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DESTINATION MATERNITY CORPORATION Reports Operating Results (10-Q)

February 09, 2010 | About:

10qk

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DESTINATION MATERNITY CORPORATION (DEST) filed Quarterly Report for the period ended 2009-12-31.

Destination Maternity Corporation has a market cap of $147.8 million; its shares were traded at around $23.87 with a P/E ratio of 10.4 and P/S ratio of 0.3. DEST is in the portfolios of Michael Price of MFP Investors LLC.

Highlight of Business Operations:

Net Income (Loss). Net income for the first quarter of fiscal 2010 was $1.3 million, or $0.20 per share (diluted) compared to net loss for the first quarter of fiscal 2009, of $(46.9) million, or $(7.86) per diluted share. Net loss for the first quarter of fiscal 2009 includes the goodwill impairment expense of $47.0 million, or $(7.87) per diluted share. Before the goodwill impairment expense, our net income was $0.1 million or $0.01 per share (diluted) for the first quarter of fiscal 2009.

On July 1, 2008, we announced that we were streamlining our merchandise brands and store nameplates and implementing cost reductions in order to simplify our business model, reduce overhead costs and improve and tighten our merchandise assortments. Pursuant to the strategic restructuring, we rebranded our Mimi Maternity® merchandise brand under our A Pea in the Pod® brand beginning with the Spring 2009 collection, which initially debuted in November 2008. We also streamlined our store nameplates, which began in November 2008, by renaming our single-brand Mimi Maternity stores as A Pea in the Pod, and by renaming our multi-brand Mimi Maternity stores as Destination Maternity®. In connection with the strategic restructuring we also reduced our corporate and field management headcount, and during fiscal 2009 we began to implement actions to achieve further cost reductions. The objectives of our restructuring and cost reduction program are to improve and simplify critical processes, consolidate activities and infrastructure, and reduce our expense structure. We incurred pretax expense of $2.5 million in the first quarter of fiscal 2010 for consulting services related to the Companys cost reduction initiatives. We incurred pretax expense of $0.2 million from our restructuring in the first quarter of fiscal 2009, consisting of $0.1 million for cash severance expense and severance-related benefits, and $0.1 million of non-cash expense for accelerated depreciation of existing store signs. As of December 31, 2009, we have incurred fees and expenses totaling $3.1 million under a consulting agreement, of which $0.6 million was recorded in fiscal 2009 and $2.5 million was recorded in the first quarter of fiscal 2010, based upon services rendered and performance results achieved in the respective periods. Remaining amounts to be charged to expense in fiscal 2010 related to the agreement, not to exceed approximately $0.8 million, will be based upon services rendered and performance results achieved. These initiatives resulted in approximate pretax savings of $12 million in fiscal 2009, with incremental pretax savings of approximately $6 million to $8 million projected for fiscal 2010. We project total annualized pretax savings of approximately $23 to $27 million in fiscal 2011 as a result of our cost reduction initiatives, which includes the savings realized in fiscal 2009 plus the incremental projected savings for fiscal 2010.

During the first quarter of fiscal 2010 we used the majority of our cash provided by operations to pay for capital expenditures and to fund a contribution to the Grantor Trust related to our executive retirement plans. For the first quarter of fiscal 2010, we spent $4.0 million on capital expenditures, including $2.5 million for leasehold improvements, fixtures and equipment for new store facilities, as well as improvements to existing stores, and $1.5 million for our information systems and distribution and corporate facilities. We used available cash to fund repayments of long-term debt in fiscal 2010. Our repayments of long-term debt in fiscal 2010 consisted predominately of $6.0 million of prepayments of our Term Loan, including a $5.8 million prepayment required under the annual Excess Cash Flow provision of the Term Loan. During the first quarter of fiscal 2009, we used cash provided by operations primarily to fund repayments of long-term debt and to pay for capital expenditures. Our repayments of long-term debt in the first quarter of fiscal 2009 consisted predominately of $10.0 million of prepayments of our Term Loan, including a $0.6 million prepayment required under the annual Excess Cash Flow provision of the Term Loan. For the first quarter of fiscal 2009, we spent $4.1 million on capital expenditures, including $3.1 million for leasehold improvements, fixtures and equipment for new store facilities, as well as improvements to existing stores, and $1.0 million for our information systems and distribution and corporate facilities. The remaining cash provided by operations was used to increase available cash.

We have in place a Term Loan Agreement for a senior secured Term Loan B, which matures on March 13, 2013, the proceeds of which were used to redeem the Senior Notes. The interest rate on the Term Loan is equal to, at our election, either (i) the prime rate plus 1.00%, or (ii) the LIBOR rate plus the applicable margin. The applicable margin was initially fixed at 2.50% through and including the fiscal quarter ended September 30, 2007. Thereafter, the applicable margin for LIBOR rate borrowings is either 2.25% or 2.50%, depending on our Consolidated Leverage Ratio (as defined). Based upon our applicable quarterly Consolidated Leverage Ratio, the applicable margin for LIBOR rate borrowings remained at 2.50% prior to December 30, 2009. Based upon our Consolidated Leverage Ratio as of September 30, 2009 and December 31, 2009, the applicable margin for LIBOR rate borrowings has been reduced to 2.25% effective from December 30, 2009. We are required to make minimum repayments of the principal amount of the Term Loan in quarterly installments of $225,000 each. We are also required to make an annual principal repayment equal to 25% or 50% of Excess Cash Flow (as defined) in excess of $5.0 million for each fiscal year, with the 25% or 50% factor depending on our Consolidated Leverage Ratio. The required principal repayment for fiscal 2009, which was calculated based on the 25% factor, was $5.8 million and was paid in December 2009. The required principal repayment for fiscal 2008, which was calculated based on the 50% factor, was $0.6 million and was paid in December 2008. Additionally, the Term Loan can be prepaid at our option, in part or in whole, at any time without any prepayment premium or penalty. During the first quarter of fiscal 2010, we prepaid $6.0 million of the outstanding Term Loan, including the $5.8 million prepayment required under the annual Excess Cash Flow provision. During the first quarter of fiscal 2009, we prepaid $10.0 million of the outstanding Term Loan, including the $0.6 million prepayment required under the annual excess cash flow provision. At December 31, 2009, our indebtedness under the Term Loan Agreement was $48.5 million.

In order to mitigate our floating rate interest risk on the variable rate Term Loan, we entered into an interest rate swap agreement with the Agent bank for the Term Loan that commenced on April 18, 2007, the date the $90.0 million Term Loan proceeds were received, and expires on April 18, 2012. The interest rate swap agreement effectively converts a specified amount of the Term Loan (equal to the notional amount of the interest rate swap) from a floating interest rate of LIBOR plus 2.50% (subject to reduction to LIBOR plus 2.25% if we achieve a specified leverage ratio), to a fixed interest rate of 7.50% (subject to reduction to 7.25% if we achieve a specified leverage ratio). The notional amount of the interest rate swap was $75.0 million at the inception of the swap agreement and decreases over time to a notional amount of $5.0 million at the expiration date. The notional amount of the swap was $35.0 million as of December 31, 2009 and over the next eighteen months decreases as follows: to $27.5 million starting April 19, 2010; to $20.0 million starting October 18, 2010; and to $12.5 million starting April 18, 2011.

In March 2007, we entered into the SERP Agreements with the SERP Executives. In May 2008, we entered into (i) a Letter Agreement with the SERP Executives and the Trustee, and (ii) an amendment to the Grantor Trust agreement with the Trustee. The Agreements amended the SERP Agreements and the Grantor Trust agreement to provide for us to deliver an irrevocable standby letter of credit to the Trustee in an amount equal to our then current funding obligation under the SERP Agreements, which was $3.9 million. The amendments affected by the Agreements also allow for the issuance, from time to time, of irrevocable standby letters of credit, or the increase of size of an irrevocable standby letter of credit already held by the Trustee, in lieu of any deposit to the Grantor Trust otherwise required in the future. In addition, the Agreements permit us, from time to time at our sole discretion, to reduce the size of any irrevocable standby letter of credit issued to the Trustee, so long as we contemporaneously fund the Grantor Trust with an amount of cash equal to the amount of the reduction of the letter of credit. In October 2008, we increased the irrevocable standby letter of credit issued to the Trustee to a total of $6.8 million, in lieu of deposits to the Grantor Trust, in connection with additional vesting of the SERP Executives benefits. In April and July 2009, we reduced the irrevocable standby letter of credit by $1.0 million and $0.6 million, respectively, to a total of $5.2 million, in connection with the April and July 2009 SERP benefit payments. In November 2009, we increased the irrevocable standby letter of credit by $0.7 million to a total of $5.9 million, in connection with additional vesting of the SERP Executives benefits. In December 2009, in connection with the additional vesting and scheduled payment of SERP Executives benefits in 2010, we made a partial cash contribution to the Grantor Trust of $1.5 million, and contemporaneously reduced tRead the The complete Report

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