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 August 4, 2001 -------------------------------------------------- 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 21, 2001, there were 19,662,031 shares of Class A Common Stock and 5,563,483 shares of Class B Common Stock outstanding.
2 THE CATO CORPORATION FORM 10-Q AUGUST 4, 2001 TABLE OF CONTENTS Page No. ---- PART I - FINANCIAL INFORMATION (UNAUDITED) Condensed Consolidated Statements of Income 2 For the Three Months and Six Months Ended August 4, 2001 and July 29, 2000 Condensed Consolidated Balance Sheets 3 At August 4, 2001, July 29, 2000 and February 3, 2001 Condensed Consolidated Statements of Cash Flows 4 For the Six Months Ended August 4, 2001 and July 29, 2000 Notes to Condensed Consolidated Financial Statements 5 - 7 For the Three Months and Six Months Ended August 4, 2001 and July 29, 2000 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 <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED ---------------------------- ---------------------------- AUGUST 4, July 29, AUGUST 4, July 29, 2001 2000 2001 2000 (UNAUDITED) (Unaudited) (UNAUDITED) (Unaudited) ------------- ------------- -------------- ------------ <S> <C> <C> <C> <C> (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES Retail sales $ 172,444 $ 163,375 $ 352,792 $ 325,529 Other income (principally finance, late, and layaway charges) 4,957 5,307 10,340 10,393 ------------- ------------- -------------- ------------ Total revenues 177,401 168,682 363,132 335,922 ------------- ------------- -------------- ------------ COSTS AND EXPENSES Cost of goods sold 118,093 110,015 234,484 215,338 Selling, general and administrative 39,898 38,744 82,126 75,876 Depreciation 2,534 2,378 5,150 4,756 Interest 10 10 21 17 ------------- ------------- -------------- ------------ Total expenses 160,535 151,147 321,781 295,987 ------------- ------------- -------------- ------------ INCOME BEFORE INCOME TAXES 16,866 17,535 41,351 39,935 Income tax expense 5,903 6,137 14,473 13,977 ------------- ------------- -------------- ------------ NET INCOME $ 10,963 $ 11,398 $ 26,878 $ 25,958 ============= ============= ============== ============ BASIC EARNINGS PER SHARE $ .43 $ .46 $ 1.06 $ 1.04 ============= ============= ============== ============ DILUTED EARNINGS PER SHARE $ .42 $ .45 $ 1.03 $ 1.02 ============= ============= ============== ============ DIVIDENDS PER SHARE $ .135 $ .10 $ .26 $ .20 ============= ============= ============== ============ </TABLE> See accompanying notes to condensed consolidated financial statements.
4 Page 3 THE CATO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> AUGUST 4, July 29, February 3, 2001 2000 2001 (UNAUDITED) (Unaudited) --------------- --------------- --------------- <S> <C> <C> <C> (DOLLARS IN THOUSANDS) ASSETS Current Assets Cash and cash equivalents $ 21,990 $ 18,997 $ 25,201 Short-term investments 66,553 61,084 57,911 Accounts receivable - net 46,489 44,434 46,972 Merchandise inventories 77,496 71,899 79,161 Deferred income taxes 1,554 3,898 1,579 Prepaid expenses 4,633 2,108 4,665 --------------- --------------- --------------- Total Current Assets 218,715 202,420 215,489 Property and equipment - net 92,436 75,900 85,819 Other assets 9,084 8,097 9,434 --------------- --------------- --------------- Total $ 320,235 $ 286,417 $ 310,742 =============== =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 53,121 $ 49,233 $ 59,681 Accrued expenses 23,005 21,499 24,378 Income taxes 6,530 7,091 5,706 --------------- --------------- --------------- Total Current Liabilities 82,656 77,823 89,765 Deferred income taxes 5,386 5,550 5,386 Other noncurrent liabilities 7,447 7,978 7,834 Shareholders' Equity Preferred stock, $100 par value per share, 100,000 shares authorized, none issued -- -- -- Class A common stock, $.033 par value per share, 50,000,000 shares authorized; issued 24,880,750 shares, 24,239,294 shares and 24,643,420 shares at August 4, 2001, July 29, 2000, and February 3, 2001, respectively 830 808 821 Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized; issued 5,563,483 shares, 5,364,317 shares and 5,364,317 shares at August 4, 2001, July 29, 2000 and February 3, 2001, respectively 186 179 179 Additional paid-in capital 80,392 72,517 76,778 Retained earnings 195,550 167,769 175,275 Accumulated other comprehensive losses (837) (1,647) (884) Unearned compensation - restricted stock awards (541) (837) (689) --------------- --------------- --------------- 275,580 238,789 251,480 Less Class A common stock in treasury, at cost (5,220,719 shares at August 4, 2001, 4,759,148 shares at July 29, 2000, and 4,759,148 shares at February 3, 2001) (50,834) (43,723) (43,723) --------------- --------------- --------------- Total Shareholders' Equity 224,746 195,066 207,757 --------------- --------------- --------------- Total $ 320,235 $ 286,417 $ 310,742 =============== =============== =============== </TABLE> See accompanying notes to condensed consolidated financial statements.
5 Page 4 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> SIX MONTHS ENDED -------------------------------------------- AUGUST 4, July 29, 2001 2000 (UNAUDITED) (Unaudited) -------------------------------------------- <S> <C> <C> (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net income $ 26,878 $ 25,958 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 5,150 4,756 Amortization of investment premiums 84 76 Compensation expense related to restricted stock awards 148 147 Loss on disposal of property and equipment 152 549 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable 483 1,024 Merchandise inventories 1,665 (2,402) Other assets 382 (77) Accrued income taxes 824 2,361 Accounts payable and other liabilities (8,295) (7,824) ----------------- ---------------- Net cash provided by operating activities 27,471 24,568 ----------------- ---------------- INVESTING ACTIVITIES Expenditures for property and equipment (11,919) (11,867) Purchases of short-term investments (25,163) (8,423) Sales of short-term investments 16,484 4,304 ----------------- ---------------- Net cash used in investing activities (20,598) (15,986) ----------------- ---------------- FINANCING ACTIVITIES Dividends paid (6,603) (5,071) Purchases of treasury stock (7,111) (15,449) Proceeds from employee stock purchase plan 211 223 Proceeds from stock options exercised 3,419 323 ----------------- ---------------- Net cash used in financing activities (10,084) (19,974) ----------------- ---------------- Net decrease in cash and cash equivalents (3,211) (11,392) Cash and cash equivalents at beginning of period 25,201 30,389 ----------------- ---------------- Cash and cash equivalents at end of period $ 21,990 $ 18,997 ================= ================ </TABLE> See accompanying notes to condensed consolidated financial statements.
6 Page 5 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 4, 2001 AND JULY 29, 2000 - ------------------------------------------------------------------------------- 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 August 4, 2001 and July 29, 2000 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 thereto, included in the Company's Annual Report in Form 10-K for the fiscal year ended February 3, 2001. 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 August 4, 2001 was $11,319,000 and $26,925,000, respectively. Total comprehensive income for the second quarter and six months ended July 29, 2000 was $11,615,000 and $26,112,000, respectively. Total comprehensive income is composed of net income and net unrealized gains and 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 second quarter of fiscal 2001, the Company repurchased 190,000 shares of Class A common stock and accepted 9,071 shares of Class A common stock related to a stock option exercise for a total of $3,136,219, or an average price of $15.75 per share. For the six months ended August 4, 2001, the Company repurchased 452,500 shares of Class A common stock and accepted 9,071 shares of Class A common stock for $7,110,594, or an average price of $15.41 per share. For the six months ended July 29, 2000, the Company repurchased 1,468,800 shares of Class A common stock for $15,449,238 or an average price of $10.52 per share. In May 2001, the Board of Directors increased the quarterly dividend by 8% from $.125 per share to $.135 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 4, 2001 AND JULY 29, 2000 - ------------------------------------------------------------------------------- NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS: In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. SFAS 142 will be effective for fiscal years beginning after December 15, 2001. The Company intends to adopt the provisions of SFAS No. 142 during its fiscal year 2002. The impact of this pronouncement on the Company's financial results is currently being evaluated. NOTE 3 - 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 -------------------------------- --------------------------------- AUGUST 4, July 29, AUGUST 4, July 29, 2001 2000 2001 2000 --------------- -------------- --------------- --------------- <S> <C> <C> <C> <C> Weighted-average shares outstanding 25,338,372 24,805,846 25,312,414 25,054,790 Dilutive effect of stock options 669,707 393,335 674,021 369,442 --------------- ------------ --------------- --------------- Weighted-average shares and equivalents outstanding 26,008,079 25,199,181 25,986,435 25,424,232 =============== ============== =============== =============== </TABLE> NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION: Income tax payments, net of refunds received, for the six months ended August 4, 2001 and July 29, 2000 were $14,119,000 and $12,189,000, respectively.
8 Page 7 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 4, 2001 AND JULY 29, 2000 - ------------------------------------------------------------------------------- NOTE 5 - FINANCING ARRANGEMENTS: At August 4, 2001, 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 with which the Company was in compliance. There were no borrowings outstanding during the six months ended August 4, 2001 or the fiscal year ended February 3, 2001. NOTE 6 - 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 --------------------------------- --------------------------------- AUGUST 4, July 29, AUGUST 4, July 29, 2001 2000 2001 2000 ---------------- ---------------- --------------- --------------- <S> <C> <C> <C> <C> Revenues: Retail $ 174,089 $ 165,287 $ 356,474 $ 329,279 Credit 3,312 3,395 6,658 6,643 ---------------- --------------- --------------- --------------- Total $ 177,401 $ 168,682 $ 363,132 $ 335,922 ================ =============== =============== =============== Income before taxes: Retail $ 15,958 $ 16,352 $ 39,533 $ 37,765 Credit 908 1,183 1,818 2,170 ---------------- --------------- --------------- --------------- Total $ 16,866 $ 17,535 $ 41,351 $ 39,935 ================ =============== =============== =============== </TABLE>
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 a percentage of total retail sales: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------ ------------------------------- AUGUST 4, July 29, AUGUST 4, July 29, 2001 2000 2001 2000 -------------- -------------- -------------- --------------- <S> <C> <C> <C> <C> Total retail sales 100.0 % 100.0 % 100.0 % 100.0 % Total revenues 102.9 103.2 102.9 103.2 Cost of goods sold 68.5 67.3 66.5 66.1 Selling, general and administrative 23.1 23.7 23.3 23.3 Income before income taxes 9.8 10.7 11.7 12.3 Net income 6.4 7.0 7.6 8.0 </TABLE> COMPARISON OF SECOND QUARTER AND FIRST SIX MONTHS OF 2001 WITH 2000. Total retail sales for the second quarter were $172.4 million compared to last year's second quarter sales of $163.4 million, a 6% increase. Same-store sales were flat in the second quarter. For the six months ended August 4, 2001, total retail sales were $352.8 million compared to last year's first six months sales of $325.5 million, an 8% increase, and same-store sales increased 2% for the comparable six month period. The increase in retail sales for the first six months of 2001 resulted from the Company's continued everyday low pricing strategy, improved merchandise offerings, and an increase in store development activity. The Company operated 895 stores at August 4, 2001 compared to 825 stores at the end of last year's second quarter. Other income for the second quarter and first six months of 2001 decreased 7% and 1%, respectively, over the prior year's comparable periods. The decrease in the current year resulted primarily from reduced finance and late charge income on the Company's customer accounts receivable. Cost of goods sold were 68.5% and 66.5% of total retail sales for the second quarter and first six months of 2001, respectively, compared to 67.3% and 66.1% for last year's comparable three and six month periods. The increase in cost of goods sold as a percent of retail sales for the first six months of 2001 resulted from more markdowns in the second quarter.
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 $39.9 million and $82.1 million for the second quarter and first six months of this year, compared to $38.7 million and $75.9 million for last year's comparable three and six month periods, respectively. SG&A expenses as a percentage of retail sales declined 60 basis points for the second quarter of 2001 and were flat for the first six months of 2001, as compared to the prior year as expenses remained well controlled and under plan. The overall increase in SG&A resulted primarily from increased selling-related expenses and increased infrastructure expenses attributable to the Company's store development activities. LIQUIDITY AND CAPITAL RESOURCES At August 4, 2001, the Company had working capital of $136.1 million, compared to $124.6 million at July 29, 2000 and $125.7 million at February 3, 2001. Cash provided by operating activities was $27.5 million for the six months ended August 4, 2001, compared to $24.6 million for last year's comparable six month period. The increase resulted primarily from an increase in inventory turnover and net income offset by a decrease in accounts receivables, accrued income taxes and accounts payable and other liabilities. At August 4, 2001, the Company had cash, cash equivalents, and short-term investments of $88.5 million, compared to $80.1 million at July 29, 2000 and $83.1 million at February 3, 2001. Net cash used in investing activities totaled $20.6 million for the first six months of 2001 compared to $16.0 million for the comparable period of 2000. Cash was used to fund capital expenditures for new, relocated and remodeled stores and for investments in new technology for an enterprise-wide information system for merchandising, distribution and finance. Additionally, the increase in cash used was in part related to an increase in the purchase of short-term investments offset by an increase in the sale of short-term investments in fiscal 2001 as compared to fiscal 2000. Expenditures for property and equipment totaled $11.9 million for both the six months ended August 4, 2001 and July 29, 2000. 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 relocate 24 stores during the current fiscal year. For the six months ended August 4, 2001, the Company opened 40 new stores, relocated 8 stores, and closed 4 stores. Net cash used in financing activities totaled $10.1 million for the first six months of 2001 compared to $20.0 million for the comparable period of 2000. The decrease was due primarily to a reduction in its share buyback program and an increase in stock options exercised, which were partially offset by an increase in dividends paid in fiscal 2001 as compared to fiscal 2000.
11 Page 10 THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES - CONTINUED At August 4, 2001, 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 with which the Company was in compliance. There were no borrowings outstanding during the six months ended August 4, 2001, or the fiscal year ended February 3, 2001. In May 2001, the Board of Directors increased the quarterly dividend by 8% from $.125 per share to $.135 per share. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". In June 2000, the FASB issued SFAS No. 138, which amended certain provisions of SFAS 133. The Company adopted SFAS 133 and the corresponding amendments under SFAS 138 on February 4, 2001. Management believes that the adoption of this statement has no impact on the Company's consolidated results of operations and financial position. At August 4, 2001, July 29, 2000, and February 3, 2001, the Company's investment portfolio was primarily 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 losses. The Company believes that its cash, cash equivalents and short-term investments, together with cash flows 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 2001. In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. SFAS 142 will be effective for fiscal years beginning after December 15, 2001. The Company intends to adopt the provisions of SFAS No. 142 during its fiscal year 2002. The impact of this pronouncement on the Company's financial results is currently being evaluated. 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 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 Following are the results of the matters voted upon at the Company's Annual Meeting which was held on May 24, 2001. ELECTION OF DIRECTORS: Mr. Thomas E. Cato - For 71,295,047 ; Abstaining 2,277,802 Mr. George S. Currin - For 73,129,005 ; Abstaining 443,844 Mr. A. F. (Pete) Sloan - For 73,168,872 ; Abstaining 403,977 RATIFICATION OF DELOITTE & TOUCHE LLP AS INDEPENDENT AUDITORS For 73,552,411 ; Abstaining 1,835 ; Against 18,604 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 August 4, 2001.
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 12, 2001 /s/ Wayland H. Cato, Jr. - ----------------------- -------------------------------------- Date Wayland H. Cato, Jr. Chairman of the Board September 12, 2001 /s/ John P. Derham Cato - ----------------------- -------------------------------------- Date John P. Derham Cato President, Vice Chairman of the Board and Chief Executive Officer September 12, 2001 /s/ Michael O. Moore - ----------------------- -------------------------------------- Date Michael O. Moore Executive Vice President Chief Financial Officer and Secretary September 12, 2001 /s/ Robert M. Sandler - ----------------------- -------------------------------------- Date Robert M. Sandler Senior Vice President Controller