<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 [FEE REQUIRED]
For the fiscal year ended January 31, 1998
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 27, 1998, there were 22,237,391 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 27, 1998 was approximately $218,667,352 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 22, 1998, relating to the 1998
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
----
PART I:
<S> <C> <C> <C>
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 - 16
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>
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PART I
ITEM 1. BUSINESS:
GENERAL
The Company, founded in 1946, operated 548 women's apparel specialty
stores at January 31, 1998 under the names "Cato," "Cato Fashions" and "Cato
Plus" in 21 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, ages 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 26% of retail sales in fiscal 1997. In addition to its
Cato stores, the Company operated 145 off-price family apparel and accessories
stores at January 31, 1998 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, ages 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 1997, approximately 30% 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 1997, purchases from the Company's largest vendor accounted
for approximately 8% of the Company's total purchases. No other vendor accounted
for more than 5% 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, newspapers, radio and in-store
advertising as its primary advertising media. Newspaper advertisements typically
promote specific items or image. The Company uses radio advertising throughout
its trade areas. The Company's total advertising expenditures were approximately
1.6% of retail sales in fiscal 1997.
STORE OPERATIONS
The Company's store operations management team consists of an
executive vice president and senior vice president, nine regional vice
presidents and 50 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 80 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.
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ITEM 1. BUSINESS: (CONTINUED)
All of the Company's stores are leased. Approximately 92% are located
in strip shopping centers, 1% in downtown locations and 7% 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 1993.
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>
1993............. 438 65 13 490
1994............. 490 57 9 538
1995............. 538 19 7 550
1996............. 550 18 32 536
1997............. 536 28 16 548
</TABLE>
The Cato Division intends to open approximately 30 new stores and to
relocate or expand approximately 20 existing stores in fiscal 1998.
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 18% of retail sales in fiscal 1997. The Company's net bad debt
expense in fiscal 1997 was 4.1% 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 8% of retail sales in
fiscal 1997.
IT'S FASHION! STORES
The Company operated 145 off-price stores at January 31, 1998 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 14% of the Company's retail sales during fiscal 1997. As part
of its planned expansion program, the Company currently intends to open
approximately 35 new It's Fashion! stores in fiscal 1998.
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>
1993.............. 67 21 3 85
1994.............. 85 23 0 108
1995.............. 108 18 5 121
1996.............. 121 10 12 119
1997.............. 119 27 1 145
</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.
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ITEM 1. BUSINESS: (CONTINUED)
EMPLOYEES
As of January 31, 1998, the Company employed approximately 7,100
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.
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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 1997 and 1996.
- - --------------------------------------------------------------------------------
Price
<TABLE>
<CAPTION>
1997 HIGH LOW DIVIDEND
- - ----------------- ------- --------- ---------
<S> <C> <C> <C>
First quarter $ 6 1/4 $3 63 /64 $ .04
Second quarter 7 5/8 4 1/8 .04
Third quarter 10 7 .04
Fourth quarter 12 7 .04
Price
1996 HIGH LOW DIVIDEND
- - ---------------- ------- --------- ---------
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>
- - --------------------------------------------------------------------------------
As of March 27, 1998 the approximate number of holders of the
Company's Class A Common stock was 3,746 and there were 14 record holders of the
Company's Class B Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA:
The Cato Corporation
Selected Financial Data
<TABLE>
<CAPTION>
Fiscal Year Ended
JANUARY 31, February 1, February 3, January 28, January 29,
1998 1997 1996 1995 1994
----------- ----------- ----------- ---------- -----------
(Dollars in thousands, except per share and selected operating data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Retail sales $ 496,851 $ 477,011 $ 476,638 $ 463,737 $ 407,878
Other income 15,597 14,498 13,357 12,449 12,021
Total revenues 512,448 491,509 489,995 476,186 419,899
Cost of goods sold, including
occupancy, distribution and
buying 354,627 344,919 341,144 324,309 275,090
Gross margin percent,
including occupancy,
distribution and buying 28.6% 27.7% 28.4% 30.1% 32.6%
Selling, general and 124,439 121,600 122,699 116,144 100,760
administrative
Depreciation 7,713 8,330 7,785 6,844 5,465
Interest 262 262 292 377 250
Closed store expense -- 5,500 -- -- --
Income before income taxes 25,407 10,898 18,075 28,512 38,334
Income tax expense 8,006 3,869 6,055 10,407 13,532
Net income $ 17,401 $ 7,029 $ 12,020 $ 18,105 $ 24,802
Basic earnings per share $ .62 $ .25 $ .42 $ .64 $ .88
Diluted earnings per share $ .62 $ .25 $ .42 $ .63 $ .85
Cash dividends paid per share $ .16 $ .16 $ .16 $ .145 $ .088
SELECTED OPERATING DATA:
Stores open at end of year 693 655 671 646 575
Average sales per store $ 748,000 $ 710,000 $ 721,000 $ 749,000 $ 744,000
Average sales per square foot
selling space $ 163 $ 153 $ 158 $ 172 $ 187
Comparable store sales
increase (decrease) 4% (2)% (5)% 1% 8%
BALANCE SHEET DATA:
Working capital $ 113,327 $ 105,373 $ 102,169 $ 94,581 $ 91,569
Total assets 241,437 218,243 209,895 201,322 178,603
Total stockholders' equity $ 157,516 $ 151,903 $ 149,682 $ 141,508 $ 127,533
</TABLE>
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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 years indicated:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------
Fiscal Year Ended
JANUARY 31, February 1, February 3,
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Retail sales.................................. 100.0% 100.0% 100.0%
Other income.................................. 3.1 3.0 2.8
Total revenues................................ 103.1 103.0 102.8
Cost of goods sold, including occupancy,
distribution and buying.................... 71.4 72.3 71.6
Selling, general and administrative........... 25.0 25.4 25.7
Depreciation.................................. 1.5 1.7 1.6
Closed store expense.......................... -- 1.2 --
Selling, general, administrative,
depreciation and closed store expense...... 26.5 28.3 27.3
Income before income taxes.................... 5.1 2.3 3.8
Net income.................................... 3.5% 1.5% 2.5%
- - ---------------------------------------------------------------------------------------------
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996
Retail sales increased by 4% to $496.9 million in fiscal 1997 from
$477.0 million in fiscal 1996. Same-store sales increased 4% from the prior
year. Total revenues, comprised of retail sales and other income (principally
finance charges on customer accounts receivable, interest income and layaway
fees), increased by 4% to $512.4 million in fiscal 1997 from $491.5 million in
fiscal 1996. The Company operated 693 stores at January 31, 1998, compared to
655 stores operated at February 1, 1997.
The increase in retail sales in fiscal 1997 resulted from the Company's
adoption of an everyday low pricing strategy, improved merchandise offerings,
and an increase in store development activity. In fiscal 1997, the Company
increased its selling square footage approximately 3% by opening 55 new stores,
relocating or expanding 16 stores while closing 17 existing stores.
Other income in fiscal 1997 increased 8% over fiscal 1996. 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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (CONTINUED)
Cost of goods sold, including occupancy, distribution and buying, was
$354.6 million, or 71.4% of retail sales, in fiscal 1997, compared to $344.9
million, or 72.3% of retail sales, in fiscal 1996. The decrease in cost of goods
sold as a percent of retail sales resulted primarily from much improved
merchandise offerings, more timely markdowns and tighter merchandise planning
and control. Total gross margin dollars (retail sales less cost of goods sold)
increased by 8% to $142.2 million in fiscal 1997 from $132.1 million in fiscal
1996.
Selling, general, and administrative expenses (SG&A) were $124.4
million in fiscal 1997, compared to $121.6 million in fiscal 1996, an increase
of 2%. As a percent of retail sales, SG&A was 25.0% compared to 25.4% of retail
sales in the prior year. The overall increase in SG&A resulted primarily from
increased selling-related expenses and increased infrastructure expenses brought
about by the Company's store development activities.
Depreciation expense was $7.7 million in fiscal 1997, compared to $8.3
million in fiscal 1996. The 7% decrease in fiscal 1997 resulted primarily from
fixed asset dispositions relating to the prior year's store closings.
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 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.
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 decreased by 2.5% to $132.1 million in
fiscal 1996 from $135.5 million in fiscal 1995.
<PAGE> 15
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (CONTINUED)
SG&A expenses 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 non-cancelable lease payments.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK
At January 31, 1998, the Company had working capital of $113.3 million
compared to $105.4 million at February 1, 1997. Cash provided by operating
activities was $38.9 million in fiscal 1997, compared to $15.6 million in fiscal
1996. The increase in cash provided by operating activities in fiscal 1997
resulted primarily from an increase in net income and in accounts payable and
other liabilities, partially offset by the build-up of receivable levels. At
January 31, 1998, the Company had $69.5 million in cash, cash equivalents and
short-term investments, compared to $50.1 million at February 1, 1997.
At January 31, 1998, the Company had an 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 2000 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 Company feels the terms of the revolving credit
agreement support the Company's future working capital needs.
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
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (CONTINUED)
Expenditures for property and equipment totaled $7.4 million, $8.4
million and $9.4 million in fiscal 1997, 1996 and 1995, respectively. The
expenditures for fiscal 1997 were primarily for store development. The Company
intends to open approximately 65 new stores, to relocate or expand 20 stores,
and is currently planning approximately $13.3 million of capital expenditures
for fiscal 1998.
During 1997, the Company repurchased 1,196,500 shares of Class A Common
Stock for $8.2 million, or an average price of $6.84 per share.
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.
The Company does not use derivative financial instruments in its
investment portfolio. The Company's investment policy requires investments in
instruments that meet high credit quality standards, limits the investment
holding period of an instrument to a maximum of 3 years, and limits the amount
of credit exposure to any one issue, issuer and type of instrument. At January
31, 1998, approximately 93% of the Company's investment portfolio was invested
in governmental debt securities with maturities of 1 to 33 months, and the
remaining 7% was invested in corporate debt securities. These securities are
classified as available-for-sale, and are recorded on the balance sheet at fair
value with unrealized losses reported as a separate component of retained
earnings. Based on the current portfolio, an immediate change in interest rates
would not have a material impact on the Company's financial condition.
The Company is in the process of addressing the Year 2000 issue.
Certain hardware and software maintained by the Company may require
modification. The Company will utilize both internal and external resources to
reprogram or replace and test all of its hardware and software for Year 2000
compliance, and the Company expects to complete the project by December 1998.
The total cost to the Company has not been and is not anticipated to be material
to its financial position or results of operations in any given year.
Conclusions regarding the cost of the project and the expected completion date
are based on management's best estimates.
In June 1997, the Financial Accounting Standards Board (the "Board")
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), which requires that changes in the amounts
of comprehensive income items, currently reported as separate components of
equity, be shown in a financial statement, displayed as prominently as other
financial statements. Management believes the most significant component of
other comprehensive income will be unrealized gains and losses on
available-for-sale securities. The Company will adopt SFAS 130 in fiscal 1998.
<PAGE> 17
Page 16
In June 1997, the Board also issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), which establishes new standards for business segment
reporting. Requirements of SFAS 131 include reporting of (a) financial and
descriptive information about reportable operating segments, (b) a measure of
segment profit or loss, certain specific revenue and expense items and segment
assets with reconciliations of such amounts to the Company's financial
statements and (c) information regarding revenues derived from the Company's
products and services, information about major customers and information related
to geographic areas. SFAS 131 is effective for fiscal years beginning after
December 15, 1997, and thus will be adopted by the Company in fiscal 1998.
Adoption of SFAS 131 may require reporting of business segment information that
is more comprehensive than that currently reported in the financial statements.
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.
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, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Wayland H. Cato, Jr. * ++............ 75 Chairman of the Board and
Chief Executive Officer
John P. Derham Cato.................. 47 Vice Chairman of the Board,
President and Chief Operating
Officer
Edgar T. Cato........................ 73 Former Vice Chairman of the Board,
Co-Founder and Director
Alan E. Wiley........................ 51 Senior Executive Vice President,
Secretary, Chief Financial and
Administrative Officer and
Director
Howard A. Severson................... 50 Executive Vice President, Assistant
Secretary, Chief Real Estate and
Store Development Officer and
Director
C. David Birdwell.................... 58 Executive Vice President, President
and General Manager of the It's
Fashion! Division
David P. Kempert..................... 48 Executive Vice President and Chief
Store Operations Officer of the
Cato Division
B. Allen Weinstein................... 51 Executive Vice President and Chief
Merchandising Officer of the Cato
Division
Stephen R. Clark..................... 55 Senior Vice President, Human
Resources and Assistant Secretary
Clarice Cato Goodyear * ++........... 51 Special Assistant to the Chairman
and President, Assistant Secretary
and Director
Thomas E. Cato....................... 43 Vice President, Divisional
Merchandise Manager Accessories
and Shoes and Director
Robert W. Bradshaw, Jr. * +.......... 64 Director
George S. Currin * +................. 61 Director
Paul Fulton * + ..................... 63 Director
Grant L. Hamrick * +................. 59 Director
James H. Shaw * +.................... 69 Director
A.F. (Pete) Sloan * + ............... 68 Director
</TABLE>
* Members of Compensation Committee
+ Members of Audit and Stock Option Committees
++ Members of Audit Committee
<PAGE> 19
Page 18
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS: (CONTINUED)
Wayland H. Cato, Jr. is Chairman of the Board and has been a director
of the Company since 1946. Since 1960, he has served as the Company's Chief
Executive Officer.
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 of the Board, President and Chief Operating Officer.
Mr. John Cato is a son of Mr. Wayland H. Cato, Jr.
Edgar T. Cato is the Former Vice Chairman of the Board and Co-Founder
of the Company, and has been a director of the Company since 1946. Mr. Edgar T.
Cato is the brother of Mr. Wayland H. Cato, Jr.
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.
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.
C. David Birdwell joined the Company as Executive Vice President,
President and General Manager of the It's Fashion! Division in October 1996.
From 1994-1996, he was employed as President/General Merchandise Manager of
Allied Stores, a family apparel chain headquartered in Savannah, Georgia. In
1993, he was Executive Vice President/General Merchandise Manager of Ambers,
Inc., based in Dallas, Texas. From 1989-1992, he was employed as a Chartered
Financial Consultant with Jefferson Pilot, based in Greensboro, North Carolina.
From 1985-1989, he was President/CEO of Maxway Stores, a discount chain
headquartered in Sanford, North Carolina.
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.
B. Allen Weinstein joined the Company as Executive Vice President,
Chief Merchandising Officer of the Cato Division in August 1997. From 1995 to
1997, he was Senior Vice President - Merchandising of Catherines Stores
Corporation. From 1985 to 1995, he served as Senior Vice President of
Merchandising for Beall's, Inc.
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.
<PAGE> 20
Page 19
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS: (CONTINUED)
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 Special Assistant to the Chairman and President and as Assistant
Secretary. From March 1987 through July 1993, Ms. Goodyear held senior
administrative, operational services and human resources positions in the
Company; she served as Executive Vice President, Chief Administrative Officer
and Assistant Secretary from May 1992 through July 1993. Ms. Goodyear is a
daughter of Mr. Wayland H. Cato, Jr.
Thomas E. Cato has been employed by the Company since 1977, has served
as an officer since 1986 and has been a director 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 is 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. He currently
serves as Chairman and Chief Executive Officer for Bassett Furniture Industries,
Inc. From January 1994 until 1997, Mr. Fulton served as Dean of the
Kenan-Flagler Business School of the University of North Carolina at Chapel
Hill. From July 1988 to December 1993, Mr. Fulton served as President of Sara
Lee Corporation. Mr. Fulton is currently a director of Sonoco Products,
NationsBank Corporation, Lowe's Companies, Inc., Bassett Furniture Industries,
Inc., and Hudson's Bay Company.
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 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 1998
annual stockholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
Incorporated by reference to Registrant's proxy statement for 1998
annual stockholders' meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Incorporated by reference to Registrant's proxy statement for 1998
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 45 of this annual report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended January 31,
1998.
<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 JANUARY 31, 1998
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:
<TABLE>
<S> <C>
Report of Independent Auditors............................Page 24
Consolidated Statements of Income.........................Page 25
Consolidated Balance Sheets...............................Page 26
Consolidated Statements of Cash Flows ....................Page 27
Consolidated Statements of Stockholders' Equity...........Page 28
Notes to Consolidated Financial Statements................Pages 29 - 42
The following consolidated financial statement schedule of the Cato Corporation
is included in Item 14 (d):
SCHEDULE II - Valuation and qualifying accounts ..................Page 43
</TABLE>
<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 and subsidiaries (the Company) as of January 31, 1998 and February
1, 1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended January
31, 1998. Our audits also included the financial statement schedule listed in
the index at Item 14(A). These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and financial statement
schedule based on our audits.
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 companies at January 31, 1998
and February 1, 1997, and the results of their operations and their cash flows
for each of the three years in the period ended January 31, 1998, 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 13, 1998
<PAGE> 26
Page 25
The Cato Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
Fiscal Year Ended
JANUARY 31, February 1, February 3,
1998 1997 1996
--------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
REVENUES
Retail sales $496,851 $477,011 $476,638
Other income (principally finance
and layaway charges) 15,597 14,498 13,357
-------- -------- --------
Total revenues 512,448 491,509 489,995
-------- -------- --------
COSTS AND EXPENSES
Cost of goods sold, including
occupancy, distribution
and buying 354,627 344,919 341,144
Selling, general and administrative 124,439 121,600 122,699
Depreciation 7,713 8,330 7,785
Interest 262 262 292
Closed store expense -- 5,500 --
-------- -------- --------
Total operating expenses 487,041 480,611 471,920
-------- -------- --------
INCOME BEFORE INCOME TAXES 25,407 10,898 18,075
Income tax expense 8,006 3,869 6,055
-------- -------- --------
NET INCOME $ 17,401 $ 7,029 $ 12,020
======== ======== ========
BASIC EARNINGS PER SHARE $ .62 $ .25 $ .42
======== ======== ========
DILUTED EARNINGS PER SHARE $ .62 $ .25 $ .42
======== ======== ========
DIVIDENDS PER SHARE $ .16 $ .16 $ .16
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 27
Page 26
The Cato Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JANUARY 31, February 1,
1998 1997
---------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 41,644 $ 16,593
Short-term investments 27,843 33,512
Accounts receivable, net of
allowance for doubtful accounts of
$3,701 at January 31, 1998 and
$3,401 at February 1, 1997 47,186 43,192
Merchandise inventories 64,226 63,968
Deferred income taxes 2,958 2,014
Prepaid expenses 1,686 2,181
-------- --------
Total Current Assets 185,543 161,460
Property and Equipment - net 49,801 51,333
Other Assets 6,093 5,450
-------- --------
Total Assets $241,437 $218,243
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 52,931 $ 38,276
Accrued expenses 17,244 16,232
Income taxes 2,041 1,579
-------- --------
Total Current Liabilities 72,216 56,087
Deferred Income Taxes 5,296 3,851
Other Noncurrent Liabilities
(primarily deferred rent) 6,409 6,402
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; 23,502,647 shares
issued at January 31, 1998
and 23,366,403 shares issued at
February 1, 1997 783 778
Convertible Class B Common Stock,
$.033 par value per share,
15,000,000 shares authorized;
5,264,317 shares issued and
outstanding at January 31, 1998 and
February 1, 1997 176 176
Additional paid-in capital 64,187 63,272
Retained earnings 101,537 88,656
-------- --------
166,683 152,882
Less Class A Common Stock in treasury,
at cost (1,371,500 shares at
January 31, 1998 and 175,000 shares
at February 1, 1997) 9,167 979
-------- --------
Total Stockholders' Equity 157,516 151,903
-------- --------
Total Liabilities and Stockholders' Equity $241,437 $218,243
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 28
Page 27
The Cato Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Fiscal Year Ended
JANUARY 31, February 1, February 3,
1998 1997 1996
--------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 17,401 $ 7,029 $ 12,020
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,713 8,330 7,785
Amortization of investment premiums 95 183 280
Provision for doubtful accounts 3,675 3,585 2,918
Deferred income taxes 496 (771) 216
Loss on disposal of property and equipment 1,196 412 --
Changes in operating assets and liabilities
which provided (used) cash:
Accounts receivable (7,669) (6,985) (4,784)
Merchandise inventories (258) (5,528) (3,766)
Other assets (148) (51) (283)
Accrued income taxes 760 251 419
Accounts payable and other liabilities 15,674 9,176 93
-------- -------- --------
Net cash provided by operating activities 38,935 15,631 14,898
-------- -------- --------
INVESTING ACTIVITIES
Expenditures for property and equipment (7,377) (8,371) (9,415)
Purchases of short-term investments (24,553) (23,312) (10,442)
Sales of short-term investments 30,122 11,164 11,566
-------- -------- --------
Net cash used in investing activities (1,808) (20,519) (8,291)
-------- -------- --------
FINANCING ACTIVITIES
Dividends paid (4,510) (4,558) (4,554)
Purchase of treasury stock (8,188) (756) (223)
Proceeds from employee stock purchase plan 234 279 381
Proceeds from stock options exercised 388 333 9
-------- -------- --------
Net cash used in financing activities (12,076) (4,702) (4,387)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents 25,051 (9,590) 2,220
Cash and Cash Equivalents at Beginning of Year 16,593 26,183 23,963
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 41,644 $ 16,593 $ 26,183
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 29
Page 28
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
------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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 $58,000 (106)
--------- ----------- ---------- --------- ---------
BALANCE-- FEBRUARY 1, 1997 778 176 63,272 88,656 979
Net income 17,401
Dividends paid ($.16 per share) (4,510)
Class A Common Stock sold through employee
stock purchase plan-- 47,194 shares 2 232
Class A Common Stock sold through stock
option plans-- 89,050 shares 3 385
Income tax benefit from stock options
exercised 298
Purchase of treasury shares-- 1,196,500
shares 8,188
Unrealized losses on available for sale
securities, net of deferred income
taxes of $5,000 (10)
--------- ----------- ---------- --------- ---------
BALANCE-- JANUARY 31, 1998 $ 783 $ 176 $ 64,187 $ 101,537 $ 9,167
========= =========== ========== ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 30
Page 29
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation -- The consolidated financial statements
include the accounts of the 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 ended January 31, 1998 and
February 1, 1997 each included fifty-two weeks. The fiscal year ended 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 values of short-term investments are based on
quoted market prices.
The Company's short-term investments held at January 31, 1998 and
February 1, 1997 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 $1,749,000 and
$2,862,000 at January 31, 1998 and February 1, 1997, respectively.
Supplemental Cash Flow Information -- Interest paid during the fiscal
years ended January 31, 1998, February 1, 1997 and February 3, 1996 was
$255,000, $308,000 and $375,000, respectively. Income tax payments, net of
refunds received, for the fiscal years ended January 31, 1998, February 1, 1997
and February 3, 1996 were $6,754,000, $4,324,000 and $5,577,000, respectively.
Inventories -- Merchandise inventories are stated at the lower of cost
(first-in, first-out method) or market as determined by the retail method.
<PAGE> 31
Page 30
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, which are as follows:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
ESTIMATED
CLASSIFICATION USEFUL LIVES
- - -------------------------------------------------------------------------------
<S> <C> <C>
Land improvements 10 years
Buildings 30 - 40 years
Leasehold improvements 5 - 10 years
Fixtures and equipment 3 - 10 years
- - -------------------------------------------------------------------------------
</TABLE>
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 $7,334,000, $8,898,000 and $8,803,000
for the fiscal years ended January 31, 1998, February 1, 1997 and February 3,
1996, respectively.
Earnings Per Share -- In February 1997, Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") was issued. In
accordance with SFAS 128, the Company has retroactively adopted the new standard
in the quarter and year ended January 31, 1998. SFAS 128 requires dual
presentation of basic and diluted earnings per share (EPS) on the face of the
consolidated statements of income and a reconciliation of the components of the
basic and diluted EPS calculations in the notes to the financial statements.
Basic EPS excludes dilution of stock options and is computed by dividing net
earnings by the weighted-average number of Class A and Class B common shares
outstanding for the respective periods. The weighted-average number of shares
used in the basic earnings per share computations was 28,058,934, 28,499,843 and
28,429,130 for the fiscal years ended January 31, 1998, February 1, 1997 and
February 3, 1996, respectively. The weighted-average number of shares
representing the dilutive effect of stock options was 73,450, 69,732 and 131,213
for the fiscal years ended January 31, 1998, February 1, 1997 and February 3,
1996, respectively. The weighted-average number of shares used in the diluted
earnings per share computations was 28,132,384, 28,569,575 and 28,560,343 for
the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996,
respectively.
Income Taxes -- The Company and its subsidiaries file a consolidated
federal income tax return. Income taxes are provided based on the asset and
liability method of accounting, whereby deferred income taxes are provided for
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities.
Store Opening and Closing Costs -- Costs relating to the opening of new
stores or the relocating or expanding of existing stores are expensed as
incurred. The Company evaluates all long-lived assets, including certain
identifiable intangibles and goodwill related to those assets, for impairment.
Impairment losses are recognized when expected future cash flows from the use of
the assets are less than the assets' carrying values.
<PAGE> 32
Page 31
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 June 1997, the Financial
Accounting Standards Board (the "Board") issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which requires that changes in the amounts of comprehensive income items,
currently reported as separate components of equity, be shown in a financial
statement, displayed as prominently as other financial statements. Management
believes the most significant component of other comprehensive income will be
unrealized gains and losses on available-for-sale securities. The Company will
adopt SFAS 130 in fiscal 1998.
In June 1997, the Board also issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), which establishes new standards for business segment
reporting. Requirements of SFAS 131 include reporting of (a) financial and
descriptive information about reportable operating segments, (b) a measure of
segment profit or loss, certain specific revenue and expense items and segment
assets with reconciliations of such amounts to the Company's financial
statements and (c) information regarding revenues derived from the Company's
products and services, information about major customers and information related
to geographic areas. SFAS 131 is effective for fiscal years beginning after
December 15, 1997, and thus will be adopted by the Company in fiscal 1998.
Adoption of SFAS 131 may require reporting of business segment information that
is more comprehensive than that currently reported in 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 1997 fiscal year.
<PAGE> 33
Page 32
2. SHORT-TERM INVESTMENTS:
Short-term investments at January 31, 1998 include the following:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
ESTIMATED
UNREALIZED FAIR
SECURITY TYPE COST (LOSSES) VALUE
- - --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Obligations of states
and political subdivisions $26,012 $ (94) $25,918
Corporate debt securities 2,000 (75) 1,925
------- ----- -------
Total $28,012 $(169) $27,843
======= ===== =======
- - -------------------------------------------------------------------------------
</TABLE>
Short-term investments at February 1, 1997 include the following:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
ESTIMATED
UNREALIZED FAIR
SECURITY TYPE COST (LOSSES) 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>
The unrealized losses at January 31, 1998 and February 1, 1997 of
$116,000 and $106,000, respectively, net of an income tax benefit of $53,000 and
$58,000, respectively, are included in stockholders' equity as an adjustment to
retained earnings.
<PAGE> 34
Page 33
The amortized cost and estimated fair value of debt securities at
January 31, 1998, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------
ESTIMATED
FAIR
SECURITY TYPE COST VALUE
- - -------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Due in one year or less $12,869 $12,728
Due in one year through three
years 15,143 15,115
------- -------
Total $28,012 $27,843
======= =======
- - --------------------------------------------------------------------------
</TABLE>
3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------
JANUARY 31, February 1,
1998 1997
------------------------------
(In thousands)
<S> <C> <C>
Customer accounts - principally
deferred payment accounts $48,948 $44,044
Miscellaneous trade receivables 1,939 2,549
------- -------
Total 50,887 46,593
Less allowance for doubtful
accounts 3,701 3,401
------- -------
Accounts receivable - net $47,186 $43,192
======= =======
- - ---------------------------------------------------------------------------
</TABLE>
Finance charge and late charge revenue on customer deferred payment
accounts totaled $8,262,000, $6,937,000 and $6,535,000 for the fiscal years
ended January 31, 1998, February 1, 1997 and February 3, 1996, respectively, and
the provision for doubtful accounts was $3,675,000, $3,585,000 and $2,918,000,
for the fiscal years ended January 31, 1998, February 1, 1997 and February 3,
1996, 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>
- - -----------------------------------------------------------------------------
JANUARY 31, February 1,
1998 1997
-------------------------------
(In thousands)
<S> <C> <C>
Land and improvements $ 1,661 $ 1,661
Buildings 15,445 15,445
Leasehold improvements 17,484 15,665
Fixtures and equipment 61,635 59,047
Construction in progress 298 251
------- -------
Total 96,523 92,069
Less accumulated depreciation 46,722 40,736
------- -------
Property and equipment - net $49,801 $51,333
======= =======
- - ---------------------------------------------------------------------------
</TABLE>
5. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------
JANUARY 31, February 1,
1998 1997
--------------------------------
(In thousands)
<S> <C> <C>
Accrued bonus and retirement
savings plan contributions $ 3,761 $ 1,919
Accrued payroll and related
items 2,492 2,849
Closed store expense 2,901 4,689
Property and other taxes 1,451 1,159
Contingent rent 579 545
Advertising 937 1,136
Accrued credit expenses 500 394
Accrued data processing
expenses 439 269
Accrued health care plan
contributions 938 669
Other 3,246 2,603
------- -------
Total accrued expenses $17,244 $16,232
======= =======
- - -------------------------------------------------------------------------
</TABLE>
<PAGE> 36
Page 35
6. FINANCING ARRANGEMENTS:
At January 31, 1998, the Company had an 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 2000 and the letter of credit facility is renewable
annually. The revolving credit agreement contains various financial covenants,
including the maintenance of specific financial ratios. There were no borrowings
outstanding under the agreement at January 31, 1998 or February 1, 1997.
The Company had approximately $7,641,000 and $4,877,000 at January 31,
1998 and February 1, 1997, 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 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 47,194 shares and 51,506
shares for the years ended January 31, 1998 and February 1, 1997, respectively.
In December 1997, the Board of Directors proposed to amend the Plan to increase
the maximum number of Class A shares of Common Stock authorized to be issued
from 250,000 to 500,000 shares, subject to shareholder approval.
<PAGE> 37
Page 36
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 January 31, 1998
is set forth below:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------
WEIGHTED
NUMBER AVERAGE
OF SHARES PRICE
-------------------------------
<S> <C> <C>
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
Granted 1,023,000 8.10
Exercised (89,050) 4.36
Cancelled (979,968) 7.51
---------
Outstanding options,
January 31, 1998 2,785,732 $ 7.73
========= ======
Exercisable at
January 31, 1998 1,272,482 $ 7.49
========= ======
- - ------------------------------------------------------------------------------
</TABLE>
As of January 31, 1998, the weighted average contractual life remaining
for the outstanding options was 7 years with exercise prices ranging from $1.50
to $9.31.
Outstanding options at January 31, 1998 covered 317,000 shares of Class
B Common Stock and 2,468,732 shares of Class A Common Stock. 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. Options available to be granted under the option
plans were 391,368 shares at January 31, 1998 and 434,400 shares at February 1,
1997.
<PAGE> 38
Page 37
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its stock options
plans. Accordingly, no compensation expense has been recognized for stock-based
compensation where the option price of the stock approximated the fair market
value of the stock on the date of grant. Had compensation expense for fiscal
1997, 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 basic and diluted
earnings per share amounts for fiscal 1997, 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 1997 $ 17,401 $ 16,476
Basic Earnings Per Share $ .62 $ .59
Diluted Earnings Per Share $ .62 $ .59
Net Income-- Fiscal 1996 $ 7,029 $ 6,668
Basic Earnings Per Share $ .25 $ .23
Diluted Earnings Per Share $ .25 $ .23
Net Income-- Fiscal 1995 $ 12,020 $ 11,628
Basic Earnings Per Share $ .42 $ .41
Diluted Earnings Per Share $ .42 $ .41
- - -----------------------------------------------------------------------------
</TABLE>
The fair value of each option granted during fiscal 1997, 1996 and 1995
is estimated as $4.02, $3.34 and $3.34 per share, respectively. The fair value
of each option grant is estimated using the Black-Scholes option-pricing model
with the following assumptions for grants issued in 1997, 1996 and 1995,
respectively: expected dividend yield of 1.49%, 2.67% and 2.67%; expected
volatility of 58.14%, 59.24% and 59.24%, adjusted for expected dividends;
risk-free interest rate of 5.44%, 6.69% and 6.69%; and an expected life of 5
years, 4 years and 4 years. The effects of applying SFAS 123 in this proforma
disclosure are not indicative of future amounts.
In February 1998, the Board of Directors increased the quarterly
dividend by 12.5% from $.04 per share to $.045 per share.
<PAGE> 39
Page 38
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 January 31, 1998, February 1, 1997 and
February 3, 1996 were approximately $1,177,000, $798,000 and $961,000,
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. The
contribution for the fiscal year ended January 31, 1998 was $130,000. No
contributions were made to the ESOP for the years ended February 1, 1997 and
February 3, 1996, 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. The Company has stop-loss insurance coverage for
individual claims in excess of $200,000. Contributions to the VEBA trust were
$3,854,000, $3,200,000 and $3,115,000 in fiscal 1997, 1996 and 1995,
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 do not meet
criteria for capital lease accounting, are being accounted for as operating
leases and have terms of seven years. However, these leases may be cancelled
annually upon proper notice to the lessor. Upon notice of cancellation, the
Company would be obligated to purchase the equipment at a prescribed termination
value from the lessor. If the Company cancelled the leases, the purchase price
for the equipment would be approximately $13,743,000.
The minimum commitments relating to future payments under
non-cancelable operating leases are (in thousands):
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------
FISCAL YEAR
- - --------------------------------------------------------------------------
<S> <C>
1998 $27,114
1999 19,374
2000 15,294
2001 12,026
2002 7,930
2003 and thereafter 5,118
------
Total minimum lease payments $86,856
========
- - --------------------------------------------------------------------------
</TABLE>
<PAGE> 40
Page 39
The following schedule shows the composition of total rental expense
for all leases:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------
Fiscal Year Ended
JANUARY 31, February 1, February 3,
1998 1997 1996
------------------------------------------
(In thousands)
<S> <C> <C> <C>
Minimum rentals $29,660 $30,028 $28,666
Contingent rent 226 218 363
------- ------- -------
Total rental expense $29,886 $30,246 $29,029
======= ======= =======
- - ----------------------------------------------------------------------------------------
</TABLE>
10. INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------
Fiscal Year Ended
JANUARY 31, February 1, February 3,
1998 1997 1996
-------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current income taxes:
Federal $ 6,825 $ 4,056 $ 4,976
State 685 584 863
------- ------- -------
Total 7,510 4,640 5,839
------- ------- -------
Deferred income taxes:
Federal 205 (477) 861
State 291 (294) (645)
------- ------- -------
Total 496 (771) 216
------- ------- -------
Total income tax expense $ 8,006 $ 3,869 $ 6,055
======= ======= =======
- - -----------------------------------------------------------------------------------------
</TABLE>
<PAGE> 41
Page 40
Significant components of the Company's deferred tax assets and
liabilities as of January 31, 1998 and February 1, 1997 are as follows:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------
JANUARY 31, February 1,
1998 1997
---------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Bad debt reserve $ 1,432 $ 1,373
Inventory valuation 1,197 938
Unrealized losses on short-term
investments 53 58
Reserves 1,202 678
------- -------
Total deferred tax assets 3,884 3,047
------- -------
Deferred tax liabilities:
Tax over book depreciation 6,426 5,113
Other, net (204) (229)
------- -------
Total deferred tax liabilities 6,222 4,884
------- -------
Net deferred tax liabilities $ 2,338 $ 1,837
======= =======
</TABLE>
The reconciliation of the Company's effective income tax rate with the
statutory rate is as follows:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------
Fiscal Year Ended
JANUARY 31, February 1, February 3,
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Federal income tax
rate 35.0% 35.0% 35.0%
State income taxes 2.9 4.0 2.8
Other (6.4) (3.5) (4.3)
---- ---- ----
Effective income tax
rate 31.5% 35.5% 33.5%
==== ==== ====
- - ---------------------------------------------------------------------------------------
</TABLE>
<PAGE> 42
Page 41
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial results are as follows (dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------
FISCAL 1997 FIRST SECOND THIRD FOURTH
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail sales $ 123,251 $ 120,901 $ 109,886 $ 142,813
Total revenues 127,500 124,451 113,743 146,754
Cost of goods sold,
including occupancy,
distribution and buying 83,056 85,954 80,028 105,589
Net income 8,020 3,776 1,390 4,215
Basic earnings per share $ .28 $ .13 $ .05 $ .15
Diluted earnings per share $ .28 $ .13 $ .05 $ .15
FISCAL 1996
- - -----------------------------------------------------------------------------------------------
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)
Basic earnings (loss)
per share $ .27 $ .08 $ (.03) $ (.07)
Diluted earnings (loss)
per share $ .27 $ .08 $ (.03) $ (.07)
- - -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 43
Page 42
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 non-cancelable lease payments. Total
costs were $5,500,000, of which $998,000 and $3,772,000 was unpaid and accrued
at January 31, 1998 and February 1, 1997, respectively. The remaining accrued
lease payments at January 31, 1998 will be paid over the remaining lease terms
which range from 11 to 35 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 $970,000, $1,158,000 and $967,000 in fiscal 1997, 1996 and 1995,
respectively. The Company had approximately $1,832,000 at January 31, 1998 and
February 1, 1997, 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> 44
Page 43
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 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
Additions charged to costs and expenses 3,675 2,001
Additions (Deductions) charged to other accounts 853 (d) --
Deductions (4,228)(c) (1,015)
------- -------
Balance at January 31, 1998 $ 3,701 $ 1,903
======= =======
</TABLE>
(a) Deducted from trade accounts receivable.
(b) Provision for the difference between costs and revenues from non-cancelable
subleases over the lease terms of closed stores.
(c) Uncollectible accounts written off.
(d) Recoveries of amounts previously written off.
<PAGE> 45
Page 44
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.
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
Date: April 22, 1998
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:
<TABLE>
<S> <C>
/s/ Wayland H. Cato, Jr. /s/ Robert W. Bradshaw, Jr.
- - ------------------------------------------ -------------------------------------
Wayland H. Cato, Jr. Robert W. Bradshaw, Jr.
(Director) (Director)
/s/ John P. Derham Cato /s/ George S. Currin
- - ------------------------------------------ -------------------------------------
John P. Derham Cato George S. Currin
(Director) (Director)
/s/ Edgar T. Cato /s/ Paul Fulton
- - ------------------------------------------ -------------------------------------
Edgar T. Cato Paul Fulton
(Director) (Director)
/s/ Alan E. Wiley /s/ Grant L. Hamrick
- - ------------------------------------------ -------------------------------------
Alan E. Wiley Grant L. Hamrick
(Director) (Director)
/s/ Howard A. Severson /s/ James H. Shaw
- - ------------------------------------------ -------------------------------------
Howard A. Severson James H. Shaw
(Director) (Director)
/s/ Clarice Cato Goodyear /s/ A.F. (Pete) Sloan
- - ------------------------------------------ -------------------------------------
Clarice Cato Goodyear A.F. (Pete) Sloan
(Director) (Director)
/s/ Thomas E. Cato
- - ------------------------------------------
Thomas E. Cato
(Director)
</TABLE>
<PAGE> 46
Page 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
DESIGNATION OF
EXHIBIT PAGE
- - -------------- ----
<S> <C> <C>
21 Subsidiaries of the Registrant........................... 46
23 Consent of Independent Auditors.......................... 47
27 Financial Data Schedule (For SEC Use Only)............... 48
</TABLE>
<PAGE> 1
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
CatoWest LLC Nevada CatoWest LLC
Cedar Hill National Bank A Nationally Chartered Cedar Hill National Bank
Bank
</TABLE>
<PAGE> 1
EXHIBIT 23
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 13, 1998, 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
January 31, 1998.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
April 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT OF THE CATO CORPORATION AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
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0
0
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</TABLE>
