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 1, 1997 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 of other jurisdiction (IRS Employer
of incorporation or Identification No.)
organization)
3742 Lamar Ave, Memphis, TN 38118
(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).
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.
<PAGE>
As of December 3, 1997 there were 7,225,235 shares of Catherines Stores
Corporation common stock outstanding.
CATHERINES STORES CORPORATION
FORM 10-Q
November 1, 1997
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
Part 1. Financial Information
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $ 67,670,046 $ 65,642,367 $209,301,926 $204,939,427
Cost of sales, including
buying and
occupancy costs 48,210,195 46,423,066 145,441,565 141,092,500
Gross margin 19,459,851 19,219,301 63,860,361 63,846,927
Selling, general and
administrative expenses 18,088,493 18,518,041 56,283,659 55,408,526
Store closing costs 638,980 33,984 813,975 20,590
Amortization of intangible
assets 248,382 290,954 771,643 892,285
<PAGE>
Operating income 483,996 376,322 5,991,084 7,525,526
Interest expense, net 357,611 305,196 1,008,074 862,185
Income before income taxes 126,385 71,126 4,983,010 6,663,341
Provision for income taxes 54,000 30,000 2,043,000 2,732,000
Net income $ 72,385 $ 41,126 $ 2,940,010 $ 3,931,341
Net income per common share$ 0.01 $ 0.01 $ 0.40 $ 0.51
Weighted average number of
common shares outstanding 7,294,151 7,504,045 7,271,177 7,736,229
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 1, February 1,
1997 1997
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,314,911 $ 2,992,339
Receivables 3,562,052 3,051,595
Merchandise inventory 59,050,236 51,933,957
Prepaid expenses and other 3,694,355 3,478,849
Deferred income taxes 1,055,000 1,294,000
Total current assets 70,676,554 62,750,740
Property and Equipment, at cost:
Land 500,000 500,000
Leasehold improvements 24,049,809 22,703,829
Fixtures and equipment 29,485,242 27,799,419
Equipment under capital leases 12,444,101 9,204,817
Improvements in process 103,573 425,542
66,582,725 60,633,607
Less accumulated depreciation (31,269,671) (25,119,716)
and amortization
35,313,054 35,513,891
Deferred Income Taxes 317,000 388,000
Other Assets and Deferred Charges,
less accumulated amortization
of $2,157,343 and $1,910,112 (Note 3) 2,803,395 2,999,552
Goodwill, less accumulated amortization
of $4,775,759 and $4,251,347 23,188,841 23,713,253
$132,298,844 $125,365,436
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 25,299,697 $ 25,973,186
<PAGE>
Accrued expenses (Note 4) 12,206,052 12,053,356
Current maturities of long-term 2,722,075 2,514,849
bank and other debt
Total current liabilities 40,227,824 40,541,391
Long-Term Bank and Other Debt, less current maturities
(Note 5)
Stockholders' Equity (Note 7): 19,076,373 14,877,902
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued and outstanding
Common stock, $.01 par value, 50,000,000 shares
authorized, 7,225,235 and 7,191,656 shares issued and
outstanding 72,223 71,917
Additional paid-in capital 46,498,879 46,390,691
Retained earnings 26,423,545 23,483,535
Total stockholders' equity 72,994,647 69,946,143
$132,298,844 $125,365,436
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
4
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirty-nine weeks ended
November 1, 1997 November 2, 1996
<S> <C> <C>
Cash Flows from Operating Activities:
Net income.................................. $ 2,940,010 $ 3,931,341
Adjustments to reconcile net income to
net cash provided by operating
activities--
Depreciation and amortization........... 7,273,671 6,199,232
Provision for losses on receivables..... 565,997 516,564
Change in other noncash reserves........ 26,447 (71,142)
Net change in current assets and liabilities (8,645,479) (7,202,992)
(Note 2)
Write off of assets in closed stores.... 180,561 -
Other................................... (231,206) 4,388
Total adjustments..................... (830,009) (553,950)
Net cash provided by operating activities 2,110,001 3,377,391
Cash Flows from Investing Activities:
Capital expenditures........................ (3,012,106) (8,824,101)
Net cash used by investing activities. (3,012,106) (8,824,101)
Cash Flows from Financing Activities:
Sales (Repurchases) of common stock, net.... 108,494 (3,645,970)
Proceeds from issuance of long-term bank
and other debt............................ 3,250,000 10,437,000
Principal payments of long-term bank
and other debt............................ (2,133,817) (2,492,678)
Net cash provided by financing activities 1,224,677 4,298,352
<PAGE>
Net Increase (Decrease) in Cash and Cash Equivalents 322,572 (1,148,358)
Cash and Cash Equivalents, beginning of period 2,992,339 3,954,808
Cash and Cash Equivalents, end of period...... $ 3,314,911 $ 2,806,450
</TABLE>
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 November 1, 1997 and February 1, 1997, and
the consolidated results of their operations for the thirteen and thirty-nine
weeks ended November 1, 1997 and November 2, 1996 and their cash flows for the
thirty-nine weeks ended November 1, 1997 and November 2, 1996. 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 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:
Thirty-nine weeks ended
---------------------------------------------
November 1, November 2,
1997 1996
------------------- -----------------
Increase (decrease) in cash and
cash equivalents -
Receivables -1026454 -624641
Merchandise inventory -6984726 -3721689
<PAGE>
Prepaid expenses and other -215476 -218507
Accounts payable -673519 -3996971
Accrued expenses 254696 1358816
------------------- -----------------
Total -8645479 -7202992
------------------- -----------------
Interest paid during the thirty-nine weeks ended November 1,
1997 and November 2, 1996 was approximately $884,000 and $747,000, respectively.
Income taxes paid during the thirty-nine weeks ended November 1, 1997 and
November 2, 1996 were approximately $1,198,000 and $1,995,000, 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:
<TABLE>
<CAPTION>
November 1, February 1, Amortization Methods
1997 1997 and Periods
----------------- ------------------ -----------------------------------
<S> <C> <C> <C>
Straight-line over
Covenants not to compete 1152368 1324348 term of
agreements
Trademarks and tradenames 1078675 1112482 Straight-line over 40 years
Effective interest
Deferred financing costs 28361 69805 method over term of
financing
Other 543991 492917
----------------- ------------------
Total 2803395 2999552
----------------- ------------------
</TABLE>
(4) Accrued Expenses
Accrued expenses consisted of the following:
<PAGE>
November 1, February 1,
1997 1997
----------------- ------------------
Payroll and related benefits 2706708 2430673
Taxes other than income taxes 870755 1138246
Rent and other related costs 2055177 2307074
Insurance 111205 1006664
Deferred revenues 1814557 1830652
Other 4647650 3340047
----------------- ------------------
Total 12206052 12053356
----------------- ------------------
(5) Long-Term Bank and Other Debt
Long-term bank and other debt consisted of the following:
<TABLE>
<CAPTION>
November 1, February 1,
1997 1997
<S> <C> <C>
---------------- -----------------
Due to banks:
Term loan . . . . . . . . . . . . . . . . . . . 1500000 2250000
Working capital notes . . . . . . . . . . . . . 15250000 12000000
Other:
Capital lease obligations . . . . . . . . . . . 4925045 3040939
Other notes and obligations . . . . . . . . . . 123403 101812
---------------- -----------------
21798448 17392751
Less current maturities . . . . . . . . . . . . . -2722075 -2514849
---------------- -----------------
Total . . . . . . . . . . . . . . . . . . . . 19076373 14877902
---------------- -----------------
</TABLE>
7
At November 1, 1997, the Company had approximately $8,729,000 available
under its combined working capital and swing line facility after considering
outstanding letters of credit of approximately $4,021,000. During the
thirty-nine weeks ended November 1, 1997, the Company entered into two
supplements to capital lease agreements for the purpose of 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 leases. Year to date
$2,900,000 has been financed.
(6) Leases
During the thirty-nine weeks ended November 1, 1997, the Company
entered into new leases for 11 stores, including relocations. Future minimum
rental payments have increased approximately $431,000 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 $78,335,000.
Total rent expense for all operating leases was as follows:
<PAGE>
Thirty-nine weeks
ended
-------------------------------------
November 1, November 2,
1997 1996
---------------- ----------------
Minimum rentals 15912678 15121327
Contingent rentals 211496 273564
---------------- ----------------
Total 16124174 15394891
---------------- ----------------
(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. At November 1, 1997, there were vested options outstanding
to purchase 647,725 shares of common stock at an average price per share of
$8.71.
The change in stockholders' equity was as follows:
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Balance at February 1, 71917 46390691 23483535 69946143
1997
Net proceeds from sale
of common shares 306 108188 - 108494
Net income - - 2940010 2940010
------------------ ------------------ ----------------- ------------------
Balance at November 1, 72223 46498879 26423545 72994647
1997
------------------ ------------------ ----------------- ------------------
</TABLE>
(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
8
the income statement and a reconciliation of weighted average shares to 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.
(9) Weighted Average Common Shares Outstanding
<PAGE>
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:
<TABLE>
<CAPTION>
Thirteen weeks Thirty-nine weeks
ended ended
------------------------------------- - ------------------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Weighted average number of
shares outstanding 7217294 7376813 7207881 7578011
Common stock equivalents -
Shares issuable under the 1994
Omnibus
Incentive Plan, the 1992
Nonqualified
Stock Option Plan, and the 1990
Performance Units Plan 76857 127232 63296 158218
----------------- ----------------- ----------------- ---------------
Weighted average common
shares outstanding assuming
full dilution 7294151 7504045 7271177 7736229
----------------- ----------------- ----------------- ---------------
</TABLE>
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
<PAGE>
The Company's cash provided by operations was $2,110,000
during the thirty-nine weeks ended November 1, 1997, compared to cash provided
by operations of $3,377,000 during the thirty-nine weeks ended November 2, 1996.
The decrease in cash flow provided by operations is primarily attributable to
increased working capital needs and a reduction in net income. The Company's
working capital was $30,449,000 at November 1, 1997 compared to $22,209,000 at
February 1, 1997 and $27,246,000 at November 2, 1996. Compared to the third
quarter of 1996, per store inventories increased 12.9%. The Company's internally
generated cash flow, along with borrowing under its bank credit agreement,
financed its operating requirements, capital expenditures and debt service
during the thirty-nine week period ended November 1, 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 has reviewed its store base and as a result has closed fifteen
underperforming stores during 1997. An additional five stores are scheduled to
close during the fourth quarter. Nine stores will close at the expiration of
their leases in 1998.
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 November 1, 1997, the Company had approximately $8,729,000
available under its combined working capital and swing line facility after
considering approximately $4,021,000 in outstanding letters of credit.
10
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.
Results of Operations
Thirteen Weeks Ended November 1, 1997 Compared to Thirteen Weeks Ended
November 2, 1996
Net sales in the third quarter of 1997 increased 3.1% to $67,670,000 from
$65,642,000 in the third quarter of 1996. Comparable stores' sales increased
3.8%. The average unit
<PAGE>
selling price, the number of saleschecks generated and number of units sold all
increased. During the third quarter, eight stores were closed and one store was
opened, reducing the number of stores operated by the Company on November 1,
1997 to 448.
Gross margin, after buying and occupancy costs, decreased as a percentage
of sales to 28.8% from 29.3% in the third quarter of 1996. The decrease is
primarily attributable to a decrease in merchandise margin.
Selling, general and administrative expenses decreased to $18,088,000 in
the third quarter of 1997 compared to $18,518,000 in the third quarter of 1996.
The decrease is primarily attributable to lower advertising, supplies and
pre-store opening expenses, offset by a slight increase in payroll costs. As a
percentage of sales, the selling, general and administrative expenses decreased
to 26.7% from 28.2% in the third quarter of 1996. Selling, general and
administrative expenses per store decreased 1.4% from the third quarter of 1996.
During the third quarter, the company closed eight underperforming stores
at a cost of $639,000. The costs consist primarily of lease termination payments
and the write-off of fixed assets.
Interest expense was approximately $358,000 in the third quarter of 1997
compared to $305,000 in the third quarter of 1996. The increase is primarily
attributable to the increase in working capital borrowings.
Income taxes were provided at an effective rate of 42.7% and 42.2% for the
thirteen weeks ended 1997 and 1996, respectively.
Net income for the third quarter of 1997 was $72,400 compared to $41,100
for the third quarter of 1996. Net income per common share was $0.01 per share
in the third quarter of 1997 and 1996.
Thirty-nine Weeks Ended November 1, 1997 Compared to Thirty-nine Weeks
Ended November 2, 1996
Net sales in the first nine months of 1997 increased 2.1% to $209,302,000
from $204,939,000 in the first nine months of 1996. Comparable stores' sales
increased 1.1%, due primarily to increases in the average unit price, offset by
decreases in number of units sold and units per salescheck. During the first
nine months of 1997, six stores were opened and fifteen stores were closed,
reducing the number of stores operated by the Company on November 1, 1997 to
448.
11
Gross margin, after buying and occupancy costs, decreased as a percentage
of sales to 30.5% from 31.2% in the first nine months of 1996. The decrease is
primarily attributable to an increase in depreciation and rent expenses and a
decrease in merchandise margins.
Selling, general and administrative expenses increased to $56,284,000 in
the first nine months of 1997 from $55,409,000 in the first nine months of 1996.
The increase is primarily attributable to payroll and data processing services
offset by a decrease in travel. As a percentage of sales, selling, general and
administrative expenses decreased to 26.9% from 27.0% in the first nine months
of 1996. Selling, general and administrative expenses per store before store
closing costs increased 2.6% from the first nine months of 1996.
During the year, the company closed fifteen underperforming stores at a
cost of $814,000. The costs consist primarily of lease termination payments and
the write-off of fixed assets.
<PAGE>
Interest expense was approximately $1,008,000 in the first nine months of
1997 compared to $862,000 in the first nine 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 nine
months of 1997 and 1996.
Net income for the first nine months of 1997 was $2,940,000 compared to
$3,931,000 for the first nine months of 1996. Net income per common share was
$0.40 compared to $0.51 per share reported in the first nine months of 1996.
12
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) Exhibt 27 - Financial Data Schedule (EDGAR filing only) (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 3, 1997 /s/David C. Forell
---------------
(Date) David C. Forell,
Executive Vice President,
Chief Financial Officer
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statements of Income and the Consolidated Balance
Sheets of Catherines Stores Corporation for the quarter ended November 1, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000875194
<NAME> CATHERINES STORES CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-2-1997
<PERIOD-END> NOV-1-1997
<CASH> 3,315
<SECURITIES> 0
<RECEIVABLES> 3,562
<ALLOWANCES> 0
<INVENTORY> 59,050
<CURRENT-ASSETS> 70,677
<PP&E> 66,583
<DEPRECIATION> (31,270)
<TOTAL-ASSETS> 132,299
<CURRENT-LIABILITIES> 40,228
<BONDS> 0
0
0
<COMMON> 46,571
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 132,299
<SALES> 209,302
<TOTAL-REVENUES> 209,302
<CGS> 145,442
<TOTAL-COSTS> 145,442
<OTHER-EXPENSES> 57,869
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,008
<INCOME-PRETAX> 4,983
<INCOME-TAX> 2,043
<INCOME-CONTINUING> 2,940
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,940
<EPS-PRIMARY> $0.40
<EPS-DILUTED> $0.40
</TABLE>
