<PAGE> 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.
<PAGE> 2
THE CATO CORPORATION
FORM 10-Q
JULY 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
No.
---
<S> <C> <C>
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
</TABLE>
<PAGE> 3
Page 2
PART I FINANCIAL INFORMATION
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
Page 3
THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, August 1, January 30,
1999 1998 1999
(UNAUDITED) (Unaudited)
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
Page 4
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------
JULY 31, August 1,
1999 1998
(UNAUDITED) (Unaudited)
---------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 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.
<PAGE> 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- --------------------------------
JULY 31, August 1, JULY 31, August 1,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
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.
<PAGE> 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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- ---------------------------------
JULY 31, August 1, JULY 31, August 1,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
<PAGE> 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JULY 31, August 1, JULY 31, August 1,
1999 1998 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> JUL-31-1999
<CASH> 41,802
<SECURITIES> 53,365
<RECEIVABLES> 49,049
<ALLOWANCES> 5,075
<INVENTORY> 67,374
<CURRENT-ASSETS> 212,374
<PP&E> 115,991
<DEPRECIATION> 55,729
<TOTAL-ASSETS> 279,044
<CURRENT-LIABILITIES> 78,463
<BONDS> 0
0
0
<COMMON> 979
<OTHER-SE> 186,647
<TOTAL-LIABILITY-AND-EQUITY> 279,044
<SALES> 301,883
<TOTAL-REVENUES> 311,745
<CGS> 200,143
<TOTAL-COSTS> 200,143
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,963
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 36,419
<INCOME-TAX> 12,747
<INCOME-CONTINUING> 23,672
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,672
<EPS-BASIC> 0.89
<EPS-DILUTED> 0.88
</TABLE>
