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, 2002 ------------------------------------------------ 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 21, 2002, there were 19,460,363 shares of Class A common stock and 5,985,149 shares of Class B common stock outstanding.
THE CATO CORPORATION FORM 10-Q MAY 4, 2002 TABLE OF CONTENTS Page No. ------- PART I - FINANCIAL INFORMATION (UNAUDITED) Condensed Consolidated Statements of Income 2 For the Three Months Ended May 4, 2002 and May 5, 2001 Condensed Consolidated Balance Sheets 3 At May 4, 2002, May 5, 2001 and February 2, 2002 Condensed Consolidated Statements of Cash Flows 4 For the Three Months Ended May 4, 2002 and May 5, 2001 Notes to Condensed Consolidated Financial Statements 5 - 7 For the Three Months Ended May 4, 2002 and May 5, 2001 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 11 PART II - OTHER INFORMATION 12 - 13
Page 2 PART I FINANCIAL INFORMATION THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED -------------------------------- MAY 4, May 5, 2002 2001 (UNAUDITED) (Unaudited) ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES Retail sales $196,617 $180,347 Other income (principally finance, late, and layaway charges) 5,024 5,383 -------- -------- Total revenues 201,641 185,730 -------- -------- COSTS AND EXPENSES Cost of goods sold 124,460 116,391 Selling, general and administrative 45,383 42,228 Depreciation 3,108 2,616 Interest 7 11 -------- -------- Total expenses 172,958 161,246 -------- -------- INCOME BEFORE INCOME TAXES 28,683 24,484 Income tax expense 10,383 8,569 -------- -------- NET INCOME $ 18,300 $ 15,915 ======== ======== BASIC EARNINGS PER SHARE $ .72 $ .63 ======== ======== DILUTED EARNINGS PER SHARE $ .71 $ .61 ======== ======== DIVIDENDS PER SHARE $ .135 $ .125 ======== ======== See accompanying notes to condensed consolidated financial statements.
Page 3 THE CATO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS MAY 4, May 5, February 2, 2002 2001 2002 (UNAUDITED) (Unaudited) ----------- ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS Current Assets Cash and cash equivalents $ 68,392 $ 38,622 $ 41,772 Short-term investments 40,071 61,232 42,923 Accounts receivable - net 51,614 46,373 52,293 Merchandise inventories 92,578 93,506 80,407 Deferred income taxes 969 1,746 777 Prepaid expenses 5,587 5,112 5,036 --------- --------- --------- Total Current Assets 259,211 246,591 223,208 Property and equipment - net 102,903 88,204 100,137 Other assets 9,158 9,115 8,696 --------- --------- --------- Total $ 371,272 $ 343,910 $ 332,041 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 70,785 $ 76,695 $ 57,495 Accrued expenses 25,146 24,684 25,260 Income taxes 11,083 11,219 820 --------- --------- --------- Total Current Liabilities 107,014 112,598 83,575 Deferred income taxes 5,177 5,386 5,177 Other noncurrent liabilities 8,365 7,515 8,591 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 25,135,542 shares, 24,892,623 shares and 25,011,732 shares at May 4, 2002, May 5, 2001, and February 2, 2002, respectively 838 829 833 Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized; issued 5,985,149 shares, 5,364,317 shares and 5,812,649 shares at May 4, 2002, May 5, 2001 and February 2, 2002, respectively 199 179 194 Additional paid-in capital 89,444 78,902 86,948 Retained earnings 219,853 188,006 204,961 Accumulated other comprehensive losses (876) (1,193) (567) Unearned compensation - restricted stock awards (320) (615) (394) --------- --------- --------- 309,138 266,108 291,975 Less Class A common stock in treasury, at cost (5,675,179 shares at May 4, 2002, 5,021,648 shares at May 5, 2001, and 5,626,498 shares at February 2, 2002, respectively) (58,422) (47,697) (57,277) --------- --------- --------- Total Shareholders' Equity 250,716 218,411 234,698 --------- --------- --------- Total $ 371,272 $ 343,910 $ 332,041 ========= ========= ========= See accompanying notes to condensed consolidated financial statements.
Page 4 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED --------------------------------- MAY 4, May 5, 2002 2001 (UNAUDITED) (Unaudited) ----------- ----------- (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net income $ 18,300 $ 15,915 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,108 2,616 Amortization of investment premiums 29 45 Compensation expense related to restricted stock awards 74 73 Loss on disposal of property and equipment 187 57 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable 679 599 Merchandise inventories (12,171) (14,345) Other assets (1,013) (128) Accrued income taxes 10,263 5,513 Accounts payable and other liabilities 12,758 16,834 -------- -------- Net cash provided by operating activities 32,214 27,179 -------- -------- INVESTING ACTIVITIES Expenditures for property and equipment (6,061) (5,058) Purchases of short-term investments (645) (5,971) Sales of short-term investments 3,159 2,296 -------- -------- Net cash used in investing activities (3,547) (8,733) -------- -------- FINANCING ACTIVITIES Dividends paid (3,408) (3,184) Purchases of treasury stock -- (3,975) Proceeds from employee stock purchase plan 247 199 Proceeds from stock options exercised 1,114 1,935 -------- -------- Net cash used in financing activities (2,047) (5,025) -------- -------- Net increase in cash and cash equivalents 26,620 13,421 Cash and cash equivalents at beginning of period 41,772 25,201 -------- -------- Cash and cash equivalents at end of period $ 68,392 $ 38,622 ======== ======== See accompanying notes to condensed consolidated financial statements.
Page 5 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MAY 4, 2002 AND MAY 5, 2001 - ------------------------------------------------------------------------------- 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 as of and for the periods ended May 4, 2002 and May 5, 2001 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 on Form 10-K for the fiscal year ended February 2, 2002. 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 quarters ended May 4, 2002 and May 5, 2001 was $17,991,000 and $15,606,000, 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 first quarter of fiscal 2002, the Company accepted 48,681 mature shares of Class A common stock in an option transaction for $1,145,000, or an average price of $23.52 per share. In the first quarter of fiscal 2001, the Company repurchased 262,500 shares of Class A common stock for $3,974,000, or an average price of $15.14 per share. In May 2002, the Board of Directors increased the quarterly dividend by 11% from $.135 per share to $.15 per share. The provisions for income taxes are based on the Company's estimated annual effective tax rate.
Page 6 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MAY 4, 2002 AND MAY 5, 2001 - ------------------------------------------------------------------------------- NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS: In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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. The Company adopted SFAS No. 142 on February 3, 2002, and the adoption of this statement had no impact on the Company's consolidated results of operations and financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets to be Disposed Of" and Accounting Principles Board Opinion (APB) No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". Along with establishing a single accounting model, based on the framework established in SFAS No. 121 for impairment of long-lived assets, this standard retains the basic provisions of APB No. 30 for the presentation of discontinued operations in the income statement, but broadens that presentation to include a component of the entity. The Company adopted SFAS No. 144 on February 3, 2002, and the adoption of this statement had no material impact on the Company's consolidated results of operations and financial position. 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. THREE MONTHS ENDED -------------------------------- MAY 4, May 5, 2002 2001 ---------- ---------- Weighted-average shares outstanding 25,279,022 25,286,456 Dilutive effect of stock options 589,567 634,217 ---------- ---------- Weighted-average shares and equivalents outstanding 25,868,589 25,920,673 ========== ==========
Page 7 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MAY 4, 2002 AND MAY 5, 2001 - ------------------------------------------------------------------------------- NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION: Income tax payments, net of refunds received, for the three months ended May 4, 2002 and May 5, 2001 were $119,000 and $3,481,000, respectively. NOTE 5 - FINANCING ARRANGEMENTS: At May 4, 2002, 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 three months ended May 4, 2002 or the fiscal year ended February 2, 2002. NOTE 6 - REPORTABLE SEGMENT INFORMATION: The Company has two reportable segments: retail and credit. The following schedule summarizes certain segment information (in thousands): THREE MONTHS ENDED ---------------------------- MAY 4, May 5, 2002 2001 -------- -------- Revenues: Retail $198,314 $182,384 Credit 3,327 3,346 -------- -------- Total $201,641 $185,730 ======== ======== Income before income taxes: Retail $ 27,435 $ 23,574 Credit 1,248 910 -------- -------- Total $ 28,683 $ 24,484 ======== ========
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 Condensed Consolidated Statements of Income as a percentage of total retail sales: THREE MONTHS ENDED ----------------------- MAY 4, May 5, 2002 2001 ------ ------ Total retail sales 100.0% 100.0% Total revenues 102.6 103.0 Cost of goods sold 63.3 64.5 Selling, general and administrative 23.1 23.4 Income before income taxes 14.6 13.6 Net income 9.3 8.8 COMPARISON OF FIRST QUARTER OF 2002 WITH 2001. Total retail sales for the first quarter were $196.6 million, an increase of 9% over sales of $180.3 million for the first quarter last year. Same-store sales increased 2% in this year's first quarter. The increase in retail sales for the first quarter resulted from the Company's continued everyday low price strategy, improved merchandise offerings, and an increase in store development activity. The Company operated 949 stores at May 4, 2002 compared to 872 stores at the end of last year's first quarter. Other income for the first quarter of 2002 decreased 7%, over the prior year's comparable periods. The decrease in the current year resulted primarily from decreased late charge fee income on the Company's customer accounts receivable and decreased earnings from interest income from investments. Cost of goods sold were 63.3% of total retail sales for the current year's first quarter, compared to 64.5% for last year's first three months. The decrease in cost of goods sold as a percent of retail sales resulted from strong sell-through of regular priced goods, improved purchasing programs and tightly managed inventory in the first quarter. Selling, general and administrative (SG&A) expenses were $45.4 million, or 23.1% of retail sales, for this year's first quarter compared to $42.2 million, or 23.4% of retail sales, in last year's first quarter. SG&A expenses as a percentage of retail sales declined 30 basis points. The overall increase in SG&A expenses resulted primarily from increased selling-related expenses and increased infrastructure expenses attributable to the Company's store development activities.
Page 9 THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- CRITICAL ACCOUNTING POLICIES The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgement. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of the Company's financial statements include the allowance for doubtful accounts receivable, reserves relating to workers' compensation, general and auto insurance liabilities and reserves for inventory markdowns. Historically, actual results have not significantly deviated from those determined using the estimates described above. LIQUIDITY AND CAPITAL RESOURCES At May 4, 2002, the Company had working capital of $152.2 million, compared to $134.0 million at May 5, 2001 and $139.6 million at February 2, 2002. Cash provided by operating activities was $32.2 million for the three months ended May 4, 2002, compared to $27.2 million for last year's comparable three month period. The increase in net cash provided by operating activities resulted primarily from an increase in net income, accrued income taxes and a smaller increase in inventories than in the prior year offset by the change in other assets and accounts payable and other liabilities. At May 4, 2002, the Company had cash, cash equivalents, and short-term investments of $108.5 million, compared to $99.9 million at May 5, 2001 and $84.7 million at February 2, 2002. Net cash used in investing activities totaled $3.5 million for the first three months of 2002 compared to $8.7 million for the comparable period of 2001. 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. The decrease in cash used was primarily related to a decrease in the purchase of short-term investments in fiscal 2002 as compared to fiscal 2001. Expenditures for property and equipment totaled $6.1 million for the three months ended May 4, 2002, compared to $5.1 million of expenditures in last year's first three months. The Company expects total capital expenditures to be approximately $29 million for the current fiscal year. The Company intends to open approximately 90 new stores, close 10 stores and to relocate 20 stores during the current fiscal year. For the three months ended May 4, 2002, the Company had opened 12 new stores and relocated 7 stores.
Page 10 THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Net cash used in financing activities totaled $2.0 million for the first three months of 2002 compared to $5.0 million for the comparable period of 2001. 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 2002 as compared to fiscal 2001. At May 4, 2002, 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 three months ended May 4, 2002, or the fiscal year ended February 2, 2002. In May 2002, the Board of Directors increased the quarterly dividend by 11% from $.135 per share to $.15 per share. The Company does not use derivative financial instruments. At May 4, 2002, May 5, 2001, and February 2, 2002, 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 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 during fiscal 2002. In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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. The Company adopted SFAS No. 142 on February 3, 2002, and the adoption of this statement had no impact on the Company's consolidated results of operations and financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets to be Disposed Of" and Accounting Principles Board Opinion (APB) No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". Along with establishing a single accounting model, based on the framework established in SFAS No. 121 for impairment of long-lived assets, this standard retains the basic provisions of APB
Page 11 THE CATO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) No. 30 for the presentation of discontinued operations in the income statement, but broadens that presentation to include a component of the entity. The Company adopted SFAS No. 144 on February 3, 2002, and the adoption of this statement had no material impact on the Company's consolidated results of operations and financial position. 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.
Page 12 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 None ITEM 5. OTHER INFORMATION The Company has begun the process of listing its Class A common stock on the New York Stock Exchange. The Company's stock begins trading on the New York Stock Exchange on Thursday, June 13, 2002 under the symbol "CTR". As of June 13, 2002, the Company's shares will no longer trade on Nasdaq. 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, 2002.
Page 13 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 11, 2002 /s/ John P. Derham Cato - ---------------------- ------------------------------------- Date John P. Derham Cato President, Vice Chairman of the Board and Chief Executive Officer June 11, 2002 /s/ Michael O. Moore - ---------------------- ------------------------------------- Date Michael O. Moore Executive Vice President Chief Financial Officer and Secretary June 11, 2002 /s/ Robert M. Sandler - ---------------------- ------------------------------------- Date Robert M. Sandler Senior Vice President Controller