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 July 31, 1999 or
[ ] 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
CATHERINES STORES CORPORATION
(exact name of registrant as specified in its charter)
Tennessee 62-1350411
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3742 Lamar Avenue, Memphis, Tennessee, 38118
(Address of principal executive offices)
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).
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 1, 1999, there were 6,776,200 shares of Catherines Stores
Corporation common stock outstanding.
CATHERINES STORES CORPORATION
FORM 10-Q
July 31, 1999
Table of Contents
PART 1 - FINANCIAL INFORMATION
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART 2 - OTHER INFORMATION
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Thirteen weeks ended Twenty-six weeks ended
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
------- --------- -------- ---------
Net sales $78,333,536 $74,826,611 $158,633,264 $151,279,005
Cost of sales,
including buying and
occupancy costs 49,556,525 49,208,328 102,835,948 100,317,466
---------- ---------- ----------- -----------
Gross margin 28,777,011 25,618,283 55,797,316 50,961,539
Selling, general and
administrative expenses 20,239,227 19,314,462 40,949,568 39,745,501
Amortization of
intangible assets 249,523 275,072 502,714 529,380
------- ------- ------- -------
Operating income before
write-down of store
assets and store
closing costs 8,288,261 6,028,749 14,345,034 10,686,658
Write-down of store
assets and store
closing costs 22,659 11,099 237,132 199,755
------ ------ ------- -------
Operating income 8,265,602 6,017,650 14,107,902 10,486,903
Interest and other, net 91,552 154,139 194,923 433,787
------ ------- ------- -------
Income before
income taxes 8,174,050 5,863,511 13,912,979 10,053,116
Provision for
income taxes 3,273,000 2,405,000 5,565,000 4,123,000
--------- --------- --------- ---------
Net income $4,901,050 $3,458,511 $8,347,979 $5,930,116
========== ========== ========== ==========
Net income per common
share $ 0.71 $ 0.48 $ 1.19 $ 0.82
===== ===== ===== =====
Net income per common share,
assuming dilution $ 0.68 $ 0.47 $ 1.16 $ 0.80
===== ===== ===== =====
The accompanying notes are an integral part of these consolidated financial
statements.
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, January 30,
1999 1999
------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 15,134,573 $ 11,561,223
Receivables 2,504,309 2,457,333
Merchandise inventory 49,357,364 50,355,267
Prepaid expenses and other 4,164,501 3,398,562
Deferred income taxes 4,203,000 4,203,000
------------- -------------
Total current assets 75,363,747 71,975,385
------------- -------------
Property and Equipment, at cost:
Land 500,000 500,000
Buildings and leasehold improvements 27,801,210 25,751,524
Fixtures and equipment 34,980,774 31,910,633
Equipment under capital leases 15,184,895 13,588,016
Improvements in process 346,439 2,644,496
------------- -------------
78,813,318 74,394,669
Less accumulated depreciation
and amortization (43,125,219) (39,410,261)
------------- -------------
35,688,099 34,984,408
------------- -------------
Other Assets and Deferred Charges,
less accumulated amortization of
$2,159,279 and $1,997,082 1,977,995 2,290,022
Goodwill, less accumulated amortization
of $5,837,114 and $5,534,646 21,397,405 21,871,164
------------- -------------
$ 134,427,246 $ 131,120,979
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 21,862,409 $ 22,310,110
Accrued expenses 19,577,140 19,347,208
Current maturities of long-term bank
and other debt 1,853,413 1,816,119
------------- -------------
Total current liabilities 43,292,962 43,473,437
------------- -------------
Long-Term Bank and Other Debt,
less current maturities 9,518,758 9,517,067
Deferred Income Taxes 378,000 378,000
Stockholders' Equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized, none issued and outstanding -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 6,806,262 and 7,279,949 shares
issued and outstanding 68,063 72,800
Additional paid-in capital 41,666,996 46,525,187
Retained earnings 39,502,467 31,154,488
------------- -------------
Total stockholders' equity 81,237,526 77,752,475
------------- -------------
$ 134,427,246 $ 131,120,979
============= =============
The accompanying notes are an integral part of these consolidated balance
sheets.
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-six weeks ended
July 31, 1999 August 1, 1998
------------- --------------
Cash Flows from Operating Activities:
Net income $ 8,347,979 $ 5,930,116
------------ ------------
Adjustments to reconcile net income to
net cash provided by
operating activities--
Depreciation and amortization 4,442,897 4,514,293
Write-down of closed store assets 206,904 --
Change in reserve for store
closing costs (364,120) 29,869
Net change in current assets
and liabilities 171,492 653,893
Change in other noncash reserves 159,847 545,762
Change in other assets 149,831 (71,147)
------------ ------------
Total adjustments 4,766,851 5,672,670
------------ ------------
Net cash provided by
operating activities 13,114,830 11,602,786
------------ ------------
Cash Flows from Investing Activities:
Capital expenditures (3,644,457) (2,366,131)
------------ ------------
Net cash used in investing activities (3,644,457) (2,366,131)
------------ ------------
Cash Flows from Financing Activities:
Sales of common stock 423,723 99,139
Repurchases of common stock (5,286,651) --
Proceeds from long-term bank
and other debt -- 6,919,000
Principal payments of long-term bank
and other debt (1,034,095) (9,154,392)
------------ ------------
Net cash used in financing activities (5,897,023) (2,136,253)
------------ ------------
Net Increase in Cash and
Cash Equivalents 3,573,350 7,100,402
Cash and Cash Equivalents,
beginning of period 11,561,223 3,089,290
------------ -----------
Cash and Cash Equivalents, end of period $ 15,134,573 $ 10,189,692
============ ============
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 July 31, 1999, and January 30, 1999, the
consolidated results of their operations for the thirteen and twenty-six weeks
ended July 31, 1999, and August 1, 1998, and their cash flows for the twenty-six
weeks ended July 31, 1999, and August 1, 1998. Stores and its subsidiaries are
collectively referred to as the "Company". The results of operations for the
thirteen and twenty-six week periods may not be indicative of the results for
the entire year.
These statements should be read in conjunction with the Company's audited
financial statements and related notes which have been incorporated by reference
in the Company's Form 10-K for the year ended January 30, 1999. 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.
Certain prior year balances have been reclassified to conform to the
current year presentation.
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) Accounts Receivable
The Company sells accounts receivable generated from its proprietary credit
card to a third-party provider, without recourse. Under the agreement, the
Company sells its receivables from in-house credit sales on a daily basis. In
April 1999, the agreement was extended to January 2005. In addition, certain
terms of the agreement were favorably amended. Also, as an incentive to extend
the agreement, the third-party provider agreed to pay the Company an up-front
cash payment. This amount will be amortized into income evenly over the life of
the new agreement.
(3) 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
-----------------------
July 31, August 1,
1999 1998
-------- ---------
Increase (decrease) in cash and
cash equivalents-
Receivables $ (60,822) $ 55,130
Merchandise inventory 833,902 1,987,376
Prepaid expenses and other (765,939) 177,728
Accounts payable (447,701) (4,507,652)
Accrued expenses 612,052 2,941,311
----------- -----------
Total $ 171,492 $ 653,893
=========== ===========
Interest paid during the twenty-six weeks ended July 31, 1999, and August
1, 1998, was approximately $445,000 and $527,000, respectively. Interest expense
is net of interest income of approximately $275,000 and $77,000 for the first
six months of fiscal 1999 and 1998, respectively. Income taxes paid during the
twenty-six weeks ended July 31, 1999, and August 1, 1998, were approximately
$5,228,000 and $2,568,000, respectively.
(4) Accrued Expenses
Accrued expenses consisted of the following:
July 31, January 30,
1999 1999
-------- ----------
Payroll and related benefits $ 3,964,482 $ 5,012,439
Taxes other than income taxes 1,522,863 1,761,964
Rent and other related costs 2,453,803 2,427,805
Deferred revenues 3,713,241 1,836,298
Reserve for customer awards 1,203,975 1,513,900
Reserve for store closing costs 746,225 1,110,345
Income taxes 1,308,881 1,000,333
Other 4,663,670 4,684,124
----------- -----------
Total $19,577,140 $19,347,208
=========== ===========
(5) Long-Term Bank and Other Debt
Long-term bank and other debt consisted of the following:
July 31, January 30,
1999 1999
-------- ----------
Due to banks:
Mortgage note $ 6,737,342 $ 6,784,599
Working capital notes -- --
Other:
Capital lease and other obligations 4,634,829 4,548,587
---------- -----------
11,372,171 11,333,186
Less current maturities (1,853,413) (1,816,119)
------------ ------------
Total $ 9,518,758 $ 9,517,067
============ ============
The mortgage financing agreement provides a $6,919,000 mortgage facility
with a seven-year term and a 20-year amortization period. The interest rate on
the mortgage note is fixed at 7.5%. The working capital facility has a total
availability of $28 million, including the swing line of credit. The interest
rate fluctuates based on the Company's debt coverage ratio. The interest rate
can range from LIBOR plus 1 1/4 to LIBOR plus 2 1/4, or the agent bank's prime
rate, at the Company's option. Based on the formula in the agreement, the
Company's current borrowing cost would be LIBOR plus 1 1/4%, or the agent bank's
prime rate, at the Company's option. Amounts available under this facility are
based on the Company's eligible receivables and inventories.
At July 31, 1999, the Company had approximately $21,000,000 available under
its combined working capital and swing line facility. Outstanding letters of
credit were approximately $7,000,000 at July 31, 1999. During the twenty-six
weeks ended July 31, 1999, the Company entered into capital lease agreements for
the purpose of obtaining computer equipment, at a cost of approximately
$1,100,000.
(6) Leases
During the twenty-six weeks ended July 31, 1999, the Company entered,
amended or extended leases for 51 stores, which increased future minimum rental
payments by approximately $14,187,000 since January 30, 1999. Total future
minimum rental payments under all noncancelable operating leases with initial or
remaining lease terms of one year or more are approximately $75,025,000.
Total rent expense for all operating leases was as follows:
Twenty-six weeks ended
----------------------
July 31, August 1,
1999 1998
-------- --------
Minimum rentals $10,524,924 $10,421,365
Contingent rentals 220,676 153,285
----------- -----------
Total $10,745,600 $10,574,650
=========== ===========
(7) Net Income Per Common Share
The reconciliation of net income per common share and net income per common
share, assuming dilution, is as follows:
Net Income
Net Income Per
Per Stock Common Share,
Common Share Options Assuming Dilution
------------- -------- ------------------
Twenty-six weeks ended July 31, 1999:
Net income $8,347,979 -- $8,347,979
Weighted average shares 7,010,438 196,316 7,206,754
---------- ----------
Per share amount $ 1.19 $ 1.16
========== ==========
Twenty-six weeks ended August 1, 1998:
Net income $5,930,116 -- $5,930,116
Weighted average shares 7,237,835 143,490 7,381,325
---------- ----------
Per share amount $ 0.82 $ 0.80
========== ==========
Thirteen weeks ended July 31, 1999:
Net income $4,901,050 -- $4,901,050
Weighted average shares 6,914,409 258,167 7,172,576
---------- ----------
Per share amount $ 0.71 $ 0.68
========== ==========
Thirteen weeks ended August 1, 1998:
Net income $3,458,511 -- $3,458,511
Weighted average shares 7,242,973 161,731 7,404,704
---------- ----------
Per share amount $ 0.48 $ 0.47
========== ==========
(8) Store Closing Costs
In late fiscal 1997, the Company adopted a plan to close approximately 30
underperforming stores upon lease termination or settlement with the landlords.
During fiscal 1998, 14 unprofitable stores were closed, including seven during
the first half. In addition, based on financial performance evaluations,
management added 10 stores to the store closing plan and removed 11 stores from
the store closing plan, bringing the number of stores in the store closing plan
to 15 at January 30, 1999. The Company closed six unprofitable stores during the
first half of fiscal 1999.
The Company has scheduled three additional stores for closing during the
remainder of fiscal 1999. Terminations of the remaining stores' leases are still
being negotiated with the landlords. Write-down of store assets and store
closing costs were approximately $237,000 and $200,000 during the first half of
1999 and 1998, respectively.
(9) Stockholders' Equity
The change in stockholders' equity was as follows:
Additional
Common Paid-In Retained
Stock Capital Earnings Total
------ ---------- -------- ------
Balance at January 30, 1999 $72,800 $46,525,187 $31,154,488 $77,752,475
Net proceeds from the sale
of 57,729 common shares 577 423,146 --- 423,723
Repurchase of 531,416
common shares (5,314) (5,281,337) --- (5,286,651)
Net income --- --- 8,347,979 8,347,979
------ --------- --------- ---------
Balance July 31, 1999 $68,063 $41,666,996 $39,502,467 $81,237,526
====== =========== =========== ===========
The Company began a stock repurchase initiative in late January 1999.
During the six months ended July 31, 1999, the Company repurchased and retired
531,416 shares of its outstanding common stock for approximately $9.95 per
share. The Company has repurchased a total of 616,416 shares since inception of
this initiative. Additionally, 48,126 common stock options have been exercised
during the first half of 1999 and 9,603 common shares have been purchased
through the employee stock purchase plan.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This outlook contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are based on current expectations that are subject to known and
unknown risks, uncertainties and other factors that could cause actual results
to differ materially from those contemplated by the forward-looking statements.
Such factors include, but are not limited to, the following: Year 2000
information systems issues; general economic conditions; competitive factors and
pricing pressures; the Company's ability to predict fashion trends; consumer
apparel buying patterns; adverse weather conditions and inventory risks due to
shifts in market demand. The Company does not undertake to publicly update or
revise the forward-looking statements even if experience or future changes make
it clear that projected results expressed or implied therein will not be
realized.
Overview
The Company's net income for the thirteen week period ended July 31, 1999,
was $4,901,000 compared to $3,459,000 in the thirteen week period ended August
1, 1998. Operating income margins were 10.6% for the second quarter of 1999
compared to 8.0% in 1998.
Net income for the twenty-six week period ended July 31, 1999, was
$8,348,000 compared to $5,930,000 in the twenty-six week period ended August 1,
1998. Operating income for the first half of 1999 increased 34.5% over the first
half of 1998. Operating income margins were 8.9% for the first half of 1999
compared to 6.9% for the first half of 1998.
The improvement in operating income margin over the prior year is
attributable to improved sales and merchandise margins, leveraged buying and
occupancy costs, savings generated from the amendment and extension of the
contract with the Company's third party credit processor and a decrease in
consulting fees, which were incurred in 1998 to re-engineer the merchandise
planning and distribution functions.
Liquidity and Capital Resources
The Company's cash provided by operations was $13,115,000 during the
twenty-six weeks ended July 31, 1999, compared to cash provided by operations of
$11,603,000 during the twenty-six weeks ended August 1, 1998. The increase in
cash flow provided by operations is primarily attributable to an increase in net
income. The Company's working capital was $32,100,000 at July 31, 1999, compared
to $28,500,000 at January 30, 1999. The Company's internally generated cash flow
financed its operating requirements, capital expenditures and debt service
during the twenty-six week period ended July 31, 1999.
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 private label credit card sales. The third
party provides all authorization, billing and collection services for these
accounts. The agreement was amended and extended during the first quarter of
1999, allowing the Company to obtain more favorable terms. Also, as an incentive
to extend the agreement, the third-party provider agreed to pay the Company an
up-front cash payment. This amount will be amortized evenly into income over the
life of the new agreement. The agreement expires in January 2005.
Capital Expenditures
The Company incurred approximately $3,200,000 to open new stores and
relocate, remodel or expand existing stores during the first half of 1999. The
Company estimates that fiscal 1999 capital expenditures will be approximately
$8,000,000 to $9,000,000 of which an estimated $7,200,000 will be used for the
opening of 12 new locations and the remodeling, relocation and expansion of
approximately 44 other locations. The remainder of capital expenditures are to
upgrade existing computer systems, add additional software technology and to
maintain existing facilities.
Banking Arrangements
The mortgage financing agreement provides a $6,919,000 mortgage facility
with a seven-year term and a 20-year amortization period. The interest rate on
the mortgage note is fixed at 7.5%. The existing bank credit facility has an
availability of $28,000,000, including the swing line of credit. The interest
rate fluctuates based on the Company's debt coverage ratio. The interest rate
can range from LIBOR plus 1 1/4 to LIBOR plus 2 1/4, or the agent bank's prime
rate, at the Company's option. Based on the formula in the agreement, the
Company's current borrowing cost would be LIBOR plus 1 1/4%, or the agent bank's
prime rate, at the Company's option. The agreement expires June 30, 2001.
At July 31, 1999, the Company had approximately $21,000,000 available under
its combined working capital and swing line facility and approximately
$7,000,000 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
foreseeable future.
Results of Operations
Thirteen Weeks Ended July 31, 1999, Compared to Thirteen Weeks Ended August 1,
1998
Net sales in the second quarter of 1999 increased 4.7% to $78,334,000 from
$74,827,000 in the second quarter of 1998. Comparable stores' sales increased
5.0%, primarily due to an increase in the number of saleschecks generated and
the average number of units per salescheck. The average unit price declined
slightly. During the second quarter, five stores were closed and two stores were
opened, reducing the number of stores operated by the Company on July 31, 1999
to 433. At August 1, 1998, the Company operated 436 stores.
Gross margin, after buying and occupancy costs, increased as a percentage
of sales to 36.7% in the second quarter of 1999 from 34.2% in the second quarter
of 1998. The increase is attributable to an increase in merchandise margin,
which increased as a percentage of sales by 176 basis points. The increase in
merchandise margin was driven primarily by a decrease in merchandise markdowns.
Additionally, the Company leveraged its buying and occupancy costs as a result
of increased sales. Buying and occupancy costs as a percentage of sales
decreased by 74 basis points.
Selling, general and administrative expenses increased to $20,239,000 in
the second quarter of 1999 compared to $19,314,000 in the second quarter of
1998. As a percentage of sales, the selling, general and administrative expenses
remained flat at 25.8%. The expense increase is primarily attributable to
increased management bonuses, software modifications and freight to stores,
offset by the income generated from the amended third-party credit agreement.
In late fiscal 1997, the Company adopted a plan to close approximately 30
underperforming stores upon lease termination or settlement with the landlords.
During fiscal 1998, 14 unprofitable stores were closed, including seven during
the first half. In addition, based on financial performance evaluations,
management added 10 stores to the store closing plan and removed 11 stores from
the store closing plan, bringing the number of stores in the store closing plan
to 15 at January 30, 1999.
The Company closed five unprofitable stores during the second quarter of
1999, bringing the total number of stores closed in 1999 to six. The Company has
scheduled three additional stores for closing during the remainder of fiscal
1999. Terminations of the remaining stores' leases are still being negotiated
with the landlords. Write-down of store assets and store closing costs were
approximately $23,000 and $11,000 during the second quarters of 1999 and 1998,
respectively.
Interest expense was approximately $92,000 in the second quarter of 1999
compared to $154,000 in the second quarter of 1998. The decrease is primarily
attributable to an increase in interest income.
Income taxes were provided at effective rates of 40.0% and 41.0% for the
thirteen weeks ended July 31, 1999, and August 1, 1998, respectively. The
statutory rate is affected primarily by non-deductible goodwill amortization and
state income taxes.
Net income for the second quarter of 1999 was $4,901,000 compared to
$3,459,000 for the second quarter of 1998. Net income per common share, assuming
dilution, ("Net income per common share") was $0.68 per share in the second
quarter of 1999 and $0.47 per share in the second quarter of 1998.
Twenty-Six Weeks Ended July 31, 1999, Compared to Twenty-Six Weeks Ended August
1, 1998
Net sales in the first half of 1999 increased 4.9% to $158,633,000 from
$151,279,000 in the first half of 1998. Comparable stores' sales increased 5.5%,
primarily due to an increase in the number of saleschecks generated and the
average number of units per salescheck. The average unit price declined
slightly. During the first six months of 1999, six stores were closed and seven
stores were opened bringing the number of stores operated by the Company on July
31, 1999 to 433. At August 1, 1998, the Company operated 436 stores.
Gross margin, after buying and occupancy costs, increased as a percentage
of sales to 35.2% in the first half of 1999 from 33.7% in the first six months
of 1998. The increase is attributable to an increase in merchandise margin,
which increased as a percentage of sales by 101 basis points. The increase in
merchandise margin was driven primarily by a decrease in merchandise markdowns.
Additionally, the Company leveraged its buying and occupancy costs as a result
of increased sales. Buying and occupancy costs as a percentage of sales
decreased by 48 basis points.
Selling, general and administrative expenses increased to $40,950,000 in
the first six months of 1999 compared to $39,746,000 in the first six months of
1998. As a percentage of sales, the selling, general and administrative expenses
decreased to 25.8% from 26.3% in the first six months of 1998. The expense
increase is primarily attributable to increased management bonuses and employee
benefits earned based on increased profits and increased freight to stores,
offset by the income generated from the third-party credit agreement and
consultant services incurred to re-engineer the merchandise assortment and
planning and distribution functions in 1998.
In late fiscal 1997, the Company adopted a plan to close approximately 30
underperforming stores upon lease termination or settlement with the landlords.
During fiscal 1998, 14 unprofitable stores were closed, including seven during
the first half. In addition, based on financial performance evaluations,
management added 10 stores to the store closing plan and removed 11 stores from
the store closing plan, bringing the number of stores in the store closing plan
to 15 at January 30, 1999.
The Company closed six unprofitable stores during the first half of 1999.
The Company has scheduled three additional stores for closing during the
remainder of fiscal 1999. Terminations of the remaining stores' leases are still
being negotiated with the landlords. Write-down of store assets and store
closing costs were approximately $237,000 and $200,000 during the first six
months of 1999 and 1998, respectively.
Interest expense was approximately $195,000 in the first six months of 1999
compared to $434,000 in the first six months of 1998. The decrease is primarily
attributable to an increase in interest income.
Income taxes were provided at an effective rate of 40.0% in the first six
months of 1999 and 41% in 1998. The statutory rate is affected primarily by
non-deductible goodwill amortization and state income taxes.
Net income for the first six months of 1999 was $8,348,000 compared to
$5,930,000 for the first six months of 1998. Net income per common share was
$1.16 compared to $0.80 per share reported in the first six months of 1998.
Year 2000 Compliance
The Company has developed a plan to ensure its systems are compliant with
the requirements to process transactions in the year 2000. The majority of the
Company's information systems are provided and serviced by outside vendors who
are in the process of completing all necessary updates to ensure they will
continue to be effective in the year 2000. Management currently believes that
any other minor technological equipment, if not year 2000 compliant, will not
have a material impact on the Company's business operations.
The Company has requested, from its key third-party providers,
certifications of year 2000 compliance. The Company is developing plans to test
the systems where the third-party responded as being compliant by December 31,
1999. Contingency plans to address unexpected year 2000 scenarios are currently
being developed to address the material risks and uncertainties for those
third-parties who either did not respond or who responded that they will not be
compliant. The Company expects the majority of its information systems to be
year 2000 compliant by 2000; however, no assurances can be given that the
efforts by the Company and its third-parties will be successful. The Company
does not currently estimate that the cost to remedy year 2000 noncompliant
technologies will be significant.
PART 2 - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
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 1, 1999, for the
results of the Company's Annual Meeting of Stockholders held on June 2, 1999.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
1.10.38 Second Amendment to Amended and Restated Credit Agreement
2.27.1 Financial Data Schedule (for 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 1, 1999
(Date) /s/ David C. Forell
-------------------------
David C. Forell,
Executive Vice President,
Chief Financial Officer
EXHIBIT 10.38
SECOND AMENDMENT
TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (the "Second
Amendment") effective as of June 3, 1999, is made by and among CATHERINES, INC.,
a Delaware corporation (the "Company"), CATHERINES STORES CORPORATION, a
Tennessee corporation (the "Parent"), CATHERINES OF PENNSYLVANIA, INC., a
Tennessee corporation ("PA Co."), CATHERINES OF CALIFORNIA, INC., a California
corporation ("RT Co."), CATHERINES PARTNERS, L.P., a Tennessee limited
partnership ("Intex"), and FIRST AMERICAN NATIONAL BANK, a national banking
association ("FANB"), individually and in its capacity as agent for the Banks,
defined below (together with any of its successors in such capacity, the
"Agent"), HIBERNIA NATIONAL BANK, a national banking association ("Hibernia")
and BANK ONE, N.A., a national banking association ("Bank One"); (together with
their successors, transferees and assigns from time to time parties hereto shall
be referred to collectively as the "Banks" and each individually shall be
referred to as a "Bank").
W I T N E S S E T H:
A. The Company, Catherines Stores Corporation, a Delaware corporation (the
"Predecessor Parent"), Virginia Specialty Stores, Inc. ("VSS"), Added
Dimensions, Inc. ("Added Dimensions"), Linda Karan-Large Size Factory Outlet,
Inc. ("Linda Karan"), The Answer-The Elegant Large Size Discounter, Inc. ("The
Answer") (Added Dimensions, Linda Karan and The Answer collectively called "VSS
Subsidiaries") and FANB entered into a Credit Agreement dated as of March 31,
1994 (the "Original Credit Agreement") pursuant to which FANB provided a term
loan and a working capital loan facility to the Company. In connection with the
execution of the Original Credit Agreement the Company, the Predecessor Parent,
VSS and the VSS Subsidiaries executed a number of ancillary documents
(collectively the "Original Loan Documents") including without limitation
various security agreements, pledge agreements and mortgages in favor of Agent
for the benefit of the Banks (collectively the "Original Security Documents").
B. Hibernia and The Hongkong and Shanghai Banking Corporation Limited
("Hongkong") became parties to the Original Credit Agreement by the execution of
certain Commitment Transfer Supplements dated as of March 31, 1994.
C. Subsequent to the execution of the Original Credit Agreement, PA Co., RT
Co., Intex and CSC Sub, Inc., a Tennessee corporation ("CSC Sub") were formed,
the VSS Subsidiaries merged with VSS and certain assets were transferred from
the Company to PA Co., RT Co., Intex and CSC Sub. The corporate restructure and
the transfer of assets were contemplated by the terms of the Original Credit
Agreement and were subject to the execution by the Company, the Predecessor
Parent, VSS, PA Co., RT Co., Intex and CSC Sub of a First Amendment to Credit
Agreement (the "First Amendment to Credit Agreement") dated as of January 29,
1995, whereby PA Co., RT Co., Intex and CSC Sub became Credit Parties and
certain ancillary documents were executed in connection therewith (collectively,
the "First Amendment Loan Documents") including but not limited to security
agreements and pledge agreements in favor of Agent for the benefit of FANB,
Hibernia and Hongkong (collectively, the "First Amendment Security Documents").
D. Subsequent to the execution of the First Amendment to Credit Agreement,
VSS merged into the Company and the Parent became a successor corporation by
virtue of a merger between CSC Sub and the Predecessor Parent. As of December 6,
1995, the Company, Parent, PA Co., RT Co., Intex, FANB, Hibernia and Hongkong
executed a Second Amendment to Credit Agreement (the "Second Amendment") whereby
(a) the working capital loan facility was increased from $20,000,000.00 to
$25,000,000.00; (b) a $3,000,000.00 swingline loan subfacility was provided; (c)
the term of the working capital loan facility was extended; (d) certain
collateral was released as security for the Loans and (e) certain other
amendments were made to the credit facilities. In connection therewith the
Credit Parties executed certain ancillary documents (collectively, the "Second
Amendment Loan Documents") including, but not limited to, amendments to security
agreements, amendments to pledge agreements and amendments to deeds of trust in
favor of Agent (collectively, the "Second Amendment Security Documents").
E. As of April 26, 1996, the Credit Parties, FANB, Hibernia and Hongkong
executed a Third Amendment to Credit Agreement (the "Third Amendment") to
reflect certain changes to the financial covenants of the Credit Agreement.
F. As of September 4, 1996, the Credit Parties, FANB, Hibernia and Hongkong
executed a Fourth Amendment to Credit Agreement (the "Fourth Amendment") (a) to
extend the term of the swingline loan subfacility, (b) to extend the term of the
working capital loan facility and (c) to reflect certain changes to the
financial covenants of the Credit Agreement. In connection therewith the Credit
Parties executed certain ancillary documents (collectively, the "Fourth
Amendment Loan Documents") including but not limited to the amendments to the
deeds of trust (collectively, the "Fourth Amendment Security Documents").
G. As of December 4, 1996, the Credit Parties, FANB, Hibernia and Hongkong
executed a Fifth Amendment to Credit Agreement (the "Fifth Amendment") to
reflect certain changes to the Credit Agreement.
H. The Original Credit Agreement as amended by the First Amendment to
Credit Agreement, Second Amendment, Third Amendment, Fourth Amendment and Fifth
Amendment is referred to herein as the "Prior Credit Agreement". The Original
Loan Documents, the First Amendment Loan Documents, the Second Amendment Loan
Documents, the Third Amendment Loan Documents, and the Fourth Amendment Loan
Documents are collectively referred to as the "Prior Loan Documents". The
Original Security Documents, the First Amendment Security Documents, the Second
Amendment Security Documents, and the Fourth Amendment Security Documents are
collectively referred to as the "Prior Security Documents".
I. Pursuant to the Prior Credit Agreement, FANB, Hibernia and Hongkong made
Loans and issued Letters of Credit pursuant to their Commitments under and as
defined in the Prior Credit Agreement. The obligations of the Company and the
other Credit Parties pursuant to the Prior Credit Agreement are embodied within
the Prior Loan Documents and are evidenced by the Term Notes, certain working
capital promissory notes, as amended and restated (the "Prior Working Capital
Notes") and a certain swingline note, as amended (the "Prior Swingline Note")
(the Term Notes, the Prior Working Capital Notes and the Prior Swingline Note
being collectively referred to herein as the "Prior Notes") and certain
guaranties of the Parent, PA Co., RT Co. and Intex, as amended (the "Prior
Guaranties").
J. As of February 27, 1998, the Company paid and satisfied the indebtedness
evidenced by the Term Notes, the Term Loan Commitment terminated, the liens of
the Deeds of Trust were released, Bank One acquired all of Hongkong's
participating interest in the Working Capital Loan and all of Hongkong's
participating interest in the Letters of Credit pursuant to the execution of a
Commitment Transfer Supplement dated as of February 27, 1998.
K. As of February 27, 1998, the Credit Parties, FANB, Hibernia and Bank One
executed an Amended and Restated Credit Agreement (the "Amended and Restated
Credit Agreement") whereby Bank One became a Bank party to the Amended and
Restated Credit Agreement. In addition and among other things, the "Working
Capital Commitments" as defined in the Prior Credit Agreement were reduced to
$22,000,000 and the Credit Parties' obligations were amended and restated.
L. As of January 12, 1999, the Credit Parties and the Banks executed a
First Amendment to Amended and Restated Credit Agreement (the "First Amendment")
(the First Amendment together with the Amended and Restated Credit Agreement
being hereinafter collectively referred to as the "Amended and Restated Credit
Agreement") whereby, among other things, the working capital loan facility was
increased from $22,000,000 to $25,000,000.
M. The Credit Parties have requested that the Banks make certain changes to
the Amended and Restated Credit Agreement with respect to stock repurchase
rights. The Banks consent to and approve the foregoing request of the Credit
Parties, subject to the terms and conditions of this Second Amendment.
SECTION ONE: DEFINITIONS
1.01 Definitions. All capitalized terms used but not defined herein shall
have the meanings provided in the Amended and Restated Credit Agreement.
SECTION TWO: AMENDMENTS
2.01 Amendment to Subsection 9.12. Subsection 9.12 to the Amended and
Restated Credit Agreement is amended by deleting subsection 9.12 in its entirety
and by substituting in lieu thereof the following:
9.12 Limitation on Dividends/Stock Repurchase. Declare any cash dividends
on any shares of any class of stock of the Credit Parties or make any payment on
account of, or set apart assets for a sinking or other analogous fund for the
purchase, redemption, retirement or other acquisition of any shares of any class
of stock of the Credit Parties, whether now or hereafter outstanding, or make
any other distribution in respect thereof, either directly or indirectly,
whether in cash or property or in obligations of the Credit Parties, except that
the Company or the Parent may declare dividends on any Class or series of stock
of the Company or the Parent, and the Parent may repurchase up to the lesser of
$6,500,000 or ten percent (10%) of its outstanding stock provided that, in
either event, no Default or Event of Default exists and the Dividend Ratio for
such Fiscal Year exceeds 1.05 to 1.0.
SECTION THREE: CONDITIONS PRECEDENT.
3.01 Conditions to the Execution of the Second Amendment. The obligation of
the Banks to enter into the Second Amendment shall be subject to the following
conditions to the satisfaction of the Agent:
(a) Second Amendment. Each Bank shall have received an original of the
Second Amendment duly executed by a duly authorized officer of each of the
Credit Parties.
(b) No Default or Event of Default. No Default or Event of Default shall
have occurred and be continuing on the date of the Second Amendment. No Event of
Default (or condition which would constitute an Event of Default with the giving
of notice, the lapse of time, or both) under material (in the reasonable opinion
of the Company and the Agent) contracts of the Credit Parties such as, but not
limited to, agreements with respect to capital stock, financing documents and
lease agreements shall have occurred and be continuing on the date of the Second
Amendment.
(c) Representations and Warranties. The representations, warranties and
disclosures made by the Credit Parties in the Amended and Restated Agreement, as
amended by the Second Amendment, or in any Basic Document or made by any of the
Credit Parties in any certificate, document or financial or other statement
furnished in connection herewith or therewith, shall be true and correct in all
material respects on and as of the date of the Second Amendment with the same
effect as if made on such date.
SECTION FOUR: REPRESENTATIONS AND WARRANTIES.
4.01 Entity Existence; Compliance with Law.
(a) Each of the corporate Credit Parties (i) is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, (ii) has the corporate power and authority and the legal right to
own or lease and operate its property, and to conduct the business in which it
is currently engaged, (iii) is duly qualified as a foreign corporation and in
good standing under the laws of each jurisdiction where failure so to qualify
and remain in good standing would materially and adversely affect its ability to
own or lease and operate its property or to conduct the business in which it is
currently engaged or intends to engage in the future and (iv) is in compliance
with all Requirements of Law, except where non-compliance would not have
material adverse effect on the business, operations, assets or financial
conditions of each such Credit Party.
(b) Intex (i) is duly organized, validly existing and in good standing
under the laws of Tennessee, (ii) has the partnership power and authority and
the legal right to own or lease and operate its property, and to conduct the
business in which it is currently engaged, (iii) is duly qualified as a foreign
limited partnership and in good standing under the laws of each jurisdiction
where failure so to qualify and remain in good standing would materially and
adversely affect its ability to own or lease and operate its property or to
conduct the business in which it is currently engaged or intends to engage in
the future and (iv) is in compliance with all Requirements of Law, except where
non-compliance would not have material adverse effect on the business,
operations, assets or financial conditions of Intex.
4.02 Entity Power; Authorization; Enforceable Obligations.
(a) Each of the corporate Credit Parties has the corporate power and
authority, and Intex has the partnership power and authority, to make, deliver
and perform all of its respective obligations in connection with the Amended and
Restated Credit Agreement as amended by the Second Amendment; each corporate
Credit Party has taken all necessary corporate action, and Intex has taken all
necessary partnership action, to authorize the execution, delivery and
performance of the Second Amendment. No consent or authorization of, filing
with, or other act by or in respect of, any other Person is required in
connection with the execution, delivery or performance by each of the Credit
Parties or the validity of or enforceability against each of the Credit Parties,
of the Second Amendment (except such filings as are necessary in connection with
perfection of the Liens created by such documents, which filings have been duly
made and/or obtained and are in full force and effect). The Second Amendment has
been duly executed and delivered on behalf of each such Credit Party. The Second
Amendment constitutes a legal, valid and binding obligation of each Credit
Party, enforceable against each such Credit Party in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
moratorium or other similar laws affecting creditors' rights generally, and
except as enforceability may be limited by general principles of equity (whether
considered in a suit at law or in equity).
4.03 No Legal Bar. The execution, delivery and performance by each of the
Credit Parties of the Second Amendment do not and will not violate any
Requirement of Law or any Contractual Obligation applicable to or binding upon
the Credit Parties or any of their properties or assets, except where
noncompliance would not have a material effect on the business, operations,
property, assets or financial condition of the Credit Parties taken as a whole
and will not result in the creation or imposition of any Lien on any such
properties or assets pursuant to the provisions of any Requirement of Law or any
Contractual Obligations other than the Lien of the Security Documents.
4.04 No Default. None of the Credit Parties is in default in the payment or
performance of any of its Contractual Obligations in any respect that is
material to the Credit Parties, and no Default or Event of Default has occurred
and is continuing. None of the Credit Parties is in default in any respect that
is material to it under any order, award or decree of any Governmental Authority
or arbitrator binding upon or affecting it or by which any of its properties or
assets may be bound or affected.
SECTION FIVE: MISCELLANEOUS.
5.01 Governing Law; No Third-Party Rights. THIS SECOND AMENDMENT AND THE
RIGHTS AND DUTIES OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
TENNESSEE.
5.02 Counterparts. This Second Amendment may be executed by one or more of
the parties to this Second Amendment on any number of separate counterparts, and
all of said counterparts taken together shall be deemed to constitute one and
the same instrument.
5.03 No Other Amendments. All other terms and provisions of the Amended and
Restated Credit Agreement not modified or amended hereby shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Second Amendment to
Amended and Restated Credit Agreement as of the day and year first above
written.
CATHERINES, INC.
By:________________________________
David C. Forell
Executive Vice President
CATHERINES STORES CORPORATION
By:________________________________
David C. Forell
Executive Vice President
CATHERINES OF PENNSYLVANIA, INC.
By:________________________________
David C. Forell
Executive Vice-President
CATHERINES OF CALIFORNIA, INC.
By:________________________________
David C. Forell
Executive Vice-President
CATHERINES PARTNERS, L.P.
By: CATHERINES, INC.,
its general partner
By: __________________________
David C. Forell
Executive Vice President
FIRST AMERICAN NATIONAL BANK,
individually and as Agent
By:________________________________
Title:_____________________________
HIBERNIA NATIONAL BANK
By:________________________________
Title:_____________________________
BANK ONE, N.A.
By:________________________________
Title:_____________________________
SCHEDULE 1.2
Commitments
Working Swingline
Working Capital Swingline Loan
Capital Commitment Loan Commitment
Bank Commitment Percentage Commitment Percentage Commitment
First American
National Bank $ 7,955,000 31.82% $3,000,000 100% $10,955,000
Hibernia
National Bank $ 8,522,500 34.09% -0- -0- $ 8,522,500
Bank One, N.A. $ 8,522,500 34.09% -0- -0- $ 8,522,500