SEC Filing | The Cato Corporation

1 UNITED STATES 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 number 0-3747 ---------------------------------- THE CATO CORPORATION AND SUBSIDIARIES ----------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 56-0484485 ------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 8100 Denmark Road, Charlotte, North Carolina 28273-5975 ------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (704) 554-8510 ----------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable ----------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 [ ] As of August 16, 1999, there were 21,236,013 shares of Class A Common Stock and 5,264,317 shares of Class B Common Stock outstanding.

2 THE CATO CORPORATION FORM 10-Q JULY 31, 1999 TABLE OF CONTENTS Page No. --- PART I - FINANCIAL INFORMATION (UNAUDITED) Condensed Consolidated Statements of Income 2 Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Cash Flows 4 Notes to Condensed Consolidated Financial Statements 5-7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 PART II - OTHER INFORMATION 11-12

3 Page 2 PART I FINANCIAL INFORMATION THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED SIX MONTHS ENDED ------------------------ ------------------------ JULY 31, August 1, JULY 31, August 1, 1999 1998 1999 1998 (UNAUDITED) (Unaudited) (UNAUDITED) (Unaudited) ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES Retail sales $ 148,500 $ 132,573 $ 301,883 $ 268,747 Other income (principally finance and layaway charges) 4,990 4,603 9,862 9,473 ----------- ----------- ----------- ----------- Total revenues 153,490 137,176 311,745 278,220 ----------- ----------- ----------- ----------- COSTS AND EXPENSES Cost of goods sold 99,974 93,864 200,143 183,043 Selling, general and administrative 36,118 32,410 71,040 65,500 Depreciation 2,109 1,909 4,132 3,774 Interest 5 65 11 131 ----------- ----------- ----------- ----------- Total expenses 138,206 128,248 275,326 252,448 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 15,284 8,928 36,419 25,772 Income taxes 5,350 3,293 12,747 9,020 ----------- ----------- ----------- ----------- NET INCOME $ 9,934 $ 5,635 $ 23,672 $ 16,752 =========== =========== =========== =========== BASIC EARNINGS PER SHARE $ .37 $ .20 $ .89 $ .61 =========== =========== =========== =========== DILUTED EARNINGS PER SHARE $ .37 $ .20 $ .88 $ .59 =========== =========== =========== =========== DIVIDENDS PER SHARE $ .075 $ .045 $ .13 $ .09 =========== =========== =========== =========== See accompanying notes to consolidated financial statements.

4 Page 3 THE CATO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS JULY 31, August 1, January 30, 1999 1998 1999 (UNAUDITED) (Unaudited) ----------- ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS Current Assets Cash and cash equivalents $ 41,802 $ 54,403 $ 44,068 Short-term investments 53,365 38,167 42,141 Accounts receivable - net 43,974 41,902 44,536 Merchandise inventories 67,374 63,063 61,112 Deferred income taxes 3,837 2,905 3,372 Prepaid expenses 2,022 2,023 2,374 ----------- ----------- ----------- Total Current Assets 212,374 202,463 197,603 Property and Equipment - net 60,262 49,748 54,740 Other Assets 6,408 6,177 6,170 ----------- ----------- ----------- Total $ 279,044 $ 258,388 $ 258,513 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 52,156 $ 51,813 $ 52,391 Accrued expenses 20,773 18,537 20,991 Income taxes 5,534 3,956 197 ----------- ----------- ----------- Total Current Liabilities 78,463 74,306 73,579 Deferred Income Taxes 5,801 5,296 5,922 Other Noncurrent Liabilities 7,154 6,187 6,778 Stockholders' Equity: Class A Common Stock, issued 24,109,961 shares, 23,891,040 shares and 24,070,519 shares at July 31, 1999, August 1, 1998 and January 30, 1999, respectively 803 796 802 Convertible Class B Common Stock, issued and outstanding 5,264,317 shares at July 31, 1999, August 1, 1998 and January 30, 1999, respectively 176 176 176 Additional paid-in capital 70,216 67,092 69,878 Retained earnings 139,710 115,946 120,590 ----------- ----------- ----------- 210,905 184,010 191,446 Less Class A Common Stock in treasury, at cost (2,873,948 shares at July 31, 1999, 1,523,000 shares at August 1, 1998, and 2,368,000 shares at January 30, 1999) 23,279 11,411 19,212 ----------- ----------- ----------- Total Stockholders' Equity 187,626 172,599 172,234 ----------- ----------- ----------- Total $ 279,044 $ 258,388 $ 258,513 =========== =========== =========== See accompanying notes to consolidated financial statements.

5 Page 4 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED --------------------------------- JULY 31, August 1, 1999 1998 (UNAUDITED) (Unaudited) --------------------------------- (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net income $ 23,672 $ 16,752 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,132 3,774 Amortization of investment premiums 89 50 Loss on disposal of property and equipment 295 580 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable 562 5,284 Merchandise inventories (6,262) 1,163 Other assets 114 (421) Accrued income taxes 5,337 1,915 Accounts payable and other liabilities 455 82 ----------- ----------- Net cash provided by operating activities 28,394 29,179 ----------- ----------- INVESTING ACTIVITIES Expenditures for property and equipment (9,950) (4,301) Purchases of short-term investments (15,306) (19,479) Sales of short-term investments 2,320 9,273 ----------- ----------- Net cash used in investing activities (22,936) (14,507) ----------- ----------- FINANCING ACTIVITIES Dividends paid (3,465) (2,459) Purchase of treasury stock (4,577) (2,310) Proceeds from employee stock purchase plan 247 183 Proceeds from stock options exercised 71 2,673 ----------- ----------- Net cash used in financing activities (7,724) (1,913) ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents (2,266) 12,759 Cash and Cash Equivalents at Beginning of Year 44,068 41,644 ----------- ----------- Cash and Cash Equivalents at End of Period $ 41,802 $ 54,403 =========== =========== See accompanying notes to consolidated financial statements.

6 Page 5 THE CATO CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR SIX MONTHS ENDED JULY 31, 1999 AND AUGUST 1, 1998 NOTE 1 - GENERAL: The consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the Company) and all amounts shown at July 31, 1999 and August 1, 1998 are unaudited. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of the interim period may not be indicative of the entire year. The Company's short-term investments are classified as available for sale securities, and therefore, are carried at fair value, with unrealized gains and losses, net of income taxes, reported as a component of other comprehensive income. Total comprehensive income for the second quarter and six months ended July 31, 1999 was $9,262,000 and $22,585,000 respectively. Total comprehensive income for the second quarter and six months ended August 1, 1998 was $5,814,000 and $16,861,000, respectively. Total comprehensive income is composed of net income and unrealized losses on available-for-sale securities. Merchandise inventories are stated at the lower of cost (first-in, first-out) or market as determined by the retail inventory method. In March 1999, the Company transferred 63,000 shares of Class A Common Stock from treasury stock to its Employee Stock Ownership Plan as the contribution for the fiscal year ended January 30, 1999. In the first quarter of fiscal 1999, the Company repurchased 569,000 shares of Class A Common Stock for $4,577,000, or an average price of $8.04 per share. The provisions for income taxes are based on the Company's estimated annual effective tax rate.

7 Page 6 THE CATO CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR SIX MONTHS ENDED JULY 31, 1999 AND AUGUST 1, 1998 NOTE 2 - EARNINGS PER SHARE: Earnings per share is calculated by dividing net income by the weighted-average number of Class A and Class B common shares outstanding during the respective periods. The weighted-average shares outstanding is used in the basic earnings per share calculation, while the weighted-average shares and equivalents outstanding is used in the diluted earnings per share calculation. THREE MONTHS ENDED SIX MONTHS ENDED -------------------------------- -------------------------------- JULY 31, August 1, JULY 31, August 1, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Weighted-average shares outstanding 26,496,155 27,707,347 26,577,860 27,603,502 Dilutive effect of stock options 505,125 869,504 400,484 820,046 ----------- ----------- ----------- ----------- Weighted-average shares and equivalents outstanding 27,001,280 28,576,851 26,978,344 28,423,548 =========== =========== =========== =========== NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the six months ended July 31, 1999 and August 1, 1998 was $11,100 and $81,000, respectively. Income tax payments, net of refunds received, for the six months ended July 31, 1999 and August 1, 1998 were $7,641,000 and $7,193,000, respectively. NOTE 4 - FINANCING ARRANGEMENTS: At July 31, 1999, the Company had an unsecured revolving credit agreement which provides for borrowings of up to $35 million. The revolving credit agreement is committed until May 2001. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios. The Company was in compliance with all financial covenants and ratios and there were no borrowings outstanding under the agreement at July 31, 1999 or August 1, 1998.

8 Page 7 THE CATO CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR SIX MONTHS ENDED JULY 31, 1999 AND AUGUST 1, 1998 NOTE 5 - REPORTABLE SEGMENT INFORMATION: The Company has two reportable segments: retail and credit. The following schedule summarizes certain segment information (in thousands): THREE MONTHS ENDED SIX MONTHS ENDED -------------------------------- --------------------------------- JULY 31, August 1, JULY 31, August 1, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenues: Retail $ 150,624 $ 134,376 $ 306,020 $ 272,656 Credit 2,866 2,800 5,725 5,564 ----------- ----------- ----------- ----------- Total $ 153,490 $ 137,176 $ 311,745 $ 278,220 =========== =========== =========== =========== Income before taxes: Retail $ 14,320 $ 8,013 $ 34,559 $ 24,078 Credit 964 915 1,860 1,694 ----------- ----------- ----------- ----------- Total $ 15,284 $ 8,928 $ 36,419 $ 25,772 =========== =========== =========== ===========

9 Page 8 THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items in the Company's Unaudited Condensed Consolidated Statements of Income as percentages of total retail sales: THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------- ------------------------------- JULY 31, August 1, JULY 31, August 1, 1999 1998 1999 1998 ---------- --------- --------- --------- Total retail sales 100.0% 100.0% 100.0% 100.0% Total revenues 103.3 103.5 103.2 103.5 Cost of goods sold 67.3 70.8 66.3 68.1 Selling, general and administrative 24.3 24.4 23.5 24.4 Income before income taxes 10.3 6.8 12.0 9.6 Net income 6.7 4.3 7.8 6.2 COMPARISON OF SECOND QUARTER AND FIRST SIX MONTHS OF 1999 WITH 1998. OPERATING RESULTS Total retail sales for the second quarter were $148.5 million compared to last year's second quarter sales of $132.6 million, a 12% increase. Same-store sales increased 5% in this year's second quarter. For the six months ended July 31, 1999, total retail sales were $301.9 million compared to last year's first six months sales of $268.7 million, a 12% increase, and same-store sales increased 6% for the comparable six month period. The increase in retail sales for the first six months of 1999 resulted from the Company's continued everyday low pricing strategy, improved merchandise offerings, and an increase in store development activity. The Company operated 770 stores at July 31, 1999 compared to 701 stores at the end of last year's second quarter. Other income for the second quarter and first six months of 1999 increased 8% and 4%, respectively, over the prior year's comparable periods. The increase in the current year resulted primarily from increased finance and late charge income on the Company's customer accounts receivable and increased earnings from cash equivalents and short-term investments. Cost of goods sold were 67.3% and 66.3% of total retail sales for the second quarter and first six months of 1999, respectively, compared to 70.8% and 68.1% for last year's comparable three and six month periods. The decrease in cost of goods sold as a percent of retail sales resulted by maintaining timely and aggressive markdowns on slow moving merchandise, eliminating unprofitable promotions and improving inventory flow.

10 Page 9 THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING RESULTS - CONTINUED Selling, general and administrative (SG&A) expenses were $36.1 million and $71.0 million for the second quarter and first six months of this year, respectively, compared to $32.4 million and $65.5 million for last year's comparable three and six month periods, respectively. Expenses remained well controlled and were under planned levels. LIQUIDITY AND CAPITAL RESOURCES At July 31, 1999, the Company had working capital of $133.9 million, compared to $128.2 million at August 1, 1998 and $124.0 million at January 30, 1999. Cash provided from operating activities was $28.4 million for the six months ended July 31, 1999, compared to $29.2 million for last year's comparable six month period. The Company had no borrowings under its revolving credit agreement at July 31, 1999 or August 1, 1998. At July 31, 1999, the Company had cash, cash equivalents, and short-term investments of $95.2 million, compared to $92.6 million at August 1, 1998 and $86.2 million at January 30, 1999. At July 31, 1999, the Company had an unsecured revolving credit agreement which provides for borrowings of up to $35 million. The revolving credit agreement is committed until May 2001. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios. The Company was in compliance with all financial covenants and ratios and there were no borrowings outstanding under the agreement at July 31, 1999 or August 1, 1998. Expenditures for property and equipment totaled $10.0 million for the six months ended July 31, 1999, compared to $4.3 million in the first six months of 1998. The Company expects total capital expenditures to be approximately $26 million for the current fiscal year. The Company intends to open approximately 85 new stores, close 10 stores, and to relocate 22 stores during the current fiscal year. For the six months ended July 31, 1999, the Company had opened 39 new stores, relocated 13 stores, and closed 1 store. In May 1999, the Board of Directors increased the quarterly dividend by 36% from $.055 per share to $.075 per share. The Company believes that its cash, cash equivalents and short-term investments, together with cash flow from operations and borrowings available under its revolving credit agreement, will be adequate to fund the Company's proposed capital expenditures and other operating requirements.

11 Page 10 THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES - CONTINUED The Company developed a two phase approach to address the Year 2000 issue, which involves the exposure to risks in its information technology (IT) systems, as well as potential risks in other non-IT systems with embedded technology. Phase 1 was an analysis to identify and fix all internally developed programs. Phase 2 is the identification and correction to all programs purchased from external sources. The Company has completed Phase 1, and Phase 2 will be completed in the third fiscal quarter of 1999 with continued testing of compliance throughout 1999. The Company expects to spend approximately $525,000 in 1998 and 1999 on hardware, software and consulting to ensure proper processing of transactions relating to the Year 2000 and beyond. The Company has initiated formal communications with its third-party suppliers and vendors to determine the extent to which the Company is vulnerable to those third-parties' failure to remediate their own Year 2000 issue. Although lack of compliance for Year 2000 issues by third-party suppliers and vendors could have an adverse effect on the Company's business, results of operations and financial condition, the Company expects its Year 2000 compliance efforts to significantly reduce the risk of business interruption and the level of uncertainty the Year 2000 issue may have on its computer systems. A contingency plan will be established upon the completion of Phase 2 to address these issues. Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical facts included in the Form 10-Q and located elsewhere herein regarding the Company's financial position and business strategy may constitute forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.

12 Page 11 PART II OTHER INFORMATION THE CATO CORPORATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS None ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES Not Applicable ITEM 4. RESULT OF VOTES OF SECURITY HOLDERS Following are the results of the matters voted upon at the Company's Annual Meeting which was held on May 20, 1999. ELECTION OF DIRECTORS: Mr. Wayland H Cato, Jr - For 70,384,788 ; Abstaining 1,370,723 Mr. Edgar T. Cato - For 70,384,788 ; Abstaining 1,370,723 Mr. Howard A. Severson - For 70,384,713 ; Abstaining 1,370,798 Mr. Robert W. Bradshaw - For 71,108,224 ; Abstaining 647,287 Mr. Grant L. Hamrick - For 71,502,397 ; Abstaining 253,114 RATIFICATION OF DELOITTE & TOUCHE LLP AS INDEPENDENT AUDITORS For 71,735,518 ; Abstaining 1,893 ; Against 18,100 ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibit 27 - Financial Data Schedule (for SEC use only) (B) No Reports on Form 8-K were filed during the quarter ended July 31, 1999.

13 Page 12 PART II OTHER INFORMATION (CONTINUED) THE CATO CORPORATION Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE CATO CORPORATION September 9, 1999 /s/ Wayland H. Cato, Jr. - --------------------------- ---------------------------------------- Date Wayland H. Cato, Jr. Chairman of the Board September 9, 1999 /s/ John P. Derham Cato - --------------------------- ---------------------------------------- Date John P. Derham Cato Vice Chairman of the Board President and Chief Executive Officer September 9, 1999 /s/ Michael O. Moore - --------------------------- ---------------------------------------- Date Michael O. Moore Executive Vice President Chief Financial Officer and Secretary

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS JAN-29-2000 JUL-31-1999 41,802 53,365 49,049 5,075 67,374 212,374 115,991 55,729 279,044 78,463 0 0 0 979 186,647 279,044 301,883 311,745 200,143 200,143 0 1,963 11 36,419 12,747 23,672 0 0 0 23,672 0.89 0.88