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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 29, 2000
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 24, 2000, there were 20,028,732 shares of Class A Common Stock and
5,364,317 shares of Convertible Class B Common Stock outstanding. The aggregate
market value of the Registrant's Class A Common Stock held by Non-affiliates of
the Registrant as of March 24, 2000 was approximately $160,608,853 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 26, 2000, relating to the 2000
annual meeting of shareholders are incorporated by reference into the following
part of this annual report:
Part III - Items 10, 11, 12 and 13
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THE CATO CORPORATION
FORM 10-K
TABLE OF CONTENTS
<TABLE>
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Page
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PART I:
Item 1. Business.............................................................Pages 2 - 8
Item 2. Properties...........................................................Page 8
Item 3. Legal Proceedings....................................................Page 9
Item 4. Submission of Matters to a Vote of Security Holders..................Page 9
PART II:
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................................Page 10
Item 6. Selected Financial Data..............................................Page 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................Pages 12 - 15
Item 8. Financial Statements and Supplementary Data..........................Page 15
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................Page 15
PART III:
Item 10. Directors and Executive Officers of the Registrant...................Pages 16 - 19
Item 11. Executive Compensation...............................................Page 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management...........................................................Page 20
Item 13. Certain Relationships and Related Transactions.......................Page 20
PART IV:
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K....................................................Page 21
</TABLE>
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PART I
ITEM 1. BUSINESS:
GENERAL
The Company, founded in 1946, operated 809 women's fashion specialty
stores at January 29, 2000 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 20% of retail sales in fiscal 1999. See Note 12 to the Consolidated
Financial Statements, "Reportable Segment Information" for a discussion of
segment information.
BUSINESS
The Company's primary objective is to be the leading fashion specialty
retailer for fashion conscious low-to-middle income females in its markets.
Management believes the Company's success is dependent upon its ability to
differentiate its stores from department stores, mass merchandise discount
stores and competing women's specialty stores.
The key elements of the Company's business strategy are:
Merchandise Assortment. The Company's stores offer a wide
assortment of apparel and accessory items in regular and large sizes
and emphasize color, product coordination and selection.
Value Pricing. The Company offers quality merchandise that is
generally priced below comparable merchandise offered by department
stores and 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 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 rural, middle and metro markets in northern,
midwestern and western adjacent states, as well as continuing to
"fill-in" existing southeastern core geography.
MERCHANDISING
Merchandising
The Company offers a broad selection of 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, career and casual
sportswear, dresses, 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 has enhanced merchandise
offerings delivering quality private label products at lower costs. Product
development and the direct sourcing operation provide research on emerging
fashion and color trends, technical services and direct sourcing capabilities.
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ITEM 1. BUSINESS: (CONTINUED)
As a part of its merchandising strategy, members of the Company's
merchandising staff frequently visit selected stores, monitor the merchandise
offerings of other retailers, regularly communicate with store operations
associates and frequently confer with key vendors. The Company tests most new
fashion-sensitive items in selected stores to aid it in determining their appeal
before making a substantial purchasing commitment. The Company also takes
aggressive markdowns on slow-selling merchandise and does not carry over
merchandise to the next season.
Purchasing, Allocation and Distribution
Although the Company purchases merchandise from approximately 1,500
suppliers, most of its merchandise is purchased from approximately 100 primary
vendors. In fiscal 1999, purchases from the Company's largest vendor accounted
for approximately 7% of the Company's total purchases. No other vendor accounted
for more than 3% of total purchases. The Company is not dependent on its largest
vendor or any other vendor for merchandise purchases and the loss of any single
vendor or group of vendors would not have a material adverse effect on the
Company's operating results or financial condition. A substantial portion of the
Company's merchandise is sold under its private labels and is produced by
various vendors in accordance with the Company's specifications. The Company
purchases most of its merchandise from domestic importers and vendors, which
typically minimizes the time necessary to purchase and obtain shipments in order
to enable the Company to react to merchandise trends in a more timely fashion.
Although a significant portion of the Company's merchandise is manufactured
overseas, principally in the Far East, any economic, political or social unrest
in that region is not expected to have a material adverse effect on the
Company's ability to obtain adequate supplies of merchandise.
An important component of the Company's strategy is the allocation of
merchandise to individual stores based on an analysis of sales trends by
merchandise category, customer profiles and climatic conditions. A 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, radio and in-store advertising as its
primary advertising media. The Company uses radio advertising throughout its
trade areas. The Company's total advertising expenditures were approximately .9%
of retail sales in fiscal 1999.
STORE OPERATIONS
The Company's store operations management team consists of two
directors of stores, two territorial managers, fourteen regional managers and
seventy-eight district managers. Regional managers receive a salary plus a bonus
based on achieving targeted goals for sales, payroll expense, shrinkage control
and store profitability. District managers receive a salary plus a bonus based
on achieving targeted objectives for district sales increases and shrinkage
control. Stores are staffed with a manager, two assistant managers and
additional part-time sales associates depending on the size of the 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
associates who have achieved superior results in meeting the Company's goals for
store sales, payroll expense and shrinkage control. The type and extent of
district manager training varies depending on whether the manager is promoted
from within or recruited from outside the Company. All district managers receive
at a minimum a one-week orientation program at the Company's 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 approximately 4,300 square feet.
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ITEM 1. BUSINESS: (CONTINUED)
All of the Company's stores are leased. Approximately 93% are located
in strip shopping centers, 1% in downtown locations and 6% in enclosed shopping
malls. Where lease terms are acceptable and a potential location meets the
Company's demographic and other site-selection criteria, the Company locates
stores in strip shopping centers anchored by 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 1995.
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>
1995................ 646 37 12 671
1996................ 671 28 44 655
1997................ 655 55 17 693
1998................ 693 52 13 732
1999................ 732 83 6 809
</TABLE>
The Company plans to open approximately 100 new stores and to relocate
approximately 28 existing stores in fiscal 2000. Additionally, the Company plans
to remodel approximately 100 stores in fiscal 2000.
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 15% of retail sales in fiscal 1999. The Company's net bad debt
expense in fiscal 1999 was 4.5% of credit sales.
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ITEM 1. BUSINESS: (CONTINUED)
Customers applying for the Company's credit card are approved for
credit if they have a satisfactory credit record and meet 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. In fiscal 1999, the Company changed its method of accounting for
layaway sales. This change is the result of the issuance of Staff Accounting
Bulletin No.101, "Revenue Recognition in Financial Statements" ("SAB 101").
Under the new accounting method the Company defers recognition of layaway sales
and its related fees to the accounting period when the customer picks up layaway
merchandise. Layaway sales represented approximately 5% of retail sales in
fiscal 1999.
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.
The Company developed a two phase approach to address the Year 2000
issue, which involved 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 was the identification and correction to all programs
purchased from external sources. The Company successfully completed Phase 1 and
Phase 2 on schedule at a cost of $575,000. Following the arrival of the Year
2000, the Company has not experienced any significant issues and there has been
no interruption in business nor any material financial impact due to 2000
issues.
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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.
ASSOCIATES
As of January 29, 2000, the Company employed approximately 8,500
full-time and part-time associates. The Company also employs additional
part-time associates during the peak retailing seasons. The Company is not a
party to any collective bargaining agreements and considers that its associate
relations are good.
ITEM 2. PROPERTIES:
The Company's distribution center and general offices are located in a
Company-owned building of approximately 492,000 square feet located on a 15-acre
tract in Charlotte, North Carolina. The Company's automated merchandise handling
and distribution activities occupy approximately 418,000 square feet of this
building and its general offices and corporate training center are located in
the remaining 74,000 square feet.
Substantially all of the Company's retail stores are leased from
unaffiliated parties. Most of the leases have an initial term of five years,
with two to three five-year renewal options. Substantially all of the leases
provide for fixed rentals plus a percentage of sales in excess of a specified
volume.
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ITEM 3. LEGAL PROCEEDINGS:
There are no material pending legal proceedings to which the
registrant or its subsidiaries is a party, or to which any of their property is
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
MARKET & DIVIDEND INFORMATION
The Company's Class A Common Stock trades in the over-the-counter
market under the NASDAQ National Market System symbol CACOA. Below is the market
range and dividend information for the four quarters of fiscal 1999 and 1998.
- ----------------------------------------------------------------------------
Price
1999 HIGH LOW DIVIDEND
- ---- -------------- ------------- ------------
First quarter $ 11 7/16 $ 7 9/16 $ .055
Second quarter 13 15/16 10 1/2 .075
Third quarter 15 9/16 10 7/8 .075
Fourth quarter 13 3/8 10 1/4 .075
Price
1998 HIGH LOW DIVIDEND
- ---- -------------- ------------- ------------
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
- ----------------------------------------------------------------------------
As of March 24, 2000 the approximate number of holders of the
Company's Class A Common stock was 3,600 and there were 12 record holders of the
Company's Class B Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA:
<TABLE>
<CAPTION>
Fiscal Year
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data and selected operating data)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Retail sales $ 585,085 $ 524,381 $ 496,851 $ 477,011 $ 476,638
Other income 19,948 19,283 15,597 14,498 13,357
Total revenues 605,033 543,664 512,448 491,509 489,995
Cost of goods sold 403,655 371,005 354,627 344,919 341,144
Gross margin percent 31.0% 29.2% 28.6% 27.7% 28.4%
Selling, general and administrative 140,741 128,207 124,676 121,837 122,961
Selling, general and administrative percent 24.0% 24.4% 25.1% 25.5% 25.8%
Depreciation 8,639 7,638 7,713 8,330 7,785
Interest 23 19 25 25 30
Closed store expense -- -- -- 5,500 --
Income before income taxes and cumulative effect
of accounting change 51,975 36,795 25,407 10,898 18,075
Income tax expense 18,191 12,878 8,006 3,869 6,055
Income before cumulative effect of accounting change 33,784 23,917 17,401 7,029 12,020
Cumulative effect of accounting change, net of taxes 147 -- -- -- --
Net income $ 33,931 $ 23,917 $ 17,401 $ 7,029 $ 12,020
Basic earnings per share $ 1.28 $ .87 $ .62 $ .25 $ .42
Diluted earnings per share $ 1.26 $ .85 $ .62 $ .25 $ .42
Cash dividends paid per share $ .28 $ .19 $ .16 $ .16 $ .16
SELECTED OPERATING DATA:
Stores open at end of year 809 732 693 655 671
Average sales per store $ 756,000 $ 740,000 $ 748,000 $ 710,000 $ 721,000
Average sales per square foot of selling space $ 177 $ 169 $ 163 $ 153 $ 158
Comparable store sales increase (decrease) 4% 2% 4% (2)% (5)%
BALANCE SHEET DATA:
Cash and investments $ 87,275 $ 86,209 $ 69,487 $ 50,105 $ 47,894
Working capital 124,988 124,024 113,327 105,373 102,169
Total assets 285,789 258,513 241,437 218,243 209,895
Total stockholders' equity $ 188,780 $ 172,234 $ 157,516 $ 151,903 $ 149,682
===============================================================================================================================
</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 29, January 30, January 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Retail sales 100.0% 100.0% 100.0%
Other income 3.4 3.7 3.1
Total revenues 103.4 103.7 103.1
Cost of goods sold 69.0 70.8 71.4
Selling, general and administrative 24.0 24.4 25.1
Depreciation 1.5 1.5 1.5
Selling, general, administrative and depreciation 25.5 25.9 26.6
Income before income taxes and cumulative effect of accounting change 8.9 7.0 5.1
Net income 5.8% 4.6% 3.5%
=================================================================================================================================
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Retail sales increased by 12% to $585.1 million in fiscal 1999 from $524.4
million in fiscal 1998. Comparable store sales increased 4% from the prior year.
Total revenues, comprised of retail sales and other income (principally finance
charges and late fees on customer accounts receivable, interest income and
layaway fees), increased by 11% to $605.0 million in fiscal 1999 from $543.7
million in fiscal 1998. The Company operated 809 stores at January 29, 2000,
compared to 732 stores operated at January 30, 1999.
The increase in retail sales in fiscal 1999 resulted from the Company's
continuation of an everyday low pricing strategy, improved merchandise
offerings, and an increase in store development activity. In fiscal 1999, the
Company increased its number of stores 11% by opening 83 new stores, relocating
21 stores while closing 6 existing stores.
Other income in fiscal 1999 increased $.7 million or 3% over fiscal 1998. The
increase resulted primarily from increased earnings from higher finance charges,
late fee income and income from cash equivalents and short-term investments
partially offset by decreased layaway service charges.
Cost of goods sold was $403.7 million, or 69.0% of retail sales, in fiscal 1999,
compared to $371.0 million, or 70.8% of retail sales, in fiscal 1998. The
decrease in cost of goods sold as a percent of retail sales resulted primarily
by maintaining timely and aggressive markdowns on slow moving merchandise,
eliminating unprofitable promotions and improving inventory flow. Total gross
margin dollars (retail sales less cost of goods sold) increased by 18% to $181.4
million in fiscal 1999 from $153.4 million in fiscal 1998.
Selling, general and administrative expenses (SG&A) were $140.7 million in
fiscal 1999, compared to $128.2 million in fiscal 1998, an increase of 10%. As a
percent of retail sales, SG&A was 24.0% compared to 24.4% in the prior year. The
overall increase in SG&A resulted primarily from increased selling-related
expenses and increased infrastructure expenses attributable to the Company's
store development activities.
Depreciation expense was $8.6 million in fiscal 1999 compared to $7.6 million in
fiscal 1998. The 13% increase in fiscal 1999 resulted primarily from the
Company's store development.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (CONTINUED)
Effective for fiscal 1999, the Company changed its policy for recognizing
revenues related to layaway sales to comply with the Securities and Exchange
Commissions Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101). Revenues for layaway sales and related fees are
recognized when the layaway merchandise is delivered to the customer.
Previously, revenues were recognized at the time of the sale. The Company
accounted for the adoption of SAB 101 as a change in accounting principle and
recorded a cumulative effect in the first quarter of fiscal 1999. The cumulative
effect of this accounting change resulted in an increase in net income of
$147,000, net of income tax of $79,000, or $.01 per share. This increase was
driven by the release of the Company's layaway reserve, which slightly exceeded
the associated margin on previously recognized layaway sales. The proforma
effects of retroactive application of the accounting change on fiscal 1998 and
1997 are immaterial to the financial statements.
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. Comparable store sales increased 2% from the prior year.
Total revenues 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 income partially offset by
decreased layaway service charges.
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
from maintaining timely and aggressive markdowns on slow moving merchandise,
eliminating unprofitable promotions and improving inventory flow. Total gross
margin dollars increased by 8% to $153.4 million in fiscal 1998 from $142.2
million in fiscal 1997.
SG&A expenses were $128.2 million in fiscal 1998, compared to $124.7 million in
fiscal 1997, an increase of 3%. As a percent of retail sales, SG&A was 24.4%
compared to 25.1% in the prior year. The overall increase in SG&A resulted
primarily from increased selling-related expenses and increased infrastructure
expenses attributable to the Company's store development activities.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK
At January 29, 2000, the Company had working capital of $125.0 million compared
to $124.0 million at January 30, 1999. Cash provided by operating activities was
$44.5 million in fiscal 1999, compared to $40.9 million in fiscal 1998. The
increase in cash provided by operating activities in fiscal 1999 resulted
primarily from an increase in net income, depreciation, accounts payable, other
liabilities and accrued income taxes. At January 29, 2000, the Company had $87.3
million in cash, cash equivalents and short-term investments, compared to $86.2
million at January 30, 1999.
At January 29, 2000, the Company had an unsecured revolving credit agreement
which provided for borrowings of up to $35 million. The revolving credit
agreement is committed until July 2002. The credit agreement contains various
financial covenants and limitations, including maintenance of specific financial
ratios with which the Company was in compliance. The Company feels the terms of
the revolving credit agreement will continue to support the Company's future
working capital needs through the next twelve months. There were no borrowings
outstanding under the agreement at January 29, 2000.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (CONTINUED)
The Company has a master lease agreement with a lessor to lease $19.5 million of
store fixtures, point-of-sale devices and warehouse equipment. The operating
leases are for a term of seven years but may be cancelled annually upon proper
notice to the lessor. Upon notice of cancellation, the Company would be
obligated to purchase the equipment at a prescribed termination value from the
lessor.
Expenditures for property and equipment totaled $24.0 million, $13.5 million and
$7.4 million in fiscal 1999, 1998 and 1997, respectively. The expenditures for
fiscal 1999 were primarily for store development, store remodels and investments
in new technology for merchandising, distribution and finance. In fiscal 2000,
the Company is planning to spend approximately $32 million for capital
expenditures. This includes expenditures to open 100 new stores, close 10 stores
and relocate 28 stores. In addition, the Company plans to remodel 100 stores and
has provided for investments in technology including an enterprise-wide system
scheduled to be implemented by fall 2001.
During 1999, the Company repurchased 985,400 shares of Class A Common Stock for
$9.6 million, or an average price of $9.71 per share. Over the course of fiscal
1999, the Company increased its quarterly dividend from $.055 per share to $.075
per share. In February 2000, the Board of Directors further increased the
quarterly dividend by 33% from $.075 per share to $.10 per share and approved a
resolution to purchase an additional 2,000,000 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 over the next twelve
months.
The Company does not use derivative financial instruments in its investment
portfolio. At January 29, 2000, the Company's investment portfolio was invested
in governmental debt securities with maturities of up to 36 months. These
securities are classified as available-for-sale, and are recorded on the balance
sheet at fair value with unrealized gains and losses reported as accumulated
other comprehensive income.
The Company developed a two phase approach to address the Year 2000 issue, which
involved 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
was the identification and correction to all programs purchased from external
sources. The Company successfully completed Phase 1 and Phase 2 on schedule at a
cost of $575,000. Following the arrival of the Year 2000, the Company has not
experienced any significant issues and there has been no interruption in
business nor any material financial impact due to 2000 issues.
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 2001. The Company has not yet completed its analysis of any potential
impact of SFAS 133 on its financial statements.
As previously described, during 1999 the Securities and Exchange Commission
issued SAB 101, "Revenue Recognition in Financial Statements". The Company
adopted SAB 101 in fiscal 1999 and changed its policy for recognizing revenues
related to layaway sales. The cumulative effect of this change in accounting
principle was an increase in net income of $147,000, net of income tax of
$79,000, or $.01 per share.
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.
<PAGE> 16
Page 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: (CONTINUED)
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
None.
<PAGE> 17
Page 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The directors and executive officers of the Company and their ages as
of March 31, 2000 are as follows:
NAME AGE POSITION
---- --- --------
Wayland H. Cato, Jr. * ..... 77 Chairman of the Board
John P. Derham Cato......... 49 Vice Chairman of the Board,
President and Chief Executive Officer
Edgar T. Cato............... 75 Former Vice Chairman of the Board,
Co-Founder and Director
Michael O. Moore............ 49 Executive Vice President, Chief Financial
Officer and Secretary
Howard A. Severson.......... 52 Executive Vice President, Chief Real Estate
and Store Development Officer, Assistant
Secretary and Director
B. Allen Weinstein.......... 53 Executive Vice President, Chief
Merchandising Officer of the Cato Division
David P. Kempert............ 50 Executive Vice President, Chief Store
Operations Officer of the Cato Division
C. David Birdwell........... 60 Executive Vice President, President and
General Manager of the It's Fashion!
Division
Stephen R. Clark............ 57 Senior Vice President, Human Resources and
Assistant Secretary
Clarice Cato Goodyear *..... 53 Special Assistant to the Chairman and
President and Assistant Secretary and
Director
Thomas E. Cato.............. 45 Vice President, Divisional Merchandise
Manager and Director
Robert W. Bradshaw, Jr. *... 66 Director
George S. Currin *.......... 63 Director
Paul Fulton +* ............. 65 Director
Grant L. Hamrick +*......... 61 Director
James H. Shaw +*............ 71 Director
A.F. (Pete) Sloan +*....... 70 Director
+ Members of Compensation Committee
* Members of Audit Committee
<PAGE> 18
Page 17
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: (CONTINUED)
Wayland H. Cato, Jr. is Chairman of the Board and has been a director
of the Company since 1946. From 1991 to May 1999, he served as Chairman of the
Board and Chief Executive Officer. From 1970 until 1991, he served as the
Chairman of the Board, President and Chief Executive Officer. From 1960 until
1970, he served as President and Chief Executive Officer of the Company.
John P. Derham Cato has been employed as an officer of the Company
since 1981 and has been a director of the Company since 1986. Since May 1999,
Mr. John Cato has served as Vice Chairman of the Board, President and Chief
Executive Officer. From June 1997 to May 1999, he served as Vice Chairman of the
Board, President and Chief Operating Officer. From August 1996 to June 1997, he
served as Vice Chairman of the Board and Chief Operating Officer. From 1992 to
August 1996, he served as Executive Vice President and as President and General
Manager of the It's Fashion! Division. Mr. John Cato is a son of Mr. Wayland H.
Cato, Jr.
Edgar T. Cato is the Former Vice Chairman of the Board and Co-Founder
of the Company, and has been a director of the Company since 1946. Mr. Edgar T.
Cato is the brother of Mr. Wayland H. Cato, Jr.
Michael O. Moore joined the Company as Executive Vice President, Chief
Financial Officer and Secretary in July 1998. From 1997 to 1998, he was Vice
President - Chief Financial Officer of The Party Experience, a specialty
retailer of party goods. From 1994 to 1997, he was employed by 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 employed by the Company since 1985 and has
served as a director of the Company since 1995. Since January 1993, he has
served as Executive Vice President, Assistant Secretary and Chief Real Estate
and Store Development Officer. From August 1989 through January 1993, Mr.
Severson served as Senior Vice President - Chief Real Estate Officer.
B. Allen Weinstein joined the Company as Executive Vice President,
Chief Merchandising Officer of the Cato Division in August 1997. From 1995 to
1997, he was Senior Vice President - Merchandising of Catherines Stores
Corporation. From 1981 to 1995, he served as Senior Vice President of
Merchandising for Beall's, Inc.
David P. Kempert joined the Company in August 1989. He currently serves
as Executive Vice President, Chief Store Operations Officer of the Cato
Division. From 1982 until 1989, he was employed by The Gap Stores, an apparel
specialty chain, where his most recent position was Zone Vice President of the
Northeast Region.
C. David Birdwell joined the Company as Executive Vice President,
President and General Manager of the It's Fashion! Division in October 1996.
From 1994 to 1996, he was employed as President/General Merchandise Manager of
Allied Stores, a family apparel chain headquartered in Savannah, Georgia. In
1993, he was Executive Vice President/General Merchandise Manager of Ambers,
Inc., based in Dallas, Texas. From 1989 to 1992, he was employed as a Chartered
Financial Consultant with Jefferson Pilot, based in Greensboro, North Carolina.
From 1985 to
<PAGE> 19
Page 18
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: (CONTINUED)
1989, he was President/CEO of Maxway Stores, a discount chain headquartered in
Sanford, North Carolina.
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.
Clarice Cato Goodyear has been employed by the Company since 1975 and
has served as a director and officer of the Company since 1979. Since July 1993,
she has served as Special Assistant to the Chairman and Chief Executive Officer
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 of the Company since 1993.
Since February 1987, he has served as Vice President, Divisional Merchandise
Manager. Mr. Thomas Cato is a son of Mr. Wayland H. Cato, Jr
Robert W. Bradshaw, Jr. has been a director of the Company since 1994.
Since 1961, he has been engaged in the private practice of law with Robinson,
Bradshaw & Hinson, P.A. and is a Shareholder of the firm.
George S. Currin has been a director of the Company since 1973. Since
1989, he has served as Chairman and Managing Director of Fourth Stockton Company
and Chairman of Currin-Patterson Properties LLC, both privately held real estate
investment companies.
Paul Fulton has been a director of the Company since 1994. Since March
2000, he has served as Chairman of the Board of Directors of Bassett Furniture
Industries, Inc. From July 1997 to March 2000, he served as Chairman and Chief
Executive Officer of Bassett Furniture Industries, Inc. From January 1994 until
1997, Mr. Fulton served as Dean of the Kenan-Flagler Business School of the
University of North Carolina at Chapel Hill. From July 1988 to December 1993,
Mr. Fulton served as President of Sara Lee Corporation. Mr. Fulton is currently
a director of Sonoco Products, Bank of America Corporation, Lowes Companies,
Inc., Bassett Furniture Industries, Inc.
Grant L. Hamrick has been a director of the Company since 1994. Mr.
Hamrick was Senior Vice President and Chief Financial Officer for American City
Business Journals, Inc. from 1989 until his retirement in 1996. From 1961 to
1985, Mr. Hamrick was employed by the public accounting firm Price Waterhouse
and served as Managing Partner of the Charlotte, North Carolina Office.
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.
1
<PAGE> 20
Page 19
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: (CONTINUED)
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.
<PAGE> 21
Page 20
ITEM 11. EXECUTIVE COMPENSATION:
Incorporated by reference to Registrant's proxy statement for 2000
annual stockholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
Incorporated by reference to Registrant's proxy statement for 2000
annual stockholders' meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Incorporated by reference to Registrant's proxy statement for 2000
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 40 of this annual report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended January 29,
2000.
<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 29, 2000
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 - 38
The following consolidated financial statement schedule of the Cato Corporation
is included in Item 14 (d):
SCHEDULE II - Valuation and qualifying accounts...................Page 39
<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 29, 2000 and January
30, 1999, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended January
29, 2000. Our audits also included the financial statement schedule listed in
the index at Item 14(A). These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statements
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at January 29, 2000 and
January 30, 1999, and the results of its operations and its cash flows for each
of the three years in the period ended January 29, 2000, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth herein.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
March 13, 2000
<PAGE> 26
Page 25
The Cato Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
Fiscal Year Ended
JANUARY 29, January 30, January 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
REVENUES
Retail sales $ 585,085 $ 524,381 $ 496,851
Other income (principally finance, late and layaway charges) 19,948 19,283 15,597
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 605,033 543,664 512,448
- ---------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of goods sold 403,655 371,005 354,627
Selling, general and administrative 140,741 128,207 124,676
Depreciation 8,639 7,638 7,713
Interest 23 19 25
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 553,058 506,869 487,041
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 51,975 36,795 25,407
Income tax expense 18,191 12,878 8,006
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 33,784 $ 23,917 $ 17,401
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX ($79) 147 -- --
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 33,931 $ 23,917 $ 17,401
===========================================================================================================================
BASIC EARNINGS PER SHARE $ 1.28 $ .87 $ .62
===========================================================================================================================
BASIC AVERAGE SHARES 26,486,407 27,522,582 28,058,934
===========================================================================================================================
DILUTED EARNINGS PER SHARE $ 1.26 $ .85 $ .62
===========================================================================================================================
DILUTED AVERAGE SHARES 26,953,948 28,181,585 28,132,384
===========================================================================================================================
DIVIDENDS PER SHARE $ .28 $ .19 $ .16
===========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 27
Page 26
The Cato Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JANUARY 29, January 30,
2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 30,389 $ 44,068
Short-term investments 56,886 42,141
Accounts receivable, net of allowance for doubtful accounts of
$5,101 at January 29, 2000 and $4,201 at January 30, 1999 45,458 44,536
Merchandise inventories 69,497 61,112
Deferred income taxes 4,093 3,372
Prepaid expenses 2,494 2,374
- ----------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 208,817 197,603
Property and Equipment - net 69,338 54,740
Other Assets 7,634 6,170
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 285,789 $ 258,513
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 54,707 $ 52,391
Accrued expenses 24,392 20,991
Income taxes 4,730 197
- ----------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 83,829 73,579
Deferred Income Taxes 5,806 5,922
Other Noncurrent Liabilities (primarily deferred rent) 7,374 6,778
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;
24,173,480 shares issued at January 29, 2000 and 24,070,519 shares issued at January 30, 1999 805 802
Convertible Class B Common Stock, $.033 par value per share, 15,000,000 shares authorized;
5,364,317 shares issued at January 29, 2000 and 5,264,317 issued at January 30, 1999 179 176
Additional paid-in capital 71,974 69,878
Retained earnings 146,881 120,366
Accumulated Other Comprehensive Income (Loss) (1,801) 224
Unearned Compensation - Restricted Stock Awards (984) --
- ----------------------------------------------------------------------------------------------------------------------------------
217,054 191,446
Less Class A Common Stock in treasury, at cost (3,290,348 shares at
January 29, 2000 and 2,368,000 shares at January 30, 1999) (28,274) (19,212)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 188,780 172,234
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 285,789 $ 258,513
==================================================================================================================================
</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 29, January 30, January 31,
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 33,931 $ 23,917 $ 17,401
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 8,639 7,638 7,713
Amortization of investment premiums 187 123 95
Provision for doubtful accounts 4,850 4,081 3,675
Deferred income taxes 175 38 496
Compensation expense related to restricted stock awards 196 -- --
Loss on disposal of property and equipment 727 942 1,196
Changes in operating assets and liabilities which provided (used) cash:
Accounts receivable (5,772) (1,431) (7,669)
Merchandise inventories (8,385) 3,114 (258)
Other assets (1,584) (765) (148)
Accrued income taxes 4,712 (463) 760
Accounts payable and other liabilities 6,845 3,705 15,674
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 44,521 40,899 38,935
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures for property and equipment (23,964) (13,519) (7,377)
Purchases of short-term investments (22,544) (24,624) (24,553)
Sales of short-term investments 4,496 10,717 30,122
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (42,012) (27,426) (1,808)
- -----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid (7,416) (5,204) (4,510)
Purchases of treasury stock (9,572) (10,112) (8,188)
Proceeds from employee stock purchase plan 447 336 234
Proceeds from stock options exercised 353 3,931 388
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (16,188) (11,049) (12,076)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (13,679) 2,424 25,051
Cash and Cash Equivalents at Beginning of Year 44,068 41,644 16,593
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 30,389 $ 44,068 $ 41,644
=============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 29
Page 28
The Cato Corporation
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
UNEARNED
COMPEN-
CONVERTIBLE ACCUMULATED SATION TOTAL
CLASS A CLASS B ADDITIONAL COMPRE- RESTRICTED STOCK-
COMMON COMMON PAID-IN RETAINED HENSIVE STOCK TREASURY HOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME (LOSS) AWARDS STOCK EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE-- FEBRUARY 1, 1997 $778 $176 $63,272 $ 88,762 $ (106) $ $ (979) $151,903
(*)Comprehensive income:
Net income 17,401 17,401
Unrealized losses on available for sale
securities, net of deferred income tax
benefit of $5 (10) (10)
Dividends paid ($.16 per share) (4,510) (4,510)
Class A Common Stock sold through employee
stock purchase plan-- 47,194 shares 2 232 234
Class A Common Stock sold through stock
option plans-- 89,050 shares 3 385 388
Income tax benefit from stock options exercised 298 298
Purchase of treasury shares-- 1,196,500 shares (8,188) (8,188)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE-- JANUARY 31, 1998 783 176 64,187 101,653 (116) (9,167) 157,516
(*)Comprehensive income:
Net income 23,917 23,917
Unrealized gains on available for sale
securities, net of deferred income taxes
of $174 340 340
Dividends paid ($.19 per share) (5,204) (5,204)
Class A Common Stock sold through employee
stock purchase plan-- 37,122 shares 1 335 336
Class A Common Stock sold through stock
option plans-- 530,750 shares 18 3,913 3,931
Income tax benefit from stock options exercised 1,381 1,381
Purchase of treasury shares-- 1,006,500 shares (10,112) (10,112)
Contribution of treasury stock to Employee
Stock Purchase Plan - 10,000 shares 62 67 129
- ------------------------------------------------------------------------------------------------------------------------------------
Balance-- January 30, 1999 802 176 69,878 120,366 224 $(19,212) 172,234
(*)Comprehensive income:
Net income 33,931 3,931
Unrealized losses on available for sale
securities, net of deferred income tax
benefit of $1,091 (2,025) (2,025)
Dividends paid ($.28 per share) (7,416) (7,416)
Class A Common Stock sold through employee
stock purchase plan-- 53,811 shares 2 445 447
Class A Common Stock sold through stock
option plans-- 49,150 shares 1 352 353
Income tax benefit from stock options exercised 100 100
Purchase of treasury shares--985,400 shares (9,572) (9,572)
Contribution of treasury stock to Employee
Stock Purchase Plan-- 63,052 shares 22 510 532
Unearned compensation - Restricted Stock Awards 3 1,177 (984) 196
- ------------------------------------------------------------------------------------------------------------------------------------
Balance-- January 29, 2000 $805 $179 $71,974 $146,881 $(1,801) $(984) $(28,274) $188,780
====================================================================================================================================
</TABLE>
(*)Total comprehensive income for the years ended January 29, 2000, January 30,
1999 and January 31, 1998 was $31,906, $24,257 and $17,391, 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 accounts and transactions have been
eliminated.
DESCRIPTION OF BUSINESS AND FISCAL YEAR -- The Company has two business segments
- -- the operation of women's fashion specialty stores and a credit card division.
The apparel specialty stores 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 1999, 1998 and 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.
Significant accounting estimates reflected in the Company's financial statements
include the allowance for doubtful accounts receivable, reserves relating to
workers' compensation, general and auto insurance liabilities and reserves for
inventory markdowns.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS -- Cash equivalents consist
of highly liquid investments with original maturities of three months or less.
Investments with original maturities beyond three months are classified as
short-term investments. The fair values of short-term investments are based on
quoted market prices.
The Company's short-term investments are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses, net of income taxes, reported as a component of accumulated other
comprehensive income. The 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.
CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially subject
the Company to a concentration of credit risk principally consist of cash
equivalents and accounts receivable. The Company places its cash equivalents
with high credit qualified institutions and, by practice, limits the amount of
credit exposure to any one institution. Concentrations of credit risks with
respect to accounts receivable are limited due to the dispersion across
different geographies of the Company's customer base.
SUPPLEMENTAL CASH FLOW INFORMATION -- Income tax payments, net of refunds
received, for the fiscal years ended January 29, 2000, January 30, 1999 and
January 31, 1998 were $13,895,000, $13,394,000 and $6,754,000, respectively.
INVENTORIES -- Merchandise inventories are stated at the lower of cost
(first-in, first-out method) or market as determined by the retail method.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost.
Maintenance and repairs are charged to operations as incurred; renewals and
betterments are capitalized. Depreciation is provided on the straight-line
method over the estimated useful lives of the related assets, which are as
follows:
<TABLE>
<CAPTION>
CLASSIFICATION ESTIMATED USEFUL LIVES
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Land improvements 10 years
Buildings 30-40 years
Leasehold improvement 5-10 years
Fixtures and equipment 3-10 years
=====================================================================================================================
</TABLE>
RETAIL SALES -- Revenues from retail sales, net of returns, are recognized upon
delivery of the merchandise to the customer and exclude sales taxes.
ADVERTISING -- Advertising costs are expensed in the period in which they are
incurred. Advertising expense was $5,109,000, $5,755,000 and $7,334,000 for the
fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998,
respectively.
<PAGE> 31
Page 30
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER SHARE -- Basic earnings per share excludes dilution of stock
options and is computed by dividing net earnings by the weighted-average number
of Class A and Class B common shares outstanding for the respective periods. The
weighted-average number of shares used in the basic earnings per share
computations was 26,486,407, 27,522,582 and 28,058,934 for the fiscal years
ended January 29, 2000, January 30, 1999 and January 31, 1998, respectively. The
weighted-average number of shares representing the dilutive effect of stock
options was 467,541, 659,003 and 73,450 for the fiscal years ended January 29,
2000, January 30, 1999 and January 31, 1998, respectively. The weighted-average
number of shares used in the diluted earnings per share computations was
26,953,948, 28,181,585 and 28,132,384 for the fiscal years ended January 29,
2000, January 30, 1999 and January 31, 1998, respectively.
INCOME TAXES -- The Company files a consolidated federal income tax return.
Income taxes are provided based on the asset and liability method of accounting,
whereby deferred income taxes are provided for temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities.
STORE OPENING AND CLOSING COSTS -- Costs relating to the opening of new stores
or the relocating or expanding of existing stores are expensed as incurred. The
Company evaluates all long-lived assets, 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.
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 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 2001. The Company has not yet
completed its analysis of any potential impact of SFAS 133 on its financial
statements.
Effective for fiscal 1999, the Company changed its policy for recognizing
revenues related to layaway sales to comply with the Securities and Exchange
Commissions Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101). Revenues for layaway sales and related fees are
recognized when the layaway merchandise is delivered to the customer.
Previously, revenues were recognized at the time of the sale. The Company
accounted for the adoption of SAB 101 as a change in accounting principle and
recorded a cumulative effect in the first quarter of fiscal 1999. The cumulative
effect of this accounting change resulted in an increase in net income of
$147,000, net of income tax of $79,000, or $.01 per share. This increase was
driven by the release of the Company's layaway reserve, which slightly exceeded
the associated margin on previously recognized layaway sales. The proforma
effects of retroactive application of the accounting change on fiscal 1998 and
1997 are immaterial to the financial statements.
RECLASSIFICATIONS -- Certain reclassifications have been made to the
consolidated financial statements for prior fiscal years to conform with
presentation for fiscal 1999.
2. SHORT-TERM INVESTMENTS:
Short-term investments at January 29, 2000 include the following:
<TABLE>
<CAPTION>
ESTIMATED
UNREALIZED FAIR
SECURITY TYPE COST (LOSSES) VALUE
- ------------- ------- -------------- ---------
(In thousands)
<S> <C> <C> <C>
Obligations of federal, state and political subdivisions $59,657 $(2,771) $56,886
------- ------- -------
Total $59,657 $(2,771) $56,886
======= ======= =======
</TABLE>
<PAGE> 32
Page 31
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Short-term investments at January 30, 1999 include the following:
<TABLE>
<CAPTION>
UNREALIZED ESTIMATED
SECURITY TYPE COST GAINS FAIR VALUE
- ------------- ------- -------------- ----------
(In thousands)
<S> <C> <C> <C>
Obligations of federal, state and political subdivisions $41,796 $ 345 $42,141
------- ------- -------
Total $41,796 $ 345 $42,141
======= ======= =======
</TABLE>
The accumulated unrealized losses at January 29, 2000 of ($1,801,000), net of an
income tax benefit of $970,000, and the accumulated unrealized gains at January
30, 1999 of $224,000, net of an income tax expense of $121,000, are reflected in
other comprehensive income.
The amortized cost and estimated fair value of debt securities at January 29,
2000, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
SECURITY TYPE COST FAIR VALUE
- ------------- ------- ----------
(In thousands)
<S> <C> <C>
Due in one year or less $11,882 $11,721
Due in one year through three years 47,775 45,165
------- -------
Total $59,657 $56,886
======= =======
</TABLE>
3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
JANUARY 29, January 30,
2000 1999
----------- -----------
(In thousands)
<S> <C> <C>
Customer accounts - principally deferred payment accounts $47,702 $46,913
Miscellaneous trade receivables 2,857 1,824
------- -------
Total 50,559 48,737
Less allowance for doubtful accounts 5,101 4,201
------- -------
Accounts receivable - net $45,458 $44,536
======= =======
</TABLE>
Finance charge and late charge revenue on customer deferred payment accounts
totaled $11,870,000, $11,113,000 and $8,262,000 for the fiscal years ended
January 29, 2000, January 30, 1999 and January 31, 1998, respectively, and the
provision for doubtful accounts was $4,850,000, $4,081,000 and $3,675,000, for
the fiscal ended January 29, 2000, January 30, 1999 and January 31, 1998,
respectively. The provision for doubtful accounts is classified as a component
of selling, general and administrative expenses.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 29, January 30,
2000 1999
----------- -----------
(In thousands)
<S> <C> <C>
Land and improvements $ 1,739 $ 1,709
Buildings 15,806 15,784
Leasehold improvements 23,145 19,190
Fixtures and equipment 75,566 66,817
Construction in progress 12,195 3,449
-------- --------
Total 128,451 106,949
Less accumulated depreciation 59,113 52,209
------- --------
Property and equipment - net $ 69,338 $ 54,740
======== ========
</TABLE>
<PAGE> 33
Page 32
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
2000 1999
----------- -----------
(In thousands)
<S> <C> <C>
Accrued bonus and retirement savings plan contributions $ 9,502 $ 6,371
Accrued payroll and related items 3,735 2,705
Closed store lease obligations 1,878 2,168
Property and other taxes 2,925 2,266
Accrued health care plan 1,981 2,068
Other 4,371 5,413
-------- --------
Total accrued expenses $ 24,392 $ 20,991
======== ========
</TABLE>
6. FINANCING ARRANGEMENTS:
At January 29, 2000, the Company had an unsecured revolving credit agreement
which provided for borrowings of up to $35 million. The revolving credit
agreement is committed until July 2002. The credit agreement contains various
financial covenants and limitations, including the maintenance of specific
financial ratios with which the Company was in compliance. There were no
borrowings outstanding under the agreement at January 29, 2000 or January 30,
1999.
The Company had approximately $4,594,000 and $5,524,000 at January 29, 2000 and
January 30, 1999, respectively, of outstanding irrevocable letters of credit
relating to purchase commitments.
7. STOCKHOLDERS' EQUITY:
The holders of Class A Common Stock are entitled to one vote per share, whereas
the holders of Class B Common Stock are entitled to ten votes per share. Each
share of Class B Common Stock may be converted at any time into one share of
Class A Common Stock. Subject to the rights of the holders of any shares of
Preferred Stock that may be outstanding at the time, in the event of
liquidation, dissolution or winding up of the Company, holders of Class A Common
Stock are entitled to receive a preferential distribution of $1.00 per share of
the net assets of the Company. Cash dividends on the Class B Common Stock cannot
be paid unless cash dividends of at least an equal amount are paid on the Class
A Common Stock.
The Company's charter provides that shares of Class B Common Stock may be
transferred only to certain "Permitted Transferees" consisting generally of the
lineal descendants of holders of Class B Stock, trusts for their benefit,
corporations and partnerships controlled by them and the Company's employee
benefit plans. Any transfer of Class B Common Stock in violation of these
restrictions, including a transfer to the Company, results in the automatic
conversion of the transferred shares of Class B Common Stock held by the
transferee into an equal number of shares of Class A Common Stock.
In October 1993, the Company registered 250,000 shares of Class A Common Stock
available for issuance under an Employee Stock Purchase Plan (the "Plan"). In
May 1998, the shareholders approved an amendment to the Plan to increase the
maximum number of Class A shares of Common Stock authorized to be issued from
250,000 to 500,000 shares. Under the terms of the Plan, substantially all
employees may purchase Class A Common Stock through payroll deductions of up to
10% of their salary. The Class A Common Stock is purchased at the lower of 85%
of market value on the first or last business day of a six-month payment period.
Additionally, each April 15, employees are given the opportunity to make a lump
sum purchase of up to $10,000 worth of Class A Common Stock at 85% of market
value. The number of shares purchased by participants through the plan were
53,811 shares, 37,122 shares and 47,194 for the years ended January 29, 2000,
January 30, 1999 and January 31, 1998, respectively.
The Company has an Incentive Stock Option Plan and a Non-Qualified Stock Option
Plan for key employees of the Company. Total shares issuable under the plans are
3,900,000, of which 825,000 shares are issuable under the Incentive to
Consolidated Financial Statements Stock Option Plan and 3,075,000 shares are
issuable under the Non-Qualified Stock Option Plan. The purchase price of
<PAGE> 34
Page 33
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
In August 1999, the Board of Directors adopted the 1999 Incentive Compensation
Plan, of which 1,000,000 shares are issuable. No awards shall be granted after
July 31, 2004, and shares must be exercisable not later than 10 years after the
date of the grant unless otherwise expressly authorized by the Board of
Directors.
In August 1999, the Board of Directors granted under the 1999 Incentive
Compensation Plan, restricted stock awards of 100,000 shares of Class B Common
Stock, with a per share fair value of $11.81 to a key executive. These stock
awards vest over four years and the unvested portion is included in
stockholders' equity as unearned compensation at January 29, 2000 in the
accompanying financial statements. The charge to compensation expense for these
stock awards in 1999 was $196,000.
Option plan activity for the three fiscal years ended January 29, 2000 is set
forth below:
<TABLE>
<CAPTION>
RANGE OF WEIGHTED
OPTIONS OPTION AVERAGE
OUTSTANDING PRICES PRICE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Granted 670,000 9.36 - 13.25 12.51
Exercised (48,950) 1.50 - 8.25 7.25
Cancelled (110,250) 3.21 - 12.69 8.23
-------------------------------------------
Outstanding options, January 29, 2000 2,972,782 $ 1.50 - $14.59 $ 9.39
===========================================
</TABLE>
The following tables summarize stock option information at January 29, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 1.50 - $ 7.63 814,682 2.39 years $ 7.42
$ 7.69 - $ 8.25 1,169,900 6.88 years $ 8.08
$ 9.25 - $ 14.59 988,200 9.17 years $ 12.57
- ---------------------------------------------------------------------------------------------------------------------
$ 1.50 - $ 14.59 2,972,782 6.41 years $ 9.39
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
-------------------
WEIGHTED
RANGE OF NUMBER AVERAGE
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 1.50 - $ 7.63 778,082 $ 7.53
$ 7.69 - $ 8.25 575,000 $ 8.00
$ 9.25 - $ 14.59 69,400 $ 12.41
- ---------------------------------------------------------------------------------------------------------------------
$1.50 - $ 14.59 1,422,482 $ 7.96
=====================================================================================================================
</TABLE>
Outstanding options at January 29, 2000 covered 717,000 shares of Class B Common
Stock and 2,255,782 shares of Class A Common Stock. Outstanding options at
January 30, 1999 covered 517,000 shares of Class B Common Stock and
<PAGE> 35
Page 34
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1,944,982 shares of Class A Common Stock. Options available to be granted under
the option plans were 526,018 shares at January 29, 2000 and 184,368 shares at
January 30, 1999.
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
1999, 1998 and 1997 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 1999, 1998 and 1997 would approximate the
following proforma amounts (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
AS REPORTED PROFORMA
- ----------------------------------------------------------------------
<S> <C> <C>
Net Income-- Fiscal 1999 $33,931 $32,329
Basic Earnings Per Share $ 1.28 $ 1.22
Diluted Earnings Per Share $ 1.26 $ 1.20
Net Income-- Fiscal 1998 $23,917 $22,822
Basic Earnings Per Share $ .87 $ .83
Diluted Earnings Per Share $ .85 $ .81
Net Income-- Fiscal 1997 $17,401 $16,476
Basic Earnings Per Share $ .62 $ .59
Diluted Earnings Per Share $ .62 $ .59
</TABLE>
The weighted-average fair value of each option granted during fiscal 1999, 1998
and 1997 is estimated as $6.12, $6.71 and $4.02 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 1999,
1998 and 1997, respectively: expected dividend yield of 2.62%, 2.20% and 1.49%;
expected volatility of 62.10%, 66.44% and 58.14%, adjusted for expected
dividends; risk-free interest rate of 6.40%, 5.07% and 5.44%; and an expected
life of 5 years, 5 years and 5 years. The effects of applying SFAS 123 in this
proforma disclosure are not indicative of future amounts.
In February 2000, the Board of Directors increased the quarterly dividend by 33%
from $.075 per share to $.10 per share.
In 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 29, 2000, January 30, 1999 and January 31, 1998 is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
----------- ----------------- -----------
(In thousands)
<S> <C> <C> <C>
Net income $ 33,931 $ 23,917 $ 17,401
Unrealized gains (losses) on available for sale securities, net of taxes (2,025) 340 (10)
---------- ----------- -----------
Total comprehensive income $ 31,906 $ 24,257 $ 17,391
========== ============ ===========
</TABLE>
The following schedule summarizes the activity in other comprehensive income for
the year ended January 29, 2000 (in thousands):
<TABLE>
<CAPTION>
TAX EXPENSE
PRE-TAX (BENEFIT) NET OF TAX
----------- ------------- -----------
<S> <C> <C> <C>
Net unrealized (losses) arising during the year $ (3,116) $ (1,091) $ (2,025)
----------- ------------ ----------
Other comprehensive income (loss) $ (3,116) $ (1,091) $ (2,025)
=========== ============ ==========
</TABLE>
<PAGE> 36
Page 35
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution retirement savings plan (401(k)) which
covers all employees who meet minimum age and service requirements. The 401(k)
plan allows participants to contribute up to 16% of their annual compensation.
The Company is obligated to make a minimum contribution to cover plan
administrative expenses and further Company contributions, at the discretion of
the Board of Directors. The Company's contributions for the years ended January
29, 2000, January 30, 1999 and January 31, 1998 were approximately $2,145,000,
$1,606,000 and $1,177,000, 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 29, 2000, January 30, 1999 and January 31, 1998
were $1,913,000, $531,000 and $130,000, respectively.
The Company is self-insured with respect to employee health, workers
compensation and general liability claims. Employee health claims are funded
through a VEBA trust to which the Company makes periodic contributions. The
Company has stop-loss insurance coverage for individual claims in excess of
$220,000. Contributions to the VEBA trust were $5,214,000, $4,177,000 and
$3,854,000 in fiscal 1999, 1998 and 1997, respectively.
9. LEASES:
The Company has operating lease arrangements for store facilities and
equipment. Facility leases generally are for periods of five years with renewal
options, and most provide for additional contingent rentals based on a
percentage of store sales in excess of stipulated amounts. Equipment leases are
generally for three-to seven-year periods. The Company has a master lease
agreement with a lessor to lease $19.5 million of store fixtures, point-of-sale
devices and warehouse equipment, which do not meet criteria for capital lease
accounting, and are being accounted for as operating leases with terms of seven
years. However, these leases may be cancelled annually upon proper notice to
the lessor. Upon notice of cancellation, the Company would be obligated to
purchase the equipment at a prescribed termination value from the lessor. If
the Company cancelled the leases at January 29, 2000, the purchase price for
the equipment would be approximately $8,815,000.
The minimum rental commitments under non-cancelable operating leases are (in
thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
FISCAL YEAR
- --------------------------------------------------------------------------
<S> <C>
2000 $ 30,032
2001 24,409
2002 14,456
2003 5,886
2004 803
Thereafter 834
---------
Total minimum lease payments $ 76,420
=========
</TABLE>
The following schedule shows the composition of total rental expense for all
leases:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Fiscal Year Ended
JANUARY 29, January 30, January 31,
2000 1999 1998
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Minimum rentals $ 32,453 $ 30,313 $ 29,660
Contingent rent 257 270 226
----------------------------------------------------
Total rental expense $ 32,710 $ 30,583 $ 29,886
====================================================
</TABLE>
<PAGE> 37
Page 36
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Fiscal Year Ended
JANUARY 29, January 30, January 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current income taxes:
Federal $ 17,826 $ 12,502 $ 6,825
State 190 338 685
----------------------------------------
Total 18,016 12,840 7,510
----------------------------------------
Deferred income taxes:
Federal 81 (190) 205
State 94 228 291
----------------------------------------
Total 175 38 496
----------------------------------------
Total income tax expense $ 18,191 $ 12,878 $ 8,006
========================================
</TABLE>
Significant components of the Company's deferred tax assets and liabilities as
of January 29, 2000 and January 30, 1999 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
JANUARY 29, January 30,
2000 1999
- --------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Bad debt reserve $ 1,969 $ 1,623
Inventory valuation 1,411 1,134
Unrealized losses on short-term investments 970 --
Reserves 1,108 958
--------------------------
Total deferred tax assets 5,458 3,715
--------------------------
Deferred tax liabilities:
Tax over book depreciation 6,527 6,326
Unrealized gains on short-term investments -- 121
Other, net 644 (182)
--------------------------
Total deferred tax liabilities 7,171 6,265
--------------------------
Net deferred tax liabilities $ 1,713 $ 2,550
==========================
</TABLE>
The reconciliation of the Company's effective income tax rate with the
statutory rate is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Fiscal Year Ended
JANUARY 29, January 30, January 31,
2000 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0%
State income taxes 0.5 1.2 2.9
Other (0.5) (1.2) (6.4)
------------------------------------------
Effective income tax rate 35.0% 35.0% 31.5%
==========================================
</TABLE>
<PAGE> 38
Page 37
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial results have been restated for the effects of
SAB 101 and are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FISCAL 1999 FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail sales $ 153,047 $ 148,782 $ 127,367 $ 155,889
Total revenues 157,874 153,809 132,357 160,993
Cost of goods sold 100,017 100,100 90,247 113,291
Income before income taxes and cumulative effect of accounting change 20,906 15,477 5,418 10,174
Income before cumulative effect of accounting change 13,589 10,060 3,522 6,613
Cumulative effect of accounting change, net of tax 147 -- -- --
Net income 13,736 10,060 3,522 6,613
Basic earnings per share (before cumulative effect of accounting change) $ .51 $ .38 $ .13 $ .25
Basic earnings per share $ .52 $ .38 $ .13 $ .25
Diluted earnings per share (before cumulative effect of accounting change) $ .51 $ .37 $ .13 $ .25
Diluted earnings per share $ .51 $ .37 $ .13 $ .25
FISCAL 1998
- -------------------------------------------------------------------------------------------------------------------------------
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
Income before income taxes 16,844 8,928 4,322 6,701
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
===============================================================================================================================
</TABLE>
The restatement for the effects of SAB 101 for fiscal 1999 resulted in a
decrease in net income before cumulative effect of accounting change of
$149,000 with no per share effect in the first quarter; an increase in net
income of $126,000 with no per share effect in the second quarter; and a
decrease in net income of $442,000 with a decrease of $.02 per share in the
third quarter.
12. REPORTABLE SEGMENT INFORMATION:
The Company has two reportable segments: retail and credit. The Company
operates its women's fashion 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 1999 RETAIL CREDIT TOTAL
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 592,855 $ 12,178 $ 605,033
Depreciation 8,603 36 8,639
Interest expense 23 -- 23
Income before taxes 47,347 4,628 51,975
Total assets 224,501 61,288 285,789
Capital expenditures 23,807 157 23,964
FISCAL 1998 RETAIL CREDIT TOTAL
- -----------------------------------------------------------------------------
Revenues $ 532,330 $ 11,334 $ 543,664
Depreciation 7,613 25 7,638
Interest expense 19 -- 19
Income before taxes 33,044 3,751 36,795
Total assets 200,946 57,567 258,513
Capital expenditures 13,459 60 13,519
</TABLE>
<PAGE> 39
Page 38
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS REPORT
<TABLE>
<CAPTION>
FISCAL 1997 RETAIL CREDIT TOTAL
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 503,914 $ 8,534 $ 512,448
Depreciation 7,685 28 7,713
Interest expense 25 -- 25
Income before taxes 24,535 872 25,407
Total assets 197,871 43,566 241,437
Capital expenditures 7,377 -- 7,377
============================================================================
</TABLE>
13. COMMITMENTS AND CONTINGENCIES:
Workers compensation and general liability claims are settled through a claims
administrator and are limited by stop-loss insurance coverage for individual
claims in excess of $250,000 and $100,000, respectively. The Company paid
claims of $1,074,000, $1,347,000 and $970,000 in fiscal 1999, 1998 and 1997,
respectively. The Company had no outstanding letters of credit relating to such
claims at January 29, 2000, and $1,600,000 at January 30, 1999. 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.
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 29, 2000 and January
30, 1999, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended January
29, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility if to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at January 29, 2000
and January 30, 1999 and the results of its operations and its cash flows for
each of the three years in the period ended January 29, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
March 13, 2000
<PAGE> 40
Page 39
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Allowance Reserve
for for
Doubtful Rental
Accounts (a) Commitments (b)
----------------- ---------------
(In thousands)
<S> <C> <C>
Balance at 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
Additions charged to costs and expenses 4,850 998
Additions (Deductions) charged to other accounts 936 (d) -
Deductions (4,886) (c) (1,153)
------------------ ---------------
Balance at January 29, 2000 $ 5,101 $ 1,771
================== ===============
</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> 41
Page 40
EXHIBIT INDEX
DESIGNATION OF
EXHIBIT PAGE
- -------------- ----
10 Employment Agreement................................. 41
21 Subsidiaries of the Registrant....................... 42
23 Consent of Independent Auditors...................... 43
27 Financial Data Schedule (for SEC use only)
<PAGE> 42
Page 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Cato has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
The Cato Corporation
<TABLE>
<S> <C>
By /s/ Wayland H. Cato, Jr. By /s/ John P. Derham Cato
-------------------------------------- --------------------------------------
Wayland H. Cato, Jr. John P. Derham Cato
Chairman of the Board Vice Chairman of the Board
President and Chief Executive Officer
By /s/ Michael O. Moore By /s/ Robert M. Sandler
-------------------------------------- --------------------------------------
Michael O. Moore Robert M. Sandler
Executive Vice President Senior Vice President
Chief Financial Officer and Secretary Controller
</TABLE>
Date: April 26, 2000
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 41
EXHIBIT 10
EMPLOYMENT AGREEMENT
<PAGE> 2
Approved by Board of Directors
8/26/99
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, made as of May 20, 1999, between THE CATO
CORPORATION, a Delaware corporation with its principal place of business in
Charlotte, North Carolina (the "Company"), and JOHN P. DERHAM CATO, an
individual residing at 8225 Bar Harbor Lane, Charlotte, North Carolina 28210
("Employee").
BACKGROUND STATEMENT
Employee is currently employed by the Company as its Vice-Chairman of
the Board of Directors, President and Chief Operating Officer. The Board of
Directors recognizes that Employee has made substantial contributions to the
growth and success of the Company and desires to promote Employee to
Vice-Chairman of the Board of Directors, President and Chief Executive Officer
of the Company.
AGREEMENT
In consideration of the mutual agreements herein contained, the Company
and Employee hereby agree as follows:
1. Employment. The Company hereby agrees to employ Employee as
Vice-Chairman, President and Chief Executive Officer of the Company for the Term
of Employment as herein set forth, and Employee hereby agrees to continue to
serve the Company in such capacity for such term.
2. Term of Employment. The "Term of Employment," as used herein, will
commence on the date hereof and, unless sooner terminated as hereinafter
provided, shall terminate on May 31, 2002; provided, however, that in the event
that a Change in Control (as defined below) occurs at a time when the remaining
Term of Employment is less than one year, the Term of Employment will be
automatically extended until the first anniversary of the Change in Control.
3. Employment During the Term. During the Term of Employment, Employee
shall devote his full professional time to the business of the Company, shall
use his best efforts to promote the interests of the Company and shall serve as
Vice-Chairman, President and Chief Executive Officer and in such other senior
executive capacities as the Board of Directors of the Company shall hereafter
designate from time to time.
4. Vacation. Employee shall be entitled to annual vacations in
accordance with the vacation policy and practices of the Company.
5. Compensation.
(a) Base Salary. As compensation for Employee's services hereunder and
for his covenants set forth in Sections 9, 10, and 11 below, the Company shall
pay to Employee a base salary of $600,000 per annum. Such salary may be
increased, but not decreased, by the
1
<PAGE> 3
Approved by Board of Directors
8/26/99
Company from time to time based on the Compensation Committee's and the Board of
Directors' review of Employee's performance, in accordance with the Company's
performance-appraisal practices and guidelines. Such compensation shall be
payable in accordance with the Company's payroll practices for executive
employees.
(b) Bonus Plan. In addition, Employee shall be eligible to participate
in the Company's annual incentive bonus plan, and other compensation plans of
the Company, as they shall be administered by the Board of Directors of the
Company and the relevant committees thereof (referred to herein as the "Bonus
Plans"). Employee will be eligible to receive an annual incentive bonus of up to
150% of his base salary, depending on the achievement of performance goals
established by the Compensation Committee.
(c) Equity Awards. As soon as is reasonably practical and after the
adoption of stock option and other plans pursuant to which such awards may be
made, the Company will make the following equity awards to Employee:
(i) Options. Non-Qualified Stock Options to acquire 200,000
shares of the Company's common stock (options for 100,000 shares of
which have been granted as of the date hereof under the 1987
Non-Qualified Stock Option Plan, and options for an additional 100,000
shares will be granted under the 1999 Incentive Compensation Plan),
exercisable at fair market value on the date of grant, to vest over
five years and be exercisable over 10 years as the Compensation
Committee shall provide; and
(ii) Restricted Stock. Two grants of restricted stock (subject
to 4-year cliff vesting) as follows:
(A) 100,000 shares, subject to such restrictions and
contingent on such performance goals as the Compensation
Committee shall provide.
(B) 100,000 shares, to be awarded if and when, during
the Employee's employment hereunder but not later than August
18, 2004, the Company's daily share price (calculated using
the average of the high and low price for the day) shall
average at least $20 per share during any period of 90
consecutive days and the price per share on the 90th
consecutive day shall be at least $20.00.
6. Benefits. Employee shall be entitled to participate in all health,
accident, disability, medical, life and other insurance programs and other
welfare benefit plans maintained by the Company for the benefit of Employee
and/or other executive employees of the Company in accordance with the Company's
policies.
7. Termination. The Employee's employment may be terminated under any
of the circumstances listed in (b) through (f) below.
(a) Termination Benefits Generally. In the event of any termination of
employment, the Employee will be entitled to receive his salary and benefits
through the date of termination, plus the additional compensation specified
below. Except to the extent specified to the contrary below, with respect to the
Company's compensation and benefit plans (including, without
2
<PAGE> 4
Approved by Board of Directors
8/26/99
limitation, the 1999 Incentive Compensation Plan), the Employee's rights and
benefits shall be as specified in such plans and the awards made thereunder.
(b) Death. The employment will terminate upon the death of Employee.
(c) Disability. The Company or the Employee may terminate the
employment on account of Disability. For purposes of this Employment Agreement,
"Disability" shall mean Employee's absence from continuous full-time employment
with the Company for a period of at least 180 consecutive days by reason of a
mental or physical illness. The Company shall have the right to have Employee
examined at such reasonable times by such physicians satisfactory to Employee as
the Company may designate, and Employee will make himself available for and
submit to such examination as and when requested. Except as otherwise provided
in this Section 7(d), the inability of Employee to perform his duties hereunder,
whether by reason of injury, illness (physical or mental), or otherwise shall
not result in the termination of Employee's employment hereunder, and he shall
be entitled to continue to receive his base salary and other benefits as
provided herein.
In the event of a termination on account of Disability, (1) the
Employee will be entitled to receive his annual base salary for one year
following such termination (any amounts provided to the Employee pursuant to any
Company-funded disability plans or insurance will be credited against the
Company's obligation to make such salary continuation payments), and (2) the
Company will continue to provide Employee, for one year following such
termination (but not after the date that Employee secures other employment),
with the welfare benefit plans in which the Employee was entitled to participate
before the termination.
(d) Cause. Cause shall mean (i) failure (other than by reason of
incapacity due to physical or mental illness) to perform his material duties
hereunder, (ii) gross negligence or misfeasance in the performance of his
duties, (iii) failure to follow reasonable directives of the Board of Directors,
(iv) conviction of Employee of a felony or plea of no contest to a felony, or
(v) perpetuation of a material dishonest act or fraud against the Company or any
affiliate thereof.
(e) Without Cause. The Company may terminate the Employee without
Cause.
In the event of a termination without Cause, whether during or after
the Term of Employment, or upon the normal expiration of the Term of Employment,
(1) Employee will be entitled to receive his annual base salary for the longer
of (i) the remainder of the Term of Employment or (ii) one year, provided that
with respect to such post-termination period after the first anniversary of the
termination, the salary amounts paid to Employee shall be reduced by the amounts
the Employee actually earns during such period from another employer; (2) the
Company will continue to provide Employee with the welfare benefit plans in
which the Employee was entitled to participate before the termination, for the
longer of (i) the remainder of the Term of Employment, or (ii) one year, but not
after the date that Employee secures other employment; (3) all unvested stock
options held by the Employee will immediately vest in full, and will remain
exercisable for a period of up to 90 days after the Date of Termination (but in
no event beyond the original expiration date of such stock options); and (4) the
unexpired Restriction Period with respect to the restricted stock awards
referred to in Section 5(c)(ii), if awarded, will lapse, and such restricted
stock will become unrestricted common stock.
3
<PAGE> 5
Approved by Board of Directors
8/26/99
In addition, if such termination without Cause occurs during the Term
of Employment, (1) the Employee will be entitled to receive a prorated incentive
bonus award for the year in which the termination occurs.
(f) Change of Control. For purposes of this Employment Agreement, "a
Change in Control" of the Company shall mean:
(A) an acquisition (other than directly from the Company) by a
Person (as defined below) (excluding the Company or an employee benefit
plan of the Company or an entity controlled by the Company's
shareholders) that results in such Person beneficially owning shares of
the Company's voting securities with total voting power exceeding the
total voting power of the Company's voting securities beneficially
owned by the current holders of the Company's Class B Common Stock and
persons who would be "Permitted Transferees" as such term is defined in
the Company's certificate of incorporation.
(B) at any time during the term of this Employment Agreement
there is a change in the composition of the Board of Directors of the
Company resulting in a majority of the directors of the Company who are
in office on the date hereof ("Incumbent Company Directors") no longer
constituting a majority of the directors of the Company; provided that,
in making such determination, persons who are elected to serve as
directors of the Company and who are approved by all of the directors
in office on the date of such election (other than in connection with
an actual or threatened proxy contest) shall be treated as Incumbent
Company Directors; or
(C) consummation of a complete liquidation or dissolution of
the Company or a merger, consolidation or sale of all or substantially
all of the Company's assets or stock (collectively a "Business
Combination") other than a Business Combination in which the
shareholders of the Company, as a group, receive stock having fifty
percent (50%) or more of the aggregate voting power in the entity
resulting from the Business Combination.
Notwithstanding the foregoing, a transaction in which Employee is a material
participant in the acquiring Person or entity effecting the transaction shall
not constitute a Change in Control. For the purpose of this paragraph, the term
"beneficially owned" shall have the meaning set forth in Rule l3d-3 promulgated
under the Securities Exchange Act of 1934, and the term "Person" shall have the
meaning set forth in Sections 3(a)(2) and 13(d)(3) of the Exchange Act.
If the Company terminates the Employee without cause at any time after
the occurrence of a Change in Control, or if the Employee voluntary terminates
his employment following a Change in Control and the simultaneous or subsequent
occurrence of any of the following:
(A) Employee is required to maintain his principal office at a location
more than 20 miles from Charlotte, N.C.;
(B) Employee ceases to be, either in title or in fact, the chief
executive officer of the Company;
4
<PAGE> 6
Approved by Board of Directors
8/26/99
(C) Employee's base salary is reduced; or
(D) Employee's maximum bonus opportunity is reduced,
the Company will pay to the Employee an amount equal to 2.99 times his "base
amount," as defined in Section 280G of the Internal Revenue Code, and will
continue to provide Employee with the welfare benefit plans in which Employee
was entitled to participate before the termination, for the longer of (i) the
remainder of the Term of Employment or (ii) one year, but not after the date
that Employee secures other employment; provided, however, that the amount of
any benefits accruing to Employee by virtue of such Change in Control under
stock option, restricted stock or other benefit plans that is considered (for
purposes of Section 280G) to be payments contingent upon a change in control
will be credited against the payment required hereunder. In no event shall the
Employee be entitled to receive any amount of compensation and benefits as a
result of such Change in Control that would not be deductible by the Company
pursuant to Section 280G.
(g) Date and Notice of Termination. Any termination of Employee's
employment by the Company or by Employee (other than termination because of
death) shall be communicated by written Notice of Termination to the other party
hereto. For purposes of this Employment Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Employment Agreement relied upon and, unless the termination is without
Cause pursuant to Section 7(e), shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of Employee's
employment under the provision so indicated.
"Date of Termination" shall mean (i) if Employee's employment is
terminated by his death, the date of his death, and (ii) if Employee's
employment is terminated pursuant to a Notice of Termination, the date specified
in the Notice of Termination; provided that, if within thirty (30) days after
any Notice of Termination is given the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be the date which is finally
determined to be the Date of Termination, either by mutual written agreement of
the parties, by a binding and final arbitration award or by a final judgment,
order or decree of a court of competent jurisdiction (the time for appeal
therefrom having expired and no appeal having been perfected).
8. Business Expenses. The Company agrees that during his employment
with the Company, the Company will reimburse Employee for actual travel and
other out-of-pocket expenses reasonably incurred by him in connection with the
performance of his duties hereunder and accounted for in accordance with the
policies and procedures currently established by the Company.
9. Competition. Employee agrees that during his employment with the
Company and for a period of two years after the date of termination of
employment, he will not, directly or indirectly, as owner, employee, consultant
or otherwise, engage in business on behalf of any of the following:
5
<PAGE> 7
Approved by Board of Directors
8/26/99
Charming Shoppes, Maurices, The Dress Barn, Deb Shops, Paul
Harris Stores, United Retail Group, Goody's Family Clothing,
One Price Clothing, Fashion Cents, Simply Fashions, or
Catherines Stores
The foregoing restriction shall not prohibit the ownership of less than
1% of the shares of an entity whose shares are traded on a national securities
exchange or over NASDAQ.
10. No Solicitation. Employee agrees that during the two-year period
following the termination of his employment with the Company, he will not
directly or indirectly solicit or recruit any person to leave the employment of
the Company, or recommend to any other person or business the hiring of any
person then employed with the Company.
11. Confidentiality. Employee agrees that, during the Term of
Employment and thereafter, he will not, without the written consent of the
Company, disclose to anyone not entitled thereto, any confidential information
relating to the business, sales, financial condition or products of the Company
or any affiliate thereof. Employee also recognizes and acknowledges that he has
a common law obligation not to disclose trade secrets and other proprietary
information of the Company. Employee further agrees that, should he leave the
active service of the Company, he will not take with him or retain, without the
written authorization of the Board of Directors, any papers, files or other
documents or copies thereof or other confidential information of any kind
belonging to the Company pertaining to its business, sales, financial condition
or products. Employee understands and agrees that the rights and obligations set
forth in this Section 11 are perpetual and, in any case, shall extend beyond the
period of his employment.
12. Injunctive Relief. Without limiting the remedies available to the
Company, Employee acknowledges that a breach of the covenants contained in
Sections 9, 10 and 11 herein may result in material irreparable injury to the
Company for which there is no adequate remedy at law, that it will not be
possible to measure damages for such injuries precisely and that, in the event
of such a breach or threat thereof, the Company shall be entitled to obtain a
temporary restraining order or a preliminary injunction restraining Employee
from engaging in activities prohibited by Sections 9, 10 and 11 or such other
relief as may be required to specifically enforce any of the covenants in such
Sections.
13. Successors. This Employment Agreement shall inure to the benefit of
and be binding upon the Company and its successors and assigns and upon Employee
and his legal representatives. The Company shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to expressly assume
and agree to perform this Employment Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place.
14. Amendments. This Employment Agreement, which contains the entire
contractual understanding between the parties, may not be changed orally but
only by a written instrument signed by the parties hereto.
6
<PAGE> 8
Approved by Board of Directors
8/26/99
15. Governing Law. This Employment Agreement shall be governed by and
construed in accordance with the laws of the State of North Carolina.
16. Waiver. The waiver of breach of any term or condition of this
Employment Agreement shall not be deemed to constitute the waiver of any other
breach of the same or any other term or condition.
17. Severability. In the event that any provision or portion of this
Employment Agreement shall be determined to be invalid or unenforceable for any
reason, the remaining provisions and portions of this Employment Agreement shall
be unaffected thereby and shall remain in full force and effect to the fullest
extent provided by law.
18. Notices. Any notices or other communications required or permitted
hereunder shall be deemed sufficiently given if sent by registered mail, postage
prepaid, as follows:
(a) If to Employee:
-----------------------
-----------------------
-----------------------
(b) If to the Company:
The Cato Corporation
8100 Denmark Road
Charlotte, NC 28273
or to such other address as shall have been specified in writing by either party
to the other. Any such notice or communication shall be deemed to have been
given on the second day (excluding any days U.S. Post Offices are not open)
after the date so mailed.
7
<PAGE> 9
Approved by Board of Directors
8/26/99
IN WITNESS WHEREOF, the Company has caused this Employment Agreement to
be executed by its duly authorized representative, and Employee has hereunto set
his hand as of the date first above written.
THE CATO CORPORATION
By:
-------------------------------------
Wayland H. Cato, Jr., Chairman
-------------------------------------
A. F. "Pete" Sloan
Chairman, Compensation Committee
ATTEST:
- ------------------------------
Michael O. Moore, Secretary
-------------------------------------
John P. Derham Cato
8
<PAGE> 1
Page 42
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
Catocorp.com, LLC Delaware Catocorp.com, LLC
</TABLE>
<PAGE> 1
Page 43
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-96283) pertaining to The Cato Corporation Incentive Compensation
Plan, in the Registration Statement (Form S-8 No. 33-41314) pertaining to The
Cato Corporation Employee Incentive Stock Option Plan, in the Registration
Statement (Form S-8 No. 33-41315) pertaining to The Cato Corporation
Non-qualified Stock Option Plan, and in the Registration Statement (Form S-8 No.
33-69844) pertaining to the Cato Corporation Employee Stock Purchase Plan, of
our report dated March 13, 2000, with respect to the consolidated financial
statements and financial statement schedule of The Cato Corporation included in
the Annual Report on Form 10-K for the year ended January 29, 2000.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
April 26, 2000
<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-29-2000
<PERIOD-END> JAN-29-2000
<CASH> 30,389
<SECURITIES> 56,886
<RECEIVABLES> 50,059
<ALLOWANCES> 5,101
<INVENTORY> 69,497
<CURRENT-ASSETS> 208,817
<PP&E> 128,451
<DEPRECIATION> 59,113
<TOTAL-ASSETS> 285,789
<CURRENT-LIABILITIES> 83,829
<BONDS> 0
0
0
<COMMON> 984
<OTHER-SE> 188,780
<TOTAL-LIABILITY-AND-EQUITY> 285,789
<SALES> 585,085
<TOTAL-REVENUES> 605,033
<CGS> 403,655
<TOTAL-COSTS> 403,655
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,850
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> 52,201
<INCOME-TAX> 18,270
<INCOME-CONTINUING> 33,931
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,931
<EPS-BASIC> 1.28
<EPS-DILUTED> 1.26
</TABLE>
