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EX-31 - EXHIBIT 31.1 - CATO CORPexhibit311.htm
EX-32 - EXHIBIT 32.1 - CATO CORPexhibit321.htm
EX-31 - EXHIBIT 31.1 - CATO CORPexhibit312.htm
EX-32 - EXHIBIT 32.1 - CATO CORPexhibit322.htm
EX-18 - EXHIBIT 18.1 - CATO CORPexhibit181.htm

 

 

Table of Contents

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 July 30, 2011

 

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 1-31340  

 

THE CATO CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

56-0484485

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer 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

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

X

No

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer  ¨     Accelerated filer  þ      Non-accelerated filer  ¨      Smaller reporting company ¨ 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

 

No

X

 

As of September 7, 2011, there were 27,707,496 shares of Class A common stock and 1,743,525 shares of Class B common stock outstanding.

 


 

 

THE CATO CORPORATION

 

FORM 10-Q

 

Quarter Ended July 30, 2011

Table of Contents

 

Page No.

 

PART I – FINANCIAL INFORMATION (UNAUDITED)

 

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income

2

 

 

For the Three Months and Six Months Ended July 30, 2011 and July 31, 2010

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

At July 30, 2011, July 31, 2010 and January 29, 2011

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

4

 

 

For the Six Months Ended July 30, 2011 and July 31, 2010

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5 – 16

 

 

For the Three Months and Six Months Ended July 30, 2011 and July 31, 2010

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17 – 23

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

 

Item 4.

Controls and Procedures

24

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

25

 

 

 

 

 

Item 1A.

Risk Factors

25

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

26

 

 

 

 

 

Item 4.

Removed and Reserved

26

 

 

 

 

 

Item 5.

Other Information

26

 

 

 

 

 

Item 6.

Exhibits

26

 

 

 

 

 

Signatures

27 - 32

 

 

 

 

 

 

             

 

1

 


 

 

Table of Contents

 

PART I FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE INCOME

 

Three Months Ended

Six Months Ended

July 30, 2011

July 31, 2010

July 30, 2011

July 31, 2010

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Dollars in thousands, except per share data)

REVENUES

Retail sales

$

234,077

 

$

231,839

$

505,010

 

$

490,879

Other income (principally finance charges, late fees and

layaway charges)

2,729

 

2,862

5,456

 

5,785

Total revenues

236,806

 

234,701

510,466

 

496,664

COSTS AND EXPENSES, NET

Cost of goods sold (exclusive of depreciation shown below)

145,156

 

141,404

303,561

 

291,264

Selling, general and administrative (exclusive of depreciation

shown below)

58,955

62,340

122,271

130,421

Depreciation

5,371

 

5,277

10,775

 

10,547

Interest and other income

(949)

 

(957)

(1,906)

 

(1,849)

Cost and expenses, net

208,533

 

208,064

434,701

 

430,383

Income before income taxes

28,273

 

26,637

75,765

 

66,281

Income tax expense

10,170

 

9,659

27,141

 

24,269

Net income

$

18,103

 

$

16,978

$

48,624

 

$

42,012

Basic earnings per share

$

0.61

$

0.58

$

1.65

$

1.42

Diluted earnings per share

$

0.61

$

0.58

$

1.65

$

1.42

Dividends per share

$

0.230

$

0.185 

$

0.415

$

0.35 

Comprehensive income:

Net income

$

18,103

$

16,978

$

48,624

$

42,012

Unrealized gain (loss) on available-for-sale securities, net

of deferred income tax benefit

310

130

584

44

Comprehensive income

$

18,413

$

17,108

$

49,208

$

42,056

 

See notes to consolidated financial statements.

2

 


 

 

Table of Contents

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

July 30, 2011

July 31, 2010

January 29, 2011

(Unaudited)

(Unaudited)

(Unaudited)

(Dollars in thousands)

ASSETS

Current Assets:

Cash and cash equivalents

$

77,376

$

68,336

$

48,630

Short-term investments

190,533

165,755

181,395

Restricted cash and investments

4,801

2,547

4,826

Accounts receivable, net of allowance for doubtful accounts of

$2,654 , $3,233 and $2,985 at July 30, 2011, July 31, 2010 and

January 29, 2011 respectively

37,621

39,747

39,703

Merchandise inventories

117,225

105,157

144,028

Deferred income taxes

3,338

7,802

3,660

Prepaid expenses

3,739

5,352

3,199

Total Current Assets

434,633

394,696

425,441

Property and equipment – net

104,333

100,869

99,773

Other assets

9,434

7,499

7,545

Total Assets

$

548,400

$

503,064

$

532,759

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Accounts payable

$

86,553

$

79,276

$

103,898

Accrued expenses

36,308

32,587

35,318

Accrued bonus and benefits

8,906

18,062

22,841

Accrued income taxes

23,145

22,493

11,861

Total Current Liabilities

154,912

152,418

173,918

Deferred income taxes

9,540

7,833

9,540

Other noncurrent liabilities (primarily deferred rent)

14,190

16,362

15,287

Commitments and contingencies:

Stockholders' 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 27,741,091 shares, 27,736,131 shares

and 27,758,123 shares at July 30, 2011, July 31, 2010 and

January 29, 2011, respectively

925

925

925

Convertible Class B common stock, $.033 par value per share,

15,000,000 shares authorized; issued 1,743,525 shares at July 30, 2011,

July 31, 2010 and January 29, 2011, respectively

58

58

58

Additional paid-in capital

70,203

66,584

68,537

Retained earnings

297,713

258,307

264,218

Accumulated other comprehensive income

859

577

276

Total Stockholders' Equity

369,758

326,451

334,014

Total Liabilities and Stockholders’ Equity

$

548,400

$

503,064

$

532,759

 

See notes to consolidated financial statements.

3

 


 

 

Table of Contents

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended

July 30, 2011

July 31, 2010

(Unaudited)

(Unaudited)

(Dollars in thousands)

Operating Activities:

Net income

$

48,624

$

42,012

Adjustments to reconcile net income to net cash provided

by operating activities:

Depreciation

10,775

10,547

Provision for doubtful accounts

882

1,499

Share-based compensation

1,302

1,213

Excess tax benefits from share-based compensation

(89)

(133)

Loss on disposal of property and equipment

415

220

Changes in operating assets and liabilities which provided

(used) cash:

Accounts receivable

1,200

(1,092)

Merchandise inventories

26,803

24,492

Prepaid and other assets

(2,437)

(2,145)

Accrued income taxes

11,373

11,686

Accounts payable, accrued expenses and other liabilities

(31,387)

(28,357)

Net cash provided by operating activities

67,461

59,942

Investing Activities:

Expenditures for property and equipment

(15,751)

(8,866)

Purchase of short-term investments

(79,623)

(111,454)

Sales of short-term investments

71,399

93,768

Change in restricted cash and investments

25

28

Net cash used in investing activities

(23,950)

(26,524)

Financing Activities:

Dividends paid

(12,243)

(10,304)

Repurchase of common stock

(2,897)

(5,840)

Proceeds from employee stock purchase plan

254

218

Excess tax benefits from share-based compensation

89

133

Proceeds from stock options exercised

32

326

Net cash used in financing activities

(14,765)

(15,467)

Net increase in cash and cash equivalents

28,746

17,951

Cash and cash equivalents at beginning of period

48,630

50,385

Cash and cash equivalents at end of period

$

77,376

$

68,336

 

See notes to consolidated financial statements.

4

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 30, 2011 AND JULY 31, 2010

 

 

 

NOTE 1 - GENERAL

 

The condensed 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 July 30, 2011 and July 31, 2010 are unaudited.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  All such adjustments are of a normal, recurring nature unless otherwise noted.  The results of the interim period may not be indicative of the results expected for the entire year.

 

The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011.  Amounts as of January 29, 2011, have been derived from the audited balance sheet other than the retrospective application of the change in accounting principle.

 

On August 25, 2011, the Board of Directors maintained the quarterly dividend at $.23 per share or an annualized rate of $0.92 per share.

 

CHANGE IN ACCOUNTING PRINCIPLE:

 

The Company elected to change its method of accounting for inventory to the weighted average cost method from the retail method effective January 30, 2011.  In accordance with ASC 250 “Accounting Changes and Error Corrections”, all periods have been retrospectively adjusted to reflect the period-specific effects of the change to the weighted average cost method.  The Company believes that the weighted average cost method better matches cost of sales with related sales, as well as having an inventory valuation that more closely reflects the acquisition cost of inventory by valuing inventory on a unit basis versus the product department level under the retail method.  The cumulative adjustment as of January 31, 2010, was an increase in inventory of $11,700,000 and an increase in retained earnings of $7,300,000. 

 

Additionally, the Company has changed the classification for certain balance sheet items to conform to the 2011 presentation.  This change in classification has reduced accounts payable and inventory by $1,600,000 as of January 29, 2011 and $500,000 as of July 31, 2010.

 

In addition, the Company has changed the classification of certain prior year income statement items to conform to the 2011 presentation.  The change has no effect on net income; however, it does reduce retail sales by $26,000 and cost of goods sold by $98,000 and increases selling, general and administrative expense by $72,000 for the three months ended July 31, 2010.  The change also reduces retail sales by $746,000, cost of goods sold by $339,000 and selling, general and administrative expense by $407,000 for the six months ended July 31, 2010.

5

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 30, 2011 AND JULY 31, 2010

 

 

 

As a result of this retrospective application of the change in accounting principle and the change in the classification of the Balance Sheet, the following items in the Company's Condensed Consolidated Balance Sheets have been adjusted as follows:

 
 
 

 

 

January 29, 2011

 

(Unaudited)

 

(Dollars in thousands)

 

As Previously Reported

Total Changes

As Adjusted

 

Merchandise inventories

$

132,020

$

12,008

$

144,028

 

Deferred income taxes

5,001

(1,341)

3,660

 

Total Current Assets

414,774

10,667

425,441

 

Total Assets

522,092

10,667

532,759

 

Accounts payable

105,526

(1,628)

103,898

 

Total Current Liabilities

175,546

(1,628)

173,918

 

Deferred income taxes

5,695

3,845

9,540

 

Retained earnings

255,768

8,450

264,218

 

Total Stockholders' Equity

325,564

8,450

334,014

 

Total Liabilities and Stockholders’ Equity

$

522,092

$

10,667

$

532,759

 

 

July 31, 2010

(Unaudited)

(Dollars in thousands)

As Previously Reported

Total Changes

As Adjusted

Merchandise inventories

$

95,720

$

9,437

$

105,157

Deferred income taxes

7,748

54

7,802

Total Current Assets

385,205

9,491

394,696

Total Assets

493,573

9,491

503,064

Accounts payable

79,802

(526)

79,276

Total Current Liabilities

152,944

(526)

152,418

Deferred income taxes

4,087

3,746

7,833

Retained earnings

252,037

6,270

258,307

Total Stockholders' Equity

320,181

6,270

326,451

Total Liabilities and Stockholders’ Equity

$

493,573

$

9,491

$

503,064

6

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 30, 2011 AND JULY 31, 2010

 

 

 

As a result of this retrospective application of the change in accounting principle and the change in the classification of the Income Statement, the following items in the Company's Condensed Consolidated Statements of Income and Condensed Consolidated Statement of Cash Flows have been adjusted as follows:

Three Months Ended

July 31, 2010

(Unaudited)

(Dollars in thousands, except per share data)

As Previously Reported

Total Changes

As Adjusted

Retail Sales

$

231,865

$

(26)

$

231,839

Total Revenues

234,727

(26)

234,701

Cost of goods sold

143,039

(1,635)

141,404

Selling, general and administrative

62,268

72

62,340

Cost and expenses, net

209,627

(1,563)

208,064

Income before income taxes

25,100

1,537

26,637

Income tax expense

9,081

578

9,659

Net income

$

16,019

$

959

$

16,978

Basic earnings per share

$

0.54

$

0.04

$

0.58

Diluted earnings per share

$

0.54

$

0.04

$

0.58

Six Months Ended

July 31, 2010

(Unaudited)

(Dollars in thousands, except per share data)

As Previously Reported

Total Changes

As Adjusted

Retail Sales

$

491,625

$

(746)

$

490,879

Total Revenues

497,410

(746)

496,664

Cost of goods sold

289,893

1,371

291,264

Selling, general and administrative

130,828

(407)

130,421

Cost and expenses, net

429,419

964

430,383

Income before income taxes

67,991

(1,710)

66,281

Income tax expense

24,912

(643)

24,269

Net income

$

43,079

$

(1,067)

$

42,012

Basic earnings per share

$

1.46

$

(0.04)

$

1.42

Diluted earnings per share

$

1.46

$

(0.04)

$

1.42

 

Six Months Ended

July 31, 2010

(Unaudited)

(Dollars in thousands)

As Previously Reported

Total Changes

As Adjusted

Cash flow from operating activities:

Net income

$

43,079

$

(1,067)

$

42,012

Merchandise inventories

22,908

1,584

24,492

Accounts payable, accrued expenses

and other liabilities

$

(27,840)

$

(517)

$

(28,357)

7

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 30, 2011 AND JULY 31, 2010

 

 

 

NOTE 2 - EARNINGS PER SHARE:

 

ASC 260 – Earnings Per Share requires dual presentation of basic and diluted Earnings Per Share (EPS) on the face of all income statements for all entities with complex capital structures.  The Company has presented one basic EPS and one diluted EPS amount for all common shares in the accompanying Condensed Consolidated Statements of Income.  While the Company’s certificate of incorporation provides the right for the Board of Directors to declare dividends on Class A shares without declaration of commensurate dividends on Class B shares, the Company has historically paid the same dividends to both Class A and Class B shareholders and the Board of Directors has resolved to continue this practice.  Accordingly, the Company’s allocation of income for purposes of the EPS computation is the same for Class A and Class B shares and the EPS amounts reported herein are applicable to both Class A and Class B shares.

 

Basic EPS is computed as net income less earnings allocated to non-vested equity awards divided by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options and the Employee Stock Purchase Plan.   

 

Three Months Ended

Six Months Ended

July 30, 2011

July 31, 2010

July 30, 2011

July 31, 2010

(Dollars in thousands, except share data and per share data)

Basic earnings per share:

Net earnings

$

18,103

$

16,978

$

48,624

$

42,012

Earnings allocated to non-vesting equity awards

(292)

(287)

(811)

(709)

Net earnings available to common stockholders

$

17,811

$

16,692

$

47,813

$

41,303

Basic weighted-average common shares outstanding

29,010,209

28,966,065 

28,978,512

28,990,500 

Basic earnings per share

$

0.61

$

0.58

$

1.65

$

1.42

Diluted earnings per share:

Net earnings

$

18,103

$

16,978

$

48,624

$

42,012

Earnings allocated to non-vesting equity awards

(292)

(287)

(810)

(709)

Net earnings available to common stockholders

$

17,811

$

16,692

$

47,814

$

41,303

Basic weighted-average common shares outstanding

29,010,209

28,966,065 

28,978,512

28,990,500 

Dilutive effect of stock options

5,932

12,710 

5,635

12,109 

Diluted weighted-average common shares outstanding

29,016,141

28,978,775 

28,984,147

29,002,609 

Diluted earnings per share

$

0.61

$

0.58

$

1.65

$

1.42

 

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:

 

Income tax payments, net of refunds received, for the six months ended July 30, 2011 and July 31, 2010 were $15,780,000 and $13,315,000, respectively.

8

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 30, 2011 AND JULY 31, 2010

 

 

 

NOTE 4 – FINANCING ARRANGEMENTS:

 

As of July 30, 2011, the Company had an unsecured revolving credit agreement of $35.0 million.  The revolving credit agreement is committed until August 2013.  The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of July 30, 2011.  There were no borrowings outstanding under this credit facility during the six months ended July 30, 2011 or July 31, 2010.  Interest on any borrowings is based on LIBOR, which was 0.19% at July 30, 2011.

 

At July 30, 2011 and July 31, 2010 the Company had approximately $5.7 million and $10.3 million, respectively, of outstanding irrevocable letters of credit relating to purchase commitments. 

 

NOTE 5 – REPORTABLE SEGMENT INFORMATION:

 

The Company has two reportable segments: retail and credit. The Company operated its fashion specialty retail stores in 31 states at July 30, 2011, principally in the southeastern United States. The Company offers its own credit card to its customers and all related credit authorizations, payment processing, and collection efforts are performed by a separate subsidiary of the Company.

 

The following schedule summarizes certain segment information (in thousands):

 

Three Months Ended

Six Months Ended

July 30, 2011

Retail

Credit

Total

July 30, 2011

Retail

Credit

Total

Revenues

$

234,885

$

1,921

$

236,806

Revenues

$

506,592

$

3,874

$

510,466

Depreciation

5,367

4

5,371

Depreciation

10,767

8

10,775

Interest and other income

(949)

(949)

Interest and other income

(1,906)

(1,906)

Income before taxes

27,330

943

28,273

Income before taxes

74,183

1,582

75,765

Total assets

471,320

77,080

548,400

Total assets

471,320

77,080

548,400

Capital expenditures

11,319

41

11,360

Capital expenditures

15,665

86

15,751

Three Months Ended

Six Months Ended

July 31, 2010

Retail

Credit

Total

July 31, 2010

Retail

Credit

Total

Revenues

$

232,581

$

2,120 

$

234,701

Revenues

$

492,322

$

4,342 

$

496,664

Depreciation

5,272

5,277 

Depreciation

10,536 

11 

10,547 

Interest and other income

(957)

(957)

Interest and other income

(1,849)

(1,849)

Income before taxes

25,794

843 

26,637

Income before taxes

64,810

1,471 

66,281

Total assets

429,977

73,087 

503,064

Total assets

429,977

73,087 

503,064

Capital expenditures

4,842

4,842 

Capital expenditures

8,866 

8,866 

 

The Company evaluates segment performance based on income before taxes.  The Company does not allocate certain corporate expenses or income taxes to the credit segment.

9

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 30, 2011 AND JULY 31, 2010

 

 

 

 

NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):

 

The following schedule summarizes the direct expenses of the credit segment which are reflected in selling, general and administrative expenses (in thousands):

 

Three Months Ended

Six Months Ended

July 30, 2011

July 31, 2010

July 30, 2011

July 31, 2010

Bad debt expense

$

352

$

676

$

882

$

1,499

Payroll

247

239

489

474

Postage

187

197

388

425

Other expenses

188

160

525

462

Total expenses

$

974

$

1,272

$

2,284

$

2,860

 

NOTE 6 – STOCK BASED COMPENSATION:

 

As of July 30, 2011, the Company had three long-term compensation plans pursuant to which stock-based compensation was outstanding or could be granted. The Company’s 1987 Non-Qualified Stock Option Plan authorized 5,850,000 shares for the granting of options to officers and key employees. The 1999 Incentive Compensation Plan and 2004 Amended and Restated Incentive Compensation Plan authorized 1,500,000 and 1,350,000 shares, respectively, for the granting of various forms of equity-based awards, including restricted stock and stock options to officers and key employees.  The 1999 Plan has expired as to the ability to grant new awards.

 

The following table presents the number of options and shares of restricted stock initially authorized and available for grant under each of the plans:

 

1987

1999

2004

Plan

Plan

Plan

Total

Options and/or restricted stock initially authorized

5,850,000

1,500,000

1,350,000

8,700,000

Options and/or restricted stock available for grant:

January 29, 2011

18,627

627,872

646,499

July 30, 2011

19,677

537,981

557,658

 

In accordance with ASC 718, the fair value of current restricted stock awards is estimated on the date of grant based on the market price of the Company’s stock and is amortized to compensation expense on a straight-line basis over the related vesting periods. As of July 30, 2011 and July 31, 2010, there was $7,346,000 and $7,312,000 of total unrecognized compensation cost related to nonvested restricted stock awards, which have a remaining weighted average vesting period of 2.7 years and 2.9 years, respectively. The total fair value of the shares recognized as compensation expense during the second quarter and six months ended July 30, 2011 was $790,000 and $1,257,000, respectively compared to $770,000 and $1,226,000 for the second quarter and six months ended July 31, 2010, respectively.  These expenses are classified as a component of selling, general and administrative expenses in the Condensed Consolidated Statements of Income.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 30, 2011 AND JULY 31, 2010

 

 

 

 

NOTE 6 – STOCK BASED COMPENSATION (CONTINUED):

 

The following summary shows the changes in the shares of restricted stock outstanding during the six months ended July 30, 2011:

 

Weighted Average

Number of

Grant Date Fair

Shares

Value Per Share

Restricted stock awards at January 29, 2011

509,456

$

20.32

Granted

102,449

25.41

Vested

(123,423)

20.55

Forfeited or expired

(18,127)

21.19

Restricted stock awards at July 30, 2011

470,355

$

21.43

 

The Company’s Employee Stock Purchase Plan allows eligible full-time employees to purchase a limited number of shares of the Company’s Class A Common Stock during each semi-annual offering period at a 15% discount through payroll deductions. During the six months ended July 30, 2011 and July 31, 2010, the Company sold 12,006 and 12,729 shares to employees at an average discount of $3.74 and $3.03 per share, respectively, under the Employee Stock Purchase Plan. The compensation expense recognized for the 15% discount given under the Employee Stock Purchase Plan was approximately $45,000 and $39,000 for the six months ended July 30, 2011 and July 31, 2010, respectively.  These expenses are classified as a component of selling, general and administrative expenses.

 

The following is a summary of the changes in stock options outstanding during the six months ended July 30, 2011:

Weighted

Weighted

Average

Average

Remaining

Aggregate

Exercise

Contractual

Intrinsic

Shares

Price

Term

Value(a)

Options outstanding at January 29, 2011

21,675

$

13.86

2.78 years

$

228,434

Granted

-

Forfeited or expired

1,050

12.00

Exercised

3,450

13.47

Outstanding at July 30, 2011

17,175

$

14.05

2.49 years

$

229,746

Vested and exercisable at July 30, 2011

17,175

$

14.05

2.49 years

$

229,746

 

 

                     

 

(a)    The intrinsic value of a stock option is the amount by which the market value of the        underlying stock exceeds the exercise price of the option.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 30, 2011 AND JULY 31, 2010

 

 

 

 

NOTE 6 – STOCK BASED COMPENSATION (CONTINUED):

 

No options were granted in the first half of fiscal 2011 or fiscal 2010. 

 

The total intrinsic value of options exercised during the second quarter and six months ended July 30, 2011 was $41,000.

 

During the second quarter of 2010, the Company completed amortizing its nonvested options.  In accordance with ASC 718, the Company adjusted its related forfeiture assumption and recognized a reduction in share based compensation expense of $53,000 and $52,000 for the second quarter and six month period ended July 31, 2010.  There was no share based compensation expense for the second quarter and six month period ended July 30, 2011.

  

Stock option awards outstanding under the Company’s current plans were granted at exercise prices which were equal to the market value of the Company’s stock on the date of grant, vest over five years and expire no later than ten years after the grant date.

 

 

NOTE 7 – INCOME TAXES:

 

For the quarter ended July 30, 2011, the Company’s effective tax rate was 36.0% compared to 36.3% for the prior year quarter ended July 31, 2010.  The current year quarter was impacted by the reduction of a reserve for certain unrecognized tax benefits from the closing of a state income tax audit.  The effective income tax rate for the first six months of fiscal 2011 was 35.8% compared to 36.6% for the first six months of fiscal 2010.  During the next 12 months, various taxing authorities’ statutes of limitations are expected to expire which could result in a potential reduction of unrecognized tax benefits.  In addition, certain state examinations may close, the ultimate resolution of which could materially affect the effective tax rate.  As a consequence, the balance in unrecognized tax benefits can be expected to fluctuate from period to period.  It is reasonably possible such changes could be significant when compared to our total unrecognized tax benefits, but the amount of change is not currently estimable.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 30, 2011 AND JULY 31, 2010

 

 

 

NOTE 8 – FAIR VALUE MEASUREMENTS:

 

 

The following tables set forth information regarding the Company’s financial assets that are measured at fair value (in thousands) as of July 30, 2011 and January 29, 2011.

 

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

July 30,

Assets

Inputs

Inputs

Description

2011

Level 1

Level 2

Level 3

State/Municipal Bonds

$

142,938

$

$

142,938

$

Corporate Bonds

28,119

28,119

Auction Rate Securities (ARS)

3,450

3,450

Variable Rate Demand Notes (VRDN)

20,817

20,817

US Treasury Notes

2,679

2,679

-

Privately Managed Funds

1,909

1,909

Corporate Equities

473

473

Certificates of Deposit

100

100

Total

$

200,485

$

24,069

$

171,057

$

5,359

 

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

January 29,

Assets

Inputs

Inputs

Description

2011

Level 1

Level 2

Level 3

State/Municipal Bonds

$

129,678

$

$

129,678

$

Corporate Bonds

34,288

34,288

Auction Rate Securities (ARS)

3,450

3,450

Variable Rate Demand Notes (VRDN)

19,308

19,308

Privately Managed Funds

1,925

1,925

Corporate Equities

480

480

Total

$

189,129

$

19,788

$

163,966

$

5,375

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 30, 2011 AND JULY 31, 2010

 

 

 

 

NOTE 8 – FAIR VALUE MEASUREMENTS (CONTINUED):

 

The Company’s investment portfolio was primarily invested in tax exempt variable rate demand notes (“VRDN”), corporate bonds, and governmental debt securities held in managed funds with underlying ratings of A or better at both July 30, 2011 and January 29, 2011.  The underlying securities have contractual maturities which generally range from 62 days to 29 years.  Although the Company’s investments in VRDN’s have underlying securities with contractual maturities longer than one year, the VRDN’s themselves have interest rate resets of 7 days and are considered short-term investments.  These securities are classified as available-for-sale and are recorded as short-term investments on the accompanying Condensed Consolidated Balance Sheets at estimated fair value, with unrealized gains and losses reported net of taxes in accumulated other comprehensive income.

 

Additionally, at July 30, 2011 and January 29, 2011, the Company had $1.9 million of privately managed funds, $0.5 million of corporate equities and a single auction rate security (“ARS”) of $3.5 million which continues to fail its auction.  All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets.

 

Level 1 category securities are measured at fair value using quoted active market prices.  Level 2 investment securities include corporate and municipal bonds for which quoted prices may not be available on active exchanges for identical instruments.  Their fair value is principally based on market values determined by management with assistance of a third party pricing service. 

 

The Company’s failed ARS is measured at fair value using Level 3 inputs at each reporting period.  Due to the fact that there is no active market for this particular ARS, its fair value was determined through the use of a discounted cash flow analysis. The terms used in the analysis were based on management’s estimate of the timing of future liquidity, which assumes that the security will be called or refinanced by the issuer or settled with a broker dealer prior to maturity. The discount rates used in the discounted cash flow analysis were based on market rates for similar liquid tax exempt securities with comparable ratings and maturities. Due to the uncertainty surrounding the timing of future liquidity, the Company also considered a liquidity/risk value reduction. In estimating the fair value of this ARS, the Company also considered the financial condition and near-term prospects of the issuer, the probability that the Company will be unable to collect all amounts due according to the contractual terms of the security and whether the security has been downgraded by a rating agency.  The Company’s valuation is sensitive to market conditions and management’s judgment and can change significantly based on the assumptions used.

 

The Company has two privately managed funds.  The privately managed funds cannot be redeemed at net asset value at a specific date without advance notice.  As a result, the Company has classified the investments as Level 3.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 30, 2011 AND JULY 31, 2010

 

 

 

 

NOTE 8 – FAIR VALUE MEASUREMENTS (CONTINUED):

 

The following tables summarize the change in the fair value of the Company’s financial assets measured using Level 3 inputs during the first six months of fiscal 2011 and fiscal 2010 ($ in thousands):

 

Fair Value Measurements Using Significant

Unobservable Inputs (Level 3)

Available-For-Sale

Debt Securities

Other Investments

ARS

Private Equity

Total

Beginning Balance at January 29, 2011

$

3,450

$

1,925

$

5,375

Total gains or (losses)

Included in earnings (or changes in net assets)

(16)

(16)

Ending Balance at July 30, 2011

$

3,450

$

1,909

$

5,359