Cato Corporation
Annual Report 2004

Plain-text annual report

2004 ANNUAL REPORT COMPANY PROFILE 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 nearly 1,200 apparel specialty stores principally in the southeastern United States. Cato offers exclusive merchandise with updated fashion and quality comparable to mall specialty stores at low prices, every day. Most Cato stores range from 4,000 to 6,000 square feet and are located primarily in strip shopping centers anchored by national discounters or market dominant grocery stores. It’s Fashion! provides junior-inspired fashion apparel and accessories with stores ranging from 3,000 to 4,000 square feet. The Company is headquartered in Charlotte, North Carolina. FINANCIAL HIGHLIGHTS FISCAL YEAR (Dollars in thousands, except per share data) FOR THE YEAR ENDED Retail sales Total revenues Comparable store sales increase (decrease) Income before income taxes Net income Net income as a percent of retail sales Cash dividends paid per share Basic earnings per share Diluted earnings per share Number of stores Number of stores opened Number of stores closed Net increase in number of stores AT YEAR END 2004 2003 (Restated) 2002 (Restated) 2001 (Restated) 2000 (Restated) $ 773,809 789,604 $ 731,770 747,267 $ 732,742 748,331 $ 685,653 699,321 $ 648,482 662,537 0% 54,695 34,841 4.5% .685 1.69 1.66 1,177 80 5 75 (7)% 48,687 31,014 4.2% .63 1.34 1.32 1,102 87 7 80 0% 71,230 45,445 6.2% .585 1.78 1.75 1,022 90 5 85 1% 65,314 42,462 6.2% .53 1.69 1.64 937 85 7 78 3% 59,884 38,924 6.0% .425 1.56 1.53 859 65 15 50 Cash, cash equivalents and investments Working capital Current ratio Total assets Stockholders’ equity $ 107,228 133,791 2.0 394,134 211,175 $ 71,402 117,403 2.0 356,284 186,075 $ 106,936 166,264 2.7 387,272 262,505 $ 84,695 143,101 2.7 335,708 227,428 $ 83,112 129,437 2.4 314,637 201,110 A MESSAGE TO OUR SHAREHOLDERS Cato means real value. Customers find value in the quality fashion we offer. Shareholders find value in increasing earnings per share and increasing dividends. sourcing functions. More exclusive styles, when joined with our on-trend fashion and high product quality, will add value for our customers. By delivering fashion and quality with exceptional value, 2004 earnings increased 12% to $34.8 million and EPS increased 26% to $1.66. As a shareholder, your investment in Cato has been rewarded with continued profitability, consistent growth, and an increasing dividend. We have stated that we will increase dividends as earnings grow. In 2004, the Company’s annualized dividend increased 9% to $.70 per share. After repurchasing $98 million of Company stock in 2003 and reducing outstanding shares by 21%, we ended 2004 with more than $107 million in cash and short-term investments. In April 2005, we paid the remaining $20.5 million balance on the loan used to finance a portion of the share repurchase two and a half years early. We are again debt-free. We invested more than $25 million in capital expenditures during 2004 including opening 80 new stores and implementing new technology in many areas. Our management team remains focused on the execution of three key strategies that have been in place for many years. First, we will continue to improve our merchandise offering. We are improving fashion and quality across all merchandise categories. We are developing more exclusive products through our fashion design and direct Second, we will continue to enhance the shopping experience for our customer. We have improved our customer service training programs, created more selective store staff hiring guidelines, and improved the monitoring of performance against standards. Our focus on merchandise presentation by color makes it easy for customers to coordinate outfits. In 2005 we are implementing two major Third, we will continue to improve our business through technology investments in merchandising, distribution, and sales support. systems. A state-of-the-art warehouse management system will reduce costs and increase processing speed and a new point of sale system will lower costs, reduce transaction times, and streamline store communications. The right strategies are in place. We continue building a strong organization to execute these strategies. We operate our business for the long term. We remain committed to growing our business profitably, growing our dividend as earnings increase, and increasing long-term shareholder value. John P. Derham Cato Chairman, President and Chief Executive Officer A NEW STATEMENT OF STYLE Customers can always find their style and enjoy their shopping experience at Cato Styles for work, weekends or a night out Fashion, quality, fit and great colors Convenient locations Comfortable shopping environment Friendly service Exceptional value STORE GROWTH NUMBER OF STORES (AT YEAR END) 1,177 1,102 1,022 937 859 809 732 693 97 98 99 00 01 02 03 04 INVESTMENT FOR GROWTH Investing to build long-term value for our customers, associates and shareholders 90 new stores in 2005 More exclusive designs and increased direct sourcing New technology to improve efficiency and productivity Strong organization to support our strategies MANAGEMENT EXECUTIVE GROUP BOARD OF DIRECTORS John P. Derham Cato Chairman, President and Chief Executive Officer Michael O. Moore Executive Vice President, Chief Financial Officer and Secretary B. Allen Weinstein Executive Vice President, Chief Merchandising Officer Howard A. Severson Executive Vice President, Chief Real Estate and Store Development Officer Michael T. Greer Senior Vice President, Director of Stores Robert C. Brummer Senior Vice President, Human Resources John P. Derham Cato Chairman, President and Chief Executive Officer Michael O. Moore Executive Vice President, Chief Financial Officer and Secretary 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 William H. Grigg Chairman Emeritus (Retired) Duke Energy Corporation 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) Sloan 2,3 Retired Chairman and Chief Executive Officer Lance, Inc. D. Harding Stowe President and Chief Executive Officer R. L. Stowe Mills, Inc. 1 Member of the Corporate Governance and Nominating Committee 2 Member of the Compensation Committee 3 Member of the Audit Committee 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 29, 2005 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. 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 July 31, 2004, the last business day of the Company's most recent second quarter, was $420,193,294 based on the last reported sale price per share on the New York Stock Exchange (NYSE) on that date. As of March 29, 2005, there were 20,367,720 shares of Class A Common Stock and 460,350 shares of Convertible Class B Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement relating to the 2005 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 (This page intentionally left blank) 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 of PART II Page 3 Ó 7 7 7 7 8 9 10 Item 7A. Quantitative and Qualitative Disclosures about Market RiskÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 8. Item 9. Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11 Ó 18 18 Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 Ó 43 Changes in and Disagreements with Independent Registered Public Accounting Firm on Accounting and Consolidated Financial Disclosure ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 9A. Controls and Procedures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44 44 PART III Item 10. Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 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. 45 45 45 46 46 PART IV Item 15. Exhibits and Financial Statement Schedules ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46 Ó 55 1 Forward-looking Information The following discussion and analysis should be read along with the Consolidated Financial Statements, including the accompanying Notes appearing later in this report. Any of 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 2005 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 (including amendments to these reports) Ñled or furnished pursuant to Section 13(a) or 15(d) under the Securities Exchange Act of 1934. 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 regulations. The documents are also available in print to any shareholder who requests by contacting our corporate secretary at our company oÇces. 2 PART I Item 1. Business: General The Company, founded in 1946, operated 1,177 women's fashion specialty stores at January 29, 2005, under the names ""Cato,'' ""Cato Fashions,'' ""Cato Plus'' and ""It's Fashion!'' in 29 states, principally in the southeastern United States. The Company oÅers quality fashion apparel and accessories at low prices, every day in junior/missy and plus sizes. Additionally, the Company oÅers clothing for girls sizes 7 to 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 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 presentations in an appealing store environment. The Company oÅers its own credit card and layaway plan. Credit and layaway sales represented 14% of retail sales in Ñscal 2004. See Note 14 to the Consolidated Financial Statements, ""Reportable Segment Information'' for a discussion of segment information. Restatement of Prior Financial Information We have restated the consolidated balance sheet at January 31, 2004, and the consolidated statements of income, cash Öows and stockholders' equity for the years ended January 31, 2004 and February 1, 2003 in this Annual Report on Form 10-K. We have also restated the quarterly Ñnancial information for Ñscal 2003 and the Ñrst three quarters of Ñscal 2004. See Note 13 to the accompanying consolidated Ñnancial statements. The restatement also aÅects periods prior to Ñscal 2002. The impact of the restatement on such prior periods has been reÖected as an adjustment to retained earnings as of February 2, 2002 in the accompanying consolidated statements of stockholders' equity. We have also restated the applicable Ñnancial information for Ñscal 2000, Ñscal 2001, Ñscal 2002 and Ñscal 2003 in ""Item 6. Selected Financial Data.'' The restatement corrects our historical lease accounting practices. For information with respect to the restatement, see Note 1 to the accompanying consolidated Ñnancial statements. We did not amend our previously Ñled Annual Report on Form 10-K or Quarterly Reports on Form 10-Q for the restatement, and the Ñnancial statements and related Ñnancial information contained in such reports should no longer be relied upon. Throughout this Form 10-K all referenced amounts for prior periods and prior period comparisons reÖect the balances and amounts on a restated basis. Business The Company's primary objective is to be the leading fashion specialty retailer for fashion and value conscious 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 junior/missy 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. 3 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 and value conscious females. 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 sizes 7 to 16 is oÅered in approximately 1,000 stores. The 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 2004, purchases from the Company's largest vendor accounted for approximately 6% of the Company's total purchases. No other vendor accounted for more than 3% of total purchases. The Company is not dependent on its largest vendor or any other vendor for merchandise purchases and the loss of any single vendor or group of vendors would not have a material adverse 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 any one 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. 4 All merchandise is shipped directly to the Company's distribution center in Charlotte, North Carolina, where it is inspected and 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, in store signage, graphics and a Company 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 2004. Store Operations The Company's store operations management team consists of 1 director of stores, 4 territorial managers, 15 regional managers and 120 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 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. Over 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 4,500 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 2000. Fiscal Year Store Development Number of Stores Beginning of Year 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 809 859 937 1,022 1,102 5 Number Opened Number Closed Number of Stores End of Year 65 85 90 87 80 15 7 5 7 5 859 937 1,022 1,102 1,177 In Fiscal 2004 the Company relocated 29 stores and remodeled 17 stores. In Fiscal 2005 the Company plans to open approximately 90 new stores, relocate 20 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 Ñve stores closed in 2004 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 9% of retail sales in Ñscal 2004. The Company's net bad debt expense in Ñscal 2004 was 7.3% 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 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 2004, 2003 and 2002. 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 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. 6 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 U.S. Patriot Act and the Bank Secrecy Act which require the Company to monitor account holders and account transactions, respectively. Additionally, the Gramm-Leach- Bliley Act requires the Company to disclose, initially and annually, to its customers, the Company's privacy policy as it relates to a customer's non-public personal information. Associates As of January 29, 2005, the Company employed approximately 9,600 full-time and part-time associates. The Company also employs additional part-time associates during the peak retailing seasons. The Company is not a party to any collective bargaining agreements and considers that its associate relations are good. Item 2. Properties: The Company's distribution center and general 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. Many of the leases provide for Ñxed rentals plus a percentage of sales in excess of a speciÑed volume. Item 3. Legal Proceedings: From time to time, claims are asserted against the Company arising out of operations in the ordinary course of business. The Company currently is not a party to any pending litigation that it believes is likely to have a material adverse eÅect on the Company's Ñnancial conditions or results of operations. Item 4. Submission of Matters to a Vote of Security Holders: None. 7 Item 4A. Executive OÇcers of the Registrant: The executive oÇcers of the Company and their ages as of March 31, 2005 are as follows: Name Age Position John P. Derham Cato ÏÏÏÏÏÏ 54 Michael O. Moore ÏÏÏÏÏÏÏÏÏ 54 B. Allen WeinsteinÏÏÏÏÏÏÏÏÏ 58 Howard A. Severson ÏÏÏÏÏÏÏ 57 Michael T. Greer ÏÏÏÏÏÏÏÏÏÏ 42 Robert C. BrummerÏÏÏÏÏÏÏÏ 60 Chairman, President and Chief Executive OÇcer Executive Vice President, Chief Financial OÇcer and Secretary Executive Vice President, Chief Merchandising OÇcer Executive Vice President, Chief Real Estate and Store Development OÇcer Senior Vice President, Director of Stores 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. 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. Since November 2004, he has served as Executive Vice President, Chief Merchandising OÇcer of the Company. 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. 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 November 2004, he has served as Senior Vice President, Director of Stores of the Company. From February 2004 through November 2004, he 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 Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of PART II Equity Securities: Market & Dividend Information The Company's Class A Common Stock trades on the New York Stock Exchange (NYSE) under the symbol CTR. As required by Section 3.03A.12(a) of the NYSE listing standards, The Cato Corporation Ñled with the NYSE the certiÑcation of its Chief Executive OÇcer that he is not aware of any violation by the company of NYSE corporate governance listing standards. Below is the market range and dividend information for the four quarters of Ñscal 2004 and 2003. 2004 Price High Low Dividend First quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Second quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $21.60 22.82 23.35 30.10 $19.47 18.90 20.35 23.54 $ .16 .175 .175 .175 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 As of March 29, 2005 the approximate number of record holders of the Company's Class A Common Stock was 1,279 and there were 3 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 29, 2005 have been derived from the Company's audited Ñnancial statements. The Ñnancial statements and Independent Registered Public Accounting Firm's 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. The Ñve-year selected consolidated Ñnancial data presented in this Item 6 has been revised to reÖect a restatement. For information with respect to the restatement, see Note 1 to the accompanying consolidated Ñnancial statements. Fiscal Year 2004 2001 2002 2003 (Restated) (Restated) (Restated) (Dollars in thousands, except per share data and selected operating data) 2000 (Restated) STATEMENT OF OPERATIONS DATA: Retail sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $773,809 15,795 Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 789,604 Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 528,916 Cost of goods soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 244,893 Gross margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross margin percent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Selling, general and administrative ÏÏÏÏÏÏÏÏÏ Selling, general and administrative percent of retail sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,397 Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 717 Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,739) Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54,695 Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,854 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 34,841 1.69 Basic earnings per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.66 Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .685 Cash dividends paid per shareÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 187,618 31.6% 24.2% SELECTED OPERATING DATA: Stores open at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,177 Average sales per store(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $682,000 Average sales per square foot of selling space 170 Comparable store sales increase (decrease) $ 0% $731,770 15,497 747,267 508,991 222,779 $732,742 15,589 748,331 496,954 235,788 $685,653 13,668 699,321 467,338 218,315 $648,482 14,055 662,537 445,565 202,917 30.4% 32.2% 31.8% 31.3% 174,202 168,914 162,082 154,150 23.8% 23.1% 23.6% 18,695 306 (3,614) 48,687 17,673 $ 31,014 1.34 $ 1.32 $ .63 $ 14,913 21 (3,701) 71,230 25,785 $ 45,445 1.78 $ 1.75 $ .585 $ 10,886 38 (6,337) 65,314 22,852 $ 42,462 1.69 $ 1.64 $ .53 $ 23.8% 9,492 3 (6,557) 59,884 20,960 $ 38,924 1.56 $ 1.53 $ .425 $ 1,102 $692,000 171 $ 1,022 $753,000 184 $ 937 $767,000 186 $ 859 $781,000 187 $ (7)% 0% 1% 3% BALANCE SHEET DATA: Cash, cash equivalents and short-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $107,228 133,791 394,134 211,175 Working capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 71,402 117,403 356,284 186,075 $106,936 166,264 387,272 262,505 $ 84,695 143,101 335,708 227,428 $ 83,112 129,437 314,637 201,110 (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: Restatement of Prior Financial Information We have restated the consolidated balance sheet at January 31, 2004, and the consolidated statements of income, cash Öows and stockholders' equity for the years ended January 31, 2004 and February 1, 2003 in this Annual Report on Form 10-K to correct our historical lease, inbound freight capitalization and vendor allowance accounting practices. We have also restated our quarterly Ñnancial information for Ñscal 2003 and the Ñrst three quarters of Ñscal 2004. See Note 13 to the accompanying consolidated Ñnancial statements. The restatement also aÅects periods prior to Ñscal 2002. The impact of the restatement on such prior periods has been reÖected as an adjustment of $7.3 million to retained earnings as of February 2, 2002 in the accompanying consolidated statement of stockholders' equity. We have also restated the applicable Ñnancial information for Ñscal 2000, Ñscal 2001, Ñscal 2002 and Ñscal 2003 in ""Item 6. Selected Financial Data.'' After the staÅ of the Securities and Exchange Commission issued a letter on February 7, 2005 we, like many other retailers, reviewed our lease accounting practices and determined that certain corrections were needed. As a result, we corrected our lease accounting practices for Ñscal 2004 and restated certain historical Ñnancial information. The restatement corrections did not impact cash payments and had no impact on revenues, comparable store sales or operating cash Öows. The Company corrected its lease accounting practices to recognize lease expense on a straight-line basis over the expected lease term (as that term is deÑned by Statement of Financial Accounting No. 13, as amended ""SFAS No. 13'') beginning on the date the Company takes possession of the leased property, including lease renewal periods that are required to be included in the lease term because of economic penalties that result in the renewal being reasonably assured. Likewise, the Company corrected its practices to recognize landlord allowances on a straight-line basis over the lease term. The restatement includes adjustments to cost of goods sold, gross margin, operating income, income before taxes, income tax provision, net income and earnings per share. This correction to our lease accounting practices reduced net income by $484,000 and diluted earnings per share by $0.02 in Ñscal 2004. The corrections decreased net income by $775,000 or $0.03 per diluted share in Ñscal year 2003 and by $366,000 or $0.02 per diluted share in Ñscal 2002. In addition, the Company increased net income by $400,000 or $0.01 per diluted share in Ñscal 2003 and decreased net income by $22,000 in Ñscal 2002 to properly capitalize inbound freight on domestic purchases and to properly account for vendor allowances. For information with respect to the restatement adjustments, see Note 1 to the accompanying consolidated Ñnancial statements. We did not amend our previously Ñled Annual Reports on Form 10-K for Ñscal years 2003 and 2002 or Quarterly Reports on Form 10-Q for Ñscal year 2004 for the restatement, and, accordingly, the Ñnancial statements and related Ñnancial information contained in such reports should no longer be relied upon. Throughout ""Management's Discussion and Analysis of Financial Condition and Results of Operations,'' all referenced amounts for prior periods and prior period comparisons reÖect the balances and amounts on a restated basis. 11 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 Retail sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Selling, general and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ January 29, 2005 100.0% 2.0 102.0 68.4 24.2 2.6 0.1 (0.4) 7.1 4.5% January 31, 2004 (Restated) 100.0% 2.1 102.1 69.6 23.8 2.6 0.0 (0.5) 6.6 4.2% February 1, 2003 (Restated) 100.0% 2.1 102.1 67.8 23.1 2.0 0.0 (0.5) 9.7 6.2% Fiscal 2004 Compared to Fiscal 2003 Retail sales increased by 6% to $773.8 million in Ñscal 2004 compared to $731.8 million in Ñscal 2003. Total revenues, comprised of retail sales and other income (principally Ñnance charges and late fees on customer accounts receivable and layaway fees), increased by 6% to $789.6 million in Ñscal 2004 compared to $747.3 million in Ñscal 2003. The Company operated 1,177 stores at January 29, 2005 compared to 1,102 stores operated at January 31, 2004. The increase in retail sales in Ñscal 2004 was attributable to improved merchandise oÅerings and an increase in store development activity. In Ñscal 2004, the Company opened 80 new stores, relocated 29 stores, remodeled 17 stores and closed 5 stores. Credit revenue of $14.2 million, represented 1.8% of total revenue in Ñscal 2004. This is comparable to 2003 credit revenue of $14.5 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 $8.7 million in Ñscal 2004 compared to $9.7 million in Ñscal 2003. The decrease in costs was principally due to lower bad debt expense in Ñscal 2004. See Note 14 of the Consolidated Financial Statements for a schedule of credit related expenses. Total credit income before taxes increased $0.7 million from $4.7 million in 2003 to $5.4 million in 2004 due to the decreased bad debt expense, partially oÅset by decreased credit revenue. Total credit income in 2004 represented 9.9% of income before taxes of $54.7 million. Other income in total, as included in total revenues in Ñscal 2004, increased slightly to $15.8 million from $15.5 million in Ñscal 2003. The increase resulted primarily from an increase in late charges. Cost of goods sold was $528.9 million, or 68.4% of retail sales, in Ñscal 2004 compared to $509.0 million, or 69.6% of retail sales, in Ñscal 2003. The decrease in cost of goods sold as a percent of retail sales resulted primarily from reduced markdowns. Cost of goods sold includes merchandise costs, net of discounts and allowances, buying costs, distribution costs, occupancy costs, freight and inventory shrinkage. Net merchan- dise 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. Total gross margin dollars (retail sales less cost of goods sold) increased by 10% to $244.9 million in Ñscal 2004 from $222.8 million in Ñscal 2003. Gross margin as presented may not be comparable to those of other entities. For example, others may include internal transfer costs in selling, general and administrative expenses while the Company classiÑes them as cost of goods sold. 12 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 $187.6 million in Ñscal 2004 compared to $174.2 million in Ñscal 2003, an increase of 8%. As a percent of retail sales, SG&A was 24.2% compared to 23.8% in the prior year. The overall increase in SG&A resulted primarily from increased incentive and discretionary bonuses and increased infrastructure expenses attributable to the Company's store development activities. Depreciation expense was $20.4 million in Ñscal 2004 compared to $18.7 million in Ñscal 2003. The 9% increase in Ñscal 2004 resulted primarily from the Company's store development activity. Interest and other income was $2.7 million in Ñscal 2004 compared to $3.6 million in Ñscal 2003. The 25% decrease in Ñscal 2004 resulted primarily from the Company's lower cash and short-term investment position following the repurchase of $98.3 million of Company stock in Ñscal 2003. Income tax expense was $19.9 million, or 2.6% of retail sales in Ñscal 2004 compared to $17.7, or 2.4% of retail sales in Ñscal 2003. The increase resulted from higher pre-tax income. The eÅective tax rate was 36.3% in both Ñscal 2004 and Ñscal 2003. The Company expects the eÅective rate in 2005 to be in the range of 36% to 37%. Fiscal 2003 Compared to Fiscal 2002 Retail sales were Öat at $731.8 million in Ñscal 2003 compared to $732.7 million in Ñscal 2002. Total revenues were Öat 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 increased its number of stores 8% by opening 87 new stores, relocating 28 stores, remodeling 15 stores and closing 7 stores. Credit revenues increased $0.5 million from $14.0 million in 2002 to $14.5 million in 2003 mainly due to increased Ñnance charges and late fees. Credit revenues represented 1.9% of total revenues in both 2003 and 2002. Related expenses totaled $9.7 million in 2003 compared to $8.5 million in 2002 principally due to higher bad debt expenses in 2003. Total credit income before taxes decreased $0.8 million from $5.5 million in 2002 to $4.7 million in 2003 as a result of the increased costs partially oÅset by increased credit revenue. Total credit income in 2003 represented 9.7% of income before taxes of $48.7 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 $509.0 million, or 69.6% of retail sales, in Ñscal 2003 compared to $497.0 million, or 67.8% 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. SG&A expenses 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 implementation of an enterprise-wide information system. Interest and other income was $3.6 million in Ñscal 2003 compared to $3.7 million in Ñscal 2002. The 3% 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 $17.7 million, or 2.4% of retail sales in Ñscal 2003 compared to $25.8 million, or 3.5% of retail sales in Ñscal 2002. The decrease resulted from lower pre-tax income. 13 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 policies and estimates are discussed with the Audit Committee. Allowance for Doubtful Accounts The Company evaluates the collectibility of accounts receivable and records an allowance for doubtful accounts based on estimates of actual write-oÅs and the accounts receivable aging roll rates over a period of up to 12 months. The allowance is reviewed for adequacy and adjusted, as necessary, on a monthly basis. The Company also provides for estimated uncollectible late fees charged based on historical write-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 make adjustments to the provision for insurance costs that 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 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. 14 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 although we have exercised this right infrequently. 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. The general economic environment for retail apparel sales could result in an increase in the level of markdowns, which would result in lower inventory values and increases to cost of goods sold as a percentage of net sales in future periods. Management makes estimates regarding markdowns based on inventory levels on hand and customer demand, which may impact inventory valuations. Markdown exposure with respect to inventories on hand is limited due to the fact that seasonal merchandise is not carried forward. Historically, actual results have not signiÑcantly deviated from those determined using the estimates described above. Lease Accounting The Company recognizes rent expense on a straight-line basis over the lease term as deÑned in SFAS No. 13. Our lease agreements generally provide for scheduled rent increases during the lease term or rent holidays, including rental payments commencing at a date other than the date of initial occupancy. We include any rent escalation and rent holidays in our straight-line rent expense. In addition, we record landlord allowances for normal tenant improvements as deferred rent, which is included in other non-current liabilities in the consolidated balance sheets. This deferred rent is amortized over the lease term as a reduction of rent expense. Also, leasehold improvements are amortized using the straight-line method over the shorter of their estimated useful lives or the related lease term. See Note 1 to the Consolidated Financial Statements for further information on the Company's accounting for its leases. 15 Liquidity, Capital Resources and Market Risk The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during Ñscal 2004 was $79.9 million as compared to $59.3 million in Ñscal 2003. 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. 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 and for the foreseeable future beyond twelve months. At January 29, 2005, the Company had working capital of $133.8 million compared to $117.4 million at January 31, 2004. The increase in net cash provided by operating activities in Ñscal 2004 is primarily the result of an increase in net income of $3.8 million; an increase in depreciation expense of $1.7 million due to store expansion; a reduction in accounts receivable from strong collection eÅorts of $1.4 million; a reduction of merchandise inventories of $1.2 million; a reduction of prepaid expense of $4.7 million; and an increase in accounts payable, accrued expenses and other liabilities of $15.0 million. OÅsetting these increases in net cash provided by operating activities was a decrease in deferred income taxes of $5.6 million and decrease of $1.5 million in accrued income taxes. Additionally, the Company had $1.8 million invested in privately managed investment funds at January 31, 2005, which are reported under other assets of the consolidated balance sheets. At January 29, 2005, 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 29, 2005. There were no borrowings outstanding under these credit facilities during the Ñscal year ended January 29, 2005 or January 31, 2004. The Company had approximately $3.5 million and $5.4 million at January 29, 2005 and January 31, 2004, respectively, of outstanding irrevocable letters of credit relating to purchase commitments. Expenditures for property and equipment totaled $25.3 million, $20.6 million and $29.0 million in Ñscal 2004, 2003 and 2002, respectively. The expenditures for Ñscal 2004 were primarily for store development, store remodels and investments in new technology. In Ñscal 2005, the Company is planning to invest approximately $33 million in capital expenditures. This includes expenditures to open 90 new stores, relocate 20 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 then Chairman of the Board, and a limited partnership aÇliated with Edgar T. Cato, a Company founder and then 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 were due in monthly installments of $500,000 plus accrued interest, based on LIBOR. The LIBOR rate at January 29, 2005 was 2.59%. 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 16 agreements. The after-tax charge was $1.8 million or $.08 per diluted share in Ñscal 2003. 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. Over the course of 2003, the Board of Directors increased the quarterly dividend by 7% from $.15 per share to $.16 per share. During Ñscal 2004, the Company increased its quarterly dividend by 9% from $.16 per share to $.175 per share. On April 5, 2005, the Company repaid the remaining balance of $20.5 million on the $30 million Ñve-year term loan facility. With the early retirement of this loan, the Company had no outstanding debt as of April 5, 2005. The Company does not use derivative Ñnancial instruments. At January 29, 2005, 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 as a reduction of interest and other income in the accompanying Statements of Consolidated Income. The following table shows the Company's obligations and commitments as of January 29, 2005, to make future payments under contractual obligations (in thousands): Payments Due During One Year Fiscal Period Ending Contractual Obligations Total 2005 2006 2007 2008 2009 2010° Merchandise letters of credit ÏÏÏÏÏÏÏÏÏ Operating leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loan payment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,469 138,490 22,000 $ 3,469 46,769 6,000 $ Ì $ Ì $ 38,375 6,000 28,757 6,000 Ì $ Ì $ Ì 229 6,990 Ì Ì 17,370 4,000 Total Contractual Obligations ÏÏÏÏÏÏÏÏ $163,959 $56,238 $44,375 $34,757 $21,370 $6,990 $229 Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (""FASB'') issued Statement No. 123R (""SFAS 123R''), ""Share-Based Payment,'' a revision of FASB issued Statement No. 123 (""SFAS 123''), ""Accounting for Stock-Based Compensation.'' SFAS 123R required the measurement of all stock-based payments to employees, including grants of employee stock options and stock purchase rights granted pursuant to certain employee stock purchase plans, using a fair-value based method and the recording of such expense in the Company's consolidated statements of operations. The accounting provisions of SFAS 123R are eÅective for reporting periods beginning after December 15, 2005. Accordingly, we are required to adopt SFAS 123R in the Ñrst quarter of 2006. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to Ñnancial statement recognition. See Note 1 to the accompanying consolidated Ñnancial statements for the pro forma net income and earnings per share amounts for Ñscal 2002 through Ñscal 2004, as if we had used a fair-value based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock-based compensation awards. We are currently evaluating the provisions of SFAS 123R. The adoption of this standard is not expected to have a material eÅect on our consolidated Ñnancial statements. Based on our current projections, we expect the future expense to be recognized as a result of the adoption of SFAS 123R to be similar to the pro forma amounts disclosed for Ñscal 2004 in the notes to our consolidated Ñnancial statements. In November 2004, the FASB issued Statement No. 151 (""SFAS 151''), ""Inventory Costs.'' SFAS 151 amends the guidance in Accounting Research Bulletin No. 43, ""Inventory Pricing,'' to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current period changes and that the allocation of Ñxed production overheads to the cost of converting work in process to Ñnished goods be based on the normal capacity of the production facilities. This statement is eÅective for inventory costs incurred during Ñscal years 17 beginning after June 15, 2005. The adoption of this statement is not expected to have a material impact on our consolidated Ñnancial 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. 18 Item 8. Financial Statements and Supplementary Data: INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Report of Independent Registered Public Accounting Firm ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Report of Independent Registered Public Accounting Firm ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Statements of Income for the Ñscal years ended January 29, 2005, January 31, 2004 (as restated) and February 1, 2003 (as restated)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Balance Sheets at January 29, 2005 and January 31, 2004 (as restated)ÏÏÏÏÏÏÏÏÏÏÏ Consolidated Statements of Cash Flows for the Ñscal years ended January 29, 2005, January 31, 2004 (as restated) and February 1, 2003 (as restated) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Statements of Stockholders' Equity for the Ñscal years ended January 29, 2005, January 31, 2004 (as restated) and February 1, 2003 (as restated) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Notes to Consolidated Financial StatementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Schedule I Ì Independent Registered Public Accounting Firm's Consent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Schedule II Ì Valuation and Qualifying Accounts and Reserves for the Ñscal years ended January 29, 2005, January 31, 2004 and February 1, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Page 20-21 22 23 24 25 26 27 S-1 S-2 19 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of The Cato Corporation: We have completed an integrated audit of The Cato Corporation's 2004 consolidated Ñnancial statements and of its internal control over Ñnancial reporting as of January 29, 2005 and audits of its 2003 consolidated Ñnancial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated Ñnancial statements and Ñnancial statement schedule In our opinion, the consolidated Ñnancial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the Ñnancial position of The Cato Corporation and its subsidiaries at January 29, 2005 and January 31, 2004, and the results of their operations and their cash Öows for each of the two years in the period ended January 29, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the Ñnancial statement schedule for the years ended January 29, 2005 and January 31, 2004, listed in the index appearing under Item 8 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 and Ñnancial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Ñnancial statements are free of material misstatement. An audit of Ñnancial statements 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 audits provide a reasonable basis for our opinion. As described in Note 1, Restatement of Prior Financial Information, the Company restated its previously issued Ñnancial statements for year ended January 31, 2004. Internal control over Ñnancial reporting Also, in our opinion, management's assessment, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained eÅective internal control over Ñnancial reporting as of January 29, 2005 based on criteria established in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, eÅective internal control over Ñnancial reporting as of January 29, 2005, based on criteria established in Internal Control Ì Integrated Framework issued by the COSO. The Company's management is responsible for maintaining eÅective internal control over Ñnancial reporting and for its assessment of the eÅectiveness of internal control over Ñnancial reporting. Our responsibility is to express opinions on management's assessment and on the eÅectiveness of the Company's internal control over Ñnancial reporting based on our audit. We conducted our audit of internal control over Ñnancial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether eÅective internal control over Ñnancial reporting was maintained in all material respects. An audit of internal control over Ñnancial reporting includes obtaining an understanding of internal control over Ñnancial reporting, evaluating management's assessment, testing and evaluating the design and operating eÅectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over Ñnancial reporting is a process designed to provide reasonable assurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancial statements for external 20 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ì (Continued) purposes in accordance with generally accepted accounting principles. A company's internal control over Ñnancial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reÖect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of Ñnancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material eÅect on the Ñnancial statements. Because of its inherent limitations, internal control over Ñnancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of eÅectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP Charlotte, North Carolina April 28, 2005 21 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of The Cato Corporation We have audited the accompanying consolidated statements of income, stockholders' equity, and cash Öows of The Cato Corporation and subsidiaries (the ""Company'') for the year ended February 1, 2003. Our audit also included the Ñnancial statement schedule listed in the index at Item 15(a) for the year ended February 1, 2003. These Ñnancial statements 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 audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated Ñnancial statements present fairly, in all material respects, the results of the operations and cash Öows for the Ñscal year 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. As discussed in Note 1 to the consolidated Ñnancial statements, the accompanying consolidated statements of income, stockholders' equity and cash Öows for the year ended February 1, 2003 have been restated. /s/ Deloitte & Touche LLP Charlotte, North Carolina April 21, 2003 (April 25, 2005 as to the eÅects of the restatement discussed in Note 1) 22 THE CATO CORPORATION CONSOLIDATED STATEMENTS OF INCOME January 29, 2005 Fiscal Year Ended January 31, 2004 (Restated) (Dollars in thousands, except per share data) February 1, 2003 (Restated) REVENUES Retail sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Other income (principally Ñnance charges, late fees and 773,809 $ 731,770 $ 732,742 layaway charges) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,795 Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 789,604 15,497 747,267 15,589 748,331 COSTS AND EXPENSES, NET Cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Selling, general and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 528,916 187,618 20,397 717 (2,739) 734,909 54,695 19,854 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 34,841 Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.69 Basic weighted average shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,584,262 Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.66 Diluted weighted average shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,985,374 Dividends per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .685 Comprehensive income: Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Unrealized gains (losses) on available-for-sale securities, net 34,841 508,991 174,202 18,695 306 (3,614) 698,580 48,687 17,673 31,014 1.34 23,140,581 1.32 23,559,541 .63 496,954 168,914 14,913 21 (3,701) 677,101 71,230 25,785 45,445 1.78 25,465,543 1.75 25,947,457 .585 $ $ $ $ 31,014 $ 45,445 $ $ $ $ $ of deferred income tax liability or beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 (195) 820 Net comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 34,854 $ 30,819 $ 46,265 See notes to consolidated Ñnancial statements. 23 THE CATO CORPORATION CONSOLIDATED BALANCE SHEETS January 29, 2005 January 31, 2004 (Restated) (Dollars in thousands) ASSETS Current Assets: Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Short-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounts receivable, net of allowance for doubtful accounts of $6,122 at January 29, 2005 and $6,335 at January 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merchandise inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepaid expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Current Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property and equipment Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,640 88,588 $ 23,857 47,545 50,889 100,538 5,781 1,986 266,422 117,590 10,122 52,714 97,292 4,995 5,708 232,111 114,367 9,806 Total Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 394,134 $ 356,284 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Accrued expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Current Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other noncurrent liabilities (primarily deferred rent) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 82,828 39,338 4,465 6,000 132,631 10,172 16,000 24,156 $ 76,387 27,815 4,506 6,000 114,708 10,203 21,500 23,798 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; 26,249,178 and 26,015,868 shares issued at January 29, 2005 and January 31, 2004, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized; 5,597,834 and 5,607,834 shares issued at January 29, 2005 and January 31, 2004, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated other comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unearned compensation Ì restricted stock awards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 875 Ì 867 187 103,366 265,499 71 (911) 187 99,676 244,792 58 (1,593) 369,087 343,987 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 29, 2005 and January 31, 2004, respectively) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (157,912) (157,912) Total Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 211,175 186,075 Total Liabilities and Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 394,134 $ 356,284 See notes to consolidated Ñnancial statements. 24 THE CATO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS January 29, 2005 Fiscal Year Ended January 31, 2004 (Restated) (Dollars in thousands) February 1, 2003 (Restated) OPERATING ACTIVITIES Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of investment premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Write-down of investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Compensation expense related to restricted stock awardsÏÏÏÏÏÏÏÏÏ Loss on disposal of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Changes in operating assets and liabilities which provided (used) cash: Accounts receivableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Merchandise inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepaid and other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounts payable, accrued expenses and other liabilities ÏÏÏÏÏÏÏ 34,841 $ 31,014 $ 45,445 20,397 Ì 5,096 Ì (817) 682 1,554 (3,271) (3,246) 3,406 (41) 21,250 18,695 4 6,098 Ì 4,779 782 798 14,913 66 4,764 1,800 (159) 750 870 (4,696) (4,463) (1,312) 1,412 6,236 (6,587) (13,016) (470) 2,074 13,279 Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ INVESTING ACTIVITIES Expenditures for property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchases of short-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sales of short-term investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided (used) in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ FINANCING ACTIVITIES Cash overdrafts included in accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchases of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds of long term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payments to settle long term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from employee stock purchase plan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from stock options exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79,851 59,347 63,729 (25,301) (122,380) 81,350 (20,553) (18,462) 45,589 (28,953) (46,281) 13,735 (66,331) 6,574 (61,499) (2,800) (14,134) Ì Ì (5,500) 478 3,219 6,400 (14,465) (98,304) 30,000 (2,500) 507 4,233 Ì (14,890) (1,187) Ì Ì 509 3,631 Net cash used in Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18,737) (74,129) (11,937) Net (decrease) in cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and cash equivalents at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,217) 23,857 (8,208) 32,065 (9,707) 41,772 Cash and cash equivalents at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 18,640 $ 23,857 $ 32,065 See notes to consolidated Ñnancial statements. 25 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 Retained Comprehensive Capital Earnings Income (Loss) Stock Awards (Restated) (Dollars in thousands) Total Treasury Stockholders' Stock Equity (Restated) Balance Ì February 2, 2002.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restatement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Balance Ì February 2, 2002 (Restated) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ *Comprehensive income: Net income (Restated) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized gains on available-for-sale securities, net of deferred income tax liability of $448 ÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends paid ($.585 per share) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Class A common stock sold through employee stock purchase plan Ì 32,487 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Class A common stock sold through stock option plans Ì 171,600 sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Class B common stock sold through stock option plans Ì 172,500 sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax beneÑt from stock options exercisedÏÏÏÏÏÏÏÏ Purchase of treasury shares Ì 66,000 shares ÏÏÏÏÏÏÏÏÏÏÏ Surrender of shares for stock options Ì 48,681 shares ÏÏÏ Restricted stock awards Ì 100,000 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏ Unearned compensation Ì restricted stock awards ÏÏÏÏÏÏ Balance Ì February 1, 2003 (Restated) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ *Comprehensive income: Net income (Restated) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized losses on available-for-sale securities, net of deferred income tax beneÑt of $111 ÏÏÏÏÏÏÏÏÏÏÏÏ Dividends paid ($.63 per share) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Class A common stock sold through employee stock purchase plan Ì 28,306 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Class A common stock sold through stock option plans Ì 288,250 sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax beneÑt from stock options exercisedÏÏÏÏÏÏÏÏ Purchase of treasury shares Ì 5,302,484 shares ÏÏÏÏÏÏÏÏ Shares reclassiÑed from Class B to Class A Ì 477,315 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unearned compensation Ì restricted stock awards ÏÏÏÏÏÏ Balance Ì January 31, 2004 (Restated) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ *Comprehensive income: Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized gains on available-for-sale securities, net of deferred income tax liability of $7 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends paid ($.685 per share) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Class A common stock sold through employee stock purchase plan Ì 27,310 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Class A common stock sold through stock option plans Ì 196,000 sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax beneÑt from stock options exercisedÏÏÏÏÏÏÏÏ Unearned compensation Ì restricted stock awards ÏÏÏÏÏÏ 833 194 86,948 204,961 (567) (394) (57,277) 234,698 (7,273) (7,273) 833 194 86,948 197,688 (567) (394) (57,277) 227,425 45,445 (14,890) 820 1 6 508 1,547 1,310 1,906 2,728 6 3 45,445 820 (14,890) 509 1,553 1,316 1,906 (1,187) (1,144) Ì 750 (1,187) (1,144) (2,731) 750 840 203 94,947 228,243 253 (2,375) (59,608) 262,503 31,014 (14,465) (195) 1 10 506 2,857 1,366 16 (16) 31,014 (195) (14,465) 507 2,867 1,366 (98,304) (98,304) 782 Ì 782 867 187 99,676 244,792 58 (1,593) (157,912) 186,075 34,841 (14,134) 13 34,841 13 (14,134) 478 2,361 859 682 682 1 7 477 2,354 859 Balance Ì January 29, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 875 187 103,366 265,499 71 (911) (157,912) 211,175 * Total comprehensive income for the year ended January 29, 2005 was $34,854. Total restated comprehensive income for the years ended January 31, 2004 and February 1, 2003 was $30,819 and $46,265, respectively. See notes to consolidated Ñnancial statements. 26 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 self insured workers' compensation liabilities, general and auto insurance liabilities, reserves for inventory markdowns, calculation of asset impairment, shrink accrual and tax contingency reserves. Restatement of Prior Financial Information: The Company historically straight-lined lease expense over the period from the open date of the store through the initial non-cancelable lease term expiration. However, in accordance with FASB issued Statement No. 13 (""SFAS 13''), ""Accounting for leases,'' as amended, FASB issued Technical Bulletin No. 88-1 (""FTB 88-1''), ""Issues Relating to Accounting for Leases'', and FASB issued Technical Bulletin No. 85-3 (""FTB 85-3''), ""Accounting for Operating Leases with Scheduled Rent Increases'', the Company corrected its lease accounting practices to recognize lease expense on a straight-line basis over the lease term which begins on the date we obtain control of the property and includes any renewal periods for which failure to renew imposes a penalty on the lessee such that renewal is determined to be reasonably assured. Likewise, the Company corrected its practices to amortize landlord allowances on a straight-line basis over the lease term. These corrections to our lease accounting practices reduced net income by $484,000 and diluted earnings per share by $0.02 in Ñscal 2004. The corrections decreased net income by $775,000 or $0.03 diluted share in Ñscal year 2003 and by $366,000 or $0.02 per diluted share in Ñscal 2002. In connection with this restatement of prior Ñnancial statements, the Company recorded certain adjustments in prior periods in order to conform its accounting for the capitalization of inbound freight on domestic purchases and certain discounts from vendors to the Company's current practices. Historically, the Company fully expensed inbound freight and domestic purchases and certain discounts from vendors through cost of goods sold. These adjustments had the eÅect of increasing net income by $400,000 or $0.01 per diluted share in Ñscal 2003 and decreasing net income by $22,000 in Ñscal 2002. The Company restated its consolidated balance sheet at January 31, 2004 and its consolidated statements of income, cash Öows and stockholders' equity for the years ended January 31, 2004 and February 1, 2003. The Company also restated its quarterly Ñnancial information for Ñscal 2003 and the Ñrst three quarters of Ñscal 2004, as disclosed in Note 13. The restatement also aÅects periods prior to Ñscal 2002. The impact of the restatement on such prior periods has been reÖected as an adjustment of $7.3 million to retained earnings as of February 2, 2002 in the consolidated statement of stockholders' equity. 27 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) As a result of this restatement, the Company's Ñnancial results have been restated as follows (in thousands, except per share data): Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued income taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other noncurrent liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Liabilities and Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏ RevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of Goods Sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ As Previously Reported January 31, 2004 $ 284 227,400 351,573 4,290 114,492 11,267 157,462 252,828 194,111 $351,573 As Previously Reported January 31, 2004 $747,267 508,401 49,277 17,888 $ 31,389 Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ $ 1.36 1.33 RevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of Goods Sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ As Previously Reported February 1, 2003 $748,331 496,345 71,839 26,006 $ 45,833 Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ $ 1.80 1.77 Adjustments $ 4,711 4,711 4,711 216 216 12,531 12,747 (8,036) (8,036) $ 4,711 Adjustments $ 0 590 (590) (215) $(375) $ (.02) $ (.01) Adjustments $ 0 609 (609) (221) $(388) $ (.02) $ (.02) As Restated January 31, 2004 $ 4,995 232,111 356,284 4,506 114,708 23,798 170,209 244,792 186,075 $356,284 As Restated January 31, 2004 $747,267 508,991 48,687 17,673 $ 31,014 $ $ 1.34 1.32 As Restated February 1, 2003 $748,331 496,954 71,230 25,785 $ 45,445 $ $ 1.78 1.75 All referenced amounts for prior periods in these Ñnancial statements and the notes thereto reÖect the balances and amounts on a restated basis. 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. 28 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 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 in the accompanying Statements of Consolidated Income. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization of premiums, accretion of discounts and realized gains and losses are included in Interest and other income. Concentration of Credit Risk: Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash equivalents and accounts receivable. The Company places its cash equivalents with high credit 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 29, 2005, January 31, 2004 and February 1, 2003 were $18,454,000, $12,643,000 and $21,982,000, respectively. Cash paid for interest for the Ñscal years ended January 29, 2005, January 31, 2004 and February 1, 2003 were $610,000, $306,400 and $21,000, 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 Obtained for Internal Use''. Depreciation is provided on the straight-line method over the estimated useful lives of the related assets excluding leasehold improvements. Leasehold improvements are amortized over the shorter of the estimated useful life or lease term. Typical estimated useful lives are as follows: ClassiÑcation Estimated Useful Lives Land improvementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BuildingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fixtures, equipment and software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 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. 29 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 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 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 $5,504,000, $5,638,000 and $5,299,000 for the Ñscal years ended January 29, 2005, January 31, 2004 and February 1, 2003, 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 2004 and 2003, and had no impact on Ñscal 2002. The weighted-average number of shares used in the basic earnings per share computations was 20,584,262, 23,140,581, and 25,465,543 for the Ñscal years ended January 29, 2005, January 31, 2004, and February 1, 2003, respectively. The weighted-average number of shares representing the dilutive eÅect of stock options was 401,112, 418,960 and 481,914 for the Ñscal years ended January 29, 2005, January 31, 2004 and February 1, 2003, respectively. The weighted-average number of shares used in the diluted earnings per share computations was 20,985,374, 23,559,541, and 25,947,457 for the Ñscal years ended January 29, 2005, January 31, 2004 and February 1, 2003, 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 2004, 2003 and 2002. 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 30 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 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 consideration 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 29, 2005 or January 31, 2004. 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. 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 expected sublease rentals. Insurance: The Company is self-insured with respect to employee healthcare, workers' compensation and general liability. The Company's self-insurance liabilities are based on the total estimated cost of claims 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 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 $11,205,000, $8,995,000 and $8,970,000 in Ñscal 2004, 2003 and 2002, respectively. Accrued healthcare was $1,318,000 and $1,380,000 and assets held in VEBA trust were $731,000 and $924,000 at January 29, 2005 and January 31, 2004, respectively. The Company paid worker's compensation and general liability claims of $3,227,000, $3,019,000 and $2,609,000 in Ñscal years 2004, 2003 and 2002, respectively. Including claims incurred, but not yet paid, the Company recognized an expense of $3,513,000, $3,764,000 and $3,284,000 in Ñscal 2004, 2003 and 2002, respectively. Accrued workers' compensation and general liabilities was $4,254,000 and $3,968,000 at January 29, 2005 and January 31, 2004, respectively. The Company had no outstanding letters of credit relating to such claims at January 29, 2005 or at January 31, 2004. 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 2004, 2003, and 2002 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 31 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) share amounts for Ñscal 2004, 2003 and 2002 would approximate the following proforma amounts (dollars in thousands, except per share data): Net Income as Reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $34,841 January 29, 2005 January 31, 2004 (Restated) $31,014 February 1, 2003 (Restated) $45,445 Add: Stock-Based employee compensation expense included in reported net income, net of related tax eÅectsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax eÅects ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 435 498 479 (499) (1,024) (1,219) Pro forma Net IncomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $34,777 $30,488 $44,705 Earnings per share: Basic Ì as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic Ì pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted Ì as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted Ì pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ $ $ $ 1.69 1.69 1.66 1.66 $ $ $ $ 1.34 1.32 1.32 1.29 $ $ $ $ 1.78 1.76 1.75 1.72 The weighted-average fair value of each option granted during Ñscal 2004, 2003 and 2002 is estimated at $6.35, $5.84 and $8.29 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 2004, 2003 and 2002, respectively: expected dividend yield of 3.00%, 3.01% and 3.29%; expected volatility of 38.13%, 44.34% and 57.06%, adjusted for expected dividends; risk-free interest rate of 3.74%, 3.29% and 2.60%; and an expected life of 5 years for 2004, 2003 and 2002. The eÅects of applying SFAS 148 in this proforma disclosure are not indicative of future amounts. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (""FASB'') issued Statement No. 123R (""SFAS 123R''), ""Share-Based Payment,'' a revision of FASB issued Statement No. 123 (""SFAS 123''), ""Accounting for Stock-Based Compensation.'' SFAS 123R requires the measurement of all stock-based payments to employees, including grants of employee stock options and stock purchase rights granted pursuant to certain employee stock purchase plans, using a fair-value based method and the recording of such expense in our consolidated statements of operations. The accounting provisions of SFAS 123R are eÅective for reporting periods beginning after December 15, 2005. Accordingly, we are required to adopt SFAS 123R in the Ñrst quarter of 2006. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to Ñnancial statement recognition. See Note 1 to the accompanying consolidated Ñnancial statements for the pro forma net income and earnings per share amounts for Ñscal 2002 through Ñscal 2004, as if we had used a fair-value based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock-based compensation awards. We are currently evaluating the provisions of SFAS 123R. The adoption of this standard is not expected to have a material eÅect on our consolidated Ñnancial statements. Based on our current projections, we expect the future expense to be recognized as a result of the adoption of SFAS 123R to be similar to the pro forma amounts disclosed for Ñscal 2004 in the notes to our consolidated Ñnancial statements. In November 2004, the FASB issued Statement No. 151 (""SFAS 151''), ""Inventory Costs.'' SFAS 151 amends the guidance in Accounting Research Bulletin No. 43, ""Inventory Pricing,'' to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). 32 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) SFAS 151 requires that those items be recognized as current period changes and that the allocation of Ñxed production overheads to the cost of converting work in process to Ñnished goods be based on the normal capacity of the production facilities. This statement is eÅective for inventory costs incurred during Ñscal years beginning after June 15, 2005. The adoption of this statement is not expected to have a material impact on our consolidated Ñnancial statements. ReclassiÑcations: Certain reclassiÑcations have been made to the consolidated Ñnancial statements for prior Ñscal years to conform with the current year presentation. 2. Interest and Other Income: The components of Interest and other income are shown below in gross amounts (in thousands): January 29, 2005 January 31, 2004 February 1, 2003 Dividend incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Miscellaneous income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (Gain)/loss investment sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (20) (1,499) (1,473) 253 $ (2) (1,704) (1,235) (673) $ (10) (3,046) (2,342) 1,697 Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(2,739) $(3,614) $(3,701) 3. Short-Term Investments: Short-Term investments at January 29, 2005 and January 31, 2004 include the following (in thousands): January 29, 2005 Unrealized Estimated Gain/(Loss) Fair Value January 31, 2004 Unrealized Estimated Gain/(Loss) Fair Value Cost Cost $ 3,603 $ (5) $ 3,598 $ Ì $ Ì $ Ì Security Type: Debt Securities issued by U.S. Treasury & other U.S. government corporations and agencies: With unrealized (loss)ÏÏÏÏÏÏÏÏÏÏÏ Debt Securities issued by states of the United States and political subdivisions of the states: With unrealized gain ÏÏÏÏÏÏÏÏÏÏÏÏ With unrealized (loss)ÏÏÏÏÏÏÏÏÏÏÏ Corporate debt securities: With unrealized gain ÏÏÏÏÏÏÏÏÏÏÏÏ With unrealized (loss)ÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 85,087 Ì (97) Ì Ì Ì 37,777 7,500 84,990 Ì Ì Ì 2,500 146 (345) Ì (33) 37,923 7,155 Ì 2,467 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $88,690 $(102) $88,588 $47,777 $(232) $47,545 The accumulated unrealized losses in short-term investments at January 29, 2005 of $65,000, net of a deferred income tax beneÑt of $37,000 oÅset by the accumulated unrealized gains in equity investments of $136,000, net of a deferred income tax liability of $77,000 and the accumulated unrealized losses of January 31, 2004 of $148,000, net of a deferred income tax beneÑt of $84,000 oÅset by the accumulated unrealized gains in equity investments of $206,000 net of a deferred income tax liability of $117,000 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. 33 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) The Company's short-term investments are all classiÑed as available-for-sale. As they are available for current operations, they are classiÑed in the consolidated balance sheets as current assets. Available-for-sale securities are carried at fair value, with unrealized gains and temporary losses, net of income taxes, reported as a component of accumulated other comprehensive income. Other than temporary declines in fair value of investments are recorded as a reduction in the cost of the investments in the accompanying Consolidated Balance Sheets and a reduction of interest and other income in the accompanying Statements of Consolidated Income. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization of premiums, accretion of discounts and realized gains and losses are included in Interest and other income. As reported in Note 2, the Company had realized losses of $253,000 in Ñscal 2004, realized gains of $673,000 in Ñscal 2003 and realized losses of $1,697,000 in Ñscal 2002. The amortized cost and estimated fair value of debt securities at January 29, 2005, 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 $85,087 3,603 Estimated Fair Value $84,990 3,598 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $88,690 $88,588 Additionally, the Company had $1.8 million invested in privately managed investment funds at January 29, 2005 and $1.6 million 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 $53,337 3,674 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,011 6,122 $55,480 3,569 59,049 6,335 Accounts receivable Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $50,889 $52,714 January 29, 2005 January 31, 2004 Finance charge and late charge revenue on customer deferred payment accounts totaled $13,918,000, $14,169,000 and $13,672,000 for the Ñscal years ended January 29, 2005, January 31, 2004 and February 1, 2003, respectively, and the allowance for doubtful accounts was $5,096,000, $6,098,000 and $4,763,000 for the Ñscal years ended January 29, 2005, January 31, 2004 and February 1, 2003, respectively. Expenses charged relating to the allowance for doubtful accounts are classiÑed as a component of selling, general and administrative expenses in the accompanying Consolidated Statements of Income. 34 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 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 softwareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction in progress ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less accumulated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ January 29, 2005 January 31, 2004 $ 2,019 17,751 43,317 170,367 4,015 237,469 119,879 $ 2,019 17,751 39,354 155,394 2,534 217,052 102,685 Property and equipment Ì net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $117,590 $114,367 Construction in progress primarily represents costs related to a warehouse management system to be implemented in 2005. 6. Accrued Expenses: Accrued expenses consist of the following (in thousands): January 29, 2005 January 31, 2004 Accrued bonus and retirement savings plan contributionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued payroll and related items ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued advertising ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Closed store lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property and other taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,103 7,189 963 487 10,539 5,572 6,485 $ 2,784 4,348 976 616 8,719 5,348 5,024 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $39,338 $27,815 7. Financing Arrangements: At January 29, 2005, 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 29, 2005. There were no borrowings outstanding during the Ñscal year ended January 29, 2005 or January 31, 2004. Interest is based on LIBOR, which was 2.59% on January 29, 2005. 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 2.59% on January 29, 2005. On April 5, 2005, the Company repaid the remaining balance of $20.5 million on this loan facility. With the early retirement of this loan, the Company had no outstanding debt as of April 5, 2005. 35 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) The Company had approximately $3,469,000 and $5,365,000 at January 29, 2005 and January 31, 2004, 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 then Chairman of the Board, and a limited partnership aÇliated with Edgar T. Cato, a Company founder and a then 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. 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 27,310 shares, 28,306 shares and 32,487 shares for the years ended January 29, 2005, January 31, 2004 and February 1, 2003, respectively. In December 2003, the Board of Directors authorized a dividend of one preferred share purchase right (a ""Right'') for each share of Class A Common Stock and Class B Common Stock, each par value $.031/3 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 36 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 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 $682,000, $782,000 and $750,000 in Ñscal 2004, 2003 and 2002, respectively. In April 2004, the Board of Directors adopted the 2004 Incentive Compensation Plan, of which 900,000 shares are issuable. As of January 29, 2005, 33,000 shares had been granted from this Plan. Option plan activity for the three Ñscal years ended January 29, 2005 is set forth below: Options Range of Option Prices Weighted Average Price 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 $10.39 20.89 8.11 11.27 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 Outstanding options, January 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,154,400 75,750 (196,000) (30,600) 5.13 Ó 26.76 19.64 Ó 23.13 5.13 Ó 21.01 9.59 Ó 21.90 11.20 17.66 9.94 12.75 11.54 21.55 11.97 17.27 Outstanding options, January 29, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,003,550 $ 7.69 Ó $26.76 $12.08 37 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) The following tables summarize stock option information at January 29, 2005: Range of Exercise Prices $ 7.69 Ó $ 9.59 12.22 Ó 14.13 16.65 Ó 19.64 20.13 Ó 26.76 Options 376,750 508,750 36,700 81,350 $ 7.69 Ó $26.76 1,003,550 Options Outstanding Weighted Average Remaining Contractual Life Weighted Average Exercise Price 2.30 years 3.94 years 7.97 years 8.92 years 3.87 years Options Exercisable $ 8.19 12.98 18.05 21.73 $12.08 Range of Exercise Prices $ 7.69 Ó $ 9.59 12.22 Ó 14.13 16.65 Ó 19.64 20.13 Ó 26.76 $ 7.69 Ó $26.76 Options 374,250 503,750 7,300 5,700 891,000 Weighted Average Exercise Price $ 8.18 12.98 17.79 22.73 $11.07 Outstanding options at January 29, 2005 covered 702,000 shares of Class B Common Stock and 301,550 shares of Class A Common Stock. Outstanding options at January 31, 2004 covered 702,000 shares of Class B Common Stock and 452,400 shares of Class A Common Stock. Options available to be granted under the option plans were 880,318 at January 29, 2005 and 406,600 at January 31, 2004. In May 2004, the Board of Directors increased the quarterly dividend by 9% from $.16 per share to $.175 per share. Total comprehensive income for the years ended January 29, 2005, January 31, 2004 and February 1, 2003 is as follows (in thousands): Fiscal Year Ended January 29, 2005 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized gains (losses) on available-for-sale securities ÏÏÏ Income tax eÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $34,841 20 7 Unrealized gains (losses) net of taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 January 31, 2004 (Restated) $31,014 (306) (111) (195) February 1, 2003 (Restated) $45,445 1,268 (448) 820 Total comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $34,854 $30,819 $46,265 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 ($161,000), $429,000 and ($1,083,000) for Ñscal years 2004, 2003 and 2002, 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 38 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 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 29, 2005, January 31, 2004 and February 1, 2003 were approximately $1,663,000, $1,764,000 and $1,906,000, 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 29, 2005, January 31, 2004 or February 1, 2003. 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 $11,205,000, $8,995,000 and $8,970,000 in Ñscal 2004, 2003 and 2002, respectively. Accrued liabilities for healthcare costs were $1,318,000 and $1,380,000 and assets held in the VEBA trust were $731,000 and $924,000 at January 29, 2005 and January 31, 2004, respectively. 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 recorded as a deferred liability and amortized over the term of the lease as a reduction to rent expense on the Consolidated Statements of Income. Equipment leases are generally for one to three year periods. The minimum rental commitments under non-cancelable operating leases are (in thousands): Fiscal Year 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2010 ° ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 46,769 38,375 28,757 17,370 6,990 229 Total minimum lease paymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $138,490 The following schedule shows the composition of total rental expense for all leases (in thousands): Fiscal Year Ended January 29, 2005 January 31, 2004 February 1, 2003 Minimum rentals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Contingent rent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $44,493 85 Total rental expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $44,578 $39,998 165 $40,163 $37,848 389 $38,237 39 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 11. Related Party Transactions: The Company leases certain stores from entities in which Mr. George S. Currin, a director of the Company has a controlling or non-controlling ownership interest. Rent expense and related charges totaling $286,860, $261,660 and $221,584 were paid to entities controlled by Mr. Currin or his family in Ñscal 2004, 2003, and 2002, respectively, under these leases. Rent expense and related charges totaling $800,929, $610,947, and $661,783 were paid to entities in which Mr. Currin or his family had a non-controlling ownership interest in Ñscal 2004, 2003, and 2002, respectively, under these leases. 12. Income Taxes: The provision for income taxes consists of the following (in thousands): Fiscal Year Ended Current income taxes: January 29, 2005 January 31, 2004 (Restated) February 1, 2003 (Restated) Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ StateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $20,142 535 $12,806 337 $24,529 1,364 TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,677 13,143 25,893 Deferred income taxes: Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ StateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (735) (88) (823) 4,048 482 4,530 (91) (17) (108) Total income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $19,854 $17,673 $25,785 SigniÑcant components of the Company's deferred tax assets and liabilities as of January 29, 2005 and January 31, 2004 are as follows (in thousands): January 29, 2005 January 31, 2004 (Restated) Deferred tax assets: Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventory valuationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restricted stock optionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred rent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital loss carryoverÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,338 1,643 684 4,998 446 4,856 830 Total deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,795 Deferred tax liabilities: Fixed assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized gains on short-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,442 40 704 20,186 $ 2,426 946 428 4,712 669 3,872 763 13,816 17,974 33 1,017 19,024 Net deferred tax liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,391 $ 5,208 40 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) Capital loss carryovers included in the Company's deferred tax assets have a limited life and realization of these assets is not assured and will expire in 2008. The reconciliation of the Company's eÅective income tax rate with the statutory rate is as follows: Fiscal Year Ended Federal income tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EÅective income tax rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ January 29, 2005 January 31, 2004 February 1, 2003 35.0% 1.3 36.3% 35.0% 1.3 36.3% 35.0% 1.2 36.2% 13. Quarterly Financial Data (Unaudited): Summarized quarterly Ñnancial results are as follows (in thousands, except per share data): Fiscal 2004 First Second Third Fourth Retail sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏ Gross margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before income taxes ÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic earnings per share ÏÏÏÏÏÏÏ Diluted earnings per share ÏÏÏÏÏ (Restated) $205,193 209,201 132,398 72,795 26,372 16,799 0.82 0.81 $ $ (As Previously Reported) $205,193 209,201 132,344 72,849 26,399 16,816 0.82 0.81 $ $ (Restated) $197,068 200,884 136,185 60,883 12,777 8,139 0.39 0.38 $ $ (As Previously Reported) $197,068 200,884 136,051 61,017 12,844 8,182 0.40 0.39 $ $ (Restated) $163,611 167,514 115,640 47,971 2,825 1,800 0.09 0.09 $ $ (As Previously Reported) $163,612 167,514 115,481 48,131 2,904 1,850 0.09 0.09 $ $ $207,937 212,005 144,693 63,244 12,721 8,103 0.39 0.38 $ $ Fiscal 2003 First Second Third Fourth (Restated) (As Previously (Restated) (As Previously (Restated) (As Previously (Restated) (As Previously Retail sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $197,304 201,210 Total revenues ÏÏÏÏÏÏÏÏÏÏÏ 127,316 Cost of goods sold ÏÏÏÏÏÏÏÏ 69,988 Gross margin ÏÏÏÏÏÏÏÏÏÏÏÏ 27,126 Income before income taxes 17,280 Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.68 Basic earnings per share ÏÏÏ $ 0.67 $ Diluted earnings per share Reported) $197,304 201,210 126,998 70,306 27,444 17,482 0.69 0.68 $ $ $188,218 191,993 132,782 55,436 11,971 7,625 0.30 0.29 $ $ Reported) $188,218 191,993 132,616 55,602 12,137 7,731 0.30 0.30 $ $ $153,171 157,129 109,003 44,168 805 513 0.02 0.02 $ $ Reported) $153,171 157,129 108,557 44,614 1,251 797 0.04 0.04 $ $ $193,077 196,935 139,890 53,187 8,785 5,596 0.27 0.27 $ $ Reported) $193,077 196,935 140,230 52,847 8,445 5,379 0.26 0.26 $ $ 41 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 14. Reportable Segment Information: The Company has two reportable segments: retail and credit. The Company operates its women's fashion specialty retail stores in 29 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. The following schedule summarizes certain segment information (in thousands): Fiscal 2004 Retail Credit Total Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fiscal 2003 Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fiscal 2002 Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest and other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $775,421 20,320 (2,739) 49,268 329,010 25,102 Retail (Restated) $732,796 18,617 (3,614) 43,963 293,911 20,549 Retail (Restated) $734,352 14,851 (3,701) 65,766 28,953 $14,183 77 0 5,427 65,124 199 Credit $14,471 78 0 4,724 62,373 4 Credit $13,979 62 0 5,464 0 $789,604 20,397 (2,739) 54,695 394,134 25,301 Total (Restated) $747,267 18,695 (3,614) 48,687 356,284 20,553 Total (Restated) $748,331 14,913 (3,701) 71,230 28,953 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 29, 2005 January 31, 2004 February 1, 2003 Bad debt expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payroll ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PostageÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,096 1,142 1,075 1,366 Total expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $8,679 $6,098 1,101 1,131 1,339 $9,669 $4,764 1,117 1,121 1,451 $8,453 42 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) 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 $3,227,000, $3,019,000 and $2,609,000 in Ñscal 2004, 2003 and 2002, respectively. Including claims incurred, but not yet paid, the Company recognized an expense of $3,513,000, $3,764,000 and $3,284,000 in Ñscal 2004, 2003 and 2002, respectively. Accrued workers' compensation and general liabilities was $4,254,000 and $3,968,000 at January 29, 2005 and January 31, 2004, respectively. The Company had no outstanding letters of credit relating to such claims at January 29, 2005 or at January 31, 2004. 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 CatoWest 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. CatoWest LLC purchases receivables from Cedar Hill on a daily basis (generally one day in arrears). In the event CatoWest LLC fails to transfer to Cedar Hill the purchase price for any receivable within two business days, Cedar Hill has the right to withdraw any amount necessary from the account established by the Company to satisfy the amount due Cedar Hill from CatoWest LLC. Although the amount of potential future payments is limited to the amount of the deposit, Cedar Hill may require, at its discretion, the Company to increase the amount of the deposit with no limit on the increase. The deposit is based upon the amount of payments that would be due from CatoWest LLC to Cedar Hill for the highest credit card sales weekends of the year that would remain unpaid until the following business day. The Company has no obligations related to the deposit at year-end. No recourse provisions exist nor are any assets held as collateral that would reimburse the Company if Cedar Hill withdraws a portion of the deposit. 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. 43 Item 9. Changes in and Disagreements with Independent Registered Public Accounting Firm on Accounting and Consolidated Financial Disclosure: As previously reported on a 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 to succeed Deloitte & Touche LLP as the Company's principal independent accountants. Item 9A. Controls and Procedures: Conclusion Regarding the EÅectiveness of Disclosure Controls and Procedures We carried out an evaluation, with the participation of our principal executive oÇcer and principal Ñnancial oÇcer, of the eÅectiveness of our disclosure controls and procedures as of January 29, 2005. Based on this evaluation, our principal executive oÇcer and principal Ñnancial oÇcer concluded that, as of January 29, 2005, our disclosure controls and procedures, as deÑned in Rule 13a-15(e), were eÅective to ensure that information required to be disclosed by the issuer in the reports that it Ñles or submits under the Securities Exchange Act of 1934 (the ""Exchange Act'') are recorded, processed, summarized and reported within the time periods speciÑed in the Securities and Exchange Commission's rules and forms. Management's Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over Ñnancial reporting, as deÑned in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive oÇcer and principal Ñnancial oÇcer, we carried out an evaluation of the eÅectiveness of our internal control over Ñnancial reporting as of January 29, 2005 based on the Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (""COSO''). Based on this evaluation, our management concluded that our internal control over Ñnancial reporting was eÅective as of January 29, 2005. PricewaterhouseCoopers LLP, an independent registered public accounting Ñrm, has audited our management's assessment of the eÅectiveness of our internal control over Ñnancial reporting as of January 29, 2005 as stated in their report which is included herein. Changes in Internal Control Over Financial Reporting No change was made in the Company's internal control over Ñnancial reporting during the Company's most recent Ñscal quarter that has materially aÅected, or is reasonably likely to materially aÅect, the Company's internal control over Ñnancial reporting. Management's Consideration of the Restatement In coming to the conclusion that our internal control over Ñnancial reporting was eÅective as of January 29, 2005, our management considered, among other things, the control deÑciency related to periodic review of the application of generally accepted accounting principles, which resulted in the need to restate our previously issued Ñnancial statements as disclosed in Note 1 to the accompanying consolidated Ñnancial statements included in this Form 10-K. After reviewing and analyzing the Securities and Exchange Commission's StaÅ Accounting Bulletin (""SAB'') No. 99, ""Materiality,'' Accounting Principles Board Opinion No. 28, ""Interim Financial Reporting,'' paragraph 29 and SAB Topic 5F, ""Accounting Changes Not Retroactively Applied Due to Immateriality,'' and taking into consideration (i) that the restatement adjustments did not have a material impact on the Ñnancial statements of prior interim or annual periods taken as a whole; (ii) that the cumulative impact of the restatement adjustments on stockholders' equity was not material to the Ñnancial statements of prior interim or annual periods; and (iii) that we decided to restate our previously issued Ñnancial statements solely because the cumulative impact of the error, if recorded in the current period, would have been material to the current year's reported net income, our management concluded that the control deÑciency that resulted in the restatement of the prior period Ñnancial statements was not in itself a material weakness and that when aggregated with other deÑciencies did not constitute a material weakness. 44 Item 10. Directors and Executive OÇcers of the Registrant: PART III Information contained under the captions ""Election of Directors,'' ""Meetings and Committees,'' ""Corporate Governance Matters'' and ""Section 16(a) BeneÑcial Ownership Reporting and Compliance'' in the Registrant's Proxy Statement for its 2005 annual stockholders' meeting (the ""2005 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 4A, Part I hereof under the caption ""Executive OÇcers of the Registrant''. Item 11. Executive Compensation: Information contained under the captions ""Summary Compensation Table,'' ""Employment and Sever- ance Agreements,'' ""Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values'' in the Company's 2005 Proxy Statement is incorporated by reference in response to this Item. 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 29, 2005. Plan Category Equity compensation plans approved by security holder ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Equity compensation plans not approved by security holders ÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (a) (b) 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) (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reÖected in column (a)(2) 1,003,550 Ì 1,003,550 $12.08 Ì $12.08 1,102,086 Ì 1,102,086 (1) This column contains information regarding employee stock options only; there are no outstanding warrants or stock appreciation rights. (2) Includes the following: 867,000 shares available for grant under the Company's stock incentive plan, referred to as the 2004 Incentive Compensation Plan. Under this plan, non-qualiÑed stock options may be granted to key employees. Additionally, 13,318 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 221,768 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. Information contained under ""Security Ownership of Certain BeneÑcial Owners and Management in the 2005 Proxy Statement is incorporated by reference in response to this Item. 45 Item 13. Certain Relationships and Related Transactions: Information contained under the caption ""Certain Transactions'' in the 2005 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'' and ""Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Service by the Independent Auditor'' in the 2005 Proxy Statement. PART IV Item 15. Exhibits and Financial Statement Schedules: (a) The following documents are Ñled as part of this report: (1) Financial Statements: Report of Independent Registered Public Accounting Firm ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Report of Independent Registered Public Accounting Firm ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Statements of Income for the Ñscal years ended January 29, 2005, January 31, 2004 (as restated) and February 1, 2003 (as restated) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Balance Sheets at January 29, 2005 and January 31, 2004 (as restated)ÏÏÏ Consolidated Statements of Cash Flows for the Ñscal years ended January 29, 2005, January 31, 2004 (as restated) and February 1, 2003 (as restated) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Statements of Stockholders' Equity for the Ñscal years ended January 29, 2005, January 31, 2004 (as restated) and February 1, 2003 (as restated) ÏÏÏÏÏÏÏÏÏÏÏ Notes to Consolidated Financial StatementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Page 20-21 22 23 24 25 26 27 (2) Financial Statement Schedules: The following report and Ñnancial statement schedules are Ñled herewith: Independent Registered Public Accounting Firm's Consent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Schedule II Ì Valuation and Qualifying Accounts and ReservesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 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. 46 (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 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. 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 Registered Public Accounting Firm. Consent of Independent Registered Public Accounting Firm. Rule 13a-14(a)/15d-14(a) CertiÑcation of Chief Executive OÇcer. Rule 13a-14(a)/15d-14(a) CertiÑcation of Chief Financial OÇcer. Section 1350 CertiÑcation of Chief Executive OÇcer. Section 1350 CertiÑcation of Chief Financial OÇcer. 47 EXHIBIT INDEX Designation of Exhibit Page 49 Subsidiaries of the RegistrantÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21 23.1 Consent of Independent Registered Public Accounting FirmÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 23.2 Consent of Independent Registered Public Accounting FirmÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ S-1 52 31.1 Rule 13a-14(a)/15d-14(a) CertiÑcation of Chief Executive OÇcerÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53 31.2 Rule 13a-14(a)/15d-14(a) CertiÑcation of Chief Financial OÇcer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54 Section 1350 CertiÑcation of Chief Executive OÇcerÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32.1 55 Section 1350 CertiÑcation of Chief Financial OÇcer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32.2 48 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT 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 49 EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statement No. 333-119300 on Form S-8 pertaining to The Cato Corporation 2004 Incentive Compensation Plan, in Registration Statement No. 333-119299 pertaining to The Cato Corporation 2003 Employee Stock Purchase Plan, 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 April 28, 2005 relating to the Ñnancial statements, Ñnancial statement schedule, management's assessment of the eÅectiveness of internal control over Ñnancial reporting and the eÅectiveness of internal control over Ñnancial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Charlotte, North Carolina April 28, 2005 50 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 28, 2005 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/ GRANT L. HAMRICK John P. Derham Cato (Director) Grant L. Hamrick (Director) /s/ MICHAEL O. MOORE /s/ JAMES H. SHAW Michael O. Moore (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) /s/ GEORGE S. CURRIN /s/ D. HARDING STOWE George S. Currin (Director) /s/ WILLIAM H. GRIGG William H. Grigg (Director) D. Harding Stowe (Director) 51 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)) and internal control over Ñnancial reporting (as deÑned in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over Ñnancial reporting, or caused such internal control over Ñnancial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancial statements for external purposes in accordance with generally accepted accounting principles; c) 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; d) 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 functions): 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 control over Ñnancial reporting. Date: April 28, 2005 /s/ John P. Derham Cato John P. Derham Cato Chairman, President and Chief Executive OÇcer 52 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)) and internal control over Ñnancial reporting (as deÑned in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over Ñnancial reporting, or caused such internal control over Ñnancial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancial statements for external purposes in accordance with generally accepted accounting principles; c) 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; d) 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 functions): 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 control over Ñnancial reporting. Date: April 28, 2005 /s/ Michael O. Moore Michael O. Moore Executive Vice President Chief Financial OÇcer and Secretary 53 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 29, 2005 (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 28, 2005 /s/ John P. Derham Cato John P. Derham Cato Chairman, President and Chief Executive OÇcer 54 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 29, 2005 (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 28, 2005 /s/ Michael O. Moore Michael O. Moore Executive Vice President Chief Financial OÇcer and Secretary 55 EXHIBIT 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 No. 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 (April 25, 2005 as to the eÅects of the restatement discussed in Note 1) (which report expresses an unqualiÑed opinion and includes an explanatory paragraph relating to the restatement discussed in Note 1) relating to the consolidated Ñnancial statements and Ñnancial statement schedule of The Cato Corporation appearing in and incorporated by reference in the Annual Report on Form 10-K for the year ended January 29, 2005. /s/ Deloitte & Touche LLP Charlotte, North Carolina April 26, 2005 S-1 VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II 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 Balance at January 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additions charged to costs and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additions charged to other accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deductions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Allowance for Doubtful Accounts(a) $ 5,968 4,763 887(d) (5,519)(e) 6,099 6,098 858(d) (6,720)(e) 6,335 5,096 1,069(d) (6,378)(e) Reserve for Rental Commitments(b) (In thousands) $ 1,077 1,000 Ì (1,121) 956 1,062 Ì (1,402) 616 1,373 Ì (1,502) Allowance for Sales Returns(c) $ Ì 390 Ì Ì 390 10 Ì Ì 400 22 Ì Ì Balance at January 29, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,122 $ 487 $422 (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 CORPORATE INFORMATION A copy of the Company’s Annual Report to the Securities and Exchange Commission (Form 10-K) for the fiscal year ended January 29, 2005 is available to shareholders without charge upon written request to Mr. Michael O. Moore, Executive Vice President, Chief Financial Officer and Secretary, The Cato Corporation, P.O. Box 34216, Charlotte, North Carolina 28234. CORPORATE HEADQUARTERS The Cato Corporation 8100 Denmark Road Charlotte, North Carolina 28273-5975 Telephone: (704) 554-8510 MAILING ADDRESS P.O. Box 34216 Charlotte, North Carolina 28234 INDEPENDENT AUDITOR PricewaterhouseCoopers LLP Charlotte, North Carolina 28202 CORPORATE COUNSEL Robinson, Bradshaw & Hinson, P.A. Charlotte, North Carolina 28246 TRANSFER AGENT AND REGISTRAR Wachovia Bank, N.A. Securities Transfer Department, CMG-5 Charlotte, North Carolina 28288 ANNUAL MEETING NOTICE The Annual Meeting of Shareholders 11:00 a.m.,Thursday, May 26, 2005 Corporate Office, 8100 Denmark Road, Charlotte, NC 28273-5975 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 2004 and 2003. 2004 HIGH LOW DIVIDEND PRICE First quarter Second quarter Third quarter Fourth quarter $ 21.60 $ 19.47 $ .16 22.82 23.35 30.10 18.90 20.35 23.54 PRICE .175 .175 .175 2003 HIGH LOW DIVIDEND First quarter Second quarter Third quarter Fourth quarter $ 20.50 $ 16.28 $ .15 24.10 25.11 21.57 18.20 19.95 18.84 .16 .16 .16 As of March 29, 2005 the approximate number of record holders of the Company’s Class A Common Stock was 1,279 and there were 3 record holders of the Company’s Class B Common Stock. THE CATO CORPORATION 8100 Denmark Road Charlotte, NC 28273-5975 www.catocorp.com 

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