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 31, 1998 ------------------------------------------------- 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 17, 1998, there were 22,191,738 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 31, 1998 TABLE OF CONTENTS Page No. --- PART I - FINANCIAL INFORMATION (UNAUDITED) Consolidated Statements of Income 2 Consolidated Balance Sheets 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5-6 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 UNAUDITED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------- ------------------------------- OCTOBER 31, November 1, OCTOBER 31, November 1, 1998 1997 1998 1997 -------------- -------------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES Retail sales $ 113,834 $ 109,886 $ 382,581 $ 354,038 Other income (principally finance and layaway charges) 4,766 3,857 14,239 11,656 ------------- ------------- ------------- ------------- Total revenues 118,600 113,743 396,820 365,694 ------------- ------------- ------------- ------------- COSTS AND EXPENSES Cost of goods sold, including occupancy, distribution and buying 81,364 80,028 264,407 249,038 Selling, general and administrative 30,977 29,747 96,477 91,428 Depreciation 1,883 1,873 5,657 5,781 Interest 54 66 185 197 ------------- ------------- ------------- ------------- Total expenses 114,278 111,714 366,726 346,444 ------------- ------------- ------------- ------------- INCOME BEFORE INCOME TAXES 4,322 2,029 30,094 19,250 Income taxes 1,513 639 10,533 6,064 ------------- ------------- ------------- ------------- NET INCOME $ 2,809 $ 1,390 $ 19,561 $ 13,186 ============= ============= ============= ============= BASIC EARNINGS PER SHARE $ .10 $ .05 $ .71 $ .47 ============= ============= ============= ============= DILUTED EARNINGS PER SHARE $ .10 $ .05 $ .69 $ .46 ============= ============= ============= ============= DIVIDENDS PER SHARE $ .05 $ .04 $ .14 $ .12 ============= ============= ============= ============= See accompanying notes to consolidated financial statements. 4 Page 3 THE CATO CORPORATION CONSOLIDATED BALANCE SHEETS OCTOBER 31, November 1, January 31, 1998 1997 1998 (UNAUDITED) (Unaudited) -------------- -------------- -------------- (DOLLARS IN THOUSANDS) ASSETS Current Assets Cash and cash equivalents $ 36,785 $ 18,189 $ 41,644 Short-term investments 39,875 33,774 27,843 Accounts receivable - net 43,148 47,453 47,186 Merchandise inventories 87,327 89,365 64,226 Deferred income taxes 2,905 2,014 2,958 Prepaid expenses 2,140 1,833 1,686 ------------- ------------- ------------- Total Current Assets 212,180 192,628 185,543 Property and Equipment - net 52,073 50,229 49,801 Other Assets 6,150 5,554 6,093 ------------- ------------- ------------- Total $ 270,403 $ 248,411 $ 241,437 ============= ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 63,984 $ 58,317 $ 52,931 Accrued expenses 20,494 17,475 17,244 Income taxes 2,322 4,225 2,041 ------------- ------------- ------------- Total Current Liabilities 86,800 80,017 72,216 Deferred Income Taxes 5,417 3,851 5,296 Other Noncurrent Liabilities 6,452 6,671 6,409 Stockholders' Equity: Class A Common Stock, issued 23,979,238 shares, 23,439,466 shares and 23,502,647 shares at October 31, 1998, November 1, 1997 and January 31, 1998, respectively 799 781 783 Convertible Class B Common Stock, issued and outstanding 5,264,317 shares at October 31, 1998, November 1, 1997 and January 31, 1998, respectively 176 176 176 Preferred Stock, none - - - Additional paid-in capital 67,817 63,677 64,187 Retained earnings 117,609 98,449 101,537 ------------- ------------- ------------- 186,401 163,083 166,683 Less Class A Common Stock in treasury, at cost (1,822,500 shares at October 31, 1998, 851,500 shares at November 1, 1997, and 1,371,500 shares at January 31, 1998, respectively) 14,667 5,211 9,167 ------------- ------------- ------------- Total Stockholders' Equity 171,734 157,872 157,516 ------------- ------------- ------------- Total $ 270,403 $ 248,411 $ 241,437 ============= ============= ============= See accompanying notes to consolidated financial statements. 5 Page 4 THE CATO CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED ---------------------------------------- OCTOBER 31, November 1, 1998 1997 ---------------------------------------- (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net income $ 19,561 $ 13,186 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 5,657 5,781 Amortization of investment premiums 83 75 Loss on disposal of property and equipment 638 - Changes in operating assets and liabilities which provided (used) cash: Accounts receivable 4,038 (4,261) Merchandise inventories (23,101) (25,397) Other assets (511) 244 Accrued income taxes 281 2,646 Accounts payable and other liabilities 14,475 22,179 ------------- ------------- Net cash provided by operating activities 21,121 14,453 ------------- ------------- INVESTING ACTIVITIES Expenditures for property and equipment (8,567) (5,303) Purchases of short-term investments (22,032) (5,866) Sales of short-term investments 10,431 5,529 ------------- ------------- Net cash used in investing activities (20,168) (5,640) ------------- ------------- FINANCING ACTIVITIES Dividends paid (3,829) (3,393) Purchase of treasury stock (5,567) (4,232) Proceeds from employee stock purchase plan 331 229 Proceeds from stock options exercised 3,253 179 ------------- ------------- Net cash used in financing activities (5,812) (7,217) ------------- ------------- Net Increase (Decrease) in Cash and Cash Equivalents (4,859) 1,596 Cash and Cash Equivalents at Beginning of Period 41,644 16,593 ------------- ------------- Cash and Cash Equivalents at End of Period $ 36,785 $ 18,189 ============= ============= See accompanying notes to consolidated financial statements. 6 Page 5 THE CATO CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THREE MONTHS AND NINE MONTHS ENDED OCTOBER 31, 1998 AND NOVEMBER 1, 1997 - - ------------------------------------------------------------------------------- NOTE 1 - GENERAL: The consolidated financial statements have been prepared from the accounting records of The Cato Corporation (the Company) and all amounts shown at October 31, 1998 and November 1, 1997 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 an adjustment to retained earnings. In the first quarter of fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). 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 for the third quarter and nine months ended November 1, 1997 was $1,390,000 and $13,186,000, respectively. Total comprehensive income is composed of net income and unrealized gains or losses on available-for-sale securities. Inventories are stated at the lower of cost (first-in, first-out) or market, determined by the retail inventory method. In April 1998, the Company transferred 10,000 shares of Class A Common Stock from treasury stock to its Employee Stock Ownership Plan as the contribution for the fiscal year ended January 31, 1998. In July 1998, the Company repurchased 161,500 shares of Class A Common Stock for $2,310,000, or an average price of $14.30 per share. In the third quarter of fiscal 1998, the Company repurchased an additional 299,500 shares of Class A Common Stock for $3,257,000, or an average price of $10.87 per share. The provisions for income taxes are based on the Company's estimated annual effective tax rate. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") was effective in the first quarter of fiscal 1998. Management is currently evaluating the effects of SFAS 131, if any, on the Company's financial reporting disclosures for the year ended January 30, 1999. 7 Page 6 THE CATO CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THREE MONTHS AND NINE MONTHS ENDED OCTOBER 31, 1998 AND NOVEMBER 1, 1997 - - ------------------------------------------------------------------------------- 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 number of shares used in the basic and diluted earnings per share computations are as follows: THREE MONTHS ENDED NINE MONTHS ENDED -------------------------------- -------------------------------- OCTOBER 31, November 1, OCTOBER 31, November 1, 1998 1997 1998 1997 --------------- -------------- --------------- -------------- Weighted-average shares outstanding 27,433,823 27,879,686 27,546,942 28,224,032 Dilutive effect of stock options 508,592 251,370 729,375 112,176 ---------- ---------- ---------- ---------- Weighted-average shares and equivalents outstanding 27,942,415 28,131,056 28,276,317 28,336,208 ========== ========== ========== ========== NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the nine months ended October 31, 1998 and November 1, 1997 was $121,000 and $194,000, respectively. Income tax payments, net of refunds received, for the nine months ended October 31, 1998 and November 1, 1997 were $10,308,000 and $2,869,000, respectively. NOTE 4 - FINANCING ARRANGEMENTS: In May 1998, the Company's unsecured revolving credit agreement was amended to add the $15 million letter of credit facility to the $20 million revolving credit facility. The entire $35 million unsecured credit facility was extended to May 31, 2001 with no change in financial covenants or maintenance of specific financial ratios. There were no borrowings outstanding under the agreement at October 31, 1998 or November 1, 1997. 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 Consolidated Statements of Income as percentages of total retail sales: THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------ ----------------------------- OCTOBER 31, November 1, OCTOBER 31, November 1, 1998 1997 1998 1997 -------------- -------------- -------------- ------------- Total retail sales 100.0% 100.0% 100.0% 100.0% Total revenues 104.2 103.5 103.7 103.3 Cost of goods sold, including occupancy, distribution and buying 71.5 72.8 69.1 70.3 Selling, general and administrative 27.2 27.0 25.2 25.9 Income before income taxes 3.8 1.9 7.9 5.4 Net income 2.5 1.3 5.1 3.7 COMPARISON OF THIRD QUARTER AND FIRST NINE MONTHS OF 1998 WITH 1997. OPERATING RESULTS Total retail sales for the third quarter were $113.8 million compared to last year's third quarter sales of $109.9 million, a 4% increase. Same-store sales increased 1% in this year's third quarter. For the nine months ended October 31, 1998, total retail sales were $382.6 million compared to last year's first nine months sales of $354.0 million, an 8% increase, and same-store sales increased 5% for the comparable nine month period. The increase in retail sales for the first nine months of 1998 resulted from the Company's continued everyday low pricing strategy, improved merchandise content, and an increase in store development activity. The Company operated 723 stores at October 31, 1998 compared to 688 stores at the end of last year's third quarter. Other income for the third quarter and first nine months of 1998 increased 24% and 22%, 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. 9 Page 8 THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - ------------------------------------------------------------------------------- OPERATING RESULTS - CONTINUED Cost of goods sold, including occupancy, distribution and buying expenses were 71.5% and 69.1% of total retail sales for the third quarter and first nine months of 1998, compared to 72.8% and 70.3% 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 $31.0 million and $96.5 million for the third quarter and first nine months of this year, compared to $29.7 million and $91.4 million for last year's comparable three and nine month periods, respectively. SG&A expense for the third quarter experienced a slight increase of 20 basis points over last year due to one-time expenses related to store development activities during the quarter. SG&A expense for the nine months improved 70 basis points over the prior year. LIQUIDITY AND CAPITAL RESOURCES At October 31, 1998, the Company had working capital of $125.4 million, compared to $112.6 million at November 1, 1997 and $113.3 million at January 31, 1998. Cash provided from operating activities was $21.1 million for the nine months ended October 31, 1998, compared to $14.5 million for last year's comparable nine month period. The Company had no borrowings under its revolving credit agreement at October 31, 1998 or November 1, 1997. At October 31, 1998, the Company had cash, cash equivalents, and short-term investments of $76.7 million, compared to $52.0 million at November 1, 1997 and $69.5 million at January 31, 1998. In May 1998, the Company's unsecured revolving credit agreement was amended to add the $15 million letter of credit facility to the $20 million revolving credit facility. The entire $35 million unsecured credit facility was extended to May 31, 2001 with no change in financial covenants or maintenance of specific financial ratios. There were no borrowings outstanding under the agreement at October 31, 1998 or November 1, 1997. 10 Page 9 THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - ------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES - CONTINUED Expenditures for property and equipment totaled $8.6 million for the nine months ended October 31, 1998, compared to $5.3 million in the first nine months of 1997. The Company expects total capital expenditures to be approximately $13 million for the current fiscal year. The Company intends to open approximately 14 new stores, close approximately 6 stores, and relocate approximately 5 stores during the fourth quarter of fiscal 1998. For the nine months ended October 31, 1998, the Company had opened 38 new stores, relocated 13 stores, and closed 8 stores. 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. The Company developed a two phase approach to address the Year 2000 issue. 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 is scheduled to be substantially complete by the end of its first 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 affect 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 has not been established, but a plan will be considered upon the completion of Phase 2. 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 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 31, 1998. 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 December 9, 1998 /s/ Wayland H. Cato, Jr. ---------------- --------------------------- Date Wayland H. Cato, Jr. Chairman of the Board of Directors and Chief Executive Officer December 9, 1998 /s/ Michael O. Moore ---------------- --------------------------- Date Michael O. Moore Executive Vice President Chief Financial Officer and Secretary