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 28, 1995 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 of other jurisdiction (I.R.S. Employer of incorporation or organization) 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 10, 1995 there were 23,162,959 shares of Class A Common Stock and 5,264,317 shares of Class B Common Stock outstanding. THE CATO CORPORATION FORM 10-Q October 28, 1995 Table of Contents Page No. PART I - FINANCIAL INFORMATION (UNAUDITED) Consolidated statements of operations 2 Consolidated balance sheets 3 Consolidated statements of cash flows 4 Notes to consolidated financial statements 5 - 7 Management's discussion and analysis of financial condition and results of operations 8 - 9 PART II - OTHER INFORMATION 10 - 11 Page 2 PART I FINANCIAL INFORMATION THE CATO CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended Nine Months Ended -------------------------- -------------------------- October 28, October 29, October 28, October 29, 1995 1994 1995 1994 ------------ ------------ ------------- ------------ (In thousands, except per share data) REVENUES Retail sales........... $ 105,825 $ 109,111 $ 335,025 $ 329,412 Other income (principally finance and layaway charges).. 3,506 3,101 9,911 9,194 ------------ ------------- --------------- ---------- Total revenues........ 109,331 112,212 344,936 338,606 ------------ ------------- --------------- ---------- COST AND EXPENSES Cost of goods sold, including occupancy, distribution and buying ................ 80,097 77,505 237,629 225,306 Selling, general and administrative......... 29,504 28,454 87,815 83,782 Depreciation........... 1,917 1,762 5,795 5,127 Interest............... 56 83 212 243 ------------ ------------- --------------- ---------- Total operating expenses........... 111,574 107,804 331,451 314,458 ------------ ------------- --------------- ---------- INCOME (LOSS) BEFORE INCOME TAXES.............. (2,243) 4,408 13,485 24,148 Income taxes(benefit).. (751) 1,609 4,516 8,814 ------------ ------------- --------------- ---------- NET INCOME (LOSS)....... $ (1,492) $ 2,799 $ 8,969 $ 15,334 ============ ============= =============== ========== EARNINGS (LOSS) PER SHARE............. $ (0.05) $ 0.10 $ 0.31 $ 0.52 ============ ============= =============== ========== DIVIDENDS PER SHARE.............. $ 0.04 $ 0.04 $ 0.12 $ 0.105 ============ ============= =============== ========== See notes to unaudited consolidated financial statements. Page 3 THE CATO CORPORATION UNAUDITED CONSOLIDATED BALANCE SHEETS October 28, October 29, January 28, 1995 1994 1995 ----------- ---------- ----------- (In thousands) ASSETS Current Assets Cash and cash equivalents.......... $ 17,448 $ 9,507 $ 23,963 Short - term investments........... 23,830 23,098 22,263 Accounts receivable - net.......... 37,425 40,488 37,926 Merchandise inventories............ 82,085 83,573 54,674 Deferred income taxes.............. 1,768 1,870 2,053 Prepaid expenses................... 2,381 2,001 2,602 ----------- ----------- ---------- Total Current Assets............. 164,937 160,537 143,481 Property and Equipment........... 53,051 51,271 53,146 Other Assets..................... 4,957 4,560 4,695 ----------- ----------- ---------- Total................................ $ 222,945 $ 216,368 $ 201,322 =========== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable...................... $ - $ 10,400 $ - Accounts payable................... 52,507 52,147 36,159 Accrued expenses................... 11,289 10,152 11,832 Income taxes....................... - - 909 ----------- ----------- ---------- Total Current Liabilities........ 63,796 72,699 48,900 Deferred Income Taxes.............. 4,192 3,482 4,192 Other Noncurrent Liabilities....... 7,243 263 6,722 Stockholders' Equity: Class A Common Stock, issued 23,202,959 shares, 23,127,144 shares and 23,132,327 shares at October 28, 1995, October 29, 1994 and January 28, 1995, respectively 773 770 770 Convertible Class B Common Stock, issued and outstanding 5,264,317 shares at October 28, 1995, October 29, 1994 and January 28, 1995................ 176 176 176 Preferred Stock, none issued........................... - - - Additional paid - in capital....... 62,660 62,246 62,278 Retained earnings.................. 84,328 76,732 78,284 ----------- ------------ ----------- 147,937 139,924 141,508 Less Class A Common Stock in treasury, at cost (40,000 shares at October 28, 1995)......................... 223 - - ----------- ------------ ----------- Total Stockholders' Equity......... 147,714 139,924 141,508 ----------- ------------ ----------- Total................................ $ 222,945 $ 216,368 $ 201,322 =========== ============ =========== See notes to unaudited consolidated financial statements. Page 4 THE CATO CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended ------------------------------ October 28, October 29, 1995 1994 -------------- ----------- (In thousands) OPERATING ACTIVITIES Net income........................... $ 8,969 $ 15,334 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................ 5,795 5,127 Loss on disposal of assets.......... - 352 Amortization of investment premiums. 159 438 Changes in assets and liabilities: (Increase) decrease in accounts receivable......................... 501 (3,674) (Increase) in merchandise inventories........................ (27,411) (27,759) (Increase) in other assets......... (41) (304) (Decrease) in accrued income taxes. (909) - Increase in accounts payable and other liabilities............. 16,566 15,058 --------------- ----------- Net cash provided by operating activities.......................... 3,629 4,572 --------------- ----------- INVESTING ACTIVITIES Expenditures for property and equipment........................... (5,940) (21,715) Proceeds from sale of assets........ - 378 Purchases of short-term investments......................... (5,990) (10,239) Sales of short-term investments..... 5,036 6,594 ---------------- ---------- Net cash used in investing activities.......................... (6,894) (24,982) ---------------- ---------- FINANCING ACTIVITIES Cash dividends paid................. (3,412) (2,978) Proceeds from employee stock purchase plan....................... 379 429 Purchase of treasury stock.......... (223) - Proceeds from stock options exercised........................... 6 65 Borrowings under credit agreement... - 10,400 ---------------- ---------- Net cash provided by (used in) financing activities................ (3,250) 7,916 ---------------- ---------- Net decrease in Cash and Cash Equivalents......................... (6,515) (12,494) Cash and Cash Equivalents at Beginning of Year................... 23,963 22,001 ---------------- ---------- Cash and Cash Equivalents at End of Period........................ $ 17,448 $ 9,507 ================ ========== See notes to unaudited consolidated financial statements. Page 5 THE CATO CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 1995 AND OCTOBER 29, 1994 NOTE 1 - GENERAL: The consolidated financial statements have been prepared from the accounting records of the Company and all amounts shown at October 28, 1995 and October 29, 1994 are unaudited. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation have been included. Certain reclassifications have been made to the consolidated financial statements as of October 29, 1994 to conform with classifications used as of October 28, 1995. 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. Inventories are stated at the lower of cost (first-in, first-out) or market, determined by the retail inventory method. The provisions for income taxes are based on the Company's estimated annual effective tax rate. NOTE 2 - EARNINGS (LOSS) PER SHARE: Earnings (loss) per share is calculated by dividing net income by the weighted average number of Class A and Class B common shares and common stock equivalents outstanding during the respective periods. Common stock equivalents represent the dilutive effect of the assumed exercise of outstanding stock options. The number of shares used in the computations were 28,570,582 shares and 28,612,012 shares for the three months and nine months ended October 28, 1995, respectively, and 29,020,713 shares and 29,283,581 shares for the three months and nine months ended October 29, 1994, respectively. Page 6 THE CATO CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 1995 AND OCTOBER 29, 1994 NOTE 3 - SHORT-TERM INVESTMENTS: Short-term investments at October 28, 1995 and October 29, 1994 include the following (in thousands): October 28, 1995 October 29, 1994 ------------------------------ --------------------------- Unrealized Estimated Unrealized Estimated Gain Fair Cost Gain Fair Security Type Cost (Loss) Value (Loss) Value - - ------------- ------- ---------- --------- ------ -------- --------- Obligations of states and political subdivisions $ 18,481 $ 36 $ 18,517 $ 17,272 $ (2) $ 17,270 Corporate debt securities 2,000 (40) 1,960 2,000 (80) 1,920 --------- ----------- -------- ------- -------- --------- Subtotal 20,481 (4) 20,477 19,272 (82) 19,190 Equity securities 3,426 (73) 3,353 4,548 (640) 3,908 --------- ----------- -------- ------- --------- ------- Total $ 23,907 $ (77) $ 23,830 $ 23,820 $ (722) $ 23,098 ========= =========== ======== ======= ======== ========= The amortized cost and estimated fair value of debt and marketable equity securities at October 28, 1995 and October 29, 1994, by contractual maturity, are shown below (in thousands): October 28, 1995 October 29, 1994 --------------------- --------------------- Estimated Estimated Fair Fair Security Type Cost Value Cost Value - - ------------- --------- ---------- ---------- ---------- Due in one year or less $ 16,704 $ 16,719 $ 14,441 $ 14,388 Due in one year through three years 3,777 3,758 4,831 4,802 --------- ----------- ---------- ---------- Subtotal 20,481 20,477 19,272 19,190 Equity securities 3,426 3,353 4,548 3,908 --------- ----------- ---------- ---------- Total 23,907 23,830 23,820 23,098 ========= =========== ========== ========== Page 7 THE CATO CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS AND NINE MONTHS ENDED OCTOBER 28, 1995 AND OCTOBER 29, 1994 NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the nine months ended October 28, 1995 and October 29, 1994 was $234,000 and $143,000, respectively. Income tax payments for the nine months ended October 28, 1995 and October 29, 1994 were $5,412,000 and $8,511,000, respectively. NOTE 5 - LEASES: In the nine months ended October 28, 1995, the Company entered into lease agreements with a lessor to lease approximately $9,502,000 of store fixtures, POS devises and warehouse equipment. The operating lease is for a term of seven years but may be canceled annually upon notice to the lessor. Upon notice of cancellation, the Company would be obligated to purchase the equipment at a prescribed termination value from the lessor. 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 Consolidated Statements of Operations as percentages of total retail sales: Three Months Ended Nine Months Ended ---------------------- --------------------- Oct. 28, Oct. 29, Oct. 28, Oct. 29, 1995 1994 1995 1994 -------- -------- -------- -------- Total retail sales 100.0% 100.0% 100.0% 100.0% Total revenues 103.4 102.8 102.8 103.0 Cost of goods sold, including occupancy, distribution and buying 75.7 71.0 70.9 68.4 Selling, general and administrative 27.9 26.1 26.2 25.4 Income (loss) before income taxes (2.1) 4.0 4.0 7.3 Net (loss) income (1.4) 2.6 2.7 4.7 Comparison of Third Quarter and First Nine Months of 1995 and 1994. OPERATING RESULTS Total retail sales for the third quarter decreased 3% from last year's third quarter to $105.8 million from $109.1 million last year. Same-store sales decreased 8% in this year's third quarter. For the nine months ended October 28, 1995, total retail sales increased 2% over the prior year's first nine months, and same-store sales decreased 6% for the comparable nine-month period. The Company operated 671 stores at October 28, 1995, compared to 636 stores operated at the end of last year's third quarter. Sales from new, relocated or expanded stores opened within the last twelve months were responsible for the increase in retail sales for this year's first nine months. Other income for the third quarter and first nine months of 1995 increased 13% and 8%, respectively, over the prior year's comparable periods. The increase in the current year resulted primarily from increased earnings from cash equivalents and short-term investments partially offset by decreased layaway service charges. Cost of goods sold, including occupancy, distribution and buying expenses were 75.7% and 70.9% of total retail sales for the third quarter and first nine months of this year, respectively, compared to 71.0% and 68.4% for last year's third quarter and first nine months, respectively. The increase in cost of goods sold as a percent of retail sales resulted primarily from higher levels of promotional markdowns brought about by sales not reaching planned levels. Competitive pressures from widespread discounting and inventory liquidation has continued to prevail throughout the ladies apparel retail sector. The Company has been very aggressive in taking markdowns in order to turn inventory and keep inventory levels in line with the sales results being achieved. 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 $29.5 million, or 27.9% of total retail sales and $87.8 million, or 26.2% of total retail sales for the third quarter and first nine months of this year, respectively. SG&A expenses were $28.5 million, or 26.1% of total retail sales, and $83.8 million, or 25.4% of total retail sales for last year's comparable three and nine month periods, respectively. The Company has continued to maintain a conservative cost structure and is continuing to closely monitor all operating expenses to keep them in line with the sales levels achieved. LIQUIDITY AND CAPITAL RESOURCES At October 28, 1995, the Company had working capital of $101.1 million, compared to $87.8 million at October 29, 1994 and $94.6 million at January 28, 1995. Cash provided by operating activities was $3.6 million for the nine months ended October 28, 1995, compared to $4.6 million in the prior year's first nine months. The Company had no borrowings under its $35 million revolving credit and term loan agreement at October 28, 1995, compared to $10.4 million of borrowings at end of last year's third quarter. At October 28, 1995, the Company had cash, cash equivalents and short-term investments of $41.3 million, compared to $32.6 million at October 29, 1994 and $46.2 million at January 28, 1995. In this year's first nine months, the Company entered into an agreement with a lessor to lease $9.5 million of store fixtures, POS devices, and warehouse equipment. The operating lease is for a term of seven years but may be canceled annually upon notice to the lessor. Upon notice of cancellation, the Company would be obligated to purchase the equipment at a prescribed termination value. Additionally, the Company has the option to leasing up to $5.5 million more of qualifying assets during the current fiscal year. Expenditures for property and equipment totaled $5.9 million for the nine months ended October 28, 1995, compared to $21.7 million of expenditures in last year's first nine months. The Company expects net capital expenditures to be approximately $8.4 million for current fiscal year. The Company intends to open approximately 37 new stores in the current fiscal year and to relocate or expand an additional 28 stores. Additional expenditures are planned for materials handling equipment for the Company's distribution facilities and to upgrade management information systems. For the nine months ended October 28, 1995, the Company had opened 29 new stores, relocated or expanded 25 stores and closed 4 stores. The Company believes that its cash, cash equivalents and short-term investments, together with cash flow from operations and borrowings available under a $35 million revolving credit and term loan agreement, will be adequate to fund the Company's proposed capital expenditures and other operating requirements. 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. RESULT OF VOTES OF SECURITY HOLDERS None 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) The Company filed a report on Form 8-K dated August 24, 1995 relating to a change in the Registrant's Certifying Accountant from Ernst & Young LLP to Deloitte & Touche LLP. 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 4, 1995 /s/ Wayland H. Cato, Jr. ---------------- ------------------------ Date Wayland H. Cato, Jr. Chairman of the Board of Directors and Chief Executive Officer December 4, 1995 /s/ Alan E. Wiley ---------------- ------------------------ Date Alan E. Wiley Executive Vice President- Secretary, Chief Financial and Administrative Officer