<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended January 30, 1999
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 26, 1999, there were 21,198,119 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 26, 1999 was approximately $153,581,255 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, 1999, relating to the 1999
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
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PART I:
<S> <C> <C>
Item 1. Business.......................................................................Pages 2 - 8
Item 2. Properties.....................................................................Page 8
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 732 women's apparel specialty
stores at January 30, 1999 under the names "Cato," "Cato Fashions," "Cato Plus"
and "It's Fashion!" in 21 states, principally in the Southeast. The Company
offers quality fashion apparel and accessories at everyday low prices in
junior, missy and plus sizes. Additionally, the Company offers clothing and
accessories for girls ages 7 - 16 in selected locations. With the objective of
offering head-to-toe dressing for its customers, the Company's stores feature a
broad assortment of apparel and accessories, including casual and dressy
sportswear, dresses, careerwear, coats, hosiery, shoes, costume jewelry,
handbags and millinery. A substantial portion of the Company's merchandise is
sold under its private labels and is produced by various vendors in accordance
with the Company's specifications. Most stores range in size from 3,000 to
6,000 square feet and are located primarily in strip shopping centers anchored
by national 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 21% of retail sales in fiscal 1998.
BUSINESS
The Company's primary 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. The Company
has positioned itself as the everyday low price leader in its
segment.
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ITEM 1. BUSINESS: (CONTINUED)
Strip Shopping Center Locations. The Company locates its
stores principally in strip centers convenient to our customers
anchored by national 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
existing stores in small to medium sized towns and selected
metropolitan areas in northern, midwestern and western fringe states,
as well as continuing to "fill-in" existing southeastern core
geography.
MERCHANDISING
Merchandising
The Company offers a broad selection of popular-priced apparel and
accessories to suit the various lifestyles of the fashion conscious
low-to-middle income female, ages 18 to 50. In addition, the Company offers
consistent product quality and fit.
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 7 - 16 are offered in
selected stores. Most of the Company's merchandise is sold under its private
labels.
The collaboration of the merchandising team with an expanded in-house
product development and new direct sourcing function will enhance merchandise
offerings in order to deliver quality private label products at lower costs.
The product development office provides research on emerging fashion and color
trends, technical services and direct sourcing capabilities.
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ITEM 1. BUSINESS: (CONTINUED)
As a part of its merchandising strategy, members of the Company's
merchandising staff frequently visit selected stores, monitor the merchandise
offerings of other retailers, regularly communicate with store operations
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 1998, purchases from the Company's largest vendor accounted
for approximately 6% of the Company's total purchases. No other vendor
accounted for more than 4% of total purchases. The Company is not dependent on
its largest vendor or any other vendor for merchandise purchases and the loss
of any single vendor or group of vendors would not have a material adverse
effect on the Company's operating results or financial condition. A substantial
portion of the Company's merchandise is sold under its private labels and is
produced by various vendors in accordance with the Company's specifications.
The Company purchases most of its merchandise from domestic importers and
vendors, which typically minimizes the time necessary to purchase and obtain
shipments in order to enable the Company to react to merchandise trends in a
more timely fashion. Although a significant portion of the Company's
merchandise is manufactured overseas, principally in the Far East, any
economic, political or social unrest in that region is not expected to have a
material adverse effect on the Company's ability to obtain adequate supplies of
merchandise.
An important component of the Company's strategy is the allocation of
merchandise to individual stores based on an analysis of 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 1.2% of retail sales in fiscal 1998.
STORE OPERATIONS
The Company's store operations management team consists of two
executive vice presidents, a senior vice president, eleven regional vice
presidents, three regional assistant vice presidents and sixty-seven district
managers. Regional vice presidents and assistant 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 Southeast in small to
medium-sized towns, with populations of 10,000 to 50,000 and retail trade areas
of 25,000 to 100,000. Stores range in size from 3,000 to 6,000 square feet and
average in size approximately 4,300 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 and relocating other existing stores to more desirable locations in the
same market area. The following table sets forth information with respect to
the Company's development activities since fiscal 1994.
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>
1994................ 575 80 9 646
1995................ 646 37 12 671
1996................ 671 28 44 655
1997................ 655 55 17 693
1998................ 693 52 13 732
</TABLE>
The Company intends to open approximately 75 new stores and to
relocate approximately 24 existing stores in fiscal 1999. Additionally, the
Company plans to remodel 200 stores over the next two years.
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 16% of retail sales in fiscal 1998. The Company's net bad debt
expense in fiscal 1998 was 4.3% 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.
Layaway Plan
Under the Company's layaway plan, merchandise is set aside for
customers who agree to make periodic payments. The Company adds a nonrefundable
administrative fee to each layaway sale. If no payment is made for four weeks,
the customer is considered to have defaulted, and the merchandise is returned
to the selling floor and again offered for sale, often at a reduced price. All
payments made by customers who subsequently default on their layaway purchase
are returned to the customer upon request, less the administrative fee and a
restocking fee. Layaway sales represented approximately 6% of retail sales in
fiscal 1998.
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.
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ITEM 1. BUSINESS: (CONTINUED)
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.
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.
EMPLOYEES
As of January 30, 1999, the Company employed approximately 7,000
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.
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ITEM 3. LEGAL PROCEEDINGS:
There are no material pending legal proceedings to which the
registrant or its subsidiaries is a party, or to which any of their property is
subject.
ITEM 4. 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 1998 and
1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Price
1998 HIGH LOW DIVIDEND
- -------------------------- --------- ------------- -----------
<S> <C> <C> <C>
First quarter $ 15 1/8 $ 10 1/2 $ .045
Second quarter 19 1/8 13 1/8 .045
Third quarter 15 1/2 7 1/2 .05
Fourth quarter 15 5/8 7 11/16 .05
Price
1997 HIGH LOW DIVIDEND
- -------------------------- --------- ------------- -----------
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
- --------------------------------------------------------------------------------
</TABLE>
As of March 26, 1999 the approximate number of holders of the
Company's Class A Common stock was 3,626 and there were 12 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 30, January 31, February 1, February 3, January 28,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share and selected operating data)
STATEMENT OF OPERATIONS DATA:
Retail sales $524,381 $496,851 $477,011 $476,638 $463,737
Other income 19,283 15,597 14,498 13,357 12,449
Total revenues 543,664 512,448 491,509 489,995 476,186
Cost of goods sold 371,005 354,627 344,919 341,144 324,309
Gross margin percent 29.2% 28.6% 27.7% 28.4% 30.1%
Selling, general and administrative 127,986 124,439 121,600 122,699 116,144
Selling, general and
administrative percent 24.4% 25.0% 25.4% 25.7% 25.0%
Depreciation 7,638 7,713 8,330 7,785 6,844
Interest 240 262 262 292 377
Closed store expense -- -- 5,500 -- --
Income before income taxes 36,795 25,407 10,898 18,075 28,512
Income tax expense 12,878 8,006 3,869 6,055 10,407
Net income $ 23,917 $ 17,401 $ 7,029 $ 12,020 $ 18,105
Basic earnings per share $ .87 $ .62 $ .25 $ .42 $ .64
Diluted earnings per share $ .85 $ .62 $ .25 $ .42 $ .63
Cash dividends paid per share $ .19 $ .16 $ .16 $ .16 $ .145
SELECTED OPERATING DATA:
Stores open at end of year 732 693 655 671 646
Average sales per store $740,000 $748,000 $710,000 $721,000 $749,000
Average sales per square foot of
selling space $ 169 $ 163 $ 153 $ 158 $ 172
Comparable store sales increase
(decrease) 2% 4% (2)% (5)% 1%
BALANCE SHEET DATA:
Cash and investments $ 86,209 $ 69,487 $ 50,105 $ 47,894 $ 46,226
Working capital 124,024 113,327 105,373 102,169 94,581
Total assets 258,513 241,437 218,243 209,895 201,322
Total stockholders' equity $172,234 $157,516 $151,903 $149,682 $141,508
</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 30, January 31, February 1,
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Retail sales 100.0% 100.0% 100.0%
Other income 3.7 3.1 3.0
Total revenues 103.7 103.1 103.0
Cost of goods sold 70.8 71.4 72.3
Selling, general and administrative 24.4 25.0 25.4
Depreciation 1.5 1.5 1.7
Closed store expense -- -- 1.2
Selling, general, administrative,
depreciation and closed store expense 25.9 26.5 28.3
Income before income taxes 7.0 5.1 2.3
Net income 4.6% 3.5% 1.5%
- ---------------------------------------------------------------------------------------------
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Retail sales increased by 6% to $524.4 million in fiscal 1998 from $496.9
million in fiscal 1997. Same-store sales increased 2% from the prior year.
Total revenues, comprised of retail sales and other income (principally finance
charges and late fees on customer accounts receivable, interest income and
layaway fees), increased by 6% to $543.7 million in fiscal 1998 from $512.4
million in fiscal 1997. The Company operated 732 stores at January 30, 1999,
compared to 693 stores operated at January 31, 1998.
The increase in retail sales in fiscal 1998 resulted from the Company's
adoption of an everyday low pricing strategy, improved merchandise offerings,
and an increase in store development activity. In fiscal 1998, the Company
increased its number of stores 6% by opening 52 new stores, relocating 18
stores while closing 13 existing stores.
Other income in fiscal 1998 increased $3.7 million or 24% over fiscal 1997.
The increase resulted primarily from increased earnings on cash equivalents and
short-term investments and from higher finance charge and late fee 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 was $371.0 million, or 70.8% of retail sales, in fiscal
1998, compared to $354.6 million, or 71.4% of retail sales, in fiscal 1997. The
decrease in cost of goods sold as a percent of retail sales resulted primarily
by maintaining timely and aggressive markdowns on slow moving merchandise,
eliminating unprofitable promotions and improving inventory flow. Total gross
margin dollars (retail sales less cost of goods sold) increased by 8% to $153.4
million in fiscal 1998 from $142.2 million in fiscal 1997.
Selling, general, and administrative expenses (SG&A) were $128.0 million in
fiscal 1998, compared to $124.4 million in fiscal 1997, an increase of 3%. As a
percent of retail sales, SG&A was 24.4% compared to 25.0% of retail sales in
the prior year. The overall increase in SG&A resulted primarily from increased
selling-related expenses and increased infrastructure expenses brought about by
the Company's store development activities.
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 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.
Cost of goods sold 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 increased by 8% to
$142.2 million in fiscal 1997 from $132.1 million in fiscal 1996.
<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 $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.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK
At January 30, 1999, the Company had working capital of $124.0 million
compared to $113.3 million at January 31, 1998. Cash provided by operating
activities was $40.9 million in fiscal 1998, compared to $38.9 million in
fiscal 1997. The increase in cash provided by operating activities in fiscal
1998 resulted primarily from an increase in net income and accounts payable and
other liabilities, and a decrease in merchandise inventories. At January 30,
1999, the Company had $86.2 million in cash, cash equivalents and short-term
investments, compared to $69.5 million at January 31, 1998.
At January 30, 1999, the Company had an unsecured revolving credit
agreement which provides for borrowings of up to $35 million. The revolving
credit agreement is committed until May 2001. 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. There were no borrowings outstanding under the agreement at
January 30, 1999.
The Company has an agreement with a lessor to lease $19.5 million of store
fixtures, point-of-sale devices and warehouse equipment. The operating leases
are for a term of seven years but may be cancelled annually upon proper notice
to the lessor. Upon notice of cancellation, the Company would be obligated to
purchase the equipment at a prescribed termination value from the lessor.
Expenditures for property and equipment totaled $13.5 million, $7.4 million
and $8.4 million in fiscal 1998, 1997 and 1996, respectively. The expenditures
for fiscal 1998 were primarily for store development and new technology for
merchandising, distribution and finance. For fiscal 1999, the Company intends
to open approximately 75 new stores, close 10 stores, relocate 24 stores, and
is currently planning approximately $24 million of capital expenditures,
primarily for store development and further system implementations for
merchandising, distribution and finance. The Company plans to remodel 200
stores over the next two years.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (CONTINUED)
During 1998, the Company repurchased 1,006,500 shares of Class A Common
Stock for $10.1 million, or an average price of $10.05 per share. Over the
course of fiscal 1998, the Company increased its quarterly dividend from $.04
per share to $.05 per share. In February 1999, the Board of Directors increased
the quarterly dividend by 10% from $.05 per share to $.055 per share and
approved a resolution to purchase an additional 1,000,000 shares of stock.
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 30, 1999,
all of the Company's investment portfolio was invested in governmental debt
securities with maturities of 1 to 33 months. These securities are classified
as available-for-sale, and are recorded on the balance sheet at fair value with
unrealized gains and losses reported as other comprehensive income. 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 developed a two phase approach to address the Year 2000 issue,
which involves the exposure to risks in its information technology (IT)
systems, as well as potential risks in other non-IT systems with embedded
technology. Phase 1 was an analysis to identify and fix all internally
developed programs. Phase 2 is the identification and correction to all
programs purchased from external sources. The Company has completed Phase 1,
and Phase 2 is scheduled to be substantially complete by the end of the second
fiscal quarter of 1999 with continued testing of compliance throughout 1999.
The Company expects to spend approximately $525,000 in 1998 and 1999 on
hardware, software and consulting to ensure proper processing of transactions
relating to the Year 2000 and beyond. The Company has initiated formal
communications with its third-party suppliers and vendors to determine the
extent to which the Company is vulnerable to those third-parties' failure to
remediate their own Year 2000 issue. Although lack of compliance for Year 2000
issues by third-party suppliers and vendors could have an adverse effect on the
Company's business, results of operations and financial condition, the Company
expects its Year 2000 compliance efforts to significantly reduce the risk of
business interruption and the level of uncertainty the Year 2000 issue may have
on its computer systems. A contingency plan will be established upon the
completion of Phase 2.
<PAGE> 17
Page 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (CONTINUED)
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which
provides guidance on the capitalization of certain software development costs.
Adoption of SOP 98-1 is effective for fiscal 1999, and management is currently
evaluating the effect this statement may have on the financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"), which provides guidance on the
accounting for start-up costs. The Company adopted SOP 98-5 in fiscal 1998, and
the effect on the financial statements was immaterial.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") which addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts and hedging activities. SFAS 133 is effective for the Company's
fiscal 2000. The Company has not yet completed its analysis of any potential
impact of SFAS 133 on its financial statements.
The Annual Report includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in the Annual
Report and located elsewhere herein regarding the Company's financial position
and business strategy may constitute forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct.
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, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Wayland H. Cato, Jr. * ++............................... 76 Chairman of the Board and
Chief Executive Officer
John P. Derham Cato..................................... 48 Vice Chairman of the Board,
President and Chief Operating Officer
Edgar T. Cato........................................... 74 Former Vice Chairman of the Board,
Co-Founder and Director
Michael O. Moore........................................ 48 Executive Vice President, Chief Financial Officer
and Secretary
Howard A. Severson...................................... 51 Executive Vice President, Chief Real Estate and
Store Development Officer, Assistant Secretary
and Director
B. Allen Weinstein...................................... 52 Executive Vice President and Chief Merchandising
Officer of the Cato Division
David P. Kempert........................................ 49 Executive Vice President and Chief Store
Operations Officer of the Cato Division
C. David Birdwell....................................... 59 Executive Vice President, President and General
Manager of the It's Fashion! Division
Stephen R. Clark........................................ 56 Senior Vice President, Human Resources and
Assistant Secretary
Clarice Cato Goodyear * ++.............................. 52 Special Assistant to the Chairman and President,
Assistant Secretary and Director
Thomas E. Cato.......................................... 44 Vice President, Divisional Merchandise Manager
and Director
Robert W. Bradshaw, Jr. * +............................. 65 Director
George S. Currin * +.................................... 62 Director
Paul Fulton * + ........................................ 64 Director
Grant L. Hamrick * +.................................... 60 Director
James H. Shaw * +....................................... 70 Director
A.F. (Pete) Sloan * + .................................. 69 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.
Michael O. Moore joined the Company as Executive Vice President, Chief
Financial Officer and Secretary in July 1998. From 1997 to 1998, he was Vice
President - Chief Financial Officer of The Party Experience, a specialty
retailer of party goods. From 1994 to 1997, he was employed by Davids Bridal, a
specialty retailer of bridalwear and related merchandise, as Executive Vice
President - Chief Financial Officer. From 1984 to 1994, he was employed by
Bloomingdales where his most recent position was Senior Vice President - Chief
Financial Officer.
Howard A. Severson has been an officer of the Company since 1985. He
currently serves as Executive Vice President, Chief Real Estate and Store
Development Officer and Assistant Secretary 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.
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.
David P. Kempert joined the Company in August 1989. He currently
serves as Executive Vice President, Chief Store Operations Officer of the Cato
Division. From 1982 until 1989, he was employed by The Gap Stores, an apparel
specialty chain, where his most recent position was Zone Vice President of the
Northeast Region.
C. David Birdwell joined the Company as Executive Vice President,
President and General Manager of the It's Fashion! Division in October 1996.
From 1994 to 1996, he was employed as President/General Merchandise Manager of
Allied Stores, a family apparel chain headquartered in Savannah, Georgia. In
1993, he was Executive Vice President/General Merchandise Manager of Ambers,
Inc., based in Dallas, Texas. From 1989 to 1992, he was employed as a Chartered
Financial Consultant with Jefferson Pilot, based in Greensboro, North Carolina.
From 1985 to 1989, he was President/CEO of Maxway Stores, a discount chain
headquartered in Sanford, North Carolina.
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. 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, Bank
America 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. and Richfood Holdings, Inc.
<PAGE> 21
Page 20
ITEM 11. EXECUTIVE COMPENSATION:
Incorporated by reference to Registrant's proxy statement for 1999
annual stockholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
Incorporated by reference to Registrant's proxy statement for 1999
annual stockholders' meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Incorporated by reference to Registrant's proxy statement for 1999
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 46 of this annual report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended January 30,
1999.
<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 30, 1999
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:
Independent Auditors' Report............................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 - 44
The following consolidated financial statement schedule of the Cato Corporation
is included in Item 14 (d):
SCHEDULE II - Valuation and qualifying accounts....................Page 45
<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 30, 1999 and January
31, 1998, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended January
30, 1999. 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 Company at January 30, 1999 and
January 31, 1998, and the results of its operations and its cash flows for each
of the three years in the period ended January 30, 1999, 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 12, 1999
<PAGE> 26
Page 25
The Cato Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
Fiscal Year Ended
JANUARY 30, January 31, February 1,
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
(Dollars in thousands, except per share data)
REVENUES
Retail sales $524,381 $496,851 $477,011
Other income (principally finance and layaway charges) 19,283 15,597 14,498
-------- -------- --------
Total revenues 543,664 512,448 491,509
-------- -------- --------
COSTS AND EXPENSES
Cost of goods sold 371,005 354,627 344,919
Selling, general and administrative 127,986 124,439 121,600
Depreciation 7,638 7,713 8,330
Interest 240 262 262
Closed store expense -- -- 5,500
-------- -------- --------
Total operating expenses 506,869 487,041 480,611
-------- -------- --------
INCOME BEFORE INCOME TAXES 36,795 25,407 10,898
Income tax expense 12,878 8,006 3,869
-------- -------- --------
NET INCOME $ 23,917 $ 17,401 $ 7,029
======== ======== ========
BASIC EARNINGS PER SHARE $ .87 $ .62 $ .25
======== ======== ========
DILUTED EARNINGS PER SHARE $ .85 $ .62 $ .25
======== ======== ========
DIVIDENDS PER SHARE $ .19 $ .16 $ .16
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 27
Page 26
The Cato Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JANUARY 30, January 31,
1999 1998
---------------------------
<S> <C> <C>
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 44,068 $ 41,644
Short-term investments 42,141 27,843
Accounts receivable, net of allowance for doubtful accounts of
$4,201 at January 30, 1999 and $3,701 at January 31, 1998 44,536 47,186
Merchandise inventories 61,112 64,226
Deferred income taxes 3,372 2,958
Prepaid expenses 2,374 1,686
-------- --------
Total Current Assets 197,603 185,543
Property and Equipment - net 54,740 49,801
Other Assets 6,170 6,093
-------- --------
Total Assets $258,513 $241,437
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 52,391 $ 52,931
Accrued expenses 20,991 17,244
Income taxes 197 2,041
-------- --------
Total Current Liabilities 73,579 72,216
Deferred Income Taxes 5,922 5,296
Other Noncurrent Liabilities (primarily deferred rent) 6,778 6,409
Stockholders' Equity:
Preferred Stock, $100 par value per share, 100,000 shares -- --
authorized, none issued
Class A Common Stock, $.033 par value per share, 50,000,000
shares authorized; 24,070,519 shares issued at January 30, 1999
and 23,502,647 shares issued at January 31, 1998 802 783
Convertible Class B Common Stock, $.033 par value per share,
15,000,000 shares authorized; 5,264,317 shares issued and
outstanding at January 30, 1999 and January 31, 1998 176 176
Additional paid-in capital 69,878 64,187
Retained earnings 120,590 101,537
-------- --------
191,446 166,683
Less Class A Common Stock in treasury, at cost (2,368,000 shares at
January 30, 1999 and 1,371,500 shares at January 31, 1998) 19,212 9,167
-------- --------
Total Stockholders' Equity 172,234 157,516
-------- --------
Total Liabilities and Stockholders' Equity $258,513 $241,437
======== ========
</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 30, January 31, February 1,
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 23,917 $ 17,401 $ 7,029
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,638 7,713 8,330
Amortization of investment premiums 123 95 183
Provision for doubtful accounts 4,081 3,675 3,585
Deferred income taxes 38 496 (771)
Loss on disposal of property and equipment 942 1,196 412
Changes in operating assets and liabilities which
provided (used) cash:
Accounts receivable (1,431) (7,669) (6,985)
Merchandise inventories 3,114 (258) (5,528)
Other assets (765) (148) (51)
Accrued income taxes (463) 760 251
Accounts payable and other liabilities 3,705 15,674 9,176
-------- -------- --------
Net cash provided by operating activities 40,899 38,935 15,631
-------- -------- --------
INVESTING ACTIVITIES
Expenditures for property and equipment (13,519) (7,377) (8,371)
Purchases of short-term investments (24,624) (24,553) (23,312)
Sales of short-term investments 10,717 30,122 11,164
-------- -------- --------
Net cash used in investing activities (27,426) (1,808) (20,519)
-------- -------- --------
FINANCING ACTIVITIES
Dividends paid (5,204) (4,510) (4,558)
Purchases of treasury stock (10,112) (8,188) (756)
Proceeds from employee stock purchase plan 336 234 279
Proceeds from stock options exercised 3,931 388 333
-------- -------- --------
Net cash used in financing activities (11,049) (12,076) (4,702)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 2,424 25,051 (9,590)
Cash and Cash Equivalents at Beginning of Year 41,644 16,593 26,183
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 44,068 $ 41,644 $ 16,593
======== ======== ========
</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
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
BALANCE -- FEBRUARY 3, 1996 $ 773 $ 176 $ 62,665 $ 86,291 $ 223
*Comprehensive income:
Net income 7,029
Unrealized losses on available for sale securities,
net of deferred income tax benefit of $58,000 (106)
Dividends paid ($.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
-------- -------- -------- -------- --------
BALANCE -- FEBRUARY 1, 1997 778 176 63,272 88,656 979
*Comprehensive income:
Net income 17,401
Unrealized losses on available for sale securities,
net of deferred income taxes of $5,000 (10)
Dividends paid ($.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
-------- -------- -------- -------- --------
BALANCE -- JANUARY 31, 1998 783 176 64,187 101,537 9,167
*Comprehensive income:
Net income 23,917
Unrealized gains on available for sale securities,
net of deferred income taxes of $174,000 340
Dividends paid ($.19 per share) (5,204)
Class A Common Stock sold through employee
stock purchase plan -- 37,122 shares 1 335
Class A Common Stock sold through stock
option plans -- 530,750 shares 18 3,913
Income tax benefit from stock options exercised 1,381
Purchase of treasury shares -- 1,006,500 shares 10,112
Contribution of treasury stock to Employee Stock
Purchase Plan -- 10,000 shares 62 (67)
-------- -------- -------- -------- --------
BALANCE -- JANUARY 30, 1999 $ 802 $ 176 $ 69,878 $120,590 $ 19,212
======== ======== ======== ======== ========
</TABLE>
*Total comprehensive income for the years ended January 30, 1999, January 31,
1998 and February 1, 1997 was $24,257, $17,391 and $6,923, respectively.
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 Cato Corporation and its wholly-owned subsidiaries
("the Company"). All significant intercompany balances and transactions have
been eliminated.
Description of Business and Fiscal Year -- The Company has principally two
segments of business -- operation of women's apparel specialty stores and a
credit card division. 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 the Southeast. The Company's fiscal year ends on the
Saturday nearest January 31. Fiscal years ended January 30, 1999, January 31,
1998 and February 1, 1997 each included fifty-two 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 and Cash Equivalents and Short-Term Investments -- Cash equivalents
consist of highly liquid investments with original maturities of three months
or less. Investments with original maturities beyond three months are
classified as short-term investments. The fair values of short-term investments
are based on quoted market prices.
The Company's short-term investments held at January 30, 1999 and January
31, 1998 are classified as available-for-sale. Available-for-sale securities
are carried at fair value, with unrealized gains and losses, net of income
taxes, reported as a component of other comprehensive income. 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 $308,000 and
$1,749,000 at January 30, 1999 and January 31, 1998, respectively.
Supplemental Cash Flow Information -- Interest paid during the fiscal years
ended January 30, 1999, January 31, 1998 and February 1, 1997 was $193,000,
$255,000 and $308,000, respectively. Income tax payments, net of refunds
received, for the fiscal years ended January 30, 1999, January 31, 1998 and
February 1, 1997 were $13,394,000, $6,754,000 and $4,324,000, respectively.
<PAGE> 31
Page 30
Inventories - Merchandise inventories are stated at the lower of cost
(first-in, first-out method) or market as determined by the retail method.
Property and Equipment - Property and equipment are recorded at cost.
Maintenance and repairs are charged to operations as incurred; renewals and
betterments are capitalized. Depreciation of property and equipment is provided
on the straight-line method over the estimated useful lives of the related
assets, which are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------
ESTIMATED
CLASSIFICATION USEFUL LIVES
- -------------------------------------------
<S> <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 $5,755,000, $7,334,000 and $8,898,000 for
the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997,
respectively.
Earnings Per Share -- Basic earnings per share excludes dilution of stock
options and is computed by dividing net earnings by the weighted-average number
of Class A and Class B common shares outstanding for the respective periods.
The weighted-average number of shares used in the basic earnings per share
computations was 27,522,582, 28,058,934 and 28,499,843 for the fiscal years
ended January 30, 1999, January 31, 1998 and February 1, 1997, respectively.
The weighted-average number of shares representing the dilutive effect of stock
options was 659,003, 73,450 and 69,732 for the fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997, respectively. The weighted-average
number of shares used in the diluted earnings per share computations was
28,181,585, 28,132,384 and 28,569,575 for the fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997, 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 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.
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.
Recent Accounting Pronouncements -- In March 1998, the American Institute
of Certified Public Accountants ("AICPA") issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), which provides guidance on the capitalization of
certain software development costs. Adoption of SOP 98-1 is effective for
fiscal 1999, and management is currently evaluating the effect this statement
may have on the financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"), which provides guidance on the
accounting for start-up costs. The Company adopted SOP 98-5 in fiscal 1998, and
the effect on the financial statements was immaterial.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") which addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts and hedging activities. SFAS 133 is effective for the Company's
fiscal 2000. The Company has not yet completed its analysis of any potential
impact of SFAS 133 on its financial statements.
Reclassifications -- Certain reclassifications have been made to the
consolidated financial statements for prior fiscal years to conform with
classifications used for the 1998 fiscal year.
<PAGE> 33
Page 32
2. SHORT-TERM INVESTMENTS:
Short-term investments at January 30, 1999 include the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ESTIMATED
UNREALIZED FAIR
SECURITY TYPE COST GAINS VALUE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Obligations of states and
political subdivisions $ 41,796 $ 345 $ 42,141
Corporate debt securities -- -- --
----------- ---------- -------------
Total $ 41,796 $ 345 $ 42,141
=========== ========== =============
- -------------------------------------------------------------------------------
</TABLE>
Short-term investments at January 31, 1998 include the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ESTIMATED
UNREALIZED FAIR
SECURITY TYPE COST (LOSSES) VALUE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
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>
The unrealized gains at January 30, 1999 of $224,000, net of an income tax
expense of $121,000, and the unrealized losses at January 31, 1998 of $116,000,
net of an income tax benefit of $53,000, are reflected in other comprehensive
income.
<PAGE> 34
Page 33
The amortized cost and estimated fair value of debt securities at January
30, 1999, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
ESTIMATED
FAIR
SECURITY TYPE COST VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Due in one year or less $ 7,148 $ 7,112
Due in one year through three years 34,648 35,029
---------- -------------
Total $ 41,796 $ 42,141
========== =============
- -------------------------------------------------------------------------------
</TABLE>
3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
JANUARY 30, January 31,
1999 1998
--------------------------------------
<S> <C> <C>
(In thousands)
Customer accounts - principally
deferred payment accounts $ 46,913 $ 48,948
Miscellaneous trade receivables 1,824 1,939
------------- ------------
Total 48,737 50,887
Less allowance for doubtful accounts 4,201 3,701
------------- ------------
Accounts receivable - net $ 44,536 $ 47,186
============= ============
- -------------------------------------------------------------------------------
</TABLE>
Finance charge and late charge revenue on customer deferred payment
accounts totaled $11,113,000, $8,262,000 and $6,937,000 for the fiscal years
ended January 30, 1999, January 31, 1998 and February 1, 1997, respectively,
and the provision for doubtful accounts was $4,081,000, $3,675,000 and
$3,585,000, for the fiscal years ended January 30, 1999, January 31, 1998 and
February 1, 1997, 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 30, January 31,
1999 1998
--------------------------------------
<S> <C> <C>
(In thousands)
Land and improvements $ 1,709 $ 1,661
Buildings 15,784 15,445
Leasehold improvements 19,190 17,484
Fixtures and equipment 66,817 61,635
Construction in progress 3,449 298
-------------- ------------
Total 106,949 96,523
Less accumulated depreciation 52,209 46,722
-------------- ------------
Property and equipment - net $ 54,740 $ 49,801
============== ============
- --------------------------------------------------------------------------
</TABLE>
5. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
JANUARY 30, January 31,
1999 1998
-------------------------------------
<S> <C> <C>
(In thousands)
Accrued bonus and retirement
savings plan contributions $ 6,371 $ 3,761
Accrued payroll and related items 2,705 2,492
Closed store lease obligations 2,168 2,901
Property and other taxes 2,266 1,451
Accrued health care 2,068 938
Other 5,413 5,701
-------------- ------------
Total accrued expenses $ 20,991 $ 17,244
============== ============
- -------------------------------------------------------------------------
</TABLE>
<PAGE> 36
Page 35
6. FINANCING ARRANGEMENTS:
At January 30, 1999, the Company had an unsecured revolving credit
agreement which provides for borrowings of up to $35 million. The revolving
credit agreement is committed until May 2001. The credit agreement contains
various financial covenants and limitations, including the maintenance of
specific financial ratios. There were no borrowings outstanding under the
agreement at January 30, 1999 or January 31, 1998.
The Company had approximately $5,524,000 and $7,641,000 at January 30, 1999
and January 31, 1998, 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"). In May 1998, the shareholders approved an amendment to the Plan to
increase the maximum number of Class A shares of Common Stock authorized to be
issued from 250,000 to 500,000 shares. Under the terms of the Plan,
substantially all employees may purchase Class A Common Stock through payroll
deductions of up to 10% of their salary. The Class A Common Stock is purchased
at the lower of 85% of market value on the first or last business day of a
six-month payment period. Additionally, each April 15, employees are given the
opportunity to make a lump sum purchase of up to $10,000 worth of Class A
Common Stock at 85% of market value. The number of shares purchased by
participants through the plan were 37,122 shares and 47,194 shares for the
years ended January 30, 1999 and January 31, 1998, respectively.
<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 30, 1999 is
set forth below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
RANGE OF WEIGHTED
OPTIONS OPTION AVERAGE
OUTSTANDING PRICES PRICE
----------------------------------------------------
<S> <C> <C> <C>
Outstanding options,
February 3, 1996 3,017,800 $ 1.42 - $ 8.42 $ 7.28
Granted 76,000 4.94 - 9.31 6.70
Exercised (110,250) 1.42 - 7.69 3.03
Cancelled (151,800) 2.09 - 7.81 7.61
------------
Outstanding options,
February 1, 1997 2,831,750 1.42 - 9.31 7.41
Granted 1,023,000 5.03 - 9.25 8.10
Exercised (89,050) 1.42 - 7.69 4.36
Cancelled (979,968) 6.97 - 8.25 7.51
------------
Outstanding options,
January 31, 1998 2,785,732 1.50 - 9.31 7.73
Granted 302,000 10.66 - 14.59 13.03
Exercised (530,750) 1.50 - 9.31 7.38
Cancelled (95,000) 4.94 - 12.56 7.63
------------
Outstanding options,
January 30, 1999 2,461,982 $ 1.50 - $ 14.59 $ 8.45
============ ========
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 38
Page 37
The following tables summarize information about stock options outstanding
at January 30, 1999:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Options Outstanding
-----------------------------------------------------------
Weighted
Average Weighted
Range of Number Remaining Average
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------------------------------------------------------------------------
<C> <C> <C> <C>
$ 1.50 - $ 7.63 838,782 3.49 years $ 7.35
$ 7.96 - $ 8.25 1,293,000 7.86 years $ 8.08
$ 9.25 - $ 14.59 330,200 9.64 years $ 12.69
--------------
$ 1.50 - $ 14.59 2,461,982 6.61 years $ 8.45
==============
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Options Exercisable
--------------------------------------------------------
Weighted
Range of Number Average
Exercise Prices Exercisable Exercise Price
- -------------------------------------------------------------------------------
<C> <C> <C>
$ 1.50 - $ 7.63 777,782 $ 7.52
$ 7.96 - $ 8.25 414,400 $ 7.95
$ 9.25 - $ 14.59 4,000 $ 9.31
---------------
$ 1.50 - $ 14.59 1,196,182 $ 7.68
===============
- -------------------------------------------------------------------------------
</TABLE>
Outstanding options at January 30, 1999 covered 517,000 shares of Class B
Common Stock and 1,944,982 shares of Class A Common Stock. 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. Options available to be granted under
the option plans were 184,368 shares at January 30, 1999 and 391,368 shares at
January 31, 1998.
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
1998, 1997 and 1996 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 1998, 1997 and 1996 would approximate the
following proforma amounts (dollars in thousands, except per share data):
<PAGE> 39
Page 38
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
AS REPORTED PROFORMA
------------------------------
<S> <C> <C>
Net Income-- Fiscal 1998 $ 23,917 $ 22,822
Basic Earnings Per Share $ .87 $ .83
Diluted Earnings Per Share $ .85 $ .81
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
- -------------------------------------------------------------------
</TABLE>
The fair value of each option granted during fiscal 1998, 1997 and 1996 is
estimated as $6.71, $4.02 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 1998, 1997 and 1996,
respectively: expected dividend yield of 2.20%, 1.49% and 2.67%; expected
volatility of 66.44%, 58.14% and 59.24%, adjusted for expected dividends;
risk-free interest rate of 5.07%, 5.44% and 6.69%; and an expected life of 5
years, 5 years and 4 years. The effects of applying SFAS 123 in this proforma
disclosure are not indicative of future amounts.
In February 1999, the Board of Directors increased the quarterly
dividend by 10% from $.05 per share to $.055 per share.
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which requires the
components of comprehensive income to be disclosed in the financial statements.
Total comprehensive income is composed of net income and unrealized gains or
losses on available-for-sale securities. Total comprehensive income for the
years ended January 30, 1999, January 31, 1998 and February 1, 1997 is as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fiscal Year Ended
JANUARY 30, January 31, February 1,
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
(In thousands)
Net income $23,917 $17,401 $7,029
Unrealized gains (losses) on
available for sale securities,
net of taxes 340 (10) (106)
------- ------- ------
Total comprehensive income $24,257 $17,391 $6,923
======= ======= ======
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 40
Page 39
The following schedule summarizes the activity in other comprehensive
income for the year ended January 30, 1999 (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Pre-tax Tax Expense Net of Tax
-------------------------------------------------------
<S> <C> <C> <C>
Net unrealized gains arising during the year $ 299 $ 99 $ 200
Add: Reclassification adjustments for
losses included in net income 215 75 140
------------- ------------ --------------
Other comprehensive income $ 514 $ 174 $ 340
============= ============ ==============
- ------------------------------------------------------------------------------------------------------
</TABLE>
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 30, 1999, January 31, 1998 and
February 1, 1997 were approximately $1,606,000, $1,177,000 and $798,000,
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
contributions for the fiscal years ended January 30, 1999 and January 31, 1998
were $531,000 and $130,000, respectively. No contribution was made to the ESOP
for the year ended February 1, 1997. 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
$4,177,000, $3,854,000 and $3,200,000 in fiscal 1998, 1997 and 1996,
respectively.
9. LEASES:
The Company has operating lease arrangements for store facilities and
equipment. Facility leases generally are for periods of five years with renewal
options, and most provide for additional contingent rentals based on a
percentage of store sales in excess of stipulated amounts. Equipment leases are
generally for three-to seven-year periods. The Company has an agreement with a
lessor to lease $19.5 million 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 $11,381,000.
<PAGE> 41
Page 40
The minimum commitments relating to future payments under non-cancelable
operating leases are (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------
FISCAL YEAR
- -------------------------------------------------------
<S> <C>
1999 $ 27,501
2000 20,582
2001 16,889
2002 12,350
2003 6,408
Thereafter 2,787
----------
Total minimum lease payments $ 86,517
===========
- -------------------------------------------------------
</TABLE>
The following schedule shows the composition of total rental expense for
all leases:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Fiscal Year Ended
JANUARY 30, January 31, February 1,
1999 1998 1997
------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Minimum rentals $ 30,313 $ 29,660 $ 30,028
Contingent rent 270 226 218
-------------- -------------- --------------
Total rental expense $ 30,583 $ 29,886 $ 30,246
============== ============== ==============
- ------------------------------------------------------------------------------------
</TABLE>
10. INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Fiscal Year Ended
JANUARY 30, January 31, February 1,
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Current income taxes:
Federal $ 12,502 $ 6,825 $ 4,056
State 338 685 584
------------ ------------ -------------
Total 12,840 7,510 4,640
------------ ------------ -------------
Deferred income taxes:
Federal (190) 205 (477)
State 228 291 (294)
------------ ------------ -------------
Total 38 496 (771)
------------ ------------ -------------
Total income tax expense $ 12,878 $ 8,006 $ 3,869
============ ============ =============
- --------------------------------------------------------------------------------------
</TABLE>
<PAGE> 42
Page 41
Significant components of the Company's deferred tax assets and liabilities
as of January 30, 1999 and January 31, 1998 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
JANUARY 30, January 31,
1999 1998
---------------------------------------
<S> <C> <C>
(In thousands)
Deferred tax assets:
Bad debt reserve $ 1,623 $ 1,432
Inventory valuation 1,134 1,197
Unrealized losses on short-term
investments -- 53
Reserves 958 1,202
---------- ----------
Total deferred tax assets 3,715 3,884
---------- ----------
Deferred tax liabilities:
Tax over book depreciation 6,326 6,426
Unrealized gains on short-term
investments 121 --
Other, net (182) (204)
---------- ----------
Total deferred tax liabilities 6,265 6,222
---------- ----------
Net deferred tax liabilities $ 2,550 $ 2,338
========== ==========
- -------------------------------------------------------------------------------
</TABLE>
The reconciliation of the Company's effective income tax rate with the
statutory rate is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Fiscal Year Ended
JANUARY 30, January 31, February 1,
1999 1998 1997
-----------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax rate 35.0 % 35.0 % 35.0 %
State income taxes 1.2 2.9 4.0
Other (1.2) (6.4) (3.5)
----------- ----------- -----------
Effective income tax rate 35.0 % 31.5 % 35.5 %
=========== =========== ===========
- ---------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 43
Page 42
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial results are as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
FISCAL 1998 FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail sales $136,174 $132,573 $113,834 $141,800
Total revenues 141,044 137,176 118,600 146,844
Cost of goods sold 89,179 93,864 81,364 106,598
Net income 11,117 5,635 2,809 4,356
Basic earnings per share $ .40 $ .20 $ .10 $ .16
Diluted earnings per share $ .39 $ .20 $ .10 $ .16
FISCAL 1997
- -------------------------------------------------------------------------------------------------
Retail sales $123,251 $120,901 $109,886 $142,813
Total revenues 127,500 124,451 113,743 146,754
Cost of goods sold 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
- -------------------------------------------------------------------------------------------------
</TABLE>
12. STORE CLOSINGS:
In the normal course of business, the Company routinely closes 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 $242,000 and $998,000 was unpaid and accrued at January
30, 1999 and January 31, 1998, respectively. The remaining accrued lease
payments at January 30, 1999 will be paid over the remaining lease terms which
range from 2 to 23 months.
<PAGE> 44
Page 43
13. REPORTABLE SEGMENT INFORMATION:
The Company has two reportable segments: retail and credit. The Company
operates its women's apparel specialty retail stores in 21 states, principally
in the Southeast. The Company offers its own credit card to its customers, and
all credit authorizations, payment processing, and collection efforts are
performed by a separate division of the Company.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes. The
Company does not allocate certain corporate expenses or income taxes to the
segments.
The following schedule summarizes certain segment information (in
thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FISCAL 1998 Retail Credit Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 532,330 $ 11,334 $ 543,664
Depreciation 7,613 25 7,638
Interest expense 192 48 240
Income before taxes 33,044 3,751 36,795
Total assets 200,946 57,567 258,513
Capital expenditures 13,459 60 13,519
FISCAL 1997
- --------------------------------------------------------------------------------
Revenues $ 503,914 $ 8,534 $ 512,448
Depreciation 7,685 28 7,713
Interest expense 262 -- 262
Income before taxes 24,535 872 25,407
Total assets 197,871 43,566 241,437
Capital expenditures 7,377 -- 7,377
FISCAL 1996
- --------------------------------------------------------------------------------
Revenues $ 484,292 $ 7,217 $ 491,509
Depreciation 8,277 53 8,330
Interest expense 262 -- 262
Income (loss) before taxes 11,160 (262) 10,898
Total assets 180,361 37,882 218,243
Capital expenditures 8,371 -- 8,371
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 45
Page 44
14. COMMITMENTS AND CONTINGENCIES:
Workers compensation and general liability claims are settled through a
claims administrator and are limited by stop-loss insurance coverage for
individual claims in excess of $250,000 and $100,000, respectively. The Company
paid claims of $1,347,000, $970,000 and $1,158,000 in fiscal 1998, 1997 and
1996, respectively. The Company had approximately $1,600,000 at January 30,
1999 and $1,832,000 at January 31, 1998, respectively, 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> 46
Page 45
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Allowance Reserve
for for
Doubtful Rental
Accounts (a) Commitments (b)
-------------------- ----------------------
<S> <C> <C>
(In thousands)
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
Additions charged to costs and expenses 4,081 1,799
Additions (Deductions) charged to other accounts 856 (d) -
Deductions (4,437) (c) (1,776)
-------------------- ----------------------
Balance at January 30, 1999 $ 4,201 $ 1,926
==================== ======================
</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> 47
Page 46
EXHIBIT INDEX
DESIGNATION OF
EXHIBIT PAGE
- -------------- ----
21 Subsidiaries of the Registrant.......................... 47
23 Consent of Independent Auditors......................... 48
27 Financial Data Schedule (For SEC use only)..............
<PAGE> 48
Page 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Cato has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
The Cato Corporation
<TABLE>
<S> <C>
By /s/ Wayland H. Cato, Jr. By /s/ Robert M. Sandler
------------------------------------------------- -------------------------------------------------
Wayland H. Cato, Jr. Robert M. Sandler
Chairman of the Board and Senior Vice President
Chief Executive Officer Controller
By /s/ Michael O. Moore
-------------------------------------------------
Michael O. Moore
Executive Vice President
Chief Financial Officer and Secretary
</TABLE>
Date: April 22, 1999
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/ Howard A. Severson /s/ Grant L. Hamrick
- ------------------------------------------------------ -----------------------------------------------------
Howard A. Severson Grant L. Hamrick
(Director) (Director)
/s/ Clarice Cato Goodyear /s/ James H. Shaw
- ------------------------------------------------------ -----------------------------------------------------
Clarice Cato Goodyear James H. Shaw
(Director) (Director)
/s/ Thomas E. Cato /s/ A.F. (Pete) Sloan
- ------------------------------------------------------ -----------------------------------------------------
Thomas E. Cato A.F. (Pete) Sloan
(Director) (Director)
</TABLE>
<PAGE> 1
Page 47
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME OF STATE OF NAME UNDER WHICH
SUBSIDIARY INCORPORATION SUBSIDIARY DOES BUSINESS
- ---------- ------------- ------------------------
<S> <C> <C>
CHW LLC Delaware CHW LLC
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
Page 48
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
33-41314 on Form S-8 pertaining to The Cato Corporation Employee Incentive
Stock Option Plan, in Registration Statement No. 33-41315 on Form S-8
pertaining to The Cato Corporation Non-Qualified Stock Option Plan, and in the
Registration Statement No. 33-69844 on Form S-8 pertaining to The Cato
Corporation Employee Stock Purchase Plan, of our report dated March 12, 1999,
appearing in the Annual Report on Form 10-K of The Cato Corporation and
subsidiaries for the year ended January 30, 1999.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
April 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 44,068
<SECURITIES> 42,141
<RECEIVABLES> 49,697
<ALLOWANCES> 5,161
<INVENTORY> 61,112
<CURRENT-ASSETS> 197,603
<PP&E> 106,949
<DEPRECIATION> 52,209
<TOTAL-ASSETS> 258,513
<CURRENT-LIABILITIES> 73,579
<BONDS> 0
0
0
<COMMON> 978
<OTHER-SE> 171,256
<TOTAL-LIABILITY-AND-EQUITY> 258,513
<SALES> 524,381
<TOTAL-REVENUES> 543,664
<CGS> 371,005
<TOTAL-COSTS> 371,005
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,081
<INTEREST-EXPENSE> 240
<INCOME-PRETAX> 36,795
<INCOME-TAX> 12,878
<INCOME-CONTINUING> 23,917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,917
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.85
</TABLE>
