Other income in total, as included in total revenues in fiscal 2004, increased slightly to $15.8 million from $15.5 million in fiscal 2003. The increase resulted primarily from an increase in late charges.
Cost of goods sold was $528.9 million, or 68.4% of retail sales, in fiscal 2004 compared to $509.0 million, or 69.6% of retail sales, in fiscal 2003. The decrease in cost of goods sold as a percent of retail sales resulted primarily from reduced markdowns.
SG&A expenses were $187.6 million in fiscal 2004 compared to $174.2 million in fiscal 2003, an increase of 8%. As a percent of retail sales, SG&A was 24.2% compared to 23.8% in the prior year. The overall increase in SG&A resulted primarily from increased incentive and discretionary bonuses and increased infrastructure expenses attributable to the Company’s store development activities.
Depreciation expense was $20.4 million in fiscal 2004 compared to $18.7 million in fiscal 2003. The 9% increase in fiscal 2004 resulted primarily from the Company’s store development activity.
Interest and other income was $2.7 million in fiscal 2004 compared to $3.6 million in fiscal 2003. The 25% decrease in fiscal 2004 resulted primarily from the Company’s lower cash and short-term investment position following the repurchase of $98.3 million of Company stock in fiscal 2003.
Income tax expense was $19.9 million, or 2.6% of retail sales in fiscal 2004 compared to $17.7 million, or 2.4% of retail sales in fiscal 2003. The increase resulted from higher pre-tax income.
Off Balance Sheet Arrangements
Other than operating leases in the ordinary course of business, the Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
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, reserves for inventory markdowns, calculation of asset impairment, shrinkshrinkage accrual and reserves for uncertain tax contingency reserves.positions.
The Company’s critical accounting policies and estimates are discussed with the Audit Committee.
Allowance for Doubtful Accounts
The Company evaluates the collectibility of accounts receivable and records an allowance for doubtful accounts based on estimates of actual write-offs and the accounts receivable aging roll rates over a period of up to 12 months. The allowance is reviewed for adequacy and adjusted, as necessary, on a monthly basis. The Company also provides for estimated uncollectible late fees charged based on historical write-offs. The Company’s financial results can be significantly impacted by changes in bad debt write-off experience and the aging of the accounts receivable portfolio. During the third quarter of fiscal 2005, the Company revised its process for determining the amount of accounts receivable that should be written off each period. This change in process was consistent with industry and regulatory guidelines and resulted in an acceleration of accounts receivable write-off of approximately $1,700,000. This write-off reduced the gross accounts receivable balance and the Allowance for Doubtful Accounts in the third quarter of 2005. Accordingly, this change in process had no effect on the current period’s earnings and management does not expect that the change will have a material effect on the Company’s future earnings or financial position.
14
Merchandise Inventories
The Company’s inventory is valued using the retail method of accounting and is stated at the lower of cost(first-in, first-out method) or market. Under the retail inventory method, the valuation of inventory at cost and
16
resulting gross margin are calculated by applying an average cost to retail ratio to the retail value of inventory. The retail inventory method is an averaging method that has been widely used in the retail industry. Inherent in the retail method are certain significant estimates, including initial merchandise markup, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost and the resulting gross margins. Physical inventories are conducted throughout the year to calculate actual shrinkage and inventory on hand. Estimates based on actual shrinkage results are used to estimate inventory shrinkage, which is accrued for the period between the last inventory and the financial reporting date. The Company continuously reviews its inventory levels to identify slow moving merchandise and uses markdowns to clear slow moving inventory. The general economic environment for retail apparel sales could result in an increase in the level of markdowns, which would result in lower inventory values and increases to cost of goods sold as a percentage of net sales in future periods. Management makes estimates regarding markdowns based on inventory levels on hand and customer demand, which may impact inventory valuations. Markdown exposure with respect to inventories on hand is limited due to the fact that seasonal merchandise is not carried forward. Historically, actual results have not significantly deviated from those determined using the estimates described above.
Lease Accounting
The Company recognizes rent expense on a straight-line basis over the lease term as defined in SFAS No. 13.13,“Accounting for Leases”. Our lease agreements generally provide for scheduled rent increases during the lease term or rent holidays, including rental payments commencing at a date other than the date of initial occupancy. We include any rent escalation and rent holidays in our straight-line rent expense. In addition, we record landlord allowances for normal tenant improvements as deferred rent, which is included in other noncurrent liabilities in the consolidated balance sheets. This deferred rent is amortized over the lease term as a reduction of rent expense. Also, leasehold improvements are amortized using the straight-line method over the shorter of their estimated useful lives or the related lease term. See Note 1 to the Consolidated Financial Statements for further information on the Company’s accounting for its leases.
Impairment of Long-Lived Assets
The Company primarily invests in property and equipment in connection with the opening and remodeling of stores and in computer software and hardware. The Company periodically reviews its store locations and estimates the recoverability of its assets, recording an impairment charge, if necessary, when the Company decides to close the store or otherwise determines that future undiscounted cash flows associated with those assets will not be sufficient to recover the carrying value. This determination is based on a number of factors, including the store’s historical operating results and cash flows, estimated future sales growth, real estate development in the area and perceived local market conditions that can be difficult to predict and may be subject to change. In addition, the Company regularly evaluates its computer-related and other long-lived assets and may accelerate depreciation over the revised useful life if the asset is expected to be replaced or has limited future value. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is reflected in income for that period.
Insurance Liabilities
The Company is primarily self-insured for health care, workers’ compensation and general liability costs. These costs are significant primarily due to the large number of the Company’s retail locations and employees. The Company’s self-insurance liabilities are based on the total estimated costs of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims, and are not discounted. Management reviews current and historical claims data in developing its estimates. The Company also uses information provided by outside actuaries with respect to workers’ compensation and general liability claims. If the underlying facts and circumstances of the claims change or the historical experience upon which insurance provisions are recorded is not indicative of future trends, then the Company may be required to make adjustments to the provision for insurance
15
costs that could be material to the Company’s reported financial condition and results of operations. Historically, actual results have not significantly deviated from estimates.
17
Tax Reserves
The Company records liabilities for uncertain tax positions principally related to state income taxes. These liabilities reflect the Company’s best estimate of theits ultimate income tax liabilitiesliability based on factsthe tax code, regulations, and circumstances. Changespronouncements of the jurisdictions in factsand/orwhich we do business. Estimating our ultimate tax liability involves significant judgments regarding the application of complex tax regulations across many jurisdictions. Despite our belief that our estimates and judgments are reasonable, differences between our estimated and actual tax liabilities could exist. These differences may arise from settlements with individual states related to previously filedof tax returnsaudits, expiration of the statute of limitations, or the evolution and application of the various jurisdictional tax codes and regulations. Any differences will be recorded in the period in which they become known and could resulthave a material effect on the results of operations in material adjustments to the estimated liabilitiesperiod the adjustment is recorded.
Revenue Recognition
While the Company’s recognition of revenue is predominantly derived from routine retail transactions and does not involve significant judgement, revenue recognition represents an important accounting policy of the Company. As discussed in Note 1 to the Consolidated Financial Statements, the Company recognizes sales at the point of purchase when the customer takes possession of the merchandise and pays for the purchase, generally with cash or credit. Sales from purchases made with Cato credit, gift cards and layaway sales are also recorded when the customer takes possession of the merchandise. Gift cards, layaway deposits and merchandise credits granted to customers are recorded as deferred revenue until they are redeemed or forfeited. A provision is made for estimated product returns based on sales volumes and the Company’s experience; actual returns have not varied materially from amounts provided historically.
Credit revenue on the Company’s private label credit card portfolio is recognized as earned under the interest method. Late fees are recognized as earned, less provisions for estimated uncollectible fees.
Liquidity, Capital Resources and Market Risk
The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during fiscal 20052006 was $70.9$58.7 million as compared to $79.9$70.9 million in fiscal 2004.2005. These amounts have enabled the Company to fund its regular operating needs, capital expenditure program, cash dividend payments and any repurchase of the Company’s Common Stock and to prepay the term loan used to finance the 2003 repurchase of the Company’s Class B Common Stock from the Company’s founders as described below.common stock. In addition, the Company maintains $35 million of unsecured revolving credit facilities for short-term financing of seasonal cash needs, none of which was outstanding at January 28, 2006.February 3, 2007.
Cash provided by operating activities for these periods was primarily generated by earnings adjusted for depreciation, deferred rent,taxes, and changes in working capital. The decrease of $8.9$12.2 million for fiscal 20052006 over fiscal 20042005 is primarily due to a higher payables reduction in accounts payable attributable to tighter inventory management, an increaseoffset by a decrease in prepaid expenses, other assets and deferred income taxes offset by the increase in net earnings of $10.0$6.6 million.
The Company believes that its cash, cash equivalents and short-term investments, together with cash flows from operations and borrowings available under its revolving credit agreement, will be adequate to fund the Company’s proposed capital expenditures, dividends, purchase of treasury stock and other operating requirements for fiscal 20062007 and for the foreseeable future beyond twelve months.future.
At January 28, 2006,February 3, 2007, the Company had working capital of $139.1$176.5 million compared to $133.8$139.1 million at January 29, 2005.28, 2006. Additionally, the Company had $1.9 million invested in privately managed investment funds at January 28, 2006,February 3, 2007, which are reported under other noncurrent assets of the consolidated balance sheets.
At January 28, 2006,February 3, 2007, the Company had an unsecured revolving credit agreement, which provided for borrowings of up to $35 million. The revolving credit agreement is committed until August 2008. This agreement replaced a prior revolving credit agreement which was due to expire in August 2006. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of January 28, 2006.February 3, 2007. There were no borrowings outstanding under these credit facilities during the fiscal year ended January 28, 2006February 3, 2007 or the fiscal year ended January 29, 2005.28, 2006.
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On August 22, 2003, the Company entered into a new unsecured $30 million five-year term loan facility, the proceeds of which were used to purchase Class B Common Stock from the Company’s founders. Payments arewere due in monthly installments of $500,000 plus accrued interest based on LIBOR. On April 5, 2005, the Company repaid the remaining balance of $20.5 million on this loan facility with no early prepayment penalty. With the early retirement of this loan, the Company hashad no outstanding debt as of February 3, 2007 or January 28, 2006.
The Company had approximately $4.5 million and $2.8 million at February 3, 2007 and $3.5 million at January 28, 2006, and January 29, 2005, respectively, of outstanding irrevocable letters of credit relating to purchase commitments.
Expenditures for property and equipment totaled $27.5 million, $28.5 million $25.3 million and $20.6$25.3 million in fiscal 2006, 2005 2004 and 2003,2004, respectively. The expenditures for fiscal 20052006 were primarily for store development, store remodels and investments in new technology. In fiscal 2006,2007, the Company is planning to invest approximately $45$30 million in capital expenditures. This includes expenditures to open 90 new stores, relocate 2520 stores and close up to 1015 stores. In addition, the Company plans to remodel 15 stores and has planned for additional investments in technology scheduled to be implemented over the next 12 months.
Net cash used in investing activities totaled $26.0$40.0 million for fiscal 20052006 compared to $66.3$26.0 million used for the comparable period of 2004.2005. The decreaseincrease was due primarily to the reductionan increase in purchases of short-term investments, offset by an increase of sales of short-term investments.
On May 26, 2005, the Board of Directors approved athree-for-two stock split in the form of a stock dividend of the Company’s Class A and Class B Common Stock effective June 27, 2005. Additionally, on May 26, 2005,25, 2006, the Board of Directors increased the quarterly dividend by 11%15% from $.175$.13 per share to $.195$.15 per share, or an annualized rate of $.78 per share on a pre-split basis. On a post-split basis, the annualized rate is $.52 per share. Prior year basic and diluted earnings per share have been adjusted for thethree-for-two stock split.
Additionally, during fiscal 2005, the Company repurchased 186,531 shares of Class A Common Stock for a total cost of $3,535,510, or an average cost of $18.95$.60 per share.
The Company does not use derivative financial instruments. At January 28, 2006,February 3, 2007, the Company’s investment portfolio was primarily invested in governmental and other debt securities with maturities less than 36 months. These securities are classified asavailable-for-sale and are recorded on the balance sheet at fair value, with unrealized gains and temporary losses reported net of taxes as accumulated other comprehensive income. Other than temporary declines in fair value of investments are recorded as a reduction in the cost of investments in the accompanying Consolidated Balance Sheets.
The following table shows the Company’s obligations and commitments as of January 28, 2006,February 3, 2007, to make future payments under noncancellable contractual obligations (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due During One Year Fiscal Period Ending | | | Payments Due During One Year Fiscal Period Ending | |
Contractual Obligations | | Total | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | 2011+ | | | Total | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | Thereafter | |
|
Merchandise letters of credit | | $ | 2,790 | | | $ | 2,790 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,533 | | | $ | 4,533 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Operating leases | | | 140,716 | | | | 49,599 | | | | 39,213 | | | | 27,726 | | | | 16,100 | | | | 8,021 | | | | 57 | | | | 141,734 | | | | 51,001 | | | | 39,103 | | | | 26,462 | | | | 16,904 | | | | 8,235 | | | | 29 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Contractual Obligations | | $ | 143,506 | | | $ | 52,389 | | | $ | 39,213 | | | $ | 27,726 | | | $ | 16,100 | | | $ | 8,021 | | | $ | 57 | | | $ | 146,267 | | | $ | 55,534 | | | $ | 39,103 | | | $ | 26,462 | | | $ | 16,904 | | | $ | 8,235 | | | $ | 29 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Recent Accounting Pronouncements
In December 2004,Effective January 29, 2006, the FASB issued SFASCompany began recording compensation expense associated with stock options and other forms of equity compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004)123R,Share-Based Payment, “Share Based Payment” (SFAS 123(R)). SFAS 123(R) is a revisionas interpreted by SEC Staff Accounting Bulletin No. 107. Prior to January 29, 2006, the Company had accounted for stock options according to the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” which supersedes Accounting Principles Board (APB)(“APB”) Opinion No. 25, “AccountingAccounting for Stock Issued to Employees”, and amendsrelated interpretations, and therefore no related compensation expense was recorded for awards granted with no intrinsic value at the date of the grant. The Company adopted the modified prospective transition method provided under SFAS No. 95, “Statement123R, and, consequently, has not adjusted results from prior periods to retroactively reflect compensation expense. Under this transition method, compensation cost associated with stock options recognized in fiscal 2006 included: 1) quarterly amortization related to the remaining unvested portion of Cash Flows.”all stock option awards granted prior to January 29, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123(R) requires companiesNo. 123; and 2) quarterly amortization related to recognizeall stock option awards granted subsequent to January 29, 2006, based on the
19
grant date fair value estimated in accordance with the provisions of SFAS No. 123R. The impact on the Company’s consolidated financial statements for fiscal 2006 was an additional compensation expense of $235,000.
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” This Interpretation prescribes the recognition threshold a tax position is required to meet before being recognized in the income statementfinancial statements. The Interpretation also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods and disclosure of uncertain tax positions. The Interpretation is effective for an amount equal tofiscal years beginning after December 15, 2006. The Company is in the fair valueprocess of evaluating the impact of the share-based payment issued. This applies to all transactions involvingadoption of this Interpretation on the issuance of equity by a company in exchange for goods and services, including employees. Company’s consolidated financial statements.
In March 2005,September 2006, the SEC issued Staff Accounting Bulletin No. 107108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements” (SAB 107) outlining108). SAB 108 addresses how the SEC Staff’s interpretationeffects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB 108 requires an entity to quantify misstatements using a balance sheet and income-statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The adoption of SAB 108 is effective for fiscal years ending on or after November 15, 2006. The adoption of SAB 108 did not have a material impact on the Company’s financial statements.
In September 2006, FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact that the adoption of SFAS 123(R). This interpretation provides their views regarding interactions between SFAS 123(R) and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public
17
companies. Subsequently in August, October and November 2005, the FASB released Financial Staff Position (FSP) 123(R)-1, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R),” FSP123(R)-2, “Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R)” and FSP 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” Additionally,157 will have on February 1, 2006, the FASB agreed to issue FSP 123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event.” The FSPs clarify certain accounting provisions set forth in SFAS 123(R). The Company will adhere to the requirements and guidance prescribed in SFAS 123(R), SAB 107 and the FSPs in connection with its adoption in the first quarter of 2006. The Company plans to use the modified prospective method for transitioning to the new Standard. The Company estimates that the impact on 2006 earnings will approximate $.00 to $.01 of cost per share for the year associated with the expensing of the fair market value of stock options, issuances of restricted stock, and accounting for discounts associated with the Company’s employee stock purchase plan.financial statements.
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Item 7A. | Quantitative and Qualitative Disclosures About Market Risk: |
The Company is subject to market rate risk from exposure to changes in interest rates based on its financing, investing and cash management.
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Item 8. | Financial Statements and Supplementary Data: |
Item 8. Financial Statements and Supplementary Data:
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
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| | | S-2 | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Cato Corporation:
We have completed integrated audits of The Cato Corporation’s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of January 28, 2006, and an audit of its 2003 consolidated financial statementsFebruary 3, 2007, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of The Cato Corporation and its subsidiaries at February 3, 2007 and January 28, 2006, and January 29, 2005, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 2006February 3, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Itemitem 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statementsupplemental schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of January 28, 2006February 3, 2007 based on those criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2006,February 3, 2007 based on those criteria established inInternal Control — Integrated Frameworkissued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM — (Continued)
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
April 11, 20063, 2007
21
THE CATO CORPORATION
| | | | | | | | | | | | |
| | Fiscal Year Ended | |
| | January 28,
| | | January 29,
| | | January 31,
| |
| | 2006 | | | 2005 | | | 2004 | |
| | (Dollars in thousands, except per share data) | |
|
REVENUES | | | | | | | | | | | | |
Retail sales | | $ | 821,639 | | | $ | 773,809 | | | $ | 731,770 | |
Other income (principally finance charges, late fees and layaway charges) | | | 14,742 | | | | 15,795 | | | | 15,497 | |
| | | | | | | | | | | | |
Total revenues | | | 836,381 | | | | 789,604 | | | | 747,267 | |
| | | | | | | | | | | | |
COSTS AND EXPENSES, NET | | | | | | | | | | | | |
Cost of goods sold (exclusive of depreciation shown below) | | | 546,955 | | | | 528,916 | | | | 508,991 | |
Selling, general and administrative | | | 203,156 | | | | 187,618 | | | | 174,202 | |
Depreciation | | | 20,275 | | | | 20,397 | | | | 18,695 | |
Interest expense | | | 183 | | | | 717 | | | | 306 | |
Interest and other income | | | (4,563 | ) | | | (2,739 | ) | | | (3,614 | ) |
| | | | | | | | | | | | |
| | | 766,006 | | | | 734,909 | | | | 698,580 | |
| | | | | | | | | | | | |
Income before income taxes | | | 70,375 | | | | 54,695 | | | | 48,687 | |
Income tax expense | | | 25,546 | | | | 19,854 | | | | 17,673 | |
| | | | | | | | | | | | |
Net income | | $ | 44,829 | | | $ | 34,841 | | | $ | 31,014 | |
| | | | | | | | | | | | |
Basic earnings per share | | $ | 1.44 | | | $ | 1.13 | | | $ | .89 | |
| | | | | | | | | | | | |
Basic weighted average shares | | | 31,117,214 | | | | 30,876,393 | | | | 34,710,872 | |
| | | | | | | | | | | | |
Diluted earnings per share | | $ | 1.41 | | | $ | 1.11 | | | $ | .88 | |
| | | | | | | | | | | | |
Diluted weighted average shares | | | 31,789,887 | | | | 31,478,061 | | | | 35,339,312 | |
| | | | | | | | | | | | |
Dividends per share | | $ | .507 | | | $ | .457 | | | $ | .42 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | | |
Net income | | $ | 44,829 | | | $ | 34,841 | | | $ | 31,014 | |
Unrealized gains (losses) onavailable-for-sale securities, net of deferred income tax liability or benefit | | | 7 | | | | 13 | | | | (195 | ) |
| | | | | | | | | | | | |
Net comprehensive income | | $ | 44,836 | | | $ | 34,854 | | | $ | 30,819 | |
| | | | | | | | | | | | |
See notes to consolidated financial statements.
22
THE CATO CORPORATION
| | | | | | | | |
| | January 28,
| | | January 29,
| |
| | 2006 | | | 2005 | |
| | (Dollars in thousands) | |
|
ASSETS |
Current Assets: | | | | | | | | |
Cash and cash equivalents | | $ | 21,734 | | | $ | 18,640 | |
Short-term investments | | | 86,085 | | | | 88,588 | |
Accounts receivable, net of allowance for doubtful accounts of $3,694 at January 28, 2006 and $6,122 at January 29, 2005 | | | 49,644 | | | | 50,889 | |
Merchandise inventories | | | 103,370 | | | | 100,538 | |
Deferred income taxes | | | 8,526 | | | | 8,970 | |
Prepaid expenses | | | 2,318 | | | | 1,986 | |
| | | | | | | | |
Total Current Assets | | | 271,677 | | | | 269,611 | |
Property and equipment — net | | | 124,104 | | | | 117,590 | |
Other assets | | | 10,855 | | | | 10,122 | |
| | | | | | | | |
Total Assets | | $ | 406,636 | | | $ | 397,323 | |
| | | | | | | | |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current Liabilities: | | | | | | | | |
Accounts payable | | $ | 78,036 | | | $ | 82,828 | |
Accrued expenses | | | 31,967 | | | | 31,217 | |
Accrued bonus and benefits | | | 17,570 | | | | 8,121 | |
Accrued income taxes | | | 4,990 | | | | 4,465 | |
Current portion of long-term debt | | | — | | | | 6,000 | |
| | | | | | | | |
Total Current Liabilities | | | 132,563 | | | | 132,631 | |
Deferred income taxes | | | 9,261 | | | | 13,361 | |
Long-term debt | | | — | | | | 16,000 | |
Other noncurrent liabilities (primarily deferred rent) | | | 24,864 | | | | 24,156 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
| | | | | | | | |
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; 35,622,516 and 26,249,178 shares issued at January 28, 2006 and January 29, 2005, respectively | | | 1,188 | | | | 875 | |
Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized; 690,525 and 5,597,834 shares issued at January 28, 2006 and January 29, 2005, respectively | | | 23 | | | | 187 | |
Additional paid-in capital | | | 39,244 | | | | 103,366 | |
Retained earnings | | | 294,462 | | | | 265,499 | |
Accumulated other comprehensive income | | | 78 | | | | 71 | |
Unearned compensation — restricted stock awards | | | (229 | ) | | | (911 | ) |
| | | | | | | | |
| | | 334,766 | | | | 369,087 | |
Less Class A and Class B common stock in treasury, at cost (5,093,840 Class A and -0- Class B shares at January 28, 2006 and 5,906,179 Class A and 5,137,484 Class B at January 29, 2005, respectively) | | | (94,818 | ) | | | (157,912 | ) |
| | | | | | | | |
Total Stockholders’ Equity | | | 239,948 | | | | 211,175 | |
| | | | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 406,636 | | | $ | 397,323 | |
| | | | | | | | |
See notes to consolidated financial statements.
23
THE CATO CORPORATION
| | | | | | | | | | | | |
| | Fiscal Year Ended | |
| | January 28,
| | | January 29,
| | | January 31,
| |
| | 2006 | | | 2005 | | | 2004 | |
| | (Dollars in thousands) | |
|
OPERATING ACTIVITIES | | | | | | | | | | | | |
Net income | | $ | 44,829 | | | $ | 34,841 | | | $ | 31,014 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation | | | 20,275 | | | | 20,397 | | | | 18,695 | |
Amortization of investment premiums | | | — | | | | — | | | | 4 | |
Provision for doubtful accounts | | | 4,650 | | | | 5,096 | | | | 6,098 | |
Deferred income taxes | | | (3,656 | ) | | | (817 | ) | | | 4,779 | |
Compensation expense related to restricted stock awards | | | 682 | | | | 682 | | | | 782 | |
Loss on disposal of property and equipment | | | 1,757 | | | | 1,554 | | | | 798 | |
Changes in operating assets and liabilities which provided (used) cash: | | | | | | | | | | | | |
Accounts receivable | | | (3,405 | ) | | | (3,271 | ) | | | (4,696 | ) |
Merchandise inventories | | | (2,832 | ) | | | (3,246 | ) | | | (4,463 | ) |
Prepaid and other assets | | | (1,065 | ) | | | 3,406 | | | | (1,312 | ) |
Accrued income taxes | | | 525 | | | | (41 | ) | | | 1,412 | |
Accounts payable, accrued expenses and other liabilities | | | 9,183 | | | | 21,250 | | | | 6,236 | |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 70,943 | | | | 79,851 | | | | 59,347 | |
| | | | | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | | | | |
Expenditures for property and equipment | | | (28,512 | ) | | | (25,301 | ) | | | (20,553 | ) |
Purchases of short-term investments | | | (94,845 | ) | | | (122,380 | ) | | | (18,462 | ) |
Sales of short-term investments | | | 97,355 | | | | 81,350 | | | | 45,589 | |
| | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | (26,002 | ) | | | (66,331 | ) | | | 6,574 | |
| | | | | | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | | | | | |
Cash overdrafts included in accounts payable | | | (3,100 | ) | | | (2,800 | ) | | | 6,400 | |
Dividends paid | | | (15,867 | ) | | | (14,134 | ) | | | (14,465 | ) |
Purchases of treasury stock | | | (3,536 | ) | | | — | | | | (98,304 | ) |
Proceeds of long term debt | | | — | | | | — | | | | 30,000 | |
Payments to settle long term debt | | | (22,000 | ) | | | (5,500 | ) | | | (2,500 | ) |
Proceeds from employee stock purchase plan | | | 430 | | | | 478 | | | | 507 | |
Proceeds from stock options exercised | | | 2,226 | | | | 3,219 | | | | 4,233 | |
| | | | | | | | | | | | |
Net cash used in financing activities | | | (41,847 | ) | | | (18,737 | ) | | | (74,129 | ) |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 3,094 | | | | (5,217 | ) | | | (8,208 | ) |
Cash and cash equivalents at beginning of year | | | 18,640 | | | | 23,857 | | | | 32,065 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 21,734 | | | $ | 18,640 | | | $ | 23,857 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Fiscal Year Ended | |
| | February 3,
| | | January 28,
| | | January 29,
| |
| | 2007 | | | 2006 | | | 2005 | |
| | (Dollars in thousands, except per share data) | |
|
REVENUES | | | | | | | | | | | | |
Retail sales | | $ | 862,813 | | | $ | 821,639 | | | $ | 773,809 | |
Other income (principally finance charges, late fees and layaway charges) | | | 13,072 | | | | 14,742 | | | | 15,795 | |
| | | | | | | | | | | | |
Total revenues | | | 875,885 | | | | 836,381 | | | | 789,604 | |
| | | | | | | | | | | | |
COSTS AND EXPENSES, NET | | | | | | | | | | | | |
Cost of goods sold (exclusive of depreciation shown below) | | | 572,712 | | | | 546,955 | | | | 528,916 | |
Selling, general and administrative | | | 212,157 | | | | 203,156 | | | | 187,618 | |
Depreciation | | | 20,941 | | | | 20,275 | | | | 20,397 | |
Interest expense | | | 41 | | | | 183 | | | | 717 | |
Interest and other income | | | (9,597 | ) | | | (4,563 | ) | | | (2,739 | ) |
| | | | | | | | | | | | |
| | | 796,254 | | | | 766,006 | | | | 734,909 | |
| | | | | | | | | | | | |
Income before income taxes | | | 79,631 | | | | 70,375 | | | | 54,695 | |
Income tax expense | | | 28,181 | | | | 25,546 | | | | 19,854 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net income | | $ | 51,450 | | | $ | 44,829 | | | $ | 34,841 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Basic earnings per share | | $ | 1.64 | | | $ | 1.44 | | | $ | 1.13 | |
| | | | | | | | | | | | |
Basic weighted average shares | | | 31,281,163 | | | | 31,117,214 | | | | 30,876,393 | |
| | | | | | | | | | | | |
Diluted earnings per share | | $ | 1.62 | | | $ | 1.41 | | | $ | 1.11 | |
| | | | | | | | | | | | |
Diluted weighted average shares | | | 31,815,332 | | | | 31,789,887 | | | | 31,478,061 | |
| | | | | | | | | | | | |
Dividends per share | | $ | .580 | | | $ | .507 | | | $ | .457 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | | |
Net income | | $ | 51,450 | | | $ | 44,829 | | | $ | 34,841 | |
Unrealized gains onavailable-for-sale securities, net of deferred income tax liability or benefit | | | 147 | | | | 7 | | | | 13 | |
| | | | | | | | | | | | |
Net comprehensive income | | $ | 51,597 | | | $ | 44,836 | | | $ | 34,854 | |
| | | | | | | | | | | | |
See notes to consolidated financial statements.
24
THE CATO CORPORATION
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Convertible
| | | | | | | | | Accumulated
| | | Unearned
| | | | | | | |
| | Class A
| | | Class B
| | | Additional
| | | | | | Other
| | | Compensation
| | | | | | Total
| |
| | Common
| | | Common
| | | Paid-in
| | | Retained
| | | Comprehensive
| | | Restricted
| | | Treasury
| | | Stockholders’
| |
| | Stock | | | Stock | | | Capital | | | Earnings | | | Income (Loss) | | | Stock Awards | | | Stock | | | Equity | |
| | (Dollars in thousands) | |
|
Balance — February 1, 2003 | | | 840 | | | | 203 | | | | 94,947 | | | | 228,243 | | | | 253 | | | | (2,375 | ) | | | (59,608 | ) | | | 262,503 | |
*Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | 31,014 | | | | | | | | | | | | | | | | 31,014 | |
Unrealized losses onavailable-for-sale securities, net of deferred income tax benefit of $111 | | | | | | | | | | | | | | | | | | | (195 | ) | | | | | | | | | | | (195 | ) |
Dividends paid ($.42 per share) | | | | | | | | | | | | | | | (14,465 | ) | | | | | | | | | | | | | | | (14,465 | ) |
Class A common stock sold through employee stock purchase plan — 42,459 shares | | | 1 | | | | | | | | 506 | | | | | | | | | | | | | | | | | | | | 507 | |
Class A common stock sold through stock option plans — 432,375 shares | | | 10 | | | | | | | | 2,857 | | | | | | | | | | | | | | | | | | | | 2,867 | |
Income tax benefit from stock options exercised | | | | | | | | | | | 1,366 | | | | | | | | | | | | | | | | | | | | 1,366 | |
Purchase of treasury shares — 5,302,484 shares | | | | | | | | | | | | | | | | | | | | | | | | | | | (98,304 | ) | | | (98,304 | ) |
Shares reclassified from Class B to Class A — 477,315 shares | | | 16 | | | | (16 | ) | | | | | | | | | | | | | | | | | | | | | | | — | |
Unearned compensation — restricted stock awards | | | | | | | | | | | | | | | | | | | | | | | 782 | | | | | | | | 782 | |
|
|
Balance — January 31, 2004 | | | 867 | | | | 187 | | | | 99,676 | | | | 244,792 | | | | 58 | | | | (1,593 | ) | | | (157,912 | ) | | | 186,075 | |
*Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | 34,841 | | | | | | | | | | | | | | | | 34,841 | |
Unrealized gains onavailable-for-sale securities, net of deferred income tax liability of $7 | | | | | | | | | | | | | | | | | | | 13 | | | | | | | | | | | | 13 | |
Dividends paid ($.457 per share) | | | | | | | | | | | | | | | (14,134 | ) | | | | | | | | | | | | | | | (14,134 | ) |
Class A common stock sold through employee stock purchase plan — 40,965 shares | | | 1 | | | | | | | | 477 | | | | | | | | | | | | | | | | | | | | 478 | |
Class A common stock sold through stock option plans — 294,000 shares | | | 7 | | | | | | | | 2,354 | | | | | | | | | | | | | | | | | | | | 2,361 | |
Income tax benefit from stock options exercised | | | | | | | | | | | 859 | | | | | | | | | | | | | | | | | | | | 859 | |
Unearned compensation — restricted stock awards | | | | | | | | | | | | | | | | | | | | | | | 682 | | | | | | | | 682 | |
|
|
Balance — January 29, 2005 | | | 875 | | | | 187 | | | | 103,366 | | | | 265,499 | | | | 71 | | | | (911 | ) | | | (157,912 | ) | | | 211,175 | |
*Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | 44,829 | | | | | | | | | | | | | | | | 44,829 | |
Unrealized gains onavailable-for-sale securities, net of deferred income tax liability of $3 | | | | | | | | | | | | | | | | | | | 7 | | | | | | | | | | | | 7 | |
Dividends paid ($.507 per share) | | | | | | | | | | | | | | | (15,866 | ) | | | | | | | | | | | | | | | (15,866 | ) |
Class A common stock sold through employee stock purchase plan — 28,684 shares | | | 1 | | | | | | | | 429 | | | | | | | | | | | | | | | | | | | | 430 | |
Class A common stock sold through stock option plans — 172,025 shares | | | 5 | | | | | | | | 1,310 | | | | | | | | | | | | | | | | | | | | 1,315 | |
Income tax benefit from stock options exercised | | | | | | | | | | | 912 | | | | | | | | | | | | | | | | | | | | 912 | |
Purchase of treasury shares — 186,531 | | | | | | | | | | | | | | | | | | | | | | | | | | | (3,536 | ) | | | (3,536 | ) |
Cancellation of treasury shares — 6,136,354 | | | 143 | | | | | | | | (66,773 | ) | | | | | | | | | | | | | | | 66,630 | | | | — | |
Shares reclassified from Class B to Class A — 4,907,309 shares (see Note 8) | | | 164 | | | | (164 | ) | | | | | | | | | | | | | | | | | | | | | | | — | |
Unearned compensation — restricted stock awards | | | | | | | | | | | | | | | | | | | | | | | 682 | | | | | | | | 682 | |
|
|
Balance — January 28, 2006 | | | 1,188 | | | | 23 | | | | 39,244 | | | | 294,462 | | | | 78 | | | | (229 | ) | | | (94,818 | ) | | | 239,948 | |
| | | | | | | | |
| | February 3,
| | | January 28,
| |
| | 2007 | | | 2006 | |
| | (Dollars in thousands) | |
|
ASSETS |
Current Assets: | | | | | | | | |
Cash and cash equivalents | | $ | 24,833 | | | $ | 21,734 | |
Short-term investments | | | 98,709 | | | | 86,085 | |
Accounts receivable, net of allowance for doubtful accounts of $3,554 at February 3, 2007 and $3,694 at January 28, 2006 | | | 45,958 | | | | 49,644 | |
Merchandise inventories | | | 115,918 | | | | 103,370 | |
Deferred income taxes | | | 7,508 | | | | 8,526 | |
Prepaid expenses | | | 6,587 | | | | 2,318 | |
| | | | | | | | |
Total Current Assets | | | 299,513 | | | | 271,677 | |
Property and equipment — net | | | 128,461 | | | | 124,104 | |
Other assets | | | 4,348 | | | | 10,855 | |
| | | | | | | | |
Total Assets | | $ | 432,322 | | | $ | 406,636 | |
| | | | | | | | |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current Liabilities: | | | | | | | | |
Accounts payable | | $ | 77,046 | | | $ | 78,036 | |
Accrued expenses | | | 29,526 | | | | 31,967 | |
Accrued bonus and benefits | | | 10,756 | | | | 17,570 | |
Accrued income taxes | | | 5,721 | | | | 4,990 | |
| | | | | | | | |
Total Current Liabilities | | | 123,049 | | | | 132,563 | |
Deferred income taxes | | | 8,817 | | | | 9,261 | |
Other noncurrent liabilities (primarily deferred rent) | | | 23,663 | | | | 24,864 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
| | | | | | | | |
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; 35,955,815 and 35,622,516 shares issued at February 3, 2007 and January 28, 2006, respectively | | | 1,199 | | | | 1,188 | |
Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized; issued 690,525 shares at February 3, 2007 and January 28, 2006, respectively | | | 23 | | | | 23 | |
Additional paid-in capital | | | 42,475 | | | | 39,244 | |
Retained earnings | | | 327,684 | | | | 294,462 | |
Accumulated other comprehensive income | | | 225 | | | | 78 | |
Unearned compensation — restricted stock awards | | | — | | | | (229 | ) |
| | | | | | | | |
| | | 371,606 | | | | 334,766 | |
Less Class A common stock in treasury, at cost (5,093,609 shares at February 3, 2007 and 5,093,840 shares at January 28, 2006, respectively) | | | (94,813 | ) | | | (94,818 | ) |
| | | | | | | | |
Total Stockholders’ Equity | | | 276,793 | | | | 239,948 | |
| | | | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 432,322 | | | $ | 406,636 | |
| | | | | | | | |
| | |
* | | Total comprehensive income for the years ended January 28, 2006, January 29, 2005 and January 31, 2004 was $44,836, $34,854 and $30,819, respectively. |
See notes to consolidated financial statements.
25
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | |
| | Fiscal Year Ended | |
| | February 3,
| | | January 28,
| | | January 29,
| |
| | 2007 | | | 2006 | | | 2005 | |
| | (Dollars in thousands) | |
|
OPERATING ACTIVITIES | | | | | | | | | | | | |
Net income | | $ | 51,450 | | | $ | 44,829 | | | $ | 34,841 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation | | | 20,941 | | | | 20,275 | | | | 20,397 | |
Provision for doubtful accounts | | | 2,633 | | | | 4,650 | | | | 5,096 | |
Share — based compensation | | | 1,326 | | | | 682 | | | | 682 | |
Excess tax benefits from share-based compensation | | | (768 | ) | | | — | | | | — | |
Deferred income taxes | | | 574 | | | | (3,656 | ) | | | (817 | ) |
Loss on disposal of property and equipment | | | 2,079 | | | | 1,757 | | | | 1,554 | |
Changes in operating assets and liabilities which provided (used) cash: | | | | | | | | | | | | |
Accounts receivable | | | 1,053 | | | | (3,405 | ) | | | (3,271 | ) |
Merchandise inventories | | | (12,548 | ) | | | (2,832 | ) | | | (3,246 | ) |
Prepaid and other assets | | | 2,238 | | | | (1,065 | ) | | | 3,406 | |
Accrued income taxes | | | 1,499 | | | | 525 | | | | (41 | ) |
Accounts payable, accrued expenses and other liabilities | | | (11,776 | ) | | | 9,183 | | | | 21,250 | |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 58,701 | | | | 70,943 | | | | 79,851 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | | | | |
Expenditures for property and equipment | | | (27,547 | ) | | | (28,512 | ) | | | (25,301 | ) |
Purchases of short-term investments | | | (180,463 | ) | | | (94,845 | ) | | | (122,380 | ) |
Sales of short-term investments | | | 167,985 | | | | 97,355 | | | | 81,350 | |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (40,025 | ) | | | (26,002 | ) | | | (66,331 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | | | | | |
Change in cash overdrafts included in accounts payable | | | 500 | | | | (3,100 | ) | | | (2,800 | ) |
Dividends paid | | | (18,228 | ) | | | (15,867 | ) | | | (14,134 | ) |
Purchases of treasury stock | | | — | | | | (3,536 | ) | | | — | |
Payments to settle long term debt | | | — | | | | (22,000 | ) | | | (5,500 | ) |
Proceeds from employee stock purchase plan | | | 413 | | | | 430 | | | | 478 | |
Excess tax benefits from share-based compensation | | | 768 | | | | — | | | | — | |
Proceeds from stock options exercised | | | 970 | | | | 2,226 | | | | 3,219 | |
| | | | | | | | | | | | |
Net cash used in financing activities | | | (15,577 | ) | | | (41,847 | ) | | | (18,737 | ) |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 3,099 | | | | 3,094 | | | | (5,217 | ) |
Cash and cash equivalents at beginning of year | | | 21,734 | | | | 18,640 | | | | 23,857 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 24,833 | | | $ | 21,734 | | | $ | 18,640 | |
| | | | | | | | | | | | |
See notes to consolidated financial statements.
26
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Convertible
| | | | | | | | | Accumulated
| | | Unearned
| | | | | | | |
| | Class A
| | | Class B
| | | Additional
| | | | | | Other
| | | Compensation
| | | | | | Total
| |
| | Common
| | | Common
| | | Paid-in
| | | Retained
| | | Comprehensive
| | | Restricted
| | | Treasury
| | | Stockholders’
| |
| | Stock | | | Stock | | | Capital | | | Earnings | | | Income | | | Stock Awards | | | Stock | | | Equity | |
| | (Dollars in thousands) | |
|
Balance — January 31, 2004 | | | 867 | | | | 187 | | | | 99,676 | | | | 244,792 | | | | 58 | | | | (1,593 | ) | | | (157,912 | ) | | | 186,075 | |
*Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | 34,841 | | | | | | | | | | | | | | | | 34,841 | |
Unrealized gains onavailable-for-sale securities, net of deferred income tax liability of $7 | | | | | | | | | | | | | | | | | | | 13 | | | | | | | | | | | | 13 | |
Dividends paid ($.457 per share) | | | | | | | | | | | | | | | (14,134 | ) | | | | | | | | | | | | | | | (14,134 | ) |
Class A common stock sold through employee stock purchase plan — 40,965 shares | | | 1 | | | | | | | | 477 | | | | | | | | | | | | | | | | | | | | 478 | |
Class A common stock sold through stock option plans — 294,000 shares | | | 7 | | | | | | | | 2,354 | | | | | | | | | | | | | | | | | | | | 2,361 | |
Income tax benefit from stock options exercised | | | | | | | | | | | 859 | | | | | | | | | | | | | | | | | | | | 859 | |
Unearned compensation — restricted stock awards | | | | | | | | | | | | | | | | | | | | | | | 682 | | | | | | | | 682 | |
|
|
Balance — January 29, 2005 | | | 875 | | | | 187 | | | | 103,366 | | | | 265,499 | | | | 71 | | | | (911 | ) | | | (157,912 | ) | | | 211,175 | |
*Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | 44,829 | | | | | | | | | | | | | | | | 44,829 | |
Unrealized gains onavailable-for-sale securities, net of deferred income tax liability of $3 | | | | | | | | | | | | | | | | | | | 7 | | | | | | | | | | | | 7 | |
Dividends paid ($.507 per share) | | | | | | | | | | | | | | | (15,866 | ) | | | | | | | | | | | | | | | (15,866 | ) |
Class A common stock sold through employee stock purchase plan — 28,684 shares | | | 1 | | | | | | | | 429 | | | | | | | | | | | | | | | | | | | | 430 | |
Class A common stock sold through stock option plans — 172,025 shares | | | 5 | | | | | | | | 1,310 | | | | | | | | | | | | | | | | | | | | 1,315 | |
Income tax benefit from stock options exercised | | | | | | | | | | | 912 | | | | | | | | | | | | | | | | | | | | 912 | |
Purchase of treasury shares — 186,531 | | | | | | | | | | | | | | | | | | | | | | | | | | | (3,536 | ) | | | (3,536 | ) |
Cancellation of treasury shares — 6,136,354 | | | 143 | | | | | | | | (66,773 | ) | | | | | | | | | | | | | | | 66,630 | | | | — | |
Shares reclassified from Class B to Class A — 4,907,309 shares (see Note 8) | | | 164 | | | | (164 | ) | | | | | | | | | | | | | | | | | | | | | | | — | |
Unearned compensation — restricted stock awards | | | | | | | | | | | | | | | | | | | | | | | 682 | | | | | | | | 682 | |
|
|
Balance — January 28, 2006 | | | 1,188 | | | | 23 | | | | 39,244 | | | | 294,462 | | | | 78 | | | | (229 | ) | | | (94,818 | ) | | | 239,948 | |
*Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | 51,450 | | | | | | | | | | | | | | | | 51,450 | |
Unrealized gains onavailable-for-sale securities, net of deferred income tax liability of $78 | | | | | | | | | | | | | | | | | | | 147 | | | | | | | | | | | | 147 | |
Dividends paid ($.58 per share) | | | | | | | | | | | | | | | (18,228 | ) | | | | | | | | | | | | | | | (18,228 | ) |
Class A common stock sold through employee stock purchase plan — 22,873 shares | | | 1 | | | | | | | | 484 | | | | | | | | | | | | | | | | | | | | 485 | |
Class A common stock sold through stock option plans — 95,775 shares | | | 3 | | | | | | | | 1,127 | | | | | | | | | | | | | | | | | | | | 1,130 | |
Class A common stock issued through restricted stock grant plans 214,882 shares | | | 7 | | | | | | | | 857 | | | | | | | | | | | | | | | | | | | | 864 | |
Income tax benefit from stock options exercised | | | | | | | | | | | 768 | | | | | | | | | | | | | | | | | | | | 768 | |
Cancellation of treasury shares — 231 shares | | | | | | | | | | | (5 | ) | | | | | | | | | | | | | | | 5 | | | | — | |
Unearned compensation — restricted stock awards | | | | | | | | | | | | | | | | | | | | | | | 229 | | | | | | | | 229 | |
|
|
Balance — February 3, 2007 | | | 1,199 | | | | 23 | | | | 42,475 | | | | 327,684 | | | | 225 | | | | — | | | | (94,813 | ) | | | 276,793 | |
| | |
* | | Total comprehensive income for the years ended February 3, 2007, January 28, 2006 and January 29, 2005 was $51,597, $44,836 and $34,854, respectively. |
See notes to consolidated financial statements.
27
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
1. | Summary of Significant Accounting Policies: |
Principles of Consolidation: The consolidated financial statements include the accounts of The Cato Corporation and its wholly-owned subsidiaries (“the Company”). All significant intercompany accounts and transactions have been eliminated.
Description of Business and Fiscal Year: The Company has two business segments — the operation of women’s fashion specialty stores and a credit card division. The apparel specialty stores operate under the names “Cato,” “Cato Fashions,” “Cato Plus” and “It’s Fashion!” and are located primarily in strip shopping centers principally in the southeastern United States. The Company’s fiscal year ends on the Saturday nearest January 31. Fiscal 2006 had 53 weeks while fiscal 2005 and fiscal 2004 had 52 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 self insured health insurance, workers’ compensation liabilities, general and auto insurance liabilities, reserves for inventory markdowns, calculation of asset impairment, inventory shrinkshrinkage accrual and tax contingency reserves.
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 all classified asavailable-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 temporary losses, net of income taxes, reported as a component of accumulated other comprehensive income. Other than temporary declines in fair value of investments are recorded as a reduction in the cost of the investments in the accompanying Consolidated Balance Sheets and a reduction of interest and other income in the accompanying Statements of Consolidated 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 Interest and 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 3, 2007, January 28, 2006 and January 29, 2005 were $26,651,000, $28,415,000 and January 31, 2004 were $28,415,000, $18,454,000, and $12,643,000, respectively. Cash paid for interest for the fiscal years ended February 3, 2007, January 28, 2006 and January 29, 2005 were $-0- $143,000 and January 31, 2004 were $143,000, $610,000, and $306,400, respectively.
Inventories: Merchandise inventories are stated at the lower of cost(first-in, first-out method) or market as determined by the retail method.
28
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property and Equipment: Property and equipment are recorded at cost. Maintenance and repairs are charged to operations as incurred; renewals and betterments are capitalized. The Company accounts for its software development costs in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”)98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Depreciation is provided on the straight-line method over the estimated useful lives of the related assets excluding leasehold improvements. Leasehold improvements are amortized over the shorter of the estimated useful life or
26
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
lease term. For leases with renewal periods at the CompanyCompany’s option, the Company generally uses the original lease term plus reasonably assured renewal option periods (generally one five year option period) to determine estimated useful lives. Typical estimated useful lives are as follows:
| | | | |
| | Estimated
| |
Classification | | Useful Lives | |
|
Land improvements | | | 10 years | |
Buildings | | | 30 − 4030-40 years | |
Leasehold improvements | | | 5 − 105-10 years | |
Fixtures and equipment | | | 3 − 103-10 years | |
Information Technology equipment and software | | | 3 − 103-10 years | |
Impairment of Long-Lived Assets
The Company primarily invests in property and equipment in connection with the opening and remodeling of stores and in computer software and hardware. The Company periodically reviews its store locations and estimates the recoverability of its assets, recording an impairment charge, if necessary, when the Company decides to close the store or otherwise determines that future undiscounted cash flows associated with those assets will not be sufficient to recover the carrying value. This determination is based on a number of factors, including the store’s historical operating results and cash flows, estimated future sales growth, real estate development in the area and perceived local market conditions that can be difficult to predict and may be subject to change. ImpairmentStore asset impairment charges of store assets incurred forin fiscal 2006, 2005 and 2004 were $479,178, $387,139 and 2003 are $387,139, $306,983, and $912,800, respectively. In addition, the Company regularly evaluates its computer-related and other long-lived assets and may accelerate depreciation over the revised useful life if the asset is expected to be replaced or has limited future value. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is reflected in income for that period.
Leases
The Company determines the classification of leases consistent with FASB issued Statement No. 13 (“SFAS 13”),“Accounting for leasesLeases””. The Company leases all of its retail stores. Most lease agreements contain construction allowances and rent escalations. For purposes of recognizing incentives and minimum rental expenses on a straight-line basis over the terms of the leases including renewal periods considered reasonably assured, the Company uses the date of initial possession to begin amortization which is generally when the Company enters the space and begins to make improvements in preparation offor intended use.
For construction allowances, the Company records a deferred rent liability in “Other noncurrent liabilities” on the consolidated balance sheets and amortizes the deferred rent over the term of the respective lease as reduction to “Cost of goods sold” on the consolidated statements of income.
For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company records minimum rental expenses on a straight-line basis over the terms of the leases as defined by SFAS 13.
29
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue Recognition
The Company recognizes sales at the point of purchase when the customer takes possession of the merchandise and pays for the purchase, generally with cash or credit. Sales from purchases made with Cato credit, gift cards and layaway sales are also recorded when the customer takes possession of the merchandise. Gift cards, layaway deposits and merchandise credits granted to customers are recorded as deferred revenue until they are redeemed or forfeited. A provision is made for estimated product returns based on sales volumes and the Company’s experience; actual returns have not varied materially from amounts provided historically.
27
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Credit revenue on the Company’s private label credit card portfolio is recognized as earned under the interest method. Late fees are recognized as earned, less provisions for estimated uncollectible fees.
Cost of Goods Sold: Cost of goods sold includes merchandise costs, net of discounts and allowances, buying costs, distribution costs, occupancy costs, freight, and inventory shrinkage. Net merchandise costs and in-bound freight are capitalized as inventory costs. Buying and distribution costs include payroll, payroll- related costs and operating expenses for our buying departments and distribution center. Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities. Buying, distribution, occupancy and internal transfer costs are treated as period costs and are not capitalized as part of inventory.
Credit Sales: The Company offers its own credit card to customers. All credit activity is performed by the Company’s wholly-owned subsidiaries. None of the credit card receivables are secured. Finance income is recognized as earned under the interest method and late charges are recognized in the month in which they are assessed, net of provisions for estimated uncollectible amounts. The Company evaluates the collectibility of accounts receivable and records an allowance for doubtful accounts based on the aging of accounts and estimates of actual write-offs.
Advertising: Advertising costs are expensed in the period in which they are incurred. Advertising expense was $6,546,000, $6,103,000 $5,504,000 and $5,638,000$5,504,000 for the fiscal years ended February 3, 2007, January 28, 2006 and January 29, 2005, and January 31, 2004, respectively.
Earnings Per Share: FASB No. 128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements for all entities with complex capital structures. The Company has presented one basic EPS and one diluted EPS amount for all common shares in the accompanying consolidated statement of income. While the Company’s articles of incorporation provide the right for the Board of Directors to declare dividends on Class A shares without declaration of commensurate dividends on Class B shares, the Company has historically paid the same dividends to both Class A and Class B shareholders and the Board of Directors has resolved to continue this practice. Accordingly, the Company’s allocation of income for purposes of EPS computation is the same for Class A and Class B shares and the EPS amounts reported herein are applicable to both Class A and Class B shares. Basic EPS is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. Unvested restricted stock is included in the computation of diluted EPS using the treasury stock method for fiscal 2005 and 2004, and had no impact on fiscal 2003. The weighted-average number of shares used in the basic earnings per share computations was 31,117,214, 30,876,393, and 34,710,872 for the fiscal years ended January 28, 2006, January 29, 2005, and January 31, 2004, respectively. The weighted-average number of shares representing the dilutive effect of stock options was 672,673, 601,668 and 628,440 for the fiscal years ended January 28, 2006, January 29, 2005, and January 31, 2004, respectively. The weighted-average number of shares used in the diluted earnings per share computations was 31,789,887, 31,478,061, and 35,339,312 for the fiscal years ended January 28, 2006, January 29, 2005, and January 31, 2004, respectively. There were an immaterial number of shares withheld in the computation of diluted earnings per share due to potential anti-dilutive effects for the fiscal years 2005, 2004 and 2003.method.
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Twelve Months Ended | |
| | February 3,
| | | January 28,
| | | February 3,
| | | January 28,
| |
| | 2007 | | | 2006 | | | 2007 | | | 2006 | |
|
Weighted-average shares outstanding | | | 31,326,640 | | | | 31,049,631 | | | | 31,281,163 | | | | 31,117,214 | |
Dilutive effect of: | | | | | | | | | | | | | | | | |
Stock options | | | 545,350 | | | | 542,423 | | | | 512,814 | | | | 547,891 | |
Restricted stock | | | 37,464 | | | | 138,163 | | | | 21,355 | | | | 124,782 | |
Employee stock purchase plan | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Weighted-average shares and common stock equivalents outstanding | | | 31,909,454 | | | | 31,730,217 | | | | 31,815,332 | | | | 31,789,887 | |
| | | | | | | | | | | | | | | | |
30
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Vendor Allowances: The Company receives certain allowances from vendors primarily related to purchase discounts and markdown and damage allowances. All allowances are reflected in cost of goods sold as earned, generally as the related products are sold in accordance with EITFEITF 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” Under this EITF, cash consideration received from a vendor is presumed to be a reduction of the purchase cost of merchandise and should be reflected as a reduction of cost of sales or revenue unless it can be demonstrated this consideration offsets an incremental expense, in which case it can be netted against that expense.sales. The Company does not receive cooperative advertising allowances.
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. A portion of construction, design, and site selection costs are capitalized to new, relocated and remodeled stores.
28
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Closed Store Lease Obligations: At the time stores are closed, provisions are made for the rentals required to be paid over the remaining lease terms, reduced by expected sublease rentals.
Insurance: The Company is self-insured with respect to employee healthcare, workers’ compensation and general liability. The Company’s self-insurance liabilities are based on the total estimated cost of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims, and are not discounted. Management reviews current and historical claims data in developing its estimates. The Company has stop-loss insurance coverage for individual claims in excess of $250,000 for employee healthcare, $350,000 for worker’s compensation and $200,000 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 $10,430,000 $12,110,000 $11,205,000 and $8,995,000$11,205,000 in fiscal 2006, 2005 2004 and 2003,2004, respectively. Accrued healthcare was $1,200,000$814,000 and $1,318,000$1,503,000 and assets held in VEBA trust were $791,000 and $573,000 at February 3, 2007 and $731,000 at January 28, 2006, and January 29, 2005, respectively. The Company paid worker’s compensation and general liability claims of $3,329,000, $2,977,000 $3,227,000 and $3,019,000$3,227,000 in fiscal years 2006, 2005 2004 and 2003,2004, respectively. Including claims incurred, but not yet paid, the Company recognized an expense of $3,971,000, $3,518,000 $3,513,000 and $3,764,000$3,513,000 in fiscal 2006, 2005 2004 and 2003,2004, respectively. Accrued workers’ compensation and general liabilities were $4,602,000 and $4,650,000 at February 3, 2007 and $4,155,000 at January 28, 2006, and January 29, 2005, respectively. The Company had no outstanding letters of credit relating to such claims at January 28, 2006February 3, 2007 or at January 29, 2005.28, 2006.
Fair Value of Financial Instruments: The Company’s carrying values of financial instruments, such as cash and cash equivalents, and debt, approximate their fair values due to their short terms to maturityand/or their variable interest rates.
Stock-based Compensation:Recent Accounting Pronouncements The
Effective January 29, 2006, the Company applies APBbegan recording compensation expense associated with stock options and other forms of equity compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R,Share-Based Payment, as interpreted by SEC Staff Accounting Bulletin No. 107. Prior to January 29, 2006, the Company had accounted for stock options according to the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “AccountingAccounting for Stock Issued to Employees”, and related interpretations, in accountingand therefore no related compensation expense was recorded for its stock option plans. The exercise price for all options awarded under the Company’s Stock Option Plans has been equal to the fair marketawards granted with no intrinsic value of the underlying common stock onat the date of the grant. Accordingly, noThe Company adopted the modified prospective transition method provided under SFAS No. 123R, and, consequently, has not adjusted results from prior periods to retroactively reflect compensation expense. Under this transition method, compensation cost associated with stock options recognized in fiscal 2006 included: 1) quarterly amortization related to the remaining unvested portion of all stock option awards granted prior to January 29, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123; and 2) quarterly amortization related to all stock option awards granted subsequent to January 29, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. The impact on the Company’s consolidated financial statements for fiscal 2006 was an additional compensation expense has been recognized for options granted under the Plans. Had compensation expense for fiscal 2005, 2004, and 2003 stock options granted been determined consistent with SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” the Company’s net income and basic and diluted earnings per share amounts for fiscal 2005, 2004 and 2003 as adjusted for thethree-for-two stock split on June 27, 2005 would approximate the following proforma amounts (dollars in thousands, except per share data):
| | | | | | | | | | | | |
| | January 28,
| | | January 29,
| | | January 31,
| |
| | 2006 | | | 2005 | | | 2004 | |
|
Net Income as Reported | | $ | 44,829 | | | $ | 34,841 | | | $ | 31,014 | |
Add: Stock-Based employee compensation expense included in reported net income, net of related tax effects | | | 435 | | | | 435 | | | | 498 | |
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (513 | ) | | | (499 | ) | | | (1,024 | ) |
| | | | | | | | | | | | |
Pro forma Net Income | | $ | 44,751 | | | $ | 34,777 | | | $ | 30,488 | |
| | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | |
Basic — as reported | | $ | 1.44 | | | $ | 1.13 | | | $ | .89 | |
Basic — pro forma | | $ | 1.44 | | | $ | 1.13 | | | $ | .88 | |
Diluted — as reported | | $ | 1.41 | | | $ | 1.11 | | | $ | .88 | |
Diluted — pro forma | | $ | 1.41 | | | $ | 1.11 | | | $ | .86 | |
of $235,000.
2931
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” This Interpretation prescribes the recognition threshold a tax position is required to meet before being recognized in the financial statements. The weighted-average fair valueInterpretation also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods and disclosure of each option granted duringuncertain tax positions. The Interpretation is effective for fiscal 2005, 2004 and 2003years beginning after December 15, 2006. The Company is estimated at $6.20, $4.23 and $3.89 per share, respectively. The fair valuein the process of each option grant is estimated usingevaluating the Black-Scholes option-pricing model withimpact of the following assumptions for grants issued in 2005, 2004 and 2003, respectively: expected dividend yieldadoption of 2.49%, 3.00% and 3.01%; expected volatility of 37.04%, 38.13% and 44.34%, adjusted for expected dividends; risk-free interest rate of 4.27%, 3.74% and 3.29%; and an expected life of 5 years for 2005, 2004 and 2003.
Recent Accounting Pronouncementsthis Interpretation on the Company’s consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share Based Payment” (SFAS 123(R)). SFAS 123(R) is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” which supersedes Accounting Principles Board (APB) No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS 123(R) requires companies to recognize compensation expense in the income statement for an amount equal to the fair value of the share-based payment issued. This applies to all transactions involving the issuance of equity by a company in exchange for goods and services, including employees. In March 2005,September 2006, the SEC issued Staff Accounting Bulletin No. 107108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements” (SAB 107) outlining108). SAB 108 addresses how the SEC Staff’s interpretationeffects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB 108 requires an entity to quantify misstatements using a balance sheet and income-statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The adoption of SAB 108 is effective for fiscal years ending on or after November 15, 2006. The adoption of SAB 108 did not have a material impact on the Company’s financial statements.
In September 2006, FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact that the adoption of SFAS 123(R). This interpretation provides their views regarding interactions between SFAS 123(R) and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. Subsequently in August, October and November 2005, the FASB released Financial Staff Position (FSP) 123(R)-1, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R),” FSP123(R)-2, “Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R)” and FSP 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” Additionally,157 will have on February 1, 2006, the FASB agreed to issue FSP 123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event.” The FSPs clarify certain accounting provisions set forth in SFAS 123(R). The Company will adhere to the requirements and guidance prescribed in SFAS 123(R), SAB 107 and the FSPs in connection with its adoption in the first quarter of 2006. The Company plans to use the modified prospective method for transitioning to the new Standard. The Company estimates that the impact on 2006 annual earnings will approximate $.00 to $.01 of cost per share for the year associated with the expensing of the fair market value of stock options, issuances of restricted stock, and accounting for discounts associated with the Company’s employee stock purchase plan.financial statements.
Reclassifications2. Interest and Revisions:Other Income: The Consolidated Balance Sheets for the year ended January 29, 2005 reflects an immaterial revision to current deferred income taxes and noncurrent deferred income taxes of $3.2 million. This revision had no effect on the Consolidated Statements of Income or the Consolidated Statements of Cash Flows.
| |
2. | Interest and Other Income: |
The components of Interest and other income are shown below in gross amounts (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 28,
| | January 29,
| | January 31,
| | | February 3,
| | January 28,
| | January 29,
| |
| | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
|
Dividend income | | $ | (17 | ) | | $ | (20 | ) | | $ | (2 | ) | | $ | (23 | ) | | $ | (17 | ) | | $ | (20 | ) |
Interest income | | | (2,593 | ) | | | (1,499 | ) | | | (1,704 | ) | | | (4,221 | ) | | | (2,593 | ) | | | (1,499 | ) |
Hurricane claims settlement | | | | (2,384 | ) | | | — | | | | — | |
Visa/Mastercard claims settlement | | | | (470 | ) | | | — | | | | — | |
Miscellaneous income | | | (1,836 | ) | | | (1,473 | ) | | | (1,235 | ) | | | (2,100 | ) | | | (1,836 | ) | | | (1,473 | ) |
(Gain)/loss investment sales | | | (117 | ) | | | 253 | | | | (673 | ) | | | (399 | ) | | | (117 | ) | | | 253 | |
| | | | | | | | | | | | | | |
Interest and other income | | $ | (4,563 | ) | | $ | (2,739 | ) | | $ | (3,614 | ) | | $ | (9,597 | ) | | $ | (4,563 | ) | | $ | (2,739 | ) |
| | | | | | | | | | | | | | |
30
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
3. | Short-Term Investments: |
Short-Term investments at February 3, 2007 and January 28, 2006 and January 29, 2005 include the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 28, 2006 | | January 29, 2005 | | | February 3, 2007 | | January 28, 2006 | |
| | | | Unrealized
| | Estimated
| | | | Unrealized
| | Estimated
| | | | | Unrealized
| | Estimated
| | | | Unrealized
| | Estimated
| |
Security Type: | | Cost | | Gain/(Loss) | | Fair Value | | Cost | | Gain/(Loss) | | Fair Value | | | Cost | | Gain/(Loss) | | Fair Value | | Cost | | Gain/(Loss) | | Fair Value | |
|
Debt Securities issued by U.S. Treasury & other U.S. government corporations and agencies: | | | | | | | | | | | | | | | | | | | | | | | | | |
With unrealized (loss) | | $ | — | | | $ | — | | | $ | — | | | $ | 3,603 | | | $ | (5 | ) | | $ | 3,598 | | |
Debt Securities issued by states of the United States and political subdivisions of the states: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
With unrealized (loss) | | | 86,207 | | | | (122 | ) | | | 86,085 | | | | 85,087 | | | | (97 | ) | | | 84,990 | | | $ | 98,761 | | | $ | (52 | ) | | $ | 98,709 | | | $ | 86,207 | | | $ | (122 | ) | | $ | 86,085 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 86,207 | | | $ | (122 | ) | | $ | 86,085 | | | $ | 88,690 | | | $ | (102 | ) | | $ | 88,588 | | | $ | 98,761 | | | $ | (52 | ) | | $ | 98,709 | | | $ | 86,207 | | | $ | (122 | ) | | $ | 86,085 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
32
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table above reflects accumulated unrealized losses in short-term investments at February 3, 2007 of $34,000, net of a deferred income tax benefit of $18,000 and accumulated unrealized losses in short-term investments at January 28, 2006 of $78,000, net of a deferred income tax benefit of $44,000$44,000.
Additionally, the Company had $1.9 million invested in privately managed investment funds at February 3, 2007 and accumulated unrealized losses in short-term investments$1.9 million at January 29, 2005 of $65,000, net of a deferred income tax benefit of $37,000.28, 2006, which are reported within other noncurrent assets in the Consolidated Balance Sheets.
Accumulated other comprehensive income in the Consolidated Balance Sheets reflects the accumulated unrealized losses in short-term investments shown above, which at February 3, 2007 was offset by unrealized gains in equity investments of $259,000, net of a deferred income tax liability of $141,000 and at January 28, 2006 was offset by the accumulated unrealized gains in equity investments of $156,000, net of a deferred income tax liability of $88,000 at January 28, 2006 and offset by the accumulated unrealized gains in equity investments of $136,000, net of a deferred income tax liability of $77,000 at January 29, 2005.$88,000. All investments with unrealized losses disclosed were in a loss position for less than 12 months.
As disclosed in Note 2, the Company had realized gains of $399,000 in fiscal 2006, realized gains of $117,000 in fiscal 2005 and realized losses of $253,000 in fiscal 2004 and realized gains of $673,000 in fiscal 2003.2004.
The amortized cost and estimated fair value of debt securities at January 28, 2006,February 3, 2007, by contractual maturity, are shown below (in thousands):
| | | | | | | | | | | | | | | | |
| | | | Estimated
| | | | | Estimated
| |
Security Type | | Cost | | Fair Value | | | Cost | | Fair Value | |
|
Due in one year or less | | $ | 86,207 | | | $ | 86,085 | | | $ | 98,761 | | | $ | 98,709 | |
| | | | | | | | | | |
Total | | $ | 86,207 | | | $ | 86,085 | | | $ | 98,761 | | | $ | 98,709 | |
| | | | | | | | | | |
Additionally, the Company had $1.9 million invested in privately managed investment funds at January 28, 2006 and $1.8 million at January 29, 2005, which are reported within other noncurrent assets in the Consolidated Balance Sheets.
31
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounts receivable consist of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | January 28,
| | January 29,
| | | February 3,
| | January 28,
| |
| | 2006 | | 2005 | | | 2007 | | 2006 | |
|
Customer accounts — principally deferred payment accounts | | $ | 47,581 | | | $ | 53,337 | | | $ | 43,939 | | | $ | 47,581 | |
Miscellaneous trade receivables | | | 5,757 | | | | 3,674 | | | | 5,573 | | | | 5,757 | |
| | | | | | | | | | |
Total | | | 53,338 | | | | 57,011 | | | | 49,512 | | | | 53,338 | |
Less allowance for doubtful accounts | | | 3,694 | | | | 6,122 | | | | 3,554 | | | | 3,694 | |
| | | | | | | | | | |
Accounts receivable — net | | $ | 49,644 | | | $ | 50,889 | | | $ | 45,958 | | | $ | 49,644 | |
| | | | | | | | | | |
During the third quarter of fiscal 2005, the Company revised its process for determining the amount of accounts receivable that should be written off each period. This change in process was consistent with industry and regulatory guidelines and resulted in an acceleration of accounts receivable write-off of approximately $1,700,000. This write-off reduced the gross Accounts Receivable balance and the Allowance for Doubtful Accounts in the third quarter of 2005. Accordingly, this change in process had no effect on the current period’s earnings and management does not expect that the change will have a material effect on the Company’s future earnings or financial position.
Finance charge and late charge revenue on customer deferred payment accounts totaled $10,866,000, $12,507,000 $13,918,000 and $14,169,000$13,918,000 for the fiscal years ended February 3, 2007, January 28, 2006 and January 29, 2005, and January 31, 2004, respectively, and charges against the allowance for doubtful accounts were $2,633,000, $4,650,000 $5,096,000 and $6,098,000$5,096,000 for the fiscal years ended February 3, 2007, January 28, 2006 and January 29, 2005, and January 31, 2004, respectively. Expenses charged relating to the allowance for doubtful accounts are classified as a component of selling, general and administrative expenses in the accompanying Consolidated Statements of Income.
33
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
5. | Property and Equipment: |
Property and equipment consist of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | January 28,
| | January 29,
| | | February 3,
| | January 28,
| |
| | 2006 | | 2005 | | | 2007 | | 2006 | |
|
Land and improvements | | $ | 3,266 | | | $ | 2,019 | | | $ | 3,266 | | | $ | 3,266 | |
Buildings | | | 17,758 | | | | 17,751 | | | | 17,990 | | | | 17,758 | |
Leasehold improvements | | | 48,084 | | | | 43,317 | | | | 51,308 | | | | 48,084 | |
Fixtures and equipment | | | 145,965 | | | | 133,484 | | | | 158,614 | | | | 145,965 | |
Information Technology equipment and software | | | 43,276 | | | | 36,883 | | | | 45,594 | | | | 43,276 | |
Construction in progress | | | 2,186 | | | | 4,015 | | | | 2,833 | | | | 2,186 | |
| | | | | | | | | | |
Total | | | 260,535 | | | | 237,469 | | | | 279,605 | | | | 260,535 | |
Less accumulated depreciation | | | 136,431 | | | | 119,879 | | | | 151,144 | | | | 136,431 | |
| | | | | | | | | | |
Property and equipment — net | | $ | 124,104 | | | $ | 117,590 | | | $ | 128,461 | | | $ | 124,104 | |
| | | | | | | | | | |
Construction in progress primarily represents costs related to a newpoint-of-sale system, the implementation of which is expected to be implementedcompleted in 2006.2007.
32
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accrued expenses consist of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | January 28,
| | January 29,
| | | February 3,
| | January 28,
| |
| | 2006 | | 2005 | | | 2007 | | 2006 | |
|
Accrued payroll and related items | | $ | 7,728 | | | $ | 7,189 | | | $ | 5,524 | | | $ | 7,728 | |
Accrued advertising | | | 1,013 | | | | 963 | | | | 504 | | | | 1,013 | |
Property and other taxes | | | 10,825 | | | | 10,539 | | | | 11,446 | | | | 10,825 | |
Accrued insurance | | | 6,059 | | | | 5,572 | | | | 5,227 | | | | 6,059 | |
Other | | | 6,342 | | | | 6,954 | | | | 6,825 | | | | 6,342 | |
| | | | | | | | | | |
Total | | $ | 31,967 | | | $ | 31,217 | | | $ | 29,526 | | | $ | 31,967 | |
| | | | | | | | | | |
| |
7. | Financing Arrangements: |
At January 28, 2006,February 3, 2007, the Company had an unsecured revolving credit agreement which provided for borrowings of up to $35 million. This revolving credit agreement was entered into on August 22, 2003 and wasis committed until August 2008. The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of January 28, 2006.February 3, 2007. There were no borrowings outstanding under this facility during the fiscal year ended February 3, 2007 or January 28, 2006 or January 29, 2005.2006. Interest is based on LIBOR, which was 4.57%5.32% on January 28, 2006.February 3, 2007.
On August 22, 2003, the Company entered into an unsecured $30 million five-year term loan facility, the proceeds of which were used to purchase Class B Common Stock from the Company’s founders. Payments were due in monthly installments of $500,000 plus accrued interest. Interest was based on LIBOR. On April 5, 2005, the Company repaid the remaining balance of $20.5 million on this loan facility. With the early retirement of this loan, the Company had no outstanding long-term debt as of February 3, 2007 or January 28, 2006.
The Company had approximately $4,533,000 and $2,790,000 at February 3, 2007 and $3,469,000 at January 28, 2006, and January 29, 2005, respectively, of outstanding irrevocable letters of credit relating to purchase commitments.
34
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 certificate of incorporation 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. As reflected in the Consolidated Statements of Stockholders’ Equity, all Class B Common Stock held as treasury stock by the Company have been converted to an equal number of shares of Class A Common Stock.
During 2005, the Company canceled 6,136,354 shares of Class A Common Stock held as treasury stock.
33
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2005, the Company repurchased 186,531 shares of Class A Common Stock for $3,535,510, or an average price per share of $18.95.
During 2003, the Company repurchased 5,137,484 shares of Class B Common Stock from a limited partnership and trust affiliated with Wayland H. Cato, Jr., a Company founder and then Chairman of the Board, and a limited partnership affiliated with Edgar T. Cato, a Company founder and a then member ofIn April 2004, the Board of Directors. Shares were purchased at $18.50 per share for a total costDirectors adopted the 2004 Incentive Compensation Plan, of $95,043,454. Including related expenseswhich 1,350,000 shares are issuable. As of $520,000 for investment banking and related professional fees, the total cost was $95,563,454 or an average purchase price of $18.60 per share. The repurchase was funded by the Company through a new $30 million five-year term loan facility and approximately $65 million of cash and liquidated short-term investments. Additionally, during 2003, the Company repurchased 165,000February 3, 2007, 258,382 shares of Class A Common Stock for $2,740,619, or an average market price of $16.61 per share.had been granted from this Plan.
In May 2003, the shareholders approved a new 2003 Employee Stock Purchase Plan with 250,000 Class A shares of Common Stock authorized. 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, up to a maximum market value of $25,000 per year. 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 22,873 shares, 28,684 shares 40,965 shares and 42,45940,965 shares for the years ended February 3, 2007, January 28, 2006 and January 29, 2005, and January 31, 2004, respectively.
In December 2003, the Board of Directors authorized a dividend of one preferred share purchase right (a “Right”) for each share of Class A Common Stock and Class B Common Stock, each par value $.031/3$.033 per share of the Company outstanding at the close of business on January 7, 2004. In connection with the authorization of the Rights, the Company entered into a Rights Agreement, dated as of December 18, 2003 (the “Rights Agreement”), with Wachovia Bank, National Association, a national banking association,American Stock Transfer & Trust Company, as Rights Agent (the “Rights Agent”).
The Company hasadopted in 1987 an Incentive Compensation Plan and a Non-Qualified Stock Option Plan for key employees of the Company. Total shares issuable under the plans are 5,850,000, of which 1,237,500 shares were issuable under the Incentive Compensation Plan and 4,612,500 shares are issuable under the Non-Qualified Stock Option Plan. The purchase price of the shares under thean 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 a5-year period and expire 10 years after the date of the grant unless otherwise expressly authorized by the Board of Directors. As of January 28, 2006, 5,843,273February 3, 2007, 5,840,723 shares had been granted under the plans.
In August 1999, the Board of Directors adopted the 1999 Incentive Compensation Plan, of which 1,000,000 shares are issuable. NoThe ability to grant awards may be granted afterunder the 1999 Plan expired on July 31, 2004 and shares must be exercised within 10 years of the grant date unless otherwise authorized by the Board of Directors.2004.
In August 1999,May 2002, the Board of Directors approved and granted to a key executive under the 1999 Incentive Compensation Plan restricted stock awards of 150,000 shares of Class B Common Stock, with a per share fair value of $7.87 to a key executive. In May 2002, the Board of Directors approved and granted under the 1999 Incentive Compensation Plan restricted stock awards of 150,000 shares of Class B Common Stock, with a per share fair value of $18.21 to a key executive.$18.21. These stock awards cliff vestvested after 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 $682,000,$229,000, $682,000 and $782,000$682,000 in fiscal 2006, 2005 and 2004, and 2003, respectively.
In April 2004, the Board of Directors adopted the 2004 Incentive Compensation Plan, of which 1,300,500 shares are issuable. As of January 28, 2006, 49,500February 3, 2007, all such shares had been granted from this Plan.were fully vested.
3435
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Option plan activity for the three fiscal years ended January 28, 2006February 3, 2007 is set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Weighted
| | | | | | | Weighted
| |
| | | | Range of
| | Average
| | | | | Range of
| | Average
| |
| | Options | | Option Prices | | Price | | | Options | | Option Prices | | Price | |
| |
Outstanding options, | | | | | | | | | | | | | |
February 1, 2003 | | | 2,162,925 | | | $ | 3.29 – $17.84 | | | $ | 7.47 | | |
Granted | | | 29,250 | | | | 11.10 – 14.19 | | | | 11.77 | | |
Exercised | | | (432,375 | ) | | | 3.29 – 12.57 | | | | 6.63 | | |
Cancelled | | | (28,200 | ) | | | 5.50 – 12.57 | | | | 8.50 | | |
| | | | | | | |
Outstanding options, | | | | | | | | | | | | | | | | | | | | | | | | |
January 31, 2004 | | | 1,731,600 | | | | 3.42 – 17.84 | | | | 7.69 | | | | 1,731,600 | | | $ | 3.42 – $17.84 | | | $ | 7.69 | |
Granted | | | 113,625 | | | | 13.09 – 15.42 | | | | 14.37 | | | | 113,625 | | | | 13.09 – 15.42 | | | | 14.37 | |
Exercised | | | (294,000 | ) | | | 3.42 – 14.01 | | | | 7.98 | | | | (294,000 | ) | | | 3.42 – 14.01 | | | | 7.98 | |
Cancelled | | | (45,900 | ) | | | 6.39 – 14.60 | | | | 11.51 | | | | (45,900 | ) | | | 6.39 – 14.60 | | | | 11.51 | |
| | | | | | | | | | | | | | |
Outstanding options, | | | | | | | | | | | | | | | | | | | | | | | | |
January 29, 2005 | | | 1,505,325 | | | | 5.13 – 17.84 | | | | 8.05 | | | | 1,505,325 | | | | 5.13 – 17.84 | | | | 8.05 | |
Granted | | | 20,750 | | | | 18.96 – 21.75 | | | | 20.05 | | | | 22,250 | | | | 18.96 – 21.75 | | | | 20.05 | |
Exercised | | | (172,025 | ) | | | 5.13 – 17.84 | | | | 7.63 | | | | (172,025 | ) | | | 5.13 – 17.84 | | | | 7.63 | |
Cancelled | | | (12,150 | ) | | | 11.50 – 20.50 | | | | 14.62 | | | | (12,150 | ) | | | 11.50 – 20.50 | | | | 14.62 | |
| | | | | | | | | | | | | | |
Outstanding options, | | | | | | | | | | | | | | | | | | | | | | | | |
January 28, 2006 | | | 1,341,900 | | | $ | 5.50 – $21.75 | | | $ | 8.23 | | | | 1,343,400 | | | | 5.50 – 21.75 | | | | 8.23 | |
Granted | | | | — | | | | — | | | | — | |
Exercised | | | | (95,775 | ) | | | 5.50 – 21.37 | | | | 10.12 | |
Cancelled | | | | (10,950 | ) | | | 13.47 – 21.37 | | | | 17.24 | |
| | | | | | | | | | | | | | |
Outstanding options, | | | | | | | | | | | | | |
February 3, 2007 | | | | 1,236,675 | | | $ | 5.50 – $21.75 | | | $ | 8.01 | |
| | | | | | | | |
The following tables summarize stock option information at January 28, 2006:February 3, 2007:
| | | | | | | | | | | | |
| | Options Outstanding |
| | | | Weighted Average
| | Weighted
|
Range of
| | | | Remaining
| | Average
|
Exercise Prices | | Options | | Contractual Life | | Exercise Price |
|
$ 5.50 – $ 9.42 | | | 1,175,300 | | | | 2.37 years | | | $ | 7.35 | |
11.10 – 14.79 | | | 122,775 | | | | 7.57 years | | | | 13.32 | |
15.08 – 19.99 | | | 37,825 | | | | 8.60 years | | | | 16.81 | |
21.37 – 21.75 | | | 6,000 | | | | 9.08 years | | | | 21.47 | |
| | | | | | | | | | | | |
$ 5.50 – $21.75 | | | 1,341,900 | | | | 3.05 years | | | $ | 8.23 | |
| | | | | | | | | | | | |
| | | | | | | | |
| | Options Exercisable |
| | | | Weighted
|
Range of
| | | | Average
|
Exercise Prices | | Options | | Exercise Price |
|
$ 5.50 – $ 9.42 | | | 1,175,300 | | | $ | 7.35 | |
11.10 – 14.79 | | | 29,100 | | | | 12.88 | |
15.08 – 19.99 | | | 6,875 | | | | 16.31 | |
21.37 – 21.75 | | | 0 | | | | N/A | |
| | | | | | | | |
$ 5.50 – $21.75 | | | 1,211,275 | | | $ | 7.54 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | | Options Exercisable | |
| | | | | | Weighted Average
| | | Weighted
| | | | | | Weighted
| |
Range of
| | | | | | Remaining
| | | Average
| | | | | | Average
| |
Exercise Prices | | | Options | | | Contractual Life | | | Exercise Price | | | Options | | | Exercise Price | |
|
$ | 5.50 – $ 9.42 | | | | 1,119,850 | | | | 1.32 years | | | $ | 7.35 | | | | 1,119,850 | | | $ | 7.35 | |
| 11.10 – 14.79 | | | | 87,000 | | | | 6.58 years | | | | 13.28 | | | | 36,000 | | | | 12.83 | |
| 15.08 – 19.99 | | | | 28,325 | | | | 7.77 years | | | | 17.19 | | | | 9,550 | | | | 17.01 | |
| 21.75 – 21.75 | | | | 1,500 | | | | 8.88 years | | | | 21.75 | | | | 300 | | | | 21.75 | |
| | | | | | | | | | | | | | | | | | | | | | |
$ | 5.50 – $21.75 | | | | 1,236,675 | | | | 1.84 years | | | $ | 8.01 | | | | 1,165,700 | | | $ | 7.61 | |
| | | | | | | | | | | | | | | | | | | | | | |
Outstanding options at February 3, 2007 covered 1,053,000 shares of Class B Common Stock and 183,675 shares of Class A Common Stock. Outstanding options at January 28, 2006 covered 1,053,000 shares of Class B Common Stock and 288,900290,400 shares of Class A Common Stock. Outstanding options at January 29, 2005 covered 1,053,000 shares
35
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of Class B CommonSee Note 15 to the Consolidated Financial Statements for further information on the Company’s Stock and 452,325 shares of Class A Common Stock. Options available to be granted under the option plans were 1,307,227 at January 28, 2006 and 1,320,477 at January 29, 2005.Based Compensation.
On May 26, 2005 the Board of Directors approved athree-for-two stock split in the form of a stock dividend of the Company’s Class A and Class B Common Stock effective June 27, 2005. Additionally, on May 26, 2005,25, 2006 the Board of Directors increased the quarterly dividend by 11%15% from $.175$.13 per share to $.195$.15 per share, or an annualized rate of $.78$.60 per share on a pre-split basis. On a post-split basis, the annualized rate is $.52 per share.
Total comprehensive income for the years ended January 28, 2006, January 29, 2005 and January 31, 2004 is as follows (in thousands):
| | | | | | | | | | | | |
| | January 28,
| | | January 29,
| | | January 31,
| |
Fiscal Year Ended | | 2006 | | | 2005 | | | 2004 | |
|
Net income | | $ | 44,829 | | | $ | 34,841 | | | $ | 31,014 | |
Unrealized gains (losses) onavailable-for-sale securities | | | 10 | | | | 20 | | | | (306 | ) |
Income tax effect | | | 3 | | | | 7 | | | | (111 | ) |
| | | | | | | | | | | | |
Unrealized gains (losses) net of taxes | | | 7 | | | | 13 | | | | (195 | ) |
| | | | | | | | | | | | |
Total comprehensive income | | $ | 44,836 | | | $ | 34,854 | | | $ | 30,819 | |
| | | | | | | | | | | | |
The net unrealized gain/loss on investments held reflected in comprehensive income for the periods presented were net of reclassification adjustments for gains/(losses) reported in income in the amounts of $75,000, ($161,000) and $429,000 for fiscal years 2005, 2004 and 2003, respectively, net of income taxes.
| |
9. | 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 60% of their annual compensation up to the maximum elective deferral, designated by the IRS. The Company is obligated to
36
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2007, January 28, 2006 and January 29, 2005 and January 31, 2004 were approximately $1,455,000, $1,589,000 $1,663,000 and $1,764,000,$1,663,000, respectively.
The Company has an Employee Stock Ownership Plan (“ESOP”), which covers substantially all employees who meet minimum age and service requirements. The Board of Directors determines contributions to the ESOP. The Company’s contributions for the years ended February 3, 2007, January 28, 2006 and January 29, 2005 and January 31, 2004 were approximately $1,789,000, $5,637,000 $0 and $0, respectively.
The Company is primarily self-insured for healthcare, workers’ compensation and general liability costs. These costs are significant primarily due to the large number of the Company’s retail locations and employees. The Company’s self-insurance liabilities are based on the total estimated costs of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims, and are not discounted. Management reviews current and historical claims data in developing its estimates. If the underlying facts and circumstances of the claims change or the historical trend is not indicative of future trends, then the Company may be required to record additional expense or a reduction to expense which could be material to the Company’s reported financial condition and results of operations. The Company has stop-loss insurance coverage for individual claims in excess of $250,000. Employee health claims are funded through a VEBA trust to which the Company makes periodic contributions. Contributions to the VEBA trust were $12,110,000, $11,205,000 and $8,995,000 in fiscal 2005, 2004 and 2003, respectively. Accrued liabilities for healthcare costs were $1,200,000, $1,318,000 and assets held in the VEBA trust were $573,000 and $731,000 at January 28, 2006 and January 29, 2005, respectively.
36
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has operating lease arrangements for store facilities and equipment. Facility leases generally are fixed rate 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. For leases with landlord capital improvement funding, the funded amount is recorded as a deferred liability and amortized over the term of the lease as a reduction to rent expense on the Consolidated Statements of Income. Equipment leases are generally for one to three year periods.
The minimum rental commitments under non-cancelable operating leases are (in thousands):
| | | �� | | | | | |
Fiscal Year | | | | | | |
|
2006 | | $ | 49,599 | | |
2007 | | | 39,213 | | | $ | 51,001 | |
2008 | | | 27,726 | | | | 39,103 | |
2009 | | | 16,100 | | | | 26,462 | |
2010 | | | 8,021 | | | | 16,904 | |
2011 + | | | 57 | | |
2011 | | | | 8,235 | |
Thereafter | | | | 29 | |
| | | | | | |
Total minimum lease payments | | $ | 140,716 | | | $ | 141,734 | |
| | | | | | |
The following schedule shows the composition of total rental expense for all leases (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 28,
| | January 29,
| | January 31,
| | | February 3,
| | January 28,
| | January 29,
| |
Fiscal Year Ended | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
|
Minimum rentals | | $ | 47,278 | | | $ | 44,493 | | | $ | 39,998 | | | $ | 49,169 | | | $ | 47,278 | | | $ | 44,493 | |
Contingent rent | | | 74 | | | | 85 | | | | 165 | | | | 106 | | | | 74 | | | | 85 | |
| | | | | | | | | | | | | | |
Total rental expense | | $ | 47,352 | | | $ | 44,578 | | | $ | 40,163 | | | $ | 49,275 | | | $ | 47,352 | | | $ | 44,578 | |
| | | | | | | | | | | | | | |
| |
11. | Related Party Transactions: |
The Company leases certain stores from entities in which Mr. George S. Currin, a director of the Company has a controlling or non-controlling ownership interest. Rent expense and related charges totaling $371,716, $303,612 $286,860 and $261,660$286,860 were paid to entities controlled by Mr. Currin or his family in fiscal 2006, 2005, 2004, and 2003, 2004,
37
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
respectively, under these leases. Rent expense and related charges totaling $939,443, $770,563 $800,929 and $610,947$800,929 were paid to entities in which Mr. Currin or his family had a non-controlling ownership interest in fiscal 2006, 2005, 2004, and 2003,2004, respectively, under these leases.
37
THE CATO CORPORATION
In November 2006, the Company received $6,996,021 as payment for the purchase of a split-dollar life insurance policy by The Wayland H. Cato, Jr. Irrevocable Trust, the grantor of which is Wayland H. Cato, Jr., a Company founder and Chairman Emeritus. Mr. Cato was the insured and owned 50% of the death benefit, while the Company owned the policy and any cash value associated with it and 50% of the death benefit. The purchase was made under an agreement between the Company and the trust that allowed the trust to purchase the policy within three years of the date of Mr. Cato’s termination of employment for an amount equal to the policy’s cash value as of the date of transfer to the trust. Mr. Cato’s employment with the Company terminated January 31, 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provision for income taxes consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 28,
| | January 29,
| | January 31,
| | | February 3,
| | January 28,
| | January 29,
| |
Fiscal Year Ended | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
|
Current income taxes: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | $ | 26,983 | | | $ | 19,283 | | | $ | 11,440 | | | $ | 26,480 | | | $ | 27,895 | | | $ | 20,142 | |
State | | | 1,311 | | | | 535 | | | | 337 | | | | 1,205 | | | | 1,311 | | | | 535 | |
| | | | | | | | | | | | | | |
Total | | | 28,294 | | | | 19,818 | | | | 11,777 | | | | 27,685 | | | | 29,206 | | | | 20,677 | |
| | | | | | | | | | | | | | |
Deferred income taxes: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | | (3,271 | ) | | | (735 | ) | | | 4,048 | | | | 443 | | | | (3,271 | ) | | | (735 | ) |
State | | | (389 | ) | | | (88 | ) | | | 482 | | | | 53 | | | | (389 | ) | | | (88 | ) |
| | | | | | | | | | | | | | |
Total | | | (3,660 | ) | | | (823 | ) | | | 4,530 | | | | 496 | | | | (3,660 | ) | | | (823 | ) |
| | | | | | | | | | | | | | |
Allocation of tax benefits to capital stock for stock options exercised | | | 912 | | | | 859 | | | | 1,366 | | |
| | | | | | | | |
Total income tax expense | | $ | 25,546 | | | $ | 19,854 | | | $ | 17,673 | | | $ | 28,181 | | | $ | 25,546 | | | $ | 19,854 | |
| | | | | | | | | | | | | | |
Significant components of the Company’s deferred tax assets and liabilities as of February 3, 2007 and January 28, 2006 and January 29, 2005 are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | January 28,
| | January 29,
| | | February 3,
| | January 28,
| |
| | 2006 | | 2005 | | | 2007 | | 2006 | |
|
Deferred tax assets: | | | | | | | | | | | | | | | | |
Bad debt reserve | | $ | 1,417 | | | $ | 2,338 | | | $ | 1,364 | | | $ | 1,417 | |
Inventory valuation | | | 1,870 | | | | 1,643 | | | | 1,830 | | | | 1,870 | |
Restricted stock options | | | 941 | | | | 684 | | | | 184 | | | | 941 | |
Deferred lease liability | | | 5,325 | | | | 4,998 | | | | 5,277 | | | | 5,325 | |
Capital loss carryover | | | 393 | | | | 446 | | | | 393 | | | | 393 | |
Reserves | | | 4,815 | | | | 4,856 | | | | 4,828 | | | | 4,815 | |
Other | | | – | | | | 830 | | |
| | | | | | | | | | |
Total deferred tax assets | | | 14,761 | | | | 15,795 | | | | 13,876 | | | | 14,761 | |
| | | | | | | | | | |
Deferred tax liabilities: | | | | | | | | | | | | | | | | |
Fixed assets | | | 14,048 | | | | 19,442 | | | | 13,489 | | | | 14,048 | |
Unrealized gains on short-term investments | | | 44 | | | | 40 | | | | 123 | | | | 44 | |
Other | | | 1,404 | | | | 704 | | | | 1,573 | | | | 1,404 | |
| | | | | | | | | | |
Total deferred tax liabilities | | | 15,496 | | | | 20,186 | | | | 15,185 | | | | 15,496 | |
| | | | | | | | | | |
Net deferred tax liabilities | | $ | 735 | | | $ | 4,391 | | | $ | 1,309 | | | $ | 735 | |
| | | | | | | | | | |
38
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Capital loss carryovers included in the Company’s deferred tax assets have a limited life and will expire in 20082009 if not utilized. The Company believes realization is more likely than not.
38
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The reconciliation of the Company’s effective income tax rate with the statutory rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 28,
| | January 29,
| | January 31,
| | | February 3,
| | January 28,
| | January 29,
| |
Fiscal Year Ended | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
|
Federal income tax rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
State income taxes | | | 1.3 | | | | 1.3 | | | | 1.3 | | | | 2.4 | | | | 3.2 | | | | 2.1 | |
Other | | | | (2.0 | ) | | | (1.9 | ) | | | (0.8 | ) |
| | | | | | | | | | | | | | |
Effective income tax rate | | | 36.3 | % | | | 36.3 | % | | | 36.3 | % | | | 35.4 | % | | | 36.3 | % | | | 36.3 | % |
| | | | | | | | | | | | | | |
The Company records liabilities for uncertain tax positions principally related to state income taxes.taxes as of the balance sheet date. These liabilities reflect the Company’s best estimate of the ultimate income tax liabilities based on facts and circumstances. Changes in factsand/or settlements with individual states related to previously filed tax returns could result in material adjustment to the estimated liabilities recorded.recorded as of the balance sheet date.
| |
13. | Quarterly Financial Data (Unaudited): |
Summarized quarterly financial results are as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal 2005 | | First | | Second | | Third | | Fourth | | |
Fiscal 2006 | | | First | | Second | | Third | | Fourth | |
|
Retail sales | | $ | 215,064 | | | $ | 208,316 | | | $ | 177,762 | | | $ | 220,497 | | | $ | 229,741 | | | $ | 214,633 | | | $ | 187,727 | | | $ | 230,712 | |
Total revenues | | | 218,927 | | | | 211,964 | | | | 181,354 | | | | 224,136 | | | | 233,060 | | | | 217,845 | | | | 190,882 | | | | 234,097 | |
Cost of goods sold (exclusive of depreciation) | | | 136,434 | | | | 140,426 | | | | 119,869 | | | | 150,226 | | | | 142,113 | | | | 143,746 | | | | 127,229 | | | | 159,625 | |
Income before income taxes | | | 28,911 | | | | 16,809 | | | | 6,385 | | | | 18,270 | | | | 32,754 | | | | 19,044 | | | | 9,133 | | | | 18,698 | |
Net income | | | 18,416 | | | | 10,707 | | | | 4,067 | | | | 11,638 | | | | 20,799 | | | | 12,093 | | | | 5,861 | | | | 12,696 | |
Basic earnings per share | | $ | 0.59 | | | $ | 0.34 | | | $ | 0.13 | | | $ | 0.37 | | | $ | 0.67 | | | $ | 0.39 | | | $ | 0.19 | | | $ | 0.41 | |
Diluted earnings per share | | $ | 0.58 | | | $ | 0.34 | | | $ | 0.13 | | | $ | 0.37 | | | $ | 0.65 | | | $ | 0.38 | | | $ | 0.18 | | | $ | 0.40 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal 2004 | | First | | Second | | Third | | Fourth | | |
Fiscal 2005 | | | First | | Second | | Third | | Fourth | |
|
Retail sales | | $ | 205,193 | | | $ | 197,068 | | | $ | 163,611 | | | $ | 207,937 | | | $ | 215,064 | | | $ | 208,316 | | | $ | 177,762 | | | $ | 220,497 | |
Total revenues | | | 209,201 | | | | 200,884 | | | | 167,514 | | | | 212,005 | | | | 218,927 | | | | 211,964 | | | | 181,354 | | | | 224,136 | |
Cost of goods sold (exclusive of depreciation) | | | 132,398 | | | | 136,185 | | | | 115,640 | | | | 144,693 | | | | 136,434 | | | | 140,426 | | | | 119,869 | | | | 150,226 | |
Income before income taxes | | | 26,372 | | | | 12,777 | | | | 2,825 | | | | 12,721 | | | | 28,911 | | | | 16,809 | | | | 6,385 | | | | 18,270 | |
Net income | | | 16,799 | | | | 8,139 | | | | 1,800 | | | | 8,103 | | | | 18,416 | | | | 10,707 | | | | 4,067 | | | | 11,638 | |
Basic earnings per share | | $ | 0.55 | | | $ | 0.26 | | | $ | 0.06 | | | $ | 0.26 | | | $ | 0.59 | | | $ | 0.34 | | | $ | 0.13 | | | $ | 0.37 | |
Diluted earnings per share | | $ | 0.54 | | | $ | 0.25 | | | $ | 0.06 | | | $ | 0.26 | | | $ | 0.58 | | | $ | 0.34 | | | $ | 0.13 | | | $ | 0.37 | |
39
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
14. | Reportable Segment Information: |
The Company has two reportable segments: retail and credit. The Company operates its women’s fashion specialty retail stores in 31 states, principally in southeastern United States. 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 2006 | | Retail | | | Credit | | | Total | |
|
Revenues | | $ | 864,987 | | | $ | 10,898 | | | $ | 875,885 | |
Depreciation | | | 20,849 | | | | 92 | | | | 20,941 | |
Interest and other income | | | (9,597 | ) | | | 0 | | | | (9,597 | ) |
Income before taxes | | | 74,772 | | | | 4,859 | | | | 79,631 | |
Total assets | | | 368,786 | | | | 63,536 | | | | 432,322 | |
Capital expenditures | | | 27,483 | | | | 64 | | | | 27,547 | |
| | | | | | | | | | | | |
Fiscal 2005 | | Retail | | | Credit | | | Total | |
|
Revenues | | $ | 823,685 | | | $ | 12,696 | | | $ | 836,381 | |
Depreciation | | | 20,173 | | | | 102 | | | | 20,275 | |
Interest and other income | | | (4,563 | ) | | | 0 | | | | (4,563 | ) |
Income before taxes | | | 65,682 | | | | 4,693 | | | | 70,375 | |
Total assets | | | 339,788 | | | | 66,848 | | | | 406,636 | |
Capital expenditures | | | 28,477 | | | | 35 | | | | 28,512 | |
| | | | | | | | | | | | |
Fiscal 2004 | | Retail | | | Credit | | | Total | |
|
Revenues | | $ | 775,421 | | | $ | 14,183 | | | $ | 789,604 | |
Depreciation | | | 20,320 | | | | 77 | | | | 20,397 | |
Interest and other income | | | (2,739 | ) | | | 0 | | | | (2,739 | ) |
Income before taxes | | | 49,268 | | | | 5,427 | | | | 54,695 | |
Total assets | | | 332,199 | | | | 65,124 | | | | 397,323 | |
Capital expenditures | | | 25,102 | | | | 199 | | | | 25,301 | |
| | | | | | | | | | | | |
Fiscal 2003 | | Retail | | | Credit | | | Total | |
|
Revenues | | $ | 732,796 | | | $ | 14,471 | | | $ | 747,267 | |
Depreciation | | | 18,617 | | | | 78 | | | | 18,695 | |
Interest and other income | | | (3,614 | ) | | | 0 | | | | (3,614 | ) |
Income before taxes | | | 43,963 | | | | 4,724 | | | | 48,687 | |
Total assets | | | 293,911 | | | | 62,373 | | | | 356,284 | |
Capital expenditures | | | 20,549 | | | | 4 | | | | 20,553 | |
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 to the credit segment.
The following schedule summarizes the credit segment and related direct expenses which are reflected in selling, general and administrative expenses (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 28,
| | January 29,
| | January 31,
| | | February 3,
| | January 28,
| | January 29,
| |
| | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | |
|
Bad debt expense | | $ | 4,650 | | | $ | 5,096 | | | $ | 6,098 | | | $ | 2,633 | | | $ | 4,650 | | | $ | 5,096 | |
Payroll | | | 1,043 | | | | 1,142 | | | | 1,101 | | | | 1,008 | | | | 1,043 | | | | 1,142 | |
Postage | | | 1,061 | | | | 1,075 | | | | 1,131 | | | | 1,034 | | | | 1,061 | | | | 1,075 | |
Other expenses | | | 1,147 | | | | 1,366 | | | | 1,339 | | | | 1,272 | | | | 1,147 | | | | 1,366 | |
| | | | | | | | | | | | | | |
Total expenses | | $ | 7,901 | | | $ | 8,679 | | | $ | 9,669 | | | $ | 5,947 | | | $ | 7,901 | | | $ | 8,679 | |
| | | | | | | | | | | | | | |
40
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
15. | Stock Based Compensation: |
Effective January 29, 2006, the Company began recording compensation expense associated with stock options and other forms of equity compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R,Share-Based Payment, as interpreted by SEC Staff Accounting Bulletin No. 107. Prior to January 29, 2006, the Company had accounted for stock options according to the provisions of Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations, and therefore no related compensation expense was recorded for awards granted with no intrinsic value at the date of the grant. The Company adopted the modified prospective transition method provided under SFAS No. 123R, and, consequently, has not adjusted results from prior periods to retroactively reflect compensation expense. Under this transition method, compensation cost associated with stock options recognized in fiscal 2006 includes: 1) quarterly amortization related to the remaining unvested portion of all stock option awards granted prior to January 29, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123; and 2) quarterly amortization related to all stock option awards granted subsequent to January 29, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.
As of February 3, 2007, the Company had three long-term compensation plans pursuant to which stock-based compensation was outstanding or could be granted. The Company’s 1987 Non-Qualified Stock Option Plan authorized 5,850,000 shares for the granting of options to officers and key employees. The 1999 Incentive Compensation Plan and 2004 Incentive Compensation Plan authorized 1,000,000 and 1,350,000 shares, respectively, for the granting of various forms of equity-based awards, including restricted stock and stock options to officers and key employees. The 1999 Plan has expired as to the ability to grant new awards.
The following table presents the number of options and shares of restricted stock initially authorized and available to grant under each of the plans as of February 3, 2007:
| | | | | | | | | | | | | | | | |
| | 1987
| | | 1999
| | | 2004
| | | | |
| | Plan | | | Plan | | | Plan | | | Total | |
|
Optionsand/or restricted stock initially authorized | | | 5,850,000 | | | | 1,000,000 | | | | 1,350,000 | | | | 8,200,000 | |
Optionsand/or restricted stock available for grant: | | | | | | | | | | | | | | | | |
January 28, 2006 | | | 5,227 | | | | — | | | | 1,300,500 | | | | 1,305,727 | |
February 3, 2007 | | | 9,277 | | | | — | | | | 1,091,618 | | | | 1,100,895 | |
Stock option awards outstanding under the Company’s current plans were granted at exercise prices which were equal to the market value of the Company’s stock on the date of grant, vest over five years and expire no later than ten years after the grant date.
The following is a summary of the changes in stock options outstanding during the twelve months ended February 3, 2007:
| | | | | | | | | | | | | | | | |
| | | | | | | | Weighted Average
| | | Aggregate
| |
| | | | | Weighted Average
| | | Remaining Contractual
| | | Intrinsic
| |
| | Shares | | | Exercise Price | | | Term | | | Value(a) | |
|
Options outstanding at January 28, 2006 | | | 1,343,400 | | | $ | 8.23 | | | | 3.05 years | | | | | |
Granted | | | — | | | | — | | | | — | | | | | |
Forfeited or expired | | | (10,950 | ) | | | | | | | | | | | | |
Exercised | | | (95,775 | ) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at February 3, 2007 | | | 1,236,675 | | | $ | 8.01 | | | | 1.86 years | | | $ | 18,363,084 | |
Vested and exercisable at February 3, 2007 | | | 1,165,700 | | | $ | 7.61 | | | | 1.52 years | | | $ | 17,784,759 | |
| | |
(a) | | The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. |
41
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
No options were granted in fiscal 2006 and there were 22,250 options granted in fiscal 2005. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions.
| | | | |
| | Twelve Months Ended | |
| | January 28,
| |
| | 2006 | |
|
Risk free interest rate | | | 4.27 | % |
Expected life | | | 5.0 | years |
Expected volatility | | | 37.04 | % |
Expected dividend yield | | | 2.49 | % |
Weighted-average grant date fair value per share | | | $6.20 | |
As of February 3, 2007, there was approximately $297,000 of total unrecognized compensation cost related to nonvested options, which is expected to be recognized over a remaining weighted-average vesting period of 2.33 years. The total intrinsic value of options exercised during the fourth quarter and twelve months ended February 3, 2007 was approximately $436,000 and $1,289,000, respectively.
Effective January 29, 2006, the Company began recognizing share-based compensation expense ratably over the vesting period, net of estimated forfeitures. The Company recognized share-based compensation expense of $355,000 and $1,338,000 for the fourth quarter and twelve month period ended February 3, 2007, respectively, which was classified as a component of selling, general and administrative expenses. No share-based compensation expense was recognized prior to January 29, 2006 except for the amortization of restricted stock grants.
Had stock-based compensation costs been determined based on the fair value at the grant dates, consistent with SFAS No. 123R prior to January 29, 2006, the Company’s net income and earnings per share would have been adjusted to the pro forma amounts indicated below:
| | | | | | | | |
| | Fiscal Year Ended | |
| | January 28,
| | | January 29,
| |
| | 2006 | | | 2005 | |
|
Net Income as Reported | | $ | 44,829 | | | $ | 34,841 | |
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | | | 435 | | | | 435 | |
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (513 | ) | | | (499 | ) |
| | | | | | | | |
Pro forma Net Income | | $ | 44,751 | | | $ | 34,777 | |
Earnings per share: | | | | | | | | |
Basic — as reported | | $ | 1.44 | | | $ | 1.13 | |
Basic — pro forma | | $ | 1.44 | | | $ | 1.13 | |
Diluted — as reported | | $ | 1.41 | | | $ | 1.11 | |
Diluted — pro forma | | $ | 1.41 | | | $ | 1.11 | |
Prior to the adoption of SFAS No. 123R, the Company presented all benefits of tax deductions resulting from the exercise of share-based compensation as operating cash flows in the Statements of Cash Flows. SFAS No. 123R requires the benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. For the twelve months ended February 3, 2007, the Company reported $768,000 of excess tax benefits as a financing cash inflow in addition to $1,383,000 in cash proceeds received from the exercise of stock options and Employee Stock Purchase Plan purchases.
42
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s Employee Stock Purchase Plan allows eligible full-time employees to purchase a limited number of shares of the Company’s Class A Common Stock during each semi-annual offering period at a 15% discount through payroll deductions. During the twelve months ended February 3, 2007, the Company sold 22,873 shares to employees at an average discount of $3.19 per share under the Employee Stock Purchase Plan. The compensation expense recognized for the 15% discount given under the Employee Stock Purchase Plan was approximately $73,000 for the twelve months ended February 3, 2007. Prior to the adoption of SFAS 123R, the discount was not required to be charged to expense.
In accordance with SFAS No. 123R, the fair value of current restricted stock awards is estimated on the date of grant based on the market price of the Company’s stock and is amortized to compensation expense on a straight-line basis over the related vesting periods. As of February 3, 2007, there was $4,396,000 of total unrecognized compensation cost related to nonvested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of 4.25 years. The total fair value of the shares recognized as compensation expense during the fourth quarter and twelve months ended February 3, 2007 was $298,000 and $1,093,000, respectively.
The following summary shows the changes in the shares of restricted stock outstanding during the twelve months ended February 3, 2007:
| | | | | | | | |
| | | | | Weighted Average
| |
| | | | | Grant Date Fair
| |
| | Number of Shares | | | Value Per Share | |
|
Restricted stock awards at January 28, 2006 | | | 150,000 | | | $ | 18.21 | |
Granted | | | 235,754 | | | | 22.88 | |
Vested | | | (150,000 | ) | | | 18.21 | |
Forfeited | | | (20,872 | ) | | | 22.43 | |
| | | | | | | | |
Restricted stock awards at February 3, 2007 | | | 214,882 | | | $ | 22.92 | |
| |
15.16. | 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 $350,000 and $200,000, respectively. The Company paid claims of $3,329,000, $2,977,000 $3,227,000 and $3,019,000$3,227,000 in fiscal 2006, 2005 2004 and 2003,2004, respectively. Including claims incurred, but not yet paid, the Company recognized an expense of $3,971,000, $3,518,000 $3,513,000 and $3,764,000$3,513,000 in fiscal 2006, 2005 2004 and 2003,2004, respectively. Accrued workers’ compensation and general liabilities was $4,602,000 and $4,650,000 at February 3, 2007 and $4,155,000 at January 28, 2006, and January 29, 2005, respectively. The Company had no outstanding letters of credit relating to such claims at January 28, 2006February 3, 2007 or at January 29, 2005.28, 2006. See Note 7 for letters of credit related to purchase commitments, Note 9 for 401(k) plan contribution obligations and Note 10 for lease commitments.
43
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company does not have any guarantees with third parties. The Company has placed a $2 million deposit with Cedar Hill National Bank (“Cedar Hill”), a wholly owned subsidiary, as security and collateral for the payment of amounts due from CatoWest LLC, a wholly owned subsidiary, to Cedar Hill. The deposit has no set term. The deposit was made at the request of the Office of the Comptroller of the Currency because the receivable is not settled immediately and Cedar Hill has a risk of loss until payment is made. CatoWest LLC purchases receivables from Cedar Hill on a daily basis (generally one day in arrears). In the event CatoWest LLC fails to transfer to Cedar Hill the purchase price for any receivable within two business days, Cedar Hill has the right to withdraw any amount necessary from the account established by the Company to satisfy the amount due Cedar Hill from CatoWest LLC. Although the amount of potential future payments is limited to the amount of the deposit, Cedar Hill may require, at its discretion, the Company to increase the amount of the deposit with no limit on the increase. The deposit is based upon the amount of payments that would be due from CatoWest LLC to Cedar Hill for the highest credit card sales weekends of the year that would remain unpaid until the following business day. The Company has no obligations related to the deposit at year-end. No recourse provisions exist nor are any assets held as collateral that would reimburse the Company if Cedar Hill withdraws a portion of the deposit.
In addition, the Company has $4.7 million in escrow with Branch Banking & Trust Co. on behalf of Zurich American Insurance Company as security and collateral for administration of the Company’s self-insured workers compensation and general liability coverage.
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 expected to have a material effect on the Company’s results of operations, cash flows and financial position.
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Item 9. | Changes in and Disagreements with Independent Registered Public Accounting Firm on Accounting and Consolidated Financial Disclosure: |
As previously reported on aForm 8-K/A filed October 6, 2003, on September 16, 2003, the Company engaged the accounting firm of PricewaterhouseCoopers LLP as independent accountants to audit the Company’s financial statements for the fiscal year ending January 31, 2004 to succeed Deloitte & Touche LLP as the Company’s principal independent accountants.None.
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Item 9A. | Controls and Procedures: |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of January 28, 2006.February 3, 2007. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of January 28, 2006,February 3, 2007, our disclosure controls and procedures, as defined inRule 13a-15(e), under the Securities Exchange Act of 1934 (the “Exchange Act”), were effective to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 areis recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange ActRule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting as of January 28, 2006February 3, 2007 based on theInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of January 28, 2006.February 3, 2007.
PricewaterhouseCoopers LLP, our independent registered public accounting firm, has audited our management’s assessment of the effectiveness of our internal control over financial reporting as of January 28, 2006,February 3, 2007, as stated in their report which is included herein.
Changes in Internal Control Over Financial Reporting
No change was made in the Company’s internal control over financial reporting (as defined in Exchange ActRule 13a-15(f)) has occurred during the Company’s fiscal quarter ended January 28, 2006February 3, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Item 9B. | Other Information: |
None.
PART III
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Item 10. | Directors, and Executive Officers of the Registrant:and Corporate Governance: |
Information contained under the captions “Election of Directors,” “Meetings and Committees,” “Corporate Governance Matters” and “Section 16(a) Beneficial Ownership Reporting and Compliance” in the Registrant’s Proxy Statement for its 20062007 annual stockholders’ meeting (the “2006“2007 Proxy Statement”) is incorporated by reference in response to this Item 10. The information in response to this Item 10 regarding executive officers of the Company is contained in Item 4A, Part I hereof under the caption “Executive Officers of the Registrant.”
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Item 11. | Executive Compensation: |
Information contained under the captions “Summary Compensation Table,” “Employment and Severance Agreements,” “Option Grants in Last Fiscal Year,” “Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values” and “Director“Executive Compensation” in the Company’s 20062007 Proxy Statement is incorporated by reference in response to this Item.
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters: |
Equity Compensation Plan Information.
The following table provides information about stock options outstanding and shares available for future awards under all of Cato’s equity compensation plans. The information is as of January 28, 2006.February 3, 2007.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | (c) | | | | | | (c) |
| | | | | | Number of securities
| | | | | | Number of securities
|
| | | | | | remaining available for
| | | | | | remaining available for
|
| | (a) | | (b) | | future issuance under
| | (a) | | (b) | | future issuance under
|
| | Number of securities to be
| | Weighted-average
| | equity compensation
| | Number of securities to be
| | Weighted-average
| | equity compensation
|
| | issued upon exercise of
| | exercise price of
| | plans (excluding
| | issued upon exercise of
| | exercise price of
| | plans (excluding
|
| | outstanding options,
| | outstanding options,
| | securities reflected in
| | outstanding options,
| | outstanding options,
| | securities reflected in
|
Plan Category | | warrants and rights(1) | | warrants and rights(1) | | column (a) (2) | | warrants and rights(1) | | warrants and rights(1) | | column (a) (2) |
|
Equity compensation plans approved by security holder | | | 1,341,900 | | | $ | 8.23 | | | | 1,611,195 | | | | 1,236,675 | | | $ | 8.01 | | | | 1,381,969 | |
Equity compensation plans not approved by security holders | | | — | | | | — | | | | — | | | | — | | | | | | | |
Total | | | 1,341,900 | | | $ | 8.23 | | | | 1,611,195 | | | | 1,236,675 | | | $ | 8.01 | | | | 1,381,969 | |
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(1) | | This column contains information regarding employee stock options only; there are no outstanding warrants or stock appreciation rights. |
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(2) | | Includes the following: |
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| | 1,300,5001,091,618 shares of Class A Stock available for grant under the Company’s stock incentive plan, referred to as the 2004 Incentive Compensation Plan. Under this plan, non-qualified stock options may be granted to key employees. Additionally, 6,7279,227 shares of either Class A or Class B Stock available for grant under the Company’s stock incentive plan, referred to as the “1987 Non-qualified Stock Option Plan.” Stock options have terms of 10 years, vest evenly over 5 years, and are assigned an exercise price of not less than the fair market value of the Company’s stock on the date of grant; and |
|
| | 303,968281,074 shares of Class A Stock available under the 2003 Employee Stock Purchase Plan. Eligible employees may participate in the purchase of designated shares of the Company’s common stock. The purchase price of this stock is equal to 85% of the lower of the closing price at the beginning or the end of each semi-annual stock purchase period. |
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| | Information contained under “Security Ownership of Certain Beneficial Owners and Management in the 2007 Proxy Statement is incorporated by reference in response to this Item. |
Information contained under “Security Ownership of Certain Beneficial Owners and Management in the 2006 Proxy Statement is incorporated by reference in response to this Item.
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Item 13. | Certain Relationships and Related Transactions:Transactions and Director Independence: |
Information contained under the caption “Certain Transactions” and “Director Independence” in the 20062007 Proxy Statement is incorporated by reference in response to this Item.
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Item 14. | Principal Accountant Fees and Services: |
The information required by this Item is incorporated herein by reference to the section entitled “Audit Fees” and “Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Service by the Independent Auditor” in the 20062007 Proxy Statement.
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PART IV
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Item 15. | Exhibits and Financial Statement Schedule:Schedules: |
(a) The following documents are filed as part of this report:
(1) Financial Statements:
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Consolidated Balance Sheets atFebruary 3, 2007, January 28, 2006 and January 29, 2005 | | | 2324 | |
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| | | 2426 | |
| | | 2527 | |
| | | 2628 | |
(2) Financial Statement Schedule: The following report and financial statement schedule is filed herewith:
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(2) Financial Statement Schedule: The following report and financial statement schedule is filed herewith: | | | | |
| | | S-2 | |
All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes thereto.
(3) Index to Exhibits: The following exhibits are filed with this report or, as noted, incorporated by reference herein. The Company will supply copies of the following exhibits to any shareholder upon receipt of a written request addressed to the Corporate Secretary, The Cato Corporation, 8100 Denmark Road, Charlotte, NC 28273 and the payment of $.50 per page to help defray the costs of handling, copying and postage. In most cases, documents incorporated by reference to exhibits to our registration statements, reports or proxy statements filed by the Company with the Securities and Exchange Commission are available to the public over the Internet from the SEC’s web site athttp://www.sec.gov. You may also read and copy any such document at the SEC’s public reference room located at Room 1580, 100 F. Street, N.E., Washington, D.C. 20549 under the Company’s SEC file number(1-31340) (1 — 31340).
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Exhibit
| Exhibit
| | | Exhibit
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Number | Number | | Description of Exhibit | Number | | Description of Exhibit |
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| 3 | .1 | | Registrant’s Restated Certificate of Incorporation of the Registrant dated March 6, 1987, incorporated by reference to Exhibit 4.1 toForm S-8 of the Registrant filed February 7, 2000 (SEC File No. 333-96283). | 3 | .1 | | Registrant’s Restated Certificate of Incorporation of the Registrant dated March 6, 1987, incorporated by reference to Exhibit 4.1 toForm S-8 of the Registrant filed February 7, 2000 (SEC File No. 333 — 96283). |
| | | | | 3 | .2 | | Registrant’s By Laws incorporated by reference to Exhibit 4.2 toForm S-8 of the Registrant filed February 7, 2000 (SEC File No. 333 — 96283). |
| | | 4 | .1 | | Rights Agreement dated December 18, 2003, incorporated by reference to Exhibit 4.1 toForm 8-A12G of the Registrant filed December 22, 2003 and as amended inForm 8-A12B/A filed on January 6, 2004. |
| 3 | .2 | | Registrant’s By Laws incorporated by reference to Exhibit 4.2 toForm S-8 of the Registrant Filed February 7, 2000 (SEC File No. 333-96283). | 10 | .2* | | 1999 Incentive Compensation Plan dated August 26, 1999, incorporated by reference to Exhibit 4.3 toForm S-8 of the Registrant filed February 7, 2000 (SEC File No. 333 — 96283). |
| | | | | 10 | .3* | | Form of Agreement, dated as of August 29, 2003, between the Registrant and Wayland H. Cato, Jr., incorporated by reference to Exhibit 99(c) toForm 8-K of the Registrant filed on July 22, 2003. |
| | | 10 | .4* | | Form of Agreement, dated as of August 29, 2003, between the Registrant and Edgar T. Cato, incorporated by reference to Exhibit 99(d) toForm 8-K of the Registrant filed on July 22, 2003. |
| 4 | .1 | | Rights Agreement dated December 18, 2003, incorporated by reference to Exhibit 4.1 toForm 8-A12G of the Registrant filed December 22, 2003 and as amended inForm 8-A12B/A filed on January 6, 2004. | 10 | .5* | | Retirement Agreement between Registrant and Wayland H. Cato, Jr. dated August 29, 2003 incorporated by reference to Exhibit 10.1 toForm 10-Q of the Registrant for quarter ended August 2, 2003. |
| | | | | 10 | .6* | | Retirement Agreement between Registrant and Edgar T. Cato dated August 29, 2003, incorporated by reference to Exhibit 10.2 toForm 10-Q of the Registrant for the quarter ended August 2, 2003. |
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| 10 | .2 | | 1999 Incentive Compensation Plan dated August 26, 1999, incorporated by reference to Exhibit 4.3 toForm S-8 of the Registrant filed February 7, 2000 (SEC File No. 333-96283). | |
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| 10 | .3 | | Form of Agreement, dated as of August 29, 2003, between the Registrant and Wayland H. Cato, Jr., incorporated by reference to Exhibit 99(c) toForm 8-K of the Registrant filed on July 22, 2003. | |
| | | | | |
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| 10 | .4 | | Form of Agreement, dated as of August 29, 2003, between the Registrant and Edgar T. Cato, incorporated by reference to Exhibit 99(d) toForm 8-K of the Registrant filed on July 22, 2003. | |
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| 10 | .5 | | Retirement Agreement between Registrant and Wayland H. Cato, Jr. dated August 29, 2003 incorporated by reference to Exhibit 10.1 toForm 10-Q of the Registrant for quarter ended August 2, 2003. | |
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Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description of Exhibit | Number | | Description of Exhibit |
|
| 10 | .6 | | Retirement Agreement between Registrant and Edgar T. Cato dated August 29, 2003, incorporated by reference to Exhibit 10.2 toForm 10-Q of the Registrant for the quarter ended August 2, 2003. | 10 | .7* | | Letter Agreement between Registrant and Reynolds C. Faulkner dated as of March 21, 2006, incorporated by reference to Exhibit 99.1 toForm 8-K of the Registrant filed March 22, 2006. |
| | | | | 10 | .8* | | Resignation Agreement between Registrant and Reynolds C. Faulkner dated as of October 30, 2006, incorporated by reference to Exhibit 99.1 toForm 8-K of the Registrant filed November 1, 2006. |
| | | 10 | .9* | | Letter Agreement between Registrant and Thomas W. Stoltz dated as of December 4, 2006, incorporated by reference to Exhibit 99.1 toForm 8-K of the Registrant filed December 5, 2006. |
| 10 | .7 | | Letter Agreement between Registrant and Reynolds C. Faulkner dated as of March 21, 2006, incorporated by reference to Exhibit 99.1 toForm 8-K of the Registrant filed March 22, 2006. | 10 | .10* | | Summary of Named Executive Officer Compensation Determinations incorporated by reference to Exhibit 99.1 toForm 8-K filed April 12, 2006. |
| | | | | 10 | .11 | | Summary of Named Executive Officer Restricted Stock Grants, incorporated by reference to Exhibit 99.1 toForm 8-K filed May 2, 2006. |
| | | 21 | | | Subsidiaries of Registrant. |
| 21 | | | Subsidiaries of Registrant. | 23 | .1 | | Consent of Independent Registered Public Accounting Firm. |
| | | | | 31 | .1 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
| | | 31 | .2 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
| 23 | .1 | | Consent of Independent Registered Public Accounting Firm. | 32 | .1 | | Section 1350 Certification of Chief Executive Officer. |
| | | | | 32 | .2 | | Section 1350 Certification of Chief Financial Officer. |
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| 31 | .1 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. | |
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| 31 | .2 | | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. | |
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| 32 | .1 | | Section 1350 Certification of Chief Executive Officer. | |
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| 32 | .2 | | Section 1350 Certification of Principal Financial Officer. | |
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* | | Management contract or compensatory plan required to be filed under Item 15 of this report and Item 601 ofRegulation S-K. |
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