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 April 29, 2000 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 May 16, 2000, there were 19,451,671 shares of Class A Common Stock and 5,364,317 shares of Class B Common Stock outstanding.

2 THE CATO CORPORATION FORM 10-Q APRIL 29, 2000 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 - 6 For the Three Months Ended April 29, 2000 and May 1, 1999 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 - 9 PART II - OTHER INFORMATION 10 - 11

3 Page 2 PART I FINANCIAL INFORMATION THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED ------------------------- APRIL 29, May 1, 2000 1999 (UNAUDITED) (Unaudited) ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES Retail sales $162,154 $153,047 Other income (principally finance and layaway charges) 5,086 4,827 -------- -------- Total revenues 167,240 157,874 -------- -------- COSTS AND EXPENSES Cost of goods sold 105,324 100,017 Selling, general and administrative 37,132 34,922 Depreciation 2,377 2,023 Interest 7 6 -------- -------- Total expenses 144,840 136,968 -------- -------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 22,400 20,906 Income tax expense 7,840 7,317 -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 14,560 13,589 CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX ($79) -- 147 -------- -------- NET INCOME $ 14,560 $ 13,736 ======== ======== BASIC EARNINGS PER SHARE $ .58 $ .52 ======== ======== DILUTED EARNINGS PER SHARE $ .57 $ .51 ======== ======== DIVIDENDS PER SHARE $ .10 $ .055 ======== ======== See accompanying notes to condensed consolidated financial statements.

4 Page 3 THE CATO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS APRIL 29, May 1, January 29, 2000 1999 2000 (UNAUDITED) (Unaudited) --------- --------- --------- (DOLLARS IN THOUSANDS) ASSETS Current Assets Cash and cash equivalents $ 18,021 $ 42,861 $ 30,389 Short-term investments 61,095 53,273 56,886 Accounts receivable - net 44,476 43,254 45,458 Merchandise inventories 84,468 76,396 69,497 Deferred income taxes 4,014 3,475 4,093 Prepaid expenses 2,581 2,646 2,494 --------- --------- --------- Total Current Assets 214,655 221,905 208,817 Property and Equipment - net 72,353 56,779 69,338 Other Assets 7,723 6,280 7,634 --------- --------- --------- Total $ 294,731 $ 284,964 $ 285,789 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 67,867 $ 66,895 $ 54,707 Accrued expenses 17,308 17,456 24,392 Income taxes 9,589 7,530 4,730 --------- --------- --------- Total Current Liabilities 94,764 91,881 83,829 Deferred Income Taxes 5,544 5,801 5,806 Other Noncurrent Liabilities 8,718 7,001 7,374 Stockholders' Equity: Class A Common Stock, issued 24,212,819 shares, 24,101,474 shares and 24,173,480 shares at April 29, 2000, May 1, 1999, and January 29, 2000, respectively 807 803 805 Convertible Class B Common Stock, issued 5,364,317 shares, 5,264,317 shares and 5,364,317 shares at April 29, 2000, May 1, 1999 and January 29, 2000 respectively 179 176 179 Additional paid-in capital 72,324 70,147 71,974 Retained earnings 158,893 132,625 146,881 Accumulated Other Comprehensive Loss (1,864) (191) (1,801) Unearned Compensation - Restricted Stock Awards (911) -- (984) --------- --------- --------- 229,428 203,560 217,054 Less Class A Common Stock in treasury, at cost (4,759,148 shares at April 29, 2000, 2,874,000 shares at May 1, 1999, and 3,290,348 shares at January 29, 2000, respectively) (43,723) (23,279) (28,274) --------- --------- --------- Total Stockholders' Equity 185,705 180,281 188,780 --------- --------- --------- Total $ 294,731 $ 284,964 $ 285,789 ========= ========= ========= See accompanying notes to condensed consolidated financial statements.

5 Page 4 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED --------------------------- APRIL 29, May 1, 2000 1999 (UNAUDITED) (Unaudited) -------------------------- (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net income $ 14,560 $ 13,736 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,377 2,023 Amortization of investment premiums 44 44 Compensation expense related to restricted stock award 73 -- Loss on disposal of property and equipment 199 141 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable 982 1,282 Merchandise inventories (14,971) (15,284) Other assets (176) (382) Accrued income taxes 4,859 7,333 Accounts payable and other liabilities 7,237 11,723 -------- -------- Net cash provided by operating activities 15,184 20,616 -------- -------- INVESTING ACTIVITIES Expenditures for property and equipment (5,591) (4,203) Purchases of short-term investments (5,048) (14,903) Sales of short-term investments 732 3,088 -------- -------- Net cash used in investing activities (9,907) (16,018) -------- -------- FINANCING ACTIVITIES Dividends paid (2,549) (1,477) Purchases of treasury stock (15,449) (4,577) Proceeds from employee stock purchase plan 223 237 Proceeds from stock options exercised 130 12 -------- -------- Net cash used in financing activities (17,645) (5,805) -------- -------- Net Decrease in Cash and Cash Equivalents (12,368) (1,207) Cash and Cash Equivalents at Beginning of Period 30,389 44,068 -------- -------- Cash and Cash Equivalents at End of Period $ 18,021 $ 42,861 ======== ======== See accompanying notes to condensed consolidated financial statements.

6 Page 5 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED APRIL 29, 2000 AND MAY 1, 1999 - ------------------------------------------------------------------------------- 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 April 29, 2000 and May 1, 1999 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 10-K for the fiscal year ended January 29, 2000. 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 quarters ended April 29, 2000 and May 1, 1999 was $14,497,000 and $13,321,000, 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 method) or market as determined by the retail inventory method. In the first quarter of fiscal 2000, the Company repurchased 1,468,800 shares of Class A Common Stock for $15,449,000, or an average price of $10.52 per share. 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. 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. The provisions for income taxes are based on the Company's estimated annual effective tax rate. Effective for fiscal 1999, the Company changed its policy for recognizing revenues related to layaway sales to comply with the Securities and Exchange Commissions Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). Revenues for layaway sales and related fees are recognized when the layaway merchandise is delivered to the customer. Previously, revenues were recognized at the time of the sale. The Company accounted for the adoption of SAB 101 as a change in accounting principle and recorded a cumulative effect in the first quarter of fiscal 1999. The cumulative effect of this accounting change resulted in an increase in net income of $147,000, net of income tax of $79,000, or $.01 per share. This increase was driven by the release of the Company's layaway reserve, which slightly exceeded the associated margin on previously recognized layaway sales. The proforma effects of retroactive application of the accounting change on fiscal 1998 is immaterial to the financial statements.

7 Page 6 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED APRIL 29, 2000 AND MAY 1, 1999 - ------------------------------------------------------------------------------- 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 --------------------------------------- APRIL 29, MAY 1, 2000 1999 ---------------- ----------------- Weighted-average shares outstanding 25,303,734 26,659,565 Dilutive effect of stock options 334,854 248,834 ---------------- ----------------- Weighted-average shares and equivalents outstanding 25,638,588 26,908,399 ================ ================= NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION: Income tax payments, net of refunds received, for the three months ended April 29, 2000 and May 1, 1999 were $3,446,000 and $181,000, respectively. NOTE 4 - FINANCING ARRANGEMENTS: At April 29, 2000, 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 2003. 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 April 29, 2000, May 1, 1999 or January 29, 2000. 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 April 29, 2000 Retail Credit Total - -------------------------------------------------------------------------------------------------------------------- Total Revenues $ 163,991 $ 3,249 $ 167,240 Income before taxes and cumulative effect of accounting change 21,413 987 22,400 Three Months Ended May 1, 1999 - -------------------------------------------------------------------------------------------------------------------- Total Revenues $ 155,015 $ 2,859 $ 157,874 Income before taxes and cumulative effect of accounting change 20,010 896 20,906

8 Page 7 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 a percentage of total retail sales: THREE MONTHS ENDED ------------------------------ APRIL 29, May 1, 2000 1999 ------------------------------ Total retail sales 100.0 % 100.0 % Total revenues 103.1 103.2 Cost of goods sold 64.9 65.4 Selling, general and administrative 22.9 22.8 Income before income taxes and cumulative effect of accounting change 13.8 13.7 Net income 9.0 9.0 COMPARISON OF FIRST QUARTER OF 2000 WITH 1999. OPERATING RESULTS Total retail sales for the first quarter were $162.2 million, an increase of 6% over sales of $153.0 million for the first quarter last year. Same-store sales decreased 1% in this year's first quarter. The increase in total retail sales for the first quarter resulted from the Company's increase in store development activity. The Company operated 817 stores at April 29, 2000 compared to 753 stores at the end of last year's first quarter. Other income for the first quarter of 2000 increased 5%, over the prior year's comparable periods. The increase in the current year resulted primarily from increased finance and late charge fee income on the Company's customer accounts receivable and increased earnings from cash equivalents and short-term investments. Cost of goods sold were 64.9% of total retail sales for the current year's first quarter, compared to 65.4% for last year's first three months. 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.

9 Page 8 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 $37.1 million, or 22.9% of retail sales, for this year's first quarter compared to $34.9 million, or 22.8% of retail sales, in last year's first quarter. Expenses remained well controlled and were under planned levels. Effective for fiscal 1999, the Company changed its policy for recognizing revenues related to layaway sales to comply with the Securities and Exchange Commissions Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). Revenues for layaway sales and related fees are recognized when the layaway merchandise is delivered to the customer. Previously, revenues were recognized at the time of the sale. The Company accounted for the adoption of SAB 101 as a change in accounting principle and recorded a cumulative effect in the first quarter of fiscal 1999. The cumulative effect of this accounting change resulted in an increase in net income of $147,000, net of income tax of $79,000, or $.01 per share. This increase was driven by the release of the Company's layaway reserve, which slightly exceeded the associated margin on previously recognized layaway sales. The proforma effects of retroactive application of the accounting change on fiscal 1998 is immaterial to the financial statements. LIQUIDITY AND CAPITAL RESOURCES At April 29, 2000, the Company had working capital of $119.9 million, compared to $130.0 million at May 1, 1999 and $125.0 million at January 29, 2000. Cash provided by operating activities was $15.2 million for the three months ended April 29, 2000, compared to $20.6 million for last year's comparable three month period. The decrease resulted primarily from a decrease in accounts payable and other liabilities and accrued income taxes offset by an increase in net income. At April 29, 2000, the Company had cash, cash equivalents, and short-term investments of $79.1 million, compared to $96.1 million at May 1, 1999 and $87.3 million at January 29, 2000. Net cash used in investing activities totaled $9.9 million for the first three months of 2000 compared to $16.0 million for the comparable period of 1999. Cash was used primarily to fund capital expenditures for new, relocated and remodeled stores and for new technology for systems. The decrease in cash used was primarily related to a decrease in purchases of short-term investments in fiscal 2000 as compared to fiscal 1999. Expenditures for property and equipment totaled $5.6 million for the three months ended April 29, 2000, compared to $4.2 million of expenditures in last year's first three months. The Company expects total capital expenditures to be approximately $32 million for the current fiscal year. The Company intends to open approximately 100 new stores, close 10 stores and to relocate 28 stores during the current fiscal year. For the three months ended April 29, 2000, the Company had opened 12 new stores, relocated 9 stores, and closed four stores.

10 Page 9 THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- Net cash used in financing activities totaled $17.6 million for the first three months of 2000 compared to $5.8 million for the comparable period of 1999. The increase was due primarily from its share buyback program and an increase in dividends paid in fiscal 2000 as compared to fiscal 1999. At April 29, 2000, 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 2003. 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 April 29, 2000, May 1, 1999 or January 29, 2000. In February 2000, the Board of Directors increased the quarterly dividend by 33% from $.075 per share to $.10 per share. The Company does not use derivative financial instruments in its investment portfolio. At April 29, 2000, May 1, 1999 and January 29, 2000, the Company's investment portfolio was invested in governmental debt securities with maturities of up to 36 months. These securities are classified as available-for-sale, and are recorded on the balance sheet at fair value with unrealized gains and losses reported as accumulated other comprehensive income. 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 during fiscal 2000. 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.

11 Page 10 PART II OTHER INFORMATION THE CATO CORPORATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE 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 April 29, 2000.

12 Page 11 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 June 6, 2000 /s/ Wayland H. Cato, Jr. - -------------------------- --------------------------------------- Date Wayland H. Cato, Jr. Chairman of the Board June 6, 2000 /s/ John P. Derham Cato - -------------------------- --------------------------------------- Date John P. Derham Cato Vice Chairman of the Board President and Chief Executive Officer June 6, 2000 /s/ Michael O. Moore - -------------------------- --------------------------------------- Date Michael O. Moore Executive Vice President Chief Financial Officer and Secretary June 6, 2000 /s/ Robert M. Sandler - -------------------------- --------------------------------------- Date Robert M. Sandler Senior Vice President Controller

5 THE 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 3-MOS FEB-03-2001 APR-29-2000 18,021 61,095 49,613 5,137 84,468 214,655 133,136 60,783 294,731 94,764 0 0 0 986 184,719 294,731 162,154 167,240 105,324 105,324 0 913 7 22,400 7,840 14,560 0 0 0 14,560 0.58 0.57