxes from the deferred method to the asset and liability method.
Liquidity and Capital Resources
On August 31, 1993, the Company entered into an agreement with two insurance companies for the private placement of senior notes in the amount of $60.0 million (the Note Agreement). The notes, issued pursuant to the Note Agreement, mature over a seven-year period with an average maturity of 5.42 years and with the first principal payment due at the end of the third year. Interest on the notes is payable semi-annually at an average effective rate of 6.44%. The Note Agreement requires the Company to maintain certain financial ratios and to comply with certain restrictive covenants. The Company incurred approximately $0.5 million in costs related to the notes, which will be amortized proportionately over the seven-year term of the notes. Concurrently, the Company negotiated to reduce its available line of credit with a local bank from $40.0 million to $25.0 million. A portion of the proceeds from the notes was used to pay off the outstanding balance of the Company's line of credit. PAGE
The remaining proceeds will be used to fund the Company's planned capital expenditure program in 1994 and for other corporate purposes. Included in the capital expenditure program is the continuation of the long-range program involving the application of digital imaging technology to products and services in the Sears Portrait Studios.
Total assets were $305.8 million, $237.8 million and $238.9 million for 1993, 1992 and 1991, respectively. Cash and cash equivalents increased in 1993 due to the cash received on the $60.0 million Senior Notes, after declining in 1992 and 1991 as a result of the acquisition of Fox Photo and Proex. Cash and cash equivalents amounted to $66.4 million, $21.0 million and $31.2 million, representing 21.7%, 8.8% and 13.1% of total assets at the end of 1993, 1992 and 1991, respectively. Working capital increased to $62.6 million in 1993 from $16.3 million in 1992.
The table below shows assets by line of business. Corporate assets consist primarily of the Company's headquarters and surrounding property, cash and marketable securities.
Stockholders' equity increased 2.1% and 7.3% to $175.5 million and $171.9 million at the end of 1993 and 1992, respectively, net of treasury stock repurchases of $0.7 million and $2.3 million in 1993 and 1992, respectively. The 9.5% increase in stockholders' equity since 1991 is primarily due to a $17.1 million increase in retained earnings after consideration of dividends, which was partially offset by the purchase of treasury stock. On September 28, 1988, the Company's Board of Directors authorized the Company to purchase up to 2,500,000 shares of CPI Corp. common stock, or approximately 15% of the then outstanding common stock. On April 2, 1992, the Company's Board of Directors authorized the purchase of an additional 2,000,000 shares of CPI Corp. common stock. Under its PAGE
stock repurchase program, the Company has acquired 2,363,808 shares for $58.6 million as of February 5, 1994. In fiscal year 1993, 1992 and 1991, 40,655 shares, 101,210 shares and 480,792 shares were purchased for $0.7 million, $2.3 million and $11.7 million, respectively.
The following table sets forth selected financial data regarding capital resources and liquidity for the Company's last three fiscal years:
See accompanying notes to consolidated financial statements.
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See accompanying notes to consolidated financial statements.
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See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation The consolidated financial statements of CPI Corp. (the Company) include the accounts of CPI Corp. and all of its majority or wholly owned subsidiaries, partnerships and joint ventures. All significant intercompany transactions have been eliminated.
Fiscal Year The Company's fiscal year ends on the first Saturday in February. The Company designates its fiscal year by the calendar year in which the fiscal year begins. Accordingly, fiscal year 1993 ended February 5, 1994, fiscal year 1992 ended February 6, 1993 and fiscal year 1991 ended February 1, 1992. The 1993 and 1991 fiscal years are comprised of 52 weeks, while the 1992 fiscal year is comprised of 53 weeks.
Translation of Foreign Currency Assets and liabilities of foreign operations are translated into U.S. dollars at the exchange rate in effect on the balance sheet date, while equity accounts are translated at historical rates. Income and expense accounts are translated at the average rates in effect during each fiscal period.
Cash, Cash Equivalents and Short-Term Investments For purpose of reporting cash flows, cash and cash equivalents include cash on hand and short-term investments. Short-term investments consist of treasury bills, bankers acceptances, commercial paper, term deposits, government agency notes, repurchase agreements and government money market funds which mature less than one year from year-end and which are stated at cost, adjusted for discount accretion and premium amortization. The government money market funds include obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities, as well as repurchase agreements fully collateralized by such obligations, which may have a long-term maturity greater than one year but a short-term option to liquidate the investment. Based on the short-term nature of the Company's investments, the carrying value approximated estimated fair value at February 5, 1994.
Total interest income for years 1993, 1992 and 1991 was $1,210,193, $1,182,630 and $3,575,897, respectively.
Inventories Inventories are stated at the lower of cost or market, with cost of the majority of inventories being determined by the first-in, first-out (FIFO) method and the remainder by the last-in, first-out (LIFO) method.
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Photographic Sales Processed portraits initially ordered by the customer are recognized as sales when shipped from the processing lab to the studio for customer pickup. Processed portraits not initially ordered by the customer are recognized as sales at the time the portraits are purchased by the customer.
Deferred Costs Applicable to Unsold Portraits Deferred costs applicable to unsold portraits consist of photographic salaries and employment costs, advertising and other costs directly associated with the photography function. Such costs are charged to selling, general and administrative expense when the customer accepts or declines the portraits.
Depreciation Depreciation is computed principally using the straight-line method over estimated service lives of the respective assets.
Retirement Plan The Company has a noncontributory defined benefit retirement plan covering substantially all full-time employees. Pension expense, which is funded as accrued, includes current costs and amortization of prior service costs over a period of ten years.
Intangible Assets Intangible assets acquired through acquisitions were accounted for by the purchase method of accounting and include the excess of cost over fair value of net assets acquired, favorable lease rights and covenants not to compete. The excess of cost over fair value of net assets acquired and favorable lease rights are being amortized on a straight-line basis over periods ranging from five to forty years. The covenants not to compete are being amortized on a straight-line basis over the respective periods of the agreements, which range from three to five years. Accumulated amortization of intangible assets was $10,060,786 and $6,408,061 at February 5, 1994 and February 6, 1993, respectively.
Income Taxes Deferred income taxes are recognized to reflect the effect of timing differences in the recognition of income and expense items for income tax and financial reporting purposes.
Investment tax credits are recognized by the flow through method, which recognizes the benefits of such credits in the year realized.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting For Income Taxes," in 1993 on a prospective basis. Statement No. 109 requires the Company to account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial PAGE
reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognized the cumulative effect as of February 7, 1993 of $2.12 million in net earnings as a cumulative change in accounting principle.
United States income taxes have not been provided on $14,202,535 of undistributed earnings of the Canadian subsidiary because of the Company's intention to reinvest these earnings. The determination of unrecognized deferred U.S. tax liability for the undistributed earnings of international subsidiaries is not practicable. However, it is estimated that foreign withholding taxes of $1,420,254 may be payable if such earnings were distributed.
Earnings Per Common Share and Other Share Information Earnings per common share are computed by dividing net earnings by the sum total of the weighted average number of shares of common stock outstanding plus contingently issuable shares under the employee stock plans. Fully diluted earnings per common share are not presented as the differences between primary and fully diluted earnings per common share are not material.
Reclassification Certain 1992 and 1991 accounts have been reclassified to conform with the presentation in 1993.
Fair Value of Financial Instruments SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires the Company to disclose estimated fair values for its financial instruments. A financial instrument is defined as cash or a contract that both imposes on one entity a contractual obligation to deliver cash or another financial instrument to a second entity and conveys to that second entity a contractual right to receive cash or another financial instrument from the first entity. Fair value estimates, methods and assumptions are set forth for the Company's financial instruments, short-term investments and long-term obligations in Notes 1 and 7, respectively.
2. Acquisitions
On August 19, 1991, a wholly owned subsidiary of the Company acquired all the outstanding common and preferred stock of FPI Holding Corporation and its subsidiary, Fox Photo, Inc. (Fox Photo), with an effective date of August 18, 1991. The cash consideration of the acquisition of common and certain series of outstanding preferred stock amounted to $27.9 million. Payment to debt holders of Fox Photo and holders of exchangeable preferred stock amounted to approximately $26.0 million and other costs of PAGE
the transaction aggregated $7.4 million. The total cash consideration of $61.3 million was provided by the Company's then available cash. The acquisition has been recorded using the purchase method of accounting and the results of operations of Fox Photo have been included in the Company's consolidated financial statements since the effective date of the acquisition. The excess of the purchase price over the net liabilities assumed (goodwill) was approximately $49.9 million and is being amortized using a straight-line method over a 40-year period.
In addition, the Company entered into a consulting and non-compete agreement with certain employees of Fox Photo for cash consideration of $2,292,000 which is being amortized over a four-year period. Additionally, prior to the acquisition, Fox Photo purchased certain photographic processing equipment from a third party for $2,500,000 which was reimbursed by the Company.
The unaudited proforma results of operations for the fiscal year ended February 1, 1992, assuming the acquisition occurred as of the beginning of the fiscal year, were net sales of $453.7 million, net earnings of $28.3 million and earnings per share of $1.88. These proforma results were prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the combination been in effect.
On December 1, 1992, the Company acquired the operating assets of Pemtom, Inc., a Minneapolis-based company consisting of 25 photofinishing locations operating under the name Proex, 15 of which offer added services through adjacent Proex Portrait Studios, for approximately $19.0 million. In a separate, but related transaction, the Company secured the services of the Pemtom, Inc. management team for $4.8 million. The acquisition was recorded as a purchase and, accordingly, the results of operations of Proex have been included in the Company's consolidated financial statements since the effective date of the acquisition. The excess of the purchase price over the net liabilities assumed (goodwill) was approximately $6.7 million and is being amortized using a straight-line method over a 40-year period. The unaudited proforma results of operations for the fiscal year ended February 6, 1993, assuming the acquisition occurred as of the beginning of the fiscal year, were not material.
On May 30, 1993, CPI Corp. acquired Prints Plus from the Melville Corporation. The 103 store chain, located in malls throughout the United States, operates a prints, posters and framing business with annual sales in excess of $40.0 million. Prints Plus was acquired for approximately $14.7 million. In conjunction with the acquisition, the Company entered into a non-compete agreement with Melville Corporation for cash consideration aggregating $1,050,000. Stores will continue to be operated under the trade name "Prints Plus" and "Prints and Posters". The acquisition was recorded as a purchase and, accordingly, the results of operations of Prints Plus PAGE
have been included in the Company's consolidated financial statements since the effective date of the acquisition. The unaudited proforma results of operations for the fiscal year ended February 5, 1994, assuming the acquisition occurred as of the beginning of the fiscal year, were not material.
3. Discontinued Businesses
On February 3, 1992, the Company announced its intention not to renew existing contracts between the Portraits of Distinction Studios and the host department store chains. The Company also announced that it was not renewing its existing contract with Wal- Mart, Inc., which allowed the Company to provide portrait photography service through regional Wal-Mart stores.
The Company completed the closedown of the Portraits of Distinction Studios and Wal-Mart Pictureland operations in fiscal year 1992. A provision of approximately $1.1 million was made for asset write-offs and severance pay in fiscal year 1991.
There were no sales for the discontinued businesses in fiscal year 1993. Net sales of the discontinued businesses for fiscal year 1992 and 1991 were $7,333,223 and $26,846,059, respectively.
4. Property and Equipment
The following table sets forth a summary of the Company's property and equipment:
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5. Inventories
Inventories consist of the following components:
The Company accounts for certain raw material inventories of film, paper, chemicals and portraits-in-process under the LIFO method. Such inventories aggregated approximately $1,660,000 and $1,464,000 at February 5, 1994 and February 6, 1993, respectively. The excess of replacement cost of these inventories over their stated LIFO value was approximately $425,000 and $473,000 at February 5, 1994 and February 6, 1993, respectively.
Portraits-in-process include the cost of film, laboratory labor, paper, processing chemicals and supplies and other items directly associated with the production of portraits that have not been recognized as sales.
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6. Intangible Assets
Intangible assets and related amortization are as follows:
7. Credit Agreements and Outstanding Debt
On August 31, 1993, the Company entered into an agreement with two insurance companies for the private placement of senior notes in the amount of $60.0 million (the "Note Agreement"). The notes, issued pursuant to the Note Agreement, mature over a seven year period with an average maturity of 5.42 years and with the first principal payment due at the end of the third year. Interest on the notes is payable semi-annually at an average effective rate of 6.44%. The Note Agreement requires the Company to maintain certain financial ratios and comply with certain restrictive covenants. The Company incurred $459,304 in issuance costs associated with the private placement of the notes. These costs are being amortized ratably over the seven-year life of the notes.
Under a concurrently negotiated agreement with a domestic bank, the Company reduced its existing line of credit from $40.0 million to $25.0 million. The Line of Credit Agreement contains the same financial covenants as those set forth in the Note Agreement and has interest rates set at the prevailing prime interest rate or at a lower rate quoted by the bank. This Line of Credit Agreement expires July 30, 1994. As of February 5, 1994, the Company had outstanding letters of credit for the principal amount of $5,466,454. There were no borrowings under this line of credit as of fiscal year end. PAGE
The Company's performance of the conditions of the Note Agreement and the Line of Credit Agreement and the underlying notes issued under both agreements is secured by a pledge of the stock of the Company's direct subsidiaries. The pledged stock will be released if the Company achieves certain stipulated financial ratios, but not prior to the end of fiscal year 1994.
The Company's long-term obligations consist of the following:
The fair value of the Company's long-term debt is estimated based on quoted market prices for similar debt issues with the same remaining maturities. On February 5, 1994, the carrying value and estimated fair market value of the Company's long-term debt was $59,810,789 and $59,507,789, respectively.
To manage its exposure to fluctuations in interest rates, the Company has also entered into an interest rate swap agreement for a notional principal amount of $40 million, maturing August 28, 1995. Interest rate swap agreements involve the exchange of interest obligations on fixed and floating interest rate debt without the exchange of the underlying principal amount. The differential paid or received on the interest rate swap agreement is recognized as an adjustment to interest expense. The fair value of the Company's swap agreement, representing the estimated amount the Company would receive or pay to terminate the agreement, was obtained from dealer quotes. The carrying value, which represents accrued income arising from the swap agreement, and estimated fair market value for the swap agreement were $86,539 and $109,991, respectively, on February 5, 1994.
Interest expense for fiscal years 1993, 1992 and 1991 was $1,999,406, $169,106 and $153,350, respectively. PAGE
8. Operating Leases
The Company leases various premises and equipment under noncancelable operating lease agreements with initial terms of one or more years and expiring at various dates. Substantially all leases require the Company to pay maintenance, insurance and taxes.
At February 5, 1994, minimum rental payments under operating leases with initial terms in excess of one year are as follows:
Rental expense during fiscal years 1993, 1992 and 1991 on all operating leases was $30,048,454, $24,304,248 and $18,621,554, respectively.
9. Income Taxes
Earnings before income taxes by U.S. and Canadian sources (dollars in thousands):
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Income taxes from continuing operations consist of the following components (dollars in thousands):
The source of timing differences which gave rise to deferred income taxes and the related tax effects are as follows (dollars in thousands):
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The following is a reconciliation between income tax expense related to continuing operations at the Federal statutory rate and actual income tax expense (dollars in thousands):
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The sources of the tax effect for temporary differences that give rise to the deferred tax assets and liabilities were as follows:
Pursuant to SFAS 109, a valuation allowance would be provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. The Company has not established a valuation allowance as of February 5, 1994, due to management's belief that all criteria for recognition have been met, including the existence of a history of taxes paid sufficient to support the realization of deferred tax assets.
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10. Retirement Plan
The Company maintains a qualified, noncontributory pension plan that covers all full-time employees meeting certain age and service requirements. The plan provides pension benefits based on an employee's length of service and the average compensation earned from the later of the hire date or January 1, 1985 to the retirement date. The Company's funding policy is to contribute annually at least the minimum amount required by government funding standards, but not more than is tax deductible.
Pension expense included in the consolidated statement of earnings for 1993, 1992 and 1991 was $1,010,259, $721,656 and $748,231, respectively. Net periodic pension expense of the defined benefit plan for 1993, 1992 and 1991 was as follows:
Plan assets consist primarily of cash equivalents, a marketable equity securities fund, guaranteed interest contracts (GIC), immediate participation guarantee contracts (IPG) and government bonds.
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The following table sets forth the funded status at December 31, 1993, December 31, 1992 and December 31, 1991:
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Assumptions used in the previous determinations were as follows:
11. Employee Stock Plans
Deferred Compensation and Stock Appreciation Rights Plan
In January 1986, the Company's Board of Directors approved a deferred compensation and stock appreciation rights plan designed to attract and retain certain key employees. Under the deferred compensation plan, eligible employees are granted the opportunity to defer the payment of a portion of their compensation. Under the stock appreciation rights plan, eligible employees are granted the right to receive a cash payment from the Company equal to the excess of the market value of a share of common stock of the Company at the payment date over the initial value at the issuance date. The rights become payable after five years following the effective date of the grant. The stock appreciation rights plan was amended on November 7, 1991 such that the outstanding rights as of November 6, 1991 shall not be higher than the excess of $22.38 per share over the initial value at the issuance date. In the event an employee retires, their rights under the deferred compensation plan and the stock appreciation rights plan may become payable. There were no stock appreciation rights granted during fiscal years 1993 and 1992. For the 1991 fiscal year, approximately 23,700 stock appreciation rights were granted under this plan. For 1993, 1992 and 1991 fiscal years, approximately $7,070, $9,500 and $1,254,000, respectively, were paid under this plan.
Restricted Stock Plan
In January 1988, the Company's Board of Directors adopted the CPI Corp. Restricted Stock Plan with an effective date of February 7, 1988. Under the plan, 250,000 shares of CPI common stock are reserved for issuance to key employees. Awards will usually be made at the beginning of each fiscal year, and will range from 20% to 40% of a recipient's annual compensation in that fiscal year. In PAGE
fiscal year 1992, 1,761 grants were issued and were vested in fiscal 1993. In fiscal year 1993 and 1991, 4,000 and 7,022 grants, respectively, were issued and are to be vested over a four-year period. Of the grants issued in fiscal year 1988, no grants were forfeited in fiscal years 1993 and 1992 and 662 grants were forfeited during fiscal year 1991. As of February 5, 1994, 179,497 shares are reserved for issuance under this plan.
Profit Sharing Plan
Under the Company's profit sharing plan, eligible employees may elect to invest from 1% to 10% of their base compensation in a trust fund, the assets of which are invested in securities other than Company stock. The Company matches up to 70% of the employee's investment, up to a maximum of 5% of the employee's base compensation, based on attainment of predefined earnings levels by the Company. The Company's matching contributions are made in shares of its common stock which vest over a maximum of five years, depending on the employee's length of service with the Company. The difference between the market value of forfeited shares at the dates of their original contribution and their market value at the dates used to satisfy subsequent requirements have been charged to expense, with a corresponding credit to additional paid-in-capital. The Company provided 15,473 and 12,093 shares to satisfy its obligations under the plan for fiscal years 1992 and 1991, respectively, and estimates that 19,536 shares will be required to satisfy its obligations under the plan for fiscal year 1993. For fiscal years 1992 and 1991, the Company matched the employee's investment at a rate of 30%. For fiscal year 1993, the Company estimates the match will also be 30%.
Stock Bonus Plan
Under the Company's stock bonus plan, shares of the Company's common stock are reserved for issuance to key employees, based on attainment by the Company of predefined earnings levels established annually. Each year, employees receive one-third of the shares which were awarded in each of the previous three years. For the 1993 and 1992 fiscal years, 3,678 and 2,890 shares, respectively, were issuable under this plan. No original awards were made under this plan in fiscal 1991 and 1993. In fiscal 1992, there was a discretionary award of 6,355 shares. As of February 5, 1994, 63,493 shares are reserved for issuance under this plan.
Expenses related to the profit sharing and stock bonus plans are accrued in the year to which the awards relate, based on the fair market value of the Company's common stock to be issued, determined as of the date earned. The cumulative appreciation related to stock appreciation rights, determined at the end of each period, is allocated on a ratable basis over the five-year vesting period. Expenses related to the restricted stock plan are accrued periodically, based on fair market value of the Company's common PAGE
stock on the grant date. Expenses recognized for fiscal years 1993, 1992 and 1991 with respect to these plans were $370,111, $596,855 and $1,181,415, respectively.
Incentive Stock Option Plan
The Company has a non-qualified incentive stock option plan, under which certain key officers may receive options to acquire shares of the Company's common stock. Twenty-five percent of options granted become exercisable at the end of each of the second through fifth years of continuous employment from the date of the grant, and unexercised options expire after six years. No compensation expense is recognized under the plan, since the exercise price equals or exceeds the fair market value of the Company's common stock at the date of grant. Activity in the plan is summarized as follows:
There was no activity under the Incentive Stock Option Plan in 1993. As of February 5, 1994, there were 306,177 shares reserved for issuance under this plan.
Stock Option Plan
The Company has a non-qualified stock option plan, under which certain officers and key employees may receive options to acquire shares of the Company's common stock. Awards of stock options and the terms and conditions of such awards are subject to the discretion of the Stock Option Committee created under the plan and consisting of disinterested directors of the Company. The plan was approved by stockholders on June 11, 1991 and the issuance of additional shares was ratified by stockholders on June 13, 1992. A total of 1,700,000 shares has been authorized for issuance under the plan. As of February 5, 1994, the Stock Option Committee has awarded options on the terms set forth as follows: PAGE
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Substantially all the Company's portrait studio business operates in the United States under a Sears, Roebuck and Co., ("Sears") license agreement that is terminable by either the Company or Sears upon 90 days' notice. Except in connection with store closings, Sears has never terminated the operations of any of the Company's portrait studios. The Company's relationship with Sears is long-standing, and management has no reason to believe that Sears will exercise its rights under the agreements to reduce materially the scope of the Company's business with Sears.
13. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (dollars in thousands):
14. Stock Repurchase Plan
The Company's Board of Directors announced on September 29, 1988, that it had authorized the Company to purchase up to 2,500,000 shares, or approximately 15%, of its outstanding common stock. In addition, on April 2, 1992, the Company's Board also authorized the purchase of an additional 2,000,000 shares of Company common stock. The Board has authorized purchases at management's discretion from time to time at acceptable market prices. Acquired shares are held as treasury stock and will be available for general corporate purposes. As of February 5, 1994, the Company had purchased 2,363,808 shares of stock for $58,556,032 at an average stock price of $24.77. Subsequent to fiscal year end and as of April 6, 1994, the Company had purchased an additional 204,855 shares of stock for $3,329,272 at an average stock price of $16.25.
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15. Stockholder Rights Plan
On May 1, 1989, the Board of Directors of the Company declared a dividend distribution of one preferred stock purchase right for each outstanding share of common stock. The rights were issued under a Rights Plan, which entitles holders of common stock to purchase one one-hundredth of a share of Series A Participating Preferred Stock in the Company, or an acquirer of the Company, in the event of certain hostile efforts, as defined in the Rights Plan, to gain control of the Company. The rights issued expire on May 11, 1999, unless redeemed earlier. On August 26, 1993, the Board of Directors of the Company amended the Company's Stockholder Rights Plan. As a result of the amendment, the rights will be exercisable if any person or group (other than certain entities affiliated with CPI) becomes the beneficial owner of 15 percent or more of CPI common stock. Under the original Stockholder Rights Plan the rights were exercisable at 20 percent of CPI common stock.
16. Contingencies
The Company is the defendant in various lawsuits arising in the normal course of business. It is the opinion of management that the ultimate liability, if any, resulting from the resolution of such lawsuits will not have a material effect on the consolidated financial position or the results of operations of the company.
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SELECTED QUARTERLY FINANCIAL DATA
The Company's portrait photography business is seasonal, with the largest sales volume during the third and fourth quarters, the period preceding and including the Thanksgiving and Christmas seasons.
The following table sets forth selected financial data for the quarters of the Company's fiscal years ended February 5, 1994, February 6, 1993 and February 1, 1992. Although this information is unaudited, in the opinion of the Company, it reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for such periods.
Since April 17, 1989, the Company's common stock has been traded on the New York Stock Exchange under the symbol CPY. Prior to that time it was traded on the National Association of Securities Dealers Automated Quotation ("NASDAQ") under the symbol CPIC. The table below sets forth the high and low last sale prices of the common stock reported by the New York Stock Exchange or NASDAQ during the Company's last three fiscal years.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders CPI Corp.:
We have audited the accompanying consolidated balance sheets of CPI Corp. and subsidiaries as of February 5, 1994 and February 6, 1993, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for each of the fiscal years in the three-year period ended February 5, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CPI Corp. and subsidiaries at February 5, 1994 and February 6, 1993, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended February 5, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for income taxes to conform with the provisions of Statement of Financial Accounting Standards No. 109.
/s/ KPMG PEAT MARWICK
St. Louis, Missouri April 6, 1994
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DIRECTORS AND OFFICERS
Directors Milford Bohm* Retired founder and former Chairman, CPI Corp.
Alyn V. Essman Chairman of the Board and Chief Executive Officer, CPI Corp.
Russell Isaak President, CPI Corp.
Lee Liberman* Former Chairman, Laclede Gas Company
Nicholas L. Reding Vice Chairman, Monsanto Company
Robert L. Virgil* Partner, Edward D. Jones & Co.
Officers Chairman, Chief Executive Officer Alyn V. Essman
Office of the President Russell Isaak-President David E. April-Senior Executive Vice President Patrick J. Morris-Senior Executive Vice President
Secretary and General Counsel Jane E. Nelson
Corporate Officers Barry Arthur-Executive Vice President, Finance -Chief Financial Officer Edmund J. Chase-Executive Vice President, Studio Strategic Development William F. Cronin-Executive Vice President, Marketing Fran Scheper-Executive Vice President, Human Resources Richard Tarpley-Executive Vice President, Manufacturing
Division Presidents R. L. Beck-CPI/Fox Photo Finish W. G. Blossfield-Sears Portrait Studios, Eastern Retail Operations Theodore deBuhr II-CPI Electronic Publishing Arthur Padovese-Prints Plus Harry Stecher-Sears Portrait Studios, Western Retail Operations and Canadian Operations
* Member of the Audit Committee of the Board of Directors PAGE
INVESTOR INFORMATION
Most Recent Analyst Reports:
Forbes Investors Advisory Institute, William D. Curtin, November 1, 1993 Morgan Keegan & Co. , Craig T. Weichmann, March 25,1994 Smith Barney, Peter J. Enderlin, March 21, 1994 Value Line, Philip M. Seligman, March 4, 1994
Stock Transfer Agent and Registrar:
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004
Automatic Dividend Reinvestment:
The automatic dividend reinvestment plan is a convenient way for shareholders to increase their investment in the Company, with all brokerage commissions and service charges paid by CPI Corp. Cash contributions in the amount of $10 to $10,000 per quarter can also be made toward the purchase of additional shares. For a plan description, enrollment card or other information, write or call the Shareholder Service Department at CPI Corporate Headquarters.
At the Company:
Alyn V. Essman Chairman CPI Corp., 1706 Washington Avenue, St. Louis, MO 63103 (314) 231-1575, Extension 3240
At the Financial Relations Board, Inc.:
LeRoy A. Glasner, Jr. C.F.A. Assistant Managing Partner John Hancock Center 875 N. Michigan Avenue Chicago, IL 60611 (312) 266-7800
Kathy Phelan Partner, Manager-East Coast MID 675 Third Avenue New York, NY 10017 (212) 661-8030
Annual Meeting/Corporate Headquarters:
The annual meeting of stockholders' will convene at 10:00 a.m., Tuesday, June 7, 1994 at the Corporate Headquarters, 1706 Washington Avenue, St. Louis, MO 63103-1717. PAGE
(Back cover of Annual Report to Shareholders)
CPI Corp. 1706 Washington Avenue, St. Louis, Missouri 63103-1717 NYSE:CPY
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Exhibit (21)
SUBSIDIARIES OF THE REGISTRANT AS OF FEBRUARY 7, 1994
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Exhibit (23)
ACCOUNTANTS' CONSENT
The Board of Directors and Stockholders CPI Corp.:
We consent to incorporation by reference in the Registration Statements (No. 2-86403, No. 33-19981 and No. 33-50082) on Form S-8 of CPI Corp. of our report dated April 6, 1994, relating to the consolidated balance sheets of CPI Corp. and subsidiaries as of February 5, 1994 and February 6, 1993 and the related consolidated statements of earnings, changes in stockholders' equity and cash flows and related schedules for each of the fiscal years in the three-year period ended February 5, 1994, which report appears in the 1993 annual report on Form 10-K of CPI Corp.
/s/ KPMG PEAT MARWICK
St. Louis, Missouri April 6, 1994