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 3, 1996 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 19, 1996, there were 23,300,519 shares of Class A Common Stock and 5,264,317 shares of Class B Common Stock outstanding. THE CATO CORPORATION FORM 10-Q August 3, 1996 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 5-7 Management's discussion and analysis of financial condition and results of operations 8-9 PART II - OTHER INFORMATION 10-11 PART I FINANCIAL INFORMATION THE CATO CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF INCOME Three Months Six Months Ended Ended --------------------- --------------------- August 3, July 29, August 3, July 29, 1996 1995 1996 1995 --------- -------- --------- -------- (In thousands, except per share data) REVENUES Retail sales $ 112,747 $ 114,739 $ 232,775 $ 229,200 Other income (principally finance and layaway charges) 3,208 3,111 6,719 6,405 --------- --------- --------- -------- Total revenues 115,955 117,850 239,494 235,605 --------- --------- --------- -------- COSTS AND EXPENSES Cost of goods sold, including occupancy, distribution and buying 80,549 82,256 160,323 157,532 Selling, general and administrative 29,591 29,123 59,246 58,311 Depreciation 2,123 1,939 4,197 3,878 Interest 66 78 131 156 --------- --------- --------- -------- Total expenses 112,329 113,396 223,897 219,877 -------- --------- --------- -------- INCOME BEFORE INCOME TAXES 3,626 4,454 15,597 15,728 Income taxes 1,287 1,491 5,537 5,267 -------- --------- --------- -------- NET INCOME $ 2,339 $ 2,963 $ 10,060 $ 10,461 ======== ========= ========= ======== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ 0.08 $ 0.10 $ 0.35 $ 0.37 DIVIDENDS PER SHARE $ 0.04 $ 0.04 $ 0.08 $ 0.08 See notes to unaudited consolidated financial statements. THE CATO CORPORATION UNAUDITED CONSOLIDATED BALANCE SHEETS August 3, July 29, February 3, 1996 1995 1996 ---------- ---------- ---------- (In thousands) ASSETS Current Assets Cash and cash equivalents $24,815 $ 31,452 $ 26,183 Short-term investments 34,617 23,917 21,711 Accounts receivable - net 35,448 34,747 39,792 Merchandise inventories 69,734 65,202 58,440 Deferred income taxes 1,825 1,814 1,825 Prepaid expenses 4,368 2,493 2,486 --------- ---------- ---------- Total Current Assets 170,807 159,625 150,437 Property and Equipment 55,504 55,011 54,364 Other Assets 5,261 4,885 5,094 --------- ---------- ---------- Total $ 231,572 $ 219,521 $ 209,895 ========= ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 46,113 $ 46,273 $ 36,482 Accrued expenses 11,473 10,870 10,458 Income taxes 3,878 826 1,328 ---------- --------- --------- Total Current Liabilities 61,464 57,969 48,268 Deferred Income Taxes 4,491 4,192 4,491 Other Noncurrent Liabilities 7,667 7,038 7,454 Stockholders' Equity: Class A Common Stock, issued 23,340,519 shares, 23,173,805 shares and 23,204,647 shares at August 3, 1996, July 29, 1995 and February 3, 1996, respectively 777 772 773 Convertible Class B Common Stock, issued and outstanding 5,264,317 shares at August 3, 1996, July 29, 1995 and February 3, 1996, respectively 176 176 176 Preferred Stock, none - - - Additional paid-in capital 63,151 62,507 62,665 Retained earnings 94,069 86,867 86,291 ------- ------- -------- 158,173 150,322 149,905 Less Class A Common Stock in treasury,at cost (40,000 shares at August 3, 1996 and February 3, 1996) 223 - 223 -------- ------- --------- Total Stockholders' Equity 157,950 150,322 149,682 -------- ------- --------- Total $231,572 $ 219,521 $ 209,895 ========= ======== ========== See notes to unaudited consolidated financial statements. THE CATO CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended ---------------------------------------- August 3, July 29, 1996 1995 ------------ -------------- (In thousands) OPERATING ACTIVITIES Net income $ 10,060 $ 10,461 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,197 3,878 Amortization of investment premiums 114 111 Changes in operating assets and liabilities: Decrease in accounts receivable 4,344 3,179 Increase in merchandise inventories (11,294) (10,528) Increase in other assets (2,049) (81) Increase (decrease) in accrued income taxes 2,550 (83) Increase in accounts payable and other liabilities 10,990 9,682 -------------- ----------- Net cash provided by operating activities 18,912 16,619 --------------- ------------ INVESTING ACTIVITIES Expenditures for property and equipment (5,468) (5,957) Purchases of short-term investments (18,711) (3,764) Sales of short-term investments 5,691 2,635 -------------- ------------ Net cash used in investing activities (18,488) (7,086) --------------- ------------ FINANCING ACTIVITIES Dividends paid (2,282) (2,275) Proceeds from employee stock purchase plan 156 231 Proceeds from stock options exercised 334 - ---------------- ------------ Net cash used in financing activities (1,792) (2,044) ----------------- ------------ Net Increase (Decrease) in Cash and Cash Equivalents (1,368) 7,489 Cash and Cash Equivalents at Beginning of Year 26,183 23,963 ----------------- ----------- Cash and Cash Equivalents at End of Period $ 24,815 $ 31,542 ================== ============= See notes to unaudited consolidated financial statements. THE CATO CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 1996 AND JULY 29, 1995 NOTE 1 - GENERAL: The consolidated financial statements have been prepared from the accounting records of the Company and all amounts shown at August 3, 1996 and July 29, 1995 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 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 PER COMMON AND COMMON EQUIVALENT SHARE: Earnings 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 earnings per common and common equivalent share computations were 28,622,744 shares and 28,770,393 shares for the three months and six months ended August 3, 1996, respectively, and 28,730,129 shares and 28,632,728 shares for the three months and six months ended July 29, 1995, respectively. THE CATO CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR SIX MONTHS ENDED AUGUST 3, 1996 AND JULY 29, 1995 NOTE 3 - SHORT-TERM INVESTMENTS: Short-term investments at August 3, 1996 and July 29, 1995 include the following (in thousands): August 3, 1996 July 29, 1995 ----------------- -------------------- Unrealized Estimated Unrealized Estimated Security Type Cost Gain Fair Cost Gain Fair (Loss) Value (Loss) Value -------- -------- --------- ------ ------- --------- Obligations of states and political subdivisions $30,176 - $30,176 $17,582 $ 43 $17,625 Corporate debt securities 2,000 - 2,000 2,000 (63) 1,937 --------- ------- ---------- ------- ------- ------- Subtotal 32,176 - 32,176 19,582 (20) 19,562 Equity securities 2,441 - 2,441 4,548 (193) 4,355 --------- ------- --------- ------- ------- ------- Total $34,617 - $34,617 $24,130 $(213) $23,917 ========= ======== ========= ======== ======= ======= The amortized cost and estimated fair value of debt and marketable equity securities at August 3, 1996 and July 29, 1995, by contractual maturity, are shown below (in thousands): August 3, 1996 July 29, 1995 ------------------- ----------------- Estimated Estimated Security Type Cost Fair Cost Fair Value Value Due in one year or less $26,043 $26,043 $16,478 $16,494 Due in one year through three years 6,133 6,133 3,104 3,068 ------- ------- ------- ------- Subtotal 32,176 32,176 19,582 19,562 Equity securities 2,441 2,441 4,548 4,355 ------- ------- --------- -------- Total $34,617 $34,617 $24,130 $23,917 ========= ======== ========== ======== THE CATO CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 1996 AND JULY 29, 1995 NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the six months ended August 3, 1996 and July 29, 1995 was $122,000 and $203,000, respectively. Income tax payments for the six months ended August 3, 1996 and July 29, 1995 were $2,975,000 and $5,349,000, respectively. NOTE 5 - FINANCING ARRANGEMENTS: In February 1996, the Company entered into a new unsecured revolving credit agreement which provides for borrowings of up to $20 million and an additional letter of credit facility of $15 million. The revolving credit agreement is committed until May 1999 and the letter of credit facility is renewable annually. The revolving credit agreement contains various financial covenants, including the maintenance of specific financial ratios. The agreement replaces an unsecured revolving credit and term loan agreement, which was committed until May 1998, and provided $35 million of available borrowings and a $15 million letter of credit facility. 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 Six Months Ended --------------------- ------------------ August July August July 3, 29, 3, 29, 1996 1995 1996 1995 ------ ------ ------ ------ Total retail sales 100.0 % 100.0 % 100.0 % 100.0 % Total revenues 102.8 102.7 102.9 102.8 Cost of goods sold, including occupancy, distribution and buying 71.4 71.7 68.9 68.7 Selling, general and administrative 26.2 25.4 25.4 25.4 Income before income taxes 3.2 3.9 6.7 6.9 Net income 2.1 2.6 4.3 4.6 Comparison of Second Quarter and First Six Months of 1996 with 1995. OPERATING RESULTS Total retail sales for the second quarter were $112.7 million compared to last year's second quarter sales of $114.7 million, a 2% decrease. Same-store sales decreased 6% in this year's second quarter. For the six months ended August 3, 1996, total retail sales increased 2% over the prior year's first six months, while same-store sales decreased 3% for the comparable six month period. The increase in retail sales for the first six months of 1996 resulted from the Company's store development activity. The Company operated 688 stores at August 3, 1996 compared to 659 stores at the end of last year's second quarter. Other income for the second quarter and first six months of 1996 increased 3% and 5%, 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 portfolio and by increased earnings from cash equivalents and short-term investments. Cost of goods sold, including occupancy, distribution and buying expenses were 71.4% and 68.9% of total retail sales for the second quarter and first six months of 1996, respectively, compared to 71.7% and 68.7% for last year's comparable three and six month periods. The Company's merchandise margins for the second quarter and first six months of 1996 continue to show the effects of the difficult ladies apparel sales environment. Selling, general and administrative (SG&A) expenses were $29.6 million and $59.2 million for the second quarter and first six months of this year, respectively, compared to $29.1 million and $58.3 million for last year's comparable three and six month periods, respectively. SG&A expenses as a percent of retail sales were flat for the first half of 1996 compared to last year's first six months. The Company has continued to aggressively manage operating expenses to keep them in line with the sales levels achieved. THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At August 3, 1996, the Company had working capital of $109.3 million, compared to $101.7 million at July 29, 1995 and $102.2 million at February 3, 1996. Cash provided from operating activities was $18.9 million for the six months ended August 3, 1996, compared to $16.6 million for last year's comparable six month period. The Company had no borrowings under its revolving credit agreement at August 3, 1996 or July 29, 1995. At August 3, 1996, the Company had cash, cash equivalents, and short-term investments of $59.4 million, compared to $55.4 million at July 29, 1995 and $47.9 million at February 3, 1996. In February 1996, the Company entered into a new unsecured revolving credit agreement which provides for borrowings of up to $20 million and an additional letter of credit facility of $15 million. The revolving credit agreement is committed until May 1999 and the letter of credit facility is renewable annually. The revolving credit agreement contains various financial covenants, including the maintenance of specific financial ratios. The agreement replaces an unsecured revolving credit and term loan agreement, which was committed until May 1998, and provided $35 million of available borrowings and a $15 million letter of credit facility. Expenditures for property and equipment totaled $5.5 million for the six months ended August 3, 1996, compared to $6.0 million of expenditures in last year's first six months. The Company expects total capital expenditures to be approximately $11.1 million for the current fiscal year. The Company is currently planning very modest store development in fiscal 1996, pending more favorable business trends. The Company intends to open approximately 30 new stores and to relocate or expand 22 stores during the current fiscal year. For the six months ended August 3, 1996, the Company had opened 18 new stores and relocated or expanded 9 stores and closed 1 store. 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. 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 23, 1996. Election of Directors: Mr. Wayland H. Cato, Jr. - For 70,251,358 ;Abstaining 127,726 Mr. Edgar T. Cato - For 70,166,003 ;Abstaining 213,081 Mr. Howard A. Severson - For 70,166,110 ;Abstaining 212,974 Mr. Robert W. Bradshaw, Jr. - For 70,165,814 ;Abstaining 213,270 Mr. Grant L. Hamrick - For 70,256,610 ;Abstaining 127,474 Ratification of Deloitte & Touche LLP as Independent Auditors For 70,349,442 ; Abstaining 150 ; Against 10,719 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 3, 1996. 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 5, 1996 /s/ Wayland H. Cato, Jr. - - -------------------- ---------------------------- Date Wayland H. Cato, Jr. Chairman of the Board of Directors and Chief Executive Officer September 5, 1996 /s/ Alan E. Wiley - - -------------------- ------------------------------- Date Alan E. Wiley Senior Executive Vice President- Secretary, Chief Financial and Administrative Officer