2003
a n n u a l r e p o r t
C o m p a ny P r o f i l e
Fi n a n c i a l H i g h l i g h t s
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 1,100
a p p a re l s p e c i a l t y s t o re s
principally in the southeastern
United States. Cato, the core
division, pr imar ily of fer s
exclusive merchandise with
fashion and quality comparable
to mall specialty stores at low
prices, ever y day. Most Cato
stores range from 4,000 to
6,000 square feet and are
located primarily in strip
shopping center s anchored by
national discounter s or market
dominant grocer y 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
2003
2002
2001
2000
1999
(Dollars in thousands, except per share data)
FOR THE YEAR ENDED
Retail sales
Total revenues
Comparable store sales
$731,770
$732,742
$685,653
$648,482
$585,085
747,267
748,331
699,321
662,537
598,240
increase (decrease)
(7)%
0%
1%
3%
4%
Income before income taxes
49,277
71,839
66,286
60,042
51,975
Net income
31,389
45,833
43,086
39,027
33,931
Net income as a percent
of retail sales
4.3%
6.3%
6.3%
6.0%
5.8%
Cash dividends paid per share
Basic earnings per share
Diluted earnings per share
.63
1.36
1.33
.585
1.80
1.77
Number of stores
1,102
1,022
Number of stores opened
Number of stores closed
Net increase in number of stores
87
7
80
90
5
85
.53
1.71
1.66
937
85
7
78
.425
1.56
1.53
859
65
15
50
.28
1.28
1.26
809
83
6
77
AT YEAR END
Cash, cash equivalents
and investments
$ 71,402
$106,936
$ 84,695
$ 83,112
$ 87,275
Working capital
112,908
162,609
139,633
125,724
124,988
Current ratio
Total assets
2.0
2.7
2.7
2.4
2.5
351,573
383,410
332,041
310,742
285,789
Stockholders’ equity
194,111
270,164
234,698
207,757
188,780
A M e s s a ge t o O u r S h a re h o l d e r s
In last year’s shareholder letter, my message was about Cato’s ability to
consistently deliver growth, improve earnings, and increase value to you and
our customers. At that time, Cato had begun to experience declining comp
store sales. Unfortunately, that trend continued for the remainder of the
year and created a challenging backdrop from which to grow earnings. The
Company has faced ongoing retail pricing pressure and an economy in which
many people remain unemployed. However, even in this difficult environment,
Cato earned $31.4 million, a high rate of return on sales for our industry
segment, and $1.33 per share. We remain committed to our sound strategies, which have served us well. We are focused
on executing these strategies to deliver fashion, quality, and value to our customers, grow profitably, and increase long-term
shareholder value.
During 2003, we strengthened the Company’s foundation with a number of significant accomplishments. We invested
$21 million in stores, systems, and infrastructure to support growth and further improve the efficiency of our business.
We continued our store expansion program by opening 87 new stores in existing and new markets. We increased the
capacity of the current distribution center to serve 2,000 stores.
Our strong cash position enabled us to repurchase 20% of our outstanding shares at a favorable price and increase our
quarterly dividend by 7% as we paid $14.5 million in dividends during the year. We have returned a portion of profits to
shareholders through dividends for 12 consecutive years while our dividend has increased fourfold since 1997.
In 2004, we will continue to invest in the future by undertaking several major initiatives. We are installing a state-of-the-art
store register system that will reduce costs and provide internet capability to the stores. We have improved our store
construction process to reduce the cost of new stores. We are implementing an in-house payroll and human resource
system to provide better control and more efficient processing. Our merchandise processing and store allocation systems
have been enhanced to enable us to better tailor size and color assortments by store. And we continue to invest in the
fashion content, quality, fit, and construction of our merchandise to provide exceptional value to our customers.
We expect difficult economic conditions to continue in many of our markets as our customers face employment concerns
and rising costs including gas, food and healthcare. The initiatives undertaken to lower operating costs and the investments
made in infrastructure and technology will help Cato maintain profitability in difficult economic times and deliver increased
earnings in good economic times. We will continue to refine and strengthen our business for the long term.
We remain committed to our long-term goal of growing both earnings and dividends at an annual rate of 10% while
delivering fashion and value to our customers and value to you as shareholders.
John P. Derham Cato
Chairman, President and
Chief Executive Officer
Mr. Wayland H. Cato, Jr., a Company co-founder and former Chief Executive Officer, retired as Chairman of the Board in
January 2004 and has been named Chairman Emeritus. Mr. Cato has served on the Board since 1946, held the position of
Chief Executive Officer from 1960 to 1999, and has served as Chairman since 1970.
Mr. Edgar T. Cato retired from the Board of Directors in January 2004. Mr. Cato is a co-founder of the Company and former
Vice Chairman of the Board and has served on the Board since 1946. He has been named Vice Chairman Emeritus.
The Board of Directors and the entire Cato organization express our appreciation for their years of service and contributions
to the growth of our Company. They have left a legacy that we are proud to continue.
Page 1
C o m m i t m e n t t o Va l u e
Cato has developed a strong niche in the women’s apparel segment by
providing high quality fashion apparel at an exceptional value. We continue
to strengthen our market positioning by further improving the quality of
merchandise and finding more ways to provide value to our customers.
We continue to invest in our merchandising area. The enterprise-wide
merchandise system implemented in 2002 is providing better information
to our merchandise organization. As we tailor our store allocations by size
and color, we will improve our ability to have the right merchandise in the
right store for our customers.
Our product development function continues to improve the quality of our
merchandise by reviewing over 12,000 styles each year to ensure they meet
our strict guidelines of construction, color, and fit. Also, we continue to
identify more styles that can be directly sourced at better margins.
Page 2
C o m m i t m e n t t o G r o w t h
In 2003, we opened 87 new stores, relocated 28 stores, and remodeled
15 stores. We entered two new states and now operate in 28 states. Over
the last 7 years, we have added 517 new stores, relocated 166 stores and
remodeled 292 stores, all funded through cash generated by operations.
We assess our store base every year and close stores that do not meet our
standards. In 2003, we closed 7 stores and have closed 70 stores over the
last 7 years.
In 2004, we will continue to open stores in our core geography as well as
in new markets in the Northeast, Midwest and West. Our strong financial
position enables us to continue our store expansion with 90 new stores
planned in 2004.
s t o r e g r o w t h
number of stores (at year end)
2
0
1
1
2
2
0
1
7
3
9
9
5
8
9
0
8
2
3
7
3
9
6
97
98
99
00
01
02
03
Page 3
M A NAG E M E N T E X E C U T I V E G RO U P
B OA R D O F D I R E C TO R S
John P. Derham Cato
Chairman, President and
Chief Executive Officer
Michael O. Moore
Executive Vice President,
Chief Financial Officer and Secretary
John P. Derham Cato
Chairman, President and
Chief Executive Officer
Michael O. Moore
Executive Vice President,
Chief Financial Officer and Secretary
B. Allen Weinstein
Thomas E. Cato
Executive Vice President, Chief Merchandising Officer
Vice President, Divisional Merchandise Manager
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
Michael T. Greer
Senior Vice President, Director of Stores
of the Cato Division
Robert C. Brummer
Senior Vice President,
Human Resources
Robert W. Bradshaw, Jr. 1,3
Of Counsel—Robinson, Bradshaw & Hinson, P.A.
George S. Currin 1,2
Chairman and Managing Director of The Fourth Stockton
Company LLC and Chairman Currin-Patterson Properties LLC
Grant L. Hamrick 3
Retired Senior Vice President, Chief Financial Officer
American City Business Journals
James H. Shaw 1,2
Retired Chairman and Chief Executive Officer
Ivey’s Department Stores
A. F. (Pete) Sloan2,3
Retired Chairman and Chief Executive Officer
Lance, Inc.
1 Member of the Corporate Governance and Nominating Committee
2 Member of the Compensation Committee
3 Member of the Audit Committee
Page 4
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Ñscal year ended January 31, 2004
or
n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-31340
The Cato Corporation
Registrant
Delaware
State of Incorporation
8100 Denmark Road
Charlotte, North Carolina 28273-5975
Address of Principal Executive OÇces
56-0484485
I.R.S. Employer
IdentiÑcation Number
704/554-8510
Registrant's Telephone Number
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock
Preferred Share Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has Ñled all reports required to be Ñled by Section 13
or 15(d) of The Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to Ñle such reports), and (2) has been subject to such Ñling requirements for
the past 90 days. Yes ¥
No n
Indicate by check mark, if disclosure of delinquent Ñlers pursuant to Item 405 of the Regulation S-K is
not contained herein, and will not be contained, to the best of the Registrant's knowledge, in deÑnitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes ¥
No n
Indicate by check mark whether the registrant is an accelerated Ñler (as deÑned in Rule 12b-2 of the
Act). Yes ¥
No n
The aggregate market value of the Registrant's Class A Common Stock held by Non-aÇliates of the
Registrant as of August 1, 2003, the last business day of the Company's most recent second quarter, was
$450,939,578 based on the last reported sale price per share on the New York Stock Exchange (NYSE) on
that date. As of March 29, 2004, there were 20,130,848 shares of Class A Common Stock and 470,350 shares
of Convertible Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement relating to the 2004 annual meeting of shareholders are incorporated by
reference into the following part of this annual report:
Part III Ì Items 10, 11, 12, 13 and 14
THE CATO CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 1.
Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 2.
Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 3.
Item 4.
Submission of Matters to a Vote of Security HoldersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 4A. Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
PART II
Page
3 Ó 7
7
7
7
7 Ó 8
9
10
Item 7A. Quantitative and Qualitative Disclosures about Market RiskÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 8.
Item 9.
of Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 Ó 17
17
Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18 Ó 40
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 9A. Controls and Procedures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
41
41
PART III
Item 10. Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41 Ó 42
42
Item 11. Executive CompensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 12.
Security Ownership of Certain BeneÑcial Owners and Management and Related
Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Principal Accountant Fees and Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 14.
42
43
43
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43 Ó 52
1
The following discussion and analysis should be read along with the Consolidated Financial Statements,
including the accompanying Notes appearing later in this report. The following are ""forward-looking''
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended: (1) statements in this Annual Report on Form 10-K that
reÖect projections or expectations of our future Ñnancial or economic performance; (2) statements that are not
historical information; (3) statements of our beliefs, intentions, plans and objectives for future operations,
including those contained in ""Business'', ""Properties'', ""Legal Proceedings'', ""Controls and Procedures'' and
""Management's Discussion and Analysis of Financial Condition and Results of Operations''; (4) statements
relating to our operations or activities for 2004 and beyond; and (5) statements relating to our future
contingencies. Words such as ""expects'', ""anticipates'', ""approximates'', ""believes'', ""estimates'', ""hopes'',
""intends'', ""may'', ""plans'', ""should'' and variations of such words and similar expressions are intended to
identify such forward-looking statements. No assurance can be given that actual results or events will not
diÅer materially from those projected, estimated, assumed or anticipated in any such forward-looking
statements. Forward-looking statements included in this report are based on information available to us as of
the Ñling date of this report, and we assume no obligation to update any such forward-looking information
contained in this report.
Our website is located at www.catocorp.com. We make available free of charge, through our website, our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements
and other reports Ñled or furnished pursuant to Section 13(a) or 15(d) under the Securities Exchange Act.
These reports are available as soon as reasonably practicable after we electronically Ñle those materials with
the SEC. We also post on our website the charters of our Audit, Compensation and Corporate Governance
and Nominating Committees; our Corporate Governance Guidelines, Code of Business Conduct and Ethics;
and any amendments or waivers thereto; and any other corporate governance materials contemplated by SEC
or New York Stock Exchange (""NYSE'') regulations. The documents are also available in print to any
shareholder who requests by contacting our corporate secretary at our company oÇces.
2
Item 1. Business:
General
PART I
The Company, founded in 1946, operated 1,102 women's fashion specialty stores at January 31, 2004,
under the names ""Cato,'' ""Cato Fashions,'' ""Cato Plus'' and ""It's Fashion!'' in 28 states, principally in the
southeastern United States. The Company oÅers quality fashion apparel and accessories at low prices,
everyday in junior/missy and plus sizes. Additionally, the Company oÅers clothing for girls ages 7 Ó 16 in
selected locations. The Company's stores feature a broad assortment of apparel and accessories, including
casual and dressy sportswear, dresses, careerwear, coats, shoes, costume jewelry and handbags. A major
portion of the Company's merchandise is sold under its private labels and is produced by various vendors in
accordance with the Company's strict speciÑcations. Most stores range in size 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. The Company emphasizes friendly customer service and coordinated merchandise presenta-
tions in an appealing store environment. The Company oÅers its own credit card and layaway plan. Credit and
layaway sales represented 15% of retail sales in Ñscal 2003. See Note 14 to the Consolidated Financial
Statements, ""Reportable Segment Information'' for a discussion of segment information.
Business
The Company's primary objective is to be the leading fashion specialty retailer for fashion conscious low-
to-middle income females in its markets. Management believes the Company's success is dependent upon its
ability to diÅerentiate its stores from department stores, mass merchandise discount stores and competing
women's specialty stores. The key elements of the Company's business strategy are:
Merchandise Assortment. The Company's stores oÅer a wide assortment of apparel and accessory items
in regular and plus sizes and emphasize color, product coordination and selection.
Value Pricing. The Company oÅers quality merchandise that is generally priced below comparable
merchandise oÅered by department stores and mall specialty apparel chains, but is generally more fashionable
than merchandise oÅered by discount stores. Management believes that the Company has positioned itself as
the everyday low price leader in its market segment.
Strip Shopping Center Locations. The Company locates its stores principally in convenient strip centers
anchored by national discounters or market-dominant grocery stores that attract large numbers of potential
customers.
Customer Service. Store managers and sales associates are trained to provide prompt and courteous
service and to assist customers in merchandise selection and wardrobe coordination.
Credit and Layaway Programs. The Company oÅers its own credit card and a layaway plan to make the
purchase of its merchandise more convenient.
Expansion. The Company plans to continue to expand into northern, midwestern and western adjacent
states, as well as continuing to ""Ñll-in'' existing southeastern core geography.
Merchandising
Merchandising
The Company oÅers a broad selection of high quality and exceptional value apparel and accessories to
suit the various lifestyles of the fashion conscious low-to-middle income female, ages 18 to 50. In addition, the
Company oÅers on-trend fashion in exciting colors with consistent Ñt and quality.
The Company's merchandise lines include dressy, career, and casual sportswear, dresses, coats, shoes,
lingerie, costume jewelry and handbags. Apparel for girls ages 7 Ó 16 is oÅered in selected stores. The
3
Company primarily oÅers exclusive merchandise with fashion and quality comparable to mall specialty stores
at low prices, every day.
The collaboration of the merchandising team with an expanded in-house product development and direct
sourcing function has enhanced merchandise oÅerings delivering quality exclusive products at lower costs. The
product development and direct sourcing operations provide research on emerging fashion and color trends,
technical services and direct sourcing options.
As a part of its merchandising strategy, members of the Company's merchandising staÅ frequently visit
selected stores, monitor the merchandise oÅerings of other retailers, regularly communicate with store
operations associates and frequently confer with key vendors. The Company tests most new fashion-sensitive
items in selected stores to aid it in determining their appeal before making a substantial purchasing
commitment. The Company also takes aggressive markdowns on slow-selling merchandise and does not carry
over merchandise to the next season.
Purchasing, Allocation and Distribution
Although the Company purchases merchandise from approximately 1,500 suppliers, most of its
merchandise is purchased from approximately 100 primary vendors. In Ñscal 2003, purchases from the
Company's largest vendor accounted for approximately 7% of the Company's total purchases. No other vendor
accounted for more than 3% of total purchases. The Company is not dependent on its largest vendor or any
other vendor for merchandise purchases and the loss of any single vendor or group of vendors would not have a
material adverse eÅect on the Company's operating results or Ñnancial condition. A substantial portion of the
Company's merchandise is sold under its private labels and is produced by various vendors in accordance with
the Company's strict speciÑcations. The Company purchases most of its merchandise from domestic importers
and vendors, which typically minimizes the time necessary to purchase and obtain shipments in order to
enable the Company to react to merchandise trends in a more timely fashion. Although a signiÑcant portion of
the Company's merchandise is manufactured overseas, principally in the Far East, any economic, political or
social unrest in that region is not expected to have a material adverse eÅect on the Company's ability to obtain
adequate supplies of merchandise.
An important component of the Company's strategy is the allocation of merchandise to individual stores
based on an analysis of sales trends by merchandise category, customer proÑles and climatic conditions. A
merchandise control system provides current information on the sales activity of each merchandise style in
each of the Company's stores. Point-of-sale terminals in the stores collect and transmit sales and inventory
information to the Company's central database, permitting timely response to sales trends on a store-by-store
basis.
All merchandise is shipped directly to the Company's distribution center in Charlotte, North Carolina,
where it is inspected then allocated by the merchandise distribution staÅ for shipment to individual stores. The
Öow of merchandise from receipt at the distribution center to shipment to stores is controlled by an on-line
system. Shipments are made by common carrier, and each store receives at least one shipment per week.
Advertising
The Company uses radio, graphics and a website as its primary advertising media. The Company uses
radio advertising in selected trade areas. The Company's total advertising expenditures were approximately
.8% of retail sales in Ñscal 2003.
Store Operations
The Company's store operations management team consists of 2 directors of stores, 3 territorial
managers, 16 regional managers and 111 district managers. Regional managers receive a salary plus a bonus
based on achieving targeted goals for sales, payroll, shrinkage control and store proÑtability. District managers
receive a salary plus a bonus based on achieving targeted objectives for district sales increases and shrinkage
control. Stores are staÅed with a manager, two assistant managers and additional part-time sales associates
4
depending on the size of the store and seasonal personnel needs. Store managers receive a salary and all other
store personnel are paid on an hourly basis. Store managers, assistant managers and sales associates are
eligible for monthly and semi-annual bonuses based on achieving targeted goals for their store's sales increases
and shrinkage control.
The Company is constantly improving its training programs to develop associates. Nearly 80% of store
and Ñeld management are promoted from within, allowing the Company to internally staÅ an expanding store
base. The Company has training programs at each level of store operations. New store managers are trained in
training stores managed by experienced associates who have achieved superior results in meeting the
Company's goals for store sales, payroll expense and shrinkage control. The type and extent of district
manager training varies depending on whether the district manager is promoted from within or recruited from
outside the Company. All district managers receive at a minimum a one-week orientation program at the
Company's corporate oÇce.
Store Locations
Most of the Company's stores are located in the southeastern United States in a variety of markets
ranging from small towns to large metropolitan areas with trade area populations of 20,000 or more. Stores
range in size from 4,000 to 6,000 square feet and average approximately 4,000 square feet.
All of the Company's stores are leased. Approximately 93% are located in strip shopping centers and 7%
in enclosed shopping malls. The Company locates stores in strip shopping centers anchored by a national
discounter, primarily Wal-Mart Supercenters, or market-dominant grocery stores. The Company's strip center
locations provide ample parking and shopping convenience for its customers.
The Company's store development activities consist of opening new stores in new and existing markets,
and relocating selected existing stores to more desirable locations in the same market area. The following table
sets forth information with respect to the Company's development activities since Ñscal 1999.
Fiscal Year
Store Development
Number of Stores
Beginning of
Year
Number
Opened
Number
Closed
Number of Stores
End of Year
1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
732
809
859
937
1,022
83
65
85
90
87
6
15
7
5
7
809
859
937
1,022
1,102
In Fiscal 2003 the Company relocated 28 stores, downsized one store and remodeled 15 stores.
In Fiscal 2004 the Company plans to open approximately 90 new stores, relocate 27 stores, close 10
stores, and remodel 15 stores.
The Company periodically reviews its store base to determine whether any particular store should be
closed based on its sales trends and proÑtability. The Company intends to continue this review process to close
underperforming stores. The seven closed in 2003 were not material to the Company's results of operations.
Credit and Layaway
Credit Card Program
The Company oÅers its own credit card, which accounted for approximately 10% of retail sales in Ñscal
2003. The Company's net bad debt expense in Ñscal 2003 was 7.8% of credit sales.
Customers applying for the Company's credit card are approved for credit if they have a satisfactory
credit record and meet minimum income criteria. Customers are required to make minimum monthly
5
payments based on their account balances. If the balance is not paid in full each month, the Company assesses
the customer a Ñnance charge. If payments are not received on time, the customer is assessed a late fee.
Layaway Plan
Under the Company's layaway plan, merchandise is set aside for customers who agree to make periodic
payments. The Company adds a nonrefundable administrative fee to each layaway sale. If no payment is made
for four weeks, the customer is considered to have defaulted, and the merchandise is returned to the selling
Öoor and again oÅered for sale, often at a reduced price. All payments made by customers who subsequently
default on their layaway purchase are returned to the customer upon request, less the administrative fee and a
restocking fee. The Company defers recognition of layaway sales and its related fees to the accounting period
when the customer picks up layaway merchandise. Layaway sales represented approximately 5% of retail sales
in Ñscal 2003, 2002 and 2001.
Management Information Systems
The Company's systems provide daily Ñnancial and merchandising information that is used by manage-
ment to enhance the timeliness and eÅectiveness of purchasing and pricing decisions. Management uses a
daily report comparing actual sales with planned sales and a weekly ranking report to monitor and control
purchasing decisions. Weekly reports are also produced which reÖect sales, weeks of supply of inventory and
other critical data by product categories, by store and by various levels of responsibility reporting. Purchases
are made based on projected sales but can be modiÑed to accommodate unexpected increases or decreases in
demand for a particular item.
Sales information is projected by merchandise category and, in some cases, is further projected and actual
performance measured by stock keeping unit (SKU). Merchandise allocation models are used to distribute
merchandise to individual stores based upon historical sales trends, climatic diÅerences, customer demo-
graphic diÅerences and targeted inventory turnover rates.
Competition
The women's retail apparel industry is highly competitive. The Company believes that the principal
competitive factors in its industry include merchandise assortment and presentation, fashion, price, store
location and customer service. The Company competes with retail chains that operate similar women's apparel
specialty stores. In addition, the Company competes with local apparel specialty stores, mass merchandise
chains, discount store chains and major department stores. To the extent that the Company opens stores in
larger cities and metropolitan areas, competition is expected to be more intense in those markets.
Regulation
A variety of laws aÅect the revolving credit program oÅered by the Company. The Federal Consumer
Credit Protection Act (Truth-in Lending) and Regulation Z promulgated thereunder require written
disclosure of information relating to such Ñnancing, including the amount of the annual percentage rate and
the Ñnance charge. The Federal Fair Credit Reporting Act also requires certain disclosures to potential
customers concerning credit information used as a basis to deny credit. The Federal Equal Credit Opportunity
Act and Regulation B promulgated thereunder prohibit discrimination against any credit applicant based on
certain speciÑed grounds. The Federal Trade Commission has adopted or proposed various trade regulation
rules dealing with unfair credit and collection practices and the preservation of consumers' claims and
defenses. The Company is also subject to the provisions of the Fair Debt Collection Practices Act that
regulates the manner in which the Company collects payments on revolving credit accounts. Additionally, the
Gramm-Leach-Bliley Act requires the Company to disclose, initially and annually, to its customers, the
Company's privacy policy as it relates to a customer's non-public personal information.
6
Associates
As of January 31, 2004, the Company employed approximately 9,100 full-time and part-time associates.
The Company also employs additional part-time associates during the peak retailing seasons. The Company is
not a party to any collective bargaining agreements and considers that its associate relations are good.
Item 2. Properties:
The Company's distribution center and general oÇces are located in a Company-owned building of
approximately 492,000 square feet located on a 15-acre tract in Charlotte, North Carolina. The Company's
automated merchandise handling and distribution activities occupy approximately 418,000 square feet of this
building and its general oÇces and corporate training center are located in the remaining 74,000 square feet. A
building of approximately 24,000 square feet located on a 2-acre tract adjacent to the Company's existing
location is used for receiving and staging shipments prior to processing.
Substantially all of the Company's retail stores are leased from unaÇliated parties. Most of the leases
have an initial term of Ñve years, with two to three Ñve-year renewal options. Substantially all of the leases
provide for Ñxed rentals plus a percentage of sales in excess of a speciÑed volume.
Item 3. Legal Proceedings:
There are no material pending legal proceedings to which the Company and its subsidiaries is a party, or
to which any of the Company's property is subject.
Item 4. Submission of Matters to a Vote of Security Holders:
None.
Item 4A. Executive OÇcers of the Registrant:
The executive oÇcers of the Company and their ages as of March 31, 2004 are as follows:
Name
Age
Position
John P. Derham Cato ÏÏÏÏÏÏ
53
Michael O. Moore ÏÏÏÏÏÏÏÏÏ
53
B. Allen WeinsteinÏÏÏÏÏÏÏÏÏ
57
C. David Birdwell ÏÏÏÏÏÏÏÏÏ
64
Howard A. Severson ÏÏÏÏÏÏÏ
56
Michael T. Greer ÏÏÏÏÏÏÏÏÏÏ
41
Robert C. BrummerÏÏÏÏÏÏÏÏ
59
Chairman, President and
Chief Executive OÇcer
Executive Vice President,
Chief Financial OÇcer and Secretary
Executive Vice President, Chief Merchandising OÇcer
of the Cato Division
Executive Vice President, President and General Manager
of the It's Fashion! Division
Executive Vice President, Chief Real Estate and
Store Development OÇcer
Senior Vice President, Director of Stores
of the Cato Division
Senior Vice President,
Human Resources
John P. Derham Cato has been employed as an oÇcer of the Company since 1981 and has been a director
of the Company since 1986. Since January 2004, he has served as Chairman, President and Chief Executive
OÇcer. From May 1999 to January 2004, he served as President, Vice Chairman of the Board and Chief
Executive OÇcer. From June 1997 to May 1999, he served as President, Vice Chairman of the Board and
Chief Operating OÇcer. From August 1996 to June 1997, he served as Vice Chairman of the Board and Chief
Operating OÇcer. From 1989 to 1996, he managed the Company's oÅ-price division, serving as Executive
Vice President and as President and General Manager of the It's Fashion! Division from 1993 to August 1996.
Mr. John Cato is currently a director of Ruddick Corporation.
7
Michael O. Moore has been employed by the Company as Executive Vice President, Chief Financial
OÇcer and Secretary since July 1998 and has been a director of the Company since 2002. Mr. Moore served
as Vice President, Chief Financial OÇcer for Party Experience from 1997 to 1998, Executive Vice President,
Chief Financial OÇcer of David's Bridal from 1994 to 1997, and was employed by Bloomingdales from 1984
to 1994 serving as Senior Vice President, Chief Financial OÇcer from 1990 to 1994.
B. Allen Weinstein joined the Company as Executive Vice President, Chief Merchandising OÇcer of the
Cato Division in August 1997. From 1995 to 1997, he was Senior Vice President Ì Merchandising of
Catherines Stores Corporation. From 1981 to 1995, he served as Senior Vice President of Merchandising for
Beall's, Inc.
C. David Birdwell joined the Company as Executive Vice President, President and General Manager of
the It's Fashion! Division in October 1996. From 1994 to 1996, he was employed as President/General
Merchandise Manager of Allied Stores, a family apparel chain headquartered in Savannah, Georgia. In 1993,
he was Executive Vice President/General Merchandise Manager of Ambers, Inc., based in Dallas, Texas.
From 1989 to 1992, he was employed as a Chartered Financial Consultant with JeÅerson Pilot, based in
Greensboro, North Carolina. From 1985 to 1989, he was President/CEO of Maxway Stores, a discount chain
headquartered in Sanford, North Carolina.
Howard A. Severson has been employed by the Company since 1985. Since January 1993, he has served
as Executive Vice President, Chief Real Estate and Store Development OÇcer and Assistant Secretary. From
1993 to 2001 Mr. Severson also served as a director. From August 1989 through January 1993, Mr. Severson
served as Senior Vice President Ì Chief Real Estate OÇcer.
Michael T. Greer has been employed by the Company since 1985. Since February 2004, he has served as
Senior Vice President, Director of Stores of the Cato Division. From 2002 to 2003 Mr. Greer served as Vice
President, Director of Stores of the It's Fashion! Division. From 1999 to 2001 he served as Territorial Vice
President of Stores of the Cato Division and from 1996 to 1999 he served as Regional Vice President of Stores
of the Cato Division. From 1985 to 1995, Mr. Greer held various store operational positions in the Cato
Division.
Robert C. Brummer joined the Company as Senior Vice President, Human Resources and Assistant
Secretary in January 2001. From 1999 through 2000, he was employed by Sleepy's, a beddings specialty
retailer as Vice President, Human Resources and Payroll. From 1997 through 1998, he was Vice President,
Human Resources and Loss Prevention for The Party Experience, a party supplies specialty retailer. From
1995 until 1997, he was Vice President, Human Resources and Loss Prevention for No Body Beats The Wiz,
an electronics specialty store chain.
8
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities:
Market & Dividend Information
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 Ñscal 2003 and
2002.
2003
Price
High
Low
Dividend
First quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fourth quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$20.50
24.10
25.11
21.57
$16.28
18.20
19.95
18.84
$.15
.16
.16
.16
2002
Price
High
Low
Dividend
First quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fourth quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$27.21
27.44
19.95
21.80
$19.91
18.00
14.18
17.33
$.135
.15
.15
.15
As of March 29, 2004 the approximate number of record holders of the Company's Class A Common
Stock was 1,227 and there were 4 record holders of the Company's Class B Common Stock.
9
Item 6. Selected Financial Data:
Certain selected Ñnancial data for the Ñve Ñscal years ended January 31, 2004 have been derived from
audited Ñnancial statements. The Ñnancial statements for the Ñscal year ended January 31, 2004 were audited
by PricewaterhouseCoopers, LLP. The Ñnancial statements for each of the four Ñscal years ended February 1,
2003 were audited by Deloitte & Touche LLP. The Ñnancial statements and independent auditors' reports for
the three most recent Ñscal years are contained elsewhere in this report. All data set forth below are qualiÑed
by reference to, and should be read in conjunction with, the Company's Consolidated Financial Statements
(including the Notes thereto) and ""Management's Discussion and Analysis of Financial Condition and
Results of Operations'' appearing elsewhere in this annual report.
Fiscal Year
2003
2002
2001
2000
1999
(Dollars in thousands, except per share data
and selected operating data)
STATEMENT OF OPERATIONS DATA:
Retail salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $731,770
15,497
Other incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
747,267
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
508,401
Cost of goods soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
223,369
Gross margin percent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selling, general and administrative ÏÏÏÏÏÏÏÏÏÏÏÏ
Selling, general and administrative percent of
174,202
30.5%
retail sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income taxes and cumulative
eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before cumulative eÅect of accounting
23.8%
18,695
(3,308)
49,277
17,888
$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
32.3%
32.0%
31.3%
31.0%
168,914
162,082
154,150
140,741
23.1%
23.6%
14,913
(3,680)
10,886
(6,299)
23.8%
9,492
(6,554)
24.0%
8,639
(6,770)
71,839
26,006
66,286
23,200
60,042
21,015
51,975
18,191
change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
31,389
45,833
43,086
39,027
33,784
Cumulative eÅect of accounting change, net of
taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 31,389
1.36
Basic earnings per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
1.33
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
.63
Cash dividends paid per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
Ì
$ 45,833
1.80
$
1.77
$
.585
$
Ì
$ 43,086
1.71
$
1.66
$
.53
$
Ì
$ 39,027
1.56
$
1.53
$
.425
$
147
$ 33,931
1.28
$
1.26
$
.28
$
SELECTED OPERATING DATA:
Stores open at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,102
Average sales per store(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $692,000
171
Average sales per square foot of selling space ÏÏÏ $
(7)%
Comparable store sales increase (decrease) ÏÏÏÏ
1,022
$753,000
184
$
937
$767,000
186
$
859
$781,000
187
$
809
$756,000
177
$
0%
1%
3%
4%
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 71,402
112,908
351,573
194,111
Working capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$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
(1) Calculated using an estimated annual sales volume for new stores.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations:
Results of Operations
The table below sets forth certain Ñnancial data of the Company expressed as a percentage of retail sales
for the years indicated:
Fiscal Year Ended
January 31,
2004
February 1,
2003
February 2,
2002
Retail sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of goods soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selling, general and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
100.0%
2.1
102.1
69.5
23.8
2.6
(0.5)
6.7
4.3%
100.0%
2.1
102.1
67.7
23.1
2.0
(0.5)
9.8
6.3%
100.0%
2.0
102.0
68.0
23.6
1.6
(0.9)
9.7
6.3%
Fiscal 2003 Compared to Fiscal 2002
Retail sales were essentially Öat to last year at $731.8 million in Ñscal 2003 compared to $732.7 million in
Ñscal 2002. Total revenues, comprised of retail sales and other income (principally Ñnance charges and late
fees on customer accounts receivable and layaway fees), were also Öat to last year at $747.3 million in Ñscal
2003 compared to $748.3 million in Ñscal 2002. The Company operated 1,102 stores at January 31, 2004
compared to 1,022 stores operated at February 1, 2003.
The Öat retail sales in Ñscal 2003 were attributable to the soft economy. In Ñscal 2003, the Company
opened 87 new stores, relocated 28 stores, remodeled 15 stores and closed 7 stores.
Credit revenue of $14.5 million, represented 1.9% of total revenue in Ñscal 2003. This is comparable to
2002 credit revenue of $14.0 million or 1.9% of total revenue. Credit revenue is comprised of interest earned on
the Company's private label credit card portfolio and related fee income. Related expenses include principally
bad debt expense, payroll, postage and other administrative expenses and totaled $9.7 million in Ñscal 2003
compared to $8.5 million in Ñscal 2002. The increase in costs was principally due to higher bad debt expense in
Ñscal 2003. See Note 14 of the Consolidated Financial Statements for a schedule of credit related expenses.
Total credit income before taxes decreased $0.8 million from $5.5 million in 2002 to $4.7 million in 2003 due
to the increased costs partially oÅset by increased credit revenue. Total credit income in 2003 represented
9.6% of income before taxes of $49.3 million
Other income in total, as included in total revenues in Ñscal 2003, decreased slightly to $15.5 million from
$15.6 million in Ñscal 2002. The decrease resulted primarily from a decline in layaway fees.
Cost of goods sold was $508.4 million, or 69.5% of retail sales, in Ñscal 2003 compared to $496.3 million,
or 67.7% of retail sales, in Ñscal 2002. The increase in cost of goods sold as a percent of retail sales resulted
primarily from lower than planned sales and additional markdowns to bring inventory in line with sales trends.
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 the buying departments and distribution center. Occupancy expenses include rent, real estate
taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities.
Pursuant to Emerging Task Force Issue No. 02-16, as described in ""Recent Accounting Pronouncements''
below, certain vendor allowances have been classiÑed in cost of goods sold totaling $1.2 million in Ñscal 2003,
previously recorded as a reduction in selling, general and administrative expenses. Total gross margin dollars
(retail sales less cost of goods sold) decreased by 6% to $223.4 million in Ñscal 2003 from $236.4 million in
Ñscal 2002. Gross margin as presented may not be comparable to those of other entities as they may include
11
internal transfer costs in selling, general and administrative expenses while the Company classiÑes them as
cost of goods sold.
Selling, general and administrative expenses (SG&A) primarily include corporate and store payroll,
related payroll taxes and beneÑts, insurance, supplies, advertising, bank and credit card processing fees and
bad debts and were $174.2 million in Ñscal 2003 compared to $168.9 million in Ñscal 2002, an increase of 3%.
As a percent of retail sales, SG&A was 23.8% compared to 23.1% in the prior year. The overall increase in
SG&A resulted primarily from increased selling-related expenses and increased infrastructure expenses
attributable to the Company's store development activities.
Depreciation expense was $18.7 million in Ñscal 2003 compared to $14.9 million in Ñscal 2002. The 25%
increase in Ñscal 2003 resulted primarily from the Company's store development and the enterprise-wide
information system which was implemented in August 2002.
Interest and other income, net was $3.3 million in Ñscal 2003 compared to $3.7 million in Ñscal 2002. The
11% decrease in Ñscal 2003 resulted primarily from the Company's lower cash and short-term investment
position following the repurchase of $98.3 million of Company stock in Ñscal 2003.
Income tax expense was $17.9 million, or 2.4% of retail sales in Ñscal 2003 compared to $26.0, or 3.5% of
retail sales in Ñscal 2002. The decrease resulted from lower pre-tax income. The eÅective tax rate was 36.3% in
Ñscal 2003 compared to 36.2% in Ñscal 2002. The Company expects the eÅective rate in 2004 to be in the
range of 35% to 37%.
Fiscal 2002 Compared to Fiscal 2001
Retail sales increased by 7% to $732.7 million in Ñscal 2002 from $685.7 million in Ñscal 2001. Total
revenues increased by 7% to $748.3 million in Ñscal 2002 from $699.3 million in Ñscal 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 Ñscal 2002 resulted from the Company's continuation of an everyday low
pricing strategy, improved merchandise oÅerings, and an increase in store development activity. In Ñscal 2002,
the Company increased its number of stores 9% by opening 90 new stores, relocating 26 stores, remodeling 24
stores and closing 5 stores.
Credit revenues increased $0.8 million from $13.2 million in 2001 to $14.0 million in 2002 mainly due to
increased credit sales volume. Credit revenues represented 1.9% of total revenues in both 2002 and 2001.
Related expenses totaled $8.5 million in 2002 compared to $9.7 million in 2001 principally due to lower bad
debt expenses in 2002. Total credit income before taxes increased $2.0 million from $3.5 million in 2001 to
$5.5 million in 2002 as a result of the increase in credit revenues and reduction in costs described above. Total
credit income in 2002 represents 7.6% of income before taxes of $71.8 million.
Other income in total, as included in total revenues in Ñscal 2002, increased $1.9 million or 14% over
Ñscal 2001. The increase resulted primarily from increased Ñnance and layaway charges.
Cost of goods sold was $496.3 million, or 67.7% of retail sales, in Ñscal 2002 compared to $466.4 million,
or 68.0% of retail sales, in Ñscal 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 Öow and sourcing. Total gross margin dollars increased by 8% to $236.4 million in Ñscal 2002 from
$219.3 million in Ñscal 2001.
SG&A expenses were $168.9 million in Ñscal 2002 compared to $162.1 million in Ñscal 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 primarily from increased selling-related expenses and increased infrastructure expenses
attributable to the Company's store development activities.
Depreciation expense was $14.9 million in Ñscal 2002 compared to $10.9 million in Ñscal 2001. The 37%
increase in Ñscal 2002 resulted primarily from the Company's store development and the implementation of an
enterprise-wide information system.
12
Interest and other income, net was $3.7 million in Ñscal 2002 compared to $6.3 million in Ñscal 2001. The
41% decrease in Ñscal 2002 resulted primarily from the Company's write-down of a $1.8 million decline in
market value on investments deemed to be other than temporary.
Income tax expense was $26.0 million, or 3.5% of retail sales in Ñscal 2002 compared to $23.2 million, or
3.4% of retail sales in Ñscal 2001. The increase resulted from higher pre-tax income.
OÅ Balance Sheet Arrangements
The Company is not a party to any oÅ-balance sheet arrangements that have, or are reasonably likely to
have, a current or future material eÅect on the Company's Ñnancial 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 Ñnancial statements in conformity with generally accepted accounting principles requires manage-
ment to make estimates and assumptions about future events that aÅect the amounts reported in the Ñnancial
statements and accompanying notes. Future events and their eÅects cannot be determined with absolute
certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results
inevitably will diÅer from those estimates, and such diÅerences may be material to the Ñnancial statements.
The most signiÑcant accounting estimates inherent in the preparation of the Company's Ñnancial 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, shrink
accrual and tax contingency reserves.
The Company's critical accounting 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-oÅs and the accounts receivable aging roll rates over the prior Ñve
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-oÅs. The Company's
Ñnancial results can be signiÑcantly impacted by changes in bad debt write-oÅ experience and the aging of the
accounts receivable portfolio.
Insurance Liabilities
The Company is primarily self-insured for health care, property loss, workers' compensation and general
liability costs. These costs are signiÑcant 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 Ñled
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
adjust the provision for insurance costs which could be material to the Company's reported Ñnancial condition
and results of operations. Historically, actual results have not signiÑcantly deviated from estimates.
Revenue Recognition
While the Company's recognition of revenue is predominantly derived from routine retail transactions
and does not involve signiÑcant judgement, revenue recognition represents an important accounting policy of
the Company. As discussed in Note 1 to the Consolidated Financial Statements, the Company recognizes
13
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.
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. Most of the Company's store leases give the
Company the option to terminate the lease if certain speciÑed sales volumes are not achieved during the Ñrst
few years of the lease. 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 Öows associated with those assets will not be suÇcient to
recover the carrying value. This determination is based on a number of factors, including the store's historical
operating results and cash Öows, estimated future sales growth, real estate development in the area and
perceived local market conditions that can be diÇcult 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 reÖected in income for that
period.
Tax Reserves
The Company provides for estimated liabilities for potential income and other tax assessments for which
actual settlement may diÅer materially from amounts provided.
Merchandise Inventories
The Company's inventory is valued using the retail method of accounting and is stated at the lower of cost
(Ñrst-in, Ñrst-out method) or market. Under the retail inventory method, the valuation of inventory at cost and
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 signiÑcant estimates including initial merchandise markup, markdowns and
shrinkage, which signiÑcantly 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 Ñnancial reporting date. The Company continuously reviews its
inventory levels to identify slow moving merchandise and uses markdowns to clear slow moving inventory.
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 signiÑcantly deviated from those determined using the estimates described above.
14
Liquidity, Capital Resources and Market Risk
The Company believes that its cash, cash equivalents and short-term investments, together with cash
Öows from operations and borrowings available under its revolving credit agreement, will be adequate to fund
the Company's proposed capital expenditures and other operating requirements over the next twelve months.
The Company has consistently maintained a strong liquidity position. Cash provided by operating
activities during Ñscal 2003 was $65.7 million as compared to $63.7 million in Ñscal 2002. 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. In addition, the Company maintains
$35 million of unsecured revolving credit facilities for short-term Ñnancing of seasonal cash needs.
At January 31, 2004, the Company had working capital of $112.9 million compared to $162.6 million at
February 1, 2003. The increase in net cash provided by operating activities in Ñscal 2003 is primarily the result
of an increase in depreciation expense of $3.8 million due to store expansion and an enterprise-wide
merchandise and Ñnance system; an increase of deferred income taxes of $4.9 million; a reduction in accounts
receivable from weak sales and strong collection eÅorts of $1.9 million; and a reduction of merchandise
inventories of $9.2 million. OÅsetting these increases in net cash provided by operating activities was a
decrease in net income of $14.4 million and decrease of $1.3 million in accounts payable, accrued expenses
and other liabilities.
Additionally, the Company had $1.6 million invested in privately managed investment funds at
January 31, 2004, which are reported under other assets of the consolidated balance sheets.
At January 31, 2004, 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 2006. This
agreement replaced a prior revolving credit agreement which was due to expire in October 2004. The credit
agreement contains various Ñnancial covenants and limitations, including the maintenance of speciÑc Ñnancial
ratios with which the Company was in compliance as of January 31, 2004. There were no borrowings
outstanding under these credit facilities during the Ñscal year ended January 31, 2004 or February 1, 2003.
The Company had approximately $5.4 million and $6.5 million at January 31, 2004 and February 1, 2003,
respectively, of outstanding irrevocable letters of credit relating to purchase commitments.
Expenditures for property and equipment totaled $20.6 million, $29.0 million and $25.7 million in Ñscal
2003, 2002 and 2001, respectively. The expenditures for Ñscal 2003 were primarily for store development, store
remodels and investments in new technology. In Ñscal 2004, the Company is planning to invest approximately
$33 million for capital expenditures. This includes expenditures to open 90 new stores, relocate 27 stores and
close 10 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.
During 2003, the Company repurchased 5,137,484 shares of Class B Common Stock from a limited
partnership and trust aÇliated with Wayland H. Cato, Jr., a Company founder and Chairman of the Board,
and a limited partnership aÇliated with Edgar T. Cato, a Company founder and a member of the Board of
Directors. Shares were purchased at $18.50 per share for a total cost of $95,043,454. Including related
expenses 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 Ñve-year term loan facility and approximately $65 million of cash and liquidated short-term
investments. Payments on the new term loan are due in monthly installments of $500,000 plus accrued
interest. Interest is based on LIBOR. The LIBOR rate at January 31, 2004 was 1.10%. Additionally, during
2003, the Company repurchased 165,000 shares of Class A Common Stock for $2,740,619, or an average
market price of $16.61 per share.
During 2002, the Company repurchased 66,000 shares of Class A Common Stock for $1,186,687, or an
average purchase price of $17.98 per share. Additionally, in Ñscal 2002, the Company accepted in an option
transaction from an oÇcer 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.
15
During 2003, the Company entered into retirement agreements with Mr. Wayland H. Cato, Jr., a
Company founder and Chairman of the Board and Mr. Edgar T. Cato, a Company founder and a member of
the Board of Directors. The agreements provided for the retirement of Mr. Wayland Cato and Mr. Edgar Cato
from the Company and the Board of Directors eÅective January 31, 2004. The Company recognized an
expense of $2.8 million representing the present value of certain payments and beneÑts under the terms of the
agreements. The after-tax charge was $1.8 million or $.08 per diluted share in Ñscal 2003.
During Ñscal 2003, the Company increased its quarterly dividend by 7% from $.15 per share to $.16 per
share. Over the course of 2002, the Board of Directors increased the quarterly dividend by 11% from $.135 per
share to $.15 per share.
The Company does not use derivative Ñnancial instruments. At January 31, 2004, the Company's
investment portfolio was invested in governmental and other debt securities with maturities of up to
36 months. These securities are classiÑed as available-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 and a reduction of interest and other income,
net in the accompanying Statements of Consolidated Income.
The following table shows the Company's obligations and commitments as of January 31, 2004, to make
future payments under contractual obligations (in thousands):
Contractual Obligations
Total
2004
2005
2006
2007
2008
Payments Due During One Year Fiscal Period Ending
Merchandise letters of credit ÏÏÏÏÏÏ
Operating leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loan paymentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
5,365
121,126
27,500
$ 5,365
40,482
6,000
$ Ì $ Ì $ Ì $ Ì
6,740
3,500
32,488
6,000
16,249
6,000
25,167
6,000
Total Contractual ObligationsÏÏÏÏÏÏ
$153,991
$51,847
$38,488
$31,167
$22,249
$10,240
Recent Accounting Pronouncements
On December 31, 2002, the FASB issued SFAS No. 148, ""Accounting for Stock-Based Compensa-
tion Ì 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 signiÑcant policies of the eÅects 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 Ñnancial
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 compensation
using the fair value method of SFAS No. 123 or the intrinsic 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 eÅective for Ñscal years ending after December 15, 2002. The
implementation of this Statement did not aÅect the Company's Ñnancial position or results of operations.
In March 2003, 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
classiÑed in the customer's statement of earnings. EITF Issue No. 02-16 is eÅective for all transactions with
vendors after December 31, 2002. The adoption of EITF Issue No. 02-16 did not have a material impact on
the Company's consolidated Ñnancial position or results of operations.
This 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
16
included in this Annual Report, including, but not limited to, statements regarding the Company's planned
capital expenditures, store openings, closures, relocations and remodelings and the expected adequacy of the
Company's liquidity, constitute forward-looking statements. Although the Company believes that the
expectations reÖected in such forward-looking statements are reasonable, it can give no assurance that such
expectations prove to be correct. Forward-looking statements involve risks and uncertainties that could cause
the Company's actual results to diÅer materially depending on a variety of important factors, including, but
not limited to, general economic conditions, competitive factors and pricing pressures. The Company does not
undertake any obligation to update any forward-looking statements.
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
Ñnancing, investing and cash management.
17
Item 8. Financial Statements and Supplementary Data:
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Auditors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Report of Predecessor Auditor (Deloitte & Touche LLP) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Income for the Ñscal years ended January 31, 2004, February 1, 2003
and February 2, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Balance Sheets at January 31, 2004 and February 1, 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Cash Flows for the Ñscal years ended January 31, 2004, February 1,
2003 and February 2, 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Stockholders' Equity for the Ñscal years ended January 31, 2004,
February 1, 2003 and February 2, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Schedule I Ì Report of Predecessor Public Accountant (Deloitte & Touche LLP) on Financial
Page
19
20
21
22
23
24
25
Statement Schedule ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
S-1
Schedule II Ì Valuation and Qualifying Accounts and Reserves for the Ñscal years ended
January 31, 2004, February 1, 2003 and February 2, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
S-2
18
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
The Cato Corporation
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of
income, of stockholders' equity, and of cash Öows present fairly, in all material respects, the Ñnancial position
of The Cato Corporation and its Subsidiaries at January 31, 2004, and the results of their operations and their
cash Öows for the year then ended in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the Ñnancial statement schedule for the year ended January 31,
2004 listed in the index at Item 15 presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated Ñnancial statements. These Ñnancial statements and
Ñnancial statement schedule are the responsibility of the Company's management; our responsibility is to
express an opinion on these Ñnancial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about whether the Ñnancial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Ñnancial statements, assessing the accounting principles used
and signiÑcant estimates made by management, and evaluating the overall Ñnancial statement presentation.
We believe that our audit provides a reasonable basis for our opinion. The Ñnancial statements of the
Company as of February 1, 2003 and for each of the two years in the period ended February 1, 2003 were
audited by other auditors whose report dated April 21, 2003 expressed an unqualiÑed opinion on those
statements.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 31, 2004
19
PREDECESSOR AUDITOR (DELOITTE & TOUCHE LLP)
To the Board of Directors and Stockholders of
The Cato Corporation
We have audited the accompanying consolidated balance sheet of The Cato Corporation and subsidiaries
(the Company) as of February 1, 2003, and the related consolidated statements of income, stockholders'
equity, and cash Öows for each of the two years in the period ended February 1, 2003. Our audits also included
the Ñnancial statement schedule listed in the index at Item 15(a) for each of the two-years in the period ended
February 1, 2003. These Ñnancial statements and the Ñnancial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these Ñnancial statements and the
Ñnancial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States
of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the Ñnancial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An audit also includes
assessing the accounting principles used and signiÑcant estimates made by management, as well as, evaluating
the overall Ñnancial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated Ñnancial statements present fairly, in all material respects, the Ñnancial
position of the Company at February 1, 2003, and the results of its operations and its cash Öows for each of the
two years in the period ended February 1, 2003, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such Ñnancial statement schedule, when considered in
relation to the basic consolidated Ñnancial statements taken as a whole, presents fairly in all material respects
the information set forth herein.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
April 21, 2003
20
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
January 31,
2004
Fiscal Year Ended
February 1,
2003
(Dollars in thousands, except per share data)
February 2,
2002
REVENUES
Retail sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 731,770
Other income (principally Ñnance charges, late fees and layaway
$ 732,742
$ 685,653
charges) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
15,497
15,589
13,668
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
747,267
748,331
699,321
COSTS AND EXPENSES, NET
Cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selling, general and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
508,401
174,202
18,695
(3,308)
496,345
168,914
14,913
(3,680)
466,366
162,082
10,886
(6,299)
697,990
676,492
633,035
Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
49,277
17,888
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
31,389
Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
1.36
71,839
26,006
45,833
1.80
66,286
23,200
43,086
1.71
$
$
$
$
Basic weighted average shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,140,581
25,465,543
25,193,610
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
1.33
$
1.77
$
1.66
Diluted weighted average shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23,559,541
25,947,457
25,888,636
Dividends per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $
.63
$
.585
$
.53
See notes to consolidated Ñnancial statements.
21
THE CATO CORPORATION
CONSOLIDATED BALANCE SHEETS
January 31,
2004
February 1,
2003
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts receivable, net of allowance for doubtful accounts of $6,335 at
January 31, 2004 and $6,099 at February 1, 2003.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Merchandise inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Current Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property and equipment Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 23,857
47,545
$ 32,065
74,871
52,714
97,292
284
5,708
227,400
114,367
9,806
54,116
93,457
1,392
4,990
260,891
113,307
9,212
Total Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$351,573
$383,410
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Current Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other noncurrent liabilities (primarily deferred rent) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 76,387
27,815
4,290
6,000
114,492
10,203
21,500
11,267
$ 66,620
28,776
2,886
Ì
98,282
6,310
Ì
8,654
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;
26,015,868 and 25,218,678 shares issued at January 31, 2004 and February 1,
2003, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Convertible Class B common stock, $.033 par value per share, 15,000,000 shares
authorized; 5,607,834 and 6,085,149 shares issued at January 31, 2004 and
February 1, 2003, respectivelyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive gainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unearned compensation Ì restricted stock awards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
867
840
187
99,676
252,828
58
(1,593)
203
94,947
235,904
253
(2,375)
352,023
329,772
Less Class A and Class B common stock in treasury, at cost (5,906,179 Class A
and 5,137,484 Class B shares at January 31, 2004 and 5,741,179 Class A and 0
Class B shares at February 1, 2003, respectively) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(157,912)
(59,608)
Total Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
194,111
270,164
Total Liabilities and Stockholders' EquityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$351,573
$383,410
See notes to consolidated Ñnancial statements.
22
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
January 31,
2004
Fiscal Year Ended
February 1,
2003
(Dollars in thousands)
February 2,
2002
OPERATING ACTIVITIES
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of investment premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Write-down of investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Compensation expense related to restricted stock awards ÏÏÏÏÏÏÏÏÏ
Loss on disposal of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in operating assets and liabilities which provided
(used) cash:
Accounts receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Merchandise inventoriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid and other assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable, accrued expenses and other liabilitiesÏÏÏÏÏÏÏÏ
$ 31,389
$ 45,833
$ 43,086
18,695
4
6,098
Ì
5,001
782
798
14,913
66
4,764
1,800
70
750
870
10,886
160
5,913
Ì
422
295
480
(4,696)
(3,835)
(1,312)
1,404
11,419
(6,587)
(13,050)
(470)
2,066
12,704
(11,234)
(1,246)
367
(1,525)
(547)
Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
65,747
63,729
47,057
INVESTING ACTIVITIES
Expenditures for property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of short-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sales of short-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(20,553)
(18,462)
45,589
(28,953)
(46,281)
13,735
(25,684)
(35,878)
51,194
Net cash provided (used) in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6,574
(61,499)
(10,368)
FINANCING ACTIVITIES
Dividends paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds of long term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments to settle long term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from employee stock purchase plan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from stock options exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(14,465)
(98,304)
30,000
(2,500)
507
4,233
(14,890)
(1,187)
Ì
Ì
509
3,631
(13,400)
(11,729)
Ì
Ì
443
4,568
Net cash used in Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(80,529)
(11,937)
(20,118)
Net increase (decrease) in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(8,208)
32,065
(9,707)
41,772
16,571
25,201
Cash and cash equivalents at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 23,857
$ 32,065
$ 41,772
See notes to consolidated Ñnancial statements.
23
THE CATO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Class A
Common Common
Stock
Stock
Convertible
Class B Additional
Accumulated
Other
Unearned
Compensation
Restricted
Paid-in
Capital
Retained Comprehensive
Earnings Income (Loss) Stock Awards
Total
Treasury Stockholders'
Stock
Equity
Balance Ì February 3, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
*Comprehensive income:
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gains on available-for-sale securities, net
of deferred income taxes of $171. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends paid ($.53 per share) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Class A common stock sold through employee stock
purchase plan Ì 38,463 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Class A common stock sold through stock option
plans Ì 329,850 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Class B common stock sold through stock option
plans Ì 448,332 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax beneÑt from stock options exercised ÏÏÏÏÏÏ
Purchase of treasury shares Ì 774,750 shares ÏÏÏÏÏÏÏÏ
Surrender of shares for stock options Ì 92,600 shares
Unearned compensation Ì restricted stock awards ÏÏÏÏ
Balance Ì February 2, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
*Comprehensive income:
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gains on available-for-sale securities, net
of deferred income taxes of $448. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends paid ($.585 per share) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Class A common stock sold through employee stock
purchase plan Ì 32,487 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Class A common stock sold through stock option
plans Ì 171,600 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Class B common stock sold through stock option
plans Ì 172,500 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax beneÑt from stock options exercised ÏÏÏÏÏÏ
Purchase of treasury shares Ì 66,000 shares ÏÏÏÏÏÏÏÏÏ
Surrender of shares for stock options Ì 48,681 shares
Restricted stock awards Ì 100,000 shares ÏÏÏÏÏÏÏÏÏÏÏ
Unearned compensation Ì restricted stock awards ÏÏÏÏ
Balance Ì February 1, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
*Comprehensive income:
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized losses on available-for-sale securities, net
of deferred income tax beneÑt of $111. ÏÏÏÏÏÏÏÏÏ
Dividends paid ($.63 per share) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Class A common stock sold through employee stock
purchase plan Ì 28,306 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Class A common stock sold through stock option
plans Ì 288,250 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax beneÑt from stock options exercised ÏÏÏÏÏÏ
Purchase of treasury shares Ì 5,302,484 shares ÏÏÏÏÏÏ
Shares reclassiÑed from Class B to Class A Ì 477,315
shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unearned compensation Ì restricted stock awards ÏÏÏÏ
$821
$179
$76,778 $175,275
$(884)
$ (689)
$ (43,723) $207,757
(Dollars in thousands)
43,086
(13,400)
317
1
11
15
442
2,961
3,406
3,361
43,086
317
(13,400)
443
2,972
3,421
3,361
(11,729)
(1,825)
295
(11,729)
(1,825)
295
833
194
86,948
204,961
(567)
(394)
(57,277)
234,698
45,833
(14,890)
820
45,833
820
(14,890)
509
1,553
1,316
1,906
(1,187)
(1,144)
Ì
750
(1,187)
(1,144)
(2,731)
750
1
6
508
1,547
1,310
1,906
2,728
6
3
840
203
94,947
235,904
253
(2,375)
(59,608)
270,164
31,389
(14,465)
(195)
31,389
(195)
(14,465)
507
2,867
1,366
(98,304)
Ì
782
(98,304)
782
1
10
506
2,857
1,366
16
(16)
Balance Ì January 31, 2004.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$867
$187
$99,676 $252,828
$
58
$(1,593)
$(157,912) $194,111
* Total comprehensive income for the years ended January 31, 2004, February 1, 2003 and February 2, 2002 was $31,194, $46,653 and $43,403,
respectively.
See notes to consolidated Ñnancial statements.
24
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of SigniÑcant Accounting Policies:
Principles of Consolidation: The consolidated Ñnancial statements include the accounts of The Cato
Corporation and its wholly-owned subsidiaries (""the Company''). All signiÑcant intercompany accounts and
transactions have been eliminated.
Description of Business and Fiscal Year: The Company has two business segments Ì 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 southeastern United States. The Company's Ñscal year ends on the Saturday nearest January 31.
Use of Estimates: The preparation of the Company's Ñnancial statements in conformity with account-
ing principles generally accepted in the United States requires management to make estimates and
assumptions that aÅect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the Ñnancial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could diÅer from those estimates. SigniÑcant accounting estimates reÖected in
the Company's Ñnancial 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, shrink 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 classiÑed 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 classiÑed as available-for-sale. As they are available for
current operations, they are classiÑed 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, 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 Interest and other income, net.
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 qualiÑed 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 diÅerent geographies of the Company's customer base.
Supplemental Cash Flow Information:
Income tax payments, net of refunds received, for the Ñscal
years ended January 31, 2004, February 1, 2003 and February 2, 2002 were $12,643,000, $21,982,000 and
$24,841,000, respectively.
Inventories: Merchandise inventories are stated at the lower of cost (Ñrst-in, Ñrst-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 CertiÑed Public Accountants
Statement of Position (""SOP'') 98-1, ""Accounting for the Costs of Computer Software Developed or
25
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Obtained for Internal Use''. Depreciation is provided on the straight-line method over the estimated useful
lives of the related assets, as follows:
ClassiÑcation
Land improvementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BuildingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixtures, equipment and software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Estimated
Useful Lives
10 years
30 Ó 40 years
5 Ó 10 years
3 Ó 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. Most of the Company's store leases give the
Company the option to terminate the lease if certain speciÑed sales volumes are not achieved during the Ñrst
few years of the lease. 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 Öows associated with those assets will not be suÇcient to
recover the carrying value. This determination is based on a number of factors, including the store's historical
operating results and cash Öows, estimated future sales growth, real estate development in the area and
perceived local market conditions that can be diÇcult 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 reÖected in income for that
period.
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.
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 oÅers 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
26
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
of accounts receivable and records an allowance for doubtful accounts based on estimates of actual write-oÅs
and the accounts receivable.
Advertising: Advertising costs are expensed in the period in which they are incurred. Advertising
expense was $5,638,000, $5,299,000 and $4,563,000 for the Ñscal years ended January 31, 2004, February 1,
2003 and February 2, 2002, 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. Basic EPS is computed as net
income divided by the weighted average number of common shares outstanding for the period. Diluted EPS
reÖects 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 Ñscal 2003 and had no impact on Ñscal 2002 and 2001, respectively. The
weighted-average number of shares used in the basic earnings per share computations was 23,140,581,
25,465,543, and 25,193,610 for the Ñscal years ended January 31, 2004, February 1, 2003, and February 2,
2002, respectively. The weighted-average number of shares representing the dilutive eÅect of stock options
was 418,960, 481,914 and 695,026 for the Ñscal years ended January 31, 2004, February 1, 2003 and
February 2, 2002, respectively. The weighted-average number of shares used in the diluted earnings per share
computations was 23,559,541, 25,947,457, and 25,888,636 for the Ñscal years ended January 31, 2004,
February 1, 2003 and February 2, 2002, respectively. There were an immaterial number of shares withheld in
the computation of diluted earnings per share due to potential anti-dilutive eÅects for the Ñscal years 2003,
2002 and 2001.
Vendor Allowances: The Company receives certain allowances from vendors primarily related to
purchase discounts and markdown and damage allowances. All allowances are reÖected in cost of goods sold
as earned, generally as the related products are sold. The Company does not receive cooperative advertising
allowances.
In January 2003, the Emerging Issues Task Force (""EITF'') issued EITF 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 reÖected as a reduction of cost of sales or revenue unless it can be demonstrated this oÅsets an
incremental expense, in which case it can be netted against that expense. The adoption of EITF 02-16 did not
have a material eÅect on the Company's Ñnancial position or results of operations for Ñscal year ended
January 31, 2004 or February 1, 2003.
Income Taxes: The Company Ñles 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 diÅerences between the Ñnancial 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. A portion of construction, design, and site selection costs are capitalized to new, relocated and
remodeled stores.
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 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
Ñled 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
27
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
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
$8,995,000, $8,970,000 and $9,090,000 in Ñscal 2003, 2002 and 2001, respectively. Accrued healthcare was
$1,380,000 and $1,125,000 and assets held in VEBA trust were $924,000 and $576,000 at January 31, 2004
and February 1, 2003, respectively. The Company paid worker's compensation and general liability claims of
$3,019,000, $2,609,000 and $3,114,000 in Ñscal years 2003, 2002 and 2001, respectively. Including claims
incurred, but not yet paid, the Company recognized an expense of $3,764,000, $3,284,000 and $3,385,000 in
Ñscal 2003, 2002 and 2001, respectively. Accrued workers' compensation and general liabilities was $3,968,000
and $3,222,000 at January 31, 2004 and February 1, 2003, respectively. The Company had no outstanding
letters of credit relating to such claims at January 31, 2004 or at February 1, 2003.
Fair Value of Financial Instruments: The Company's carrying values of Ñnancial instruments, such as
cash, cash equivalents, and debt, approximate 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 interpretations in accounting 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 market value of
the underlying common stock on the date of grant. Accordingly, no compensation expense has been
recognized for options granted under the Plans. Had compensation expense for Ñscal 2003, 2002, and 2001
stock options granted been determined consistent with SFAS No. 148, ""Accounting for Stock-Based
Compensation Ì Transition and Disclosure'', the Company's net income and basic and diluted earnings per
share amounts for Ñscal 2003, 2002 and 2001 would approximate the following proforma amounts (dollars in
thousands, except per share data):
January 31,
2004
February 1,
2003
February 2,
2002
Net Income as Reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$31,389
$45,833
$43,086
Add: Stock-Based employee compensation expense
included in reported net income, net of related tax
eÅects ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax eÅects ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
782
750
295
(1,308)
(1,490)
(1,888)
Pro forma Net IncomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$30,863
$45,093
$41,493
Earnings per share:
Basic Ì as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic Ì pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted Ì as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted Ì pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
$
$
1.36
1.33
1.33
1.30
$
$
$
$
1.80
1.77
1.77
1.74
$
$
$
$
1.71
1.65
1.66
1.60
The weighted-average fair value of each option granted during Ñscal 2003, 2002 and 2001 is estimated at
$5.84, $8.29 and $8.19 per share, respectively. The fair value of each option grant is estimated using the Black-
Scholes option-pricing model with the following assumptions for grants issued in 2003, 2002 and 2001,
respectively: expected dividend yield of 3.01%, 3.29% and 2.62%; expected volatility of 44.34%, 57.06% and
59.84%, adjusted for expected dividends; risk-free interest rate of 3.29%, 2.60% and 4.36%; and an expected
life of 5 years for 2003, 2002 and 2001. The eÅects of applying SFAS 148 in this proforma disclosure are not
indicative of future amounts.
28
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Recent Accounting Pronouncements
On December 31, 2002, the FASB issued SFAS No. 148, ""Accounting for Stock-Based Compensa-
tion Ì 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 signiÑcant policies of the eÅects 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 Ñnancial
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 compensation
using the fair value method of SFAS No. 123 or the intrinsic 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 eÅective for Ñscal years ending after December 15, 2002. The
implementation of this Statement did not aÅect the Company's Ñnancial position or results of operations and
the Company's adopted the disclosure requirements beginning with the Ñrst quarter of Ñscal 2003.
In March 2003, the Emerging Issues Task Force (EITF) reached a Ñnal 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
classiÑed in the customer's statement of earnings. EITF Issue No. 02-16 is eÅective for all transactions with
vendors after December 31, 2002. The adoption of EITF Issue No. 02-16 did not have a material impact on
the Company's consolidated Ñnancial position or results of operations.
ReclassiÑcations: Certain reclassiÑcations have been made to the consolidated Ñnancial statements for
prior Ñscal years to conform with presentation for Ñscal 2003.
2.
Interest and Other Income, Net
The components of Interest and other income, net are shown below in gross amounts (in thousands):
January 31,
2004
February 1,
2003
February 2,
2002
Dividend income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Miscellaneous income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Gain)/loss investment salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
(2)
(1,704)
(1,235)
306
(673)
$
(10)
(3,046)
(2,342)
21
1,697
$
(10)
(4,316)
(2,011)
38
0
Interest and other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(3,308)
$(3,680)
$(6,299)
29
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
3. Short-Term Investments:
Short-Term investments at January 31, 2004 and February 1, 2003 include the following (in thousands):
Security Type:
Debt Securities issued by
January 31, 2004
Unrealized
Estimated
Gain/(Loss) Fair Value
Cost
February 1, 2003
Unrealized
Estimated
Gain/(Loss) Fair Value
Cost
U.S. Treasury & other U.S.
government corporations
and agencies:
With unrealized gainÏÏÏÏÏÏ $ Ì $ Ì $ Ì
$ 1,000
$
87
$ 1,087
Debt Securities issued by
states of the United States
and political subdivisions of
the states:
With unrealized gainÏÏÏÏÏÏ
With unrealized (loss) ÏÏÏÏ
Corporate debt securities:
37,777
7,500
146
(345)
37,923
7,155
36,355
26,643
443
(244)
36,798
26,399
With unrealized gainÏÏÏÏÏÏ
With unrealized (loss) ÏÏÏÏ
Ì
2,500
Ì
(33)
Ì
2,467
3,626
6,833
128
Ì
3,754
6,833
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $47,777
$(232)
$47,545
$74,457
$ 414
$74,871
The accumulated unrealized gains in short-term investments at January 31, 2004 of $148,000, net of a
deferred income tax liability of $84,000 oÅset by the accumulated unrealized losses in equity investments of
$206,000, net of a deferred income tax beneÑt of $117,000 and the accumulated unrealized gains of
February 1, 2003 of $265,000, net of a deferred income tax liability of $149,000 oÅset by the accumulated
unrealized losses in equity investments of $12,000 net of a deferred income tax beneÑt of $6,000 are reÖected
in accumulated other comprehensive gains (losses) in the Consolidated Balance Sheets. All unrealized losses
disclosed were in a loss position for less than 12 months.
The Company's short-term investments are all classiÑed as available-for-sale. As they are available for
current operations, they are classiÑed 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, 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 Interest and other income, net.
As reported in our footnote 2 to our Ñnancial statements, the Company had realized gains of $673 in Ñscal
2003 and realized losses of $1,697 in Ñscal 2002.
30
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The amortized cost and estimated fair value of debt securities at January 31, 2004, by contractual
maturity, are shown below (in thousands):
Security Type
Cost
Due in one year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due in one year through three years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 8,621
39,156
Estimated
Fair Value
$ 8,605
38,940
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$47,777
$47,545
Additionally, the Company had $1.6 million invested in privately managed investment funds at
January 31, 2004, which are reported under other assets in the Consolidated Balance Sheets.
4. Accounts Receivable:
Accounts receivable consist of the following (in thousands):
Customer accounts Ì principally deferred payment accountsÏÏÏÏÏÏÏÏÏÏÏ
Miscellaneous trade receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$55,480
3,569
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less allowance for doubtful accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
59,049
6,335
$56,853
3,362
60,215
6,099
Accounts receivable Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$52,714
$54,116
January 31,
2004
February 1,
2003
Finance charge and late charge revenue on customer deferred payment accounts totaled $14,169,000,
$13,672,000 and $12,951,000 for the Ñscal years ended January 31, 2004, February 1, 2003 and February 2,
2002, respectively, and the allowance for doubtful accounts was $6,098,000, $4,764,000 and $5,913,000, for the
Ñscal years ended January 31, 2004, February 1, 2003 and February 2, 2002, respectively. The allowance for
doubtful accounts is classiÑed as a component of selling, general and administrative expenses in the
accompanying Consolidated Statements of Income.
5. Property and Equipment:
Property and equipment consist of the following (in thousands):
Land and improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Buildings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixtures, equipment and software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Construction in progress ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less accumulated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
January 31,
2004
February 1,
2003
$
2,019
17,751
39,354
155,394
2,534
217,052
102,685
$
2,019
17,751
34,697
143,080
2,246
199,793
86,486
Property and equipment Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$114,367
$113,307
Construction in progress primarily represents investments in technology and a carton sortation system for
the distribution center scheduled to be implemented over the next 12 months.
31
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
6. Accrued Expenses:
Accrued expenses consist of the following (in thousands):
January 31,
2004
February 1,
2003
Accrued bonus and retirement savings plan contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued payroll and related items ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued advertising ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Closed store lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property and other taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 2,784
4,348
976
616
8,719
5,348
5,024
$ 6,233
4,265
762
1,004
7,593
4,347
4,572
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$27,815
$28,776
7. Financing Arrangements:
At January 31, 2004, the Company had an unsecured revolving credit agreement which provided for
borrowings of up to $35 million. A new revolving credit agreement was entered into on August 22, 2003 and is
committed until August 2006. The credit agreement contains various Ñnancial covenants and limitations,
including the maintenance of speciÑc Ñnancial ratios with which the Company was in compliance as of
January 31, 2004. There were no borrowings outstanding during the Ñscal year ended January 31, 2004 or
February 1, 2003. Interest is based on LIBOR, which was 1.10% on January 31, 2004.
On August 22, 2003, the Company entered into a new unsecured $30 million Ñve-year term loan facility,
the proceeds of which were used to purchase Class B Common Stock from the Company's founders.
Payments are due in monthly installments of $500,000 plus accrued interest. Interest is based on LIBOR,
which was 1.10% on January 31, 2004.
The Company had approximately $5,365,000 and $6,496,000 at January 31, 2004 and February 1, 2003,
respectively, of outstanding irrevocable letters of credit relating to purchase commitments.
8. Stockholders' Equity:
The holders of Class A Common Stock are entitled to one vote per share, whereas the holders of Class B
Common Stock are entitled to ten votes per share. Each share of Class B Common Stock may be converted at
any time into one share of Class A Common Stock. Subject to the rights of the holders of any shares of
Preferred Stock that may be outstanding at the time, in the event of liquidation, dissolution or winding up of
the Company, holders of Class A Common Stock are entitled to receive a preferential distribution of $1.00 per
share of the net assets of the Company. Cash dividends on the Class B Common Stock cannot be paid unless
cash dividends of at least an equal amount are paid on the Class A Common Stock.
The Company's charter provides that shares of Class B Common Stock may be transferred only to certain
""Permitted Transferees'' consisting generally of the lineal descendants of holders of Class B Stock, trusts for
their beneÑt, corporations and partnerships controlled by them and the Company's employee beneÑt 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.
During 2003, the Company repurchased 5,137,484 shares of Class B Common Stock from a limited
partnership and trust aÇliated with Wayland H. Cato, Jr., a Company founder and Chairman of the Board,
32
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
and a limited partnership aÇliated with Edgar T. Cato, a Company founder and a member of the Board of
Directors. Shares were purchased at $18.50 per share for a total cost of $95,043,454. Including related
expenses 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 Ñve-year term loan facility and approximately $65 million of cash and liquidated short-term
investments. Payments on the new term loan are due in monthly installments of $500,000 plus accrued
interest. Interest is based on LIBOR. The LIBOR rate at January 31, 2004 was 1.10%. Additionally, during
2003, the Company repurchased 165,000 shares of Class A Common Stock for $2,740,619, or an average
market price of $16.61 per share.
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. The ""1993'' Plan expired October 1, 2003. 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 Ñrst 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 28,306 shares, 32,487 shares and 38,463 shares for the
years ended January 31, 2004, February 1, 2003 and February 2, 2002, 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 $.03 1/3 per
share (""Common Shares''), of the Company outstanding at the close of business on January 7, 2004 (the
""Record Date''). In connection with the authorization of 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, as Rights Agent (the ""Rights Agent'').
The Company has an Incentive Stock Option Plan and a Non-QualiÑed 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-QualiÑed
Stock Option Plan. The purchase price of the shares under the option must be at least 100 percent of the fair
market value of Class A Common Stock at the date of the grant. Options granted under these plans vest over a
5-year period and expire 10 years after the date of the grant unless otherwise expressly authorized by the
Board of Directors.
In August 1999, the Board of Directors adopted the 1999 Incentive Compensation Plan, of which
1,000,000 shares are issuable. No awards may be granted after July 31, 2004 and shares must be exercised
within 10 years of the grant date unless otherwise authorized by the Board of Directors.
In August 1999, the Board of Directors granted under the 1999 Incentive Compensation Plan, restricted
stock awards of 100,000 shares of Class B Common Stock, with a per share fair value of $11.81 to a key
executive. 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 cliÅ vest after four years and the unvested portion is included in
stockholders' equity as unearned compensation in the accompanying Ñnancial statements. The charge to
compensation expense for these stock awards was $782,000, $750,000 and $295,000 in Ñscal 2003, 2002 and
2001, respectively.
33
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Option plan activity for the three Ñscal years ended January 31, 2004 is set forth below:
Options
Range of
Option Prices
Weighted
Average
Price
Outstanding options,
February 3, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,537,382
21,750
(778,182)
(25,700)
$ 4.94 Ó $14.59
12.66 Ó 18.91
4.94 Ó 14.59
7.69 Ó 14.59
$ 9.68
16.17
8.20
11.61
Outstanding options,
February 2, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,755,250
45,500
(344,100)
(14,700)
4.94 Ó 18.91
18.05 Ó 26.76
4.94 Ó 17.63
8.25 Ó 12.28
Outstanding options,
February 1, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,441,950
19,500
(288,250)
(18,800)
4.94 Ó 26.76
16.65 Ó 21.29
4.94 Ó 18.86
8.25 Ó 18.86
10.39
20.89
8.11
11.27
11.20
17.66
9.94
12.75
Outstanding options,
January 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,154,400
$ 5.13 Ó $26.76
$11.54
The following tables summarize stock option information at January 31, 2004:
Range of
Exercise Prices
$ 5.13 Ó $ 7.69
8.25 Ó
9.59
10.66 Ó 12.72
13.06 Ó 26.76
Options
57,300
364,000
287,600
445,500
$ 5.13 Ó $26.76
1,154,400
Options Outstanding
Weighted Average
Remaining
Contractual Life
Weighted
Average
Exercise Price
1.27 years
3.63 years
5.66 years
5.32 years
4.67 years
Options Exercisable
$ 7.67
8.28
12.44
14.12
$11.54
Range of
Exercise Prices
$ 5.13 Ó $ 7.69
9.59
8.25 Ó
10.66 Ó 12.72
13.06 Ó 26.76
Options
57,300
357,800
190,400
352,750
$ 5.13 Ó $26.76
958,250
Weighted
Average
Exercise Price
$ 7.67
8.26
12.46
13.34
$10.93
34
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Outstanding options at January 31, 2004 covered 702,000 shares of Class B Common Stock and 452,400
shares of Class A Common Stock. Outstanding options at February 1, 2003 covered 717,000 shares of Class B
Common Stock and 724,950 shares of Class A Common Stock. Options available to be granted under the
option plans were 406,600 at January 31, 2004 and 421,618 at February 1, 2003.
In May 2003, the Board of Directors increased the quarterly dividend by 7% from $.15 per share to $.16
per share.
Total comprehensive income for the years ended January 31, 2004, February 1, 2003 and February 2,
2002 is as follows (in thousands):
Fiscal Year Ended
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gains (losses) on available-for-sale securities ÏÏÏ
Income tax eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gains (losses) net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
January 31,
2004
February 1,
2003
February 2,
2002
$31,389
(306)
111
(195)
$45,833
1,268
(448)
$43,086
488
(171)
820
317
Total comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$31,194
$46,653
$43,403
The net unrealized gain/loss on investments held reÖected in comprehensive income for the periods
presented were net of reclassiÑcation adjustments for gains/(losses) reported in income in the amounts of
$429, ($1,083) and $0 for Ñscal years 2003, 2002 and 2001, respectively, net of income taxes.
9. Employee BeneÑt Plans:
The Company has a deÑned 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 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
January 31, 2004, February 1, 2003 and February 2, 2002 were approximately $1,764,000, $1,906,000 and
$2,596,000, 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 January 31, 2004,
February 1, 2003 or February 2, 2002.
The Company is primarily self-insured for healthcare, workers' compensation and general liability costs.
These costs are signiÑcant 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 Ñled 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 circum-
stances 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 reported
Ñnancial 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 $8,995,000, $8,970,000 and
$9,090,000 in Ñscal 2003, 2002 and 2001, respectively. Accrued healthcare was $1,380,000 and $1,125,000 and
assets held in the VEBA trust were $924,000 and $576,000 at January 31, 2004 and February 1, 2003,
respectively.
35
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
10. Leases:
The Company has operating lease arrangements for store facilities and equipment. Facility leases
generally are Ñxed rate for periods of Ñve 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 booked as a deferred liability and amortized over
the term of the lease. Equipment leases are generally for one to three year periods.
The minimum rental commitments under non-cancelable operating leases are (in thousands):
Fiscal Year
2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 40,482
32,488
25,167
16,249
6,740
Total minimum lease paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$121,126
The following schedule shows the composition of total rental expense for all leases (in thousands):
Fiscal Year Ended
January 31,
2004
February 1,
2003
February 2,
2002
Minimum rentals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Contingent rent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$39,998
165
$37,848
389
$37,117
471
Total rental expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$40,163
$38,237
$37,588
11. Related Party Transactions:
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 $872,607, $883,367, and
$785,936 were paid in Ñscal 2003, 2002 and 2001, respectively, under these leases.
During 2000, 2001, 2002 and the Ñrst quarter of 2003, the Company made payments for the beneÑt 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. The Company subsequently
determined these payments were unrelated to the business of the Company. Amounts, including interest, have
been repaid. In the course of the evaluation by the Chief Executive OÇcer and the Chief Financial OÇcer
described above, the Company implemented a change in its internal controls to prevent the payment of similar
expenses in the future. As a result of this change, any payment requests for or on behalf of related parties
require the prior review by and approval of the Chief Financial OÇcer.
36
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
12.
Income Taxes:
The provision for income taxes consists of the following (in thousands):
Fiscal Year Ended
Current income taxes:
January 31,
2004
February 1,
2003
February 2,
2002
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$12,550
337
$24,572
1,364
$22,309
469
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
12,887
25,936
22,778
Deferred income taxes:
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4,457
544
5,001
63
7
70
376
46
422
Total income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$17,888
$26,006
$23,200
SigniÑcant components of the Company's deferred tax assets and liabilities as of January 31, 2004 and
February 1, 2003 are as follows (in thousands):
January 31,
2004
February 1,
2003
Deferred tax assets:
Bad debt reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventory valuationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Write-down of short-term investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restricted stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital loss carryover ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ReservesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 2,426
946
Ì
428
669
3,872
764
$ 2,338
1,739
669
407
Ì
2,972
Ì
Total deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9,105
8,125
Deferred tax liabilities:
Tax over book depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gains on short-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
17,974
33
1,017
Total deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
19,024
11,682
143
1,218
13,043
Net deferred tax liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 9,919
$ 4,918
Certain of the Company's deferred tax assets have a limited life and realization of these assets is not
assured. The capital loss carryover expires in 2008.
37
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The reconciliation of the Company's eÅective income tax rate with the statutory rate is as follows:
Fiscal Year Ended
January 31,
2004
February 1,
2003
February 2,
2002
Federal income tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅective income tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
35.0%
1.3
0.0
36.3%
35.0%
1.2
0.0
36.2%
35.0%
0.9
(0.9)
35.0%
13. Quarterly Financial Data (Unaudited):
Summarized quarterly Ñnancial results are as follows (in thousands, except per share data):
Fiscal 2003
First
Second
Third
Fourth
Retail sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$197,304
201,210
126,998
70,306
27,444
17,482
.69
.68
$
$
$188,218
191,993
132,616
55,602
12,137
7,731
.30
.30
$
$
$153,171
157,129
108,557
44,614
1,251
797
.04
.04
$
$
$193,077
196,935
140,230
52,847
8,445
5,379
.26
.26
$
$
Fiscal 2002
First
Second
Third
Fourth
Retail sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$196,617
200,491
124,460
72,157
28,683
18,300
.72
.71
$
$
$186,900
190,715
125,854
61,046
19,213
12,258
.48
.47
$
$
$158,217
162,228
110,188
48,029
8,507
5,427
.21
.21
$
$
$191,008
194,897
135,843
55,165
15,436
9,848
.39
.38
$
$
14. Reportable Segment Information:
The Company has two reportable segments: retail and credit. The Company operates its women's fashion
specialty retail stores in 28 states, principally in southeastern United States. The Company oÅers its own credit
card to its customers and all credit authorizations, payment processing, and collection eÅorts are performed by
a separate subsidiary of the Company.
38
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The following schedule summarizes certain segment information (in thousands):
Fiscal 2003
Retail
Credit
Total
Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$732,796
18,617
(3,308)
44,553
289,200
20,549
$14,471
78
Ì
4,724
62,373
4
$747,267
18,695
(3,308)
49,277
351,573
20,553
Fiscal 2002
Retail
Credit
Total
Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$734,352
14,851
(3,680)
66,375
310,173
28,953
$13,979
62
Ì
5,464
73,237
Ì
$748,331
14,913
(3,680)
71,839
383,410
28,953
Fiscal 2001
Retail
Credit
Total
Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$686,092
10,821
(6,299)
62,786
263,909
25,684
$13,229
65
Ì
3,500
68,132
Ì
$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 signiÑcant
accounting policies. The Company evaluates performance based on proÑt or loss from operations before
income taxes. The Company does not allocate certain corporate expenses or income taxes to the segments.
The following schedule summarizes the credit segment and related direct expenses which are reÖected in
selling, general and administrative expenses (in thousands):
January 31,
2004
February 1,
2003
February 2,
2002
Bad debt expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payroll ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PostageÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$6,098
1,101
1,131
1,339
Total expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$9,669
$4,764
1,117
1,121
1,451
$8,453
$5,913
1,126
1,127
1,498
$9,664
15. 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 $3,019,000, $2,609,000 and $3,114,000 in Ñscal 2003, 2002 and 2001,
respectively. Including claims incurred, but not yet paid, the Company recognized an expense of $3,764,000,
$3,284,000 and $3,385,000 in Ñscal 2003, 2002 and 2001, respectively. Accrued workers' compensation and
39
THE CATO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
general liabilities was $3,968,000 and $3,222,000 at January 31, 2004 and February 1, 2003, respectively. The
Company had no outstanding letters of credit relating to such claims at January 31, 2004 or at February 1,
2003. 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.
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 Cato West LLC, a wholly owned subsidiary, to Cedar Hill. The deposit
has no set term. The deposit was made at the request of the OÇce 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. Cato West
purchases receivables from Cedar Hill on a daily basis (generally one day in arrears). In the event Cato West
fails to transfer to Cedar Hill the purchase price for any receivable within two business days, Cedar Hill shall
have the right to withdraw any amount necessary from the account established by the Company to satisfy the
amount due Cedar Hill from Cato West. 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 Cato West 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.
The Company is a defendant in legal proceedings considered to be in the normal course of business and
none of which, singularly or collectively, are considered to be material to the Company as a whole.
40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:
EÅective September 16, 2003, The Cato Corporation (the ""Company'') dismissed Deloitte & Touche
LLP as its principal independent accountants from the engagement to perform the audit of the Ñnancial
statements of the Company for the Ñscal year ending January 31, 2004. Deloitte & Touche LLP had served as
the Company's principal independent accountants since 1995. The decision to dismiss Deloitte & Touche LLP
was made by the Audit Committee of the Board of Directors of the Company.
The audit reports of Deloitte & Touche LLP on the Ñnancial statements of the Company for the Ñscal
years ended February 1, 2003 and February 2, 2002 contained no adverse opinion or disclaimer of opinion, nor
were they qualiÑed or modiÑed as to uncertainty, audit scope, or accounting principles.
In connection with the audits of the Ñnancial statements of the Company for the Ñscal years ended
February 1, 2003 and February 2, 2002 and through the date hereof, the Company had no disagreement with
Deloitte & Touche LLP on any matter of accounting principles or practices, Ñnancial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to the satisfaction of Deloitte & Touche LLP,
would have caused them to make reference to such disagreement in their reports for such periods; and there
were no reportable events as deÑned in Item 304(a)(1)(v) of Regulation S-K.
Deloitte & Touche LLP was provided a copy of the above disclosures and was requested to furnish the
Company with a letter addressed to the Securities and Exchange Commission stating whether it agreed with
the above statements and, if not, stating in what respects it did not agree. A letter from Deloitte & Touche
LLP was attached as Exhibit 16 to the Company's Form 8-K, Ñled September 23, 2003, as amended by
Form 8-K/A, Ñled October 6, 2003.
On September 16, 2003, the Company engaged the accounting Ñrm of PricewaterhouseCoopers LLP as
independent accountants to audit the Company's Ñnancial statements for the Ñscal year ending January 31,
2004. The decision to engage PricewaterhouseCoopers LLP was made by the Audit Committee of the Board
of Directors of the Company. During the Ñscal years ended February 1, 2003 and February 2, 2002 and
through the date hereof, the Company did not consult with PricewaterhouseCoopers LLP regarding any of the
matters or reportable events set forth in Item 304(a)(2)(i) and (ii) of the Regulation S-K.
Item 9A. Controls and Procedures:
Evaluation of disclosure controls and procedures. As of January 31, 2004, an evaluation of the
eÅectiveness of the Company's disclosure controls and procedures (as deÑned in Rule 13(a)-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the ""Exchange Act'')) was
performed under the supervision and with the participation of the Company's management, including the
Chief Executive OÇcer and Chief Finance OÇcer. Based on that evaluation, the Company's Chief Executive
OÇcer and Chief Financial OÇcer have concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were eÅective to ensure that information required to be
disclosed by the Company in its reports that it Ñles or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods speciÑed in the Securities Exchange Commission rules and
forms.
Changes in internal control over Ñnancial reports. During the Company's fourth Ñscal quarter of 2003,
there has been no change in the Company's internal controls over Ñnancial reporting (as deÑned in
Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) that has materially aÅected, or is
reasonably likely to materially aÅect, the Company's internal controls over Ñnancial reporting.
PART III
Item 10. Directors and Executive OÇcers of the Registrant:
Information contained under the captions ""Election of Directors,'' ""Meetings and Committees'' and
""Section 16(a) BeneÑcial Ownership Reporting and Compliance'' in the Registrant's Proxy Statement for its
41
2004 annual stockholders' meeting (the ""2004 Proxy Statement'') is incorporated by reference in response to
this Item 10. The information in response to this Item 10 regarding executive oÇcers of the Company is
contained in Item 1, Part I hereof under the caption ""Executive OÇcers'' of the Registrant''.
Code of Ethics and Code of Business Conduct and Ethics
The Company has adopted a written Code of Ethics (the ""Code of Ethics'') that applies to the
Company's Chairman, President, and Chief Executive OÇcer, Executive Vice President, Chief Financial
OÇcer and Secretary, and Senior Vice President, Controller. The Company has adopted a Code of Business
Conduct and Ethics (the ""Code of Conduct'') that applies to all employees, oÇcers, and directors of the
Company. The Code of Ethics and Code of Conduct are available on the Company's website at
www.catocorp.com, under the ""Corporate Governance'' caption and print copies are available to any
shareholder that requests a copy. Any amendments to the Code of Ethics or Code of Conduct, or any waivers
of the Code of Ethics, or any waiver of the Code of Conduct for directors or executive oÇcers, will be
disclosed on the Company's website promptly following the date of such amendment or waiver.
Item 11. Executive Compensation:
Incorporated by reference to Registrant's Proxy Statement for 2004.
Item 12. Security Ownership of Certain BeneÑcial 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 31, 2004.
(a)
(b)
Plan Category
Equity compensation plans approved
by security holder ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity compensation plans not
approved by security holders ÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights(1)
Weighted-average
exercise price of
outstanding options,
warrants and rights(1)
1,154,400
Ì
1,154,400
$11.54
Ì
$11.54
(c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reÖected in
column (a))(2)
669,087
Ì
669,087
(1) This column contains information regarding employee stock options only; there are no warrants or stock
appreciation rights outstanding.
(2) Includes the following:
406,600 shares available for grant under the Company's stock incentive plan, referred to as the ""1999''
Incentive Plan. Under this plan, non-qualiÑed stock options may be granted to key employees. No awards
may be granted after 2004. Additionally, 14,318 shares available for grant under the Company's stock
incentive plan, referred to as the ""1987'' Non-qualiÑed 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
248,169 shares 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.
42
Information contained under ""Security Ownership of Certain BeneÑcial Owners and Management and
Related Stockholder Matters'' in the 2004 Proxy Statement is incorporated by reference in response to this
Item.
Item 13. Certain Relationships and Related Transactions:
Information contained under the caption ""Certain Transactions'' in the 2004 Proxy Statement is
incorporated by reference in response to this Item.
Item 14. Principal Accountant Fees and Services:
The information required by this Item is incorporated herein by reference to the section entitled ""Audit
Fees'' in the 2004 Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K:
(a) The following documents are Ñled as part of this report:
(1) Financial Statements:
Report of Independent Auditors (PricewaterhouseCoopers LLP) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Report of Predecessor Auditor (Deloitte & Touche LLP) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Income for the Ñscal years ended January 31, 2004,
February 1, 2003 and February 2, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Balance Sheets at January 31, 2004 and February 1, 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Cash Flows for the Ñscal years ended January 31, 2004,
February 1, 2003 and February 2, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Stockholders' Equity for the Ñscal years ended January 31,
2004, February 1, 2003 and February 2, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Page
19
20
21
22
23
24
25
(2) Financial Statement Schedules: The following report and Ñnancial statement schedules are Ñled
herewith:
Predecessor Independent Auditors' Consent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Schedule II Ì Valuation and Qualifying Accounts and Reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
S-1
S-2
All other schedules are omitted as the required information is inapplicable or the information is presented
in the consolidated Ñnancial statements or related notes thereto.
43
(3) Index to Exhibits: The following exhibits are Ñled with this report or, as noted, incorporated by
reference herein.
Exhibit
Number
Description of Exhibit
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
16.1
21
23.1
23.2
31.1
31.2
32.1
32.2
Registrant's Restated CertiÑcate of Incorporation of the Registrant dated March 6, 1987,
incorporated by reference to Form S-8 of the Registrant Ñled February 7, 2000.
Registrant's By Laws incorporated by reference to Form S-8 of the Registrant Filed February 7,
2000.
Loan Agreement, dated as of August 22, 2003, between the Registrant and Branch Banking and
Trust Company (Not Ñled herewith. The Registrant hereby agrees to furnish a copy of this
agreement to the Securities and Exchange Commission upon request.)
Share Rights Agreement dated December 18, 2003, incorporated by reference to Form 8-A12G of
the Registrant Ñled December 22, 2003 and as amended in Form 8-A12B/A Ñled on January 6,
2004.
Employment Agreement dated May 20, 1999 between The Cato Corporation and John P. Derham
Cato, incorporated by reference to Form 10-K of the Registrant for the Ñscal year ended January 29,
2000.
1999 Incentive Compensation Plan dated August 26, 1999, incorporated by reference to Form S-8
of the Registrant Ñled February 7, 2000.
Agreement, dated as of August 29, 2003, between the Registrant and Wayland H. Cato, Jr.,
incorporated by reference to Form 8-K of the Registrant Ñled on July 22, 2003.
Agreement, dated as of August 29, 2003, between the Registrant and Edgar T. Cato, incorporated
by reference to Form 8-K of the Registrant Ñled on July 22, 2003.
Retirement Agreements between Registrant and Wayland H. Cato, Jr. and Edgar T. Cato dated
August 29, 2003 incorporated by reference to Form 10-Q of the Registrant for quarter ended
August 2, 2003.
Change in the Registrants Independent Accountants from Deloitte & Touche, LLP to
PricewaterhouseCoopers, LLP eÅective September 16, 2003, incorporated by reference to
Form 8-K of the Registrant Ñled September 23, 2003 and as amended in Form 8-K/A Ñled on
October 6, 2003.
Subsidiary of Registrant.
Consent of Independent Accountants.
Consent of Predecessor Independent Accountants.
CertiÑcation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive OÇcer.
CertiÑcation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial OÇcer.
CertiÑcation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive OÇcer.
CertiÑcation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial OÇcer.
(b) Reports on Form 8-K:
Form 8-K was Ñled on November 18, 2003 disclosing the November 18, 2003 Press Release regarding the
Company's Ñnancial results for the third quarter of 2003.
Form 8-A was Ñled on December 22, 2003 disclosing that on December 4, 2003 the Board of Directors of
the Company adopted a Stockholder Rights Plan.
Pursuant to General Instruction B on Form 8-K, any reports previously or in the future submitted under
Items 9 and 12 are not deemed to be ""Ñled'' for the purpose of Section 18 of the Securities Exchange Act of
1934, as amended (the ""Exchange Act''), and the Company is not subject to the liabilities of that section. The
Company is not incorporating, and will not incorporate, by reference these reports into a Ñling under the
Securities Act of 1933, as amended, or the Exchange Act.
44
EXHIBIT INDEX
Designation
of Exhibit
Page
46
Subsidiaries of the RegistrantÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
21
23.1 Consent of Independent Accountants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
47
23.2 Consent of Predecessor Independent AccountantsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ S-1
45
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21
Name of Subsidiary
State of
Incorporation/Organization
Name under which
Subsidiary does Business
CHW LLC
Providence Insurance Company,
Delaware
A Bermudian Company
CHW LLC
Providence Insurance Company,
Limited
CatoSouth LLC
Cato of Texas L.P.
Cato Southwest, Inc.
CaDel LLC
CatoWest LLC
Cedar Hill National Bank
catocorp.com, LLC
North Carolina
Texas
Delaware
Delaware
Nevada
A Nationally Chartered Bank
Delaware
Limited
CatoSouth LLC
Cato of Texas L.P.
Cato Southwest, Inc.
CaDel LLC
CatoWest LLC
Cedar Hill National Bank
catocorp.com, LLC
46
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Registration Statement No. 333-96283 on
Form S-8 pertaining to The Cato Corporation 1999 Incentive Compensation Plan, in Registration Statement
No. 33-41314 on Form S-8 pertaining to The Cato Corporation 1987 Incentive Stock Option Plan, in
Registration Statement No. 33-41315 on Form S-8 pertaining to The Cato Corporation 1987 NonqualiÑed
Stock Option Plan, and in Registration Statement Nos. 33-69844 and 333-96285 on Forms S-8 pertaining to
The Cato Corporation 1993 Employee Stock Purchase Plan, of our report dated March 31, 2004 relating to
the Ñnancial statements and Ñnancial statement schedules, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
April 22, 2004
47
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Cato has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
By /s/
JOHN P. DERHAM CATO
By /s/ MICHAEL O. MOORE
The Cato Corporation
Michael O. Moore
Executive Vice President
Chief Financial OÇcer and Secretary
John P. Derham Cato
Chairman, President and
Chief Executive OÇcer
By /s/ ROBERT M. SANDLER
Robert M. Sandler
Senior Vice President
Controller
Date: April 22, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
/s/
JOHN P. DERHAM CATO
/s/ GEORGE S. CURRIN
John P. Derham Cato
(Director)
George S. Currin
(Director)
/s/ MICHAEL O. MOORE
/s/ GRANT L. HAMRICK
Michael O. Moore
(Director)
Grant L. Hamrick
(Director)
/s/ THOMAS E. CATO
/s/
JAMES H. SHAW
Thomas E. Cato
(Director)
James H. Shaw
(Director)
/s/ ROBERT W. BRADSHAW, JR.
/s/ A.F. (PETE) SLOAN
Robert W. Bradshaw, Jr.
(Director)
A.F. (Pete) Sloan
(Director)
48
EXHIBIT 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John P. Derham Cato, Chairman, President and Chief Executive OÇcer of The Cato Corporation,
certify that:
1. I have reviewed this Annual Report on Form 10-K of The Cato Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in this report,
fairly present in all material respects the Ñnancial condition, results of operations and cash Öows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying oÇcer and I are responsible for establishing and maintaining disclosure
controls and procedures (as deÑned in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the eÅectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the eÅectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation;
c) Disclosed in this report any change in the registrant's internal control over Ñnancial reporting that
occurred during the registrant's most recent Ñscal quarter (the registrant's fourth Ñscal quarter in the
case of an annual report) that has materially aÅected, or is reasonably likely to materially aÅect, the
registrant's internal control over Ñnancial reporting; and
5. The registrant's other certifying oÇcer and I have disclosed, based on our most recent evaluation of internal
control over Ñnancial reporting, to the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All signiÑcant deÑciencies and material weaknesses in the design or operation of internal control over
Ñnancial reporting which are reasonably likely to adversely aÅect the registrant's ability to record,
process, summarize and report Ñnancial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
signiÑcant role in the registrant's internal controls over Ñnancial reporting.
Date: April 22, 2004
/s/ John P. Derham Cato
John P. Derham Cato
Chairman, President and
Chief Executive OÇcer
49
EXHIBIT 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael O. Moore, Executive Vice President, Chief Financial OÇcer and Secretary of The Cato
Corporation, certify that:
1. I have reviewed this Annual Report on Form 10-K of The Cato Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in this report,
fairly present in all material respects the Ñnancial condition, results of operations and cash Öows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying oÇcer and I are responsible for establishing and maintaining disclosure
controls and procedures (as deÑned in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the eÅectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the eÅectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation;
c) Disclosed in this report any change in the registrant's internal control over Ñnancial reporting that
occurred during the registrant's most recent Ñscal quarter (the registrant's fourth Ñscal quarter in the
case of an annual report) that has materially aÅected, or is reasonably likely to materially aÅect, the
registrant's internal control over Ñnancial reporting; and
5. The registrant's other certifying oÇcer and I have disclosed, based on our most recent evaluation of internal
control over Ñnancial reporting, to the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All signiÑcant deÑciencies and material weaknesses in the design or operation of internal control over
Ñnancial reporting which are reasonably likely to adversely aÅect the registrant's ability to record,
process, summarize and report Ñnancial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
signiÑcant role in the registrant's internal controls over Ñnancial reporting.
Date: April 22, 2004
/s/ Michael O. Moore
Michael O. Moore
Executive Vice President
Chief Financial OÇcer and Secretary
50
EXHIBIT 32.1
CERTIFICATION OF PERIODIC REPORT
I, John P. Derham Cato, Chairman, President and Chief Executive OÇcer of The Cato Corporation, certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that on the date of this
CertiÑcation:
1. the Annual Report on Form 10-K of the Company for the annual period ended January 31, 2004 (the
""Report'') fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. the information contained in the Report fairly presents, in all material respects, the Ñnancial condition and
results of operations of the Company.
Dated: April 22, 2004
/s/ John P. Derham Cato
John P. Derham Cato
Chairman, President and
Chief Executive OÇcer
51
EXHIBIT 32.2
CERTIFICATION OF PERIODIC REPORT
I, Michael O. Moore, Executive Vice President, Chief Financial OÇcer and Secretary of The Cato
Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that
on the date of this CertiÑcation:
1. the Annual Report on Form 10-K of the Company for the annual period ended January 31, 2004 (the
""Report'') fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. the information contained in the Report fairly presents, in all material respects, the Ñnancial condition and
results of operations of the Company.
Dated: April 22, 2004
/s/ Michael O. Moore
Michael O. Moore
Executive Vice President
Chief Financial OÇcer and Secretary
52
EXHIBIT 23.2
PREDECESSOR INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 333-96283 on Form S-8
pertaining to The Cato Corporation 1999 Incentive Compensation Plan, in Registration Statement
No. 33-41314 on Form S-8 pertaining to The Cato Corporation 1987 Incentive Stock Option Plan, in
Registration Statement No. 33-41315 on Form S-8 pertaining to The Cato Corporation 1987 NonqualiÑed
Stock Plan, and in Registration Statement Nos. 33-69844 and 333-96285 on Forms S-8 pertaining to The
Cato Corporation 1993 Employee Stock Purchase Plan, of our report dated April 21, 2003, with respect to the
consolidated Ñnancial statements and Ñnancial statement schedule of the Cato Corporation included in and
incorporated by reference in the Annual Report on Form 10-K for the year ended January 31, 2004.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
April 22, 2004
S-1
VALUATION AND QUALIFYING ACCOUNTS
Allowance
for
Doubtful
Accounts(a)
Balance at February 3, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additions charged to costs and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additions charged to other accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deductions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 5,422
5,913
1,052(d)
(6,419)(e)
Balance at February 2, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additions charged to costs and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additions charged to other accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deductions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at February 1, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additions charged to costs and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additions charged to other accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deductions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5,968
4,763
887(d)
(5,519)(e)
6,099
6,098
858(d)
(6,720)(e)
SCHEDULE II
Reserve for
Rental
Commitments(b)
(In thousands)
$ 1,649
691
Ì
(1,263)
1,077
1,000
Ì
(1,121)
956
1,062
Ì
(1,402)
Allowance
for Sales
Returns(c)
$ Ì
Ì
Ì
Ì
Ì
390
Ì
Ì
390
10
Ì
Ì
Balance at January 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 6,335
$
616
$400
(a) Deducted from trade accounts receivable.
(b) Provision for the diÅerence between costs and revenues from non-cancelable subleases over the lease
terms of closed stores.
(c) Gross margin revenue on return sales.
(d) Recoveries of amounts previously written oÅ.
(e) Uncollectible accounts written oÅ.
S-2
C o r p o r a t e I n fo r m a t i o n
A copy of the Company’s Annual
Report to the Securities and Exchange
Independent Auditor
PricewaterhouseCoopers LLP
Commission (Form 10-K) for the
Charlotte, North Carolina 28202
fiscal year ended January 31, 2004
is available to shareholders without
charge upon written request to
Mr. Michael O. Moore, Executive
Corporate Counsel
Robinson, Bradshaw & Hinson, P.A.
Charlotte, North Carolina 28246
Vice President, Chief Financial Officer
and Secretary, The Cato Corporation,
Transfer Agent and Registrar
Wachovia Bank, N.A.
P.O. Box 34216, Charlotte, North
Securities Transfer Department, CMG-5
Carolina 28234.
Charlotte, North Carolina 28288
Corporate Headquarters
The Cato Corporation
8100 Denmark Road
Annual Meeting Notice
The Annual Meeting of Shareholders
11:00 a.m., Thursday, May 27, 2004
Charlotte, North Carolina 28273-5975
Corporate Office, 8100 Denmark Road,
Telephone: (704) 554-8510
Charlotte, NC 28273-5975
Mailing Address
P.O. Box 34216
Charlotte, North Carolina 28234
M a rk e t & D i v i d e n d I n fo r m a t 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 2003 and 2002.
2003
First quarter
Second quarter
Third quarter
Fourth quarter
2002
First quarter
Second quarter
Third quarter
Fourth quarter
Price
High
Low
Dividend
$20.50
$16.28
$.15
24.10
25.11
21.57
18.20
19.95
18.84
.16
.16
.16
Price
High
Low
Dividend
$27.21
$19.91
$.135
27.44
19.95
21.80
18.00
14.18
17.33
.15
.15
.15
As of March 29, 2004 the approximate number of record holders of the Company’s
Class A Common Stock was 1,227 and there were 4 record holders of the Company’s
Class B Common Stock.
v a l u e . s t y l e . e x p r e s s i o n
T H E C A T O C O R P O R A T I O N
8100 Denmark Road
Charlotte, NC 28273-5975
www.catocorp.com