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 August 2, 1997 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
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Commission File No. 000-19372
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CATHERINES STORES CORPORATION
---------------------------------
(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
--------------
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) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the
registrant's classes of common stock as of the latest practicable
date.
As of September 3, 1997 there were 7,213,860 shares of
Catherines Stores Corporation common stock outstanding.
CATHERINES STORES CORPORATION
FORM 10-Q
August 2, 1997
Table of Contents
Page No
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
PART 2 - OTHER INFORMATION 13
2
Part 1. Financial Information
Item 1. Financial Statements.
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Twenty-six weeks ended Thirteen weeks ended
August 2, 1997 August 3, 1996 August 2, 1997 August 3, 1996
-------------- ------------- -------------- -------------
Net sales $141,631,880 $139,297,060 $ 70,663,687 $ 68,832,801
Cost of sales,
including buying
and occupancy
costs 97,231,371 94,669,434 48,560,541 47,176,231
----------- ----------- ----------- -----------
Gross margin 44,400,509 44,627,626 22,103,146 21,656,570
Selling, general
and administrative
expenses 38,370,161 36,877,091 18,716,370 18,108,044
Amortization of
intangible assets 523,261 601,331 248,382 300,232
----------- ----------- ----------- ---------
Operating income 5,507,087 7,149,204 3,138,394 3,248,294
Interest expense,
net 650,462 556,989 328,038 265,772
----------- ----------- ----------- -----------
Income before
income taxes 4,856,625 6,592,215 2,810,356 2,982,522
Provision for
income taxes 1,989,000 2,702,000 1,156,000 1,247,000
----------- ----------- ----------- -----------
Net income $ 2,867,625 $ 3,890,215 $ 1,654,356 $ 1,735,522
=========== =========== =========== ===========
Net income per
common share $ 0.40 $ 0.50 $ 0.23 $ 0.22
=========== =========== =========== ===========
Weighted
average number
of common shares
outstanding 7,259,770 7,852,321 7,259,937 7,870,429
=========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 2, February 1,
1997 1997
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ASSETS
Current Assets:
Cash and cash equivalents $ 3,494,141 $ 2,992,339
Receivables 2,255,970 3,051,595
Merchandise inventory 46,173,188 51,933,957
Prepaid expenses and other 4,593,076 3,478,849
Deferred income taxes 1,294,000 1,294,000
----------- -----------
Total current assets 57,810,375 62,750,740
----------- -----------
Property and Equipment, at cost:
Land 500,000 500,000
Leasehold improvements 23,676,290 22,703,829
Fixtures and equipment 28,967,246 27,799,419
Equipment under capital leases 11,507,500 9,204,817
Improvements in process 535,753 425,542
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65,186,789 60,633,607
Less accumulated depreciation
and amortization (29,073,456) (25,119,716)
----------- -----------
36,113,333 35,513,891
----------- -----------
Deferred Income Taxes 388,000 388,000
Other Assets and Deferred Charges,
less accumulated amortization of
$2,083,765 and $1,910,112 (Note 3) 2,855,186 2,999,552
Goodwill, less accumulated amortization
of $4,600,955 and $4,251,347 23,363,645 23,713,253
----------- -----------
$120,530,539 $125,365,436
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 20,106,636 25,973,186
Accrued expenses (Note 4) 11,557,492 12,053,356
Current maturities of long-term bank
and other debt 2,780,629 2,514,849
----------- -----------
Total current liabilities 34,444,757 40,541,391
----------- -----------
Long-Term Bank and Other Debt,
less current maturities (Note 5) 13,199,936 14,877,902
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,
7,213,860 and 7,191,656 shares issued
and outstanding 72,139 71,917
Additional paid-in capital 46,462,547 46,390,691
Retained earnings 26,351,160 23,483,535
----------- -----------
Total stockholders' equity 72,885,846 69,946,143
----------- -----------
$120,530,539 $125,365,436
=========== ===========
The accompanying notes are an integral part of these
consolidated balance sheets.
4
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Twenty-six weeks ended
August 2, 1997 August 3, 1996
-------------- --------------
Cash Flows from Operating Activities:
Net income $ 2,867,625 $ 3,890,215
---------- ----------
Adjustments to reconcile net income to
net cash provided by operating
activities--
Depreciation and amortization 4,623,442 4,108,562
Provision for losses on accounts
receivable 387,324 294,330
Change in other non-cash reserves (793,444) 693,767
Change in current assets and
liabilities (Note 2) (514,127) (4,363,727)
Other (175,728) 4,590
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Total adjustments 3,527,467 737,522
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Net cash provided by operating
activities 6,395,092 4,627,737
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Cash Flows from Investing Activities:
Capital expenditures (2,302,770) (6,247,463)
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Net cash used by investing
activities (2,302,770) (6,247,463)
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Cash Flows from Financing Activities:
Sales of common stock 72,078 90,117
Proceeds from issuance of long-term bank
and other debt -- 1,750,000
Principal payments of long-term bank
and other debt (3,662,598) (1,435,151)
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Net cash (used) provided by financing
activities (3,590,520) 404,966
---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents 501,802 (1,214,760)
Cash and Cash Equivalents, beginning
of period 2,992,339 3,954,808
---------- ----------
Cash and Cash Equivalents, end of period $ 3,494,141 $ 2,740,048
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
5
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 August 2, 1997 and February 1, 1997, and
the consolidated results of their operations for the twenty-six and
thirteen weeks ended August 2, 1997 and August 3, 1996 and their
cash flows for the twenty-six weeks ended August 2, 1997 and August
3, 1996. Stores and its subsidiaries are collectively referred to
as the "Company". The results of operations for the twenty-six and
thirteen 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 1, 1997. 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.
(2) Statements of Cash Flows
- ----------------------------
The changes in current assets and liabilities reflected in the
statements of cash flows were as follows:
Twenty-Six weeks ended
-------------------------
August 2, August 3,
1997 1996
--------- --------
Increase (decrease) in cash and
cash equivalents-
Receivables $ 458,271 $ 203,069
Merchandise inventory 6,537,213 (3,318,460)
Prepaid expenses and other (1,114,197) (667,701)
Accounts payable (5,866,550) (127,586)
Accrued expenses (528,864) (453,049)
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Total $ (514,127) $(4,363,727)
========== ==========
Interest paid during the twenty-six weeks ended August 2, 1997
and August 3, 1996 was approximately $632,000 and $386,000,
respectively. Income taxes paid during the twenty-six weeks ended
August 2, 1997 and August 3, 1996 were approximately $1,148,000 and
$1,660,000, respectively.
6
(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:
August 2, February 1, Amortization Methods
1997 1997 and Periods
----------- ----------- ---------------------
Covenants not to compete $1,209,694 1,324,348 Straight-line over
term of agreements
Trademarks and tradenames 1,089,944 $ 1,112,482 Straight-line over
40 years
Deferred financing costs 33,344 69,805 Effective interest
method over term
of financing
Other 522,204 492,917
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Total $2,855,186 $2,999,552
========= =========
(4) Accrued Expenses
- --------------------
Accrued expenses consisted of the following:
August 2, February 1,
1997 1997
--------- -----------
Payroll and related benefits $ 2,635,782 $ 2,430,673
Taxes other than income taxes 532,680 1,138,246
Rent and other related costs 2,084,852 2,307,074
Insurance 122,015 1,006,664
Deferred revenues 1,823,326 1,830,652
Other 4,358,837 3,340,047
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Total $11,557,492 $12,053,356
========== ==========
(5) Long-Term Bank and Other Debt
- ---------------------------------
Long-term bank and other debt consisted of the following:
August 2, February 1,
1997 1997
--------- -----------
Due to banks:
Term loan $ 1,750,000 $ 2,250,000
Working capital notes 9,514,000 12,000,000
Other:
Capital lease obligations 4,481,172 3,040,939
Other notes and obligations 235,393 101,812
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15,980,565 17,392,751
Less current maturities (2,780,629) (2,514,849)
---------- ----------
Total $13,199,936 $14,877,902
========== ==========
At August 2, 1997, Catherines had approximately $12,498,000
available under its combined working capital and swing line
facility after considering outstanding letters of credit of
approximately $5,988,000. The Company has entered into two
supplements to a master capital lease agreement for the purpose of
7
installing new point of sale registers in its stores. This
equipment will cost approximately $3,400,000, all of which will be
financed by capital lease. Through August 2, 1997 approximately
two-thirds of these registers have been installed.
(6) Leases
- ----------
During the twenty-six weeks ended August 2, 1997, the Company
entered into new leases for 10 stores including relocations.
Future minimum rental payments have increased approximately
$1,029,000 since February 1, 1997, 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 $80,329,000.
Total rent expense for all operating leases was as follows:
Twenty-six weeks ended
--------------------------
August 2, August 3,
1997 1996
--------- --------
Minimum rentals $10,639,071 $ 9,948,205
Contingent rentals 145,071 190,193
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Total $10,784,142 $10,138,398
========== ==========
(7) Stockholders' Equity
- ------------------------
On March 19, 1997, under the 1994 Omnibus Incentive Plan,
options to purchase 143,750 shares of common stock were granted to
certain officers and key employees of the Company at $4.88 per
share, the fair market value on that date. On June 4, 1997,
options to purchase 10,000 shares of common stock were granted to
the outside directors of the Company at $4.25 per share, the fair
market value on that date. No more options are available to be
granted under this plan. At August 2, 1997, there were vested
options outstanding to purchase 679,725 shares of common stock at
an average price per share of $8.72.
The change in stockholders' equity was as follows:
Additional
Common Paid-in Retained
Stock Capital Earnings Total
--------- ----------- ----------- --------
Balance at February 1,
1997 $71,917 $46,390,691 $23,483,535 $69,946,143
Net proceeds from sale
of common shares 222 71,856 -- 72,078
Net income -- -- 2,867,625 2,867,625
------ ---------- ---------- ----------
Balance at August 2, 1997 $72,139 $46,462,547 $26,351,160 $72,885,846
====== ========== ========== ==========
(8) New Accounting Pronouncement
- --------------------------------
The Financial Accounting Standards Board has issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share",
effective for fiscal years ending after December 15, 1997. This
statement requires, among other things, the presentation of
earnings per share and diluted earnings per share on the face of
the income statement and a reconciliation of weighted average
shares to fully diluted weighted average shares in the footnotes of
the financial statements. Management does not believe that this
statement will have a material impact on the Company's presentation
of earnings per common share.
8
(9) 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:
Twenty-six weeks ended Thirteen weeks ended
---------------------- --------------------
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
---------- -------- --------- --------
Weighted average
number of shares
outstanding 7,203,255 7,678,610 7,207,978 7,682,903
Common stock
equivalents -
shares issuable
under the 1994
Omnibus Incentive
Plan, the 1992 Non-
qualified Stock Option
Plan, and the 1990
Performance Units Plan 56,515 173,711 51,959 187,526
--------- --------- --------- ---------
Weighted average
common shares out-
standing assuming
full dilution 7,259,770 7,852,321 7,259,937 7,870,429
========= ========= ========= =========
9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
- --------------------------
This outlook contains forward-looking statements based on current
expectations that involve a number of uncertainties. The factors
that could cause actual results to differ materially include the
following: general economic conditions; competitive factors and
pricing pressures; changes in product mix and fashion offerings;
and inventory risks due to shifts in market demand.
Liquidity and Capital Resources
- -------------------------------
The Company's cash provided by operations was $6,395,000 during
the twenty-six weeks ended August 2, 1997, compared to cash
provided by operations of $4,628,000 during the twenty-six weeks
ended August 3, 1996. The increase in cash flow provided by
operations is primarily attributable to decreased working capital
needs offset by a reduction in net income. The Company's working
capital was $23,366,000 at August 2, 1997 compared to $22,209,000
at February 1, 1997. Compared to the second quarter of 1996, per
store inventories decreased 12.9%. The Company's internally
generated cash flow financed its operating requirements, capital
expenditures and debt service during the twenty-six week period
ended August 2, 1997.
The Company maintains 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. The term of the agreement is
through January 31, 2000.
The Company estimates that fiscal 1997 capital expenditures will
be approximately $4,500,000, of which an estimated $3,657,000
will be used for the opening of six new locations and the
remodeling, relocation and expansion of approximately 27 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 principal 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 August 2, 1997, the Company had
approximately $12,498,000 available under its combined working
capital and swing line facility after considering approximately
$5,988,000 in outstanding letters of credit.
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 remodel or
expand.
10
Results of Operations
- ---------------------
Thirteen Weeks Ended August 2, 1997 Compared to Thirteen Weeks
- --------------------------------------------------------------
Ended August 3, 1996
- ------------------------
Net sales in the second quarter of 1997 increased 2.7% to
$70,664,000 from $68,833,000 in the second quarter of 1996.
Comparable stores' sales increased 1.5%, due primarily to
increases in the average unit price and in the number of
saleschecks generated, offset by decreases in number of units
sold. During the second quarter, five stores were closed,
reducing the number of stores operated by the Company on August
2, 1997 to 455.
Gross margin, after buying and occupancy costs, decreased as a
percentage of sales to 31.3% from 31.5% in the second quarter of
1996. The decrease is primarily attributable to a decrease in
merchandise margins, offset by an decrease in utility costs.
Selling, general and administrative expenses increased to
$18,716,000 in the second quarter of 1997 compared to $18,108,000
in the second quarter of 1996. The increase is primarily
attributable to payroll and maintenance services, offset by a
decrease in advertising and freight expenses. As a percentage of
sales, the selling, general and administrative expenses
increased to 26.5% from 26.3% in the second quarter of 1996.
Selling, general and administrative expenses per store increased
1.9% over the second quarter of 1996.
Interest expense was approximately $328,000 in the second quarter
of 1997 compared to $266,000 in the second quarter of 1996. The
increase is primarily attributable to the increase in working
capital borrowings.
Income taxes were provided at an effective rate of 41.1% in the
second quarter of 1997 compared to 41.8% in the second quarter of
1996.
Net income for the second quarter of 1997 was $1,654,000 compared
to $1,736,000 for the second quarter of 1996. Net income per
common share was $0.23 compared to $0.22 per share reported in
the second quarter of 1996. Although second quarter net income
decreased, earnings per common share increased because fewer
weighted average common shares were outstanding in the second
quarter of 1997.
Twenty-six Weeks Ended August 2, 1997 Compared to Twenty-six
- ------------------------------------------------------------
Weeks Ended August 3, 1996
- --------------------------
Net sales in the first six months of 1997 increased 1.7% to
$141,632,000 from $139,297,000 in the first six months of 1996.
Comparable stores' sales decreased 0.2%, due primarily to a
decrease in number of units sold and the number saleschecks
generated, offset by increases in the average unit price. During
the first six months of 1997, five stores opened and seven stores
were closed, reducing the number of stores operated by the
Company on August 2, 1997 to 455.
Gross margin, after buying and occupancy costs, decreased as a
percentage of sales to 31.4% from 32.0% in the first six months
of 1996. The decrease is primarily attributable to an increase
in depreciation expenses and a decrease in merchandise margins.
Selling, general and administrative expenses increased to
$38,370,000 in the first six months of 1997 compared to
$36,877,000 in the first six months of 1996. The increase is
primarily attributable to payroll, advertising, services and
freight. As a percentage of sales, selling, general and
11
administrative expenses increased to 27.1% from 26.5% in the
first six months of 1996. Selling, general and administrative
expenses per store increased 1.2% from the first six months of
1996.
Interest expense was approximately $650,000 in the first six
months of 1997 compared to $557,000 in the first six months of
1996. The increase is primarily attributable to the increase in
working capital borrowings.
Income taxes were provided at an effective rate of 41.0% in the
first six months of 1997 and in the first six months of 1996.
Net income for the first six months of 1997 was $2,868,000
compared to $3,890,000 for the first six months of 1996. Net
income per common share was $0.40 compared to $0.50 per share
reported in the first six months of 1996.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.
Not Applicable.
12
PAGE
PART 2 - 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
--------------------------------------------------
See Quarterly Report on Form 10-Q for the period
ended May 3, 1997 for the results of the Company's
Annual Meeting of Stockholders held on June 4, 1997.
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(A) Exhibits:
Exhibit 27: Financial Data Schedule
(EDGAR filing only).
(B) Reports on Form 8-K:
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
September 15, 1997 /s/David C. Forell
- ----------------- -------------------------
(Date) David C. Forell,
Executive Vice President,
Chief Financial Officer
13