1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended February 3, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
REGISTRANT: THE CATO CORPORATION
COMMISSION FILE NUMBER O-3747
State of Incorporation: Delaware I.R.S. Employer Identification
Number: 56-0484485
Address of Principal Executive Offices: Registrant's Telephone Number:
8100 Denmark Road 704/554-8510
Charlotte, North Carolina 28273-5975
SECURITIES REGISTERED PURSUANT TO SECURITIES REGISTERED PURSUANT
SECTION 12(b) OF THE ACT: TO SECTION 12(g) OF THE ACT:
NONE CLASS A COMMON STOCK
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, if disclosure of delinquent filers pursuant to Item 405
of the Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 23, 2001, there were 19,971,388 shares of Class A Common Stock and
5,364,317 shares of Convertible Class B Common Stock outstanding. The aggregate
market value of the Registrant's Class A Common Stock held by Non-affiliates of
the Registrant as of March 23, 2001 was approximately $224,738,893 based on the
last reported sale price per share on the NASDAQ National Market System on that
date.
Documents incorporated by reference:
Portions of the proxy statement dated April 25, 2001, relating to the 2001
annual meeting of shareholders are incorporated by reference into the following
part of this annual report:
Part III - Items 10, 11, 12 and 13
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THE CATO CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
----
PART I:
Item 1. Business....................................................................... Pages 2 - 8
Item 2. Properties..................................................................... Page 8
Item 3. Legal Proceedings.............................................................. Page 9
Item 4. Submission of Matters to a Vote of Security Holders............................ Page 9
PART II:
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................................ Page 10
Item 6. Selected Financial Data........................................................ Page 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................ Pages 12 - 14
Item 8. Financial Statements and Supplementary Data.................................... Page 15
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................... Page 15
PART III:
Item 10. Directors and Executive Officers of the Registrant............................. Pages 16 - 19
Item 11. Executive Compensation......................................................... Page 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................................... Page 20
Item 13. Certain Relationships and Related Transactions................................. Page 20
PART IV:
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................................... Page 21
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PART I
ITEM 1. BUSINESS:
GENERAL
The Company, founded in 1946, operated 859 women's fashion specialty
stores at February 3, 2001 under the names "Cato," "Cato Fashions," "Cato Plus"
and "It's Fashion!" in 23 states, principally in the Southeast. The Company
offers quality fashion apparel and accessories at everyday low prices in
junior/missy and plus sizes. Additionally, the Company offers clothing and
accessories for girls ages 7 - 16 in selected locations. With the objective of
offering head-to-toe dressing for its customers, the Company's stores feature a
broad assortment of apparel and accessories, including casual and dressy
sportswear, dresses, careerwear, coats, hosiery, shoes, costume jewelry,
handbags and millinery. A substantial portion of the Company's merchandise is
sold under its private labels and is produced by various vendors in accordance
with the Company's specifications. Most stores range in size from 3,000 to
6,000 square feet and are located primarily in strip shopping centers anchored
by national discounters or dominant grocery stores. The Company emphasizes
customer service and coordinated merchandise presentations in an appealing
store environment. The Company offers its own credit card and layaway plan.
Credit and layaway sales represented 18% of retail sales in fiscal 2000. See
Note 12 to the Consolidated Financial Statements, "Reportable Segment
Information" for a discussion of segment information.
BUSINESS
The Company's primary objective is to be the leading fashion
specialty retailer for fashion conscious low-to-middle income females in its
markets. Management believes the Company's success is dependent upon its
ability to differentiate its stores from department stores, mass merchandise
discount stores and competing women's specialty stores. The key elements of the
Company's business strategy are:
Merchandise Assortment. The Company's stores offer a wide
assortment of apparel and accessory items in regular and large sizes
and emphasize color, product coordination and selection.
Value Pricing. The Company offers quality merchandise that is
generally priced below comparable merchandise offered by department
stores and mall specialty apparel chains but is generally more
fashionable than merchandise offered by discount stores. The Company
has positioned itself as the everyday low price leader in its
segment.
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ITEM 1. BUSINESS: (CONTINUED)
Strip Shopping Center Locations. The Company locates its
stores principally in strip centers convenient to customers anchored
by national discounters or dominant grocery stores that attract large
numbers of potential customers.
Customer Service. Store managers and sales associates are
trained to provide prompt and courteous service and to assist
customers in merchandise selection and wardrobe coordination.
Credit and Layaway Programs. The Company offers its own
credit card and a layaway plan to make the purchase of its merchandise
more convenient.
Expansion. The Company plans to open new stores and relocate
existing stores in rural, middle and metro markets in northern,
midwestern and western adjacent states, as well as continuing to
"fill-in" existing southeastern core geography.
MERCHANDISING
Merchandising
The Company offers a broad selection of high quality and exceptional
value apparel and accessories to suit the various lifestyles of the fashion
conscious low-to-middle income female, ages 18 to 50. In addition, the Company
offers on-trend fashion in exciting colors with consistent fit and quality.
The Company's merchandise lines include dressy, career, and casual
sportswear, dresses, coats, shoes, lingerie, hosiery, costume jewelry, handbags
and millinery. Apparel and accessories for girls ages 7 - 16 are offered in
selected stores. Most of the Company's merchandise is sold under its private
labels.
The collaboration of the merchandising team with an expanded in-house
product development and direct sourcing function has enhanced merchandise
offerings delivering quality private label products at lower costs. Product
development and the direct sourcing operation provide research on emerging
fashion and color trends, technical services and direct sourcing capabilities.
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ITEM 1. BUSINESS: (CONTINUED)
As a part of its merchandising strategy, members of the Company's
merchandising staff frequently visit selected stores, monitor the merchandise
offerings of other retailers, regularly communicate with store operations
associates and frequently confer with key vendors. The Company tests most new
fashion-sensitive items in selected stores to aid it in determining their
appeal before making a substantial purchasing commitment. The Company also
takes aggressive markdowns on slow-selling merchandise and does not carry over
merchandise to the next season.
Purchasing, Allocation and Distribution
Although the Company purchases merchandise from approximately 1,500
suppliers, most of its merchandise is purchased from approximately 100 primary
vendors. In fiscal 2000, purchases from the Company's largest vendor accounted
for approximately 6% of the Company's total purchases. No other vendor
accounted for more than 3% of total purchases. The Company is not dependent on
its largest vendor or any other vendor for merchandise purchases and the loss
of any single vendor or group of vendors would not have a material adverse
effect on the Company's operating results or financial condition. A substantial
portion of the Company's merchandise is sold under its private labels and is
produced by various vendors in accordance with the Company's specifications.
The Company purchases most of its merchandise from domestic importers and
vendors, which typically minimizes the time necessary to purchase and obtain
shipments in order to enable the Company to react to merchandise trends in a
more timely fashion. Although a significant portion of the Company's
merchandise is manufactured overseas, principally in the Far East, any
economic, political or social unrest in that region is not expected to have a
material adverse effect on the Company's ability to obtain adequate supplies of
merchandise.
An important component of the Company's strategy is the allocation of
merchandise to individual stores based on an analysis of sales trends by
merchandise category, customer profiles and climatic conditions. A merchandise
control system provides current information on the sales activity of each
merchandise style in the Company's stores. Point-of-sale terminals in the
stores collect and transmit sales and inventory information to the Company's
central database, permitting timely response to sales trends on a
store-by-store basis.
All merchandise is shipped directly to the Company's distribution
center in Charlotte, North Carolina where it is inspected and allocated by the
merchandise distribution staff for shipment to individual stores. The flow of
merchandise from receipt at the distribution center to shipment to stores is
controlled by an on-line system. Shipments are made by common carrier, and each
store receives at least one shipment per week.
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ITEM 1. BUSINESS: (CONTINUED)
Advertising
The Company uses direct mail, radio and in-store advertising as its
primary advertising media. The Company uses radio advertising throughout its
trade areas. The Company's total advertising expenditures were approximately
.9% of retail sales in fiscal 2000.
STORE OPERATIONS
The Company's store operations management team consists of two
directors of stores, two territorial managers, fourteen regional managers and
eighty-nine district managers. Regional managers receive a salary plus a bonus
based on achieving targeted goals for sales, payroll expense, shrinkage control
and store profitability. District managers receive a salary plus a bonus based
on achieving targeted objectives for district sales increases and shrinkage
control. Stores are staffed with a manager, two assistant managers and
additional part-time sales associates depending on the size of the store and
seasonal personnel needs. Store managers receive a salary and all other store
personnel are paid on an hourly basis. Store managers and assistant managers
are eligible for monthly and semi-annual bonuses based on achieving targeted
goals for their store's sales increases and shrinkage control.
The Company is constantly improving its training programs to develop
associates. Nearly 80% of the store and field management are promoted from
within, allowing the Company to internally staff an expanding store base. The
Company has training programs at each level of store operations. New store
managers are trained in training stores managed by experienced associates who
have achieved superior results in meeting the Company's goals for store sales,
payroll expense and shrinkage control. The type and extent of district manager
training varies depending on whether the manager is promoted from within or
recruited from outside the Company. All district managers receive at a minimum
a one-week orientation program at the Company's corporate office.
STORE LOCATIONS
Most of the Company's stores are located in the Southeast in small to
medium-sized towns, with populations of 10,000 to 50,000 and retail trade areas
of 25,000 to 100,000. Stores range in size from 3,000 to 6,000 square feet and
average approximately 4,100 square feet.
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ITEM 1. BUSINESS: (CONTINUED)
All of the Company's stores are leased. Approximately 93% are located
in strip shopping centers, 1% in downtown locations and 6% in enclosed shopping
malls. Where lease terms are acceptable and a potential location meets the
Company's demographic and other site-selection criteria, the Company locates
stores in strip shopping centers anchored by national discounters or dominant
grocery stores. The Company's strip center locations provide ample parking and
shopping convenience for its customers.
The Company's store development activities consist of opening new
stores and relocating other existing stores to more desirable locations in the
same market area. The following table sets forth information with respect to
the Company's development activities since fiscal 1996.
STORE DEVELOPMENT
Number of Stores
Beginning of Number Number Number of Stores
Fiscal Year Year Opened Closed End of Year
----------- ---------------- ------ ------ --------------
1996................ 671 28 44 655
1997................ 655 55 17 693
1998................ 693 52 13 732
1999................ 732 83 6 809
2000................ 809 65 15 859
In Fiscal 2001 the Company plans to open approximately 85 new stores,
relocate 30 stores, close 10 stores, and remodel 25 stores.
The Company periodically reviews its store base to determine whether
any particular store should be closed based on its sales trends and
profitability. The Company intends to continue this review process to close
underperforming stores. In addition, the Company opportunistically relocates
selected stores to more desirable locations in their existing market.
CREDIT AND LAYAWAY
Credit Card Program
The Company offers its own credit card, which accounted for
approximately 14% of retail sales in fiscal 2000. The Company's net bad debt
expense in fiscal 2000 was 5.5% of credit sales.
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ITEM 1. BUSINESS: (CONTINUED)
Customers applying for the Company's credit card are approved for
credit if they have a satisfactory credit record and meet minimum income
criteria. Customers are required to make minimum monthly payments based on
their account balances. If the balance is not paid in full each month, the
Company assesses the customer a finance charge.
Layaway Plan
Under the Company's layaway plan, merchandise is set aside for
customers who agree to make periodic payments. The Company adds a nonrefundable
administrative fee to each layaway sale. If no payment is made for four weeks,
the customer is considered to have defaulted, and the merchandise is returned
to the selling floor and again offered for sale, often at a reduced price. All
payments made by customers who subsequently default on their layaway purchase
are returned to the customer upon request, less the administrative fee and a
restocking fee. In fiscal 1999, the Company changed its method of accounting
for layaway sales. This change is the result of the issuance of Staff
Accounting Bulletin No.101, "Revenue Recognition in Financial Statements" ("SAB
101"). Under the new accounting method the Company defers recognition of
layaway sales and its related fees to the accounting period when the customer
picks up layaway merchandise. Layaway sales represented approximately 4% of
retail sales in fiscal 2000.
MANAGEMENT INFORMATION SYSTEMS
The Company's systems provide daily financial and merchandising
information that is used by management to enhance the timeliness and
effectiveness of purchasing and pricing decisions. Management uses a daily
report comparing actual sales with planned sales and a weekly best seller/worst
seller report to monitor and control purchasing decisions. Weekly reports are
also produced which reflect sales, weeks of supply of inventory and other
critical data by product categories, by store and by various levels of
responsibility reporting. Purchases are made based on projected sales but can
be modified to accommodate unexpected increases or decreases in demand for a
particular item.
Sales information is projected by merchandise category and, in some
cases, is further projected and actual performance measured by stockkeeping
unit. Merchandise allocation models are used to distribute merchandise to
individual stores based upon historical sales trends, climatic differences,
customer demographic differences and targeted inventory turnover rates.
COMPETITION
The women's retail apparel industry is highly competitive. The
Company believes that the principal competitive factors in its industry include
merchandise assortment and presentation, fashion, price, store location and
customer service. The Company competes with retail chains that operate similar
women's apparel specialty stores. In addition, the Company competes with local
apparel specialty stores, mass merchandise chains, discount store chains and,
to some degree, with major department stores. To the extent that the Company
opens stores in larger cities and metropolitan areas, competition is expected
to be more intense in those markets.
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ITEM 1. BUSINESS: (CONTINUED)
REGULATION
A variety of laws affect the revolving credit program offered by the
Company. The Federal Consumer Credit Protection Act (Truth-in Lending) and
Regulation Z promulgated thereunder require written disclosure of information
relating to such financing, including the amount of the annual percentage rate
and the finance charge. The Federal Fair Credit Reporting Act also requires
certain disclosures to potential customers concerning credit information used
as a basis to deny credit. The Federal Equal Credit Opportunity Act and
Regulation B promulgated thereunder prohibit discrimination against any credit
applicant based on certain specified grounds. The Federal Trade Commission has
adopted or proposed various trade regulation rules dealing with unfair credit
and collection practices and the preservation of consumers' claims and
defenses. The Company is also subject to the provisions of the Fair Debt
Collection Practices Act, which regulates the manner in which the Company
collects payments on revolving credit accounts.
ASSOCIATES
As of February 3, 2001, the Company employed approximately 9,000
full-time and part-time associates. The Company also employs additional
part-time associates during the peak retailing seasons. The Company is not a
party to any collective bargaining agreements and considers that its associate
relations are good.
ITEM 2. PROPERTIES:
The Company's distribution center and general offices are located in
a Company-owned building of approximately 492,000 square feet located on a
15-acre tract in Charlotte, North Carolina. The Company's automated merchandise
handling and distribution activities occupy approximately 418,000 square feet
of this building and its general offices and corporate training center are
located in the remaining 74,000 square feet. In Fiscal 2000, the Company
purchased a building of approximately 24,000 square feet located on a 2-acre
tract adjacent to the Company's existing location. The new building is used for
receiving and staging shipments prior to processing.
Substantially all of the Company's retail stores are leased from
unaffiliated parties. Most of the leases have an initial term of five years,
with two to three five-year renewal options. Substantially all of the leases
provide for fixed rentals plus a percentage of sales in excess of a specified
volume.
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ITEM 3. LEGAL PROCEEDINGS:
There are no material pending legal proceedings to which the
registrant or its subsidiaries is a party, or to which any of their property is
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
MARKET & DIVIDEND INFORMATION
The Company's Class A Common Stock trades in the over-the-counter
market under the NASDAQ National Market System symbol CACOA. Below is the
market range and dividend information for the four quarters of fiscal 2000 and
1999.
----------------------------------------------------------------------------------------------
Price
2000 HIGH LOW DIVIDEND
-------------- ------- -------- --------
First quarter $12 1/4 $ 9 3/16 $.10
Second quarter 12 1/2 10 1/64 .10
Third quarter 12 7/8 10 .10
Fourth quarter 18 11 .125
Price
1999 HIGH LOW DIVIDEND
-------------- --------- -------- --------
First quarter $11 7/16 $ 7 9/16 $.055
Second quarter 13 15/16 10 1/2 .075
Third quarter 15 9/16 10 7/8 .075
Fourth quarter 13 3/8 10 1/4 .075
----------------------------------------------------------------------------------------------
As of March 23, 2001 the approximate number of holders of the
Company's Class A Common stock was 3,600 and there were 12 record holders of
the Company's Class B Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA Page 11
FISCAL YEAR 2000 1999 1998 1997 1996
(Dollars in thousands, except per share data and selected operating data)
STATEMENT OF OPERATIONS DATA:
Retail sales $648,482 $585,085 $524,381 $496,851 $ 477,011
Other income 20,653 19,948 19,283 15,597 14,498
Total revenues 669,135 605,033 543,664 512,448 491,509
Cost of goods sold 445,407 403,655 371,005 354,627 344,919
Gross margin percent 31.3% 31.0% 29.2% 28.6% 27.7%
Selling, general and administrative 154,150 140,741 128,207 124,676 121,837
Selling, general and administrative percent
of retail sales 23.8% 24.0% 24.4% 25.1% 25.5%
Depreciation 9,492 8,639 7,638 7,713 8,330
Interest 44 23 19 25 25
Closed store expense -- -- -- -- 5,500
Income before income taxes and cumulative
effect of accounting change 60,042 51,975 36,795 25,407 10,898
Income tax expense 21,015 18,191 12,878 8,006 3,869
Income before cumulative effect of accounting change 39,027 33,784 23,917 17,401 7,029
Cumulative effect of accounting change, net of taxes -- 147 -- -- --
Net income $ 39,027 $ 33,931 $ 23,917 $ 17,401 $ 7,029
Basic earnings per share $ 1.56 $ 1.28 $ .87 $ .62 $ .25
Diluted earnings per share $ 1.53 $ 1.26 $ .85 $ .62 $ .25
Cash dividends paid per share $ .425 $ .28 $ .19 $ .16 $ .16
SELECTED OPERATING DATA:
Stores open at end of year 859 809 732 693 655
Average sales per store $781,000 $756,000 $740,000 $748,000 $ 710,000
Average sales per square foot of selling space $ 187 $ 177 $ 169 $ 163 $ 153
Comparable store sales increase (decrease) 3% 4% 2% 4% (2)%
BALANCE SHEET DATA:
Cash and investments $ 83,112 $ 87,275 $ 86,209 $ 69,487 $ 50,105
Working capital 125,724 124,988 124,024 113,327 105,373
Total assets 310,742 285,789 258,513 241,437 218,243
Total stockholders' equity $207,757 $188,780 $172,234 $157,516 $ 151,903
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OPERATIONS:
RESULTS OF OPERATIONS
The table below sets forth certain financial data of the Company expressed as a
percentage of retail sales for the years indicated:
FISCAL YEAR ENDED FEBRUARY 3, JANUARY 29, JANUARY 30,
2001 2000 1999
Retail sales 100.0% 100.0% 100.0%
Other income 3.2 3.4 3.7
Total revenues 103.2 103.4 103.7
Cost of goods sold 68.7 69.0 70.8
Selling, general and
administrative 23.8 24.0 24.4
Depreciation 1.4 1.5 1.5
Selling, general,
administrative and
depreciation 25.2 25.5 25.9
Income before
income taxes and
cumulative effect of
accounting change 9.3 8.9 7.0
Net income 6.0% 5.8% 4.6%
FISCAL 2000 COMPARED TO FISCAL 1999
Retail sales increased by 11% to $648.5 million in fiscal 2000 from $585.1
million in fiscal 1999. The fiscal year ended February 3, 2001 contained 53
weeks versus 52 weeks in fiscal year ended January 29, 2000. On a comparable 53
week basis, total sales for the fiscal year ended February 3, 2001 increased 9%,
and comparable store sales increased 3% from the prior year. Total revenues,
comprised of retail sales and other income (principally finance charges and late
fees on customer accounts receivable, interest income and layaway fees),
increased by 11% to $669.1 million in fiscal 2000 from $605.0 million in fiscal
1999. The Company operated 859 stores at February 3, 2001 compared to 809 stores
operated at January 29, 2000.
The increase in retail sales in fiscal 2000 resulted from the Company's
continuation of an everyday low pricing strategy, improved merchandise
offerings, and an increase in store development activity. In fiscal 2000, the
Company opened 65 new stores, relocated 33 stores, closed 15 stores and
remodeled 105 stores.
Other income in fiscal 2000 increased $.7 million or 4% over fiscal 1999. The
increase resulted primarily from increased earnings from finance charges and
late fee income.
Cost of goods sold was $445.4 million, or 68.7% of retail sales, in fiscal 2000
compared to $403.7 million, or 69.0% of retail sales, in fiscal 1999. The
decrease in cost of goods sold as a percent of retail sales resulted primarily
by maintaining timely and aggressive markdowns on slow moving merchandise and
improving inventory flow. Total gross margin dollars (retail sales less cost of
goods sold) increased by 12% to $203.1 million in fiscal 2000 from $181.4
million in fiscal 1999.
Selling, general and administrative expenses (SG&A) were $154.2 million in
fiscal 2000 compared to $140.7 million in fiscal 1999, an increase of 10%. As a
percent of retail sales, SG&A was 23.8% compared to 24.0% in the prior year. The
overall increase in SG&A resulted primarily from increased selling-related
expenses and increased infra-structure expenses attributable to the Company's
store development activities.
Depreciation expense was $9.5 million in fiscal 2000 compared to $8.6 million in
fiscal 1999. The 10% increase in fiscal 2000 resulted primarily from the
Company's store development.
FISCAL 1999 COMPARED TO FISCAL 1998
Retail sales increased by 12% to $585.1 million in fiscal 1999 from $524.4
million in fiscal 1998. Comparable store sales increased 4% from the prior year.
Total revenues increased by 11% to $605.0 million in fiscal 1999 from $543.7
million in fiscal 1998. The Company operated 809 stores at January 29, 2000
compared to 732 stores operated at January 30, 1999.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (CONTINUED)
The increase in retail sales in fiscal 1999 resulted from the Company's adoption
of an everyday low pricing strategy, improved merchandise offerings, and an
increase in store development activity. In fiscal 1999, the Company increased
its number of stores 11% by opening 83 new stores, relocating 21 stores while
closing 6 existing stores.
Other income in fiscal 1999 increased $.7 million or 3% over fiscal 1998. The
increase resulted primarily from increased earnings from higher finance charges,
late fee income and income from cash equivalents and short-term investments
partially offset by decreased layaway service charges.
Cost of goods sold was $403.7 million, or 69.0% of retail sales, in fiscal 1999
compared to $371.0 million, or 70.8% of retail sales, in fiscal 1998. The
decrease in cost of goods sold as a percent of retail sales resulted primarily
by maintaining timely and aggressive markdowns on slow moving merchandise,
eliminating unprofitable promotions and improving inventory flow. Total gross
margin dollars increased by 18% to $181.4 million in fiscal 1999 from $153.4
million in fiscal 1998.
SG&A expenses were $140.7 million in fiscal 1999 compared to $128.2 million in
fiscal 1998, an increase of 10%. As a percent of retail sales, SG&A was 24.0%
compared to 24.4% in the prior year. The overall increase in SG&A resulted
primarily from increased selling-related expenses and increased infrastructure
expenses attributable to the Company's store development activities.
Depreciation expense was $8.6 million in fiscal 1999 compared to $7.6 million in
fiscal 1998. The 13% increase in fiscal 1999 resulted primarily from the
Company's store development.
Effective for fiscal 1999, the Company changed its policy for recognizing
revenues related to layaway sales to comply with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB 101). Revenues for layaway sales and related fees are
recognized when the layaway merchandise is delivered to the customer.
Previously, revenues were recognized at the time of the sale. The Company
accounted for the adoption of SAB 101 as a change in accounting principle and
recorded a cumulative effect in the first quarter of fiscal 1999. The cumulative
effect of this accounting change resulted in an increase in net income of
$147,000, net of income tax of $79,000, or $.01 per share. This increase was
driven by the release of the Company's layaway reserve, which slightly exceeded
the associated margin on previously recognized layaway sales. The proforma
effect of retroactive application of the accounting change on fiscal 1998 is
immaterial to the financial statements.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK
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 over the next twelve
months.
At February 3, 2001, the Company had working capital of $125.7 million compared
to $125.0 million at January 29, 2000. Cash provided by operating activities was
$44.1 million in fiscal 2000 compared to $44.5 million in fiscal 1999. The
decrease in cash provided by operating activities in fiscal 2000 resulted
primarily from an increase in net income, depreciation, provision for doubtful
accounts, deferred income taxes, loss on disposal of property and equipment
offset by an increase in accounts receivable, inventories and other assets and a
decrease in accounts payable and other liabilities. At February 3, 2001, the
Company had $83.1 million in cash, cash equivalents and short-term investments,
compared to $87.3 million at January 29, 2000.
The Company had $1.3 million invested in privately managed investment funds at
February 3, 2001, which are reported under other assets of the consolidated
balance sheets.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (CONTINUED)
At February 3, 2001, the Company had an unsecured revolving credit agreement
which provided 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 maintenance of specific financial
ratios with which the Company was in compliance. There were no borrowings
outstanding under the agreement during the fiscal year ended February 3, 2001 or
January 29, 2000.
The Company has a master lease agreement with a lessor to lease $19.5 million of
store fixtures, point-of-sale devices and warehouse equipment. The operating
leases are for a term of seven years but may be cancelled annually upon proper
notice to the lessor. Upon notice of cancellation, the Company would be
obligated to purchase the equipment at a prescribed termination value from the
lessor. If the Company had cancelled the leases at February 3, 2001, the
purchase price for the equipment would have been approximately $5,929,000.
Expenditures for property and equipment totaled $27.2 million, $24.0 million and
$13.5 million in fiscal 2000, 1999 and 1998, respectively. The expenditures for
fiscal 2000 were primarily for store development, store remodels and investments
in new technology for an enterprise-wide information system for merchandising,
distribution and finance. In fiscal 2001, the Company is planning to invest
approximately $31 million for capital expenditures. This includes expenditures
to open 85 new stores, relocate 30 stores and close 10 stores. In addition, the
Company plans to remodel 25 stores and has planned for investments in technology
including an enterprise-wide information system scheduled to be implemented over
the next 12 to 24 months.
During 2000, the Company repurchased 1,468,800 shares of Class A Common Stock
for $15.4 million, or an average price of $10.52 per share. Over the course of
fiscal 2000, the Company increased its quarterly dividend from $.075 per share
to $.125 per share. In February 2000, the Board of Directors increased the
quarterly dividend by 33% from $.075 per share to $.10 per share. In December
2000, the Board of Directors further increased the quarterly dividend by 25%
from $.10 per share to $.125 per share.
The Company does not use derivative financial instruments in its investment
portfolio. At February 3, 2001, the Company's investment portfolio was 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 income.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". In June 2000, the FASB issued SFAS No. 138,
which amended certain provisions of SFAS 133. The Company adopted SFAS 133 and
the corresponding amendments under SFAS 138 on February 4, 2001. Management
believes that the adoption of this statement has no impact on the Company's
consolidated results of operations and financial position.
The Annual Report 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 Annual
Report 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.
16
Page 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The response to this Item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
None.
17
Page 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The directors and executive officers of the Company and their ages as
of March 31, 2001 are as follows:
NAME AGE POSITION
---- --- --------
Wayland H. Cato, Jr.(1)................................. 78 Chairman of the Board
John P. Derham Cato(1).................................. 50 President, Vice Chairman of the Board
and Chief Executive Officer
Edgar T. Cato(1)........................................ 76 Former Vice Chairman of the Board,
Co-Founder and Director
Michael O. Moore........................................ 50 Executive Vice President,
Chief Financial Officer and Secretary
Howard A. Severson...................................... 53 Executive Vice President, Chief Real Estate and
Store Development Officer, Assistant Secretary
and Director
B. Allen Weinstein...................................... 54 Executive Vice President, Chief Merchandising Officer of
the Cato Division
David P. Kempert........................................ 51 Executive Vice President, Chief Store Operations
Officer of the Cato Division
C. David Birdwell....................................... 61 Executive Vice President, President and General
Manager of the It's Fashion! Division
Robert C. Brummer....................................... 56 Senior Vice President, Human Resources and
Assistant Secretary
Clarice Cato Goodyear................................... 54 Special Assistant to the Chairman and the President,
Assistant Secretary and Director
Thomas E. Cato.......................................... 46 Vice President, Divisional Merchandise Manager and Director
Robert W. Bradshaw, Jr.(1).............................. 67 Director
George S. Currin(1)(3).................................. 64 Director
Paul Fulton(1)(2)....................................... 66 Director
Grant L. Hamrick(1)(2)(3)............................... 62 Director
James H. Shaw(2)........................................ 72 Director
A.F. (Pete) Sloan(1)(2)(3).............................. 71 Director
(1) Member of the Executive/Finance Committee
(2) Member of Compensation Committees
(3) Member of Audit Committee
18
Page 17
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: (CONTINUED)
Wayland H. Cato, Jr. is Chairman of the Board and has been a director
of the Company since 1946. From 1991 to May 1999, he served as Chairman of the
Board and Chief Executive Officer. From 1970 until 1991, he served as the
Chairman of the Board, President and Chief Executive Officer. From 1960 until
1970, he served as President and Chief Executive Officer of the Company.
John P. Derham Cato has been employed as an officer of the Company
since 1981 and has been a director of the Company since 1986. Since May 1999,
Mr. John Cato has served as President, Vice Chairman of the Board and Chief
Executive Officer. From June 1997 to May 1999, he served as President, Vice
Chairman of the Board and Chief Operating Officer. From August 1996 to June
1997, he served as Vice Chairman of the Board and Chief Operating Officer. From
1992 to August 1996, he served as Executive Vice President and as President and
General Manager of the It's Fashion! Division. Mr. John Cato is a son of Mr.
Wayland H. Cato, Jr.
Edgar T. Cato is the Former Vice Chairman of the Board and Co-Founder
of the Company, and has been a director of the Company since 1946. Mr. Edgar T.
Cato is the brother of Mr. Wayland H. Cato, Jr.
Michael O. Moore joined the Company as Executive Vice President, Chief
Financial Officer and Secretary in July 1998. From 1997 to 1998, he was Vice
President - Chief Financial Officer of The Party Experience, a specialty
retailer of party goods. From 1994 to 1997, he was employed by David's Bridal,
a specialty retailer of bridalwear and related merchandise, as Executive Vice
President - Chief Financial Officer. From 1984 to 1994, he was employed by
Bloomingdales where his most recent position was Senior Vice President - Chief
Financial Officer.
Howard A. Severson has been employed by the Company since 1985 and has
served as a director of the Company since 1995. Since January 1993, he has
served as Executive Vice President, Chief Real Estate and Store Development
Officer, Assistant Secretary and Director. From August 1989 through January
1993, Mr. Severson served as Senior Vice President - Chief Real Estate Officer.
B. Allen Weinstein joined the Company as Executive Vice President,
Chief Merchandising Officer of the Cato Division in August 1997. From 1995 to
1997, he was Senior Vice President - Merchandising of Catherines Stores
Corporation. From 1981 to 1995, he served as Senior Vice President of
Merchandising for Beall's, Inc.
David P. Kempert joined the Company in August 1989. He currently
serves as Executive Vice President, Chief Store Operations Officer of the Cato
Division. From 1982 until 1989, he was employed by The Gap Stores, an apparel
specialty chain, where his most recent position was Zone Vice President of the
Northeast Region.
C. David Birdwell joined the Company as Executive Vice President,
President and General Manager of the It's Fashion! Division in October 1996.
From 1994 to 1996, he was employed as President/General Merchandise Manager of
Allied Stores, a family apparel chain headquartered in Savannah, Georgia. In
1993, he was Executive Vice President/General Merchandise Manager of Ambers,
Inc., based in Dallas, Texas. From 1989 to 1992, he was employed as a Chartered
Financial Consultant with Jefferson Pilot, based in Greensboro, North Carolina.
From 1985 to
19
Page 18
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: (CONTINUED)
1989, he was President/CEO of Maxway Stores, a discount chain headquartered in
Sanford, North Carolina.
Robert C. Brummer joined the Company as Senior Vice President, Human
Resources and Assistant Secretary in January 2001. From 1999 through 2000, he
was employed by Sleepy's, a beddings specialty retailer as Vice President,
Human Resources and Payroll. From 1997 through 1998, he was Vice President,
Human Resources and Loss Prevention for The Party Experience, a party supplies
specialty retailer. From 1995 until 1997, he was Vice President, Human
Resources and Loss Prevention for No Body Beats The Wiz, an electronics
specialty store chain.
Clarice Cato Goodyear has been employed by the Company since 1975 and
has served as a director and officer of the Company since 1979. Since July
1993, she has served as Special Assistant to the Chairman and the President and
as Assistant Secretary. From March 1987 through July 1993, Ms. Goodyear held
senior administrative, operational services and human resources positions in
the Company; she served as Executive Vice President, Chief Administrative
Officer and Assistant Secretary from May 1992 through July 1993. Ms. Goodyear
is a daughter of Mr. Wayland H. Cato, Jr.
Thomas E. Cato has been employed by the Company since 1977, has served
as an officer since 1986 and has been a director of the Company since 1993.
Since February 1987, he has served as Vice President, Divisional Merchandise
Manager. Mr. Thomas Cato is a son of Mr. Wayland H. Cato, Jr.
Robert W. Bradshaw, Jr. has been a director of the Company since 1994.
Since 1961, he has been engaged in the private practice of law with Robinson,
Bradshaw & Hinson, P.A. and currently serves of counsel to the firm.
George S. Currin has been a director of the Company since 1973. Since
1989, he has served as Chairman and Managing Director of Fourth Stockton
Company LLC and Chairman of Currin-Patterson Properties LLC, both privately
held real estate investment companies.
Paul Fulton has been a director of the Company since 1994. Since March
2000, he has served as Chairman of the Board of Directors of Bassett Furniture
Industries, Inc. From July 1997 to March 2000, he served as Chairman and Chief
Executive Officer of Bassett Furniture Industries, Inc. From January 1994 until
1997, Mr. Fulton served as Dean of the Kenan-Flagler Business School of the
University of North Carolina at Chapel Hill. From July 1988 to December 1993,
Mr. Fulton served as President of Sara Lee Corporation. Mr. Fulton is currently
a director of Sonoco Products, Bank of America Corporation, Lowe's Companies,
Inc., Bassett Furniture Industries, Inc., and Coach, Inc.
Grant L. Hamrick has been a director of the Company since 1994. Mr.
Hamrick was Senior Vice President and Chief Financial Officer for American City
Business Journals, Inc. from 1989 until his retirement in 1996. From 1961 to
1985, Mr. Hamrick was employed by the public accounting firm Price Waterhouse
and served as Managing Partner of the Charlotte, North Carolina Office.
20
Page 19
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: (CONTINUED)
James H. Shaw has been a director of the Company since 1989. Mr. Shaw
was Chairman of Consolidated Ivey's, a regional department store chain, from
1988 until his retirement in 1989, Chairman and Chief Executive Officer of J.B.
Ivey & Company from 1986 to 1988 and Chairman and Chief Executive Officer of
Ivey's Carolinas from 1983 to 1986.
A.F. (Pete) Sloan has been a director of the Company since 1994. Mr.
Sloan is retired Chairman and Chief Executive Officer of Lance, Inc. where he
was employed from 1955 until his retirement in 1990.
21
Page 20
ITEM 11. EXECUTIVE COMPENSATION:
Incorporated by reference to Registrant's proxy statement for 2001
annual stockholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
Incorporated by reference to Registrant's proxy statement for 2001
annual stockholders' meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Incorporated by reference to Registrant's proxy statement for 2001
annual stockholders' meeting.
22
Page 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) 1. & 2. LIST OF FINANCIAL STATEMENTS AND SCHEDULE
The response to this portion of Item 14 is submitted as a separate
section of this report.
(a) 3. LIST OF EXHIBITS
See Exhibit Index at page 40 of this annual report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended February 3,
2001.
23
Page 22
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(A), (1) AND (2), (C) AND (D)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED FEBRUARY 3, 2001
THE CATO CORPORATION
CHARLOTTE, NORTH CAROLINA
24
Page 23
ITEM 14(A) 1. AND 2. LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE:
THE CATO CORPORATION
The following consolidated financial statements of The Cato Corporation are
included in Item 8:
Independent Auditors' Report.................................................Page 24
Consolidated Statements of Income............................................Page 25
Consolidated Balance Sheets..................................................Page 26
Consolidated Statements of Cash Flows Page ..................................Page 27
Consolidated Statements of Stockholders' Equity..............................Page 28
Notes to Consolidated Financial Statements...................................Pages 29 - 37
The following consolidated financial statement schedule of the Cato Corporation
is included in Item 14(d):
SCHEDULE II - Valuation and qualifying accounts........................................Page 38
25
Page 24
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
of The Cato Corporation
We have audited the accompanying consolidated balance sheets of The Cato
Corporation and subsidiaries (the Company) as of February 3, 2001 and
January 29, 2000, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended February 3, 2001. Our audits also included the financial statement
schedule listed in the index at Item 14(A). These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at February 3, 2001 and
January 29, 2000, and the results of its operations and its cash flows for each
of the three years in the period ended February 3, 2001, in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth herein.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
March 16, 2001
26
Page 25
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED FEBRUARY 3, JANUARY 29, JANUARY 30,
2001 2000 1999
(Dollars in thousands, except per share data)
REVENUES
Retail sales $ 648,482 $ 585,085 $ 524,381
Other income (principally finance, late and layaway charges) 20,653 19,948 19,283
-----------------------------------------------------
Total revenues 669,135 605,033 543,664
-----------------------------------------------------
COSTS AND EXPENSES
Cost of goods sold 445,407 403,655 371,005
Selling, general and administrative 154,150 140,741 128,207
Depreciation 9,492 8,639 7,638
Interest 44 23 19
-----------------------------------------------------
Total operating expenses 609,093 553,058 506,869
-----------------------------------------------------
Income before income taxes and cumulative effect of accounting change 60,042 51,975 36,795
Income tax expense 21,015 18,191 12,878
-----------------------------------------------------
Income before cumulative effect of accounting change $ 39,027 $ 33,784 $ 23,917
Cumulative effect of accounting change, net of tax ($79) -- 147 --
-----------------------------------------------------
Net income $ 39,027 $ 33,931 $ 23,917
=====================================================
Basic earnings per share $ 1.56 $ 1.28 $ .87
=====================================================
Basic weighted average shares 24,988,844 26,486,407 27,522,582
=====================================================
Diluted earnings per share $ 1.53 $ 1.26 $ .85
=====================================================
Diluted weighted average shares 25,465,232 26,953,948 28,181,585
=====================================================
Dividends per share $ .425 $ .28 $ .19
=====================================================
See notes to consolidated financial statements.
27
Page 26
THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
FEBRUARY 3, JANUARY 29,
2001 2000
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 25,201 $ 30,389
Short-term investments 57,911 56,886
Accounts receivable, net of allowance for doubtful accounts of
$5,422 at February 3, 2001 and $5,101 at January 29, 2000 46,972 45,458
Merchandise inventories 79,161 69,497
Deferred income taxes 1,579 4,093
Prepaid expenses 4,665 2,494
----------------------------
Total Current Assets 215,489 208,817
Property and equipment - net 85,819 69,338
Other assets 9,434 7,634
----------------------------
Total Assets $ 310,742 $ 285,789
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 59,681 $ 54,707
Accrued expenses 24,378 24,392
Income taxes 5,706 4,730
----------------------------
Total Current Liabilities 89,765 83,829
Deferred income taxes 5,386 5,806
Other noncurrent liabilities (primarily deferred rent) 7,834 7,374
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;
24,643,420 and 24,173,480 shares issued at February 3, 2001 and January 29, 2000, respectively 821 805
Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized;
5,364,317 shares issued at February 3, 2001 and January 29, 2000 179 179
Additional paid-in capital 76,778 71,974
Retained earnings 175,275 146,881
Accumulated other comprehensive losses (884) (1,801)
Unearned compensation - restricted stock awards (689) (984)
----------------------------
251,480 217,054
Less Class A common stock in treasury, at cost (4,759,148 and 3,290,348 shares at
February 3, 2001 and January 29, 2000, respectively) (43,723) (28,274)
----------------------------
Total Stockholders' Equity 207,757 188,780
----------------------------
Total Liabilities and Stockholders' Equity $ 310,742 $ 285,789
============================
See notes to consolidated financial statements.
28
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THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED FEBRUARY 3, JANUARY 29, JANUARY 30,
2001 2000 1999
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 39,027 $ 33,931 $ 23,917
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 9,492 8,639 7,638
Amortization of investment premiums 126 187 123
Provision for doubtful accounts 5,292 4,850 4,081
Deferred income taxes 1,600 175 38
Compensation expense related to restricted stock awards 295 196 --
Loss on disposal of property and equipment 1,257 727 942
Changes in operating assets and liabilities which provided (used) cash:
Accounts receivable (6,806) (5,772) (1,431)
Merchandise inventories (9,664) (8,385) 3,114
Other assets (3,971) (1,584) (765)
Accrued income taxes 2,025 4,712 (463)
Accounts payable and other liabilities 5,420 6,845 3,705
-------------------------------------------
Net cash provided by operating activities 44,093 44,521 40,899
-------------------------------------------
INVESTING ACTIVITIES
Expenditures for property and equipment (27,230) (23,964) (13,519)
Purchases of short-term investments (11,906) (22,544) (24,624)
Sales of short-term investments 12,166 4,496 10,717
-------------------------------------------
Net cash used in investing activities (26,970) (42,012) (27,426)
-------------------------------------------
FINANCING ACTIVITIES
Dividends paid (10,633) (7,416) (5,204)
Purchases of treasury stock (15,449) (9,572) (10,112)
Proceeds from employee stock purchase plan 448 447 336
Proceeds from stock options exercised 3,323 353 3,931
-------------------------------------------
Net cash used in financing activities (22,311) (16,188) (11,049)
-------------------------------------------
Net increase (decrease) in cash and cash equivalents (5,188) (13,679) 2,424
Cash and cash equivalents at beginning of year 30,389 44,068 41,644
-------------------------------------------
Cash and cash equivalents at end of year $ 25,201 $ 30,389 $ 44,068
===========================================
See notes to consolidated financial statements.
29
Page 28
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNEARNED
COMPEN-
CONVERTIBLE ACCUMULATED SATION
CLASS A CLASS B ADDITIONAL OTHER RESTRICTED TOTAL
COMMON COMMON PAID-IN RETAINED COMPREHENSIVE STOCK TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME (LOSS) AWARDS STOCK EQUITY
(Dollars in thousands)
BALANCE -- JANUARY 31, 1998 $783 $ 176 $ 64,187 $101,653 $ (116) $ $ (9,167) $157,516
* Comprehensive income:
Net income 23,917 23,917
Unrealized gains on available-for-sale
securities, net of deferred income
taxes of $174 340 340
Dividends paid ($.19 per share) (5,204) (5,204)
Class A common stock sold through employee
stock purchase plan -- 37,122 shares 1 335 336
Class A common stock sold through stock
option plans -- 530,750 shares 18 3,913 3,931
Income tax benefit from stock options exercised 1,381 1,381
Purchase of treasury shares -- 1,006,500 shares (10,112) (10,112)
Contribution of treasury stock to Employee Stock
Purchase Plan - 10,000 shares 62 67 129
------------------------------------------------------------------------------------
BALANCE -- JANUARY 30, 1999 802 176 69,878 120,366 224 (19,212) 172,234
* Comprehensive income:
Net income 33,931 33,931
Unrealized losses on available-for-sale
securities, net of deferred income tax
benefit of $1,091 (2,025) (2,025)
Dividends paid ($.28 per share) (7,416) (7,416)
Class A common stock sold through employee
stock purchase plan -- 53,811 shares 2 445 447
Class A common stock sold through stock
option plans -- 49,150 shares 1 352 353
Income tax benefit from stock options exercised 100 100
Purchase of treasury shares -- 985,400 shares (9,572) (9,572)
Contribution of treasury stock to Employee Stock
Purchase Plan -- 63,052 shares 22 510 532
Unearned compensation - restricted stock awards 3 1,177 (984) 196
------------------------------------------------------------------------------------
BALANCE -- JANUARY 29, 2000 805 179 71,974 146,881 (1,801) (984) (28,274) 188,780
* Comprehensive income:
Net income 39,027 39,027
Unrealized gains on available-for-sale
securities, net of deferred income
taxes of $494 917 917
Dividends paid ($.425 per share) (10,633) (10,633)
Class A common stock sold through employee
stock purchase plan -- 44,590 shares 2 446 448
Class A common stock sold through stock
option plans -- 425,350 shares 14 3,309 3,323
Income tax benefit from stock options exercised 1,049 1,049
Purchase of treasury shares -- 1,468,800 shares (15,449) (15,449)
Unearned compensation - restricted stock awards 295 295
------------------------------------------------------------------------------------
BALANCE -- FEBRUARY 3, 2001 $821 $ 179 $ 76,778 $175,275 $ (884) $ (689) $(43,723) $207,757
====================================================================================
See notes to consolidated financial statements.
* Total comprehensive income for the years ended February 3, 2001, January 29,
2000 and January 30, 1999 was $39,944, $31,906 and $24,257, respectively.
30
Page 29
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation: The consolidated financial statements include the
accounts of The Cato Corporation and its wholly-owned subsidiaries ("the
Company"). All significant intercompany accounts and transactions have been
eliminated.
Description of Business and Fiscal Year: The Company has two business segments
-- the operation of women's fashion specialty stores and a credit card division.
The apparel specialty stores operate under the names "Cato", "Cato Fashions",
"Cato Plus" and "It's Fashion!" and are located primarily in strip shopping
centers in the Southeast. The Company's fiscal year ends on the Saturday nearest
January 31. Fiscal year 2000 included 53 weeks, and fiscal years 1999 and 1998
each included 52 weeks.
Use of Estimates: The preparation of the Company's financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant accounting estimates reflected in 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.
Cash and Cash Equivalents and Short-Term Investments: Cash equivalents consist
of highly liquid investments with original maturities of three months or less.
Investments with original maturities beyond three months are classified as
short-term investments. The fair values of short-term investments are based on
quoted market prices.
The Company's short-term investments are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses, net of income taxes, reported as a component of accumulated other
comprehensive income. The cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity. The amortization of
premiums, accretion of discounts and realized gains and losses are included in
other income.
Concentration of Credit Risk: Financial instruments that potentially subject the
Company to a concentration of credit risk principally consist of cash
equivalents and accounts receivable. The Company places its cash equivalents
with high credit qualified institutions and, by practice, limits the amount of
credit exposure to any one institution. Concentrations of credit risks with
respect to accounts receivable are limited due to the dispersion across
different geographies of the Company's customer base.
Supplemental Cash Flow Information: Income tax payments, net of refunds
received, for the fiscal years ended February 3, 2001, January 29, 2000 and
January 30, 1999 were $17,435,000, $13,895,000 and $13,394,000, respectively.
Inventories: Merchandise inventories are stated at the lower of cost (first-in,
first-out method) or market as determined by the retail method.
Property and Equipment: Property and equipment are recorded at cost. Maintenance
and repairs are charged to operations as incurred; renewals and betterments are
capitalized. Depreciation is provided on the straight-line method over the
estimated useful lives of the related assets, as follows:
CLASSIFICATION ESTIMATED USEFUL LIVES
Land improvements 10 years
Buildings 30-40 years
Leasehold improvements 5-10 years
Fixtures and equipment 3-10 years
Retail Sales: Revenues from retail sales, net of returns, are recognized upon
delivery of the merchandise to the customer and exclude sales taxes.
Advertising: Advertising costs are expensed in the period in which they are
incurred. Advertising expense was $5,812,000, $5,109,000 and $5,755,000 for the
fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999,
respectively.
31
Page 30
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share: Basic earnings per share excludes dilution of stock options
and is computed by dividing net earnings by the weighted-average number of Class
A and Class B common shares outstanding for the respective periods. The
weighted-average number of shares used in the basic earnings per share
computations was 24,988,844, 26,486,407 and 27,522,582 for the fiscal years
ended February 3, 2001, January 29, 2000 and January 30, 1999, respectively. The
weighted-average number of shares representing the dilutive effect of stock
options was 476,388, 467,541 and 659,003 for the fiscal years ended February 3,
2001, January 29, 2000 and January 30, 1999, respectively. The weighted-average
number of shares used in the diluted earnings per share computations was
25,465,232, 26,953,948 and 28,181,585 for the fiscal years ended February 3,
2001, January 29, 2000 and January 30, 1999, respectively.
Income Taxes: The Company files a consolidated federal income tax return. Income
taxes are provided based on the asset and liability method of accounting,
whereby deferred income taxes are provided for temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities.
Store Opening and Closing Costs: Costs relating to the opening of new stores or
the relocating or expanding of existing stores are expensed as incurred. The
Company evaluates all long-lived assets for impairment. Impairment losses are
recognized when expected future cash flows from the use of the assets are less
than the assets' carrying values.
Closed Store Lease Obligations: At the time stores are closed, provision is made
for the rentals required to be paid over the remaining lease terms. Rentals due
the Company under non-cancelable subleases are offset against the related
obligations in the year the sublease is signed. There is no offset for assumed
sublease revenues.
Insurance: The Company is self-insured with respect to employee health, workers
compensation and general liability claims. Employee health claims are funded
through a VEBA trust to which the Company makes periodic contributions. The
Company has stop-loss insurance coverage for individual claims in excess of
$250,000.
Fair Value of Financial Instruments: The Company's carrying values of financial
instruments, such as cash and cash equivalents, approximate their fair values
due to their short terms to maturity and/or their variable interest rates.
Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities". In June
2000, the FASB issued SFAS No. 138, which amended certain provisions of SFAS
133. The Company adopted SFAS 133 and the corresponding amendments under SFAS
138 on February 4, 2001. Management believes that the adoption of this statement
has no impact on the Company's consolidated results of operations and financial
position.
Effective for fiscal 1999, the Company changed its policy for recognizing
revenues related to layaway sales to comply with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB 101). Revenues for layaway sales and related fees are
recognized when the layaway merchandise is delivered to the customer.
Previously, revenues were recognized at the time of the sale. The Company
accounted for the adoption of SAB 101 as a change in accounting principle and
recorded a cumulative effect in the first quarter of fiscal 1999. The cumulative
effect of this accounting change resulted in an increase in net income of
$147,000, net of income tax of $79,000, or $.01 per share. This increase was
driven by the release of the Company's layaway reserve, which slightly exceeded
the associated margin on previously recognized layaway sales. The proforma
effect of retroactive application of the accounting change on fiscal 1998 is
immaterial to the financial statements.
Reclassifications: Certain reclassifications have been made to the consolidated
financial statements for prior fiscal years to conform with presentation for
fiscal 2000.
32
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THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SHORT-TERM INVESTMENTS:
Short-term investments at February 3, 2001 include the following (in thousands):
UNREALIZED ESTIMATED
SECURITY TYPE COST (LOSSES) FAIR VALUE
Obligations of federal,
state and political
subdivisions $59,271 $ (1,360) $57,911
===================================
Short-term investments at January 29, 2000 include the following (in thousands):
UNREALIZED ESTIMATED
SECURITY TYPE COST (LOSSES) FAIR VALUE
Obligations of federal,
state and political
subdivisions $59,657 $ (2,771) $56,886
===========================================
The accumulated unrealized losses at February 3, 2001 of ($884,000), net of an
income tax benefit of $476,000, and the accumulated unrealized losses at January
29, 2000 of ($1,801,000), net of an income tax benefit of $970,000, are
reflected in other comprehensive income.
The amortized cost and estimated fair value of debt securities at February 3,
2001, by contractual maturity, are shown below (in thousands):
ESTIMATED
SECURITY TYPE COST FAIR VALUE
Due in one year or less $ 9,594 $ 9,520
Due in one year through three years 49,677 48,391
-----------------------
Total $ 59,271 $ 57,911
-----------------------
3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following (in thousands):
FEBRUARY 3, JANUARY 29,
2001 2000
Customer accounts - principally
deferred payment accounts $ 48,429 $ 47,702
Miscellaneous trade receivables 3,965 2,857
---------------------
Total 52,394 50,559
Less allowance for doubtful accounts 5,422 5,101
---------------------
Accounts receivable - net $ 46,972 $ 45,458
=====================
Finance charge and late charge revenue on customer deferred payment accounts
totaled $13,689,000, $11,870,000 and $11,113,000 for the fiscal years ended
February 3, 2001, January 29, 2000 and January 30, 1999, respectively, and the
provision for doubtful accounts was $5,292,000, $4,850,000 and $4,081,000, for
the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999,
respectively. The provision for doubtful accounts is classified as a component
of selling, general and administrative expenses in the accompanying statements
of income.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
FEBRUARY 3, JANUARY 29,
2001 2000
Land and improvements $ 1,947 $ 1,739
Buildings 17,656 15,806
Leasehold improvements 25,988 23,145
Fixtures and equipment 84,535 75,566
Construction in progress 20,723 12,195
-----------------------
Total 150,849 128,451
Less accumulated depreciation 65,030 59,113
-----------------------
Property and equipment - net $ 85,819 $ 69,338
=======================
Construction in progress primarily represents investments in technology
including an enterprise-wide information system scheduled to be implemented over
the next 12 to 24 months.
33
Page 32
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
FEBRUARY 3, JANUARY 29,
2001 2000
Accrued bonus and retirement
savings plan contributions $ 8,242 $ 9,502
Accrued payroll and related items 3,636 3,735
Closed store lease obligations 1,671 1,878
Property and other taxes 3,216 2,925
Accrued health care plan 2,894 1,981
Other 4,719 4,371
-----------------------
Total $ 24,378 $ 24,392
=======================
6. FINANCING ARRANGEMENTS:
At February 3, 2001, the Company had an unsecured revolving credit agreement
which provided 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 fiscal year ended February 3, 2001 or January
29, 2000.
The Company had approximately $3,977,000 and $4,594,000 at February 3, 2001 and
January 29, 2000, respectively, of outstanding irrevocable letters of credit
relating to purchase commitments.
7. STOCKHOLDERS' EQUITY:
The holders of Class A Common Stock are entitled to one vote per share, whereas
the holders of Class B Common Stock are entitled to ten votes per share. Each
share of Class B Common Stock may be converted at any time into one share of
Class A Common Stock. Subject to the rights of the holders of any shares of
Preferred Stock that may be outstanding at the time, in the event of
liquidation, dissolution or winding up of the Company, holders of Class A Common
Stock are entitled to receive a preferential distribution of $1.00 per share of
the net assets of the Company. Cash dividends on the Class B Common Stock cannot
be paid unless cash dividends of at least an equal amount are paid on the Class
A Common Stock.
The Company's charter provides that shares of Class B Common Stock may be
transferred only to certain "Permitted Transferees" consisting generally of the
lineal descendants of holders of Class B Stock, trusts for their benefit,
corporations and partnerships controlled by them and the Company's employee
benefit plans. Any transfer of Class B Common Stock in violation of these
restrictions, including a transfer to the Company, results in the automatic
conversion of the transferred shares of Class B Common Stock held by the
transferee into an equal number of shares of Class A Common Stock.
In October 1993, the Company registered 250,000 shares of Class A Common Stock
available for issuance under an Employee Stock Purchase Plan (the "Plan"). In
May 1998, the shareholders approved an amendment to the Plan to increase the
maximum number of Class A shares of Common Stock authorized to be issued from
250,000 to 500,000 shares. Under the terms of the Plan, substantially all
employees may purchase Class A Common Stock through payroll deductions of up to
10% of their salary. The Class A Common Stock is purchased at the lower of 85%
of market value on the first or last business day of a six-month payment period.
Additionally, each April 15, employees are given the opportunity to make a lump
sum purchase of up to $10,000 of Class A Common Stock at 85% of market value.
The number of shares purchased by participants through the plan were 44,590
shares, 53,811 shares and 37,122 shares for the years ended February 3, 2001,
January 29, 2000 and January 30, 1999, respectively.
The Company has an Incentive Stock Option Plan and a Non-Qualified Stock Option
Plan for key employees of the Company. Total shares issuable under the plans are
3,900,000, of which 825,000 shares are issuable under the Incentive Stock Option
Plan and 3,075,000 shares are issuable under the Non-Qualified Stock Option
Plan. The purchase price of the shares under the option must be at least 100
percent of the fair market value of Class A Common Stock at the date of the
grant. Options granted under these plans vest over a 5-year period and expire 10
years after the date of the grant unless otherwise expressly authorized by the
Board of Directors.
34
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THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 1999, the Board of Directors adopted the 1999 Incentive Compensation
Plan, of which 1,000,000 shares are issuable. No awards shall be granted after
July 31, 2004 and shares must be exercisable not later than 10 years after the
date of the grant unless otherwise expressly authorized by the Board of
Directors.
In August 1999, the Board of Directors granted under the 1999 Incentive
Compensation Plan, restricted stock awards of 100,000 shares of Class B Common
Stock, with a per share fair value of $11.81 to a key executive. These stock
awards vest over four years and the unvested portion is included in
stockholders' equity as unearned compensation in the accompanying financial
statements. The charge to compensation expense for these stock awards in 2000
was $295,000 and in 1999 was $196,000.
Option plan activity for the three fiscal years ended February 3, 2001 is set
forth below:
WEIGHTED
OPTIONS RANGE OF AVERAGE
OUTSTANDING OPTION PRICES PRICE
Outstanding options,
January 31, 1998 2,785,732 $ 1.50 - $ 9.31 $ 7.73
Granted 302,000 10.66 - 14.59 13.03
Exercised (530,750) 1.50 - 9.31 7.38
Cancelled (95,000) 4.94 - 12.56 7.63
--------------------------------------------
Outstanding options,
January 30, 1999 2,461,982 1.50 - 14.59 8.45
Granted 670,000 9.36 - 13.25 12.51
Exercised (48,950) 1.50 - 8.25 7.25
Cancelled (110,250) 3.21 - 12.69 8.23
--------------------------------------------
Outstanding options,
January 29, 2000 2,972,782 1.50 - 14.59 9.39
Granted 46,250 9.59 - 14.38 11.66
Exercised (425,350) 4.94 - 13.44 7.82
Cancelled (56,300) 6.94 - 13.44 10.23
--------------------------------------------
Outstanding options,
February 3, 2001 2,537,382 $ 4.94 - $ 14.59 $ 9.68
============================================
The following tables summarize stock option information at February 3, 2001:
OPTIONS OUTSTANDING
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE
$ 4.94 - $ 7.63 691,432 1.32 years $ 7.48
$ 7.69 - $ 8.25 863,900 6.16 years $ 8.13
$ 9.25 - $ 14.59 982,050 8.30 years $ 12.59
--------------------------------------
$ 4.94 - $ 14.59 2,537,382 5.67 years $ 9.68
======================================
OPTIONS EXERCISABLE
WEIGHTED
AVERAGE
RANGE OF NUMBER EXERCISE
EXERCISE PRICES EXERCISABLE PRICE
$ 4.94 - $ 7.63 672,232 $ 7.55
$ 7.69 - $ 8.25 546,300 $ 8.07
$ 9.25 - $ 14.59 241,200 $ 12.70
-----------------------
$ 4.94 - $ 14.59 1,459,732 $ 8.60
=======================
Outstanding options at February 3, 2001 covered 1,337,832 shares of Class B
Common Stock and 1,199,550 shares of Class A Common Stock. Outstanding options
at January 29, 2000 covered 717,000 shares of Class B Common Stock and 2,255,782
shares of Class A Common Stock. Options available to be granted under the option
plans were 535,468 at February 3, 2001 and 526,018 at January 29, 2000.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its stock options
plans. Accordingly, no compensation expense has been recognized for stock-based
compensation where the option price of the stock approximated the fair market
value of the stock on the date of grant. Had compensation expense for fiscal
2000, 1999 and 1998 stock options granted been determined consistent with SFAS
No. 123, "Accounting for Stock-Based Compensation", the Company's net income and
basic and diluted earnings per share amounts for fiscal 2000, 1999 and 1998
would approximate the following proforma amounts (dollars in thousands, except
per share data):
35
Page 34
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS REPORTED PROFORMA
Net income -- Fiscal 2000 $ 39,027 $ 37,431
Basic earnings per share $ 1.56 $ 1.50
Diluted earnings per share $ 1.53 $ 1.47
Net income -- Fiscal 1999 $ 33,931 $ 32,329
Basic earnings per share $ 1.28 $ 1.22
Diluted earnings per share $ 1.26 $ 1.20
Net income -- Fiscal 1998 $ 23,917 $ 22,822
Basic earnings per share $ .87 $ .83
Diluted earnings per share $ .85 $ .81
The weighted-average fair value of each option granted during fiscal 2000, 1999
and 1998 is estimated as $5.45, $6.12 and $6.71 per share, respectively. The
fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following assumptions for grants issued in 2000,
1999 and 1998, respectively: expected dividend yield of 2.42%, 2.62% and 2.20%;
expected volatility of 60.34%, 62.10% and 66.44%, adjusted for expected
dividends; risk-free interest rate of 4.71%, 6.40% and 5.07%; and an expected
life of 5 years for 2000, 1999 and 1998. The effects of applying SFAS 123 in
this proforma disclosure are not indicative of future amounts.
In February 2000, the Board of Directors increased the quarterly dividend by 33%
from $.075 per share to $.10 per share. In December 2000, the Board of Directors
further increased the quarterly dividend by 25% from $.10 per share to $.125 per
share.
Total comprehensive income for the years ended February 3, 2001, January 29,
2000 and January 30, 1999 is as follows (in thousands):
FISCAL YEAR ENDED FEBRUARY 3, JANUARY 29, JANUARY 30,
2001 2000 1999
Net income $ 39,027 $ 33,931 $ 23,917
Unrealized gains
(losses) on available-
for-sale securities 1,411 (3,116) 514
Income tax effect (494) 1,091 (174)
-------------------------------------
Unrealized gains
(losses) net of taxes 917 (2,025) 340
-------------------------------------
Total comprehensive
income $ 39,944 $ 31,906 $ 24,257
=====================================
8. EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution retirement savings plan (401(k)) which
covers all employees who meet minimum age and service requirements. The 401(k)
plan allows participants to contribute up to 16% of their annual compensation.
The Company is obligated to make a minimum contribution to cover plan
administrative expenses. Further Company contributions are at the discretion of
the Board of Directors. The Company's contributions for the years ended February
3, 2001, January 29, 2000 and January 30, 1999 were approximately $2,348,000,
$2,145,000 and $1,606,000, respectively.
The Company has an Employee Stock Ownership Plan (ESOP), which covers
substantially all employees who meet minimum age and service requirements. The
Board of Directors determines contributions to the ESOP. No contribution was
made to the ESOP for the year ended February 3, 2001. The contributions for the
fiscal years ended January 29, 2000 and January 30, 1999 were $1,913,000 and
$531,000, respectively.
36
Page 35
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is self-insured with respect to employee health, workers
compensation and general liability claims. The Company has stop-loss insurance
coverage for individual claims in excess of $250,000 for workers compensation
and employee health and $100,000 for general liability. Employee health claims
are funded through a VEBA trust to which the Company makes periodic
contributions. Contributions to the VEBA trust were $6,964,000, $5,214,000 and
$4,177,000 in fiscal 2000, 1999 and 1998, respectively.
9. LEASES:
The Company has operating lease arrangements for store facilities and equipment.
Facility leases generally are for periods of five years with renewal options and
most provide for additional contingent rentals based on a percentage of store
sales in excess of stipulated amounts. Equipment leases are generally for three
to seven year periods. The Company has a master lease agreement with a lessor to
lease $19.5 million of store fixtures, point-of-sale devices and warehouse
equipment, which do not meet criteria for capital lease accounting and are being
accounted for as operating leases with terms of seven years. However, these
leases may be cancelled annually upon proper notice to the lessor. Upon notice
of cancellation, the Company would be obligated to purchase the equipment at a
prescribed termination value from the lessor. If the Company had cancelled the
leases at February 3, 2001, the purchase price for the equipment would have been
approximately $5,929,000.
The minimum rental commitments under non-cancelable operating leases are (in
thousands):
FISCAL YEAR
2001 $34,615
2002 25,977
2003 17,060
2004 8,921
2005 3,312
Thereafter 60
-------
Total minimum lease payments $89,945
=======
The following schedule shows the composition of total rental expense for all
leases (in thousands):
FISCAL YEAR ENDED FEBRUARY 3, JANUARY 29, JANUARY 30,
2001 2000 1999
Minimum rentals $34,449 $32,453 $30,313
Contingent rent 479 257 270
-----------------------------------------------
Total rental expense $34,928 $32,710 $30,583
===============================================
10. INCOME TAXES:
The provision for income taxes consists of the following (in thousands):
FISCAL YEAR ENDED FEBRUARY 3, JANUARY 29, JANUARY 30,
2001 2000 1999
Current income taxes:
Federal $18,461 $17,826 $ 12,502
State 954 190 338
------------------------------------------
Total 19,415 18,016 12,840
------------------------------------------
Deferred income taxes:
Federal 1,319 81 (190)
State 281 94 228
------------------------------------------
Total 1,600 175 38
------------------------------------------
Total income tax
expense $21,015 $18,191 $ 12,878
==========================================
Significant components of the Company's deferred tax assets and liabilities as
of February 3, 2001 and January 29, 2000 are as follows (in thousands):
FEBRUARY 3, JANUARY 29,
2001 2000
Deferred tax assets:
Bad debt reserve $2,085 $1,969
Inventory valuation 1,335 1,411
Unrealized losses on
short-term investments 476 970
Other accruals 1,104 1,108
---------------------------
Total deferred tax assets 5,000 5,458
---------------------------
Deferred tax liabilities:
Tax over book depreciation 6,167 6,527
Other, net 2,640 644
---------------------------
Total deferred tax liabilities 8,807 7,171
---------------------------
Net deferred tax liabilities $3,807 $1,713
===========================
37
Page 36
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of the Company's effective income tax rate with the statutory
rate is as follows:
FISCAL YEAR ENDED FEBRUARY 3, JANUARY 29, JANUARY 30,
2001 2000 1999
Federal income tax rate 35.0% 35.0% 35.0%
State income taxes 1.6 0.5 1.2
Other (1.6) (0.5) (1.2)
---------------------------------------------
Effective income tax rate 35.0% 35.0% 35.0%
=============================================
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial results have been restated for the effects of SAB
101 in 1999 and are as follows (in thousands, except per share data):
FISCAL 2000 FIRST SECOND THIRD FOURTH
Retail sales $162,154 $163,375 $136,856 $186,097
Total revenues 167,240 168,682 141,620 191,594
Cost of goods sold 105,324 110,015 97,429 132,640
Income before income taxes 22,400 17,535 6,842 13,265
Net income 14,560 11,398 4,447 8,622
Basic earnings per share $ .58 $ .46 $ .18 $ .34
Diluted earnings per share $ .57 $ .45 $ .18 $ .34
FISCAL 1999 FIRST SECOND THIRD FOURTH
Retail sales $153,047 $148,782 $127,367 $155,889
Total revenues 157,874 153,809 132,357 160,993
Cost of goods sold 100,017 100,100 90,247 113,291
Income before income taxes and cumulative effect of accounting change 20,906 15,477 5,418 10,174
Income before cumulative effect of accounting change 13,589 10,060 3,522 6,613
Cumulative effect of accounting change, net of tax 147 -- -- --
Net income 13,736 10,060 3,522 6,613
Basic earnings per share (before cumulative effect of accounting change) $ .51 $ .38 $ .13 $ .25
Basic earnings per share $ .52 $ .38 $ .13 $ .25
Diluted earnings per share (before cumulative effect of accounting change) $ .51 $ .37 $ .13 $ .25
Diluted earnings per share $ .51 $ .37 $ .13 $ .25
The restatement for the effects of SAB 101 for fiscal 1999 resulted in a
decrease in income before cumulative effect of accounting change of $149,000
with no per share effect in the first quarter; an increase in net income of
$126,000 with no per share effect in the second quarter; and a decrease in net
income of $442,000 with a decrease of $.02 per share in the third quarter.
38
Page 37
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. REPORTABLE SEGMENT INFORMATION:
The Company has two reportable segments: retail and credit. The Company operates
its women's fashion specialty retail stores in 23 states, principally in the
Southeast. The Company offers its own credit card to its customers and all
credit authorizations, payment processing, and collection efforts are performed
by a separate division of the Company.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before income taxes. The Company does
not allocate certain corporate expenses or income taxes to the segments.
The following schedule summarizes certain segment information (in thousands):
FISCAL 2000 RETAIL CREDIT TOTAL
Revenues $655,150 $13,985 $669,135
Depreciation 9,426 66 9,492
Interest expense 44 -- 44
Income before taxes 55,278 4,764 60,042
Total assets 244,199 66,543 310,742
Capital expenditures 27,195 35 27,230
FISCAL 1999 RETAIL CREDIT TOTAL
Revenues $592,855 $12,178 $605,033
Depreciation 8,603 36 8,639
Interest expense 23 -- 23
Income before taxes 47,347 4,628 51,975
Total assets 224,501 61,288 285,789
Capital expenditures 23,807 157 23,964
FISCAL 1998 RETAIL CREDIT TOTAL
Revenues $532,330 $11,334 $543,664
Depreciation 7,613 25 7,638
Interest expense 19 -- 19
Income before taxes 33,044 3,751 36,795
Total assets 200,946 57,567 258,513
Capital expenditures 13,459 60 13,519
13. COMMITMENTS AND CONTINGENCIES:
Workers compensation and general liability claims are settled through a claims
administrator and are limited by stop-loss insurance coverage for individual
claims in excess of $250,000 and $100,000, respectively. The Company paid claims
of $1,486,000, $1,074,000 and $1,347,000 in fiscal 2000, 1999 and 1998,
respectively. The Company had no outstanding letters of credit relating to such
claims at February 3, 2001 or at January 29, 2000. See Note 6 for letters of
credit related to purchase commitments, Note 8 for 401(k) plan contribution
obligations and Note 9 for lease commitments.
The Company is a defendant in legal proceedings considered to be in the normal
course of business and none of which, singularly or collectively, are considered
to be material to the Company as a whole.
39
Page 38
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Allowance Reserve
for for
Doubtful Rental
Accounts(a) Commitments(b)
----------- --------------
(In thousands)
Balance at January 31, 1998 $ 3,701 $ 1,903
Additions charged to costs and expenses 4,081 1,799
Additions (Deductions) charged to other accounts 856 (d) --
Deductions (4,437)(c) (1,776)
------- -------
Balance at January 30, 1999 4,201 1,926
Additions charged to costs and expenses 4,850 998
Additions (Deductions) charged to other accounts 936 (d) --
Deductions (4,886)(c) (1,153)
------- -------
Balance at January 29, 2000 5,101 1,771
Additions charged to costs and expenses 5,292 1,710
Additions (Deductions) charged to other accounts 878 (d) --
Deductions (5,849)(c) (1,832)
------- -------
Balance at February 3, 2001 $ 5,422 $ 1,649
======= =======
(a) Deducted from trade accounts receivable.
(b) Provision for the difference between costs and revenues from
non-cancelable subleases over the lease terms of closed stores.
(c) Uncollectible accounts written off.
(d) Recoveries of amounts previously written off.
40
Page 39
EXHIBIT INDEX
DESIGNATION OF
EXHIBIT PAGE
-------------- ----
21 Subsidiaries of the Registrant............................................... 40
23 Consent of Independent Auditors.............................................. 41
41
Page 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Cato has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
The Cato Corporation
By /s/ Wayland H. Cato, Jr. By /s/ John P. Derham Cato
------------------------------------------------- -------------------------------------------------
Wayland H. Cato, Jr. John P. Derham Cato
Chairman of the Board President, Vice Chairman of the Board
and Chief Executive Officer
By /s/ Michael O. Moore By /s/ Robert M. Sandler
------------------------------------------------- -------------------------------------------------
Michael O. Moore Robert M. Sandler
Executive Vice President Senior Vice President
Chief Financial Officer and Secretary Controller
Date: April 25, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
/s/ Wayland H. Cato, Jr. /s/ Robert W. Bradshaw, Jr.
------------------------------------------------------ -----------------------------------------------------
Wayland H. Cato, Jr. Robert W. Bradshaw, Jr.
(Director) (Director)
/s/ John P. Derham Cato /s/ George S. Currin
------------------------------------------------------ -----------------------------------------------------
John P. Derham Cato George S. Currin
(Director) (Director)
/s/ Edgar T. Cato /s/ Paul Fulton
------------------------------------------------------ -----------------------------------------------------
Edgar T. Cato Paul Fulton
(Director) (Director)
/s/ Howard A. Severson /s/ Grant L. Hamrick
------------------------------------------------------ -----------------------------------------------------
Howard A. Severson Grant L. Hamrick
(Director) (Director)
/s/ Clarice Cato Goodyear /s/ James H. Shaw
------------------------------------------------------ -----------------------------------------------------
Clarice Cato Goodyear James H. Shaw
(Director) (Director)
/s/ Thomas E. Cato /s/ A.F. (Pete) Sloan
------------------------------------------------------ -----------------------------------------------------
Thomas E. Cato A.F. (Pete) Sloan
(Director) (Director)