<PAGE> 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 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended February 1, 1997
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 28, 1997, there were 23,195,153 shares of Class A Common Stock and
5,264,317 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 28, 1997 was approximately $107,440,806 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, 1997, relating to the 1997
annual meeting of shareholders are incorporated by reference into the following
part of this annual report:
Part III - Items 10, 11, 12 and 13
<PAGE> 2
THE CATO CORPORATION
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I:
Item 1. Business..............................................................Pages 2 - 9
Item 2. Properties............................................................Page 9
Item 3. Legal Proceedings.....................................................Page 9
Item 4. Results of Votes 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 - 15
Item 8. Financial Statements and Supplementary Data...........................Page 16
Item 9. Disagreements on Accounting and Financial Disclosures.................Page 16
Part III:
Item 10. Directors and Executive Officers.....................................Pages 17 - 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
</TABLE>
<PAGE> 3
Page 2
PART I
Item 1. Business:
General
The Company, founded in 1946, operated 536 women's apparel specialty
stores at February 1, 1997 under the names "Cato," "Cato Fashions" and "Cato
Plus" in 20 states, principally in non-metropolitan markets in the South and
Southeast. The Company's merchandising strategy is to provide a wide variety of
value-priced merchandise in misses, junior and large sizes for the fashion
conscious low- to middle-income female customer, aged 18 to 50. Additionally,
the Company offers clothing and accessories for girls ages 4 - 14 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 4,000 to 6,000 square feet and are located primarily in strip
shopping centers anchored by major discount 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 30% of retail sales in fiscal 1996. In addition to its
Cato Stores, the Company operated 119 off-price family apparel and accessories
stores at February 1, 1997 under the name "It's Fashion!" These stores are
managed separately from the Cato stores with respect to merchandising and store
operations but use the same administration, distribution and financial systems
as the Cato stores.
Business
The Company's objective is to be the leading women's apparel 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 higher-end specialty apparel chains but is generally more
fashionable than merchandise offered by discount stores.
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Item 1. Business: (continued)
Strip Shopping Center Locations. The Company locates its
stores principally in strip centers convenient to our customers
anchored by major discount stores, such as Wal-Mart and Kmart, 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
and a layaway plan to make the purchase of its merchandise more
convenient.
Expansion. The Company plans to open new stores and relocate
or expand existing stores in small to medium-sized towns and selected
metropolitan areas, principally in the South and Southeast.
Merchandising
Merchandising
The Company offers a broad selection of apparel and accessories to
suit the various lifestyles of the fashion conscious low-to middle-income
female, aged 18 to 50. In addition, the Company features a value pricing
strategy, product quality and consistent merchandise flow providing color and
product coordination.
The Company's merchandise lines include dressy and casual sportswear,
dresses, careerwear, coats, shoes, lingerie, hosiery, costume jewelry, handbags
and millinery. Clothing and accessories for girls ages 4 - 14 are offered in
selected stores. Most of the Company's merchandise is sold under its private
labels.
In fiscal 1996, approximately 29% of Cato stores' retail sales
represented merchandise for large size customers. This merchandise is marketed
in its stores under two formats: as a distinct display area in "Cato" and "Cato
Fashions" stores and as a separate department in the combined "Cato Fashions"
and "Cato Plus" stores.
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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
personnel 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 1996, purchases from the Company's largest vendor accounted
for approximately 9% of the Company's total purchases. No other vendor accounted
for more than 4% 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 affect 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 historical and current
sales trends by merchandise category, customer profiles and climatic conditions.
A computerized 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 computer, 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 is controlled by
an on-line computer 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, local newspapers, radio and in-store
promotional advertising as its primary advertising media. Weekly newspaper
advertisements typically promote specific items or merchandise at promotional
prices. The Company uses radio advertising in selected broadcast areas that
include high concentrations of its stores. The Company's total advertising
expenditures were approximately 2% of retail sales in fiscal 1996.
Store Operations
The Company's store operations management team consists of an
executive vice president and senior vice president, nine regional vice
presidents and 48 district managers. Regional vice presidents 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 stores
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 has training programs at each level of store operations.
New store managers are trained in training stores managed by experienced
personnel 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 home office.
Store Locations
Most of the Company's stores are located in the South and 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. Approximately 120 stores, operating under the
name "Cato" or "Cato Fashions," average approximately 4,000 square feet.
Substantially all of the remaining stores are combination "Cato Fashions" and
"Cato Plus" stores, ranging in size from 4,000 to 6,000 square feet. These
combination stores have two distinct signs and selling areas but use a common
sales staff and service desk.
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Item 1. Business: (continued)
All of the Company's stores are leased. Approximately 91% are located
in strip shopping centers, 1% in downtown locations and 8% 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 major discount stores, such as
Wal-Mart and Kmart 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, expanding certain existing 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 for its
Cato stores since fiscal 1992.
Cato Store Development
<TABLE>
<CAPTION>
Number of Stores
Beginning of Number Number Number of Stores
Fiscal Year Year Opened Closed End of Year
----------- ---- ------ ------ -----------
<S> <C> <C> <C> <C>
1992................ 431 33 26 438
1993................ 438 65 13 490
1994................ 490 57 9 538
1995................ 538 19 7 550
1996................ 550 18 32 536
</TABLE>
The Company intends to open approximately 55 new stores and to
relocate or expand approximately 20 existing stores in fiscal 1997. The Company
anticipates that 25 of the 55 new stores to be opened in fiscal 1997 will be
off-price "Its Fashion!" 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 and to close
underperforming stores or relocate them to more desirable locations in their
existing markets.
Credit and Layaway
Credit Card Program
The Company offers its own credit card, which accounted for
approximately 21% of retail sales in fiscal 1996. The Company's net bad debt
expense in fiscal 1996 was 3.6% 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 a minimum income test.
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 charges a
finance charge based on the allowable rates in the customer's state of
residence.
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 nine 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. Layaway sales represented approximately 9% of retail sales in
fiscal 1996.
It's Fashion! Stores
The Company operated 119 off-price stores at February 1, 1997 in 11
states in the South and Southeast under the name "It's Fashion!" These stores
are smaller than the Cato stores, ranging in size from 3,000 to 4,000 square
feet, and offer limited selections of first-quality family apparel and
accessories at prices ranging from 20% to 60% off regular retail prices. The
Company's credit and layaway plans are not available in these stores. Most of
the merchandise for these stores is purchased at close-out prices from
manufacturers with excessive inventories due to overruns or order cancellations.
The It's Fashion! stores are managed separately from the Cato stores with
respect to merchandising and store operations but use the same administrative,
distribution and financial systems as the Cato stores. Sales from It's Fashion!
stores represented 13% of the Company's retail sales during fiscal 1996. As part
of its planned expansion program, the Company currently intends to open
approximately 25 new It's Fashion! stores in fiscal 1997.
It's Fashion! Store Development
<TABLE>
<CAPTION>
Number of Stores
Beginning of Number Number Number of Stores
Fiscal Year Year Opened Closed End of Year
----------- ---- ------ ------ -----------
<S> <C> <C> <C> <C>
1992................ 56 12 1 67
1993................ 67 21 3 85
1994................ 85 23 0 108
1995................ 108 18 5 121
1996................ 121 10 12 119
</TABLE>
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Item 1. Business: (continued)
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. Many of the Company's competitors have
substantially greater financial, marketing and other resources than the Company.
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. In addition, various state laws regulate collection
practices, require certain disclosures to credit customers and limit the finance
charges, late fees and other charges which may be imposed by the Company.
<PAGE> 10
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Item 1. Business: (continued)
Employees
As of February 1, 1997, the Company employed approximately 6,800
full-time and part-time employees. The Company also employs additional part-time
employees during the peak retailing seasons. The Company is not a party to any
collective bargaining agreements and considers that its employee 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.
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.
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. Results of Votes of Security Holders:
None.
<PAGE> 11
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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 1996 and
1995.
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price
1996 High Low Dividend
- - ---- ---- --- --------
<S> <C> <C> <C>
First quarter $ 10 1/8 $ 7 $ .04
Second quarter 9 5 9/16 .04
Third quarter 7 1/8 4 5/8 .04
Fourth quarter 5 5/8 3 3/4 .04
</TABLE>
<TABLE>
<CAPTION>
Price
1995 High Low Dividend
- - ---- ---- --- --------
<S> <C> <C> <C>
First quarter $ 8 1/4 $ 5 $ .04
Second quarter 8 7/8 7 1/8 .04
Third quarter 8 1/4 5 1/8 .04
Fourth quarter 7 3/4 5 3/4 .04
</TABLE>
- - --------------------------------------------------------------------------------
As of March 28, 1997 the approximate number of holders of the
Company's Class A Common stock was 4,700 and there were 15 record holders of the
Company's Class B Common Stock.
<PAGE> 12
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Item 6. Selected Financial Data:
The Cato Corporation
Selected Financial Data
<TABLE>
<CAPTION>
Fiscal Year Ended
February 1, February 3, January 28, January 29, January 30,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands, except per share and selected operating data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Retail sales $477,011 $476,638 $463,737 $407,878 $331,262
Other income 14,498 13,357 12,449 12,021 9,494
Total revenues 491,509 489,995 476,186 419,899 340,756
Cost of goods sold, including
occupancy, distribution and buying 344,919 341,144 324,309 275,090 220,663
Gross margin percent, including
occupancy, distribution and buying 27.7% 28.4% 30.1% 32.6% 33.4%
Selling, general and administrative 121,600 122,699 116,144 100,760 85,667
Depreciation 8,330 7,785 6,844 5,465 4,148
Interest 262 292 377 250 1,213
Closed store expense 5,500 -- -- -- --
Income before income taxes 10,898 18,075 28,512 38,334 29,065
Income tax expense 3,869 6,055 10,407 13,532 10,597
Net income $ 7,029 $ 12,020 $ 18,105 $ 24,802 $ 18,468
Earnings per common and common
equivalent share (1) $ .25 $ .42 $ .62 $ .84 $ .71
Cash dividends paid per share (1) $ .16 $ .16 $ .145 $ .088 $ .04
Selected Operating Data:
Stores open at end of period 655 671 646 575 505
Average sales per store $710,000 $721,000 $749,000 $744,000 $663,000
Average sales per square foot of
selling space $ 153 $ 158 $ 172 $ 187 $ 173
Comparable store sales increase
(decrease) (2)% (5)% 1% 8% 19%
Balance Sheet Data:
Working capital $105,373 $102,169 $ 94,581 $ 91,569 $ 53,862
Total assets 218,243 209,895 201,322 178,603 122,225
Total stockholders' equity $151,903 $149,682 $141,508 $127,533 $ 78,216
</TABLE>
(1) All per share amounts reflect a three-for-two stock split effected June 28,
1993
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Results of Operations
The table below sets forth certain financial data of the Company
expressed as a percentage of retail sales for the periods indicated:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended
February 1, February 3, January 28,
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Retail sales 100.0% 100.0% 100.0%
Other income 3.0 2.8 2.7
Total revenues 103.0 102.8 102.7
Cost of goods sold, including occupancy,
distribution and buying 72.3 71.6 69.9
Selling, general and administrative 25.4 25.7 25.0
Depreciation 1.7 1.6 1.6
Closed store expense 1.2 - -
Selling, general, administrative,
depreciation and closed store expense 28.3 27.3 26.6
Income before income taxes 2.3 3.8 6.1
Net income 1.5% 2.5% 3.9%
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
Fiscal 1996 Compared to Fiscal 1995
Retail sales were flat at $477.0 million in fiscal 1996, which included
fifty-two weeks, compared to $476.6 million in fiscal 1995, which included
fifty-three weeks. Same-store sales decreased 2% from fiscal 1995. Total
revenues, comprised of retail sales and other income (principally finance
charges on customer accounts receivable, interest income and layaway fees),
increased 0.3% to $491.5 million in fiscal 1996 from $490.0 million in fiscal
1995. The Company operated 655 stores at February 1, 1997, compared to 671
stores operated at February 3, 1996.
The increase in retail sales in fiscal 1996 resulted primarily from the
Company's store development activity. In fiscal 1996, the Company's selling
square footage declined by approximately 3% by opening 28 new stores, relocating
17 stores and expanding 2 stores while closing 44 existing stores.
Other income in fiscal 1996 increased by 8.5% over fiscal 1995. The
increase resulted primarily from higher finance charge income and by increased
earnings on cash equivalents and short-term investments.
<PAGE> 14
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Cost of goods sold, including occupancy, distribution and buying, was
$344.9 million, or 72.3% of retail sales, in fiscal 1996, compared to $341.1
million, or 71.6% of retail sales, in fiscal 1995. The increase in cost of goods
sold as a percent of retail sales resulted primarily from weak comp store sales
requiring further markdowns in fiscal 1996 and a decrease in merchandise
margins. Total gross margin dollars (retail sales less cost of goods sold)
decreased by 2.5% to $132.1 million in fiscal 1996 from $135.5 million in fiscal
1995.
Selling, general and administrative expenses (SG&A) were $121.6 million
in fiscal 1996, compared to $122.7 million in fiscal 1995, a decrease of 0.9%.
As a percent of retail sales, SG&A was 25.4% compared to 25.7% of retail sales
in the prior year. The overall decrease in SG&A resulted primarily from
decreased selling-related expenses and decreased infrastructure expenses.
Depreciation expense was $8.3 million in fiscal 1996, compared to $7.8
million in fiscal 1995. The 7% increase in fiscal 1996 resulted primarily from
additions to property and equipment from the Company's store development
activities.
The Company closed 40 underperforming stores by the end of the fiscal
year. The costs of closing these stores totaled $5.5 million and included asset
write-offs, severance pay and the remaining noncancelable lease payments.
Fiscal 1995 Compared to Fiscal 1994
Retail sales increased by 3% to $476.6 million in fiscal 1995, which
included fifty-three weeks, from $463.7 million in fiscal 1994, which included
fifty-two weeks. Same-store sales decreased 5% from the prior year on a
fifty-two week basis. Total revenues increased by 3% to $490.0 million in fiscal
1995 from $476.2 million in fiscal 1994. The Company operated 671 stores at
February 3, 1996, compared to 646 stores operated at January 28, 1995.
The increase in retail sales in fiscal 1995 resulted from the Company's
store development activity. In fiscal 1995, the Company increased its selling
square footage approximately 5% by opening 37 new stores, relocating or
expanding 29 stores while closing 12 existing stores. The decrease in same-store
sales in fiscal 1995 resulted primarily from competitive pressures and a general
price compression in the women's apparel retail sector.
Other income in fiscal 1995 increased 7% over fiscal 1994. The increase
resulted primarily from increased earnings on cash equivalents and short-term
investments and from higher finance charge income partially offset by decreased
layaway service charges.
Cost of goods sold, including occupancy, distribution and buying, was
$341.1 million, or 71.6% of retail sales, in fiscal 1995, compared to $324.3
million, or 69.9% of retail sales, in fiscal 1994. The increase in cost of goods
sold as a percent of retail sales resulted primarily from higher levels of
markdowns taken in fiscal 1995. Inventory levels throughout the year were higher
than needed for the sales levels achieved, resulting in markdowns above plan and
erosion of merchandise margins. The extremely competitive and promotional
environment prevailing throughout the women's apparel retail sector produced a
price compression resulting in a 5%
<PAGE> 15
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decrease in the average unit selling price for the year. Total gross margin
dollars decreased by 3% to $135.5 million in fiscal 1995 from $139.4 million in
fiscal 1994.
SG&A expenses were $122.7 million in fiscal 1995, compared to $116.1
million in fiscal 1994, an increase of 6%. As a percent of retail sales, SG&A
was 25.7% compared to 25.0% of retail sales in the prior year. The overall
increase in SG&A resulted primarily from increased selling-related expenses and
by increased infrastructure expenses brought about by the Company's store
development activities.
Depreciation expense was $7.8 million in fiscal 1995, compared to $6.8
million in fiscal 1994. The 14% increase in fiscal 1995 resulted primarily from
additions to property and equipment for the expansion of the Company's
distribution facility and for store development.
Liquidity and Capital Resources
At February 1, 1997, the Company had working capital of $105.4 million
compared to $102.2 million at February 3, 1996. Cash provided by operating
activities was $15.6 million in fiscal 1996, compared to $14.9 million in fiscal
1995. The increase in cash provided by operating activities in fiscal 1996
resulted primarily from an increase in accounts payable and other liabilities
which was partially offset by the build-up of inventory and receivable levels
and a decrease in net income. At February 1, 1997, the Company had $50.1 million
in cash, cash equivalents and short-term investments, compared to $47.9 million
at February 3, 1996.
In February 1996, the Company entered into a new unsecured revolving
credit agreement. The facility provides for borrowings of up to $20 million and
an additional letter of credit facility of $15 million. The revolving credit
agreement is committed until May 1999 and the letter of credit facility is
renewable annually. The credit agreement contains various financial covenants
and limitations, including maintenance of specific financial ratios and a
limitation on capital expenditures of $25 million per year (or $60 million
during the length of the agreement). The agreement replaced a revolving credit
and term loan agreement which was committed until May 1998, and provided for
borrowings of up to $35 million and an additional annually renewable letter of
credit facility of $15 million. The Company feels the terms of the new revolving
credit agreement better support the Company's future working capital needs and
the agreement contains more flexibility as to financial covenant requirements.
In fiscal 1994, the Company entered into an agreement with a lessor to
lease up to $25 million of new store fixtures, point-of-sale devices and
warehouse equipment. In January 1995, the Company leased $10 million of assets
under this agreement and in fiscal 1995 the Company leased an additional $9.5
million of qualifying assets. 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.
<PAGE> 16
Page 15
Expenditures for property and equipment totaled $8.4 million, $9.4
million and $25.5 million in fiscal 1996, 1995 and 1994, respectively. The
expenditures for fiscal 1996 included, in addition to store development
expenditures, costs relating to the installation of new point-of-sale terminals
in the Company's stores. The Company is currently planning modest store
development in fiscal 1997, pending more favorable business trends. The Company
intends to open approximately 55 new stores, to relocate or expand 20 stores,
and is currently planning approximately $8.7 million of capital expenditures for
fiscal 1997.
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.
Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in the Form 10-K
and located elsewhere herein regarding the Company's financial position and
business strategy may constitute forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct.
<PAGE> 17
Page 16
Item 8. Financial Statements and Supplementary Data:
The response to this Item is submitted in a separate section of this
report.
Item 9. Disagreements on Accounting and Financial Disclosures:
None.
<PAGE> 18
Page 17
PART III
Item 10. Directors and Executive Officers:
The directors and executive officers of the Company and their ages as
of March 31, 1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Wayland H. Cato, Jr. * ++......... 74 Chairman of the Board of Directors and Chief
Executive Officer
Edgar T. Cato..................... 72 Vice Chairman of the Board of Directors
John P. Derham Cato............... 46 Vice Chairman and Chief Operating Officer and
Director
Linda McFarland Jenkins........... 49 President and Chief Merchandising Officer of the
Cato Division and Director
Alan E. Wiley..................... 50 Senior Executive Vice President, Secretary, Chief
Financial and Administrative Officer and
Director
Howard A. Severson................ 49 Executive Vice President, Assistant Secretary,
Chief Real Estate and Store Development Officer
and Director
Clarice Cato Goodyear * ++....... 50 Executive Vice President and Assistant Secretary
and Director
C. David Birdwell................. 57 Executive Vice President, President and General
Manager of the It's Fashion! Division
David P. Kempert.................. 47 Executive Vice President and Chief Store
Operations Officer of the Cato Division
Patrick J. McIntyre............... 52 Senior Vice President, Chief Information Officer
Stephen R. Clark.................. 54 Senior Vice President, Human Resources and
Assistant Secretary
Thomas E. Cato.................... 42 Vice President, Divisional Merchandise Manager
Accessories and Shoes and Director
Robert W. Bradshaw, Jr. * +....... 63 Director
George S. Currin * +.............. 60 Director
Paul Fulton * + .................. 62 Director
Grant L. Hamrick * +.............. 58 Director
James H. Shaw * +................. 68 Director
A.F. (Pete) Sloan * + ............ 67 Director
</TABLE>
* Members of Compensation Committee
+ Members of Audit and Stock Option Committees
++ Member of Audit Committee
<PAGE> 19
Page 18
Wayland H. Cato, Jr. is Chairman of the Board of Directors and has been
a director of the Company since 1946. Since 1960, he has served as the Company's
Chief Executive Officer.
Edgar T. Cato is the Vice Chairman of the Board of Directors and has
been a director of the Company since 1946. Mr. Edgar T. Cato is the brother of
Mr. Wayland H. Cato, Jr.
John P. Derham Cato has been employed as an officer of the Company
since 1981 and has served as a director since 1986. He currently serves as Vice
Chairman and Chief Operating Officer. Mr. John Cato is a son of Mr. Wayland H.
Cato, Jr.
Linda McFarland Jenkins joined the Company in June 1990. She currently
serves as President and Chief Merchandising Officer of the Cato Division and has
been a director since 1991. Prior to joining the Company, she was Senior Vice
President - General Merchandise Manager of J.B. Ivey & Company, a Charlotte,
North Carolina based regional department store chain, where she was employed for
11 years.
Alan E. Wiley joined the Company in July 1992. He currently serves as
Senior Executive Vice President, Secretary, Chief Financial and Administrative
Officer and has been a director since 1994. From 1981 through 1990 he held
senior administrative and financial positions with British American Tobacco,
U.S. in various companies of their specialty retail division. From 1990 until
joining the Company, he was President and majority stockholder of Gibbs-Louis,
Inc., an Orlando, Florida based women's specialty store chain. In May 1992,
Gibbs-Louis, Inc. filed a petition pursuant to the U.S. Bankruptcy Code and was
liquidated in June 1992.
Howard A. Severson has been an officer of the Company since 1985. He
currently serves as Executive Vice President, Assistant Secretary, Chief Real
Estate and Store Development Officer and has been a director since March 1995.
Prior to joining the Company, Mr. Severson served for five years as the Director
of Real Estate for Minnesota Fabric Company, a Charlotte based retail fabric
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. She currently
serves as Executive Vice President and Assistant Secretary. Ms. Goodyear is a
daughter of Mr. Wayland H. Cato, Jr.
C. David Birdwell joined the Company as Executive Vice President,
President and General Manager of the It's Fashion! Division in October 1996.
Prior to joining the Company, Mr. Birdwell served for eight years as
President/General Merchandise Manager of Allied Stores, a family apparel chain
headquartered in Savannah, Georgia.
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.
<PAGE> 20
Page 19
Patrick J. McIntyre has been an officer of the Company since 1988. He
currently serves as Senior Vice President, Chief Information Officer. He was
previously employed for seven years as Vice President of Management Information
Services at The Higbee Company, a Cleveland, Ohio based regional department
store chain.
Stephen R. Clark has been an officer of the Company since 1994. He
currently serves as Senior Vice President, Human Resources and Assistant
Secretary. From 1990 until 1994, he was employed by Gantos, a women's specialty
apparel retailer, as Vice President, Human Resources.
Thomas E. Cato has been employed by the Company since 1977, has served
as an officer since 1986 and has been a director since 1993. He currently serves
as Vice President, Divisional Merchandise Manager Accessories and Shoes. 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 as a shareholder, officer and director of the firm.
The law firm serves as General Counsel to the Company.
George S. Currin has been a director of the Company since 1973. From
1978 to 1989, Mr. Currin was the President and Chief Executive Officer and a
director of Southeastern Savings Bank, Inc. Since 1989, he has served as
Chairman and Managing Director of Fourth Stockton Company and Chairman of
Currin-Patterson Properties LLC.
Paul Fulton has been a director of the Company since 1994. From July
1988 to December 1993, Mr. Fulton served as President of Sara Lee Corporation.
Since January 1994, Mr. Fulton has served as Dean of the Kenan-Flagler Business
School of the University of North Carolina at Chapel Hill. Mr. Fulton is
currently a director of Sonoco Products, NationsBank Corporation, Lowe's
Companies, Inc., Bassett Furniture Industries, Inc., and Winston Hotels, Inc.
Grant L. Hamrick has been a director of the Company since 1994. 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. From 1989 until his retirement in 1996, Mr. Hamrick served as Senior
Vice President and Chief Financial Officer for American City Business Journals,
Inc.
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 was Chairman of the Board of Lance, Inc. where he was employed from 1955
until his retirement in 1990. Mr. Sloan is currently a director of Lance, Inc.,
Bassett Furniture Industries, Inc., PCA International, Inc., and Richfood, Inc.
<PAGE> 21
Page 20
Item 11. Executive Compensation:
Incorporated by reference to Registrant's proxy statement for 1997
annual stockholders' meeting.
Item 12. Security Ownership of Certain Beneficial Owners and Management:
Incorporated by reference to Registrant's proxy statement for 1997
annual stockholders' meeting.
Item 13. Certain Relationships and Related Transactions:
Incorporated by reference to Registrant's proxy statement for 1997
annual stockholders' meeting.
<PAGE> 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 43 of this annual report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended February 1,
1997.
<PAGE> 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 1, 1997
THE CATO CORPORATION
CHARLOTTE, NORTH CAROLINA
<PAGE> 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:
Reports of Independent Auditors.....................Pages 24 - 25
Consolidated Statements of Income...................Page 26
Consolidated Balance Sheets.........................Page 27
Consolidated Statements of Cash Flows ..............Page 28
Consolidated Statements of Stockholders' Equity.....Page 29
Notes to Consolidated Financial Statements..........Pages 30 - 41
The following consolidated financial statement schedule of the Cato Corporation
is included in Item 14(d):
SCHEDULE II - Valuation and qualifying accounts ............Page 42
<PAGE> 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 (the Company) as of February 1, 1997 and February 3, 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the fiscal years then ended. Our audit also included the financial statement
schedule listed in the Index at Item 14(a) as it relates to the fiscal years
ended February 1, 1997 and February 3, 1996. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. The financial statements and
financial statement schedule of the Company for the year ended January 28, 1995
were audited by other auditors whose report dated March 10, 1995 expressed an
unqualified opinion on those statements and schedule.
We conducted our audits in accordance with generally accepted auditing
standards. 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 1, 1997 and
February 3, 1996, and the results of its operations and its cash flows for the
fiscal years then ended in conformity with generally accepted accounting
principles. 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
therein.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
March 14, 1997
<PAGE> 26
Page 25
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
THE CATO CORPORATION
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of The Cato Corporation for the year ended
January 28, 1995. Our audit also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
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 significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of The Cato Corporation for the year ended January 28, 1995 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Charlotte, North Carolina
March 10, 1995
<PAGE> 27
Page 26
The Cato Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
Fiscal Year Ended
February 1, February 3, January 28,
1997 1996 1995
---------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues
Retail sales $477,011 $476,638 $463,737
Other income (principally finance and layaway charges) 14,498 13,357 12,449
-------- -------- --------
Total revenues 491,509 489,995 476,186
-------- -------- --------
Costs and Expenses
Cost of goods sold, including occupancy, distribution
and buying 344,919 341,144 324,309
Selling, general and administrative 121,600 122,699 116,144
Depreciation 8,330 7,785 6,844
Interest 262 292 377
Closed store expense 5,500 -- --
-------- -------- --------
Total operating expenses 480,611 471,920 447,674
-------- -------- --------
Income Before Income Taxes 10,898 18,075 28,512
Income tax expense 3,869 6,055 10,407
-------- -------- --------
Net Income $ 7,029 $ 12,020 $ 18,105
======== ======== ========
Earnings Per Common and Common Equivalent Share $ .25 $ .42 $ .62
======== ======== ========
Dividends Per Share $ .16 $ .16 $ .145
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 28
Page 27
The Cato Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
-----------------------------
(In thousands)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 16,593 $ 26,183
Short-term investments 33,512 21,711
Accounts receivable, net of allowance for doubtful accounts of $3,401,000 at
February 1, 1997 and February 3, 1996 43,192 39,792
Merchandise inventories 63,968 58,440
Deferred income taxes 2,014 1,825
Prepaid expenses 2,181 2,486
-------- --------
Total Current Assets 161,460 150,437
Property and Equipment 51,333 54,364
Other Assets 5,450 5,094
======== ========
Total Assets $218,243 $209,895
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 38,276 $ 36,482
Accrued expenses 16,232 10,458
Income taxes 1,579 1,328
-------- --------
Total Current Liabilities 56,087 48,268
Deferred Income Taxes 3,851 4,491
Other Noncurrent Liabilities (primarily deferred rent) 6,402 7,454
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;
23,366,403 shares issued at February 1, 1997 and 23,204,647 shares issued at
February 3, 1996 778 773
Convertible Class B Common Stock, $.033 par value per share, 15,000,000 shares
authorized; 5,264,317 shares issued and outstanding at February 1, 1997 and
February 3, 1996 176 176
Additional paid-in capital 63,272 62,665
Retained earnings 88,656 86,291
-------- --------
152,882 149,905
Less Class A Common Stock in treasury, at cost (175,000 shares at February 1,
1997 and 40,000 shares at February 3, 1996) 979 223
-------- --------
Total Stockholders' Equity 151,903 149,682
-------- --------
Total Liabilities and Stockholders' Equity $218,243 $209,895
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 29
Page 28
The Cato Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Fiscal Year Ended
February 1, February 3, January 28,
1997 1996 1995
--------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating Activities
Net income $ 7,029 $ 12,020 $ 18,105
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 8,330 7,785 6,844
Amortization of investment premiums 183 280 235
Deferred income taxes (771) 216 575
Loss on disposal of property and equipment 412 -- 352
Changes in operating assets and liabilities which provided (used) cash:
Accounts receivable (3,400) (1,866) (1,112)
Merchandise inventories (5,528) (3,766) 1,140
Other assets (51) (283) (1,040)
Accrued income taxes 251 419 909
Accounts payable and other liabilities 9,176 93 7,386
-------- -------- --------
Net cash provided by operating activities 15,631 14,898 33,394
-------- -------- --------
Investing Activities
Expenditures for property and equipment (8,371) (9,415) (25,484)
Proceeds from sale of property and equipment -- -- 378
Purchases of short-term investments (23,312) (10,442) (11,882)
Sales of short-term investments 11,164 11,566 9,145
-------- -------- --------
Net cash used in investing activities (20,519) (8,291) (27,843)
-------- -------- --------
Financing Activities
Dividends paid (4,558) (4,554) (4,115)
Purchase of treasury stock (756) (223) --
Proceeds from employee stock purchase plan 279 381 435
Proceeds from stock options exercised 333 9 91
-------- -------- --------
Net cash used in financing activities (4,702) (4,387) (3,589)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (9,590) 2,220 1,962
Cash and Cash Equivalents at Beginning of Year 26,183 23,963 22,001
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 16,593 $ 26,183 $ 23,963
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 30
Page 29
The Cato Corporation
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Convertible
Class A Class B Additional
Common Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock
----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance -- January 29, 1994 $ 769 $ 176 $ 61,753 $ 64,835 $ -
Net income 18,105
Dividends paid ($.145 per share) (4,115)
Class A Common Stock sold through
employee stock purchase plan
-- 41,769 shares 1 434
Class A Common Stock sold through
stock option plans -- 12,350 shares - 91
Unrealized losses on available for
sale securities, net of deferred
income tax benefit of $311,000 (541)
---------- --------- ----------- ---------- ---------
Balance -- January 28, 1995 770 176 62,278 78,284 -
Net income 12,020
Dividends paid ($.16 per share) (4,554)
Class A Common Stock sold through
employee stock purchase plan
-- 68,720 shares 3 378
Class A Common Stock sold through
stock option plans -- 3,600 shares - 9
Purchase of treasury shares -- 40,000
shares 223
Unrealized gains on available for sale
securities, net of deferred income
taxes of $311,000 541
---------- --------- ----------- ---------- ---------
Balance -- February 3, 1996 773 176 62,665 86,291 223
Net income 7,029
Dividends paid ($.16 per share) (4,558)
Class A Common Stock sold through
employee stock purchase plan
-- 51,506 shares 2 277
Class A Common Stock sold through
stock option plans -- 110,250 shares 3 330
Purchase of treasury shares -- 135,000
shares 756
Unrealized losses on available for sale
securities, net of deferred income
tax benefit of $58,000 (106)
---------- --------- ----------- ---------- ---------
Balance -- February 1, 1997 $ 778 $ 176 $ 63,272 $ 88,656 $ 979
========== ========= =========== ========== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 31
Page 30
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 Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Description of Business and Fiscal Year -- The Company has principally
one segment of business -- operation of women's apparel specialty stores. The
Company's stores operate under the names Cato, Cato Fashions, Cato Plus and It's
Fashion! and are located primarily in strip shopping centers in non-metropolitan
markets in the South and Southeastern United States. The Company's fiscal year
ends on the Saturday nearest January 31. Fiscal years ending February 1, 1997
and January 28, 1995 each included fifty-two weeks. Fiscal year ending February
3, 1996 included fifty-three weeks.
Use of Estimates -- The preparation of the Company's financial
statements in conformity with generally accepted accounting principles 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.
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 value of short-term investments are based on
quoted market prices.
The Company's short-term investments held at February 1, 1997 and
February 3, 1996 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 an adjustment to retained earnings. The amortized 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.
Accounts Receivable -- Accounts receivable include customer trade
accounts, customer layaway receivables and miscellaneous trade receivables.
Customer receivables related to layaway sales are reflected net of a reserve for
unrealized profit. Net layaway receivables totaled approximately $2,862,000 and
$2,679,000 at February 1, 1997 and February 3, 1996, respectively.
Supplemental Cash Flow Information -- Interest paid during the fiscal
years ended February 1, 1997, February 3, 1996 and January 28, 1995 was
$308,000, $375,000 and $202,000, respectively. Income tax payments, net of
refunds received, for the fiscal years ended February 1, 1997, February 3, 1996
and January 28, 1995 were $4,324,000, $5,577,000 and $8,495,000, 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 of property and equipment is provided
on the straight-line method over the estimated useful lives of the related
assets.
<PAGE> 32
Page 31
Retail Sales -- Revenues from retail sales (including layaway
transactions) are recognized at the time of the sale, net of returns, and
exclude sales taxes.
Advertising -- Advertising costs are expensed in the period in which
they are incurred. Advertising expense was $8,898,000, $8,803,000 and $9,046,000
for the fiscal years ended February 1, 1997, February 3, 1996 and January 28,
1995, respectively.
Earnings Per Common and Common Equivalent Share -- Earnings per share
have been computed based on the weighted average number of Class A and Class B
common shares and common stock equivalents outstanding during the respective
periods. Common stock equivalents represent the dilutive effect of the assumed
exercise of outstanding stock options. The number of shares used in the earnings
per common and common equivalent share computations were 28,651,438, 28,597,323
and 29,113,091 for the fiscal years ended February 1, 1997, February 3, 1996 and
January 28, 1995, respectively.
Income Taxes -- The Company and its subsidiaries file a consolidated
federal income tax return. Income taxes are provided based on the 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. Prior to fiscal 1996, upon the closing or relocation of a store, costs
determined to be unrecoverable, such as the book value of certain fixtures and
equipment, were charged to expense. In fiscal 1996, the Company adopted
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
(SFAS 121). SFAS 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets. Under provisions of the Statement, impairment losses are
recognized when expected future cash flows are less than the assets' carrying
value. There was no material effect on the financial statements resulting from
the adoption of SFAS 121.
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.
Recent Accounting Pronouncements -- In fiscal 1996, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," (SFAS 125). This Statement requires an entity
to recognize the financial and servicing assets it controls and the liabilities
it has incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in the Statement. Based on
current circumstances, the Company believes the application of the new rules
will not have a material impact on the financial statements.
Fair Value of Financial Instruments -- The Company's carrying values of
financial instruments, other than short-term investments, approximate their fair
values due to their short terms to maturity and/or their variable interest
rates.
Reclassifications -- Certain reclassifications have been made to the
consolidated financial statements for prior fiscal years to conform with
classifications used for the 1996 fiscal year.
<PAGE> 33
Page 32
2. Short-Term Investments:
Short-term investments at February 1, 1997 include the following:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized Estimated
Security Type Cost (Losses) Fair Value
- - ----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Obligations of states and
political subdivisions $30,249 $ (85) $30,164
Corporate debt securities 2,000 (20) 1,980
------- ----- -------
Subtotal 32,249 (105) 32,144
Equity securities 1,427 (59) 1,368
------- ----- -------
Total $33,676 $(164) $33,512
======= ===== =======
</TABLE>
- - --------------------------------------------------------------------------------
Short-term investments at February 3, 1996 include the following:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized Estimated
Security Type Cost Gains (Losses) Fair Value
- - ------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions $17,285 $86 $ (5) $17,366
Corporate debt securities 2,000 -- (44) 1,956
------- --- ---- -------
Subtotal 19,285 86 (49) 19,322
Equity securities 2,426 -- (37) 2,389
------- --- ---- -------
Total $21,711 $86 $(86) $21,711
======= === ==== =======
</TABLE>
- - --------------------------------------------------------------------------------
The unrealized losses at February 1, 1997 of $106,000, net of an income
tax benefit of $58,000, is included in stockholders' equity as an adjustment to
retained earnings.
<PAGE> 34
Page 33
The amortized cost and estimated fair value of debt and marketable
equity securities at February 1, 1997, by contractual maturity, are shown below:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Estimated
Security Type Cost Fair Value
- - --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Due in one year or less $19,293 $19,125
Due in one year through three years 12,956 13,019
------- -------
Subtotal 32,249 32,144
Equity securities 1,427 1,368
------- -------
Total $33,676 $33,512
======= =======
</TABLE>
- - --------------------------------------------------------------------------------
3. Accounts Receivable:
Accounts receivable consist of the following:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
------------------------------------
(In thousands)
<S> <C> <C>
Customer accounts - principally
deferred payment accounts $44,044 $41,331
Miscellaneous trade receivables 2,549 1,862
------- -------
Total 46,593 43,193
Less allowance for doubtful accounts 3,401 3,401
------- -------
Accounts receivable - net $43,192 $39,792
======= =======
</TABLE>
- - --------------------------------------------------------------------------------
Finance charge and late charge revenue on customer deferred payment
accounts were $6,937,000, $6,535,000 and $6,324,000 for the fiscal years ended
February 1, 1997, February 3, 1996 and January 28, 1995, respectively, and the
provision for doubtful accounts was $3,585,000, $2,918,000 and $2,888,000, for
the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995,
respectively. The provision for doubtful accounts is classified as a component
of selling, general and administrative expenses.
<PAGE> 35
Page 34
4. Property and Equipment:
Property and equipment consist of the following:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
-------------------------------------
(In thousands)
<S> <C> <C>
Land and improvements $ 1,661 $ 1,853
Buildings 15,445 15,481
Leasehold improvements 15,665 16,182
Fixtures and equipment 59,047 57,096
Construction in progress 251 2,449
------- -------
Total 92,069 93,061
Less accumulated depreciation 40,736 38,697
------- -------
Property and equipment - net $51,333 $54,364
======= =======
</TABLE>
- - --------------------------------------------------------------------------------
5. Accrued Expenses:
Accrued expenses consist of the following:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
--------------------------------
(In thousands)
<S> <C> <C>
Accrued bonus and retirement
savings plan contributions $ 1,919 $ 1,742
Accrued payroll and related items 2,849 2,819
Closed store expense 4,689 687
Property and other taxes 1,159 1,207
Contingent rent 545 604
Advertising 1,136 253
Accrued credit expenses 394 384
Accrued data processing expenses 269 234
Accrued health care plan contributions 669 428
Other 2,603 2,100
------- -------
Total accrued expenses $16,232 $10,458
======= =======
</TABLE>
- - --------------------------------------------------------------------------------
<PAGE> 36
Page 35
6. Financing Arrangements:
In February 1996, the Company entered into a new unsecured revolving
credit agreement which provides for borrowings of up to $20 million and an
additional letter of credit facility of $15 million. The revolving credit
agreement is committed until May 1999 and the letter of credit facility is
renewable annually. The revolving credit agreement contains various financial
covenants, including the maintenance of specific financial ratios. The agreement
replaced an unsecured revolving credit and term loan agreement, which was
committed until May 1998, and provided $35 million of available borrowings and a
$15 million letter of credit facility. There were no borrowings outstanding
under the new agreement at February 1, 1997 nor the prior agreement at February
3, 1996.
The Company had approximately $4,877,000 and $4,305,000 at February 1,
1997 and February 3, 1996, respectively, of outstanding irrevocable letters of
credit relating to purchase commitments. Upon satisfaction of the terms of the
letters of credit, the Company is obligated to pay the issuing bank the dollar
amount of the commitment.
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 June 1993, the Company effected a three-for-two stock split in the
form of a stock dividend. The split resulted in the issuance of 9,395,385 shares
of Class A Common Stock to Class A and B shareholders. All references in the
financial statements to average numbers of shares outstanding and related
prices, per share amounts and stock option plan data reflect the split.
<PAGE> 37
Page 36
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"). 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 worth of Class A Common Stock at 85% of market value. The number of
shares purchased by participants through the plan were 51,506 shares and 68,720
shares for the years ended February 1, 1997 and February 3, 1996, 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 option
must be at least 100 percent of the fair market value of Class A Common Stock at
the date of the grant and must be exercisable not later than 10 years after the
date of the grant unless otherwise expressly authorized by the Board of
Directors.
Option plan activity for the three fiscal years ended February 1, 1997
is set forth below:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Weighted
of Shares Average Price
-----------------------------------------
<S> <C> <C>
Outstanding options,
January 29, 1994 2,452,850 $ 8.19
Granted 584,500 10.59
Exercised (12,350) 7.36
Cancelled (32,700) 11.62
---------
Outstanding options,
January 28, 1995 2,992,300 8.62
Granted 883,250 7.67
Exercised (3,600) 2.51
Cancelled (854,150) 12.41
---------
Outstanding options,
February 3, 1996 3,017,800 7.28
Granted 76,000 6.70
Exercised (110,250) 3.03
Cancelled (151,800) 7.61
---------
Outstanding options,
February 1, 1997 2,831,750 $ 7.41
========= ======
Exercisable at
February 1, 1997 2,028,850 $ 7.34
========= ======
</TABLE>
- - --------------------------------------------------------------------------------
<PAGE> 38
Page 37
Outstanding options at February 1, 1997 covered 927,168 shares of Class
B Common Stock and 1,904,582 shares of Class A Common Stock. Outstanding options
at February 3, 1996 covered 927,918 shares of Class B Common Stock and 2,089,882
shares of Class A Common Stock. Options available to be granted under the option
plans were 434,400 shares at February 1, 1997 and 358,600 shares at February 3,
1996.
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 for fiscal 1996 and
1995 stock options granted been determined consistent with Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation", the Company's net income and earnings per common and common
equivalent share amounts for fiscal 1996 and 1995 would approximate the
following proforma amounts (dollars in thousands, except per share data):
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As Reported Proforma
----------- ----------
<S> <C> <C>
Net Income-- Fiscal 1996 $ 7,029 $ 6,668
Earnings per Common & Common Equivalent Share $ .25 $ .23
Net Income-- Fiscal 1995 $ 12,020 $ 11,628
Earnings per Common & Common Equivalent Share $ .42 $ .41
</TABLE>
- - --------------------------------------------------------------------------------
The fair value of each option granted during fiscal 1996 is estimated
as $ 3.34 on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: expected dividend yield 2.67%, expected volatility of
59.24%, adjusted for expected dividends; risk-free interest rate of 6.69%; and
an expected life of 4 years. The effects of applying SFAS 123 in this proforma
disclosure are not indicative of future amounts. SFAS 123 does not apply to
awards prior to fiscal 1995 and additional awards in future years are
anticipated.
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 and
further Company contributions, at the discretion of the Board of Directors,
based on a formula of percentages of pre-tax profits. The Company's
contributions for the years ended February 1, 1997, February 3, 1996 and January
28, 1995 were approximately $798,000, $961,000 and $1,278,000, 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 contributions were made to
the ESOP for the years ended February 1, 1997, February 3, 1996 and January 28,
1995, respectively. 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.
<PAGE> 39
Page 38
The Company has stop-loss insurance coverage for individual claims in excess of
$100,000. Contributions to the VEBA trust were $3,200,000, $3,115,000 and
$2,705,000 in fiscal 1996, 1995 and 1994, 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. During the years ended February 3,
1996 and January 28, 1995, the Company entered into an agreement with a lessor
to lease $9.5 million and $10 million, respectively, of store fixtures,
point-of-sale devices and warehouse equipment. These leases, which are being
accounted for as operating leases, are for terms 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 cancelled the
leases, the purchase price for the equipment would be approximately $15,918,000.
The minimum commitments relating to future payments under
non-cancelable operating leases are (in thousands):
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year
- - --------------------------------------------------------------------------------
<S> <C>
1997 $26,854
1998 18,552
1999 13,917
2000 9,952
2001 7,064
2002 and thereafter 8,409
-------
Total minimum lease payments $84,748
=======
</TABLE>
- - --------------------------------------------------------------------------------
The following schedule shows the composition of total rental expense
for all leases:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
February 1, February 3, January 28,
1997 1996 1995
------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Minimum rentals $30,028 $28,666 $24,817
Contingent rent 218 363 658
------- ------- -------
Total rental expense $30,246 $29,029 $25,475
======= ======= =======
</TABLE>
- - --------------------------------------------------------------------------------
<PAGE> 40
Page 39
10. Income Taxes:
The provisions for income taxes consist of the following:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
February 1, February 3, January 28,
1997 1996 1995
------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current income taxes:
Federal $ 4,056 $ 4,976 $ 9,681
State 584 863 151
------- ------- -------
Total 4,640 5,839 9,832
------- ------- -------
Deferred income taxes:
Federal (477) 861 518
State (294) (645) 57
------- ------- -------
Total (771) 216 575
------- ------- -------
Total income tax expense $ 3,869 $ 6,055 $10,407
======= ======= =======
</TABLE>
- - --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and
liabilities as of February 1, 1997 and February 3, 1996 are as follows:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
--------------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Bad debt reserve $ 1,373 $ 1,362
Inventory valuation 938 709
Unrealized losses on short-term
investments 58 --
Reserves 678 507
------- -------
Total deferred tax assets 3,047 2,578
------- -------
Deferred tax liabilities:
Tax over book depreciation 5,113 5,425
Other, net (229) (181)
------- -------
Total deferred tax liabilities 4,884 5,244
------- -------
Net deferred tax liabilities $ 1,837 $ 2,666
======= =======
</TABLE>
- - --------------------------------------------------------------------------------
<PAGE> 41
Page 40
The reconciliation of the Company's effective income tax rate with the
statutory rate is as follows:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
February 1, February 3, January 28,
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Federal income
tax rate 35.0% 35.0% 35.0%
State income taxes 4.0 2.8 0.5
Other (3.5) (4.3) 1.0
---- ---- ----
Effective income
tax rate 35.5% 33.5% 36.5%
==== ==== ====
</TABLE>
- - --------------------------------------------------------------------------------
11. Quarterly Financial Data (Unaudited):
Summarized quarterly financial results are as follows (in thousands,
except per share data):
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal 1996 First Second Third Fourth
- - ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail sales $120,028 $112,747 $108,117 $136,119
Total revenues 123,539 115,955 111,491 140,524
Cost of goods sold,
including occupancy,
distribution and buying 79,774 80,549 81,467 103,129
Net income (loss) 7,721 2,339 (899) (2,132)
Earnings (loss) per common
and common equivalent share $ .27 $ .08 $ (.03) $ (.07)
Fiscal 1995
- - ----------------------------------------------------------------------------------------
Retail sales $114,461 $114,739 $105,825 $141,613
Total revenues 117,755 117,850 109,331 145,059
Cost of goods sold,
including occupancy,
distribution and buying 75,276 82,256 80,097 103,515
Net income (loss) 7,498 2,963 (1,492) 3,051
Earnings (loss) per common
and common equivalent share $ .26 $ .10 $ (.05) $ .11
</TABLE>
- - --------------------------------------------------------------------------------
<PAGE> 42
Page 41
12. Store Closings:
In the normal course of business, the Company routinely closes or
relocates those stores which fail to demonstrate the ability to consistently
generate an acceptable return on investment and contribution to corporate
overhead. Although such closings generally occur throughout the year as a result
of management's ongoing profitability analysis, in the fourth quarter of fiscal
1996 the Company, in an effort to better align store operations with the current
apparel industry environment, decided to close 40 underperforming stores by the
end of the fiscal year. All of these stores were closed by late January 1997.
The costs of closing these stores included the write-off of leasehold
improvements and store fixtures that will not be utilized at other stores,
employee severance pay and the remaining noncancelable lease payments. Total
costs were $5,500,000, of which $3,772,000 was unpaid and accrued at February 1,
1997. The accrued lease payments of $3,370,000 will be paid over the remaining
lease terms which range from 1 to 48 months.
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 $1,158,000, $967,000 and $845,000 in fiscal 1996, 1995 and 1994,
respectively. The Company had approximately $1,832,000 at February 1, 1997 and
February 3, 1996, of outstanding letters of credit relating to such claims. 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.
<PAGE> 43
Page 42
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Allowance Reserve
for for
Doubtful Rental
Accounts(a) Commitments(b)
----------- --------------
(In thousands)
<S> <C> <C>
Balance at January 29, 1994 $ 3,162 $ 290
Additions charged to costs and expenses 2,888 825
Additions (Deductions) charged to other accounts 843 (d) --
Deductions (3,492)(c) (700)
------- -------
Balance at January 28, 1995 3,401 415
Additions charged to costs and expenses 2,918 1,199
Additions (Deductions) charged to other accounts 758 (d) --
Deductions (3,676)(c) (955)
------- -------
Balance at February 3, 1996 3,401 659
Additions charged to costs and expenses 3,585 926
Additions (Deductions) charged to other accounts 896 (d) --
Deductions (4,481)(c) (668)
------- -------
Balance at February 1, 1997 $ 3,401 $ 917
======= =======
</TABLE>
(a) Deducted from trade accounts receivable.
(b) Provision for the difference between costs and revenues from
noncancelable subleases over the lease terms of closed stores.
(c) Uncollectible accounts written off.
(d) Recoveries of amounts previously written off.
<PAGE> 44
Page 43
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/ Robert M. Sandler
------------------------------------- ------------------------
Wayland H. Cato, Jr. Robert M. Sandler
Chairman of the Board of Senior Vice President -
Directors and Controller
Chief Executive Officer
By /s/ Alan E. Wiley
-------------------------------------
Alan E. Wiley
Senior Executive Vice President - Secretary,
Chief Financial and Administrative
Officer
Date: April 25, 1997
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.
- - -------------------------------------------------
Wayland H. Cato, Jr.
(Director)
/s/ Edgar T. Cato
- - -------------------------------------------------
Edgar T. Cato
(Director)
/s/ John P. Derham Cato
- - -------------------------------------------------
John P. Derham Cato
(Director)
/s/ Linda McFarland Jenkins
- - -------------------------------------------------
Linda McFarland Jenkins
(Director)
/s/ Alan E. Wiley
- - -------------------------------------------------
Alan E. Wiley
(Director)
/s/ Howard A. Severson
- - -------------------------------------------------
Howard A. Severson
(Director)
/s/ Clarice Cato Goodyear
- - -------------------------------------------------
Clarice Cato Goodyear
(Director)
/s/ Thomas E. Cato
- - -------------------------------------------------
Thomas E. Cato
(Director)
/s/ Robert W. Bradshaw, Jr.
- - -------------------------------------------------
Robert W. Bradshaw, Jr.
(Director)
/s/ George S. Currin
- - -------------------------------------------------
George S. Currin
(Director)
/s/ Paul Fulton
- - -------------------------------------------------
Paul Fulton
(Director)
/s/ Grant L. Hamrick
- - -------------------------------------------------
Grant L. Hamrick
(Director)
/s/ James H. Shaw
- - -------------------------------------------------
James H. Shaw
(Director)
/s/ A.F. (Pete) Sloan
- - -------------------------------------------------
A.F. (Pete) Sloan
(Director)
<PAGE> 45
Page 44
EXHIBIT INDEX
Designation of
Exhibit Page
------- ----
21 Subsidiaries of the Registrant............................. 45
23.1 Consents of Independent Auditors........................... 46
23.2 Consents of Independent Auditors........................... 47
27 Financial Data Schedule (for SEC use only)
<PAGE> 1
Page 45
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name of State of Name under which
Subsidiary Incorporation Subsidiary does Business
- - ---------- ------------- ------------------------
<S> <C> <C>
CHW Corporation Delaware CHW Corporation
Providence Insurance Company, A Bermudian Company Providence Insurance Company,
Limited Limited
CatoSouth LLC North Carolina CatoSouth LLC
Cato of Texas L.P. Texas Cato of Texas L.P.
Cato Southwest, Inc. Delaware Cato Southwest, Inc.
CaDel LLC Delaware CaDel LLC
</TABLE>
<PAGE> 1
Page 46
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-41314) pertaining to The Cato Corporation Employee Incentive Stock
Option Plan, in the Registration Statement (Form S-8 No. 33-41315) pertaining to
The Cato Corporation Non-qualified Stock Option Plan, and in the Registration
Statement (Form S-8 No. 33-69844) pertaining to The Cato Corporation Employee
Stock Purchase Plan, of our report dated March 14, 1997, with respect to the
consolidated financial statements and financial statement schedule of The Cato
Corporation included in the Annual Report on Form 10-K for the year ended
February 1, 1997.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
April 23, 1997
<PAGE> 1
Page 47
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-41314) pertaining to The Cato Corporation Employee Incentive Stock
Option Plan, in the Registration Statement (Form S-8 No. 33-41315) pertaining to
The Cato Corporation Non-Qualified Stock Option Plan, and the Registration
Statement (Form S-8 No. 33-69844) pertaining to The Cato Corporation Employee
Stock Purchase Plan, of our report dated March 10, 1995, with respect to the
consolidated financial statements and schedule of The Cato Corporation included
in the Annual Report (Form 10-K) for the year ended February 1, 1997.
ERNST & YOUNG LLP
Charlotte, North Carolina
April 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> FEB-01-1997
<CASH> 16,593
<SECURITIES> 33,512
<RECEIVABLES> 47,553
<ALLOWANCES> 4,361
<INVENTORY> 63,968
<CURRENT-ASSETS> 161,460
<PP&E> 92,069
<DEPRECIATION> 40,736
<TOTAL-ASSETS> 218,243
<CURRENT-LIABILITIES> 56,087
<BONDS> 0
0
0
<COMMON> 954
<OTHER-SE> 150,949
<TOTAL-LIABILITY-AND-EQUITY> 218,243
<SALES> 477,011
<TOTAL-REVENUES> 491,509
<CGS> 344,919
<TOTAL-COSTS> 344,919
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,584
<INTEREST-EXPENSE> 262
<INCOME-PRETAX> 10,898
<INCOME-TAX> 3,869
<INCOME-CONTINUING> 7,029
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,029
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0
</TABLE>
