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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 [FEE REQUIRED]
For the fiscal year ended February 2, 2002
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 0-3747
State of Incorporation: Delaware I.R.S. Employer Identification
Number: 56-0484485
Address of Principal Executive Offices:
8100 Denmark Road Registrants Telephone Number:
Charlotte, North Carolina 28273-5975 704/554-8510
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 files pursuant to Item 405
of the Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrants 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 22, 2002, there were 19,395,237 shares of Class A Common Stock and
5,822,649 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
ties Registrant as of March 22, 2002 was approximately $376,867,918 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 24, 2002, relating to the 2002
annual meeting of shareholders are incorporated by reference into the following
part of this annual report:
Part III - Items 10,11,12 and 13
THE CATO CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
----
PART I:
Item 1. Business..................................................Pages 2 - 8
Item 2. Properties................................................Page 8
Item 3. Legal Proceedings.........................................Page 9
Item 4. Submission of Matters to a Vote of Security Holders.......Page 9
PART II:
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................Page 10
Item 6. Selected Financial Data...................................Page 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................Pages 12 -14
Item 8. Financial Statements and Supplementary Data...............Page 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................Page 15
PART III:
Item 10. Directors and Executive Officers of the Registrant........Pages 16 -18
Item 11. Executive Compensation....................................Page 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................Page 19
Item 13. Certain Relationships and Related Transactions............Page 19
PART IV:
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K...............................................Page 20
Page 2
PART I
ITEM 1. BUSINESS:
GENERAL
The Company, founded in 1946, operated 937 women's fashion specialty
stores at February 2, 2002, under the names "Cato," "Cato Fashions;" "Cato
Plus" and "It's Fashion!" in 24 states, principally in the Southeast. The
Company offers quality fashion apparel and accessories at low prices, everyday
in junior/missy and plus sizes. Additionally, the Company offers clothing for
girls ages 7 - 16 in selected locations. 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 major portion of the Company's merchandise is sold under its
private labels and is produced by various vendors in accordance with the
Company's strict specifications. Most stores range in size from 3,000 to 6,000
square feet and are located primarily in strip shopping centers anchored by
national discounters or market-dominant grocery stores. The Company emphasizes
friendly customer service and coordinated merchandise presentations in an
appealing store environment. The Company offers its own credit card and layaway
plan. Credit and layaway sales represented 18% of retail sales in fiscal 2001.
See Note 12 to the Consolidated Financial Statements, "Reportable Segment
Information" for a discussion of segment information.
BUSINESS
The Company's primary objective is to be the leading fashion specialty
retailer for fashion conscious low-to-middle income females in its markets.
Management believes the Company's success is dependent upon its ability to
differentiate its stores from department stores, mass merchandise discount
stores and competing women's specialty stores. The key elements of the
Company's business strategy are:
Merchandise Assortment. The Company's stores offer a wide
assortment of apparel and accessory items in regular and large sizes
and emphasize color, product coordination and selection.
Value Pricing. The Company offers quality merchandise that is
generally priced below comparable merchandise offered by department
stores and mall specialty apparel chains but is generally more
fashionable than merchandise offered by discount stores. The Company
has positioned itself as the everyday low price leader in its segment.
Page 3
ITEM 1. BUSINESS: (CONTINUED)
Strip Shopping Center Locations. The Company locates its
stores principally in convenient strip centers anchored by national
discounters or market-dominant grocery stores that attract large
numbers of potential customers.
Customer Service. Store managers and sales associates are
trained to provide prompt and courteous service and to assist
customers in merchandise selection and wardrobe coordination.
Credit and Layaway Programs. The Company offers its own
credit card and a layaway plan to make the purchase of its merchandise
more convenient.
Expansion. The Company plans to open new stores and relocate
existing stores in rural, middle and metro markets in northern,
midwestern and western adjacent states, as well as continuing to
"fill-in" existing southeastern core geography.
MERCHANDISING
Merchandising
The Company offers a broad selection of high quality and exceptional
value apparel and accessories to suit the various lifestyles of the fashion
conscious low-to-middle income female, ages 18 to 50. In addition, the Company
offers on-trend fashion in exciting colors with consistent fit and quality.
The Company's merchandise lines include dressy, career, and casual
sportswear, dresses, coats, shoes, lingerie, hosiery, costume jewelry, handbags
and millinery. Apparel for girls ages 7 - 16 are offered in selected stores.
Most of the Company's merchandise is sold under its private labels.
The collaboration of the merchandising team with an expanded in-house
product development and direct sourcing function has enhanced merchandise
offerings delivering quality private label products at lower costs. Product
development and the direct sourcing operation provide research on emerging
fashion and color trends, technical services and direct sourcing options.
Page 4
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 2001, purchases from the Company's largest vendor accounted
for approximately 6% of the Company's total purchases. No other vendor
accounted for more than 3% of total purchases. The Company is not dependent on
its largest vendor or any other vendor for merchandise purchases and the loss
of any single vendor or group of vendors would not have a material adverse
effect on the Company's operating results or financial condition. A substantial
portion of the Company's merchandise is sold under its private labels and is
produced by various vendors in accordance with the Company's strict
specifications. The Company purchases most of its merchandise from domestic
importers and vendors, which typically minimizes the time necessary to purchase
and obtain shipments in order to enable the Company to react to merchandise
trends in a more timely fashion. Although a significant portion of the
Company's merchandise is manufactured overseas, principally in the Far East,
any economic, political or social unrest in that region is not expected to have
a material adverse effect on the Company's ability to obtain adequate supplies
of merchandise.
An important component of the Company's strategy is the allocation of
merchandise to individual stores based on an analysis of sales trends by
merchandise category, customer profiles and climatic conditions. A merchandise
control system provides current information on the sales activity of each
merchandise style in each of the Company's stores. Point-of-sale terminals in
the stores collect and transmit sales and inventory information to the
Company's central database, permitting timely response to sales trends on a
store-by-store basis.
All merchandise is shipped directly to the Company's distribution
center in Charlotte, North Carolina where it is inspected then allocated by the
merchandise distribution staff for shipment to individual stores. The flow of
merchandise from receipt at the distribution center to shipment to stores is
controlled by an on-line system. Shipments are made by common carrier, and each
store receives at least one shipment per week.
Page 5
ITEM 1. BUSINESS: (CONTINUED)
Advertising
The Company uses radio, graphics and a website as its primary
advertising media The Company uses radio advertising in selected trade areas.
The Company's total advertising expenditures were approximately .7% of retail
sales in fiscal 2001.
STORE OPERATIONS
The Company's store operations management team consists of two
directors of stores, three territorial managers, fourteen regional managers and
ninety-eight district managers. Regional managers receive a salary plus a bonus
based on achieving targeted goals for sales, payroll and shrinkage control and
store profitability. District managers receive a salary plus a bonus based on
achieving targeted objectives for district sales increases and shrinkage
control. Stores are staffed with a manager, two assistant managers and
additional part-time sales associates depending on the size of the store and
seasonal personnel needs. Store managers receive a salary and all other store
personnel are paid on an hourly basis. Store managers and assistant managers
are eligible for monthly and semi-annual bonuses based on achieving targeted
goals for their store's sales increases and shrinkage control.
The Company is constantly improving its training programs to develop
associates. Nearly 80% of store and field management are promoted from within,
allowing the Company to internally staff an expanding store base. The Company
has training programs at each level of store operations. New store managers are
trained in training stores managed by experienced associates who have achieved
superior results in meeting the Company's goals for store sales, payroll
expense and shrinkage control. The type and extent of district manager training
varies depending on whether the district manager is promoted from within or
recruited from outside the Company. All district managers receive at a minimum
a one-week orientation program at the Company's corporate office.
STORE LOCATIONS
Most of the Company's stores are located in the Southeast in a variety
of markets ranging from small towns to large metropolitan areas with trade area
populations of 20,000 or more. Stores range in size from 3,000 to 6,000 square
feet and average approximately 4,100 square feet.
Page 6
ITEM 1. BUSINESS: (CONTINUED)
All of the Company's stores are leased. Approximately 92% are located
in strip shopping centers, 1% in downtown locations and 7% in enclosed shopping
malls. Where lease terms are acceptable and a potential location meets the
Company's demographic and other site-selection criteria, the Company locates
stores in strip shopping centers anchored by national discounters or
market-dominant grocery stores. The Company's strip center locations provide
ample parking and shopping convenience for its customers.
The Company's store development activities consist of opening new
stores in new and existing markets, and relocating selected 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 1997.
STORE DEVELOPMENT
Number of Stores
Beginning of Number Number Number of Stores
Fiscal Year Year Opened Closed End of Year
- ------------- ---------------- ------ ------ ----------------
1997......... 655 55 17 693
1998......... 693 52 13 732
1999......... 732 83 6 809
2000......... 809 65 15 859
2001......... 859 85 7 937
In Fiscal 2002 the Company plans to open approximately 90 new stores,
relocate 20 stores, close 10 stores, and remodel 35 stores.
The Company periodically reviews its store base to determine whether
any particular store should be closed based on its sales trends and
profitability. The Company intends to continue this review process to close
underperforming stores.
CREDIT AND LAYAWAY
Credit Card Program
The Company offers its own credit card, which accounted for
approximately 13% of retail sales in fiscal 2001. The Company's net bad debt
expense in fiscal 2001 was 6.2% of credit sales.
Page 7
ITEM 1. BUSINESS: (CONTINUED)
Customers applying for the Company's credit card are approved for
credit if they have a satisfactory credit record and meet minimum income
criteria. Customers are required to make minimum monthly payments based on
their account balances. If the balance is not paid in full each month, the
Company assesses the customer a finance charge. If payments are not received on
time, the customer is assessed a late fee.
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 2001.
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 ranking report to
monitor and control purchasing decisions. Weekly reports are also produced
which reflect sales, weeks of supply of inventory and other critical data by
product categories, by store and by various levels of responsibility reporting.
Purchases are made based on projected sales but can be modified to accommodate
unexpected increases or decreases in demand for a particular item.
Sales information is projected by merchandise category and, in some
cases, is further projected and actual performance measured by stockkeeping
unit. Merchandise allocation models are used to distribute merchandise to
individual stores based upon historical sales trends, climatic differences,
customer demographic differences and targeted inventory turnover rates.
COMPETITION
The women's retail apparel industry is highly competitive. The Company
believes that the principal competitive factors in its industry include
merchandise assortment and presentation, fashion, price, store location and
customer service. The Company competes with retail chains that operate similar
women's apparel specialty stores. In addition, the Company competes with local
apparel specialty stores, mass merchandise chains, discount store chains and,
to some degree, with major department stores. To the extent that the Company
opens stores in larger cities and metropolitan areas, competition is expected
to be more intense in those markets.
Page 8
ITEM 1. BUSINESS: (CONTINUED)
REGULATION
A variety of laws affect the revolving credit program offered by the
Company. The Federal Consumer Credit Protection Act (Truth-in Lending) and
Regulation Z promulgated thereunder require written disclosure of information
relating to such financing, including the amount of the annual percentage rate
and the finance charge. The Federal Fair Credit Reporting Act also requires
certain disclosures to potential customers concerning credit information used
as a basis to deny credit. The Federal Equal Credit Opportunity Act and
Regulation B promulgated thereunder prohibit discrimination against any credit
applicant based on certain specified grounds. The Federal Trade Commission has
adopted or proposed various trade regulation rules dealing with unfair credit
and collection practices and the preservation of consumers' claims and
defenses. The Company is also subject to the provisions of the Fair Debt
Collection Practices Act, which regulates the manner in which the Company
collects payments on revolving credit accounts. Additionally, the
Gramm-Leach-Bliley Act requires the Company to disclose, initially and annually,
to its customers, the Company's privacy policy as it relates to a customer's
non-public personal information.
ASSOCIATES
As of February 2, 2002, the Company employed approximately 8,600
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. A building of approximately 24,000
square feet located on a 2-acre tract adjacent to the Company's existing
location is used for receiving and staging shipments prior to processing.
Substantially all of the Company's retail stores are leased from
unaffiliated parties. Most of the leases have an initial term of five years,
with two to three five-year renewal options. Substantially all of the leases
provide for fixed rentals plus a percentage of sales in excess of a specified
volume.
Page 9
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.
Page 10
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 2001 and
2000.
- --------------------------------------------------------------------------------
Price
2001 HIGH LOW DIVIDEND
- ---- ---- --- --------
First quarter $20.00 $14.81 $.125
Second quarter 21.75 15.51 .135
Third quarter 20.06 14.23 .135
Fourth quarter 21.34 16.68 .135
Price
2000 HIGH LOW DIVIDEND
- ---- ---- --- --------
First quarter $12.25 $ 9.19 $ .10
Second quarter 12.50 10.02 .10
Third quarter 12.88 10.00 .10
Fourth quarter 18.00 11.00 .125
- --------------------------------------------------------------------------------
As of March 22, 2002 the approximate number of holders of the
Company's Class A Common stock was 3,470 and there were 12 record holders of
the Company's Class B Common Stock.
Page 11
ITEM 6. SELECTED FINANCIAL DATA:
THE CATO CORPORATION
SELECTED FINANCIAL DATA
FISCAL YEAR 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars In thousands,
except per share data
and selected operating data)
- ----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Retail sales $685,653 $648,482 $585,085 $524,381 $496,851
Other income 20,005 20,653 19,948 19,283 15,597
Total revenues 705,658 669,135 605,033 543,664 512,448
Cost of goods sold 466,366 445,407 403,655 371,005 354,627
Gross margin percent 32.0% 31.3% 31.0% 29.2% 28.6%
Selling, general and administrative 162,082 154,150 140,741 128,207 124,676
Selling, general and administrative
percent of retail sales 23.6% 23.8% 24.0% 24.4% 25.1%
Depreciation 10,886 9,492 8,639 7,638 7,713
Interest 38 44 23 19 25
Income before income taxes
and cumulative effect of
accounting change 66,268 60,042 51,975 36,795 25,407
Income tax expense 23,200 21,015 18,191 12,878 8,006
Income before cumulative effect of
accounting change 43,086 39,027 33,784 23,917 17,401
Cumulative effect of accounting
change, net of taxes -- -- 147 -- --
Net income $ 43,086 $ 39,027 $ 33,931 $ 23,917 $ 17,401
Basic earnings per share $ 1.71 $ 1.56 $ 1.28 $ .87 $ .62
Diluted earnings per share $ 1.66 $ 1.53 $ 1.26 $ .85 $ .62
Cash dividends paid per share $ .53 $ .425 $ .28 $ .19 $ .16
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA:
Stores open at end of year 937 859 809 732 693
Average sales per store $767,000 $781,000 $756,000 $740,000 $748,000
Average sales per square foot of
selling space $ 186 $ 187 $ 177 $ 169 $ 163
Comparable store sales increase 1% 3% 4% 2% 4%
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and investments $ 84,695 $ 83,112 $ 87,275 $ 86,209 $ 69,487
Working capital 139,633 125,724 124,988 124,024 113,327
Total assets 332,041 310,742 285,789 258,513 241,437
Total stockholders' equity $234,698 $207,757 $188,780 $172,234 $157,516
- ----------------------------------------------------------------------------------------------------------------------------------
Page 12
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:
FISCAL YEAR ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
----------- ----------- -----------
Retail sales 100.0% 100.0% 100.0%
Other income 2.9 3.2 3.4
Total revenues 102.9 103.2 103.4
Cost of goods sold 68.0 68.7 69.0
Selling, general
and administrative 23.6 23.8 24.0
Depreciation 1.6 1.4 1.5
Selling, general,
administrative and
depreciation 25.2 25.2 25.5
Income before income
taxes and cumulative
effect of accounting
change 9.7 9.3 8.9
Net income 6.3% 6.0% 5.8%
----- ----- -----
FISCAL 2001 COMPARED TO FISCAL 2000
Retail sales increased by 6% to $685.7 million in fiscal 2001 from $648.5
million in fiscal 2000. The fiscal year ended February 2, 2002 contained 52
weeks versus 53 weeks in fiscal year ended February 3, 2001. On a comparable 52
week basis, total sales for the fiscal year ended February 2, 2002 increased
7%, and comparable store sales increased 1% 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 5% to $705.7 million in fiscal 2001 from $669.1
million in fiscal 2000. The Company operated 937 stores at February 2, 2002
compared to 859 stores operated at February 3, 2001.
The increase in retail sales in fiscal 2001 resulted from the Company's
continuation of an everyday low pricing strategy, improved merchandise
offerings, and an increase in store development activity. In fiscal 2001, the
Company opened 85 new stores, relocated 24 stores, remodeled 35 stores and
closed 7 stores.
Other income in fiscal 2001 decreased $.6 million or 3% over fiscal 2000. The
decrease resulted primarily from decreased earnings from late fee income and
lower credit sales.
Cost of goods sold was $466.4 million, or 68.0% of retail sales, in fiscal 2001
compared to $445.4 million, or 68.7% of retail sales, in fiscal 2000. The
decrease in cost of goods sold as a percent of retail sales resulted primarily
by maintaining timely and aggressive markdowns on slow moving merchandise and
improving inventory flow: Total gross margin dollars (retail sales less cost of
goods sold) increased by 8% to $219.3 million in fiscal 2001 from $203.1
million in fiscal 2000.
Selling, general and administrative expenses (SG&A) were $162.1 million in
fiscal 2001 compared to $154.2 million in fiscal 2000, an increase of 5%. As a
percent of retail sales, SG&A was 23.6% compared to 23.8% 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 $10.9 million in fiscal 2001 compared to $9.5 million
in fiscal 2000. The 15% increase in fiscal 2001 resulted primarily from the
Company's store development.
FISCAL 2000 COMPARED TO FISCAL 1999
Retail sales increased by 11% to $648.5 million in fiscal 2000 from $585.1
million in fiscal 1999. The 2000 fiscal year contained 53 weeks versus 52 weeks
in fiscal 1999. On a comparable 53 week basis, total sales increased 9%, and
comparable store sales increased 3% from the prior year. Total revenues
increased by 11% to $669.1 million in fiscal 2000 from $605.0 million in fiscal
1999. The Company operated 859 stores at February 3, 2001 compared to 809
stores operated at January 29, 2000.
The increase in retail sales in fiscal 2000 resulted from the Company's
adoption of an everyday low pricing strategy, improved merchandise offerings,
and an increase in store development activity. In fiscal 2000, the Company
increased its number of stores 6% by opening 65 new stores, relocating 33
stores while closing 15 existing stores.
Other income in fiscal 2000 increased $.7 million or 4% over fiscal 1999. The
increase resulted primarily from increased earnings from finance charges and
late fee income.
Page 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS: (CONTINUED)
Cost of goods sold was $445.4 million, or 68.7% of retail sales, in fiscal 2000
compared to $403.7 million, or 69.0% of retail sales, in fiscal 1999. The
decrease in cost of goods sold as a percent of retail sales resulted primarily
by maintaining timely and aggressive markdowns on slow moving merchandise and
improving inventory flow. Total gross margin dollars increased by 12%, to
$203.1 million in fiscal 2000 from $181.4 million in fiscal 1999.
SG&A expenses were $154.2 million in fiscal 2000 compared to $140.7 million in
fiscal 1999, an increase of 10%. As a percent of retail sales, SG&A was 23.8%
compared to 24.0% in the prior year. The overall increase in SG&A resulted
primarily from increased selling related expenses and increased infrastructure
expenses attributable to the Company's store development activities.
Depreciation expense was $9.5 million in fiscal 2000 compared to $8.6 million
in fiscal 1999. The 10% increase in fiscal 2000 resulted primarily from the
Company's store development.
Effective for fiscal 1999, the Company changed its policy for recognizing
revenues related to layaway sales to comply with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB 101). Revenues for layaway sales and related fees
are recognized when the layaway merchandise is delivered to the customer.
Previously, revenues were recognized at the time of the sale. The Company
accounted for the adoption of SAB 101 as a change in accounting principle and
recorded a cumulative effect in the first quarter of fiscal 1999. The
cumulative effect of this accounting change resulted in an increase in net
income of $147,000, net of income tax of $79,000, or $.O1 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.
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are more fully described in Note 1 to the
Consolidated Financial Statements. As disclosed in Note 1 of Notes to
Consolidated Financial Statements, the preparation of the Company's financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions about future events that affect
the amounts reported in the financial statements and accompanying notes. Future
events and their effects cannot be determined with absolute certainty.
Therefore, the determination of estimates requires the exercise of judgment.
Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements. The most significant
accounting estimates inherent in the preparation of 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. Historically, actual results have not
significantly deviated from those determined using the estimates described
above.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK
The Company believes that its cash, cash equivalents and short-term
investments, together with cash flow from operations and borrowings available
under its revolving credit agreement, will be adequate to fund the Company's
proposed capital expenditures and other operating requirements over the next
twelve months.
At February 2, 2002, the Company had working capital of $139.6 million compared
to $125.7 million at February 3, 2001. Cash provided by operating activities
was $47.1 million in fiscal 2001 compared to $44.1 million in fiscal 2000. Cash
provided by operating activities in fiscal 2001 resulted primarily from net
income, depreciation, provision for doubtful accounts, deferred income taxes,
loss on disposal of property and equipment and changes in deferred income
taxes, accounts receivable, inventories, other assets, accrued income taxes and
accounts payable and other liabilities. At February 2, 2002, the Company had
$84.7 million in cash, cash equivalents and short-term investments, compared to
$83.1 million at February 3, 2001.
Additionally, the Company had $1.5 million invested in privately managed
investment funds at February 2, 2002, which are reported under other assets of
the consolidated balance sheets.
At February 2, 2002, the Company had an unsecured revolving credit agreement
which provided for borrowings of up to $35 million. The revolving credit
agreement is committed until July 2003. The credit agreement contains various
financial covenants and limitations, including maintenance of specific
financial ratios with which the Company was in compliance. There were no
borrowings outstanding under the agreement during the fiscal year ended
February 2, 2002 or February 3, 2001.
Page 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS: (CONTINUED)
The Company had approximately $4,314,000 and $3,977,000 at February 2, 2002 and
February 3, 2001, respectively, of outstanding irrevocable letters of credit
relating to purchase commitments.
The Company has a master lease agreement with a lessor to lease $19.5 million
of store fixtures, point-of-sale devices and warehouse equipment. The operating
leases are for a term of seven years but may be cancelled annually upon proper
notice to the lessor. Upon notice of cancellation, the Company would be
obligated to purchase the equipment at a prescribed termination value from the
lessor. If the Company had cancelled the leases at February 2, 2002, the
purchase price for the equipment would have been approximately $2,188,000. The
operating leases, which expire in their entirety in 2002, will be purchased at
a cost of approximately $1,330,000.
Expenditures for property and equipment totaled $25.7 million, $27.2 million
and $24.0 million in fiscal 2001, 2000 and 1999, respectively. The expenditures
for fiscal 2001 were primarily for store development, store remodels and
investments in new technology for an enterprise-wide information system for
merchandising, distribution and finance. In fiscal 2002, the Company is
planning to invest approximately $29 million for capital expenditures. This
includes expenditures to open 90 new stores, relocate 20 stores and close 10
stores. In addition, the Company plans to remodel 35 stores and has planned for
additional investments in technology in the enterprise-wide information system
scheduled to be implemented over the next 12 months.
During 2001, the Company repurchased 774,750 shares of Class A Common Stock for
$11.7 million, or an average price of $15.14 per share and accepted 92,600
shares of Class A Common Stock in an option transaction for $1.8 million, or an
average price of $19.71 per share. During fiscal 2001, the Company increased
its quarterly dividend by 8% from $.125 per share to $.135 per share. Over the
course of 2000, the Board of Directors increased the quarterly dividend by 67%
from $.075 per share to $.125 per share.
The Company does not use derivative financial instruments. At February 2, 2002,
the Company's investment portfolio was invested in governmental debt securities
with maturities of up to 36 months. These securities are classified as
available-for-sale and are recorded on the balance sheet at fair value with
unrealized gains and losses reported as accumulated other comprehensive income.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". In June 2000, the FASB issued SFAS No.
138, which amended certain provisions of SFAS 133. The Company adopted SFAS 133
and the corresponding amendments under SFAS 138 on February 4, 2001, and the
adoption of this statement had no impact on the Company's consolidated results
of operations and financial position.
In July 2001, the FASB issued Statement of Financial Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets". SFAS 142 includes requirements to test
goodwill and indefinite lived intangible assets for impairment rather than
amortize them. The Company will be required to adopt SFAS No. 142 effective
February 3, 2002. Management believes that the adoption of this statement will
have no impact on the Company's consolidated results of operations and
financial position.
In August 2001, the FASB issued Statement of Financial Standards (SFAS) No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No.
144 supercedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets to
be Disposed Of" and Accounting Principles Board (APB) No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". Along with establishing a single accounting model, based on the
framework established in SFAS No. 121 for impairment of long-lived assets, this
standard retains the basic provisions of APB No. 30 for the presentation of
discontinued operations in the income statement, but broadens that presentation
to include a component of the entity. The Company will be required to adopt
SFAS No. 144 effective February 3, 2002. Management believes that the adoption
of this statement will have no impact on the Company's consolidated results of
operations ann financial position.
The Annual Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in the Annual
Report and located elsewhere herein regarding the Company's financial position
and business strategy may constitute forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations
prove to be correct.
Page 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The response to this Item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE:
None.
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, 2002 are as follows:
Name Age Position
- ---- --- --------
Wayland H. Cato, Jr.(1) ...... 79 Chairman of the Board
John P. Derham Cato(1) ....... 51 President, Vice Chairman of the Board and Chief Executive Officer
Edgar T. Cato(1) ............. 77 Former Vice Chairman of the Board, Co-Founder and Director
Michael O. Moore ............. 51 Executive Vice President, Chief Financial Officer and Secretary
Howard A. Severson ........... 54 Executive Vice President, Chief Real Estate and Store Development
Officer, Assistant Secretary and Director
B. Allen Weinstein ........... 55 Executive Vice President, Chief Merchandising Officer of the Cato Division
David P. Kempert ............. 52 Executive Vice President, Chief Store Operations
Officer of the Cato Division
C. David Birdwell ............ 62 Executive Vice President, President and General Manager of the
It's Fashion! Division
Robert C. Brummer ............ 57 Senior Vice President, Human Resources and Assistant Secretary
Clarice Cato Goodyear ........ 55 Special Assistant to the Chairman and the President,
Assistant Secretary and Director
Thomas E. Cato ............... 47 Vice President, Divisional Merchandise Manager and Director
Robert W. Bradshaw, Jr.(1) ... 68 Director
George S. Currin(1)(3) ....... 65 Director
Grant L. Hamrick(1)(2)(3) .... 63 Director
James H. Shaw(2) ............. 73 Director
A.F. (Pete) Sloan(1)(2)(3) ... 72 Director
(1) Member of the Executive/Finance Committee
(2) Member of Compensation Committees
(3) Member of Audit Committee
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,
he has served as President, Vice Chairman of the Board and Chief Executive
Officer. From June 1997 to May 1999, he served as President, Vice Chairman of
the Board and Chief Operating Officer. From August 1996 to June 1997, he served
as Vice Chairman of the Board and Chief Operating Officer. From 1992 to August
1996, he served as Executive Vice President and as President and General
Manager of the It's Fashion! Division. Mr. John Cato is a son of Mr. Wayland H.
Cato, Jr.
Edgar T. Cato is the Former Vice Chairman of the Board and Co-Founder
of the Company, and has been a director of the Company since 1946. Mr. Edgar T.
Cato is the brother of Mr. Wayland H. Cato, Jr.
Michael O. Moore, 51, has been employed by the Company as Executive
Vice President, Chief Financial Officer and Secretary since July 1998. Mr.
Moore served as Vice President, Chief Financial Officer for Party Experience
from 1997 to 1998, Executive Vice President, Chief Financial Officer of David's
Bridal from 1994 to 1997, and was employed by Bloomingdales from 1984 to 1994
serving as Senior Vice President, Chief Financial officer from 1990 to 1994.
Howard A. Severson has been employed by the Company since 1985 and has
served as a director of the Company since 1995. Since January 1993, he has
served as Executive Vice President, Chief Real Estate and Store Development
Officer, Assistant Secretary and Director. From August 1989 through January
1993, Mr. Severson served as Senior Vice President - Chief Real Estate Officer.
B. Allen Weinstein joined the Company as Executive Vice President,
Chief Merchandising Officer of the Cato Division in August 1997. From 1995 to
1997, he was Senior Vice President Merchandising of Catherines Stores
Corporation. From 1981 to 1995, he served as Senior Vice President of
Merchandising for Beall's, Inc.
David P. Kempert joined the Company in August 1989. He currently
serves as Executive Vice President, Chief Store Operations Officer of the Cato
Division. From 1982 until 1989, he was employed by The Gap Stores, an apparel
specialty chain, where his most recent position was Zone Vice President of the
Northeast Region.
C. David Birdwell joined the Company as Executive Vice President,
President and General Manager of the It's Fashion! Division in October 1996.
From 1994 to 1996, he was employed as President/General Merchandise Manager of
Allied Stores, a family apparel chain headquartered in Savannah, Georgia. In
1993, he was Executive Vice President/General Merchandise Manager of Ambers,
Inc., based in Dallas, Texas. From 1989 to 1992, he was employed as a Chartered
Financial Consultant with Jefferson Pilot, based in Greensboro, North Carolina.
From 1985 to
Page 18
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: (CONTINUED)
1989, he was President/CEO of Maxway Stores, a discount chain headquartered in
Sanford, North Carolina.
Robert C. Brummer joined the Company as Senior Vice President, Human
Resources and Assistant Secretary in January 2001. From 1999 through 2000, he
was employed by Sleepy's, a beddings specialty retailer as Vice President,
Human Resources and Payroll. From 1997 through 1998, he was Vice President,
Human Resources and Loss Prevention for The Party Experience, a party supplies
specialty retailer. From 1995 until 1997, he was Vice President, Human
Resources and Loss Prevention for No Body Beats The Wiz, an electronics
specialty store chain.
Clarice Cato Goodyear has been employed by the Company since 1975 and
has served as a director and officer of the Company since 1979. Since July
1993, she has served as Special Assistant to the Chairman and the President and
as Assistant Secretary. From March 1987 to 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 to July 1993. Ms. Goodyear is a daughter
of Mr. Wayland H. Cato, Jr.
Thomas E. Cato has been employed by the Company since 1977, has served
as an officer since 1986 and has been a director of the Company since 1993.
Since February 1987, he has served as Vice President, Divisional Merchandise
Manager. Mr. Thomas Cato is a son of Mr. Wayland H. Cato, Jr.
Robert W. Bradshaw, Jr. has been a director of the Company since 1994.
Since 1961, he has been engaged in the private practice of law with Robinson,
Bradshaw & Hinson, P.A. and currently serves of counsel to the firm.
George S. Currin has been a director of the Company since 1973. Since
1989, he has served as Chairman and Managing Director of Fourth Stockton
Company LLC and Chairman of Currin-Patterson Properties LLC, both privately
held real estate investment companies.
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.
A.F. (Pete) Sloan has been a director of the Company since 1994. Mr.
Sloan is retired Chairman and Chief Executive Officer of Lance, Inc. where he
was employed from 1955 until his retirement in 1990.
Page 19
ITEM 11. EXECUTIVE COMPENSATION:
Incorporated by reference to Registrant's proxy statement for 2002
annual stockholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
Incorporated by reference to Registrant's proxy statement for 2002
annual stockholders' meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Incorporated by reference to Registrant's proxy statement for 2002
annual stockholders' meeting.
Page 20
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 38 of this annual report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended February 2,
2002.
Page 21
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a), (1) AND (2), (c) AND (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED FEBRUARY 2, 2002
THE CATO CORPORATION
CHARLOTTE, NORTH CAROLINA
Page 22
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 23
Consolidated Statements of Income..................................Page 24
Consolidated Balance Sheets........................................Page 25
Consolidated Statements of Cash Flows..............................Page 26
Consolidated Statements of Stockholders' Equity....................Page 27
Notes to Consolidated Financial Statements.........................Pages 28 - 36
The following consolidated financial statement schedule of the Cato Corporation
is included in Item 14 (d):
SCHEDULE II - Valuation and qualifying accounts..............Page 37
Page 23
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
THE CATO CORPORATION
We have audited the accompanying consolidated balance sheets of The Cato
Corporation and subsidiaries (the Company) as of February 2, 2002 and February
3, 2001, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended February
2, 2002. 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 the financial
statement 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 February 2, 2002
and February 3, 2001, and the results of its operations and its cash flows for
each of the three years in the period ended February 2, 2002, 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.
Charlotte, North Carolina
March 8, 2002
Page 24
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
----------- ----------- -----------
(Dollars in thousands,
except per share data)
REVENUES
Retail sales $ 685,653 $ 648,482 $ 585,085
Other income (principally
finance charges, late
fees and layaway charges) 20,005 20,653 19,948
----------- ----------- -----------
Total revenues 705,658 669,135 605,033
----------- ----------- -----------
COSTS AND EXPENSES
Cost of goods sold 466,366 445,407 403,655
Selling, general and administrative 162,082 154,150 140,741
Depreciation 10,886 9,492 8,639
Interest 38 44 23
----------- ----------- -----------
Total operating expenses 639,372 609,093 553,058
----------- ----------- -----------
Income before income taxes and
cumulative effect of
accounting change 66,286 60,042 51,975
Income tax expense 23,200 21,015 18,191
----------- ----------- -----------
Income before cumulative effect
of accounting change $ 43,086 $ 39,027 $ 33,784
Cumulative effect of accounting
change, net of tax ($79) -- -- 147
----------- ----------- -----------
Net income $ 43,086 $ 39,027 $ 33,931
=========== =========== ===========
Basic earnings per share $ 1.71 $ 1.56 $ 1.28
----------- ----------- -----------
Basic weighted average shares 25,193,610 24,988,844 26,486,407
----------- ----------- -----------
Diluted earnings per share $ 1.66 $ 1.53 $ 1.26
----------- ----------- -----------
Diluted weighted average shares 25,888,636 25,465,232 25,953,948
----------- ----------- -----------
Dividends per share $ .53 $ .425 $ .28
----------- ----------- -----------
See notes to consolidated statements.
Page 25
THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
FEBRUARY 2, FEBRUARY 3,
(Dollars in thousands) 2002 2001
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 41,772 $ 25,201
Short-term investments 42,923 57,911
Accounts receivable, net of allowance
for doubtful accounts of $5,968
at February 2, 2002 and $5,422
at February 3, 2001 52,293 46,972
Merchandise inventories 80,407 79,161
Deferred income taxes 777 1,579
Prepaid expenses 5,036 4,665
--------- ---------
Total Current Assets 223,208 215,489
Property and equipment - net 100,137 85,819
Other assets 8,696 9,434
--------- ---------
Total Assets $ 332,041 $ 310,742
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 57,495 $ 59,681
Accrued expenses 25,260 24,378
Accrued income taxes 820 5,706
--------- ---------
Total Current Liabilities 83,575 89,765
Deferred income taxes 5,177 5,386
Other noncurrent liabilities
(primarily deferred rent) 8,591 7,834
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;
25,011,732 and 24,643,420 shares issued
at February 2, 2002 and February 3,
2001, respectively 833 821
Convertible Class B common stock,
$.033 par value per share, 15,000,000 shares
authorized; 5,812,649 and 5,364,317 shares
issued at February 2, 2002 and February
3, 2001, respectively 194 179
Additional paid-in capital 86,948 76,778
Retained earnings 204,961 175 275
Accumulated other comprehensive losses (567) (884)
Unearned compensation - restricted stock awards (394) (689)
--------- ---------
291,975 251,480
Less Class A common stock in treasury; at
cost (5,626,498 and 4,759,148 shares at
February 2, 2002 and February 3,
2001,respectively) (57,277) (43,723)
--------- ---------
Total Stockholders' Equity 234,698 207,757
--------- ---------
Total Liabilities and Stockholders' Equity $ 332,041 $ 310,742
========= =========
See notes to consolidated financial supplements.
Page 26
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29,
(Dollars in thousands) 2002 2001 2000
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 43,086 $ 39,027 $ 33,931
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 10,886 9,492 8,639
Amortization of investment premiums 160 126 187
Provision for doubtful accounts 5,913 5,292 4,850
Deferred income taxes 422 1,600 175
Compensation expense related to
restricted stock awards 295 295 196
Loss on disposal of property and equipment 480 1,257 727
Changes in operating assets and liabilities
which provided (used) cash:
Accounts receivable (11,234) (6,806) (5,772)
Merchandise inventories (1,246) (9,664) (8,385)
Other assets 367 (3,971) (1,584)
Accrued income taxes (1,525) 2,025 4,712
Accounts payable and other liabilities (547) 5,420 6,845
-------- -------- --------
Net cash provided by operating activities 47,057 44,093 44,521
-------- -------- --------
INVESTING ACTIVITIES
Expenditures for property and equipment (25,684) (27,230) (23,964)
Purchases of short-term investments (35,878) (11,906) (22,544)
Sales of short-term investments 51,194 12,166 4,496
-------- -------- --------
Net cash used in investing activities (10,368) (26,970) (42,012)
-------- -------- --------
FINANCING ACTIVITIES
Dividends paid (13,400) (10,633) (7,416)
Purchases of treasury stock (11,729) (15,449) (9,572)
Proceeds from employee stock purchase plan 443 448 447
Proceeds from stock options exercised 4,568 3,323 353
-------- -------- --------
Net cash used in financing activities (20,118) (22,311) (16,188)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 16,571 (5,188) (13,679)
Cash and cash equivalents at beginning of year 25,201 30,389 44,068
-------- -------- --------
Cash and cash equivalents at end of year $ 41,772 $ 25,201 $ 30,389
======== ======== ========
See notes to consolidated statements.
Page 27
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CON-
VERTIBLE ACCUMULATED UNEARNED TOTAL
CLASS A CLASS B ADDITIONAL OTHER COMPENSATION STOCK-
COMMON COMMON PAID-IN RETAINED COMPREHENSIVE RESTRICTED TREASURY HOLDERS'
(Dollars in thousands) STOCK STOCK CAPITAL EARNINGS INCOME (LOSS) STOCK AWARDS STOCK EQUITY
- ----------------------- ------- -------- ---------- -------- ------------- ------------ -------- --------
BALANCE - JANUARY 30, 1999 $802 $176 $69,878 $120,366 $ 224 $ $(19,212) $172,234
*Comprehensive income:
Net income 33,931 33,931
Unrealized losses on available-for-sale
securities, net of deferred income
tax benefit of $1,091 (2,025) (2,025)
Dividends paid ($.28 per share) (7,416) (7,416)
Class A common stock sold through employee
stock purchase plan - 53,811 shares 2 445 447
Class A common stock sold through stock
option plans - 49,150 shares 1 352 353
Income tax benefit from stock options
exercised 100 100
Purchase of treasury shares -
985,400 shares (9,572) (9,572)
Contribution of treasury stock to Employee
Stock Purchase Plan - 63,052 shares 22 510 532
Unearned compensation - restricted
stock awards 3 1,177 (984) 196
---- ---- ------- -------- ------- ----- -------- --------
BALANCE - JANUARY 29, 2000 805 179 71,974 146,881 (1,801) (984) (28,274) 188,780
*Comprehensive income:
Net income 39,027 39,027
Unrealized gains on available-for-sale
securities, net of deferred income
taxes of $494 917 917
Dividends paid ($.425 per share) (10,633) (10,633)
Class A common stock sold through employee
stock purchase plan - 44,590 shares 2 446 448
Class A common stock sold through stock
option plans - 425,350 shares 14 3,309 3,323
Income tax benefit from stock options
exercised 1,049 1,049
Purchase of treasury shares -
1,468,800 shares (15,449) (15,449)
Unearned compensation - restricted
stock awards 295 295
---- ---- ------- -------- ------- ----- -------- -------
BALANCE - FEBRUARY 3, 2001 821 179 76,778 175,275 (884) (689) (43,723) 207,757
*Comprehensive income:
Net income 43,086 43,086
Unrealized gains on available-for-sale
securities, net of deferred income
taxes of $171 317 317
Dividends paid ($.53 per share) (13,400) (13,400)
Class A common stock sold through employee
stock purchase plan - 38,463 shares 1 442 443
Class A common stock sold through stock
option plans - 329,850 shares 11 2,961 2,972
Class B common stock sold through stock
option plans - 448,332 shares 15 3,406 3,421
Income tax benefit from stock options
exercised 3,361 3,361
Purchase of treasury shares -
774,750 shares (11,729) (11,729)
Surrender of shares for stock options -
92,600 shares (1,825) (1,825)
Unearned compensation - restricted
stock awards 295 295
---- ---- ------- -------- ------- ----- -------- --------
BALANCE - FEBRUARY 2, 2002 $833 $194 $86,948 $204,961 $ (567) $(394) $(57,277) $234,698
==== ==== ======= ======== ======= ===== ======== ========
See notes to consolidated financial statements.
*Total comprehensive income for the years ended February 2, 2002, February 3,
2001 and January 29, 2000 was $43,403, $39,944 and $31,906, respectively.
Page 28
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of The Cato Corporation and its wholly-owned subsidiaries ("the
Company"). All significant intercompany accounts and transactions have been
eliminated.
DESCRIPTION OF BUSINESS AND FISCAL YEAR: The Company has two business segments
- - the operation of women's fashion specialty stores and a credit card division.
The apparel specialty stores operate under the names "Cato", "Cato Fashions",
"Cato Plus" and "It's Fashion!" and are located primarily in strip shopping
centers in the Southeast. The Company's fiscal year ends on the Saturday
nearest January 31. Fiscal years 2001 and 1999 each included 52 weeks. Fiscal
year 2000 included 53 weeks.
USE OF ESTIMATES: The preparation of the Company's financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant accounting estimates reflected in the
Company's financial statements include the allowance for doubtful accounts
receivable, reserves relating to workers' compensation, general and auto
insurance liabilities and reserves for inventory markdowns.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: Cash equivalents consist
of highly liquid investments with original maturities of three months or less.
Investments with original maturities beyond three months are classified as
short-term investments. The fair values of short-term investments are based on
quoted market prices.
The Company's short-term investments are classified as available-for-sale. As
they are available for current operations, they are classified in consolidated
balance sheets as current assets. Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of income taxes, reported as
a component of accumulated other comprehensive income. The cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity: The amortization of premiums, accretion of discounts and realized
gains and losses are included in other income.
CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject
the Company to a concentration of credit risk principally consist of cash
equivalents and accounts receivable. The Company places its cash equivalents
with high credit qualified institutions and, by practice, limits the amount of
credit exposure to any one institution. Concentrations of credit risks with
respect to accounts receivable are limited due to the dispersion across
different geographies of the Company's customer base.
SUPPLEMENTAL CASH FLOW INFORMATION: Income tax payments, net of refunds
received, for the fiscal years ended February 2, 2002, February 3, 2001 and
January 29, 2000 were $24,841,000, $17,435,000 and $13,895,000, respectively.
Additionally, in 2001, the Company accepted 92,600 shares of Class A Common
Stock in an option transaction for $1,825,000.
INVENTORIES: Merchandise inventories are stated at the lower of cost (first-in,
first-out method) or market as determined by the retail method.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Maintenance and repairs are charged to operations as incurred; renewals and
betterments are capitalized. Depreciation is provided on the straight-line
method over the estimated useful lives of the related assets, as follows:
CLASSIFICATION ESTIMATED USEFUL LIVES
- -------------- ----------------------
Land improvements 10 years
Buildings 30-40 years
Leasehold improvements 5-10 years
Fixtures and equipment 3-10 years
RETAIL SALES: Revenues from retail sales, net of returns, are recognized upon
delivery of the merchandise to the customer and exclude sales taxes.
Page 29
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVERTISING: Advertising costs are expensed in the period in which they are
incurred. Advertising expense was $4,563,000, $5,812,000 and $5,109,000 for the
fiscal years ended February 2, 2002, February 3, 2001 and January 29, 2000,
respectively.
EARNINGS PER SHARE: Basic earnings per share excludes dilution of stock options
and is computed by dividing net earnings by the weighted average number of Class
A and Class B common shares outstanding for the respective periods. The
weighted-average number of shares used in the basic earnings per share
computations was 25,193,610, 24,988,844 and 26,486,407 for the fiscal years
ended February 2, 2002, February 3, 2001 and January 29, 2000, respectively.
The weighted average number of shares representing the dilutive. effect of stock
options was 695,026, 476,388 and 467,541 for the fiscal years ended February 2,
2002, February 3, 2001 and January 29, 2000, respectively. The weighted-average
number of shares used in the diluted earnings per share computations was
25,888,636, 25,465,232 and 26,953,948 for the fiscal years ended February 2,
2002, February 3, 2001 and January 29, 2000, respectively.
INCOME TAXES: The Company files a consolidated federal income tax return.
Income taxes are provided based on the asset and liability method of
accounting, whereby deferred income taxes are provided for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities.
STORE OPENING AND CLOSING COSTS: Costs relating to the opening of new stores or
the relocating or expanding of existing stores are expensed as incurred. The
Company evaluates all long-lived assets for impairment. Impairment losses are
recognized when expected future cash flows from the use of the assets are less
than the assets' carrying values.
CLOSED STORE LEASE OBLIGATIONS: At the time stores are closed, provision is
made for the rentals required to be paid over the remaining lease terms.
Rentals due the Company under non-cancelable subleases are offset against the
related obligations in the year the sublease is signed. There is no offset for
assumed sublease revenues.
INSURANCE: The Company is self-insured with respect to employee health, workers
compensation and general liability claims. Employee health claims are funded
through a VEBA trust to which the Company makes periodic contributions. The
Company has stop-loss insurance coverage for individual claims in excess of
$250,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's carrying values of financial
instruments, such as cash and cash equivalents, approximate their fair values
due to their short terms to maturity and/or their variable interest rates.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities".
In June 2000, the FASB issued SFAS No. 138, which amended certain provisions of
SFAS 133. The Company adopted SFAS 133 and the corresponding amendments under
SFAS 138 on February 4, 2001, and the adoption of this statement had no impact
on the Company's consolidated results of operations and financial position.
In July 2001, the FASB issued Statement of Financial Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets". SFAS 142 includes requirements to test
goodwill and indefinite lived intangible assets for impairment rather than
amortize them. The Company will be required to adopt SFAS No. 142 effective
February 3, 2002. Management believes that the adoption of this statement will
have no impact on the Company's consolidated results of operations and
financial position.
In August 2001, the FASB issued Statement of Financial Standards (SFAS) No.
144, "Accounting for the Impairment or Disposal of Long Lived-Assets". SFAS No.
144 supercedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets to
be Disposed Of" and Accounting Principles Board (APB) No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". Along with establishing a single accounting model, based
Page 30
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on the framework established in SFAS No. 121 for impairment of long-lived
assets, this standard retains the basic provisions of APB No. 30 for the
presentation of discontinued operations in the income statement, but broadens
that presentation to include a component of the entity. The Company will be
required to adopt SFAS No. 144 effective February 3, 2002. Management believes
that the adoption of this statement will have no impact on the Company's
consolidated results of operations and financial position.
Effective for fiscal 1999, the Company changed its policy for recognizing
revenues related to layaway sales to comply with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB 101). Revenues for layaway sales and related fees
are recognized when the layaway merchandise is delivered to the customer.
Previously, revenues were recognized at the time of the sale. The Company
accounted for the adoption of SAB 101 as a change in accounting principle and
recorded a cumulative effect in the first quarter of fiscal 1999. The
cumulative effect of this accounting change resulted in an increase in net
income of $147,000, net of income tax of $79,000, or $.01 per share. This
increase was driven by the release of the Company's layaway reserve, which
slightly exceeded the associated margin on previously recognized layaway sales.
RECLASSIFICATIONS: Certain reclassifications have been made to the consolidated
financial statements for prior fiscal years to conform with presentation for
fiscal 2001.
2. SHORT-TERM INVESTMENTS:
Short-term investments at February 2, 2002 include the following (in
thousands):
UNREALIZED ESTIMATED
SECURITY TYPE COSTS LOSSES FAIR VALUE
- ------------- ------- ---------- ----------
Obligations of federal, state
and political subdivisions $43,795 $(872) $42,923
======= ===== =======
Short-term investments at February 3, 2001 include the following (in
thousands):
UNREALIZED ESTIMATED
SECURITY TYPE COSTS LOSSES FAIR VALUE
- ------------- ------- ---------- ----------
Obligations of federal, state
and political subdivisions $59,271 $(1,360) $57,911
======= ======= =======
The accumulated unrealized losses at February 2, 2002 of $567,000, net of an
income tax benefit of $305,000, and the accumulated unrealized losses at
February 3, 2001 of $884,000, net of an income tax benefit of $476,000, are
reflected in accumulated other comprehensive losses in the consolidated balance
sheets.
The amortized cost and estimated fair value of debt securities at February 2,
2002, by contractual maturity, are shown below (in thousands):
ESTIMATED
SECURITY TYPE COST FAIR VALUE
- ------------- ------- ----------
Due in one year or less $10,259 $10,264
Due in one year through three years 33,536 32,659
------- -------
Total $43,795 $42,923
======= =======
Additionally, the Company had $1.5 million invested in privately managed
investment funds at February 2, 2002, which are reported under other assets of
the consolidated balance sheets.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following (in thousands):
FEBRUARY 2, FEBRUARY 3,
2002 2001
----------- -----------
Customer accounts - principally
deferred payment accounts $53,012 $48,429
Miscellaneous trade receivables 5,249 3,965
------- -------
Total 58,261 52,394
Less allowance for doubtful accounts 5,968 5,422
------- -------
Accounts receivable - net $52,293 $46,972
======= =======
Page 31
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Finance charge and late charge revenue on customer deferred payment accounts
totaled $12,951,000, $13,689,000 and $11,870,000 for the fiscal years ended
February 2, 2002, February 3, 2001 and January 29, 2000, respectively, and the
provision for doubtful accounts was $5,913,000, $5,292,000 and $4,850,000, for
the fiscal years ended February 2, 2002, February 3, 2001 and January 29, 2000,
respectively. The provision for doubtful accounts is classified as a component
of selling, general and administrative expenses in the accompanying statements
of income.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
FEBRUARY 2, FEBRUARY 3,
2002 2001
----------- -----------
Land and improvements $ 2,019 $ 1,947
Buildings 17,751 17,656
Leasehold improvements 30,546 25,988
Fixtures and equipment 100,138 84,535
Construction in progress 23,333 20,723
-------- --------
Total 173,787 150,849
Less accumulated depreciation 73,650 65,030
-------- --------
Property and equipment - net $100,137 $ 85,819
======== ========
Construction in progress primarily represents investments in technology in the
enterprise-wide information system scheduled to be implemented over the next 12
months.
5. ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
FEBRUARY 2, FEBRUARY 3,
2002 2001
----------- -----------
Accrued bonus and retirement
savings plan contributions $ 7,605 $ 8,242
Accrued payroll and related items 4,216 3,636
Closed store lease obligations 1,077 1,671
Property and other taxes 4,211 3,216
Accrued health care plan 3,558 2,894
Other 4,593 4,719
------- -------
Total $25,260 $24,378
======= =======
6. FINANCING ARRANGEMENTS:
At February 2, 2002, the Company had an unsecured revolving credit agreement
which provided for borrowings of up to $35 million. The revolving credit
agreement is committed until July 2003. The credit agreement contains various
financial covenants and limitations, including the maintenance of specific
financial ratios with which the Company was in compliance. There were no
borrowings outstanding during the fiscal year ended February 2, 2002 or
February 3, 2001.
The Company had approximately $4,314,000 and $3,977,000 at February 2, 2002 and
February 3, 2001, 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
Page 32
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Plan (the "Plan"). In May 1998, the shareholders approved an amendment
to the Plan to increase the maximum number of Class A shares of Common Stock
authorized to be issued from 250,000 to 500,000 shares. Under the terms of the
Plan, substantially all employees may purchase Class A Common Stock through
payroll deductions of up to 10% of their salary. The Class A Common Stock is
purchased at the lower of 85% of market value on the first or last business day
of a six-month payment period. Additionally, each April 15, employees are given
the opportunity to make a lump sum purchase of up to $10,000 of Class A Common
Stock at 85% of market value. The number of shares purchased by participants
through the plan were 38,463 shares, 44,590 shares and 53,811 shares for the
years ended February 2, 2002, February 3, 2001 and January 29, 2000,
respectively.
The Company has an Incentive Stock Option Plan and a Non-Qualified Stock Option
Plan for key employees of the Company. Total shares issuable under the plans
are 3,900,000, of which 825,000 shares are issuable under the Incentive Stock
Option Plan and 3,075,000 shares are issuable under the Non-Qualified Stock
Option Plan. The purchase price of the shares under the option must be at least
100 percent of the fair market value of Class A Common Stock at the date of the
grant. Options granted under these plans vest over a 5-year period and expire
10 years after the date of the grant unless otherwise expressly authorized by
the Board of Directors.
In August 1999, the Board of Directors adopted the 1999 Incentive Compensation
Plan, of which 1,000,000 shares are issuable. No awards may be granted after
July 31, 2004 and shares must be exercised within 10 years of the grant date
unless otherwise authorized by the Board of Directors.
In August 1999, the Board of Directors granted under the 1999 Incentive
Compensation Plan, restricted stock awards of 100,000 shares of Class B Common
Stock, with a per share fair value of $11.81 to a key executive. These stock
awards vest over four years and the unvested portion is included in
stockholders' equity as unearned compensation in the accompanying financial
statements. The charge to compensation expense for these stock awards was
$295,000 in 2001 and 2000, and $196,000 in 1999.
Option plan activity for the three fiscal years ended February 2, 2002 is set
forth below:
WEIGHTED
RANGE OF AVERAGE
OPTIONS OPTION PRICES PRICE
--------- ---------------- --------
Outstanding options,
January 30, 1999 2,461,982 $ 1.50 - $ 14.59 $ 8.45
Granted 670,000 9.36 - 13.25 12.51
Exercised (48,950) 1.50 - 8.25 7.25
Cancelled (110,250) 3.21 - 12.69 8.23
--------- ---------------- -------
Outstanding options,
January 29, 2000 2,972,782 1.50 - 14.59 9.39
Granted 46,250 9.59 - 14.38 11.66
Exercised (425,350) 4.94 - 13.44 7.82
Cancelled (56,300) 6.94 - 13.44 10.23
--------- ---------------- -------
Outstanding options,
February 3, 2001 2,537,382 4.94 - 14.59 9.68
Granted 21,750 12.66 - 18.91 16.17
Exercised (778,182) 4.94 - 14.59 8.20
Cancelled (25,700) 7.69 - 14.59 11.61
--------- ---------------- -------
Outstanding options,
February 2, 2002 1,755,250 $ 4.94 - $ 18.91 $ 10.39
========= ================ =======
The following tables summarize stock option information at February 2, 2002:
OPTIONS
----------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF CONTRACTUAL EXERCISE
EXERCISE PRICES OPTIONS LIFE PRICE
- ---------------- --------- ----------- --------
$ 4.94 - $ 7.63 207,400 .58 years $ 7.33
$ 7.69 - $ 8.25 658,900 5.29 years $ 8.16
$ 9.25 - $ 14.59 874,700 7.25 years $ 12.67
$17.25 - $ 18.91 14,250 9.47 years $ 18.02
- ---------------- --------- ---------- -------
$ 4.94 - $ 18.91 1,755,250 5.78 years $ 10.39
================ ========= ========== =======
Page 33
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPTIONS
-------------------------------
WEIGHTED
AVERAGE
RANGE OF NUMBER EXERCISE
EXERCISE PRICES EXERCISABLE PRICE
- --------------- ----------- --------
$4.94 - $ 7.63 201,000 $ 7.40
$7.69 - $ 8.25 503,300 $ 8.14
$9.25 - $14.59 346,200 $ 12.82
- -------------- --------- -------
$4.94 - $14.59 1,050,500 $ 9.54
============== ========= =======
Outstanding options at February 2, 2002 covered 889,500 shares of Class B Common
Stock and 865,750 shares of Class A Common Stock. Outstanding options at
February 3, 2001 covered 1,337,832 shares of Class B Common Stock and 1,199,550
shares of Class A Common Stock. Options available to be granted under the option
plans were 452,418 at February 2, 2002 and 535,468 at February 3, 2001.
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
2001, 2000 and 1999 stock options granted been determined consistent with SFAS
No. 123, "Accounting for Stock-Based Compensation", the Company's net income and
basic and diluted earnings per share amounts for fiscal 2001, 2000 and 1999
would approximate the following proforma amounts (dollars in thousands, except
per share data):
AS REPORTED PROFORMA
----------- --------
Net income - Fiscal 2001 $ 43,086 $ 41,493
Basic earnings per share $ 1.71 $ 1.65
Diluted earnings per share $ 1.66 $ 1.60
Net income - Fiscal 2000 $ 39,027 $ 37,431
Basic earnings per share $ 1.56 $ 1.50
Diluted earnings per share $ 1.53 $ 1.47
Net income - Fiscal 1999 $ 33,931 $ 33,329
Basic earnings per share $ 1.28 $ 1.22
Diluted earnings per share $ 1.26 $ 1.20
-------- --------
The weighted-average fair value of each option granted during fiscal 2001, 2000
and 1999 is estimated at $8.19, $5.45 and $6.12 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 2001,
2000 and 1999, respectively: expected dividend yield of 2.62%, 2.42% and
2.62% expected volatility of 59.84%, 60.34% and 62.10%, adjusted for
expected dividends; risk-free interest rate of 4.36%, 4.71%, and 6.40%; and
an expected life of 5 years for 2001, 2000 and 1999. The effects of applying
SFAS 123 in this proforma disclosure are, not indicative of future amounts.
In May 2001, the Board of Directors increased the quarterly dividend by 8% from
$.125 per share to $.135 per share.
Total comprehensive income for the years ended February 2, 2002, February 3,
2001 and January 29, 2000 is as follows (in thousands):
FISCAL YEAR ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
- ----------------- ----------- ----------- -----------
Net income $ 43,086 $ 39,027 $ 33,931
Unrealized gains
(losses) on available-
for-sale securities 488 1,411 (3,116)
Income tax effect (171) (494) 1,091
-------- -------- --------
Unrealized gains
(losses) net of taxes 317 917 (2,025)
-------- -------- --------
Total comprehensive
income $ 43,403 $ 39,944 $ 31,906
======== ======== ========
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 15% of their annual compensation.
The Company is obligated to make a minimum contribution to cover plan
administrative expenses. Further Company contributions are at the discretion of
the Board of Directors. The Company's contributions for the years ended February
2, 2002, February 3, 2001 and January 29, 2000 were approximately $2,596,000,
$2,348,000 and $2,145,000, respectively.
Page 34
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has an Employee Stock Ownership Plan (ESOP), which covers
substantially all employees who meet minimum age and service requirements. The
Board of Directors determines contributions to the ESOP. No contributions were
made to the ESOP for the years ended February 2, 2002 or February 3, 2001. The
contribution for the fiscal year ended January 29, 2000 was $1,913,000.
The Company is self-insured with respect to employee health, workers
compensation and general liability claims. The Company has stop-loss insurance
coverage for individual claims in excess of $250,000 for workers compensation
and employee health and $100,000 for general liability. Employee health claims
are funded through a VEBA trust to which the Company makes periodic
contributions. Contributions to the VEBA trust were $9,090,000, $6,964,000 and
$5,214,000 in fiscal 2001, 2000 and 1999, respectively.
9. LEASES:
The Company has operating lease arrangements for store facilities and equipment.
Facility leases generally are for periods of five years with renewal options and
most provide for additional contingent rentals based on a percentage of store
sales in excess of stipulated amounts. Equipment leases are generally for three
to seven year periods. The Company has a master lease agreement with a lessor to
lease $19.5 million of store fixtures, point-of-sale devices and warehouse
equipment, which do not meet criteria for capital lease accounting and are being
accounted for as operating leases with terms of seven years. However, these
leases may be cancelled annually upon proper notice to the lessor. Upon notice
of cancellation, the Company would be obligated to purchase the equipment at a
prescribed termination value from the lessor. If the Company had cancelled the
leases at February 2, 2002, the purchase price for the equipment would have been
approximately $2,188,000. The operating leases which expire in their entirety in
2002, will be purchased at a cost of approximately $1,330,000.
The minimum rental commitments under non-cancelable operating leases are (in
thousands):
FISCAL YEAR
- -----------
2002 $ 34,996
2003 25,966
2004 16,985
2005 10,230
2006 4,632
- -----------------------------------------------------
Total minimum lease payments $ 92,809
=====================================================
The following schedule shows the composition of total rental expense for all
leases (in thousands):
FISCAL YEAR ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
- ----------------- ----------- ------------ -----------
Minimum rentals $ 37,117 $ 34,449 $ 32,453
Contingent rent 471 479 257
- --------------------------------------------------------------------
Total rental expense $ 37,588 $ 34,928 $ 32,710
====================================================================
The Company also leases certain of its stores from entities in which a director
of the Company has an interest. Rent expense and related charges totaling
$786,000, $524,000 and $534,000 were paid in fiscal 2001, 2000 and 1999,
respectively, under these leases.
10. INCOME TAXES:
The provision for income taxes consists of the following (in thousands):
FISCAL YEAR ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
- ----------------- ----------- ----------- -----------
Current income taxes:
Federal $ 22,309 $ 18,461 $ 17,826
State 469 954 190
- ---------------------------------------------------------------------------
Total 22,778 19,415 18,016
- ---------------------------------------------------------------------------
Deferred income taxes:
Federal 376 1,319 81
State 46 281 94
- ---------------------------------------------------------------------------
Total 422 1,600 175
- ---------------------------------------------------------------------------
Total income tax expense $ 23,200 $ 21,015 $ 18,191
===========================================================================
Page 35
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company's deferred tax assets and liabilities as
of February 2, 2002 and February 3, 2001 are as follows (in thousands):
FEBRUARY 2, FEBRUARY 3,
2002 2001
----------- -----------
Deferred tax assets:
Bad debt reserve $ 2,288 $ 2,085
Inventory valuation 1,282 1,335
Unrealized losses on
short-term investments 305 476
Other accruals 1,232 1,104
- ---------------------------------------------------------------------
Total deferred tax assets 5,107 5,000
- ---------------------------------------------------------------------
Deferred tax liabilities:
Tax over book depreciation 5,898 6,167
Other, net 3,609 2,640
- ---------------------------------------------------------------------
Total deferred tax liabilities 9,507 8,807
- ---------------------------------------------------------------------
Net deferred tax liabilities $ 4,400 $ 3,807
=====================================================================
The reconciliation of the Company's effective income tax rate with the
statutory rate is as follows:
FISCAL YEAR ENDED FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
- ----------------------------------------------------------------------------------------
Federal income tax rate 35.0% 35.0% 35.0%
State income taxes 0.9 1.6 0.5
Other (0.9) (1.6) (0.5)
- ----------------------------------------------------------------------------------------
Effective income tax rate 35.0% 35.0% 35.0%
========================================================================================
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial results are as follows (in thousands, except per
share data):
FISCAL 2001 FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------------------------------------
Retail sales $ 180,347 $ 172,444 $ 147,619 $ 185,243
Total revenues 185,731 177,401 152,869 189,657
Cost of goods sold 116,391 118,093 101,743 130,139
Income before income taxes 24,485 16,867 7,746 17,188
Net income 15,916 10,963 5,035 11,172
Basic earnings per share $ .63 $ .43 $ .20 $ .45
Diluted earnings per share $ .61 $ .42 $ .20 $ .43
- -------------------------------------------------------------------------------------------------------
FISCAL 2000 FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------------------------------------
Retail sales $ 162,154 $ 163,375 $ 136,856 $ 186,097
Total revenues 167,240 168,682 141,620 191,594
Cost of goods sold 105,324 110,015 97,429 132,640
Income before income taxes 22,400 17,535 6,842 13,265
Net income 14,560 11,398 4,447 8,622
Basic earnings per share $ .58 $ .46 $ .18 $ .34
Diluted earnings per share $ .57 $ .45 $ .18 $ .34
- -------------------------------------------------------------------------------------------------------
Page 36
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. REPORTABLE SEGMENT INFORMATION:
The Company has two reportable segments: retail and credit. The Company operates
its women's fashion specialty retail stores in 24 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 subsidiary of the Company.
The following schedule summarizes certain segment information (in thousands):
FISCAL 2001 RETAIL CREDIT TOTAL
- ---------------------------------------------------------------------------------------
Revenues $ 692,429 $ 13,229 $ 705,658
Depreciation 10,821 65 10,886
Interest expense 38 -- 38
Income before taxes 62,786 3,500 66,286
Total assets 263,909 68,132 332,041
Capital expenditures 25,684 -- 25,684
- ---------------------------------------------------------------------------------------
FISCAL 2000 RETAIL CREDIT TOTAL
- ---------------------------------------------------------------------------------------
Revenues $ 655,150 $ 13,985 $ 669,135
Depreciation 9,426 66 9,492
Interest expense 44 -- 44
Income before taxes 55,278 4,764 60,042
Total assets 244,199 66,543 310,742
Capital expenditures 27,195 35 27,230
- ---------------------------------------------------------------------------------------
FISCAL 1999 RETAIL CREDIT TOTAL
- ---------------------------------------------------------------------------------------
Revenues $ 592,855 $ 12,178 $ 605,033
Depreciation 8,603 36 8,639
Interest expense 23 -- 23
Income before taxes 47,347 4,628 51,975
Total assets 224,501 61,288 285,789
Capital expenditures 23,807 157 23,964
- ---------------------------------------------------------------------------------------
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.
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 $1,379,000, $1,486,000 and $1,074,000 in fiscal 2001, 2000 and 1999,
respectively The Company had no outstanding letters of credit relating to such
claims at February 2, 2002 or at February 3, 2001. See Note 6 for letters of
credit related to purchase commitments, Note 8 for 401(k) plan contribution
obligations and Note 9 for lease commitments.
The Company is a defendant in legal proceedings considered to be in the normal
course of business and none of which, singularly or collectively, are considered
to be material to the Company as a whole.
Page 37
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Allowance Reserve
for for
Doubtful Rental
Accounts(a) Commitments(b)
----------- --------------
(In thousands)
Balance at January 30,1999 $ 4,201 $ 1,926
Additions charged to costs and expenses 4,850 998
Additions (Deductions) charged to other accounts 936 (d) --
Deductions (4,886) (c) (1,153)
------- --------
Balance at January 29, 2000 5,101 1,771
Additions charged to costs and expenses 5,292 1,710
Additions (Deductions) charged to other accounts 878 (d) --
Deductions (5,849) (c) (1,832)
------- --------
Balance at February 3, 2001 5,422 1,649
Additions charged to costs and expenses 5,913 691
Additions (Deductions) charged to other accounts 1,052 (d) --
Deductions (6,419) (c) (1,263)
------- --------
Balance at February 2, 2002 $ 5,968 $ 1,077
======= ========
(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 38
EXHIBIT INDEX
DESIGNATION OF
EXHIBIT PAGE
- -------------- ----
21 Subsidiaries of the Registrant .......................... 39
23 Consent of Independent Auditors ......................... 40
Page 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Cato has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
The Cato Corporation
By /s/ John P. Derham Cato By /s/ Michael O. Moore
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John P. Derham Cato Michael O. Moore
President, Vice Chairman of the Board Executive Vice President
and Chief Executive Officer Chief Financial Officer and Secretary
By /s/ Robert M. Sandler
-------------------------------------
Robert M. Sandler
Senior Vice President
Controller
Date: April 24, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
/s/ Wayland H. Cato, Jr. /s/ Robert W. Bradshaw, Jr.
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Wayland H. Cato, Jr. Robert W. Bradshaw, Jr.
(Director) (Director)
/s/ John P. Derham Cato /s/ George S. Currin
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John P. Derham Cato George S. Currin
(Director) (Director)
/s/ Edgar T. Cato /s/ Grant L. Hamrick
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Edgar T. Cato Grant L. Hamrick
(Director) (Director)
/s/ Howard A. Severson /s/ James H. Shaw
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Howard A. Severson James H. Shaw
(Director) (Director)
/s/ Clarice Cato Goodyear /s/ A.F. (Pete) Sloan
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Clarice Cato Goodyear A.F. (Pete) Sloan
(Director) (Director)
/s/ Thomas E. Cato
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Thomas E. Cato
(Director)