The Cato Corporation Annual Report 2002

FY2002 Annual Report · The Cato Corporation

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The Cato Corporation
A N N U A L R E P O R T 2 0 0 2

The Cato Corporation is a leading specialty retailer of value-priced women’s fashion apparel operating two
divisions, “Cato” and “It’s Fashion!”. The Company currently operates over 1,030 apparel specialty stores
principally in the Southeast. Cato, the core division, primarily offers exclusive merchandise with fashion and
quality comparable to mall specialty stores at low prices, every day. Most Cato stores range from 4,000 to 6,000
square feet and are located primarily in strip shopping centers anchored by national discounters or market-
dominant grocery stores. It’s Fashion!, the off-price division, provides family fashion apparel and accessories with
stores ranging from 3,000 to 4,000 square feet. The Company is headquartered in Charlotte, North Carolina.

Fiscal Year
(Dollars in thousands, except per share data)

F O R T H E Y E A R E N D E D
Retail sales
Total revenues
Comparable store sales increase
Income before income taxes
Net income
Net income as a percent of retail sales
Cash dividends paid per share
Basic earnings per share
Diluted earnings per share

Number of stores
Number of stores opened
Number of stores closed
Net increase in number of stores

F I N A N C I A L H I G H L I G H T S

2002

2001

2000

1999

1998

$ 732,742
748,331

$ 685,653
699,321

$ 648,482
662,537

$ 585,085
598,240

$ 524,381
538,153

71,839
45,833

6.3%
.585
1.80
1.77

1,022
90
5
85

66,286
43,086

6.3%
.53
1.71
1.66

937
85
7
78

60,042
39,027

6.0%
.425
1.56
1.53

859
65
15
50

51,975
33,931

5.8%
.28
1.28
1.26

809
83
6
77

36,795
23,917

4.6%
.19
.87
.85

732
52
13
39

AT Y E A R E N D
Cash, cash equivalents and investments $ 106,936
162,609
Working capital
2.7
Current ratio
383,410
Total assets
270,164
Stockholders’ equity

84,695
139,633
2.7
332,041
234,698

83,112
125,724
2.4
310,742
207,757

87,275
124,988
2.5
285,789
188,780

86,209
124,024
2.7
258,513
172,234

3
3
7
6 $
8
6
8 $
4
6
$

5
8
5
$

4
2
5
$

6
4
3 $
4
9 $
3
$

4
3
$

4
2
$

7
7
.
1
$

6
6
.
1
$

3
5
.
1
$

6
2
.
1
$

5
8
.
$

98 99 00 01 02
Retail Sales
(in millions)

98 99 00 01 02
Net Income
(in millions)

98 99 00 01 02
Earnings (Diluted)
per share

For Cato customers, it has been another

exciting year of new fashions,

high quality and exceptional value.

For Cato shareholders, it has been another

successful year of solid earnings,

continued expansion and consistent growth.

Some things you can always count on from Cato.

TA B L E O F C O N T E N T S

Financial Highlights

Inside Cover

Consolidated Financial Statements

Letter to our Shareholders

Operations

Selected Financial Data

Management’s Discussion and
Analysis of Financial Condition
and Results of Operations

Notes to Consolidated
Financial Statements

Independent Auditors’ Report

Management Executive Group
and Board of Directors

Corporate Information

T H E C AT O C O R P O R AT I O N
PA G E 1

a message to our shareholders

Last year was challenging for Cato as well as most retailers. However, through the efforts of our
8,800 associates, Cato increased earnings and achieved record results in this difficult year. In fact,
2002 was the Company’s fourth consecutive year of record earnings and sixth consecutive year of
earnings growth.

Earnings improved to $45.8 million and $1.77 per share, a 6% increase in net income and a
7% increase in EPS over 2001. Cato remains financially strong with a debt-free balance sheet and
$107 million in cash and short-term investments.

Our earnings improvement in 2002 and a number of other significant accomplishments provide
strong insight into what makes Cato a consistent performer. Shareholders can count on Cato to
execute its strategies to deliver consistent growth, improve earnings, and increase shareholder value
over the long term, and deliver fashion, quality, and value to our customers every day.

Cato has returned a portion of its profits to shareholders through dividends for each of the last
11 years. In 2002, we continued to deliver value to shareholders by distributing $14.9 million in
dividends and repurchasing shares under our stock repurchase program. Our current annualized
dividend of $.60 per share has more than tripled since 1997.

In 2002, we opened 90 new stores, relocated 26 stores, remodeled 24 stores, and closed five stores
under our store development program. We opened new stores in our current geography as well as
new markets. We expanded into Iowa and Arizona and now have stores in 26 states.

T H E C AT O C O R P O R AT I O N
PA G E 2

The Company reached a significant milestone in 2002 by opening its 1,000th store in Charleston,
South Carolina, not far from where the first Cato stores opened fifty-six years ago.

We finalized a new store prototype that improves the customer shopping experience and makes
our stores a more inviting place to shop. We simplified the design and added natural wood
elements to create a timeless look that will transcend fashion trends.

We implemented an enterprise-wide system that integrates our merchandising and financial
systems and will provide better information. This system will allow us to continue to improve our
overall inventory management and store merchandise allocations.

During 2002, the Company moved to the New York Stock Exchange. Our shareholders benefit from
greater visibility in the financial community and increased liquidity in the trading of our stock.

Cato’s core strategies have not changed. We continue to offer our customers a broad assortment of
high quality, fashionable merchandise at low prices every day. We build our stores with an easy-to-
shop format in convenient strip shopping centers. Our assortment appeals to a broad demographic
profile and requires a minimum trade area of only 20,000 people. This allows us to serve
communities in small, middle, and metropolitan markets. We adhere to a disciplined real estate
approach that helps ensure that every store, regardless of the market size, is profitable.
We continually work to refine these strategies, improve our execution, and strengthen our business
over the long term. Our strong financial position and a focused approach allow us to leverage our
existing infrastructure to further improve earnings.

Our goal is to deliver consistent value in everything we do, whether it is in
the merchandise we offer our customers or the return we provide our
shareholders.

During 2003, we expect to open 90 stores in our new prototype to drive
sales and further enhance our customers’ shopping experience by relocating
and remodeling stores.

We remain committed to our long-term goal of growing both earnings and
dividends at an annual rate of 10%.

Delivering value – whether you are a customer or a shareholder, you can
count on it at Cato.

9
5
$

3
5
.
$

3
4
.
$

8
2
.
$

9
1
.
$

98 99 00 01 02

Dividends
per share

John P. Derham Cato
President, Vice Chairman of the
Board and Chief Executive Officer

T H E C AT O C O R P O R AT I O N
PA G E 3

Style you can count on.
Providing our customers fashionable merchandise

at an exceptional value and delivering friendly service

in an inviting place to shop – that’s Cato style.

Our merchandising and product development teams work

together to identify styles, colors, and fabrics that appeal to

our customer. They seek out the latest fashions from across

the U.S. and around the world and then adapt these global

trends to her needs.

The merchandise we offer not only meets her fashion and quality expectations,

but by using fabrics that are long lasting and easy to care for, it also meets the

demands of today’s fast-paced world. We deliver new merchandise to every

store on a weekly basis, so our customer can see new fashions and styles each

time she visits the store.

The construction of our garments is tightly controlled to provide our customer

with an assurance that they will find a reliable fit no matter what selection they

make. We use live models to develop standardized sizes across all of our

assortments. If a customer finds a size 10 skirt that fits her, she can be assured

that fit will be consistent in any size 10 item she selects to complete her outfit.

Our new store prototype was created to increase customer awareness of Cato

as a leading fashion apparel and accessory store. We simplified the design and

added natural wood elements to create a timeless look that will transcend

fashion trends. We increased the sales floor unit capacity while giving our

customer a better place to shop.

We are known for our wide assortment of fashionable casual, work, and weekend apparel.

By shopping fashion markets in New York, Los Angeles, Montreal, and Europe,

we gather valuable trend and fashion insights for exciting new products. And this dress is no exception.

T H E C AT O C O R P O R AT I O N
PA G E 5

Synergy – Our sportswear is designed to be completely interchangeable and versatile.

Many of the patterns we produce are exclusively ours

and give our customers fashion magazine looks at a fraction of the price.

Value you can count on. We provide value every day.
From product development and sourcing, to our low price policy and how

we run our stores, everything we do is designed to provide value to our

customers.

Several years ago, we adopted a low price every day strategy that continues

to provide our customers exceptional value. We work hard to maintain an

efficient, low cost structure to keep prices low for our customers and increase

earnings for our shareholders.

With low prices every day, we save money by not needing

to advertise. Instead, our customer knows she pays the

lowest price every day on every item and never has to wait

for a sale. And, we use those savings to further improve

the quality of our merchandise and deliver it at great

prices every day. We offer exceptional value through a

combination of fashion, quality, and price. We save our

customers time and money.

0
7
2
$

5
3
2
$

8
0
2
9 $
8
1
2 $
7
1
$

98 99 00 01 02

Shareholders’ Equity
(in millions)

T H E C AT O C O R P O R AT I O N
PA G E 7

Performance you can count on. Consistent growth
and profitability is something shareholders have come to count on from Cato.

In robust economic times, many businesses can generate profits. However,

during tough economic times, sound strategies and superior execution are

required to succeed and improve performance. Even in the current economic

downturn, Cato has continued to reward both associates and shareholders.

Over the last three years, earnings have increased over 10% per year on

average, the annual dividend has increased over 100%, 2.3 million shares

have been repurchased, and we have opened 240 new stores. During this

period, cash and short-term investments increased by $20 million to

$107 million at the end of 2002.

Our long-term goal remains a 10% annual growth rate in

earnings and dividends while building a national chain.

2
2
0
1

7
3
9

9
5
8

9
0
8

2
3
7

98 99 00 01 02

Number of Stores
(at year end)

You can count on Cato to bring the latest trends in style, fabric, and color to our customers at

low prices every day. Our garments are well made and our colors coordinate across all styles and fabrics.

We use live fit models so our customers can be assured that the fit will always be right.

T H E C AT O C O R P O R AT I O N
PA G E 9

S E L E C T E D F I N A N C I A L D ATA

2002

2001

2000

1999

1998

$ 732,742
15,589
748,331
496,345
236,397

$ 685,653
13,668
699,321
466,366
219,287

$ 648,482
14,055
662,537
445,407
203,075

$ 585,085
13,155
598,240
403,655
181,430

$ 524,381
13,772
538,153
371,005
153,376

32.3%

168,914

32.0%

162,082

31.3%

154,150

31.0%

140,741

29.2%

128,207

23.1%

14,913
(3,680)

71,839
26,006

23.6%

10,886
(6,299)

66,286
23,200

23.8%
9,492
(6,554)

60,042
21,015

24.0%
8,639
(6,770)

51,975
18,191

24.4%
7,638
(5,492)

36,795
12,878

45,833

43,086

39,027

33,784

23,917

–
45,833
1.80
1.77
.585

$
$
$
$

–
$ 43,086
1.71
$
1.66
$
.53
$

–
$ 39,027
1.56
$
1.53
$
.425
$

147
$ 33,931
1.28
$
1.26
$
.28
$

–
$ 23,917
.87
$
.85
$
.19
$

Fiscal Year
(Dollars in thousands, except per share data
and selected operating data)

S TAT E M E N T O F O P E R AT I O N S D ATA :
Retail sales
Other income
Total revenues
Cost of goods sold
Gross margin
Gross margin percent
Selling, general and administrative
Selling, general and administrative percent

of retail sales

Depreciation
Interest and other income, net
Income before income taxes and cumulative

effect of accounting change

Income tax expense
Income before cumulative effect of

accounting change

Cumulative effect of accounting change,

net of taxes

Net income
Basic earnings per share
Diluted earnings per share
Cash dividends paid per share

S E L E C T E D O P E R AT I N G D ATA :
Stores open at end of year
Average sales per store
Average sales per square foot of selling space
Comparable store sales increase

1,022
$ 753,000
184
$

937
$ 767,000
186
$

859
$ 781,000
187
$

809
$ 756,000
177
$

732
$ 740,000
169
$

B A L A N C E S H E E T D ATA :
Cash, cash equivalents and investments
Working capital
Total assets
Total stockholders’ equity

$ 106,936
162,609
383,410
270,164

$ 84,695
139,633
332,041
234,698

$ 83,112
125,724
310,742
207,757

$ 87,275
124,988
285,789
188,780

$ 86,209
124,024
258,513
172,234

T H E C AT O C O R P O R AT I O N
PA G E 1 0

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

R E S U LT S O F O P E R AT I O N S

marily from the Company’s write-down of a $1.8 million decline in mar-
ket value on investments deemed to be other than temporary.

The table below sets forth certain financial data of the Company expressed
as a percentage of retail sales for the years indicated:

Fiscal Year Ended

Retail sales
Other income
Total revenues
Cost of goods sold
Selling, general and
administrative

Depreciation
Interest and other income, net
Income before
income taxes

Net income

February 1,
2003
100.0%
2.1
102.1
67.7

February 2,
2002
100.0%
2.0
102.0
68.0

February 3,
2001
100.0%
2.1
102.1
68.7

23.1
2.0
(0.5)

9.8
6.3%

23.6
1.6
(0.9)

9.7
6.3%

23.8
1.4
(1.1)

9.3
6.0%

F I S C A L 2 0 0 2 C O M P A R E D T O F I S C A L 2 0 0 1

Retail sales increased by 7% to $732.7 million in fiscal 2002 from $685.7 mil-
lion in fiscal 2001. Total revenues, comprised of retail sales and other income
(principally finance charges and late fees on customer accounts receivable and
layaway fees), increased by 7% to $748.3 million in fiscal 2002 from $699.3
million in fiscal 2001. The Company operated 1,022 stores at February 1,
2003 compared to 937 stores operated at February 2, 2002.

The increase in retail sales in fiscal 2002 resulted from the Company’s con-
tinuation of an everyday low pricing strategy, improved merchandise
offerings, and an increase in store development activity. In fiscal 2002, the
Company opened 90 new stores, relocated 26 stores, remodeled 24 stores
and closed 5 stores.

Other income, as included in total revenues in fiscal 2002, increased
$1.9 million or 14% over fiscal 2001. The increase resulted primarily from
increased earnings from finance and layaway charges.

Cost of goods sold was $496.3 million, or 67.7% of retail sales, in fiscal
2002 compared to $466.4 million, or 68.0% of retail sales, in fiscal 2001.
The decrease in cost of goods sold as a percent of retail sales resulted
primarily from maintaining timely and aggressive markdowns on slow
moving merchandise and improving inventory flow and sourcing. Total
gross margin dollars (retail sales less cost of goods sold) increased by 8% to
$236.4 million in fiscal 2002 from $219.3 million in fiscal 2001.

Selling, general and administrative expenses (SG&A) were $168.9
million in fiscal 2002 compared to $162.1 million in fiscal 2001,
an increase of 4%. As a percent of retail sales, SG&A was 23.1% compared
to 23.6% in the prior year. The overall increase in SG&A resulted prima-
rily from increased selling-related expenses and increased infrastructure
expenses attributable to the Company’s store development activities.

Depreciation expense was $14.9 million in fiscal 2002 compared to
$10.9 million in fiscal 2001. The 37% increase in fiscal 2002 resulted pri-
marily from the Company’s store development and the implementation of
an enterprise-wide information system.

Interest and other income, net was $3.7 million in fiscal 2002 compared to
$6.3 million in fiscal 2001. The 41% decrease in fiscal 2002 resulted pri-

F I S C A L 2 0 0 1 C O M P A R E D T O F I S C A L 2 0 0 0

Retail sales increased by 6% to $685.7 million in fiscal 2001 from $648.5
million in fiscal 2000. The 2001 fiscal year contained 52 weeks versus 53
weeks in fiscal year 2000. On a comparable 52 week basis, total sales
increased 7%, and comparable store sales increased 1% from the prior year.
Total revenues increased by 6% to $699.3 million in fiscal 2001 from
$662.5 million in fiscal 2000. The Company operated 937 stores at
February 2, 2002 compared to 859 stores operated at February 3, 2001.

The increase in retail sales in fiscal 2001 resulted from the Company’s
adoption of an everyday low pricing strategy, improved merchandise offer-
ings, and an increase in store development activity. In fiscal 2001, the
Company increased its number of stores 9% by opening 85 new stores,
relocating 24 stores while closing 7 existing stores.

Other income in fiscal 2001 decreased $.4 million or 3% over fiscal 2000.
The decrease resulted primarily from decreased earnings from late fee
income and lower credit sales.

Cost of goods sold was $466.4 million, or 68.0% of retail sales, in fiscal
2001 compared to $445.4 million, or 68.7% of retail sales, in fiscal 2000.
The decrease in cost of goods sold as a percent of retail sales resulted pri-
marily from maintaining timely and aggressive markdowns on slow moving
merchandise and improving inventory flow. Total gross margin dollars
increased by 8% to $219.3 million in fiscal 2001 from $203.1 million in
fiscal 2000.

SG&A expenses were $162.1 million in fiscal 2001 compared to
$154.2 million in fiscal 2000, an increase of 5%. As a percent of retail sales,
SG&A was 23.6% compared to 23.8% in the prior year. The overall
increase in SG&A resulted primarily from increased selling-related
expenses and increased infrastructure expenses attributable to the
Company’s store development activities.

Depreciation expense was $10.9 million in fiscal 2001 compared to
$9.5 million in fiscal 2000. The 15% increase in fiscal 2001 resulted pri-
marily from the Company’s store development.

C R I T I C A L A C C O U N T I N G P O L I C I E S

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 can-
not be determined with absolute certainty. Therefore, the determination
of estimates requires the exercise of judgment. Actual results inevitably
will differ from those estimates, and such differences may be material to
the financial statements. The most significant accounting estimates
inherent in the preparation of the Company’s financial statements
include the allowance for doubtful accounts receivable, reserves relating
to workers’ compensation, general and auto insurance liabilities and
reserves for inventory markdowns.

T H E C AT O C O R P O R AT I O N
PA G E 1 1

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company evaluates the collectibility of accounts receivable and
records allowances for doubtful accounts based on estimates of actual
write-offs and the relative age of accounts. The Company’s self-insurance
liabilities related to worker’s compensation, general and auto insurance lia-
bilities are based on estimated costs of claims filed and claims incurred but
not reported and data provided by outside actuaries. Merchandise invento-
ries are stated at the lower of cost (first-in, first-out method) or market as
determined by the retail method. Management makes estimates regarding
markdowns based on customer demand which can impact inventory valu-
ations. Historically, actual results have not significantly deviated from those
determined using the estimates described above.

L I Q U I D I T Y, C A P I TA L R E S O U R C E S A N D
M A R K E T R I S K

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 and other operating require-
ments over the next twelve months.

At February 1, 2003, the Company had working capital of $162.6 million
compared to $139.6 million at February 2, 2002. Net cash provided by
operating activities was $63.7 million in fiscal 2002 compared to $47.1
million in fiscal 2001. The increase in net cash provided by operating activ-
ities in fiscal 2002 is primarily the result of an increase in net income of
$2.7 million which included a non-cash charge of $1.8 million of losses
taken on investments and an increase in depreciation expense of $4.0 mil-
lion due to store expansion and an enterprise-wide merchandise and
finance system; a reduction in accounts receivable from weak fourth quar-
ter sales and strong collection efforts of $4.6 million; and an increase in
accounts payable, accrued expenses and other liabilities of $13.3 million
primarily due to timing of payments. Offsetting these increases in net cash
provided by operating activities was an increase in merchandise inventory
to meet our store growth of $11.8 million.

Net cash used in investing activities was $61.5 million in fiscal 2002 com-
pared to $10.4 million in fiscal 2001. The increase in net cash used in
investing activities in fiscal 2002 was primarily due to a reduction of cash
provided by sales of short-term investments of $37.5 million as well as
increased purchases of short-term investments of $10.4 million.

Net cash used in financing activities was $11.9 million in fiscal 2002 com-
pared to $20.1 million in fiscal 2001. The decrease in net cash used in
financing activities in fiscal 2002 was primarily due to a reduction in treas-
ury stock purchases of $10.5 million offset by an increase in dividends paid
of $1.5 million.

At February 1, 2003, the Company had $106.9 million in cash, cash
equivalents and short-term investments, compared to $84.7 million at
February 2, 2002.

Additionally, the Company had $1.7 million invested in privately managed
investment funds at February 1, 2003, which are reported under other
assets of the consolidated balance sheets.

maintenance of specific financial ratios with which the Company was in
compliance. There were no borrowings outstanding under the agreement
during the fiscal year ended February 1, 2003 or February 2, 2002.

The Company had approximately $6.5 million and $4.3 million at
February 1, 2003 and February 2, 2002, respectively, of outstanding
irrevocable letters of credit relating to purchase commitments.

Expenditures for property and equipment totaled $29.0 million,
$25.7 million and $27.2 million in fiscal 2002, 2001 and 2000, respec-
tively. The expenditures for fiscal 2002 were primarily for store
development, store remodels and investments in new technology for an
enterprise-wide information system for merchandising and finance. In fis-
cal 2003, the Company is planning to invest approximately $25 million for
capital expenditures. This includes expenditures to open 90 new stores,
relocate 25 stores and close 10 stores. In addition, the Company plans to
remodel 30 stores and has planned for additional investments in technol-
ogy scheduled to be implemented over the next 12 months.

During 2002, the Company repurchased 66,000 shares of Class A
Common Stock for $1.2 million, or an average price of $17.98 per share.
Additionally, for the fiscal years ended February 1, 2003 and February 2,
2002, the Company accepted in an option transaction from an officer for
payment of an option exercise, 48,681 mature shares of Class A Common
Stock for $1,144,500 or $23.51 per share, the average fair market value on
the date of exchange and 92,600 mature shares of Class A Common Stock
for $1,825,000 or $19.71 per share, the average fair market value on the
date of exchange, respectively.

During fiscal 2002, the Company increased its quarterly dividend by 11%
from $.135 per share to $.15 per share. Over the course of 2001, the Board
of Directors increased the quarterly dividend by 8% from $.125 per share
to $.135 per share.

The Company does not use derivative financial instruments. At February
1, 2003, the Company’s investment portfolio was invested in governmen-
tal and other debt securities with maturities of up to 36 months. These
securities are classified as available-for-sale and are recorded on the balance
sheet at fair value with unrealized gains and temporary losses reported as
accumulated other comprehensive income. Other than temporary declines
in fair value of investments are recorded as a reduction in the cost of invest-
ments in the accompanying Consolidated Balance Sheets and a reduction
of interest and other income, net in the accompanying Statements of
Consolidated Income.

R E C E N T A C C O U N T I N G P R O N O U N C E M E N T S

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133,
“Accounting for Derivative Instruments and Hedging Activities”. In June
2000, the FASB issued SFAS No. 138, which amended certain provisions
of SFAS 133. The Company adopted SFAS 133 and the corresponding
amendments under SFAS 138 on February 4, 2001, and the adoption of
this statement had no impact on the Company’s consolidated results of
operations and financial position.

At February 1, 2003, the Company had an unsecured revolving credit
agreement which provided for borrowings of up to $35 million. The
revolving credit agreement is committed until October 2004. The credit
agreement contains various financial covenants and limitations, including

In July 2001, the FASB issued Statement of Financial Standards (SFAS)
No. 142, “Goodwill and Other Intangible Assets”. SFAS 142 includes
requirements to test goodwill and indefinite lived intangible assets for impair-
ment rather than amortize them. The Company adopted SFAS No. 142

T H E C AT O C O R P O R AT I O N
PA G E 1 2

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

on February 3, 2002, and the adoption of this statement had no impact on
the Company’s consolidated results of operations and financial position, as
the Company had no goodwill or other indefinite lived intangible assets.

In August 2001, the FASB issued Statement of Financial Standards (SFAS)
No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets”. SFAS No. 144 supercedes SFAS No. 121, “Accounting for
Impairment of Long-Lived Assets to be Disposed Of ” and Accounting
Principles Bulletin (APB) No. 30, “Reporting the Results of Operations –
Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions”. Along with establishing a single accounting model, based on
the framework established in SFAS No. 121 for impairment of long-lived
assets, this standard retains the basic provisions of APB No. 30 for the pres-
entation of discontinued operations in the income statement, but broadens
that presentation to include a component of the entity. The Company
adopted SFAS No. 144 on February 3, 2002, and the adoption of this
statement had no impact on the Company’s consolidated results of opera-
tions and financial position.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Correction”. SFAS No. 145 rescinds SFAS No. 4, “Reporting
Gains and Losses from Extinguishment of Debt”, and an amendment of
that statement, SFAS No. 64, “Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements”. Because of the rescission of SFAS No. 4, the
gains and losses from the extinguishments of debt are no longer required to
be classified as extraordinary items. SFAS No. 145 amends SFAS No. 13,
“Accounting for Leases”, to require sale-leaseback accounting for certain
lease modifications that have economic effects that are similar to sale-lease-
back transactions. The amendment of SFAS No. 13 is effective for
transactions occurring after May 15, 2002. There has been no impact to
the Company due to the Amendment of SFAS No. 13. Lastly, SFAS No.
145 makes various technical corrections to existing pronouncements that
are not substantive in nature. The Company adopted SFAS No. 145 in fis-
cal 2002 and the impact on its financial position and results of operations
of the adoption was not material.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities”. This Statement is effective for
exit or disposal activities initiated after December 31, 2002. Liabilities for
costs associated with an exit activity should be initially measured at fair
value, when incurred. This statement applies to costs associated with an
exit activity that does not involve an entity newly acquired in a business
combination, or a disposal activity covered by SFAS No. 144. The
Company adopted SFAS No. 146 on December 31, 2002, and the adop-
tion of this statement had no impact on the Company’s consolidated
results of operations and financial position.

provisions of Interpretation No. 45 apply on a prospective basis to guaran-
tees issued or modified after December 31, 2002, regardless of the
guarantor’s fiscal year-end. The disclosures are effective for financial state-
ments of interim or annual periods ending after December 31, 2002.
Although the Company has some guarantees with its subsidiaries, the
Company does not believe the impact of this Interpretation on its financial
position or result of operations will be material or that additional disclosure
is required.

On December 31, 2002, the FASB issued SFAS No. 148, “Accounting for
Stock-Based Compensation – Transition and Disclosure”. SFAS No. 148
amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to
provide for alternative methods of transition to SFAS No. 123’s fair value
method of accounting for stock-based employee compensation. SFAS No.
148 also amends the disclosure provisions of SFAS No. 123 and APB
Opinion No. 28, “Interim Financial Reporting”, to require disclosure in
the summary of significant policies of the effects of an entity’s accounting
policy with respect to stock-based employee compensation on reported net
income and earnings per-share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the dis-
closure provisions of SFAS No. 148 are applicable to all companies with
stock-based compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrin-
sic value method of APB Opinion No. 25, “Accounting for Stock Issued to
Employees”. SFAS No. 148’s amendment of the transition and annual dis-
closure requirements of SFAS No. 123 are effective for fiscal years ending
after December 15, 2002. The implementation of this Statement did not
materially affect the Company’s financial position or results of operations.

In 2002, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash
Considerations Received from a Vendor”. EITF Issue No. 02-16 provides
guidance on how cash considerations received by a customer or reseller
should be classified in the customer’s statement of earnings. EITF Issue No.
02-16 is effective for all transactions with vendors after December 31, 2002.
The adoption of EITF Issue No. 02-16 did not have a material impact on
our consolidated financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46 “Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial Statements”. This interpretation
applies immediately to variable interest entities created after January 31,
2003 and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest it acquired before February 1, 2003.
This interpretation may be applied prospectively with a cumulative-
effect adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a cumu-
lative- effect adjustment as of the beginning of the first year restated. The
implementation of this interpretation will not materially affect the
Company’s financial position or results of operations.

The Annual Report includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. All statements other than statements of historical facts
included in the Annual Report and located elsewhere herein regarding the
Company’s financial position and business strategy may constitute for-
ward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations prove to be correct.

T H E C AT O C O R P O R AT I O N
PA G E 1 3

C O N S O L I D AT E D S TAT E M E N T S O F I N C O M E

Fiscal Year Ended
(Dollars in thousands, except per share data)

February 1,
2003`

February 2,
2002

February 3,
2001

R E V E N U E S
Retail sales
Other income (principally finance charges, late fees and layaway charges)

732,742
15,589

$ 685,653
13,668

648,482
14,055

Total revenues

748,331

699,321

662,537

C O S T S A N D E X P E N S E S , N E T
Cost of goods sold
Selling, general and administrative
Depreciation
Interest and other income, net

Income before income taxes

Income tax expense

Net income

Basic earnings per share

Basic weighted average shares

Diluted earnings per share

496,345
168,914
14,913
(3,680)

466,366
162,082
10,886
(6,299)

445,407
154,150
9,492
(6,554)

676,492

633,035

602,495

71,839

66,286

26,006

23,200

45,833

1.80

43,086

1.71

60,042

21,015

39,027

1.56

25,465,543

25,193,610

24,988,844

1.77

1.66

1.53

Diluted weighted average shares

25,947,457

25,888,636

25,465,232

Dividends per share

.585

.53

.425

See notes to consolidated financial statements.

T H E C AT O C O R P O R AT I O N
PA G E 1 4

C O N S O L I D AT E D B A L A N C E S H E E T S

(Dollars in thousands)

February 1,
2003

February 2,
2002

A S S E T S
Current Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $6,099 at February 1, 2003

and $5,968 at February 2, 2002

Merchandise inventories
Deferred income taxes
Prepaid expenses

Total Current Assets

Property and equipment - net
Other assets

Total Assets

L I A B I L I T I E S A N D S T O C K H O L D E R S ’ E Q U I T Y
Current Liabilities:
Accounts payable
Accrued expenses
Accrued income taxes

Total Current Liabilities

Deferred income taxes
Other noncurrent liabilities (primarily deferred rent)

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;

25,218,678 and 25,011,732 shares issued at February 1, 2003 and February 2, 2002, respectively

Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized;

6,085,149 and 5,812,649 shares issued at February 1, 2003 and February 2, 2002, respectively

Additional paid-in capital
Retained earnings
Accumulated other comprehensive gains (losses)
Unearned compensation – restricted stock awards

Less Class A common stock in treasury, at cost (5,741,179 and 5,626,498 shares at

February 1, 2003 and February 2, 2002, respectively)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity

See notes to consolidated financial statements.

32,065
74,871

41,772
42,923

54,116
93,457
1,392
4,990
260,891
113,307
9,212
$ 383,410

66,620
28,776
2,886
98,282
6,310
8,654

52,293
80,407
777
5,036
223,208
100,137
8,696
$ 332,041

57,495
25,260
820
83,575
5,177
8,591

–

840

203
94,947
235,904
253
(2,375)
329,772

–

833

194
86,948
204,961
(567)
(394)
291,975

(59,608)
270,164
$ 383,410

(57,277)
234,698
$ 332,041

T H E C AT O C O R P O R AT I O N
PA G E 1 5

C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L OW S

Fiscal Year Ended
(Dollars in thousands)

February 1,
2003

February 2,
2002

February 3,
2001

O P E R AT I N G A C T I V I T I E S
Net income
Adjustments to reconcile net income to net cash provided by operating activities:

45,833

43,086

39,027

Depreciation
Amortization of investment premiums
Provision for doubtful accounts
Write-down of investments
Deferred income taxes
Compensation expense related to restricted stock awards
Loss on disposal of property and equipment
Changes in operating assets and liabilities which provided (used) cash:

Accounts receivable
Merchandise inventories
Prepaid and other assets
Accrued income taxes
Accounts payable, accrued expenses and other liabilities

14,913
66
4,764
1,800
70
750
870

(6,587)
(13,050)
(470)
2,066
12,704

10,886
160
5,913
–
422
295
480

(11,234)
(1,246)
367
(1,525)
(547)

9,492
126
5,292
–
1,600
295
1,257

(6,806)
(9,664)
(3,971)
2,025
5,420

Net cash provided by operating activities

63,729

47,057

44,093

I N V E S T I N G A C T I V I T I E S
Expenditures for property and equipment
Purchases of short-term investments
Sales of short-term investments

(28,953)
(46,281)
13,735

(25,684)
(35,878)
51,194

(27,230)
(11,906)
12,166

Net cash used in investing activities

(61,499)

(10,368)

(26,970)

F I N A N C I N G A C T I V I T I E S
Dividends paid
Purchases of treasury stock
Proceeds from employee stock purchase plan
Proceeds from stock options exercised

(14,890)
(1,187)
509
3,631

(13,400)
(11,729)
443
4,568

(10,633)
(15,449)
448
3,323

Net cash used in financing activities

(11,937)

(20,118)

(22,311)

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

See notes to consolidated financial statements.

(9,707)
41,772
32,065

16,571
25,201
41,772

(5,188)
30,389
25,201

T H E C AT O C O R P O R AT I O N
PA G E 1 6

C O N S O L I D AT E D S TAT E M E N T S O F S T O C K H O L D E R S ’ E Q U I T Y

(Dollars in thousands)

Balance – January 29, 2000
*Comprehensive income:

Net income
Unrealized gains on available-for-sale securities,

net of deferred income taxes of $494

Dividends paid ($.425 per share)
Class A common stock sold through employee

stock purchase plan – 44,590 shares
Class A common stock sold through stock

option plans – 425,350 shares

Income tax benefit from stock options exercised
Purchase of treasury shares – 1,468,800 shares
Unearned compensation – restricted stock awards
Balance – February 3, 2001
*Comprehensive income:

Net income
Unrealized gains on available-for-sale securities,

net of deferred income taxes of $171

Dividends paid ($.53 per share)
Class A common stock sold through employee

stock purchase plan – 38,463 shares
Class A common stock sold through stock

option plans – 329,850 shares

Class B common stock sold through stock

option plans – 448,332 shares

Income tax benefit from stock options exercised
Purchase of treasury shares – 774,750 shares
Surrender of shares for stock options – 92,600 shares
Unearned compensation – restricted stock awards
Balance – February 2, 2002
*Comprehensive income:

Net income
Unrealized gains on available-for-sale securities,

net of deferred income taxes of $448

Dividends paid ($.585 per share)
Class A common stock sold through employee

stock purchase plan – 32,487 shares
Class A common stock sold through stock

option plans – 171,600 shares

Class B common stock sold through stock

option plans – 172,500 shares

Income tax benefit from stock options exercised
Purchase of treasury shares – 66,000 shares
Surrender of shares for stock options – 48,681 shares
Restricted stock awards – 100,000 shares
Unearned compensation – restricted stock awards
Balance – February 1, 2003

Class A

Common

Stock

Convertible

Class B

Common

Stock

Additional

Paid-in

Capital

Accumulated

Unearned

Other Compensation

Total

Retained Comprehensive

Restricted

Treasury

Stockholders’

Earnings

Income (Loss)

Stock Awards

Stock

Equity

805

179

$ 71,974

$146,881

$ (1,801) $

(984)

$ (28,274) $ 188,780

39,027

(10,633)

917

446

3,309
1,049

821

179

76,778

175,275

(884)

(15,449)

(43,723)

295
(689)

43,086

(13,400)

317

442

2,961

3,406
3,361

833

194

86,948

204,961

(567)

(11,729)
(1,825)

(57,277)

295
(394)

45,833

(14,890)

820

39,027

917
(10,633)

448

3,323
1,049
(15,449)
295
207,757

43,086

317
(13,400)

443

2,972

3,421
3,361
(11,729)
(1,825)
295
234,698

45,833

820
(14,890)

509

1,553

508

1,547

1,310
1,906

2,728

840

203

$ 94,947

$235,904

253

(1,187)
(1,144)

1,316
1,906
(1,187)
(1,144)
–
750
$ (59,608) $ 270,164

(2,731)
750
$ (2,375)

See notes to consolidated financial statements.
*Total comprehensive income for the years ended February 1, 2003, February 2, 2002 and February 3, 2001 was $46,653, $43,403 and $39,944, respectively.

T H E C AT O C O R P O R AT I O N
PA G E 1 7

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

1 .

S U M M A R Y O F S I G N I F I C A N T
A C C O U N T I N G P O L I C I E S :

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 busi-
ness segments — the operation of women’s fashion specialty stores
and a credit card division. The apparel specialty stores operate under
the names “Cato”, “Cato Fashions”, “Cato Plus” and “It’s Fashion!”
and are located primarily in strip shopping centers in the Southeast.
The Company’s fiscal year ends on the Saturday nearest January 31.
Fiscal years 2002 and 2001 each included 52 weeks. Fiscal year
2000 included 53 weeks.

Use of Estimates: The preparation of the Company’s financial state-
ments in conformity with accounting principles generally accepted
in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates. Significant accounting estimates reflected in
the Company’s financial statements include the allowance for
doubtful accounts receivable, reserves relating to workers’ compen-
sation, general and auto insurance liabilities and reserves for
inventory markdowns.

Cash and Cash Equivalents and Short-Term Investments: Cash equiva-
lents 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 val-
ues of short-term investments are based on quoted market prices.

The Company’s short-term investments are classified as available-for-
sale. As they are available for current operations, they are classified in
consolidated balance sheets as current assets. Available-for-sale securi-
ties 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, net 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 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 geogra-
phies of the Company’s customer base.

Supplemental Cash Flow Information: Income tax payments, net of
refunds received, for the fiscal years ended February 1, 2003,
February 2, 2002 and February 3, 2001 were $21,982,000,
$24,841,000 and $17,435,000, respectively. Additionally, for the
fiscal years ended February 1, 2003 and February 2, 2002, the
Company accepted in an option transaction from an officer for pay-
ment of an option exercise, 48,681 mature shares of Class A
Common Stock for $1,144,500 or $23.51 per share, the average fair
market value on the date of exchange and 92,600 mature shares of
Class A Common Stock for $1,825,000 or $19.71 per share, the
average fair market value on the date of exchange, respectively.

Inventories: Merchandise inventories are stated at the lower of
cost (first-in, first-out method) or market as determined by the
retail method.

Property and Equipment: Property and equipment are recorded at
cost. Maintenance and repairs are charged to operations as incurred;
renewals and betterments are capitalized. 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, as follows:

Classification
Land improvements
Buildings
Leasehold improvements
Fixtures, equipment and software

Estimated Useful Lives
10 years
30-40 years
5-10 years
3-10 years

Retail Sales: Revenues from retail sales, net of returns, are recognized
upon delivery of the merchandise to the customer and exclude
sales taxes.

Advertising: Advertising costs are expensed in the period in which
they are incurred. Advertising expense was $5,299,000, $4,563,000
and $5,812,000 for the fiscal years ended February 1, 2003,
February 2, 2002 and February 3, 2001, respectively.

T H E C AT O C O R P O R AT I O N
PA G E 1 8

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

Earnings Per Share: Basic earnings per share excludes dilution of
stock options and is computed by dividing net earnings by the
weighted-average number of Class A and Class B common shares
outstanding for the respective periods. The weighted-average
number of shares used in the basic earnings per share computations
was 25,465,543, 25,193,610 and 24,988,844 for the fiscal years
ended February 1, 2003, February 2, 2002 and February 3, 2001,
respectively. The weighted-average number of shares representing
the dilutive effect of stock options was 481,914, 695,026 and
476,388 for the fiscal years ended February 1, 2003, February 2,
2002 and February 3, 2001, respectively. The weighted-average
number of shares used in the diluted earnings per share computa-
tions was 25,947,457, 25,888,636 and 25,465,232 for the fiscal
years ended February 1, 2003, February 2, 2002 and February 3,
2001, respectively.

Vendor Allowances: The Company receives certain allowances from
vendors primarily related to purchase discounts and markdown
allowances. These allowances are reflected in gross margin at the
time they are earned.

Income Taxes: The Company files a consolidated federal income tax
return. Income taxes are provided based on the asset and liability
method of accounting, whereby deferred income taxes are provided
for temporary differences between the financial reporting basis and
the tax basis of the Company’s assets and liabilities.

Store Opening and Closing Costs: Costs relating to the opening of
new stores or the relocating or expanding of existing stores are
expensed as incurred. The Company evaluates all long-lived assets
for impairment. Impairment losses are recognized when expected
future cash flows from the use of the asset groups are less than the
asset groups’ carrying values.

Closed Store Lease Obligations: At the time stores are closed, provi-
sions are made for the rentals required to be paid over the remaining
lease terms. Rentals due the Company under non-cancelable sub-
leases are offset against the related obligations in the year the
sublease is signed. There is no offset for assumed sublease revenues.

Insurance: The Company is self-insured with respect to employee
health, workers compensation and general liability claims. Employee
health claims are funded through a VEBA trust to which the
Company makes periodic contributions. The Company has stop-loss
insurance coverage for individual claims in excess of $250,000.

Fair Value of Financial Instruments: The Company’s carrying values
of financial instruments, such as cash and cash equivalents, approx-
imate their fair values due to their short terms to maturity and/or
their variable interest rates.

Stock-based Compensation: The Company applies APB Opinion No.
25, “Accounting for Stock Issued to Employees”, and related inter-
pretations in accounting for its stock option plans. Accordingly, no
compensation expense has been recognized for stock-based com-
pensation where the option price of the stock approximated the fair
market value of the stock on the date of grant. Had compensation
expense for fiscal 2002, 2001 and 2000 stock options granted been
determined consistent with SFAS No. 123, “Accounting for Stock-
Based Compensation”, the Company’s net income and basic and
diluted earnings per share amounts for fiscal 2002, 2001 and 2000
would approximate the following proforma amounts (dollars in
thousands, except per share data):

Stock-Based
Employee
Compensation
Cost*
$
(740)
$ (0.03)
$ (0.03)

As Reported
$ 45,833
1.80
$
1.77
$

Proforma
$ 45,093
1.77
$
1.74
$

Net income – Fiscal 2002
Basic earnings per share
Diluted earnings per share

Net income – Fiscal 2001
Basic earnings per share
Diluted earnings per share

$ 43,086
1.71
$
1.66
$

$ (1,593)
$ (0.06)
$ (0.06)

$ 41,493
1.65
$
1.60
$

Net income – Fiscal 2000
Basic earnings per share
Diluted earnings per share

$ 39,027
1.56
$
1.53
$

$ (1,596)
$ (0.06)
$ (0.06)

$ 37,431
1.50
$
1.47
$

* determined using fair value method

Recent Accounting Pronouncements: In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, “Accounting for Derivative
Instruments and Hedging Activities”. In June 2000, the FASB
issued SFAS No. 138, which amended certain provisions of SFAS
133. The Company adopted SFAS 133 and the corresponding
amendments under SFAS 138 on February 4, 2001, and the adop-
tion of this statement had no impact on the Company’s
consolidated results of operations and financial position.

In July 2001, the FASB issued Statement of Financial Standards
(SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS 142
includes requirements to test goodwill and indefinite lived intangible
assets for impairment rather than amortize them. The Company

T H E C AT O C O R P O R AT I O N
PA G E 1 9

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

adopted SFAS No. 142 on February 3, 2002, and the adoption of
this statement had no impact on the Company’s consolidated results
of operations and financial position, as the Company had no good-
will or other indefinite lived intangible assets.

In August 2001, the FASB issued Statement of Financial Standards
(SFAS) No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”. SFAS No. 144 supercedes SFAS No. 121,
“Accounting for Impairment of Long-Lived Assets to be Disposed
Of ” and Accounting Principles Bulletin (APB) No. 30, “Reporting
the Results of Operations – Reporting the Effects of Disposal of a
Segment of Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions”. Along with establishing a sin-
gle accounting model, based on the framework established in SFAS
No. 121 for impairment of long-lived assets, this standard retains
the basic provisions of APB No. 30 for the presentation of discon-
tinued operations in the income statement, but broadens that
presentation to include a component of the entity. The Company
adopted SFAS No. 144 on February 3, 2002, and the adoption of
this statement had no impact on the Company’s consolidated results
of operations and financial position.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Correction”. SFAS No. 145 rescinds SFAS No. 4,
“Reporting Gains and Losses from Extinguishment of Debt”, and
an amendment of that statement, SFAS No. 64, “Extinguishment of
Debt Made to Satisfy Sinking-Fund Requirements”. Because of the
rescission of SFAS No. 4, the gains and losses from the extinguish-
ments of debt are no longer required to be classified as extraordinary
items. SFAS No. 145 amends SFAS No. 13, “Accounting for
Leases”, to require sale-leaseback accounting for certain lease modi-
fications that have economic effects that are similar to sale-leaseback
transactions. The amendment of SFAS No. 13 is effective for trans-
actions occurring after May 15, 2002. There has been no impact to
the Company due to the Amendment of SFAS No. 13. Lastly, SFAS
No. 145 makes various technical corrections to existing pronounce-
ments that are not substantive in nature. The Company adopted SFAS
No. 145 in fiscal 2002 and the impact on its financial position and
results of operations of the adoption was not material.

In July 2002, the FASB issued SFAS no. 146, “Accounting for Costs
Associated with Exit or Disposal Activities”. This statement is effec-
tive for exit or disposal activities initiated after December 31, 2002.
Liabilities for costs associated with an exit activity should be initially
measured at fair value, when incurred. This statement applies to
costs associated with an exit activity that does not involve the entity

newly acquired in a business combination or a disposal activity cov-
ered by SFAS No. 144. The Company adopted SFAS No. 146 on
December 31, 2002, and the adoption of this statement had no
impact on the Company’s consolidated results of operations and
financial position.

On November 25, 2002 the FASB issued Interpretation No. 45,
“Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others”, which elaborates on the disclosures to be made by a guar-
antor about its obligations under certain guarantees issued. It also
clarifies that a guarantor is required to recognize, at the inception of
a guarantee, a liability for the fair value of the obligation undertaken
in issuing the guarantee. The interpretation expands on the
accounting guidance of SFAS No. 5, “Accounting
for
Contingencies”, SFAS No. 57, “Related Party Disclosures”, and
SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments”. The interpretation also incorporates, without change,
the provisions of FASB Interpretation No. 34, “Disclosure of
Indirect Guarantees of Indebtedness of Others”, which it super-
sedes. The initial recognition and measurement provisions of
Interpretation No. 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002, regardless of the guar-
antor’s fiscal year-end. The disclosures are effective for financial
statements of interim or annual periods ending after December 31,
2002. Although the Company has some guarantees with its
subsidiaries, the Company does not believe the impact of this
Interpretation on its financial position or result of operations will be
material or that additional disclosure is required.

On December 31, 2002, the FASB issued SFAS No. 148,
“Accounting for Stock-Based Compensation – Transition and
Disclosure”. SFAS No. 148 amends SFAS No. 123, “Accounting for
Stock-Based Compensation”, to provide for alternative methods of
transition to SFAS No. 123’s fair value method of accounting for
stock-based employee compensation. SFAS No. 148 also amends
the disclosure provisions of SFAS No. 123 and APB Opinion No.
28, “Interim Financial Reporting”, to require disclosure in the sum-
mary of significant policies of the effects of an entity’s accounting
policy with respect to stock-based employee compensation on
reported net income and earnings per-share in annual and interim
financial statements. While SFAS No. 148 does not amend SFAS
No. 123 to require companies to account for employee stock
options using the fair value method, the disclosure provisions of
SFAS No. 148 are applicable to all companies with stock-based
compensation, regardless of whether they account for that compen-
sation using the fair value method of SFAS No. 123 or the intrinsic

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value method of APB Opinion No. 25, “Accounting for Stock
Issued to Employees”. SFAS No. 148’s amendment of the transition
and annual disclosure requirements of SFAS No. 123 are effective
for fiscal years ending after December 15, 2002. The implementa-
tion of this Statement did not materially affect the Company’s
financial position or results of operations.

Short-term investments at February 2, 2002 include the following
(in thousands):

Security Type
Obligations of federal, state
and political subdivisions

Unrealized
(Losses)

Estimated
Fair Value

Cost

$ 43,795

(872)

$ 42,923

In 2002, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 02-16, “Accounting by a Customer (Including a Reseller)
for Cash Considerations Received from a Vendor”. EITF Issue No.
02-16 provides guidance on how cash considerations received by a cus-
tomer or reseller should be classified in the customer’s statement of
earnings. EITF Issue No. 02-16 is effective for all transactions with
vendors after December 31, 2002. The adoption of EITF Issue No.
02-16 did not have a material impact on our consolidated financial
position or results of operations.

In January 2003, the FASB issued Interpretation No. 46
“Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51, Consolidated Financial
Statements”. This interpretation applies immediately to variable
interest entities created after January 31, 2003 and to variable inter-
est entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after
June 15, 2003, to variable interest entities in which an enterprise
holds a variable interest it acquired before February 1, 2003. This
interpretation may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year
restated. The implementation of this interpretation will not materi-
ally affect the Company’s financial position or results of operations.

Reclassifications: Certain reclassifications have been made to the
consolidated financial statements for prior fiscal years to conform
with presentation for fiscal 2002.

2 .

S H O R T- T E R M I N V E S T M E N T S :

The accumulated unrealized gains in short-term investments at
February 1, 2003 of $265,000 net of a deferred income tax liability
of $149,000 offset by the accumulated unrealized losses in equity
investments of $12,000 net of a deferred income tax benefit of
$6,000 and the accumulated unrealized losses of February 2, 2002
of $567,000, net of a deferred income tax benefit of $305,000, are
reflected in accumulated other comprehensive gains (losses) in the
Consolidated Balance Sheets.

In fiscal 2002, the Company recorded a write-down of $1.8 million
in market value on investments with other than temporary declines
in fair value.

The amortized cost and estimated fair value of debt securities at
February 1, 2003, by contractual maturity, are shown below
(in thousands):

Security Type
Due in one year or less
Due in one year through three years
Total

Cost
$ 58,426
16,031
$ 74,457

Estimated
Fair Value
$ 58,483
16,388
$ 74,871

Additionally, the Company had $1.7 million invested in privately
managed investment funds at February 1, 2003, which are reported
under other assets in the Consolidated Balance Sheets.

3 . A C C O U N T S R E C E I VA B L E :

Accounts receivable consist of the following (in thousands):

Short-term investments at February 1, 2003 include the following
(in thousands):

Security Type
Obligations of federal, state
and political subdivisions

Unrealized
Gains

Estimated
Fair Value

Cost

$ 74,457

414

$ 74,871

Customer accounts – principally

deferred payment accounts
Miscellaneous trade receivables
Total
Less allowance for doubtful accounts
Accounts receivable - net

T H E C AT O C O R P O R AT I O N
PA G E 2 1

February 1,

2003

February 2,
2002

$ 56,853
3,362
60,215
6,099
$ 54,116

$ 53,012
5,249
58,261
5,968
$ 52,293

N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

Finance charge and late charge revenue on customer deferred pay-
ment accounts totaled $13,672,000, $12,951,000 and $13,689,000
for the fiscal years ended February 1, 2003, February 2, 2002 and
February 3, 2001, respectively, and the provision for doubtful
accounts was $4,764,000, $5,913,000 and $5,292,000, for the
fiscal years ended February 1, 2003, February 2, 2002 and February
3, 2001, respectively. The provision for doubtful accounts is classi-
fied as a component of selling, general and administrative expenses
in the accompanying Consolidated Statements of Income.

4 .

P R O P E R T Y A N D E Q U I P M E N T:

Property and equipment consist of the following (in thousands):

Land and improvements
Buildings
Leasehold improvements
Fixtures, equipment and software
Construction in progress
Total
Less accumulated depreciation
Property and equipment - net

February 1,

2003
2,019 $

February 2,
2002
2,019
17,751
30,546
100,138
23,333
173,787
73,650
$ 113,307 $ 100,137

17,751
34,697
143,080
2,246
199,793
86,486

As of February 1, 2003, the Company has capitalized $25.7 million
for an enterprise-wide merchandise and finance system in accor-
dance with SOP 98-1.

Construction in progress primarily represents investments in tech-
nology and ongoing store developement activities scheduled to be
implemented over the next 12 months.

5 . A C C R U E D E X P E N S E S :

Accrued expenses consist of the following (in thousands):

Accrued bonus and retirement
savings plan contributions

Accrued payroll and related items
Closed store lease obligations
Property and other taxes
Accrued health care plan
Other
Total

February 1,

2003

February 2,
2002

$ 6,233
4,265
1,004
7,593
4,347
5,334
$ 28,776

$ 7,605
4,216
1,077
4,211
3,558
4,593
$ 25,260

6 .

F I N A N C I N G A R R A N G E M E N T S :

At February 1, 2003, the Company had an unsecured revolving
credit agreement which provided for borrowings of up to $35 mil-
lion. The revolving credit agreement is committed until October
2004. The credit agreement contains various financial covenants
and limitations, including the maintenance of specific financial
ratios with which the Company was in compliance. There were no
borrowings outstanding during the fiscal year ended February 1,
2003 or February 2, 2002.

The Company had approximately $6,496,000 and $4,314,000 at
February 1, 2003 and February 2, 2002, respectively, of outstand-
ing irrevocable letters of credit relating to purchase commitments.

7 .

S T O C K H O L D E R S ’ E Q U I T Y:

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, dis-
solution or winding up of the Company, holders of Class A
Common Stock are entitled to receive a preferential distribution of
$1.00 per share of the net assets of the Company. Cash dividends
on the Class B Common Stock cannot be paid unless cash dividends
of at least an equal amount are paid on the Class A Common Stock.

The Company’s charter provides that shares of Class B Common
Stock may be transferred only to certain “Permitted Transferees” con-
sisting generally of the lineal descendants of holders of Class B Stock,
trusts for their benefit, corporations and partnerships controlled by
them and the Company’s employee benefit plans. Any transfer of
Class B Common Stock in violation of these restrictions, including a
transfer to the Company, results in the automatic conversion of the
transferred shares of Class B Common Stock held by the transferee
into an equal number of shares of Class A Common Stock.

In October 1993, the Company registered 250,000 shares of Class
A Common Stock available for issuance under an Employee Stock
Purchase Plan (the “Plan”). In May 1998, the shareholders approved
an amendment to the Plan to increase the maximum number of
Class A shares of Common Stock authorized to be issued from
250,000 to 500,000 shares. In February 2003, the Board of
Directors recommended a new plan be adopted effective October
2003 and that an additional 250,000 shares be registered, subject to

T H E C AT O C O R P O R AT I O N
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N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

shareholder approval. Under the terms of the Plan, substantially all
employees may purchase Class A Common Stock through payroll
deductions of up to 10% of their salary. The Class A Common
Stock is purchased at the lower of 85% of market value on the first
or last business day of a six-month payment period. Additionally,
each April 15, employees are given the opportunity to make a lump
sum purchase of up to $10,000 of Class A Common Stock at 85%
of market value. The number of shares purchased by participants
through the plan were 32,487 shares, 38,463 shares and 44,500
shares for the years ended February 1, 2003, February 2, 2002 and
February 3, 2001, respectively.

The Company has an Incentive Stock Option Plan and a Non-
Qualified Stock Option Plan for key employees of the Company.
Total shares issuable under the plans are 3,900,000, of which
825,000 shares are issuable under the Incentive Stock Option Plan
and 3,075,000 shares are issuable under the Non-Qualified Stock
Option Plan. The purchase price of the shares under the option
must be at least 100 percent of the fair market value of Class A
Common Stock at the date of the grant. Options granted under
these plans vest over a 5-year period and expire 10 years after the
date of the grant unless otherwise expressly authorized by the Board
of Directors.

In August 1999, the Board of Directors adopted the 1999 Incentive
Compensation Plan, of which 1,000,000 shares are issuable. No
awards may be granted after July 31, 2004 and shares must be exer-
cised within 10 years of the grant date unless otherwise authorized
by the Board of Directors.

In August 1999, the Board of Directors granted under the 1999
Incentive Compensation Plan, restricted stock awards of 100,000
shares of Class B Common Stock, with a per share fair value of
$11.81 to a key executive. In May 2002, the Board of Directors
approved and granted under the 1999 Incentive Compensation
Plan restricted stock awards of 100,000 shares of Class B Common
Stock, with a per share fair value of $27.31 to a key executive.
These stock awards cliff vest after four years and the unvested por-
tion is included in stockholders’ equity as unearned compensation
in the accompanying financial statements. The charge to compen-
sation expense for these stock awards was $750,000, $295,000 and
$295,000 in fiscal 2002, 2001 and 2000, respectively.

Option plan activity for the three fiscal years ended February 1,
2003 is set forth below:

Range of
Option Prices

Weighted
Average
Price

Options

2,972,782
46,250
(425,350)
(56,300)

$ 1.50 - $ 14.59 $
9.59 - 14.38
4.94 - 13.44
6.94 - 13.44

9.39
11.66
7.82
10.23

2,537,382
21,750
(778,182)
(25,700)

4.94 - 14.59
12.66 - 18.91
4.94 - 14.59
7.69 - 14.59

1,755,250
45,500
(344,100)
(14,700)

4.94 - 18.91
18.05 - 26.76
4.94 - 17.63
8.25 - 12.28

9.68
16.17
8.20
11.61

10.39
20.89
8.11
11.27

1,441,950

$ 4.94 - $ 26.76 $ 11.20

Outstanding options,
January 29, 2000

Granted
Exercised
Cancelled
Outstanding options,
February 3, 2001

Granted
Exercised
Cancelled
Outstanding options,
February 2, 2002

Granted
Exercised
Cancelled
Outstanding options,
February 1, 2003

The following tables summarize stock option information at
February 1, 2003:

Options Outstanding

Weighted Average
Remaining
Contractual
Life
2.37 years
4.72 years
6.73 years
6.22 years
5.60 years

Options
93,600
493,400
418,150
436,800
1,441,950

Weighted
Average
Exercise Price
7.52
$
8.28
$
$ 12.40
$ 14.14
$ 11.20

Options Exercisable

Weighted
Average
Exercise Price
7.52
$
$
8.26
$ 12.42
$ 13.35
$ 10.34

Options
93,600
483,600
211,750
275,450
1,064,400

Range of
Exercise Prices
$ 4.94 - $ 7.69
$ 8.00 - $ 9.59
$ 10.66 - $ 12.72
$ 13.06 - $ 26.76
$ 4.94 - $ 26.76

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N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

Outstanding options at February 1, 2003 covered 717,000 shares of
Class B Common Stock and 724,950 shares of Class A Common
Stock. Outstanding options at February 2, 2002 covered 889,500
shares of Class B Common Stock and 865,750 shares of Class A
Common Stock. Options available to be granted under the option plans
were 421,618 at February 1, 2003 and 452,418 at February 2, 2002.

The Company applies APB Opinion No. 25, “Accounting for Stock
Issued to Employees”, and related interpretations in accounting for its
stock option plans. Accordingly, no compensation expense has been
recognized for stock-based compensation where the option price of
the stock approximated the fair market value of the stock on the date
of grant. Had compensation expense for fiscal 2002, 2001 and 2000
stock options granted been determined consistent with SFAS No.
123, “Accounting for Stock-Based Compensation”, the Company’s
net income and basic and diluted earnings per share amounts for
fiscal 2002, 2001 and 2000 would approximate the following pro-
forma amounts (dollars in thousands, except per share data):

Stock-Based
Employee
Compensation
Cost*
$
(740)
$ (0.03)
$ (0.03)

As Reported
$ 45,833
1.80
$
1.77
$

Proforma
$ 45,093
1.77
$
1.74
$

Net income – Fiscal 2002
Basic earnings per share
Diluted earnings per share

Net income – Fiscal 2001
Basic earnings per share
Diluted earnings per share

$ 43,086
1.71
$
1.66
$

$ (1,593)
$ (0.06)
$ (0.06)

$ 41,493
1.65
$
1.60
$

Net income – Fiscal 2000
Basic earnings per share
Diluted earnings per share

$ 39,027
1.56
$
1.53
$

$ (1,596)
$ (0.06)
$ (0.06)

$ 37,431
1.50
$
1.47
$

* determined using fair value method

The weighted-average fair value of each option granted during
fiscal 2002, 2001 and 2000 is estimated at $8.29, $8.19 and $5.45
per share, respectively. The fair value of each option grant is esti-
mated using the Black-Scholes option-pricing model with the
following assumptions for grants issued in 2002, 2001 and 2000,
respectively: expected dividend yield of 3.29%, 2.62% and 2.42%;
expected volatility of 57.06%, 59.84% and 60.34%, adjusted for
expected dividends; risk-free interest rate of 2.60%, 4.36% and
4.71%; and an expected life of 5 years for 2002, 2001 and 2000.
The effects of applying SFAS 123 in this proforma disclosure are
not indicative of future amounts.

In May 2002, the Board of Directors increased the quarterly divi-
dend by 11% from $.135 per share to $.15 per share.

Total comprehensive income for the years ended February 1, 2003,
February 2, 2002 and February 3 2001 is as follows (in thousands):

Fiscal Year Ended

Net income
Unrealized gains on

available-for-sale securities

Income tax effect
Unrealized gains net of taxes
Total comprehensive

February 1,
2003
$ 45,833

February 2,
2002
$ 43,086

February 3,
2001
$ 39,027

1,268
(448)
820

488
(171)
317

1,411
(494)
917

income

$ 46,653

$ 43,403

$ 39,944

8 . E M P L O Y E E B E N E F I T P L A N S :

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 max-
imum elective deferral, designated by the IRS. The Company is
obligated to make a minimum contribution to cover plan adminis-
trative expenses. Further Company contributions are at the
discretion of the Board of Directors. The Company’s contributions
for the years ended February 1, 2003, February 2, 2002 and
February 3, 2001 were approximately $1,906,000, $2,596,000 and
$2,348,000, 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 contribu-
tions to the ESOP. No contributions were made to the ESOP for the
years ended February 1, 2003, February 2, 2002 or February 3, 2001.

The Company is self-insured with respect to employee health, workers
compensation and general liability claims. The Company has stop-loss
insurance coverage for individual claims in excess of $250,000 for
workers compensation and employee health and $100,000 for general
liability. Employee health claims are funded through a VEBA trust to
which the Company makes periodic contributions. Contributions to
the VEBA trust were $8,970,000, $9,090,000 and $6,964,000 in
fiscal 2002, 2001 and 2000, respectively.

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9 . L E A S E S :

1 1 . I N C O M E TA X E S :

The Company has operating lease arrangements for store facilities and
equipment. Facility leases generally are for periods of five years with
renewal options and most provide for additional contingent rentals
based on a percentage of store sales in excess of stipulated amounts.
Equipment leases are generally for three to seven year periods.

The minimum rental commitments under non-cancelable operating
leases are (in thousands):

Fiscal Year
2003
2004
2005
2006
2007
Total minimum lease payments

$ 37,308
28,581
21,711
15,406
8,177
$ 111,183

The following schedule shows the composition of total rental
expense for all leases (in thousands):

Fiscal Year Ended

Minimum rentals
Contingent rent
Total rental expense

February 1,
2003
$ 37,848
389
$ 38,237

February 2,

2002
$ 37,117
471
$ 37,588

February 3,
2001
$ 34,449
479
$ 34,928

1 0 . R E L AT E D P A R T Y T R A N S A C T I O N S :

The Company leases certain of its stores from entities in which
Mr. George S. Currin, a director of the Company, has an ownership
interest. Rent expense and related charges totaling $883,367,
$785,936 and $523,853 were paid in fiscal 2002, 2001 and 2000,
respectively, under these leases.

During 2000, 2001, 2002 and the first quarter of 2003, the
Company made payments totaling $59,017, $70,651, $115,069 and
$92,122 for the benefit of entities in which Mr. Wayland H. Cato,
Jr., Chairman of the Board, and Mr. Edgar T. Cato, Former Vice
Chairman of the Board and Co-Founder and Director, have a
material interest. These payments were charged to expense in the
periods indicated. The Company subsequently determined these
payments were unrelated to the business of the Company. In April
2003, $362,557, including interest of $25,698, was reimbursed to
the Company.

The provision for income taxes consists of the following (in thousands):

Fiscal Year Ended

Current income taxes:

Federal
State

Total

Deferred income taxes:

Federal
State

Total

Total income tax expense

February 1,
2003

February 2,
2002

February 3,
2001

$ 24,572
1,364
25,936

$ 22,309
469
22,778

$ 18,461
954
19,415

63
7
70
$ 26,006

376
46
422
$ 23,200

1,319
281
1,600
$ 21,015

Significant components of the Company’s deferred tax assets and
liabilities as of February 1, 2003 and February 2, 2002 are as fol-
lows (in thousands):

Deferred tax assets:
Bad debt reserve
Inventory valuation
Write-down of short-term investments
Restricted stock options
Unrealized losses on

short-term investments

Other, net

Total deferred tax assets

Deferred tax liabilities:

Tax over book depreciation
Unrealized gains on

short-term investments

Other, net

Total deferred tax liabilities

Net deferred tax liabilities

February 1,
2003

February 2,
2002

$ 2,338
1,739
669
407

$ 2,288
1,282
–
296

–
2,972
8,125

305
936
5,107

11,682

5,898

143
1,218
13,043
$ 4,918

–
3,609
9,507
$ 4,400

The reconciliation of the Company’s effective income tax rate with
the statutory rate is as follows:

Fiscal Year Ended

Federal income tax rate
State income taxes
Other
Effective income tax rate

February 1,
2003
35.0%
1.2
0.0
36.2%

February 2,

2002
35.0%
0.9
(0.9)
35.0%

February 3,
2001
35.0%
1.6
(1.6)
35.0%

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1 2 . Q U A R T E R LY F I N A N C I A L D ATA ( U N A U D I T E D ) :

Summarized quarterly financial results are as follows (in thousands, except per share data):

Fiscal 2002
Retail sales
Total revenues (1)
Cost of goods sold
Gross margin
Income before income taxes
Net income
Basic earnings per share
Diluted earnings per share

Fiscal 2001
Retail sales
Total revenues (2)
Cost of goods sold
Gross margin
Income before income taxes
Net income
Basic earnings per share
Diluted earnings per share

First
196,617
200,491
124,460
72,157
28,683
18,300
.72
.71

First
180,347
183,946
116,391
63,956
24,485
15,916
.63
.61

$
$

Second
186,900
190,715
125,854
61,046
19,213
12,258
.48
.47

Second
172,444
175,790
118,093
54,351
16,867
10,963
.43
.42

$
$

Third
$ 158,217
162,228
110,188
48,029
8,507
5,427
.21
.21

$
$

Third
$ 147,619
151,043
101,743
45,876
7,746
5,035
.20
.20

$
$

Fourth
191,008
194,897
135,843
55,165
15,436
9,848
.39
.38

Fourth
185,243
188,542
130,139
55,104
17,188
11,172
.45
.43

$
$

(1) For the first three quarters of 2002, the Company reported interest and dividend income of $1,150, $1,673 and $1,147, respectively, as part of total revenues. Such amounts have been reclassified
outside of total revenues. This reclassification had no impact on Income before income taxes or Net Income.
(2) For the four quarters of 2001, the Company reported interest and dividend income of $1,784, $1,611, $1,827 and $1,115, respectively, as part of total revenues. Such amounts have been reclassi-
fied outside of total revenues. This reclassification had no impact on Income before income taxes or Net Income.

1 3 . R E P O R TA B L E S E G M E N T I N F O R M AT I O N :

The Company has two reportable segments: retail and credit.
The Company operates its women’s fashion specialty retail stores in
26 states, principally in the Southeast. The Company offers its own
credit card to its customers and all credit authorizations, payment
processing, and collection efforts are performed by a separate sub-
sidiary of the Company.

Fiscal 2000
Revenues
Depreciation
Interest and other income, net
Income before taxes
Total assets
Capital expenditures

Retail
$ 648,552
9,426
(6,554)
55,278
244,199
27,195

Credit
$ 13,985
66
–
4,764
66,543
35

Total
$ 662,537
9,492
(6,554)
60,042
310,742
27,230

The following schedule summarizes certain segment information
(in thousands):

Fiscal 2002
Revenues
Depreciation
Interest and other income, net
Income before taxes
Total assets
Capital expenditures

Retail
$ 734,352
14,851
(3,680)
66,375
310,173
28,953

Fiscal 2001
Revenues
Depreciation
Interest and other income, net
Income before taxes
Total assets
Capital expenditures

Retail
$ 686,092
10,821
(6,299)
62,786
263,909
25,684

Credit
$ 13,979
62
–
5,464
73,237
–

Credit
$ 13,229
65
–
3,500
68,132
–

Total
$ 748,331
14,913
(3,680)
71,839
383,410
28,953

Total
$ 699,321
10,886
(6,299)
66,286
332,041
25,684

The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
The Company evaluates performance based on profit or loss from
operations before income taxes. The Company does not allocate
certain corporate expenses or income taxes to the segments.

1 4 . C O M M I T M E N T S A N D C O N T I N G E N C I E S :

Workers compensation and general liability claims are settled through
a claims administrator and are limited by stop-loss insurance cover-
age for individual claims in excess of $250,000 and $100,000,
respectively. The Company paid claims of $1,652,000, $1,379,000
and $1,486,000 in fiscal 2002, 2001 and 2000, respectively.
The Company had no outstanding letters of credit relating to such
claims at February 1, 2003 or at February 2, 2002. See Note 6 for let-
ters of credit related to purchase commitments, Note 8 for 401(k)
plan contribution obligations and Note 9 for lease commitments.

The Company is a defendant in legal proceedings considered to be in
the normal course of business and none of which, singularly or col-
lectively, are considered to be material to the Company as a whole.

T H E C AT O C O R P O R AT I O N
PA G E 2 6

I N D E P E N D E N T A U D I T O R S ’ R E P O R T

T O T H E B O A R D O F D I R E C T O R S A N D S T O C K H O L D E R S
O F T H E C AT O C O R P O R AT I O N

We have audited the accompanying consolidated balance sheets of The Cato Corporation and subsidiaries (the Company) as of
February 1, 2003 and February 2, 2002, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of
the three years in the period ended February 1, 2003. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at
February 1, 2003 and February 2, 2002 and the results of its operations and its cash flows for each of the three years in the period ended
February 1, 2003, in conformity with accounting principles generally accepted in the United States of America.

Charlotte, North Carolina
April 21, 2003

T H E C AT O C O R P O R AT I O N
PA G E 2 7

M A N A G E M E N T E X E C U T I V E G R O U P A N D B O A R D O F D I R E C T O R S

M A N A G E M E N T E X E C U T I V E G R O U P

B O A R D O F D I R E C T O R S

John P. Derham Cato
President, Vice Chairman of the Board
and Chief Executive Officer

Michael O. Moore
Executive Vice President,
Chief Financial Officer and Secretary

B. Allen Weinstein
Executive Vice President, Chief Merchandising Officer
of the Cato Division

David P. Kempert
Executive Vice President, Chief Store Operations Officer
of the Cato Division

C. David Birdwell
Executive Vice President, President and General Manager
of the It’s Fashion! Division

Howard A. Severson
Executive Vice President, Chief Real Estate and Store
Development Officer and Assistant Secretary

Robert C. Brummer
Senior Vice President, Human Resources and
Assistant Secretary

Wayland H. Cato, Jr. 1
Chairman of the Board

John P. Derham Cato 1
President, Vice Chairman of the Board
and Chief Executive Officer

Edgar T. Cato 1
Former Vice Chairman of the Board and Co-Founder

Michael O. Moore
Executive Vice President,
Chief Financial Officer and Secretary

Clarice Cato Goodyear
Special Assistant to the Chairman

Thomas E. Cato
Vice President, Divisional Merchandise Manager

Robert W. Bradshaw, Jr. 1
Of Counsel - Robinson, Bradshaw & Hinson, P.A.

George S. Currin 1,3
Chairman and Managing Director of The Fourth Stockton
Company LLC and Chairman Currin-Patterson Properties LLC

Grant L. Hamrick 1,2,3
Retired Senior Vice President, Chief Financial Officer,
American City Business Journals

James H. Shaw 2
Retired Chairman and Chief Executive Officer
Ivey’s Department Stores

A. F. (Pete) Sloan 1,2,3
Retired Chairman and Chief Executive Officer
Lance, Inc.

1 Member of the Executive/Finance Committee

2 Member of the Compensation Committee

3 Member of the Audit Committee

T H E C AT O C O R P O R AT I O N
PA G E 2 8

C O R P O R AT E I N F O R M AT I O N

A copy of the Company’s Annual Report to the Securities and Exchange Commission (Form 10-K) for the fiscal year ended February 1, 2003
is available to shareholders without charge upon written request to Mr. Michael O. Moore, Executive Vice President, Chief Financial Officer
and Secretary, The Cato Corporation, P.O. Box 34216, Charlotte, North Carolina 28234.

C O R P O R AT E H E A D Q U A R T E R S
The Cato Corporation
8100 Denmark Road
Charlotte, North Carolina 28273-5975
Telephone: (704) 554-8510

M A R K E T & D I V I D E N D I N F O R M AT I O N
The Company’s Class A Common Stock trades on the New York
Stock Exchange (NYSE) under the symbol CTR. Below is the
market range and dividend information for the four quarters of
2002 and 2001.

2002
First quarter
Second quarter
Third quarter
Fourth quarter

2001
First quarter
Second quarter
Third quarter
Fourth quarter

High
$ 27.21
27.44
19.95
21.80

High
$ 20.00
21.75
20.06
21.34

Price

Low
$ 19.91
18.00
14.18
17.33

Price

Low
$ 14.81
15.51
14.23
16.68

Dividend
.135
.15
.15
.15

Dividend
.125
.135
.135
.135

As of March 21, 2003 the approximate number of holders of the
Company’s Class A Common Stock was 1,314 and there were 10
record holders of the Company’s Class B Common Stock.

M A I L I N G A D D R E S S
P.O. Box 34216
Charlotte, North Carolina 28234

I N D E P E N D E N T A U D I T O R S
Deloitte & Touche LLP
Charlotte, North Carolina 28202-1675

C O R P O R AT E C O U N S E L
Robinson, Bradshaw & Hinson, P.A.
Charlotte, North Carolina 28246

T R A N S F E R A G E N T A N D R E G I S T R A R
Wachovia Bank, N.A.
Securities Transfer Department, CMG-5
Charlotte, North Carolina 28288

A N N U A L M E E T I N G N O T I C E
The Annual Meeting of Shareholders
11:00 a.m., Thursday, May 22, 2003
Corporate Office, 8100 Denmark Road,
Charlotte, NC 28273-5975

T H E C AT O C O R P O R AT I O N
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8 1 0 0 D E N M A R K R O A D

C H A R L O T T E , N C 2 8 2 7 3 - 5 9 7 5

W W W. C A T O C O R P. C O M