SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended November 2, 1996 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File No. 000-19372
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CATHERINES STORES CORPORATION
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(exact name of registrant as specified in its charter)
Tennessee 62-1350411
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3742 Lamar Ave, Memphis, TN 38118
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (901) 363-3900
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports).
Yes X No
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Indicate the number of shares outstanding of each of the
registrant's classes of common stock as of the latest practicable
date.
As of December 4, 1996 there were 7,178,055 shares of
Catherines Stores Corporation common stock outstanding.
CATHERINES STORES CORPORATION
FORM 10-Q
November 2, 1996
Table of Contents
Page No
PART 1 - FINANCIAL INFORMATION
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
PART 2 - OTHER INFORMATION 13
Item 1. Financial Statements
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Thirteen weeks ended Thirty-nine weeks ended
----------------------------------------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Net sales $65,642,367 $69,504,598 $204,939,427 $206,326,490
Cost of sales, including
buying and occupancy
costs 46,423,066 49,245,088 141,092,500 141,352,570
---------- ---------- ----------- -----------
Gross margin 19,219,301 20,259,510 63,846,927 64,973,920
Selling, general and
administrative expenses 18,552,025 18,575,086 55,429,116 54,016,160
Amortization of
intangible assets 290,954 300,936 892,285 904,388
---------- ---------- ----------- -----------
Operating income 376,322 1,383,488 7,525,526 10,053,372
Interest expense, net 305,196 260,874 862,185 687,925
---------- ---------- ----------- -----------
Income before income
taxes 71,126 1,122,614 6,663,341 9,365,447
Provision for income
taxes 30,000 448,000 2,732,000 3,745,000
---------- ---------- ----------- -----------
Net income $ 41,126 $ 674,614 $ 3,931,341 $ 5,620,447
========== ========== =========== ===========
Net income per common
share $ 0.01 $ 0.09 $ 0.51 $ 0.71
========== ========== =========== ===========
Weighted average number
of common shares
outstanding 7,504,045 7,921,387 7,736,229 7,866,295
========== ========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 2, February 3,
1996 1996
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,806,450 $ 3,954,808
Receivables 3,885,803 3,780,937
Merchandise inventory 53,678,026 50,077,984
Prepaid expenses and other 3,755,124 3,536,617
Deferred income tax asset 962,000 962,000
----------- -----------
Total current assets 65,087,403 62,312,346
----------- -----------
Property and Equipment, at cost:
Land 500,000 500,000
Leasehold improvements 22,543,906 18,635,489
Fixtures and equipment 27,749,037 21,316,361
Equipment under capital leases 8,952,059 7,309,076
Improvements in process --- 1,719,818
----------- -----------
59,745,002 49,480,744
Less accumulated depreciation
and amortization (23,390,611) (18,083,516)
----------- -----------
36,354,391 31,397,228
----------- -----------
Other Assets and Deferred Charges,
less accumulated amortization
of $1,798,260 and $1,442,558
(Note 3) 2,939,919 3,299,862
Goodwill, less accumulated
amortization of $4,092,093
and $3,555,510 23,913,462 24,450,044
----------- -----------
$128,295,175 $121,459,480
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 22,187,844 $ 26,184,815
Accrued expenses (Note 4) 13,032,828 11,870,012
Current maturities of
long-term bank and other
debt 2,620,874 3,045,734
----------- -----------
Total current liabilities 37,841,546 41,100,561
----------- -----------
Long-Term Bank and Other Debt,
less current maturities (Note 5) 17,527,857 7,718,518
Deferred Income Taxes 408,000 408,000
Stockholders' Equity (Note 7):
Preferred stock, $.01 par value,
1,000,000 shares authorized,
none issued and outstanding --- ---
Common stock, $.01 par value,
50,000,000 shares authorized,
7,178,055 and 7,673,174 shares
issued and outstanding 71,781 76,732
Additional paid-in capital 46,317,089 49,958,108
Retained earnings 26,128,902 22,197,561
----------- -----------
Total stockholders' equity 72,517,772 72,232,401
----------- -----------
$128,295,175 $121,459,480
=========== ===========
The accompanying notes are an integral part of
these consolidated balance sheets.
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nine weeks ended
November 2, October 28,
1996 1995
----------- -----------
Cash Flows from Operating Activities:
Net income $ 3,931,341 $ 5,620,447
---------- ----------
Adjustments to reconcile net
income to net cash provided
by operating activities--
Depreciation and amortization 6,199,232 5,308,439
Provision for losses on
accounts receivable 516,564 596,849
Change in other non-cash
reserves (71,142) (652,588)
Change in current assets and
liabilities (Note 2) (7,202,992) (8,017,777)
Other 4,388 (5,567)
---------- ----------
Total adjustments (553,950) (2,770,644)
---------- ----------
Net cash provided by
operating activities 3,377,391 2,849,803
---------- ----------
Cash Flows from Investing Activities:
Capital expenditures (8,824,101) (8,017,827)
---------- ----------
Net cash used by investing
activities (8,824,101) (8,017,827)
---------- ----------
Cash Flows from Financing Activities:
(Repurchase) Sales of common
stock, net (Note 7) (3,645,970) 113,331
Proceeds from issuance of
long-term bank and other debt 10,437,000 7,750,000
Principal payments of long-term
bank and other debt (2,492,678) (1,997,940)
---------- ----------
Net cash provided by
financing activities 4,298,352 5,865,391
---------- ----------
Net (Decrease) Increase in Cash
and Cash Equivalents (1,148,358) 697,367
Cash and Cash Equivalents,
beginning of period 3,954,808 2,000,404
---------- ----------
Cash and Cash Equivalents,
end of period $ 2,806,450 $ 2,697,771
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
CATHERINES STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
(consisting of normal recurring adjustments) which management
considers necessary to present fairly the consolidated financial
position of Catherines Stores Corporation ("Stores") and its wholly
owned subsidiaries as of November 2, 1996 and February 3, 1996, the
consolidated results of their operations for the thirteen and
thirty-nine weeks ended November 2, 1996 and October 28, 1995, and
cash flows for the thirty-nine weeks ended November 2, 1996 and
October 28, 1995. Stores and its subsidiaries are collectively
referred to as the "Company". The results of operations for the
thirteen and thirty-nine week periods may not be indicative of the
results for the entire year.
These statements should be read in conjunction with the
audited financial statements and related notes which have been
incorporated by reference in the Company's Form 10-K for the year
ended February 3, 1996. Accordingly, significant accounting
policies and other disclosures necessary for complete financial
statements in conformity with generally accepted accounting
principles have been omitted since such items are reflected in the
Company's audited financial statements and related notes thereto.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make certain estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent
assets and liabilities, at the date of the financial statements,
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Certain prior year balances have been reclassified to conform
to the current year presentation.
(2) Statements of Cash Flows
The changes in current assets and liabilities reflected in the
statements of cash flows were as follows:
Thirty-nine weeks ended
---------------------------
November 2, October 28,
1996 1995
----------- -----------
Increase (decrease) in cash
and cash equivalents -
Receivables $ (624,641) $ (1,819,922)
Merchandise inventory (3,721,689) (10,141,648)
Prepaid expenses and other (218,507) (170,304)
Accounts payable (3,996,971) (83,734)
Accrued expenses 1,358,816 4,197,831
---------- ----------
Total $(7,202,992) $(8,017,777)
========== ==========
Interest paid during the thirty-nine weeks ended November 2,
1996 and October 28, 1995 were approximately $747,000 and $693,000,
respectively. Income taxes paid during the thirty-nine weeks ended
November 2, 1996 and October 28, 1995 were approximately $1,995,000
and $3,501,000, respectively.
(3) Other Assets and Deferred Charges
Other assets and deferred charges, net of accumulated
amortization, together with the related amortization methods and
periods, were as follows:
November 2, February 3, Amortization Methods
1996 1996 and Periods
----------- ----------- --------------------
Trademarks and
tradenames $1,123,751 $1,149,758 Straight-line over 40 years
Deferred financing costs 113,059 242,824 Effective interest method
over term of financing
Covenants not to compete 1,381,674 1,581,606 Straight-line over term of
agreements
Other 321,435 325,674
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Total $2,939,919 $3,299,862
========= =========
(4) Accrued Expenses
Accrued expenses consisted of the following:
November 2, February 3,
1996 1996
----------- -----------
Payroll and related benefits $ 2,546,600 $ 2,540,098
Taxes other than income taxes 1,870,270 1,793,844
Rent and other related costs 2,319,322 2,453,354
Insurance 791,680 824,907
Deferred revenues 1,862,078 1,750,529
Other 3,642,878 2,507,280
---------- ----------
Total $13,032,828 $11,870,012
========== ==========
(5) Long-Term Bank and Other Debt
Long-term bank and other debt consisted of the following:
November 2, February 3,
1996 1996
----------- -----------
Due to banks:
Term loan $ 2,500,000 $ 3,250,000
Working capital notes 14,187,000 3,750,000
Other:
Capital lease obligations 3,266,352 3,232,576
Other notes and obligations 195,379 531,676
---------- ----------
20,148,731 10,764,252
Less current maturities (2,620,874) (3,045,734)
---------- ----------
Total $17,527,857 $ 7,718,518
========== ==========
At November 2, 1996, Catherines had approximately $9,308,000
available under its working capital facility and swing line of
credit after considering outstanding letters of credit of
approximately $4,505,000.
The Company and its lenders have amended their credit
agreement on September 4, 1996 and again on December 4, 1996. As
a result of these amendments, certain financial ratio covenants
were amended, one restrictive covenant was waived for the current
fiscal year and amended for subsequent years, the Company's capital
expenditures are limited to $11,000,000 for the current fiscal year
and to $8,000,000 thereafter and the credit agreement was extended
to March 15, 1999.
(6) Leases
During the thirty-nine weeks ended November 2, 1996, the
Company extended leases for 41 stores and entered into new leases
for 33 stores. Future minimum rental payments have increased
approximately $3,454,000 since February 3, 1996, bringing the total
future minimum rental payments under all noncancelable operating
leases with initial or remaining lease terms of one year or more to
approximately $81,358,000.
Total rent expense for all operating leases was as follows:
Thirty-nine weeks ended
--------------------------
November 2, October 28,
1996 1995
----------- -----------
Minimum rentals $15,121,327 $13,564,486
Contingent rentals 273,564 388,807
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Total $15,394,891 $13,953,293
========== ==========
(7) Stockholders' Equity
On March 20, 1996, under the 1994 Omnibus Incentive Plan,
options to purchase 156,500 shares of common stock were granted to
certain officers and key employees of the Company at $9.00 per
share, the fair market value on that date. On June 5, 1996,
options to purchase 10,000 shares of common stock were granted to
the outside directors of the Company at $10.00 per share, the fair
market value on that date. At November 2, 1996, there were vested
options outstanding to purchase 535,350 shares of common stock at
an average price per share of $8.26.
During the third quarter of 1996, the Company repurchased
509,500 shares of its outstanding common stock for an average price
of $7.33 per common share.
The change in stockholders' equity was as follows:
Additional
Common Paid-in Retained
Stock Capital Earnings Total
--------- ---------- --------- ----------
Balance at February 3,
1996 $76,732 $49,958,108 $22,197,561 $72,232,401
Net proceeds from sale
of shares to employee
stock purchase plan 144 89,973 --- 90,117
Repurchase of Stock (5,095) (3,730,992) (3,736,087)
Net income --- --- 3,931,341 3,931,341
------ ---------- ---------- ----------
Balance at November 2,
1996 $71,781 $46,317,089 $26,128,902 $72,517,772
====== ========== ========== ==========
(8) Weighted Average Common Shares Outstanding
Net income per common share is computed based on the weighted
average number of common and common equivalent shares outstanding
during the period. The computation of weighted average common
shares outstanding is as follows:
Thirteen weeks ended Thirty-nine weeks ended
--------------------------------------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Weighted average number
of shares outstanding 7,376,813 7,661,432 7,578,011 7,653,005
Common stock equivalents -
shares issuable under the
1994 Omnibus Incentive
Plan, the 1992 Nonqualified
Stock Option Plan, and the
1990 Performance Units Plan 127,232 259,955 158,218 213,290
--------- --------- --------- ---------
Weighted average common
shares outstanding assuming
full dilution 7,504,045 7,921,387 7,736,229 7,866,295
========= ========= ========= =========
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's cash provided by operations was $3,377,000
during the thirty-nine weeks ended November 2, 1996, compared to
cash provided by operations of $2,850,000 during the thirty-nine
weeks ended October 28, 1995. The increase in cash flow provided
by operations is primarily attributable to a decrease in additions
to working capital. The Company's working capital was $27,246,000
at November 2, 1996 compared to $21,212,000 at February 3, 1996.
Borrowings under the Company's working capital facility and
internally generated cash flow financed the Company's operating
requirements during the thirty-nine week period ended November 2,
1996.
The Company is a party to a merchant services agreement with
a third party credit processor. This agreement provides for the
Company to sell, without recourse, accounts receivable from credit
sales on a daily basis at face value, subject to adjustment
beginning February 1997. The term of the agreement is through
January 31, 2000.
The Company estimates that fiscal 1996 capital expenditures
will approximate $11,000,000, of which an estimated $7,767,000 will
be used for the opening of 34 new locations and the remodeling,
relocation, and expansion of approximately 30 to 35 other
locations. The remainder of capital expenditures are to upgrade
existing computer systems, add additional software technology and
to maintain existing facilities.
The Company's bank credit agreement provides for a $5,000,000
term loan, a working capital facility of $25,000,000 and a swing
line of credit of $3,000,000 with the Company's agent bank. The
term loan requires quarterly payments of $250,000. The working
capital facility may be used for letters of credit. The interest
rate is the bank's prime rate or LIBOR plus 1 1/4%, at the
Company's option. At November 2, 1996, the Company had
approximately $9,308,000 combined availability under its working
capital facility and swing line of credit after considering
approximately $4,505,000 in outstanding letters of credit. The
agreement also allows the Company to repurchase up to $8,000,000 of
its common stock over the term of the agreement. During the third
quarter the Company repurchased 509,500 shares of its common stock
outstanding for $3,736,000, or $7.33 per common share. The
Company's peak borrowing under the working capital facility and
term loan during the first three quarters of 1996, including
outstanding letters of credit, was $22,323,000 in October 1996.
The Company and its lenders have amended their credit
agreement on September 4, 1996 and again on December 4, 1996. As
a result of these amendments, certain financial ratio covenants
were amended, one restrictive covenant was waived for the current
fiscal year and amended for subsequent years, the Company's capital
expenditures are limited to $11,000,000 for the current fiscal year
and to $8,000,000 thereafter and the credit agreement was extended
to March 15, 1999.
The Company believes that its internally generated cash flow,
together with borrowings under the bank credit agreement, will be
adequate to finance the Company's operating requirements, debt
repayments and capital needs during the current year. Any material
shortfalls in operating cash flow could require management to seek
alternative sources of financing or to reduce the number of stores
that the Company expects to open, remodel or expand.
Results of Operations
Thirteen Weeks Ended November 2, 1996 Compared to Thirteen Weeks
Ended October 28, 1995
Net sales in the third quarter of 1996 decreased 5.6% to
$65,643,000 from $69,505,000 in the third quarter of 1995.
Comparable stores' sales decreased 9.1%, due primarily to
reductions in the total units sold and total saleschecks generated,
partially offset by an increase in average units per salescheck.
There was a slight increase in average unit price. During the
third quarter, nine stores were opened and one store was closed,
bringing the number of stores operated by the Company on November
2, 1996 to 460.
Gross margin, after buying and occupancy costs, increased as
a percentage of sales to 29.3% from 29.1% in the third quarter of
1995. The increase is primarily attributable to an increase of
1.8% in merchandise margins due to net lower markdowns, partially
offset by an increase in rents, depreciation and utility expenses
primarily related to new stores.
Selling, general and administrative expenses decreased 0.1% to
$18,552,000 in the third quarter of 1996 from $18,575,000 in the
third quarter of 1995. The 48 new stores opened in 1996 and the
second half of 1995 had expenses of $1,966,000, while comparable
stores reduced expenses by $1,989,000 primarily in payroll and
advertising expenses. As a percentage of sales, selling, general
and administrative expenses increased to 28.3% from 26.7% in the
third quarter of 1995 due to lower sales.
Interest expense was approximately $305,000 in the third
quarter of 1996, compared to $261,000 in the third quarter of 1995.
The increase is primarily attributable to an increase in borrowings
under the bank credit facility.
Net income for the third quarter of 1996 was $41,000 or $0.01
per common share compared to $675,000 or $0.09 per common share in
the third quarter of 1995.
Thirty-nine Weeks Ended November 2, 1996 Compared to Thirty-nine
Weeks Ended October 28, 1995
Net sales in the first three quarters of 1996 decreased 0.7%
to $204,939,000 from $206,326,000 in the first three quarters of
1995. Comparable stores' sales decreased 5.2%, due primarily to
reductions in total saleschecks generated and in total units sold,
partially offset by increases in the average units per salescheck.
There was a slight increase in the average unit price. During the
first three quarters of 1996, 33 stores were opened and five stores
were closed, bringing the number of stores operated by the Company
on November 2, 1996 to 460.
Gross margin, after buying and occupancy costs, decreased as
a percentage of sales to 31.2% from 31.5% in the first three
quarters of 1995. The decrease is primarily attributable to an
increase in rents, depreciation and utility expenses related
primarily to new stores, offset by a decrease in payroll and by an
increase in merchandise margins due to net lower markdowns.
Merchandise margins for the first three quarters of 1996 improved
1.0% as a percentage of sales from the first three quarters of
1995.
Selling, general and administrative expenses increased 2.6% to
$55,429,000 in the first three quarters of 1996 compared to
$54,015,000 in the first three quarters of 1995. The 48 new stores
opened in 1996 and the second half of 1995 had expenses of
$3,639,000, while comparable stores reduced expenses by $2,225,000
primarily in payroll and advertising expenses. As a percentage of
sales, selling, general and administrative expenses increased to
27.0% from 26.2% in the third quarter of 1995 due to lower sales.
Interest expense was approximately $862,000 in the first three
quarters of 1996, compared to $688,000 in the first three quarters
of 1995. The increase is primarily attributable to the increase in
borrowings under the bank credit facility.
Income taxes were provided at an effective rate of 41.0% in
the first three quarters of 1996, compared to 40.0% in the first
three quarters of 1995. The rate is affected by non-deductible
goodwill amortization.
Net income for the first three quarters of 1996 was $3,931,000
compared to $5,620,000 for the same period of 1995. Net income per
common share was $0.51 compared to $0.71 per share in the first
three quarters of 1995.
PART II - OTHER INFORMATION
CATHERINES STORES CORPORATION
Item 1. Legal Proceedings
None
Item 2. Changes in the Rights of the Company's Security Holders
Not applicable
Item 3. Defaults by the Company on its Senior Securities
Not applicable
Item 4. Submission of Matters to a vote of Security Holder
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) None
(B) None
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SIGNATURES
December 4, 1996 /s/ David C. Forell
---------------- -----------------------------------
(Date) David C. Forell,
Executive Vice President,
Chief Financial Officer and Treasurer