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Zumiez2000 ANNUAL REPORT BUILDING ON OUR SUCCESS VALUE The structure for success STYLE is in place. Cato continues QUALITY to grow and expand. FIT Here’s how we do it. PRICE CONTENTS 1 Financial Highlights 2 Letter to our Shareholders 4 Operations 10 Selected Financial Data 11 Management’s Discussion 14 Consolidated Statements 18 Notes 27 Auditor’s Report 28 Management 29 Corporate Information and Analysis The Cato Corporation is a leading specialty retailer of value-priced women’s fashion apparel operating two divisions, “Cato” and “It’s Fashion!”. The Company currently operates over 870 apparel specialty stores principally in the Southeast. Cato, the core division, offers women’s private label merchandise with fashion and quality comparable to mall specialty stores at low prices, every day. Most Cato stores range from 4,000 to 6,000 square feet and are located primarily in strip shopping centers anchored by national discounters or dominant grocery stores. It’s Fashion!, the off-price division, provides family fashion apparel and accessories with stores ranging from 3,000 to 4,000 square feet. The Company is headquartered in Charlotte, North Carolina. FINANCIAL HIGHLIGHTS FISCAL YEAR (Dollars in thousands, except per share data) 2000 1999 1998 1997 1996 FOR THE YEAR Retail sales Total revenues $ 648,482 $ 585,085 $ 524,381 $ 496,851 $ 477,011 669,135 605,033 543,664 512,448 491,509 Comparable store sales increase (decrease) 3% 4% 2% 4% (2)% Income before income taxes Net income 60,042 39,027 51,975 33,931 36,795 23,917 25,407 17,401 10,898 7,029 Net income as a percent of retail sales 6.0% 5.8% 4.6% 3.5% 1.5% Cash dividends paid per share Basic earnings per share Diluted earnings per share AT YEAR END Cash and investments Working capital Current ratio Total assets Stockholders’ equity Number of stores Number of stores opened Number of stores closed Net increase (decrease) in number of stores $648 $585 $524 $497 $477 .425 1.56 1.53 .28 1.28 1.26 .19 .87 .85 .16 .62 .62 .16 .25 .25 $ 83,112 $ 87,275 $ 86,209 $ 69,487 $ 50,105 125,724 2.4 310,742 207,757 859 65 15 50 124,988 124,024 113,327 105,373 2.5 285,789 188,780 809 83 6 77 $39 $34 2.7 258,513 172,234 732 52 13 39 2.6 241,437 157,516 693 55 17 38 2.9 218,243 151,903 655 28 44 (16) $1.53 $1.26 $24 $17 $7 $.85 $.62 $.25 96 97 98 99 00 96 97 98 99 00 96 97 98 99 00 RETAIL SALES (in millions) NET INCOME (in millions) EARNINGS Per Share The Cato Corporation 1 LETTER TO OUR SHAREHOLDERS Fiscal 2000 was another record year for The Cato Corporation. Earnings grew to $39.0 million and $1.53 per share. Earnings per share increased 21% over 1999, exceeding our 2000 goal of 15-20% EPS growth. Fiscal 2000 marked our fourth consecutive year of earnings growth. The fourth quarter produced our sixteenth consecutive quarter of earnings improvement. Our balance sheet is strong and debt-free with over $80 million in cash and short-term investments. More importantly, we have the strategies and organization in place to grow earnings and to increase shareholder value. BUILDING ON OUR SUCCESS: BEYOND 2000 The success we have enjoyed through 2000 demonstrates that Cato is prepared for long-term growth. We are a leading apparel retailer offering mall specialty store fashion and quality at low prices every day. In fact, we believe we offer the best value in our industry segment. Over the long term, we expect to deliver annual earnings growth averaging 15%. Our long-term growth expectations are centered on consistent comparable store sales increases, accelerated store growth, disciplined expense and inventory management, and increased leveraging of corporate overhead. BUILDING ON OUR SUCCESS: PROVEN STRATEGIES Our business model is based on strategies that are refined continuously and are geared toward providing consistent, disciplined growth. We offer a broad assortment of on-trend merchandise to a diverse customer base, allowing us to successfully operate stores in rural, middle, and metro markets. We have simplified our processes so that all levels of our company are able to focus on the important details of our business. Our true strength comes from our ability to execute these strategies. Our merchandise approach is straightforward – we are focused on our customers’ needs and offer them high quality merchandise with exceptional value. Our unique combination of style, fit, quality, and price gives Cato a special niche in the marketplace. Our everyday low price strategy provides our customers a simplified shopping experience and a better everyday value. We meet our customers’ fashion needs by tailoring our merchandise mix to match the demographics of a particular market. This “micro-merchandising” strategy is refined constantly for our existing stores and is an important element of our store expansion program. Our It’s Fashion! division had a successful year and continues to evolve. The It’s Fashion! merchandising strategy focuses on providing young, trendy fashion apparel including discounted brand names. We look forward to its continued development and contribution. BUILDING ON OUR SUCCESS: THE FUTURE We plan to open 85 new stores in 2001 and 90 -120 per year for the next several years. In 2000, we opened 65 stores, relocated 33 stores, closed 15 stores, and remodeled 105 stores. 2 The Cato Corporation “Fiscal 2000 was another record year. We have the strategies and organization in place to grow earnings and to increase shareholder value.” Wayland H. Cato, Jr. John P. Derham Cato We are building our infrastructure to provide the foundation to meet our growth plans. We expanded the capacity of our distribution center to accommodate up to 1,500 stores. We will be implementing an enterprise-wide information system over the next 12 to 24 months that will provide our merchandising team with stronger analytical tools. We continue to enhance the functionality of our website. We are constantly improving our training programs to develop our associates. In fact, nearly 80% of our store and field management are promoted from within, allowing us to internally staff our expanding store base. We are confident that our ability to successfully execute our strategies will ensure the Company's long-term growth leading to increased value to you, our shareholders. We more than tripled our dividend over the past three years from an annualized rate of $.16 per share to $.50 per share. Over the last four years, we have repurchased, on average, more than one million shares annually through our share repurchase program. This year, through April 20, we have repurchased 262,500 shares and have an open authorization to repurchase approximately 900,000 additional shares. We expect to further increase shareholder value through these initiatives. The pieces are in place to successfully build the Cato brand. We are positioned financially and operationally to build on our success and to deliver earnings and dividend growth. Our growth over the next several years will be dramatic. Within five years, we expect to operate coast-to- coast, serving customers as far away as California, New York, and Puerto Rico. The Cato Corporation is a company that is going places. John P. Derham Cato President, Vice Chairman of the Board and Chief Executive Officer Wayland H. Cato, Jr. Chairman of the Board The Cato Corporation 3 BUILDING ON OUR SUCCESS: OUR MERCHANDISE OFFERING Our goal is to “ continually improve the fashion, fit, and quality of our merchandise, providing our customers excep- tional value.” In our stores, we offer on-trend fashions in exciting colors. The high quality and consistent fit of our brands are comparable to apparel you will find at mall specialty retailers at much higher prices. Our merchandising and product development team provides value to our customer and to our bottom line by keeping us on trend with our selections and delivering better quality merchandise at lower costs. We forecast fashion trends for each season and deliver a new color palette every eight weeks. Each color story gives our customer a wide selection of coordinated tops, bottoms, and accessories. Our technical services function maintains tight controls to ensure consistency of construction, color, quality, and fit. Our customers know our sizes are true and our fit is consistent. And, they will have a garment that is easy to care for and will give them long lasting wear. This customer-focused merchandise strategy allows us to deliver high customer satisfaction and continually build the Cato brand. 4 The Cato Corporation “We offer a great fashion product at an exceptional value in a convenient, easy-to-shop format. We believe we do it better than anyone in our industry.” BUILDING ON OUR SUCCESS: THE SHOPPING EXPERIENCE “ Our customers are offered a wide assortment of fashion apparel and accessories in an easy-to-shop environment.” It is easier to shop at Cato than ever before. Lifestyle and color-coordinated presentations make it more convenient for our customers to find what they are looking for – whether for work, weekends, or special occasions. We are the everyday low price leader in our segment. This not only provides our customers with more value but also assures that they are getting our best price. Our customers can see the savings on the ticket. Through the use of technology we tailor each store’s assortment to match that store’s customer demographic profile. We match merchandise flow to sales patterns so our customers always see fresh merchandise assortments. Our customers know they will save time and money at Cato. 6 The Cato Corporation We are focused on giving our customer the ability to “Look Smart. Buy Smart.” Our Cato Now magazine is published every eight weeks to give our customers and associates the latest information on current merchandise and developing fashion trends and colors. BUILDING ON OUR SUCCESS: STORE GROWTH AND EXPANSION 859 809 732 693 655 96 97 98 99 00 NUMBER OF STORES (at year end) “ Aggressive store growth is an integral part of our brand building strategy. We are ready to expand because we have the strategies and organization in place.” A cornerstone of our growth plan is the expansion of our store base. Our financial and organizational strength allows us to pursue a more aggressive store development strategy. We have expanded our real estate team threefold in the last four years. This allows us to consider more markets and locations in both existing and adjacent states. Our business model works in rural, middle, and metro markets requiring a minimum trade area of only 20,000 people. Our merchandise assortment appeals to a broad demographic profile and can be customized to each store location. Also, we have a store and field organization in place to internally staff store expansion. Our growth over the next several years will be dramatic. Within five years, we expect to operate coast-to-coast, serving customers as far away as California, New York, and Puerto Rico. The Cato Corporation is going places. 8 The Cato Corporation A National Brand. A National Chain. “We plan to open 85 new stores in 2001 and 90 to120 per year in the next several years as we move toward becoming a national chain.” SELECTED FINANCIAL DATA FISCAL YEAR 2000 1999 1998 1997 1996 (Dollars in thousands, except per share data and selected operating data) STATEMENT OF OPERATIONS DATA: Retail sales Other income Total revenues Cost of goods sold Gross margin percent Selling, general and administrative Selling, general and administrative percent of retail sales Depreciation Interest Closed store expense Income before income taxes and cumulative effect of accounting change Income tax expense Income before cumulative effect of accounting change Cumulative effect of accounting change, net of taxes Net income Basic earnings per share Diluted earnings per share Cash dividends paid per share $ 648,482 $ 585,085 $ 524,381 $ 496,851 $ 477,011 20,653 669,135 445,407 31.3% 154,150 23.8% 9,492 44 — 60,042 21,015 39,027 — $ 39,027 $ $ $ 1.56 1.53 .425 19,948 605,033 403,655 19,283 543,664 371,005 15,597 512,448 354,627 14,498 491,509 344,919 31.0% 29.2% 28.6% 27.7% 140,741 128,207 124,676 121,837 24.0% 8,639 23 — 24.4% 7,638 19 — 25.1% 7,713 25 — 25.5% 8,330 25 5,500 51,975 18,191 33,784 147 33,931 1.28 1.26 .28 $ $ $ $ 36,795 12,878 23,917 — 23,917 .87 .85 .19 $ $ $ $ 25,407 8,006 17,401 — 17,401 .62 .62 .16 $ $ $ $ 10,898 3,869 7,029 — 7,029 .25 .25 .16 $ $ $ $ SELECTED OPERATING DATA: Stores open at end of year Average sales per store Average sales per square foot of selling space 859 $ 781,000 $ 187 809 $ 756,000 $ 177 732 $ 740,000 $ 169 693 $ 748,000 $ 163 655 $ 710,000 $ 153 Comparable store sales increase (decrease) 3% 4% 2% 4% (2)% BALANCE SHEET DATA: Cash and investments Working capital Total assets Total stockholders’ equity $ 83,112 125,724 310,742 $ 207,757 $ 87,275 $ 86,209 $ 69,487 $ 50,105 124,988 285,789 124,024 258,513 113,327 241,437 105,373 218,243 $ 188,780 $ 172,234 $ 157,516 $ 151,903 10 The Cato Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations RESULTS OF OPERATIONS in store development activity. In fiscal 2000, the Company The table below sets forth certain financial data of the opened 65 new stores, relocated 33 stores, closed 15 Company expressed as a percentage of retail sales for stores and remodeled 105 stores. the years indicated: FISCAL YEAR ENDED Retail sales Other income Total revenues Cost of goods sold Selling, general and administrative Depreciation Selling, general, administrative and depreciation Income before income taxes and cumulative effect of accounting change Net income FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 30, 1999 100.0% 100.0% 100.0% 3.2 103.2 68.7 23.8 1.4 3.4 103.4 69.0 24.0 1.5 3.7 103.7 70.8 24.4 1.5 25.2 25.5 25.9 9.3 6.0% 8.9 5.8% 7.0 4.6% 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 fiscal year ended February 3, 2001 contained 53 weeks versus 52 weeks in fiscal year ended January 29, 2000. On a comparable 53 week basis, total sales for the fiscal year ended February 3, 2001 increased 9%, and comparable store sales increased 3% from the prior year. Total revenues, comprised of retail sales and other income (principally finance charges and late fees on customer accounts receivable, interest income and layaway fees), increased by 11% to $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 continuation of an everyday low pricing strategy, improved merchandise offerings, and an increase 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. 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 (retail sales less cost of goods sold) increased by 12% to $203.1 million in fiscal 2000 from $181.4 million in fiscal 1999. Selling, general and administrative expenses (SG&A) 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 infra- structure 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. FISCAL 1999 COMPARED TO FISCAL 1998 Retail sales increased by 12% to $585.1 million in fiscal 1999 from $524.4 million in fiscal 1998. Comparable store sales increased 4% from the prior year. Total revenues increased by 11% to $605.0 million in fiscal 1999 from $543.7 million in fiscal 1998. The Company operated 809 stores at January 29, 2000 compared to 732 stores operated at January 30, 1999. The Cato Corporation 11 MANAGEMENT’S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations The increase in retail sales in fiscal 1999 resulted from the is delivered to the customer. Previously, revenues were Company’s adoption of an everyday low pricing strategy, recognized at the time of the sale. The Company accounted improved merchandise offerings, and an increase in store for the adoption of SAB 101 as a change in accounting development activity. In fiscal 1999, the Company principle and recorded a cumulative effect in the first quarter increased its number of stores 11% by opening 83 new of fiscal 1999. The cumulative effect of this accounting stores, relocating 21 stores while closing 6 existing stores. change resulted in an increase in net income of $147,000, Other income in fiscal 1999 increased $.7 million or 3% over increase was driven by the release of the Company’s fiscal 1998. The increase resulted primarily from increased layaway reserve, which slightly exceeded the associated earnings from higher finance charges, late fee income and margin on previously recognized layaway sales. The income from cash equivalents and short-term investments proforma effect of retroactive application of the accounting partially offset by decreased layaway service charges. change on fiscal 1998 is immaterial to the financial net of income tax of $79,000, or $.01 per share. This Cost of goods sold was $403.7 million, or 69.0% of retail sales, in fiscal 1999 compared to $371.0 million, or 70.8% of retail sales, in fiscal 1998. The decrease in cost of goods sold as a percent of retail sales resulted primarily by maintaining timely and aggressive markdowns on slow moving merchandise, eliminating unprofitable promotions and improving inventory flow. Total gross margin dollars increased by 18% to $181.4 million in fiscal 1999 from $153.4 million in fiscal 1998. SG&A expenses were $140.7 million in fiscal 1999 compared to $128.2 million in fiscal 1998, an increase of 10%. As a percent of retail sales, SG&A was 24.0% compared to 24.4% in the prior year. The overall increase in SG&A resulted primarily from increased selling-related expenses and increased infrastructure expenses attributable to the Company’s store development activities. Depreciation expense was $8.6 million in fiscal 1999 compared to $7.6 million in fiscal 1998. The 13% increase in fiscal 1999 resulted primarily from the Company’s store development. 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. 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 3, 2001, the Company had working capital of $125.7 million compared to $125.0 million at January 29, 2000. Cash provided by operating activities was $44.1 million in fiscal 2000 compared to $44.5 million in fiscal 1999. The decrease in cash provided by operating activities in fiscal 2000 resulted primarily from an increase in net income, depreciation, provision for doubtful accounts, deferred income taxes, loss on disposal of property and equipment offset by an increase in accounts receivable, inventories and other assets and a decrease in accounts payable and other liabilities. At February 3, 2001, the Company had $83.1 million in cash, cash equivalents and short-term investments, compared to $87.3 million at January 29, 2000. The Company had $1.3 million invested in privately managed investment funds at February 3, 2001, which are reported under other assets of the consolidated balance Statements” (SAB 101). Revenues for layaway sales and sheets. related fees are recognized when the layaway merchandise 12 The Cato Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations At February 3, 2001, the Company had an unsecured per share to $.125 per share. In February 2000, the Board revolving credit agreement which provided for borrowings of Directors increased the quarterly dividend by 33% from of up to $35 million. The revolving credit agreement is $.075 per share to $.10 per share. In December 2000, the committed until July 2003. The credit agreement contains Board of Directors further increased the quarterly dividend various financial covenants and limitations, including by 25% from $.10 per share to $.125 per share. maintenance of specific financial ratios with which the Company was in compliance. There were no borrowings The Company does not use derivative financial instruments outstanding under the agreement during the fiscal year ended in its investment portfolio. At February 3, 2001, the February 3, 2001 or January 29, 2000. Company’s investment portfolio was invested in The Company has a master lease agreement with a lessor to months. These securities are classified as available-for-sale lease $19.5 million of store fixtures, point-of-sale devices and are recorded on the balance sheet at fair value with and warehouse equipment. The operating leases are for a unrealized gains and losses reported as accumulated other governmental debt securities with maturities of up to 36 term of seven years but may be cancelled annually upon comprehensive income. proper notice to the lessor. Upon notice of cancellation, the Company would be obligated to purchase the equipment at In June 1998, the Financial Accounting Standards Board a prescribed termination value from the lessor. If the (FASB) issued Statement of Financial Accounting Standards Company had cancelled the leases at February 3, 2001, the (SFAS) No. 133, “Accounting for Derivative Instruments and purchase price for the equipment would have been Hedging Activities”. In June 2000, the FASB issued SFAS approximately $5,929,000. No. 138, which amended certain provisions of SFAS 133. The Company adopted SFAS 133 and the corresponding Expenditures for property and equipment totaled $27.2 amendments under SFAS 138 on February 4, 2001. million, $24.0 million and $13.5 million in fiscal 2000, Management believes that the adoption of this statement has 1999 and 1998, respectively. The expenditures for fiscal no impact on the Company’s consolidated results of 2000 were primarily for store development, store remodels operations and financial position. and investments in new technology for an enterprise-wide information system for merchandising, distribution and The Annual Report includes “forward-looking statements” finance. In fiscal 2001, the Company is planning to invest within the meaning of Section 27A of the Securities Act and approximately $31 million for capital expenditures. This Section 21E of the Exchange Act. All statements other than includes expenditures to open 85 new stores, relocate 30 statements of historical facts included in the Annual Report stores and close 10 stores. In addition, the Company plans and located elsewhere herein regarding the Company’s to remodel 25 stores and has planned for investments in financial position and business strategy may constitute technology including an enterprise-wide information system forward-looking statements. Although the Company believes scheduled to be implemented over the next 12 to 24 months. that the expectations reflected in such forward-looking statements are reasonable; it can give no assurance that During 2000, the Company repurchased 1,468,800 shares such expectations will prove to be correct. of Class A Common Stock for $15.4 million, or an average price of $10.52 per share. Over the course of fiscal 2000, the Company increased its quarterly dividend from $.075 The Cato Corporation 13 CONSOLIDATED STATEMENTS OF INCOME FISCAL YEAR ENDED (Dollars in thousands, except per share data) REVENUES Retail sales Other income (principally finance, late and layaway charges) FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 30, 1999 $ 648,482 20,653 $ 585,085 $ 524,381 19,948 19,283 Total revenues 669,135 605,033 543,664 COSTS AND EXPENSES Cost of goods sold Selling, general and administrative Depreciation Interest 445,407 154,150 9,492 44 403,655 140,741 8,639 23 371,005 128,207 7,638 19 Total operating expenses 609,093 553,058 506,869 Income before income taxes and cumulative effect of accounting change 60,042 51,975 36,795 Income tax expense 21,015 18,191 12,878 Income before cumulative effect of accounting change $ 39,027 $ 33,784 $ 23,917 Cumulative effect of accounting change, net of tax ($79) — 147 — Net income Basic earnings per share $ 39,027 $ 1.56 $ $ 33,931 1.28 $ $ 23,917 .87 Basic weighted average shares 24,988,844 26,486,407 27,522,582 Diluted earnings per share $ 1.53 $ 1.26 $ .85 Diluted weighted average shares 25,465,232 26,953,948 28,181,585 Dividends per share $ .425 $ .28 $ .19 See notes to consolidated financial statements. 14 The Cato Corporation CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS Current Assets: Cash and cash equivalents Short-term investments Accounts receivable, net of allowance for doubtful accounts of $5,422 at February 3, 2001 and $5,101 at January 29, 2000 Merchandise inventories Deferred income taxes Prepaid expenses Total Current Assets Property and equipment - net Other assets Total Assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable Accrued expenses Income taxes Total Current Liabilities Deferred income taxes Other noncurrent liabilities (primarily deferred rent) Stockholders’ Equity: Preferred stock, $100 par value per share, 100,000 shares authorized, none issued Class A common stock, $.033 par value per share, 50,000,000 shares authorized; 24,643,420 and 24,173,480 shares issued at February 3, 2001 and January 29, 2000, respectively Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized; 5,364,317 shares issued at February 3, 2001 and January 29, 2000 Additional paid-in capital Retained earnings Accumulated other comprehensive losses Unearned compensation – restricted stock awards Less Class A common stock in treasury, at cost (4,759,148 and 3,290,348 shares at February 3, 2001 and January 29, 2000, respectively) Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity See notes to consolidated financial statements. FEBRUARY 3, 2001 JANUARY 29, 2000 $ 25,201 57,911 $ 30,389 56,886 46,972 79,161 1,579 4,665 215,489 85,819 9,434 45,458 69,497 4,093 2,494 208,817 69,338 7,634 $ 310,742 $ 285,789 $ 59,681 $ 54,707 24,378 5,706 89,765 5,386 7,834 — 821 179 76,778 175,275 (884) (689) 251,480 (43,723) 207,757 24,392 4,730 83,829 5,806 7,374 — 805 179 71,974 146,881 (1,801) (984) 217,054 (28,274) 188,780 $ 310,742 $ 285,789 The Cato Corporation 15 CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEAR ENDED (Dollars in thousands) OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Amortization of investment premiums Provision for doubtful accounts Deferred income taxes Compensation expense related to restricted stock awards Loss on disposal of property and equipment Changes in operating assets and liabilities which provided (used) cash: Accounts receivable Merchandise inventories Other assets Accrued income taxes Accounts payable and other liabilities FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 30, 1999 $ 39,027 $ 33,931 $ 23,917 9,492 126 5,292 1,600 295 1,257 (6,806) (9,664) (3,971) 2,025 5,420 8,639 187 4,850 175 196 727 (5,772) (8,385) (1,584) 4,712 6,845 7,638 123 4,081 38 – 942 (1,431) 3,114 (765) (463) 3,705 Net cash provided by operating activities 44,093 44,521 40,899 INVESTING ACTIVITIES Expenditures for property and equipment Purchases of short-term investments Sales of short-term investments (27,230) (11,906) 12,166 (23,964) (22,544) 4,496 (13,519) (24,624) 10,717 Net cash used in investing activities (26,970) (42,012) (27,426) FINANCING ACTIVITIES Dividends paid Purchases of treasury stock Proceeds from employee stock purchase plan Proceeds from stock options exercised (10,633) (15,449) 448 3,323 (7,416) (9,572) 447 353 (5,204) (10,112) 336 3,931 Net cash used in financing activities (22,311) (16,188) (11,049) Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year See notes to consolidated financial statements. (5,188) 30,389 (13,679) 44,068 2,424 41,644 $ 25,201 $ 30,389 $ 44,068 16 The Cato Corporation CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Class A Common Stock Convertible Class B Common Stock Additional Paid-in Capital Accumulated Unearned Other Compensation Restricted Income (Loss) Stock Awards Retained Comprehensive Earnings Total Treasury Stockholders’ Equity Stock $ 783 $ 176 $ 64,187 $101,653 $ (116) $ $ (9,167) $ 157,516 (Dollars in thousands) BALANCE — JANUARY 31, 1998 * Comprehensive income: Net income Unrealized gains on available-for-sale securities, net of deferred income taxes of $174 Dividends paid ($.19 per share) Class A common stock sold through employee stock purchase plan — 37,122 shares Class A common stock sold through stock option plans — 530,750 shares Income tax benefit from stock options exercised Purchase of treasury shares — 1,006,500 shares Contribution of treasury stock to Employee Stock Purchase Plan – 10,000 shares BALANCE — JANUARY 30, 1999 Comprehensive income: * Net income Unrealized losses on available-for-sale securities, net of deferred income tax benefit of $1,091 Dividends paid ($.28 per share) Class A common stock sold through employee stock purchase plan — 53,811 shares Class A common stock sold through stock option plans — 49,150 shares Income tax benefit from stock options exercised Purchase of treasury shares — 985,400 shares Contribution of treasury stock to Employee Stock Purchase Plan — 63,052 shares Unearned compensation – restricted stock awards BALANCE — JANUARY 29, 2000 Comprehensive income: * Net income Unrealized gains on available-for-sale securities, net of deferred income taxes of $494 Dividends paid ($.425 per share) Class A common stock sold through employee stock purchase plan — 44,590 shares Class A common stock sold through stock option plans — 425,350 shares Income tax benefit from stock options exercised Purchase of treasury shares — 1,468,800 shares Unearned compensation – restricted stock awards BALANCE — FEBRUARY 3, 2001 See notes to consolidated financial statements. 1 18 802 176 2 1 805 3 179 2 14 335 3,913 1,381 62 69,878 445 352 100 22 1,177 71,974 446 3,309 1,049 23,917 (5,204) 340 120,366 224 33,931 (7,416) (2,025) (9,572) 510 (28,274) 146,881 (1,801) (984) (984) 39,027 (10,633) 917 23,917 340 (5,204) 336 3,931 1,381 (10,112) (10,112) 67 (19,212) 129 172,234 33,931 (2,025) (7,416) 447 353 100 (9,572) 532 196 188,780 39,027 917 (10,633) 448 $ 821 $ 179 $ 76,778 $175,275 $ (884) $ 3,323 1,049 (15,449) 295 $(43,723) $ 207,757 (15,449) 295 (689) *Total comprehensive income for the years ended February 3, 2001, January 29, 2000 and January 30, 1999 was $39,944, $31,906 and $24,257, respectively. The Cato Corporation 17 NOTES to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: maturity. The amortization of premiums, accretion of discounts Principles of Consolidation: The consolidated financial and realized gains and losses are included in other income. statements include the accounts of The Cato Corporation and its wholly-owned subsidiaries (“the Company”). All Concentration of Credit Risk: Financial instruments that significant intercompany accounts and transactions have potentially subject the Company to a concentration of credit been eliminated. risk principally consist of cash equivalents and accounts receivable. The Company places its cash equivalents with Description of Business and Fiscal Year: The Company has high credit qualified institutions and, by practice, limits the two business segments — the operation of women’s fashion amount of credit exposure to any one institution. specialty stores and a credit card division. The apparel Concentrations of credit risks with respect to accounts specialty stores operate under the names “Cato”, “Cato receivable are limited due to the dispersion across different Fashions”, “Cato Plus” and “It’s Fashion!” and are located geographies of the Company’s customer base. primarily in strip shopping centers in the Southeast. The Company’s fiscal year ends on the Saturday nearest January Supplemental Cash Flow Information: Income tax payments, 31. Fiscal year 2000 included 53 weeks, and fiscal years net of refunds received, for the fiscal years ended February 3, 1999 and 1998 each included 52 weeks. 2001, January 29, 2000 and January 30, 1999 were $17,435,000, $13,895,000 and $13,394,000, respectively. Use of Estimates: The preparation of the Company’s financial statements in conformity with accounting principles Inventories: Merchandise inventories are stated at the lower generally accepted in the United States requires management of cost (first-in, first-out method) or market as determined by to make estimates and assumptions that affect the reported the retail method. amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements Property and Equipment: Property and equipment are and the reported amounts of revenues and expenses during recorded at cost. Maintenance and repairs are charged to the reporting period. Actual results could differ from those operations as incurred; renewals and betterments are estimates. Significant accounting estimates reflected in the capitalized. Depreciation is provided on the straight-line Company’s financial statements include the allowance for method over the estimated useful lives of the related assets, doubtful accounts receivable, reserves relating to workers’ as follows: compensation, general and auto insurance liabilities and reserves for inventory markdowns. Cash and Cash Equivalents and Short-Term Investments: Cash equivalents consist of highly liquid investments with original maturities of three months or less. Investments with original maturities beyond three months are classified as short-term investments. The fair values of short-term investments are based on quoted market prices. The Company’s short-term investments are classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of income taxes, reported as a component of accumulated other comprehensive income. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to CLASSIFICATION Land improvements Buildings Leasehold improvements Fixtures and equipment ESTIMATED USEFUL LIVES 10 years 30-40 years 5-10 years 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. Advertising: Advertising costs are expensed in the period in which they are incurred. Advertising expense was $5,812,000, $5,109,000 and $5,755,000 for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999, respectively. 18 The Cato Corporation NOTES to Consolidated Financial Statements Earnings Per Share: Basic earnings per share excludes contributions. The Company has stop-loss insurance dilution of stock options and is computed by dividing net coverage for individual claims in excess of $250,000. earnings by the weighted-average number of Class A and Class B common shares outstanding for the respective Fair Value of Financial Instruments: The Company’s carrying periods. The weighted-average number of shares used in the values of financial instruments, such as cash and cash basic earnings per share computations was 24,988,844, equivalents, approximate their fair values due to their short 26,486,407 and 27,522,582 for the fiscal years ended terms to maturity and/or their variable interest rates. February 3, 2001, January 29, 2000 and January 30, 1999, respectively. The weighted-average number of shares Recent Accounting Pronouncements: In June 1998, the representing the dilutive effect of stock options was Financial Accounting Standards Board (FASB) issued 476,388, 467,541 and 659,003 for the fiscal years Statement of Financial Accounting Standards (SFAS) No. ended February 3, 2001, January 29, 2000 and January 30, 133, “Accounting for Derivative Instruments and Hedging 1999, respectively. The weighted-average number of shares Activities”. In June 2000, the FASB issued SFAS No. 138, used in the diluted earnings per share computations was which amended certain provisions of SFAS 133. The 25,465,232, 26,953,948 and 28,181,585 for the fiscal Company adopted SFAS 133 and the corresponding years ended February 3, 2001, January 29, 2000 and amendments under SFAS 138 on February 4, 2001. January 30, 1999, respectively. Management believes that the adoption of this statement has no impact on the Company’s consolidated results of Income Taxes: The Company files a consolidated federal operations and financial position. income tax return. Income taxes are provided based on the asset and liability method of accounting, whereby deferred Effective for fiscal 1999, the Company changed its policy income taxes are provided for temporary differences for recognizing revenues related to layaway sales to comply between the financial reporting basis and the tax basis of with the Securities and Exchange Commission’s Staff the Company’s assets and liabilities. Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB 101). Revenues for layaway sales Store Opening and Closing Costs: Costs relating to the and related fees are recognized when the layaway opening of new stores or the relocating or expanding of merchandise is delivered to the customer. Previously, revenues existing stores are expensed as incurred. The Company were recognized at the time of the sale. The Company evaluates all long-lived assets for impairment. Impairment accounted for the adoption of SAB 101 as a change in losses are recognized when expected future cash flows from accounting principle and recorded a cumulative effect in the the use of the assets are less than the assets’ carrying values. first quarter of fiscal 1999. The cumulative effect of this accounting change resulted in an increase in net income of Closed Store Lease Obligations: At the time stores are $147,000, net of income tax of $79,000, or $.01 per closed, provision is made for the rentals required to be paid share. This increase was driven by the release of the over the remaining lease terms. Rentals due the Company Company’s layaway reserve, which slightly exceeded the under non-cancelable subleases are offset against the associated margin on previously recognized layaway sales. related obligations in the year the sublease is signed. There The proforma effect of retroactive application of the is no offset for assumed sublease revenues. accounting change on fiscal 1998 is immaterial to the Insurance: The Company is self-insured with respect to employee health, workers compensation and general Reclassifications: Certain reclassifications have been made liability claims. Employee health claims are funded through to the consolidated financial statements for prior fiscal years a VEBA trust to which the Company makes periodic to conform with presentation for fiscal 2000. financial statements. The Cato Corporation 19 NOTES to Consolidated Financial Statements 2. SHORT-TERM INVESTMENTS: 3. ACCOUNTS RECEIVABLE: Short - term investments at February 3, 2001 include the Accounts receivable consist of the following (in thousands): following (in thousands): SECURITY TYPE Obligations of federal, state and political COST UNREALIZED (LOSSES) ESTIMATED FAIR VALUE Customer accounts – principally FEBRUARY 3, 2001 JANUARY 29, 2000 deferred payment accounts $ 48,429 $ 47,702 Miscellaneous trade receivables subdivisions $ 59,271 $ (1,360) $ 57,911 Total Less allowance for doubtful accounts 3,965 52,394 5,422 2,857 50,559 5,101 Short-term investments at January 29, 2000 include the Accounts receivable - net $ 46,972 $ 45,458 following (in thousands): SECURITY TYPE Obligations of federal, state and political COST UNREALIZED (LOSSES) ESTIMATED FAIR VALUE Finance charge and late charge revenue on customer deferred payment accounts totaled $13,689,000, $11,870,000 and $11,113,000 for the fiscal years ended subdivisions $ 59,657 $ (2,771) $ 56,886 February 3, 2001, January 29, 2000 and January 30, The accumulated unrealized losses at February 3, 2001 of ($884,000), net of an income tax benefit of $476,000, and the accumulated unrealized losses at January 29, 2000 of ($1,801,000), net of an income tax benefit of $970,000, are reflected in other comprehensive income. The amortized cost and estimated fair value of debt securities at February 3, 2001, by contractual maturity, are shown below (in thousands): SECURITY TYPE Due in one year or less Due in one year through three years Total COST 9,594 49,677 59,271 $ $ ESTIMATED FAIR VALUE $ $ 9,520 48,391 57,911 1999, respectively, and the provision for doubtful accounts was $5,292,000, $4,850,000 and $4,081,000, for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999, 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): Land and improvements Buildings Leasehold improvements Fixtures and equipment Construction in progress Total Less accumulated depreciation FEBRUARY 3, 2001 $ 1,947 JANUARY 29, 2000 $ 1,739 17,656 25,988 84,535 20,723 150,849 65,030 15,806 23,145 75,566 12,195 128,451 59,113 Property and equipment - net $ 85,819 $ 69,338 Construction in progress primarily represents investments in technology including an enterprise-wide information system scheduled to be implemented over the next 12 to 24 months. 20 The Cato Corporation 5. ACCRUED EXPENSES: The Company’s charter provides that shares of Class B Accrued expenses consist of the following (in thousands): Common Stock may be transferred only to certain “Permitted NOTES to Consolidated Financial Statements FEBRUARY 3, 2001 JANUARY 29, 2000 3,636 1,671 3,216 2,894 4,719 9,502 3,735 1,878 2,925 1,981 4,371 $ 24,378 $ 24,392 Accrued bonus and retirement savings plan contributions $ 8,242 $ Accrued payroll and related items Closed store lease obligations Property and other taxes Accrued health care plan Other Total 6. FINANCING ARRANGEMENTS: Transferees” consisting generally of the lineal descendants of holders of Class B Stock, trusts for their benefit, corporations and partnerships controlled by them and the Company’s employee benefit plans. Any transfer of Class B Common Stock in violation of these restrictions, including a transfer to the Company, results in the automatic conversion of the transferred shares of Class B Common Stock held by the transferee into an equal number of shares of Class A Common Stock. In October 1993, the Company registered 250,000 shares of Class A Common Stock available for issuance under an Employee Stock Purchase Plan (the “Plan”). In May 1998, At February 3, 2001, the Company had an unsecured the shareholders approved an amendment to the Plan to revolving credit agreement which provided for borrowings of increase the maximum number of Class A shares of up to $35 million. The revolving credit agreement is committed Common Stock authorized to be issued from 250,000 to until July 2003. The credit agreement contains various 500,000 shares. Under the terms of the Plan, substantially financial covenants and limitations, including the maintenance all employees may purchase Class A Common Stock of specific financial ratios with which the Company was in through payroll deductions of up to 10% of their salary. The compliance. There were no borrowings outstanding during the Class A Common Stock is purchased at the lower of 85% of fiscal year ended February 3, 2001 or January 29, 2000. market value on the first or last business day of a six-month The Company had approximately $3,977,000 and are given the opportunity to make a lump sum purchase $4,594,000 at February 3, 2001 and January 29, 2000, of up to $10,000 of Class A Common Stock at 85% of respectively, of outstanding irrevocable letters of credit market value. The number of shares purchased by payment period. Additionally, each April 15, employees 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. participants through the plan were 44,590 shares, 53,811 shares and 37,122 shares for the years ended February 3, 2001, January 29, 2000 and January 30, 1999, 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. The Cato Corporation 21 NOTES to Consolidated Financial Statements In August 1999, the Board of Directors adopted the 1999 The following tables summarize stock option information at Incentive Compensation Plan, of which 1,000,000 shares February 3, 2001: are issuable. No awards shall be granted after July 31, 2004 and shares must be exercisable not later than 10 years after the date of the grant unless otherwise expressly authorized by the Board of Directors. In August 1999, the Board of Directors granted under the 1999 Incentive Compensation Plan, restricted stock awards of 100,000 shares of Class B Common Stock, with a per share fair value of $11.81 to a key executive. These stock awards vest over four years and the unvested portion is included in stockholders’ equity as unearned compensation in the accompanying financial statements. The charge to compensation expense for these stock awards in 2000 was $295,000 and in 1999 was $196,000. Option plan activity for the three fiscal years ended February 3, 2001 is set forth below: OPTIONS OUTSTANDING RANGE OF OPTION PRICES WEIGHTED AVERAGE PRICE Outstanding options, OPTIONS OUTSTANDING WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE 1.32 years 6.16 years 8.30 years NUMBER OUTSTANDING 691,432 863,900 982,050 2,537,382 5.67 years WEIGHTED AVERAGE EXERCISE PRICE $ $ 7.48 8.13 $ 12.59 $ 9.68 OPTIONS EXERCISABLE NUMBER EXERCISABLE 672,232 546,300 241,200 1,459,732 WEIGHTED AVERAGE EXERCISE PRICE $ $ 7.55 8.07 $ 12.70 $ 8.60 RANGE OF EXERCISE PRICES $ 4.94 - $ 7.63 $ 7.69 - $ 8.25 $ 9.25 - $ 14.59 $ 4.94 - $ 14.59 RANGE OF EXERCISE PRICES $ 4.94 - $ 7.63 $ 7.69 - $ 8.25 $ 9.25 - $ 14.59 $ 4.94 - $ 14.59 Outstanding options at February 3, 2001 covered 1,337,832 shares of Class B Common Stock and January 31, 1998 2,785,732 $ 1.50 - $ 9.31 $ 7.73 1,199,550 shares of Class A Common Stock. Outstanding Granted Exercised Cancelled 302,000 10.66 - 14.59 (530,750) 1.50 - 9.31 (95,000) 4.94 - 12.56 13.03 7.38 7.63 Outstanding options, options at January 29, 2000 covered 717,000 shares of Class B Common Stock and 2,255,782 shares of Class A Common Stock. Options available to be granted under the option plans were 535,468 at February 3, 2001 and January 30, 1999 2,461,982 1.50 - 14.59 8.45 526,018 at January 29, 2000. Granted Exercised Cancelled 670,000 (48,950) 9.36 - 13.25 1.50 - 8.25 (110,250) 3.21 - 12.69 12.51 7.25 8.23 Outstanding options, 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 January 29, 2000 2,972,782 1.50 - 14.59 9.39 compensation where the option price of the stock Granted Exercised Cancelled 46,250 9.59 - 14.38 (425,350) 4.94 - 13.44 (56,300) 6.94 - 13.44 11.66 7.82 10.23 Outstanding options, approximated the fair market value of the stock on the date of grant. Had compensation expense for fiscal 2000, 1999 and 1998 stock options granted been determined consistent with SFAS No. 123, “Accounting for Stock-Based Compensation”, the Company’s net income and basic and February 3, 2001 2,537,382 $ 4.94 - $14.59 $ 9.68 diluted earnings per share amounts for fiscal 2000, 1999 and 1998 would approximate the following proforma amounts (dollars in thousands, except per share data): 22 The Cato Corporation AS REPORTED PROFORMA FISCAL YEAR ENDED Net income — Fiscal 2000 Basic earnings per share Diluted earnings per share Net income — Fiscal 1999 Basic earnings per share Diluted earnings per share Net income — Fiscal 1998 Basic earnings per share Diluted earnings per share $ $ $ $ $ $ $ $ $ 39,027 1.56 1.53 33,931 1.28 1.26 23,917 .87 .85 $ $ $ $ $ $ $ $ $ 37,431 1.50 1.47 32,329 1.22 1.20 22,822 .83 .81 The weighted-average fair value of each option granted during fiscal 2000, 1999 and 1998 is estimated as $5.45, $6.12 and $6.71 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 2000, 1999 and 1998, respectively: expected dividend yield of 2.42%, 2.62% and 2.20%; expected volatility of 60.34%, 62.10% and 66.44%, adjusted for expected dividends; risk-free interest rate of 4.71%, 6.40% and 5.07%; and an expected life of 5 years for 2000, 1999 and 1998. The effects of applying SFAS 123 in this proforma disclosure are not indicative of future amounts. In February 2000, the Board of Directors increased the quarterly dividend by 33% from $.075 per share to $.10 per share. In December 2000, the Board of Directors further increased the quarterly dividend by 25% from $.10 per share to $.125 per share. Total comprehensive income for the years ended February 3, 2001, January 29, 2000 and January 30, 1999 is as follows (in thousands): NOTES to Consolidated Financial Statements FEBRUARY 3, 2001 $ 39,027 JANUARY 29, 2000 JANUARY 30, 1999 $ 33,931 $ 23,917 1,411 (494) (3,116) 1,091 514 (174) Net income Unrealized gains (losses) on available- for-sale securities Income tax effect Unrealized gains (losses) net of taxes 917 (2,025) 340 Total comprehensive income $ 39,944 $ 31,906 $ 24,257 8. EMPLOYEE BENEFIT PLANS: The Company has a defined contribution retirement savings plan (401(k)) which covers all employees who meet minimum age and service requirements. The 401(k) plan allows participants to contribute up to 16% of their annual compensation. The Company is obligated to make a minimum contribution to cover plan administrative expenses. Further Company contributions are at the discretion of the Board of Directors. The Company’s contributions for the years ended February 3, 2001, January 29, 2000 and January 30, 1999 were approximately $2,348,000, $2,145,000 and $1,606,000, respectively. The Company has an Employee Stock Ownership Plan (ESOP), which covers substantially all employees who meet minimum age and service requirements. The Board of Directors determines contributions to the ESOP. No contribution was made to the ESOP for the year ended February 3, 2001. The contributions for the fiscal years ended January 29, 2000 and January 30, 1999 were $1,913,000 and $531,000, respectively. The Cato Corporation 23 NOTES to Consolidated Financial Statements The Company is self-insured with respect to employee The following schedule shows the composition of total rental health, workers compensation and general liability claims. expense for all leases (in thousands): The Company has stop-loss insurance coverage for individual claims in excess of $250,000 for workers FISCAL YEAR ENDED periods of five years with renewal options and most provide FISCAL YEAR ENDED 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 $6,964,000, $5,214,000 and $4,177,000 in fiscal 2000, 1999 and 1998, respectively. 9. LEASES: The Company has operating lease arrangements for store facilities and equipment. Facility leases generally are for 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 3, 2001, the purchase price for the equipment would have been approximately $5,929,000. The minimum rental commitments under non-cancelable operating leases are (in thousands): FISCAL YEAR 2001 2002 2003 2004 2005 Thereafter $ 34,615 25,977 17,060 8,921 3,312 60 Minimum rentals Contingent rent FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 30, 1999 $ 34,449 $ 32,453 $ 30,313 479 257 270 Total rental expense $ 34,928 $ 32,710 $ 30,583 10. INCOME TAXES: The provision for income taxes consists of the following (in thousands): FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 30, 1999 $ 18,461 $ 17,826 $ 12,502 954 19,415 1,319 281 1,600 190 18,016 338 12,840 81 94 175 (190) 228 38 Current income taxes: Federal State Total Deferred income taxes: Federal State Total Total income tax expense $ 21,015 $ 18,191 $ 12,878 Significant components of the Company’s deferred tax assets and liabilities as of February 3, 2001 and January 29, 2000 are as follows (in thousands): Deferred tax assets: Bad debt reserve Inventory valuation Unrealized losses on short-term investments Other accruals Total deferred tax assets Deferred tax liabilities: FEBRUARY 3, 2001 JANUARY 29, 2000 $ 2,085 1,335 $ 1,969 1,411 476 1,104 5,000 6,167 2,640 8,807 970 1,108 5,458 6,527 644 7,171 Total minimum lease payments $ 89,945 Tax over book depreciation Other, net Total deferred tax liabilities Net deferred tax liabilities $ 3,807 $ 1,713 24 The Cato Corporation NOTES to Consolidated Financial Statements The reconciliation of the Company’s effective income tax rate with the statutory rate is as follows: FISCAL YEAR ENDED Federal income tax rate State income taxes Other Effective income tax rate FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 30, 1999 35.0% 1.6 (1.6) 35.0% 35.0% 0.5 (0.5) 35.0% 35.0% 1.2 (1.2) 35.0% 11. QUARTERLY FINANCIAL DATA (UNAUDITED): Summarized quarterly financial results have been restated for the effects of SAB 101 in 1999 and are as follows (in thousands, except per share data): FISCAL 2000 Retail sales Total revenues Cost of goods sold Income before income taxes Net income Basic earnings per share Diluted earnings per share FISCAL 1999 Retail sales Total revenues Cost of goods sold Income before income taxes and cumulative effect of accounting change Income before cumulative effect of accounting change Cumulative effect of accounting change, net of tax Net income Basic earnings per share (before cumulative effect of accounting change) Basic earnings per share Diluted earnings per share (before cumulative effect of accounting change) Diluted earnings per share FIRST SECOND THIRD FOURTH $ 162,154 $ 163,375 $ 136,856 $ 186,097 167,240 105,324 22,400 14,560 .58 .57 $ $ 168,682 110,015 17,535 11,398 .46 .45 $ $ 141,620 97,429 6,842 4,447 .18 .18 $ $ 191,594 132,640 13,265 8,622 .34 .34 $ $ FIRST SECOND THIRD FOURTH $ 153,047 $ 148,782 $ 127,367 $ 155,889 157,874 100,017 20,906 13,589 147 13,736 .51 .52 .51 .51 $ $ $ $ 153,809 100,100 15,477 10,060 – 10,060 .38 .38 .37 .37 $ $ $ $ 132,357 90,247 5,418 3,522 – 3,522 .13 .13 .13 .13 $ $ $ $ 160,993 113,291 10,174 6,613 – 6,613 .25 .25 .25 .25 $ $ $ $ The restatement for the effects of SAB 101 for fiscal 1999 resulted in a decrease in income before cumulative effect of accounting change of $149,000 with no per share effect in the first quarter; an increase in net income of $126,000 with no per share effect in the second quarter; and a decrease in net income of $442,000 with a decrease of $.02 per share in the third quarter. The Cato Corporation 25 NOTES to Consolidated Financial Statements 12. REPORTABLE SEGMENT INFORMATION: 13. COMMITMENTS AND CONTINGENCIES: The Company has two reportable segments: retail and Workers compensation and general liability claims are credit. The Company operates its women’s fashion specialty settled through a claims administrator and are limited by retail stores in 23 states, principally in the Southeast. The stop-loss insurance coverage for individual claims in excess Company offers its own credit card to its customers and all of $250,000 and $100,000, respectively. The Company credit authorizations, payment processing, and collection paid claims of $1,486,000, $1,074,000 and $1,347,000 efforts are performed by a separate division of the in fiscal 2000, 1999 and 1998, respectively. The Company Company. had no outstanding letters of credit relating to such claims at February 3, 2001 or at January 29, 2000. See Note 6 The accounting policies of the segments are the same as for letters of credit related to purchase commitments, Note 8 those described in the summary of significant accounting for 401(k) plan contribution obligations and Note 9 for policies. The Company evaluates performance based on lease commitments. profit or loss from operations before income taxes. The Company does not allocate certain corporate expenses or The Company is a defendant in legal proceedings income taxes to the segments. considered to be in the normal course of business and none of which, singularly or collectively, are considered to be The following schedule summarizes certain segment information material to the Company as a whole. (in thousands): FISCAL 2000 Revenues RETAIL CREDIT TOTAL $ 655,150 $ 13,985 $ 669,135 Depreciation Interest expense Income before taxes Total assets Capital expenditures 9,426 44 55,278 244,199 27,195 66 — 4,764 66,543 35 9,492 44 60,042 310,742 27,230 FISCAL 1999 Revenues RETAIL CREDIT TOTAL $ 592,855 $ 12,178 $ 605,033 Depreciation Interest expense Income before taxes Total assets Capital expenditures 8,603 23 47,347 224,501 23,807 36 — 4,628 61,288 157 8,639 23 51,975 285,789 23,964 FISCAL 1998 Revenues RETAIL CREDIT TOTAL $ 532,330 $ 11,334 $ 543,664 Depreciation Interest expense Income before taxes Total assets Capital expenditures 7,613 19 33,044 200,946 13,459 25 — 3,751 57,567 60 7,638 19 36,795 258,513 13,519 26 The Cato Corporation INDEPENDENT AUDITORS’ REPORT 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 3, 2001 and January 29, 2000, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended February 3, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at February 3, 2001 and January 29, 2000, and the results of its operations and its cash flows for each of the three years in the period ended February 3, 2001, in conformity with accounting principles generally accepted in the United States of America. Charlotte, North Carolina March 16, 2001 The Cato Corporation 27 MANAGEMENT EXECUTIVE GROUP AND BOARD OF DIRECTORS MANAGEMENT EXECUTIVE GROUP BOARD OF DIRECTORS Wayland H. Cato, Jr. Chairman of the Board Wayland H. Cato, Jr. 1 Chairman of the Board John P. Derham Cato John P. Derham Cato 1 President, Vice Chairman of the Board President, Vice Chairman of the Board and Chief Executive Officer and Chief Executive Officer Michael O. Moore Executive Vice President, Chief Financial Officer and Secretary Edgar T. Cato 1 Former Vice Chairman of the Board and Co-Founder Howard A. Severson Howard A. Severson Executive Vice President, Chief Real Estate and Store Executive Vice President, Chief Real Estate and Store Development Officer and Assistant Secretary Development Officer and Assistant Secretary B. Allen Weinstein Special Assistant to the Chairman and the President Executive Vice President, Chief Merchandising Officer and Assistant Secretary Clarice Cato Goodyear of the Cato Division David P. Kempert Executive Vice President, Chief Store Operations Officer of the Cato Division C. David Birdwell Thomas E. Cato Vice President, Divisional Merchandise Manager Robert W. Bradshaw, Jr. 1 Of Counsel - Robinson, Bradshaw & Hinson, P.A. Executive Vice President, President and General Manager George S. Currin 1,3 of the It’s Fashion! Division Robert C. Brummer Chairman and Managing Director of The Fourth Stockton Company LLC and Chairman Currin-Patterson Properties LLC Senior Vice President, Human Resources and Paul Fulton 1,2 Assistant Secretary Chairman of the Board, Bassett Furniture Industries, Inc. Grant L. Hamrick 1,2,3 Retired Senior Vice President, Chief Financial Officer, American City Business Journals James H. Shaw 2 Retired Chairman and Chief Executive Officer Ivey’s Department Stores A. F. (Pete) Sloan 1,2,3 Retired Chairman and Chief Executive Officer Lance, Inc. 1 Member of the Executive/Finance Committee 2 Member of the Compensation Committee 3 Member of the Audit Committee 28 The Cato Corporation CORPORATE INFORMATION A copy of the Company’s Annual Report to the Securities and Exchange Commission (Form 10-K) for the fiscal year ended February 3, 2001 is available to shareholders without charge upon written request to Mr. Michael O. Moore, Executive Vice President, Chief Financial Officer and Secretary, The Cato Corporation, P.O. Box 34216, Charlotte, North Carolina 28234. CORPORATE HEADQUARTERS MARKET & DIVIDEND INFORMATION The Cato Corporation 8100 Denmark Road The Company’s Class A Common Stock trades in the over-the- counter market under the NASDAQ National Market System Charlotte, North Carolina 28273-5975 symbol CACOA. Below is the market range and dividend Telephone: (704) 554-8510 information for the four quarters of 2000 and 1999. MAILING ADDRESS P.O. Box 34216 Charlotte, North Carolina 28234 INDEPENDENT AUDITORS Deloitte & Touche LLP Charlotte, North Carolina 28202-1675 CORPORATE COUNSEL Robinson, Bradshaw & Hinson, P.A. Charlotte, North Carolina 28246 TRANSFER AGENT AND REGISTRAR First Union National Bank Securities Transfer Department, CMG-5 Charlotte, North Carolina 28288 ANNUAL MEETING NOTICE The Annual Meeting of Shareholders 11:00 a.m., Thursday, May 24, 2001 Corporate Office 8100 Denmark Road, Charlotte, NC. 2000 First quarter Second quarter Third quarter Fourth quarter 1999 First quarter Second quarter Third quarter Fourth quarter HIGH $ 12 1/4 12 1/2 12 7/8 18 HIGH $ 11 7/16 13 15/16 15 9/16 13 3/8 PRICE $ LOW 9 3/16 10 1/64 10 11 PRICE $ LOW 7 9/16 10 1/2 10 7/8 10 1/4 DIVIDEND $ .10 .10 .10 .125 DIVIDEND $ .055 .075 .075 .075 As of March 23, 2001 the approximate number of holders of the Company’s Class A Common Stock was 3,600 and there were 12 record holders of the Company’s Class B Common Stock. The Cato Corporation 29 8100 DENMARK ROAD CHARLOTTE, NC 28273-5975 WWW.CATOCORP.COM
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