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 October 30, 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 November 16, 1999, there were 21,192,639 shares of Class A Common Stock and 5,264,317 shares of Class B Common Stock outstanding.

2 THE CATO CORPORATION FORM 10-Q OCTOBER 30, 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 NINE MONTHS ENDED --------------------------- ---------------------------- OCTOBER 30, October 31, OCTOBER 30, October 31, 1999 1998 1999 1998 (UNAUDITED) Unaudited (UNAUDITED) Unaudited ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES Retail sales $128,514 $113,834 $430,397 $382,581 Other income (principally finance and layaway charges) 5,037 4,766 14,900 14,239 -------- -------- -------- -------- Total revenues 133,551 118,600 445,297 396,820 -------- -------- -------- -------- COSTS AND EXPENSES Cost of goods sold 90,761 81,364 290,904 264,407 Selling, general and administrative 34,485 30,977 105,525 96,477 Depreciation 2,202 1,883 6,334 5,657 Interest 5 54 16 185 -------- -------- -------- -------- Total expenses 127,453 114,278 402,779 366,726 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 6,098 4,322 42,518 30,094 Income taxes 2,134 1,513 14,881 10,533 -------- -------- -------- -------- NET INCOME $ 3,964 $ 2,809 $ 27,637 $ 19,561 ======== ======== ======== ======== BASIC EARNINGS PER SHARE $ .15 $ .10 $ 1.04 $ .71 ======== ======== ======== ======== DILUTED EARNINGS PER SHARE $ .15 $ .10 $ 1.02 $ .69 ======== ======== ======== ======== DIVIDENDS PER SHARE $ .075 $ .05 $ .205 $ .14 ======== ======== ======== ======== See accompanying notes to condensed consolidated financial statements.

4 Page 3 THE CATO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS OCTOBER 30, October 31, January 30, 1999 1998 1999 (UNAUDITED) (Unaudited) ----------- ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS Current Assets Cash and cash equivalents $ 26,502 $ 36,785 $ 44,068 Short-term investments 54,347 39,875 42,141 Accounts receivable - net 45,438 43,148 44,536 Merchandise inventories 89,027 87,327 61,112 Deferred income taxes 3,969 2,905 3,372 Prepaid expenses 1,520 2,140 2,374 -------- -------- -------- Total Current Assets 220,803 212,180 197,603 Property and Equipment - net 67,032 52,073 54,740 Other Assets 6,524 6,150 6,170 -------- -------- -------- Total $294,359 $270,403 $258,513 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 62,209 $ 63,984 $ 52,391 Accrued expenses 23,852 20,494 20,991 Income taxes 5,422 2,322 197 -------- -------- -------- Total Current Liabilities 91,483 86,800 73,579 Deferred Income Taxes 5,801 5,417 5,922 Other Noncurrent Liabilities 7,413 6,452 6,778 Stockholders' Equity: Class A Common Stock, issued 24,163,587 shares, 23,979,238 shares and 24,070,519 shares at October 30, 1999, October 31, 1998 and January 30, 1999, respectively 805 799 802 Convertible Class B Common Stock, issued and outstanding 5,264,317 shares at October 30, 1999, October 31, 1998 and January 30, 1999, respectively 176 176 176 Additional paid-in capital 70,640 67,817 69,878 Retained earnings 141,440 117,609 120,590 -------- -------- -------- 213,061 186,401 191,446 Less Class A Common Stock in treasury, at cost (2,883,948 shares at October 30, 1999, 1,822,500 shares at October 31, 1998, and 2,368,000 shares at January 30, 1999, respectively) 23,399 14,667 19,212 -------- -------- -------- Total Stockholders' Equity 189,662 171,734 172,234 -------- -------- -------- Total $294,359 $270,403 $258,513 ======== ======== ======== See accompanying notes to condensed consolidated financial statements.

5 Page 4 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED ----------------------------- OCTOBER 30, October 31, 1999 1998 (UNAUDITED) (Unaudited) ----------------------------- (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net income $ 27,637 $ 19,561 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 6,334 5,657 Amortization of investment premiums 138 83 Loss on disposal of property and equipment 405 638 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable (902) 4,038 Merchandise inventories (27,915) (23,101) Other assets 500 (511) Accrued income taxes 5,225 281 Accounts payable and other liabilities 13,846 14,475 -------- -------- Net cash provided by operating activities 25,268 21,121 -------- -------- INVESTING ACTIVITIES Expenditures for property and equipment (19,032) (8,567) Purchases of short-term investments (20,013) (22,032) Sales of short-term investments 5,619 10,431 -------- -------- Net cash used in investing activities (33,426) (20,168) -------- -------- FINANCING ACTIVITIES Dividends paid (5,454) (3,829) Purchase of treasury stock (4,697) (5,567) Proceeds from employee stock purchase plan 436 331 Proceeds from stock options exercised 307 3,253 -------- -------- Net cash used in financing activities (9,408) (5,812) -------- -------- Net Decrease in Cash and Cash Equivalents (17,566) (4,859) Cash and Cash Equivalents at Beginning of Period 44,068 41,644 -------- -------- Cash and Cash Equivalents at End of Period $ 26,502 $ 36,785 ======== ======== See accompanying notes to condensed consolidated financial statements.

6 Page 5 THE CATO CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR NINE MONTHS ENDED OCTOBER 30, 1999 AND OCTOBER 31, 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 October 30, 1999 and October 31, 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 interim financial statements should be read in conjunction with the financial statements and notes there to, included in the Company's Annual Report in Form 10K for the fiscal year ended January 30, 1999. 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 third quarter and nine months ended October 30, 1999 was $3,719,000 and $26,305,000 respectively. Total comprehensive income for the third quarter and nine months ended October 31, 1998 was $3,033,000 and $19,894,000, respectively. Total comprehensive income is composed of net income and net 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 nine months of fiscal 1999, the Company repurchased 579,000 shares of Class A Common Stock for $4,697,000, or an average price of $8.11 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 NINE MONTHS ENDED OCTOBER 30, 1999 AND OCTOBER 31, 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 NINE MONTHS ENDED -------------------------------- --------------------------------- OCTOBER 30, October 31, OCTOBER 30, October 31, 1999 1998 1999 1998 --------------- -------------- ----------------- -------------- Weighted-average shares outstanding 26,523,490 27,433,823 26,559,736 27,546,942 Dilutive effect of stock options 579,744 508,592 469,030 729,375 --------------- ------------ ----------------- -------------- Weighted-average shares and equivalents outstanding 27,103,234 27,942,415 27,028,766 28,276,317 =============== ============== ================= ============== NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the nine months ended October 30, 1999 and October 31, 1998 was $16,000 and $121,000, respectively. Income tax payments, net of refunds received, for the nine months ended October 30, 1999 and October 31, 1998 were $10,020,799 and $10,308,000, respectively. NOTE 4 - FINANCING ARRANGEMENTS: At October 30, 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 July 2002. 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 October 30, 1999 or October 31, 1998.

8 Page 7 THE CATO CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR NINE MONTHS ENDED OCTOBER 30, 1999 AND OCTOBER 31, 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 NINE MONTHS ENDED --------------------------------- ---------------------------------- OCTOBER 30, October 31, OCTOBER 30, October 31, 1999 1998 1999 1998 ---------------- ---------------- ---------------- ----------------- Revenues: Retail $ 130,633 $ 115,806 $ 436,653 $ 388,463 Credit 2,918 2,794 8,644 8,357 ---------------- --------------- ---------------- ----------------- Total $ 133,551 $ 118,600 $ 445,297 $ 396,820 ================ =============== ================ ================= Income before taxes: Retail $ 4,930 $ 3,215 $ 39,490 $ 27,293 Credit 1,168 1,107 3,028 2,801 ---------------- --------------- ---------------- ----------------- Total $ 6,098 $ 4,322 $ 42,518 $ 30,094 ================ =============== ================ =================

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 NINE MONTHS ENDED ------------------------------ ------------------------------- OCTOBER 30, October 31, OCTOBER 30, October 31, 1999 1998 1999 1998 -------------- -------------- -------------- --------------- Total retail sales 100.0 % 100.0 % 100.0 % 100.0 % Total revenues 103.9 104.2 103.5 103.7 Cost of goods sold 70.6 71.5 67.6 69.1 Selling, general and administrative 26.8 27.2 24.5 25.2 Income before income taxes 4.8 3.8 9.9 7.9 Net income 3.1 2.5 6.4 5.1 COMPARISON OF THIRD QUARTER AND FIRST NINE MONTHS OF 1999 WITH 1998. OPERATING RESULTS Total retail sales for the third quarter were $128.5 million compared to last year's third quarter sales of $113.8 million, a 13% increase. Same-store sales increased 5% in this year's third quarter. For the nine months ended October 30, 1999, total retail sales were $430.4 million compared to last year's first nine months sales of $382.6 million, a 13% increase, and same-store sales increased 6% for the comparable nine month period. The increase in retail sales for the first nine months of 1999 resulted from the Company's continued everyday low pricing strategy, improved merchandise content, and an increase in store development activity. The Company operated 794 stores at October 30, 1999 compared to 723 stores at the end of last year's third quarter. Other income for the third quarter and first nine months of 1999 increased 6% and 5%, 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.

10 Page 9 THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- OPERATING RESULTS - CONTINUED Cost of goods sold were 70.6% and 67.6% of total retail sales for the third quarter and first nine months of 1999, compared to 71.5% and 69.1% for last year's comparable three and nine month periods, respectively. The decrease in cost of goods sold as a percent of retail sales resulted primarily from much improved merchandise offerings, more timely and aggressive markdowns and tighter merchandise planning and control. Selling, general and administrative (SG&A) expenses were $34.5 million and $105.5 million for the third quarter and first nine months of this year, compared to $31.0 million and $96.5 million for last year's comparable three and nine month periods, respectively. SG&A expenses for the third quarter and first nine months of 1999 declined 40 and 70 basis points respectively over the prior year as expenses remained well controlled and under plan. LIQUIDITY AND CAPITAL RESOURCES At October 30, 1999, the Company had working capital of $129.3 million, compared to $125.4 million at October 31, 1998 and $124.0 million at January 30, 1999. Net cash provided from operating activities was $25.3 million for the nine months ended October 30, 1999, compared to $21.1 million for last year's comparable nine month period. Net cash used in investing activities totaled $33.4 million for the first nine months of 1999 compared to $20.2 million for the comparable period of 1998. Cash was used primarily to fund capital expenditures for new, relocated and remodeled stores and for new technology for systems. Net cash used in financing activities totaled $9.4 million for the first nine months of 1999 compared to $5.8 million for the comparable period of 1998. The increase was due primarily from reduced proceeds from stock options exercised and an increase in dividends paid. The Company had no borrowings under its revolving credit agreement at October 30, 1999 or October 31, 1998. At October 30, 1999, the Company had cash, cash equivalents, and short-term investments of $80.8 million, compared to $76.7 million at October 31, 1998 and $86.2 million at January 30, 1999.

11 Page 10 THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES - CONTINUED At October 30, 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 July 2002. 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 October 30, 1999 or October 31, 1998. 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 was the identification and correction to all programs purchased from external sources. The Company has completed Phase 1 and Phase 2 with continued testing of compliance throughout 1999. The Company expenditures approximated $575,000 in 1999 for hardware, software and consulting to ensure proper processing of transactions relating to the Year 2000 and beyond. The Company has completed 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. The company has developed contingency plans for each area within the organization that could be affected by Year 2000 issues in the event of internal interruptions or failures on the part of third-party suppliers and vendors. 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 None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) None (B) No Reports on Form 8-K were filed during the quarter ended October 30, 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 December 9, 1999 /s/ Wayland H. Cato, Jr. - ----------------------------- --------------------------------------- Date Wayland H. Cato, Jr. Chairman of the Board December 9, 1999 /s/ John P. Derham Cato - ----------------------------- --------------------------------------- Date John P. Derham Cato Vice Chairman of the Board President and Chief Executive Officer December 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 OCT-30-1999 26,502 54,347 50,464 5,026 89,027 220,803 124,804 57,772 294,359 91,483 0 0 0 981 188,681 294,359 430,397 445,297 290,904 290,904 0 2,869 16 42,518 14,881 27,637 0 0 0 27,637 1.04 1.02