The Cato Corporation
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

AMENDMENT NO. 1
     
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
     
    For the fiscal year ended February 1, 2003
     
    OR
     
[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

THE CATO CORPORATION

(Exact name of registrant as specified in Charter)

COMMISSION FILE NUMBER 1-31340

     
State of Incorporation: Delaware   I.R.S. Employer Identification Number:
  56-0484485
Address of Principal Executive Offices:   Registrant’s Telephone Number:
8100 Denmark Road
Charlotte, North Carolina 28273-5975
  704/554-8510
SECURITIES REGISTERED
PURSUANT TO
SECTION 12(b) OF THE ACT:
  SECURITIES REGISTERED
PURSUANT TO
SECTION 12(g) OF THE ACT:
NONE   CLASS A COMMON STOCK

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed 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 file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X]   No [   ]

Indicate by check mark, if disclosure of delinquent filers 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Act).

YES [X]   No [   ]

As of March 21, 2003, there were 19,312,500 shares of Class A Common Stock and 6,085,149 shares of Convertible Class B Common Stock outstanding. The aggregate market value of the Registrant’s Class A Common Stock held by Non-affiliates of the Registrant as of August 2, 2002, the last business day of the Company’s most recent second quarter, was $319,132,510 based on the last reported sale price per share on the New York Stock Exchange (NYSE) on that date.

Documents incorporated by reference:

Portions of the proxy statement dated April 30, 2003, relating to the 2003 annual meeting of shareholders are incorporated by reference into the following part of this annual report:

Part III – Items 10, 11, 12, 13, 14 and 15

 


 

Page 2

EXPLANATORY NOTE

     The Cato Corporation (the “Company”) is hereby amending this Annual Report on Form 10-K for the fiscal year ended February 1, 2003 (a) to refile the Independent Auditors’ Report, dated April 21, 2003 (the “Auditors’ Report”) for the sole purpose of indicating the signature of Deloitte & Touche LLP, as independent auditors, which indication was previously inadvertently omitted, and (b) to refile Exhibit 23 (Independent Auditor’s Consent) for the sole purpose of indicating the signature of Deloitte & Touche LLP, as independent auditors, which indication was previously inadvertently omitted. This amendment also includes new Certifications by John P. Derham Cato, as Chairman, President and Chief Executive Officer, and by Michael O. Moore, as Executive Vice President and Chief Financial Officer and Secretary of the Company, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, for amendments to an Annual Report on Form 10-K. Except for the foregoing matters, no other information included in the original Annual Report on Form 10-K is amended by this amendment.


 

Page 3

Item 15. Exhibits, Financial Statement Schedules, Reports on Form 8-K:

             
(a) 1. & 2. LIST OF FINANCIAL STATEMENTS AND SCHEDULE
 
           
    The response to this portion of Item 14 is submitted as a separate section of this report.
 
           
(a) 3.   LIST OF EXHIBITS
 
           
    See Exhibit Index at page 24 of this annual report.
 
           
  *3 (a) (i)   Exhibit Form 8-K dated August 24, 1995 relating to a change in the Registrant’s Certifying Accountant from Ernst & Young LLP to Deloitte & Touche LLP.
 
           
  *3 (a) (ii)   Exhibit index designation of exhibit page 10.5.0 Loan Agreement dated December 16, 1994 between The Cato Corporation and NationsBank of North Carolina and Wachovia Bank of North Carolina, N.A., incorporated by reference to Form 10-K of the Registrant for the fiscal year ended January 28, 1995.
 
           
  *3 (a) (iii)   Exhibit index designation of Exhibit 10 – 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 fiscal year ended January 29, 2000.
 
           
  *3 (a) (iv)   Exhibit Form 8-K dated September 3, 2002 relating to Exhibit Number 99.1, Statement Under Oath of Principal Executive Officer Regarding Facts and Circumstances to Exchange Act Filings and Exhibit Number 99.2, Statement Under Oath of Principal Financial Officer Regarding Facts and Circumstances to Exchange Act Filings.
 
           
  *21   Subsidiaries of the Registrant
 
           
  23   Consent of Independent Auditors
 
           
  31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
           
  31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
           
  32.1   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer, incorporated by reference to Form 10-Q of the Registrant for the quarterly period ended August 3, 2002.
 
           
  32.2   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer, incorporated by reference to Form 10-Q of the Registrant for the quarterly period ended August 3, 2002.
 
           
(b)   REPORTS ON FORM 8-K
 
           
    No reports on Form 8-K were filed during the quarter ended February 1, 2003.

*Previously Filed


 

Page 4

ANNUAL REPORT ON FORM 10-K

ITEM 8, ITEM 14(a), (1) AND (2), (c) AND (d)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LIST OF FINANCIAL STATEMENTS

CERTAIN EXHIBITS

FINANCIAL STATEMENT SCHEDULE

YEAR ENDED FEBRUARY 1, 2003

THE CATO CORPORATION

CHARLOTTE, NORTH CAROLINA


 

Page 5

Item 14(a) 1. And 2. List of Financial Statements and Financial Statement Schedule:

THE CATO CORPORATION

The following consolidated financial statements of The Cato Corporation are included in Item 8:

     
Independent Auditors’ Report
  Page 6
Consolidated Statements of Income
  Page 7
Consolidated Balance Sheets
  Page 8
Consolidated Statements of Cash Flows
  Page 9
Consolidated Statements of Stockholders’ Equity
  Page 10
Notes to Consolidated Financial Statements
  Pages 11

The following consolidated financial statement schedule of the Cato Corporation is included in Item 14 (d):

     
SCHEDULE II – Valuation and qualifying accounts
  Page 23


 

Page 6

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of
The Cato Corporation

We have audited the accompanying consolidated balance sheets of The Cato Corporation and subsidiaries (the Company) as of February 1, 2003 and February 2, 2002, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended February 1, 2003. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at February 1, 2003 and February 2, 2002, and the results of its operations and its cash flows for each of the three years in the period ended February 1, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth herein.

/s/ Deloitte & Touche LLP

Charlotte, North Carolina
April 21, 2003


 

Page 7

The Cato Corporation
Consolidated Statements of Income

                         
Fiscal Year Ended   February 1,   February 2,   February 3,
(Dollars in thousands, except per share data)
  2003
  2002
  2001
REVENUES
                       
Retail sales
  $ 732,742     $ 685,653     $ 648,482  
Other income (principally finance charges, late fees and layaway charges)
    15,589       13,668       14,055  
 
   
 
     
 
     
 
 
Total revenues
    748,331       699,321       662,537  
 
   
 
     
 
     
 
 
COSTS AND EXPENSES, NET
                       
Cost of goods sold
    496,345       466,366       445,407  
Selling, general and administrative
    168,914       162,082       154,150  
Depreciation
    14,913       10,886       9,492  
Interest and other income, net
    (3,680 )     (6,299 )     (6,554 )
 
   
 
     
 
     
 
 
 
    676,492       633,035       602,495  
 
   
 
     
 
     
 
 
Income before income taxes
    71,839       66,286       60,042  
Income tax expense
    26,006       23,200       21,015  
 
   
 
     
 
     
 
 
Net income
  $ 45,833     $ 43,086     $ 39,027  
 
   
 
     
 
     
 
 
Basic earnings per share
  $ 1.80     $ 1.71     $ 1.56  
 
   
 
     
 
     
 
 
Basic weighted average shares
    25,465,543       25,193,610       24,988,844  
 
   
 
     
 
     
 
 
Diluted earnings per share
  $ 1.77     $ 1.66     $ 1.53  
 
   
 
     
 
     
 
 
Diluted weighted average shares
    25,947,457       25,888,636       25,465,232  
 
   
 
     
 
     
 
 
Dividends per share
  $ .585     $ .53     $ .425  
 
   
 
     
 
     
 
 

See notes to consolidated financial statements.


 

Page 8

The Cato Corporation
Consolidated Balance Sheets

                 
    February 1,   February 2,
(Dollars in thousands)
  2003
  2002
ASSETS
               
Current Assets:
               
Cash and cash equivalents
  $ 32,065     $ 41,772  
Short-term investments
    74,871       42,923  
Accounts receivable, net of allowance for doubtful accounts of $6,099 at February 1, 2003 and $5,968 at February 2, 2002
    54,116       52,293  
Merchandise inventories
    93,457       80,407  
Deferred income taxes
    1,392       777  
Prepaid expenses
    4,990       5,036  
 
   
 
     
 
 
Total Current Assets
    260,891       223,208  
Property and equipment — net
    113,307       100,137  
Other assets
    9,212       8,696  
 
   
 
     
 
 
Total Assets
  $ 383,410     $ 332,041  
 
   
 
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
Accounts payable
  $ 66,620     $ 57,495  
Accrued expenses
    28,776       25,260  
Accrued income taxes
    2,886       820  
 
   
 
     
 
 
Total Current Liabilities
    98,282       83,575  
Deferred income taxes
    6,310       5,177  
Other noncurrent liabilities (primarily deferred rent)
    8,654       8,591  
Commitments and contingencies
               
Stockholders’ Equity:
               
Preferred stock, $100 par value per share, 100,000 shares authorized, none issued
           
Class A common stock, $.033 par value per share, 50,000,000 shares authorized; 25,218,678 and 25,011,732 shares issued at February 1, 2003 and February 2, 2002,respectively
    840       833  
Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized; 6,085,149 and 5,812,649 shares issued at February 1, 2003 and February 2, 2002, respectively
    203       194  
Additional paid-in capital
    94,947       86,948  
Retained earnings
    235,904       204,961  
Accumulated other comprehensive gains (losses)
    253       (567 )
Unearned compensation — restricted stock awards
    (2,375 )     (394 )
 
   
 
     
 
 
 
    329,772       291,975  
Less Class A common stock in treasury, at cost (5,741,179 and 5,626,498 shares at February 1, 2003 and February 2, 2002, respectively)
    (59,608 )     (57,277 )
 
   
 
     
 
 
Total Stockholders’ Equity
    270,164       234,698  
 
   
 
     
 
 
Total Liabilities and Stockholders’ Equity
  $ 383,410     $ 332,041  
 
   
 
     
 
 

See notes to consolidated financial statements.


 

Page 9

The Cato Corporation
Consolidated Statements of Cash Flows

                         
Fiscal Year Ended   February 1,   February 2,   February 3,
(Dollars in thousands)
  2003
  2002
  2001
OPERATING ACTIVITIES
                       
Net income
  $ 45,833     $ 43,086     $ 39,027  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation
    14,913       10,886       9,492  
Amortization of investment premiums
    66       160       126  
Provision for doubtful accounts
    4,764       5,913       5,292  
Write-down of investments
    1,800              
Deferred income taxes
    70       422       1,600  
Compensation expense related to restricted stock awards
    750       295       295  
Loss on disposal of property and equipment
    870       480       1,257  
Changes in operating assets and liabilities which provided (used) cash:
                       
Accounts receivable
    (6,587 )     (11,234 )     (6,806 )
Merchandise inventories
    (13,050 )     (1,246 )     (9,664 )
Prepaid and other assets
    (470 )     367       (3,971 )
Accrued income taxes
    2,066       (1,525 )     2,025  
Accounts payable, accrued expenses and other liabilities
    12,704       (547 )     5,420  
 
   
 
     
 
     
 
 
Net cash provided by operating activities
    63,729       47,057       44,093  
 
   
 
     
 
     
 
 
INVESTING ACTIVITIES
                       
Expenditures for property and equipment
    (28,953 )     (25,684 )     (27,230 )
Purchases of short-term investments
    (46,281 )     (35,878 )     (11,906 )
Sales of short-term investments
    13,735       51,194       12,166  
 
   
 
     
 
     
 
 
Net cash used in investing activities
    (61,499 )     (10,368 )     (26,970 )
 
   
 
     
 
     
 
 
FINANCING ACTIVITIES
                       
Dividends paid
    (14,890 )     (13,400 )     (10,633 )
Purchases of treasury stock
    (1,187 )     (11,729 )     (15,449 )
Proceeds from employee stock purchase plan
    509       443       448  
Proceeds from stock options exercised
    3,631       4,568       3,323  
 
   
 
     
 
     
 
 
Net cash used in financing activities
    (11,937 )     (20,118 )     (22,311 )
 
   
 
     
 
     
 
 
Net increase (decrease) in cash and cash equivalents
    (9,707 )     16,571       (5,188 )
Cash and cash equivalents at beginning of year
    41,772       25,201       30,389  
 
   
 
     
 
     
 
 
Cash and cash equivalents at end of year
  $ 32,065     $ 41,772     $ 25,201  
 
   
 
     
 
     
 
 

See notes to consolidated financial statements.


 

Page 10

The Cato Corporation
Consolidated Statements of Stockholders’ Equity

                                                                 
            Convertible                   Accumulated   Unearned            
    Class A   Class B   Additional           Other   Compensation           Total
    Common   Common   Paid-in   Retained   Comprehensive   Restricted   Treasury   Stockholders’
(Dollars in thousands)
  Stock
  Stock
  Capital
  Earnings
  Income (Loss)
  Stock Awards
  Stock
  Equity
Balance — January 29, 2000
  $ 805     $ 179     $ 71,974     $ 146,881     $ (1,801 )   $ (984 )   $ (28,274 )   $ 188,780  
*Comprehensive income:
                                                               
Net income
                            39,027                               39,027  
Unrealized gains on available-for-sale securities, net of deferred income taxes of $494
                                    917                       917  
Dividends paid ($.425 per share)
                            (10,633 )                             (10,633 )
Class A common stock sold through employee stock purchase plan — 44,590 shares
    2               446                                       448  
Class A common stock sold through stock option plans — 425,350 shares
    14               3,309                                       3,323  
Income tax benefit from stock options exercised
                    1,049                                       1,049  
Purchase of treasury shares — 1,468,800 shares
                                                    (15,449 )     (15,449 )
Unearned compensation — restricted stock awards
                                            295               295  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Balance — February 3, 2001
    821       179       76,778       175,275       (884 )     (689 )     (43,723 )     207,757  
*Comprehensive income:
                                                               
Net income
                            43,086                               43,086  
Unrealized gains on available-for-sale securities, net of deferred income taxes of $171
                                    317                       317  
Dividends paid ($.53 per share)
                            (13,400 )                             (13,400 )
Class A common stock sold through employee stock purchase plan — 38,463 shares
    1               442                                       443  
Class A common stock sold through stock option plans — 329,850 shares
    11               2,961                                       2,972  
Class B common stock sold through stock option plans — 448,332 shares
            15       3,406                                       3,421  
Income tax benefit from stock options exercised
                    3,361                                       3,361  
Purchase of treasury shares — 774,750 shares
                                                    (11,729 )     (11,729 )
Surrender of shares for stock options — 92,600 shares
                                                    (1,825 )     (1,825 )
Unearned compensation — restricted stock awards
                                            295               295  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Balance — February 2, 2002
    833       194       86,948       204,961       (567 )     (394 )     (57,277 )     234,698  
*Comprehensive income:
                                                               
Net income
                            45,833                               45,833  
Unrealized gains on available-for-sale securities, net of deferred income taxes of $448
                                    820                       820  
Dividends paid ($.585 per share)
                            (14,890 )                             (14,890 )
Class A common stock sold through employee stock purchase plan — 32,487 shares
    1               508                                       509  
Class A common stock sold through stock option plans — 171,600 shares
    6               1,547                                       1,553  
Class B common stock sold through stock option plans — 172,500 shares
            6       1,310                                       1,316  
Income tax benefit from stock options exercised
                    1,906                                       1,906  
Purchase of treasury shares — 66,000 shares
                                                    (1,187 )     (1,187 )
Surrender of shares for stock options — 48,681 shares
                                                    (1,144 )     (1,144 )
Restricted stock awards — 100,000 shares
            3       2,728                       (2,731 )              
Unearned compensation — restricted stock awards
                                            750               750  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Balance — February 1, 2003
  $ 840     $ 203     $ 94,947     $ 235,904     $ 253     $ (2,375 )   $ (59,608 )   $ 270,164  

See notes to consolidated financial statements.

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


 

Page 11

The Cato Corporation
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation: The consolidated financial statements include the accounts of The Cato Corporation and its wholly-owned subsidiaries (“the Company”). All significant intercompany accounts and transactions have been eliminated.

Description of Business and Fiscal Year: The Company has two business segments - - the operation of women’s fashion specialty stores and a credit card division. The apparel specialty stores operate under the names “Cato”, “Cato Fashions”, “Cato Plus” and “It’s Fashion!” and are located primarily in strip shopping centers in the Southeast.

The Company’s fiscal year ends on the Saturday nearest January 31. Fiscal years 2002 and 2001 each included 52 weeks. Fiscal year 2000 included 53 weeks.

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

Cash and Cash Equivalents and Short-Term Investments: Cash equivalents consist of highly liquid investments with original maturities of three months or less. Investments with original maturities beyond three months are classified as short-term investments. The fair values of short-term investments are based on quoted market prices.

The Company’s short-term investments are classified as available-for-sale. As they are available for current operations, they are classified in consolidated balance sheets as current assets. Available-for-sale securities are carried at fair value, with unrealized gains and temporary losses, net of income taxes, reported as a component of accumulated other comprehensive income. Other than temporary declines in fair value of investments are recorded as a reduction in the cost of the investments in the accompanying Consolidated Balance Sheets and a reduction of interest and other income, net in the accompanying Statements of Consolidated Income. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization of premiums, accretion of discounts and realized gains and losses are included in other income.

Concentration of Credit Risk: Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash equivalents and accounts receivable. The Company places its cash equivalents with high credit qualified institutions and, by practice, limits the amount of credit exposure to any one institution. Concentrations of credit risks with respect to accounts receivable are limited due to the dispersion across different geographies of the Company’s customer base.

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

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

Property and Equipment: Property and equipment are recorded at cost. Maintenance and repairs are charged to operations as incurred; renewals and betterments are capitalized. The Company accounts for its software development costs in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”. Depreciation is provided on the straight-line method over the estimated useful lives of the related assets, as follows:


 

Page 12

     
Classification
  Estimated Useful Lives
Land improvements
  10 years
Buildings
  30-40 years
Leasehold improvements
  5-10 years
Fixtures, equipment and software
  3-10 years

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

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

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

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

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

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

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

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

Fair Value of Financial Instruments: The Company’s carrying values of financial instruments, such as cash and cash equivalents, 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. Accordingly, no compensation expense has been recognized for stock-based compensation where the option price of the stock approximated the fair market value of the stock on the date of grant. Had compensation expense for fiscal 2002, 2001 and 2000 stock options granted been determined consistent with SFAS No. 123, “Accounting for Stock-Based Compensation”, the Company’s net income and basic and diluted earnings per share amounts for fiscal 2002, 2001 and 2000 would approximate the following proforma amounts (dollars in thousands, except per share data):


 

Page 13

                         
            Stock-Based    
            Employee    
            Compensation    
    As Reported
  Cost*
  Proforma
Net income — Fiscal 2002
  $ 45,833     $ (740 )   $ 45,093  
Basic earnings per share
  $ 1.80     $ (0.03 )   $ 1.77  
Diluted earnings per share
  $ 1.77     $ (0.03 )   $ 1.74  
Net income — Fiscal 2001
  $ 43,086     $ (1,593 )   $ 41,493  
Basic earnings per share
  $ 1.71     $ (0.06 )   $ 1.65  
Diluted earnings per share
  $ 1.66     $ (0.06 )   $ 1.60  
Net income — Fiscal 2000
  $ 39,027     $ (1,596 )   $ 37,431  
Basic earnings per share
  $ 1.56     $ (0.06 )   $ 1.50  
Diluted earnings per share
  $ 1.53     $ (0.06 )   $ 1.47  

* determined using fair value method

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

In July 2001, the FASB issued Statement of Financial Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. The Company adopted SFAS No. 142 on February 3, 2002, and the adoption of this statement had no impact on the Company’s consolidated results of operations and financial position, as the Company had no goodwill or other indefinite lived intangible assets.

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

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

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


 

Page 14

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

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

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

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

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

2. SHORT-TERM INVESTMENTS:

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

                         
            Unrealized   Estimated
Security Type
  Cost
  Gains
  Fair Value
Obligations of federal, state and political subdivisions
  $ 74,457     $ 414     $ 74,871  
     
     
     
 

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


 

Page 15

                         
            Unrealized   Estimated
Security Type
  Cost
  (Losses)
  Fair Value
Obligations of federal, state and political subdivisions
  $ 43,795     $ (872 )   $ 42,923  
 
   
 
     
 
     
 
 

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

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

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

                 
            Estimated
Security Type
  Cost
  Fair Value
Due in one year or less
  $ 58,426     $ 58,483  
Due in one year through three years
    16,031       16,388  
 
   
 
     
 
 
Total
  $ 74,457     $ 74,871  
 
   
 
     
 
 

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

3. ACCOUNTS RECEIVABLE:

Accounts receivable consist of the following (in thousands):

                 
    February 1,   February 2,
    2003
  2002
Customer accounts — principally deferred payment accounts
  $ 56,853     $ 53,012  
Miscellaneous trade receivables
    3,362       5,249  
 
   
 
     
 
 
Total
    60,215       58,261  
Less allowance for doubtful accounts
    6,099       5,968  
 
   
 
     
 
 
Accounts receivable — net
  $ 54,116     $ 52,293  
 
   
 
     
 
 

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

4. PROPERTY AND EQUIPMENT:

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


 

Page 16

                 
    February 1,   February 2,
    2003
  2002
Land and improvements
  $ 2,019     $ 2,019  
Buildings
    17,751       17,751  
Leasehold improvements
    34,697       30,546  
Fixtures, equipment and software
    143,080       100,138  
Construction in progress
    2,246       23,333  
 
   
 
     
 
 
Total
    199,793       173,787  
Less accumulated depreciation
    86,486       73,650  
 
   
 
     
 
 
Property and equipment — net
  $ 113,307     $ 100,137  
 
   
 
     
 
 

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

Construction in progress primarily represents investments in technology and ongoing store development activities scheduled to be implemented over the next 12 months.

5. ACCRUED EXPENSES:

Accrued expenses consist of the following (in thousands):

                 
    February 1,   February 2,
    2003
  2002
Accrued bonus and retirement savings plan contributions
  $ 6,233     $ 7,605  
Accrued payroll and related items
    4,265       4,216  
Closed store lease obligations
    1,004       1,077  
Property and other taxes
    7,593       4,211  
Accrued health care plan
    4,347       3,558  
Other
    5,334       4,593  
 
   
 
     
 
 
Total
  $ 28,776     $ 25,260  
 
   
 
     
 
 

6. FINANCING ARRANGEMENTS:

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

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

7. STOCKHOLDERS’ EQUITY:

The holders of Class A Common Stock are entitled to one vote per share, whereas the holders of Class B Common Stock are entitled to ten votes per share. Each share of Class B Common Stock may be converted at any time into one share of Class A Common Stock. Subject to the rights of the holders of any shares of Preferred Stock that may be outstanding at the time, in the event of liquidation, dissolution or winding up of the Company, holders of Class A Common Stock are entitled to receive a preferential distribution of $1.00 per share of the net assets of the Company. Cash dividends on the Class B Common Stock cannot be paid unless cash dividends of at least an equal amount are paid on the Class A Common Stock.

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 benefit, corporations and partnerships


 

Page 17

controlled by them and the Company’s employee benefit plans. Any transfer of Class B Common Stock in violation of these restrictions, including a transfer to the Company, results in the automatic conversion of the transferred shares of Class B Common Stock held by the transferee into an equal number of shares of Class A Common Stock.

In October 1993, the Company registered 250,000 shares of Class A Common Stock available for issuance under an Employee Stock Purchase Plan (the “Plan”). In May 1998, the shareholders approved an amendment to the Plan to increase the maximum number of Class A shares of Common Stock authorized to be issued from 250,000 to 500,000 shares. In February 2003, the Board of Directors recommended a new plan be adopted effective October 2003 and that an additional 250,000 shares be registered, subject to shareholder approval. Under the terms of the Plan, substantially all employees may purchase Class A Common Stock through payroll deductions of up to 10% of their salary. The Class A Common Stock is purchased at the lower of 85% of market value on the first or last business day of a six-month payment period. Additionally, each April 15, employees are given the opportunity to make a lump sum purchase of up to $10,000 of Class A Common Stock at 85% of market value. The number of shares purchased by participants through the plan were 32,487 shares, 38,463 shares and 44,500 shares for the years ended February 1, 2003, February 2, 2002 and February 3, 2001, respectively.

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

In August 1999, the Board of Directors adopted the 1999 Incentive Compensation Plan, of which 1,000,000 shares are issuable. No awards may be granted after July 31, 2004 and shares must be 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 cliff vest after four years and the unvested portion is included in stockholders’ equity as unearned compensation in the accompanying financial statements. The charge to compensation expense for these stock awards was $750,000, $295,000 and $295,000 in fiscal 2002, 2001 and 2000, respectively.

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

                                         
                                    Weighted
            Range of   Average
    Options
  Option Prices
  Price
Outstanding options, January 29, 2000
    2,972,782     $ 1.50           $ 14.59     $ 9.39  
Granted
    46,250       9.59             14.38       11.66  
Exercised
    (425,350 )     4.94             13.44       7.82  
Cancelled
    (56,300 )     6.94             13.44       10.23  
 
   
 
     
 
             
 
     
 
 
Outstanding options, February 3, 2001
    2,537,382       4.94             14.59       9.68  
Granted
    21,750       12.66             18.91       16.17  
Exercised
    (778,182 )     4.94             14.59       8.20  
Cancelled
    (25,700 )     7.69             14.59       11.61  
 
   
 
     
 
             
 
     
 
 
Outstanding options, February 2, 2002
    1,755,250       4.94             18.91       10.39  
Granted
    45,500       18.05             26.76       20.89  
Exercised
    (344,100 )     4.94             17.63       8.11  
Cancelled
    (14,700 )     8.25             12.28       11.27  
 
   
 
     
 
             
 
     
 
 
Outstanding options, February 1, 2003
    1,441,950     $ 4.94           $ 26.76     $ 11.20  
 
   
 
     
 
             
 
     
 
 


 

Page 18

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

                                         
                    Options Outstanding
                            Weighted Average    
                            Remaining   Weighted
Range of           Contractual   Average
Exercise Prices
  Options
  Life
  Exercise Price
$ 4.94    
  $ 7.69       93,600       2.37  years   $ 7.52  
$ 8.00    
  $ 9.59       493,400       4.72  years   $ 8.28  
$ 10.66    
  $ 12.72       418,150       6.73  years   $ 12.40  
$ 13.06    
  $ 26.76       436,800       6.22  years   $ 14.14  
 
 
   
 
   
 
     
 
     
 
     
 
 
$ 4.94    
  $ 26.76       1,441,950       5.60  years   $ 11.20  
 
 
   
 
   
 
     
 
     
 
     
 
 
                                 
                    Options Exercisable
                            Weighted
Range of           Average
Exercise Prices
  Options
  Exercise Price
$ 4.94    
  $ 7.69       93,600     $ 7.52  
$ 8.00    
  $ 9.59       483,600     $ 8.26  
$ 10.66    
  $ 12.72       211,750     $ 12.42  
$ 13.06    
  $ 26.76       275,450     $ 13.35  
 
 
   
 
   
 
     
 
     
 
 
$ 4.94    
  $ 26.76       1,064,400     $ 10.34  
 
 
   
 
   
 
     
 
     
 
 

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

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

                         
            Stock-Based    
            Employee    
            Compensation    
    As Reported
  Cost*
  Proforma
Net income — Fiscal 2002
  $ 45,833     $ (740 )   $ 45,093  
Basic earnings per share
  $ 1.80     $ (0.03 )   $ 1.77  
Diluted earnings per share
  $ 1.77     $ (0.03 )   $ 1.74  
Net income — Fiscal 2001
  $ 43,086     $ (1,593 )   $ 41,493  
Basic earnings per share
  $ 1.71     $ (0.06 )   $ 1.65  
Diluted earnings per share
  $ 1.66     $ (0.06 )   $ 1.60  
Net income — Fiscal 2000
  $ 39,027     $ (1,596 )   $ 37,431  
Basic earnings per share
  $ 1.56     $ (0.06 )   $ 1.50  
Diluted earnings per share
  $ 1.53     $ (0.06 )   $ 1.47  

* determined using fair value method

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


 

Page 19

future amounts.

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

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

                         
    February 1,   February 2,   February 3,
Fiscal Year Ended
  2003
  2002
  2001
Net income
  $ 45,833     $ 43,086     $ 39,027  
Unrealized gains on available-for-sale securities
    1,268       488       1,411  
Income tax effect
    (448 )     (171 )     (494 )
 
   
 
     
 
     
 
 
Unrealized gains net of taxes
    820       317       917  
 
   
 
     
 
     
 
 
Total comprehensive income
  $ 46,653     $ 43,403     $ 39,944  
 
   
 
     
 
     
 
 

8. EMPLOYEE BENEFIT PLANS:

The Company has a defined contribution retirement savings plan (401(k)) which covers all employees who meet minimum age and service requirements. The 401(k) plan allows participants to contribute up to 60% of their annual compensation up to the maximum elective deferral, designated by the IRS. The Company is obligated to make a minimum contribution to cover plan administrative expenses. Further Company contributions are at the discretion of the Board of Directors. The Company’s contributions for the years ended February 1, 2003, February 2, 2002 and February 3, 2001 were approximately $1,906,000, $2,596,000 and $2,348,000, respectively.

The Company has an Employee Stock Ownership Plan (ESOP), which covers substantially all employees who meet minimum age and service requirements. The Board of Directors determines contributions to the ESOP. No contributions were made to the ESOP for the years ended February 1, 2003, February 2, 2002 or February 3, 2001.

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

9. LEASES:

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

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

         
Fiscal Year        
2003
  $ 37,308  
2004
    28,581  
2005
    21,711  
2006
    15,406  
2007
    8,177  
 
   
 
 
Total minimum lease payments
  $ 111,183  
 
   
 
 

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


 

Page 20

                         
    February 1,   February 2,   February 3,
Fiscal Year Ended
  2003
  2002
  2001
Minimum rentals
  $ 37,848     $ 37,117     $ 34,449  
Contingent rent
    389       471       479  
 
   
 
     
 
     
 
 
Total rental expense
  $ 38,237     $ 37,588     $ 34,928  
 
   
 
     
 
     
 
 

10. RELATED PARTY TRANSACTIONS:

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

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

11. INCOME TAXES:

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

                         
    February 1,   February 2,   February 3,
Fiscal Year Ended
  2003
  2002
  2001
Current income taxes:
                       
Federal
  $ 24,572     $ 22,309     $ 18,461  
State
    1,364       469       954  
 
   
 
     
 
     
 
 
Total
    25,936       22,778       19,415  
 
   
 
     
 
     
 
 
Deferred income taxes:
                       
Federal
    63       376       1,319  
State
    7       46       281  
 
   
 
     
 
     
 
 
Total
    70       422       1,600  
 
   
 
     
 
     
 
 
Total income tax expense
  $ 26,006     $ 23,200     $ 21,015  
 
   
 
     
 
     
 
 

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

                 
    February 1,   February 2,
    2003
  2002
Deferred tax assets:
               
Bad debt reserve
  $ 2,338     $ 2,288  
Inventory valuation
    1,739       1,282  
Write-down of short-term investments
    669        
Restricted stock options
    407       296  
Unrealized losses on short-term investments
          305  
Other, net
    2,972       936  
 
   
 
     
 
 
Total deferred tax assets
    8,125       5,107  
 
   
 
     
 
 
Deferred tax liabilities:
               
Tax over book depreciation
    11,682       5,898  
Unrealized gains on short-term investments
    143        
Other, net
    1,218       3,609  
 
   
 
     
 
 
Total deferred tax liabilities
    13,043       9,507  
 
   
 
     
 
 
Net deferred tax liabilities
  $ 4,918     $ 4,400  
 
   
 
     
 
 


 

Page 21

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

                         
    February 1,   February 2,   February 3,
Fiscal Year Ended
  2003
  2002
  2001
Federal income tax rate
    35.0 %     35.0 %     35.0 %
State income taxes
    1.2       0.9       1.6  
Other
    0.0       (0.9 )     (1.6 )
 
   
 
     
 
     
 
 
Effective income tax rate
    36.2 %     35.0 %     35.0 %
 
   
 
     
 
     
 
 

12. QUARTERLY FINANCIAL DATA (UNAUDITED):

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

                                 
Fiscal 2002
  First
  Second
  Third
  Fourth
Retail sales
  $ 196,617     $ 186,900     $ 158,217     $ 191,008  
Total revenues(1)
    200,491       190,715       162,228       194,897  
Cost of goods sold
    124,460       125,854       110,188       135,843  
Gross margin
    72,157       61,046       48,029       55,165  
Income before income taxes
    28,683       19,213       8,507       15,436  
Net income
    18,300       12,258       5,427       9,848  
Basic earnings per share
  $ .72     $ .48     $ .21     $ .39  
Diluted earnings per share
  $ .71     $ .47     $ .21     $ .38  
 
   
 
     
 
     
 
     
 
 
                                 
Fiscal 2001
  First
  Second
  Third
  Fourth
Retail sales
  $ 180,347     $ 172,444     $ 147,619     $ 185,243  
Total revenues(2)
    183,946       175,790       151,043       188,542  
Cost of goods sold
    116,391       118,093       101,743       130,139  
Gross margin
    63,956       54,351       45,876       55,104  
Income before income taxes
    24,485       16,867       7,746       17,188  
Net income
    15,916       10,963       5,035       11,172  
Basic earnings per share
  $ .63     $ .43     $ .20     $ .45  
Diluted earnings per share
  $ .61     $ .42     $ .20     $ .43  
 
   
 
     
 
     
 
     
 
 

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

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

13. REPORTABLE SEGMENT INFORMATION:

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


 

Page 22

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

                         
Fiscal 2002
  Retail
  Credit
  Total
Revenues
  $ 734,352     $ 13,979     $ 748,331  
Depreciation
    14,851       62       14,913  
Interest and other income, net
    (3,680 )           (3,680 )
Income before taxes
    66,375       5,464       71,839  
Total assets
    310,173       73,237       383,410  
Capital expenditures
    28,953             28,953  
 
   
 
     
 
     
 
 
                         
Fiscal 2001
  Retail
  Credit
  Total
Revenues
  $ 686,092     $ 13,229     $ 699,321  
Depreciation
    10,821       65       10,886  
Interest and other income, net
    (6,299 )           (6,299 )
Income before taxes
    62,786       3,500       66,286  
Total assets
    263,909       68,132       332,041  
Capital expenditures
    25,684             25,684  
 
   
 
     
 
     
 
 
                         
Fiscal 2000
  Retail
  Credit
  Total
Revenues
  $ 648,552     $ 13,985     $ 662,537  
Depreciation
    9,426       66       9,492  
Interest and other income, net
    (6,554 )           (6,554 )
Income before taxes
    55,278       4,764       60,042  
Total assets
    244,199       66,543       310,742  
Capital expenditures
    27,195       35       27,230  
 
   
 
     
 
     
 
 

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

14. 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 $250,000 and $100,000, respectively. The Company paid claims of $1,652,000, $1,379,000 and $1,486,000 in fiscal 2002, 2001 and 2000, respectively. The Company had no outstanding letters of credit relating to such claims at February 1, 2003 or at February 2, 2002. See Note 6 for letters of credit related to purchase commitments, Note 8 for 401(k) plan contribution obligations and Note 9 for lease commitments.

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


 

Page 23

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS

                 
    Allowance   Reserve
    for   for
    Doubtful   Rental
    Accounts (a)
  Commitments (b)
    (In thousands)
Balance at January 29, 2000
  $ 5,101     $ 1,771  
Additions charged to costs and expenses
    5,292       1,710  
Additions charged to other accounts
    878 (d)      
Deductions
    (5,849 )(c)     (1,832 )
 
   
 
     
 
 
Balance at February 3, 2001
    5,422       1,649  
Additions charged to costs and expenses
    5,913       691  
Additions charged to other accounts
    1,052 (d)      
Deductions
    (6,419 )(c)     (1,263 )
 
   
 
     
 
 
Balance at February 2, 2002
    5,968       1,077  
Additions charged to costs and expenses
    4,763       1,000  
Additions charged to other accounts
    887 (d)      
Deductions
    (5,519 )(c)     (1,121 )
 
   
 
     
 
 
Balance at February 1, 2003
  $ 6,099     $ 956  
 
   
 
     
 
 

(a)   Deducted from trade accounts receivable.

(b)   Provision for the difference between costs and revenues from non-cancelable subleases over the lease terms of closed stores.

(c)   Uncollectible accounts written off.

(d)   Recoveries of amounts previously written off.


 

Page 24

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, The Cato Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

The Cato Corporation

             
By
  /s/ John P. Derham Cato   By   /s/ Michael O. Moore
 
 
     
 
  John P. Derham Cato       Michael O. Moore
  Chairman, President and       Executive Vice President
  Chief Executive Officer       Chief Financial Officer and Secretary
 
           
By:
  /s/ Robert M. Sandler        
 
 
       
  Robert M. Sandler        
  Senior Vice President        
  Controller        

Date: April 8, 2004

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:

     
/s/ Robert W. Bradshaw, Jr.
  April 8, 2004

   
Robert W. Bradshaw, Jr.
   
(Director)
   
 
   
/s/ John P. Derham Cato
  April 8, 2004

   
John P. Derham Cato
   
(Director)
   
 
   
/s/ Thomas E. Cato
  April 8, 2004

   
Thomas E. Cato
   
(Director)
   
 
   
/s/ George S. Currin
  April 8, 2004

   
George S. Currin
   
(Director)
   
 
   
/s/ Grant L. Hamrick
  April 8, 2004

   
Grant L. Hamrick
   
(Director)
   
 
   
/s/ Michael O. Moore
  April 8, 2004

   
Michael O. Moore
   
(Director)
   
 
   
/s/ James H. Shaw
  April 8, 2004

   
James H. Shaw
   
(Director)
   
 
   
/s/ A.F. (Pete) Sloan
  April 8, 2004

   
A.F. (Pete) Sloan
   
(Director)
   


 

Page 25

EXHIBIT INDEX

                 
Designation of        
Exhibit
      Page
  21    
*Subsidiaries of the Registrant
       
       
 
       
  23    
Consent of Independent Auditors
    26  
       
 
       
  31.1    
Chairman, President and Chief Executive Officer’s Certification
    27  
       
 
       
  31.2    
Executive Vice President, Chief Financial Officer and Secretary’s Certification
    28  
       
 
       
  32.1    
Chairman, President and Chief Executive Officer’s Certification of Periodic Report
    29  
       
 
       
  32.2    
Executive Vice President, Chief Financial Officer and Secretary’s Certification of Periodic Report
    29  

*Previously Filed

Page 26 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-96283 on Form S-8 pertaining to The Cato Corporation 1999 Incentive Compensation Plan, in Registration Statement No. 33-41314 on Form S-8 pertaining to The Cato Corporation 1987 Incentive Stock Option Plan, in Registration Statement No. 33-41315 on Form S-8 pertaining to The Cato Corporation 1987 Nonqualified 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 21, 2003, with respect to the consolidated financial statements and financial statement schedule of The Cato Corporation included in and incorporated by reference in the Annual Report on Form 10-K for the year ended February 1, 2003. /s/ Deloitte & Touche LLP Charlotte, North Carolina April 8, 2004

Page 27 Exhibit 31.1 CERTIFICATION I, John P. Derham Cato, Chairman, President and Chief Executive Officer 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 annual 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 financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures 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 annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses: Date: April 8, 2004 /s/ John P. Derham Cato - --------------------------------------- John P. Derham Cato Chairman, President and Chief Executive Officer

Page 28 Exhibit 31.2 CERTIFICATION I, Michael O. Moore, Executive Vice President, Chief Financial Officer 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 annual 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 financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures 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 annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses: Date: April 8, 2004 /s/ Michael O. Moore - -------------------------------------- Michael O. Moore Executive Vice President Chief Financial Officer and Secretary

Page 29 Exhibit 32.1 CERTIFICATION OF PERIODIC REPORT I, John P. Derham Cato,, Chairman, President and Chief Executive Officer 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 Certification: 1. the Annual Report on Form 10-K of the Company for the annual period ended February 1, 2003 (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 financial condition and results of operations of the Company. Dated: April 8, 2004 /s/ John P. Derham Cato --------------------------- John P. Derham Cato Chairman, President and Chief Executive Officer

Page 30 Exhibit 32.2 CERTIFICATION OF PERIODIC REPORT I, Michael O. Moore, Executive Vice President, Chief Financial Officer 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 Certification: 1. the Annual Report on Form 10-K of the Company for the annual period ended February 1, 2003 (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 financial condition and results of operations of the Company. Dated: April 8, 2004 /s/ Michael O. Moore -------------------------------- Michael O. Moore Executive Vice President Chief Financial Officer and Secretary