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 May 4, 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 May 17, 1996, there were 23,261,275 shares of Class A Common Stock and 5,264,317 shares of Class B Common Stock outstanding. THE CATO CORPORATION FORM 10-Q May 4, 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 Ended ---------- ---------- May 4, April 29, 1996 1995 ---------- ---------- (In thousands, except per share data) REVENUES Retail sales $ 120,028 $ 114,461 Other income (principally finance and layaway charges) 3,511 3,294 --------- ----------- Total revenues 123,539 117,755 COSTS AND EXPENSES Cost of goods sold, including occupancy, distribution and buying 79,774 75,276 Selling, general and administrative 29,655 29,188 Depreciation 2,074 1,939 Interest 65 78 --------- ---------- Total expenses 111,568 106,481 --------- ---------- INCOME BEFORE INCOME TAXES 11,971 11,274 Income taxes 4,250 3,776 --------- ---------- NET INCOME $ 7,721 $ 7,498 ========= ========== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ 0.27 $ 0.26 ========= ========== DIVIDENDS PER SHARE $ 0.04 $ 0.04 ========= ========== See notes to unaudited consolidated financial statements. THE CATO CORPORATION UNAUDITED CONSOLIDATED BALANCE SHEETS May 4, April 29, February 3, 1996 1995 1996 -------- --------- ----------- (In thousands) ASSETS Current Assets Cash and cash equivalents $ 21,756 $ 26,378 $ 26,183 Short-term investments 34,816 25,423 21,711 Accounts receivable - net 39,538 37,455 39,792 Merchandise inventories 69,547 70,101 58,440 Deferred income taxes 1,825 1,914 1,825 Prepaid expenses 4,652 2,686 2,486 -------- ---------- --------- Total Current Assets 172,134 163,957 150,437 Property and Equipment 55,118 52,857 54,364 Other Assets 5,186 4,780 5,094 -------- --------- --------- Total $ 232,438 $ 221,594 $ 209,895 ======== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 48,824 $ 48,467 $ 36,482 Accrued expense 10,591 9,372 10,458 Income taxes 4,352 4,365 1,328 -------- --------- --------- Total Current Liabilities 63,767 62,204 48,268 Deferred Income Taxes 4,491 4,192 4,491 Other Noncurrent Liabilities 7,551 7,061 7,454 Stockholders' Equity: Class A Common Stock, issued 23,301,275 shares, 23,172,796 shares and 23,204,647 shares at May 4, 1996, April 29, 1995 and February 3, 1996, respectively 776 771 773 Convertible Class B Common Stock, issued and outstanding 5,264,317 shares 176 176 176 Preferred Stock, none Additional paid-in capital 63,026 62,343 62,665 Retained earnings 92,874 84,847 86,291 -------- -------- -------- Less Class A Common Stock in 156,852 148,137 149,905 treasury, at cost (40,000 shares at May 4, 1996 and February 3, 1996) 223 - 223 -------- -------- -------- Total Stockholders' Equity 156,629 148,137 149,682 -------- -------- -------- Total $ 232,438 $ 221,594 $ 209,895 ========= ========= ========= See notes to unaudited consolidated financial statements. THE CATO CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended --------------------------------- May 4, April 29, 1996 1995 ---------------------------------- (In thousands) OPERATING ACTIVITIES Net income $ 7,721 $ 7,498 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,074 1,939 Amortization of investment premiums 35 50 Changes in operating assets and liabilities: Decrease in accounts receivable 254 471 Increase in merchandise inventories (11,107) (15,427) Increase in other assets (2,258) (169) Increase in accrued income taxes 3,024 3,456 Increase in accounts payable and other liabilities 12,580 10,256 -------- -------- Net cash provided by operating activities 12,323 8,074 -------- -------- INVESTING ACTIVITIES Expenditures for property and equipment (2,836) (1,719) Purchases of short-term investments (14,140) (3,419) Sales of short-term investments 1,000 550 -------- -------- Net cash used in investing activities (15,976) (4,588) -------- -------- FINANCING ACTIVITIES Dividends paid (1,138) (1,137) Proceeds from employee stock purchase plan 154 66 Proceeds from stock options exercised 210 - -------- -------- Net cash used in financing activities (774) (1,071) -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents (4,427) 2,415 Cash and Cash Equivalents at Beginning of Year 26,183 23,963 --------- -------- Cash and Cash Equivalents at End of Period $ 21,756 $ 26,378 ========= ========= See notes to unaudited consolidated financial statements. THE CATO CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THREE MONTHS ENDED MAY 4, 1996 AND APRIL 29, 1995 NOTE 1 - GENERAL: The consolidated financial statements have been prepared from the accounting records of the Company and all amounts shown at May 4, 1996 and April 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 28,918,042 shares for the three months ended May 4, 1996 and 28,535,326 shares for the three months ended April 29, 1995. THE CATO CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THREE MONTHS ENDED MAY 4, 1996 AND APRIL 29, 1995 <TABLE> <CAPTION> NOTE 3 - SHORT-TERM INVESTMENTS: Short-term investments at May 4, 1996 and April 29, 1995 include the following (in thousands): May 4, 1996 April 29, 1995 ----------------------- ---------------------- <S> <C> <C> <C> <C> <C> <C> Unrealized Estimated Unrealized Estimated Security Type Cost Gain Fair Cost Gain Fair (Loss) Value (Loss) Value ---------- ---------- --------- ---------- ---------- --------- Obligations of states and political subdivisions $30,885 - $30,885 $19,386 $(20) $19,366 Corporate debt securities 2,000 - 2,000 2,000 (130) 1,870 ---------- ---------- ---------- ---------- ---------- --------- Total 32,885 - 32,885 21,386 (150) 21,236 Equity securities 1,931 - 1,931 4,548 (361) 4,187 ---------- ---------- ----------- ---------- ---------- --------- Total $34,816 - $34,816 $25,934 $(511) $25,423 ========== ========== =========== =========== ========== ========= </TABLE> The amortized cost and estimated fair value of debt and marketable equity securities at May 4, 1996 and April 29, 1995, by contractual maturity, are shown below (in thousands): May 4, 1996 April 29, 1995 --------------------- -------------------- Estimated Estimated Fair Fair Security Type Cost Value Cost Value - - ----------------- -------- --------- -------- --------- Due in one year or less $29,513 $29,513 $18,880 $18,718 Due in one year through three years 3,372 3,372 2,506 2,518 -------- --------- -------- -------- Subtotal 32,885 32,885 21,386 21,236 Equity securities 1,931 1,931 4,548 4,187 -------- --------- --------- ------- Total $34,816 $34,816 $25,934 $25,423 ======== ========= ========= ====== THE CATO CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THREE MONTHS ENDED MAY 4, 1996 AND APRIL 29, 1995 NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the three months ended May 4, 1996 and April 29, 1995 was $61,000 and $145,000, respectively. Income tax payments, net of refunds received, were $1,249,000 and $318,000 for the three months ended May 4, 1996 and April 29, 1995, 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 ------------------- May 4, April 29, 1996 1995 ------ ------- Total retail sales 100.0% 100.0% Total revenues 102.9 102.9 Cost of goods sold, including occupancy, distribution and buying 66.5 65.8 Selling, general and administrative 24.7 25.5 Income before income taxes 10.0 9.8 Net income 6.4 6.5 Comparison of First Quarter of 1996 with 1995. OPERATING RESULTS Total retail sales for the first quarter increased 5% over last year's first quarter to $120.0 million from $114.5 million. Same- store sales were flat for the first quarter of 1996. The increase in retail sales for the first quarter resulted from the Company's store development activity. The Company operated 682 stores at May 4, 1996 compared to 657 stores operated at the end of last year's first quarter. Other income for the first quarter increased 7% over last year's first quarter. The increase in the current year resulted primarily from increased finance charge income on the Company's customer accounts receivable and increased earnings from cash equivalents and short-term investments. Cost of goods sold, including occupancy, distribution, and buying expenses were 66.5% of total retail sales for the current year's first quarter, compared to 65.8% for last year's first three months. The increase in cost of goods sold as a percent of retail sales resulted primarily from higher levels of promotional markdowns taken in this year's first quarter. Selling, general and administrative (SG&A) expenses were $29.7 million, or 24.7% or retail sales, for this year's first quarter, compared to $29.2 million, or 25.5% or retail sales, in last year's first quarter. The decrease in SG&A as a percent of retail sales reflects the Company's continued emphasis on operating expense management. THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At May 4, 1996, the Company had working capital of $108.4 million, compared to $101.8 million at April 29, 1995 and $102.2 million at February 3, 1996. Cash provided by operating activities was $12.3 million for the three months ended May 4, 1996, compared to $8.1 million for last year's comparable three- month period. The Company had no borrowings under its revolving credit agreement at May 4, 1996 or April 29, 1995. At May 4, 1996, the Company had cash, cash equivalents, and short-term investments of $56.6 million, compared to $51.8 million at April 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 $2.8 million for the three months ended May 4, 1996, compared to $1.7 million of expenditures in last year's first three months. The Company expects total capital expenditures to be approximately $9.6 million for 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 20 new stores and to relocate or expand 15 stores during the current fiscal year. For the three months ended May 4, 1996, the Company had opened 11 new stores and relocated or expanded 4 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. 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 May 4, 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 June 7, 1996 /s/ Wayland H. Cato, Jr. --------------- ------------------------- Date Wayland H. Cato, Jr. Chairman of the Board of Directors and Chief Executive Officer June 7, 1996 /s/ Alan E. Wiley --------------- --------------------------- Date Alan E. Wiley Executive Vice President-Secretary, Chief Financial and Administrative Officer