Annual Statements Open main menu

CATO CORP - Quarter Report: 2002 November (Form 10-Q)

e10vq
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

     
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
       
For the quarterly period ended   November 2, 2002
   

OR

     
[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________________ to __________________

       
Commission file number   0-3747
   

THE CATO CORPORATION AND SUBSIDIARIES


(Exact name of registrant as specified in its charter)
     
Delaware   56-0484485

 
(State or other jurisdiction   (I.R.S. Employer
of incorporation)   Identification No.)

8100 Denmark Road, Charlotte, North Carolina 28273-5975


(Address of principal executive offices)
(Zip Code)

(704) 554-8510


(Registrant’s telephone number, including area code)

Not Applicable


(Former name, former address and former fiscal year,
if changed since last report)

     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      

As of November 19, 2002, there were 19,447,557 shares of Class A Common Stock and 6,085,149 shares of Class B Common Stock outstanding.

 


 

THE CATO CORPORATION

FORM 10-Q

November 2, 2002

Table of Contents

             
        Page
        No.
       
PART I — FINANCIAL INFORMATION (UNAUDITED)
       
 
       
 
Condensed Consolidated Statements of Income
    2  
   
For the Three Months and Nine Months Ended November 2, 2002 and November 3, 2001
       
 
       
 
Condensed Consolidated Balance Sheets
    3  
   
At November 2, 2002, November 3, 2001 and February 2, 2002
       
 
       
 
Condensed Consolidated Statements of Cash Flows
    4  
   
For the Nine Months Ended November 2, 2002 and November 3, 2001
       
 
       
 
Notes to Condensed Consolidated Financial Statements
    5–8  
   
For the Three Months and Nine Months Ended November 2, 2002 and November 3, 2001
       
 
       
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    9–12  
 
       
 
Control Procedures
    13  
 
       
PART II — OTHER INFORMATION
    14-18  

 


 

Page 2

PART I FINANCIAL INFORMATION

THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

                                     
        Three Months Ended   Nine Months Ended
       
 
        November 2,   November 3,   November 2,   November 3,
        2002   2001   2002   2001
       
 
 
 
        (Dollars in thousands, except per share data)
REVENUES
                               
 
Retail sales
  $ 158,217     $ 147,619     $ 541,734     $ 500,410  
 
Other income (principally finance, late, and layaway charges)
    5,158       5,250       15,670       15,591  
 
   
     
     
     
 
   
Total revenues
    163,375       152,869       557,404       516,001  
 
   
     
     
     
 
 
                               
COSTS AND EXPENSES
                               
 
Cost of goods sold
    110,188       101,743       360,503       336,227  
 
Selling, general and administrative
    40,533       40,593       129,976       122,720  
 
Depreciation
    4,143       2,779       10,505       7,927  
 
Interest
    4       8       17       30  
 
   
     
     
     
 
   
Total expenses
    154,868       145,123       501,001       466,904  
 
   
     
     
     
 
 
                               
INCOME BEFORE INCOME TAXES
    8,507       7,746       56,403       49,097  
 
                               
Income tax expense
    3,080       2,711       20,418       17,184  
 
   
     
     
     
 
 
                               
NET INCOME
  $ 5,427     $ 5,035     $ 35,985     $ 31,913  
 
   
     
     
     
 
 
                               
BASIC EARNINGS PER SHARE
  $ .21     $ .20     $ 1.41     $ 1.26  
 
   
     
     
     
 
 
                               
DILUTED EARNINGS PER SHARE
  $ .21     $ .20     $ 1.39     $ 1.23  
 
   
     
     
     
 
 
                               
DIVIDENDS PER SHARE
  $ .15     $ .135     $ .435     $ .395  
 
   
     
     
     
 

See accompanying notes to condensed consolidated financial statements.

 


 

Page 3

THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

                                 
            November 2,   November 3,   February 2,
            2002   2001   2002
            (Unaudited)   (Unaudited)    
           
 
 
            (Dollars in thousands)
ASSETS
                       
Current Assets
                       
 
Cash and cash equivalents
  $ 49,528     $ 5,710     $ 41,772  
 
Short-term investments
    54,627       71,639       42,923  
 
Accounts receivable — net
    52,303       50,593       52,293  
 
Merchandise inventories
    104,775       97,972       80,407  
 
Deferred income taxes
    1,069       1,168       777  
 
Prepaid expenses
    5,020       5,134       5,036  
 
   
     
     
 
   
Total Current Assets
    267,322       232,216       223,208  
Property and equipment — net
    111,351       96,127       100,137  
Other assets
    9,144       8,693       8,696  
 
   
     
     
 
       
Total
  $ 387,817     $ 337,036     $ 332,041  
 
   
     
     
 
 
                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Current Liabilities
                       
 
Accounts payable
  $ 77,240     $ 68,571     $ 57,495  
 
Accrued expenses
    30,584       29,041       25,260  
 
Income taxes payable
    6,011       3,591       820  
 
   
     
     
 
   
Total Current Liabilities
    113,835       101,203       83,575  
Deferred income taxes
    5,177       5,386       5,177  
Other noncurrent liabilities
    8,412       7,648       8,591  
Shareholders’ 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; issued 25,188,736 shares, 24,913,749 shares and 25,011,732 shares at November 2, 2002, November 3, 2001, and February 2, 2002, respectively
    840       830       833  
 
Convertible Class B common stock, $.033 par value per share, 15,000,000 shares authorized; issued and outstanding 6,085,149 shares, 5,573,483 shares and 5,812,649 shares at November 2, 2002, November 3, 2001, and February 2, 2002, respectively
    202       186       194  
Additional paid-in capital
    92,743       80,818       86,948  
Retained earnings
    229,889       197,177       204,961  
Accumulated other comprehensive losses
    (1,053 )     (120 )     (567 )
Unearned compensation – restricted stock awards
    (2,619 )     (468 )     (394 )
 
   
     
     
 
 
    320,002       278,423       291,975  
Less Class A common stock in treasury, at cost (5,741,179 shares at November 2, 2002, 5,542,969 shares at November 3, 2001, and 5,626,498 shares at February 2, 2002)
    (59,609 )     (55,624 )     (57,277 )
 
   
     
     
 
   
Total Shareholders’ Equity
    260,393       222,799       234,698  
 
   
     
     
 
     
Total
  $ 387,817     $ 337,036     $ 332,041  
 
   
     
     
 

See accompanying notes to condensed consolidated financial statements.

 


 

Page 4

THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

                       
          Nine Months Ended
         
          November 2,   November 3,
          2002   2001
         
 
          (Dollars in thousands)
OPERATING ACTIVITIES
               
 
               
 
Net income
  $ 35,985     $ 31,913  
 
               
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
   
Depreciation
    10,505       7,927  
   
Amortization of investment premiums
    64       125  
   
Compensation expense related to restricted stock awards
    506       221  
   
Loss on disposal of property and equipment
    406       331  
   
Changes in operating assets and liabilities which provided (used) cash:
               
     
Accounts receivable
    (9 )     (3,621 )
     
Merchandise inventories
    (24,368 )     (18,811 )
     
Other assets
    (432 )     272  
     
Accrued income taxes
    5,191       (2,115 )
     
Accounts payable and other liabilities
    24,598       13,778  
 
   
     
 
 
               
 
Net cash provided by operating activities
    52,446       30,020  
 
   
     
 
 
               
INVESTING ACTIVITIES
               
 
               
 
Expenditures for property and equipment
    (22,125 )     (18,566 )
 
Purchases of short-term investments
    (25,520 )     (35,181 )
 
Sales of short-term investments
    13,265       22,092  
 
   
     
 
 
               
 
Net cash used in investing activities
    (34,380 )     (31,655 )
 
   
     
 
 
               
FINANCING ACTIVITIES
               
 
               
 
Dividends paid
    (11,057 )     (10,011 )
 
Purchases of treasury stock
    (1,187 )     (11,901 )
 
Proceeds from employee stock purchase plan
    496       431  
 
Proceeds from stock options exercised
    1,438       3,625  
 
   
     
 
 
               
 
Net cash used in financing activities
    (10,310 )     (17,856 )
 
   
     
 
 
               
 
Net increase (decrease) in cash and cash equivalents
    7,756       (19,491 )
 
               
 
Cash and cash equivalents at beginning of period
    41,772       25,201  
 
   
     
 
 
               
 
Cash and cash equivalents at end of period
  $ 49,528     $ 5,710  
 
   
     
 

See accompanying notes to condensed consolidated financial statements.

 


 

Page 5

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2002
AND NOVEMBER 3, 2001


NOTE 1 — GENERAL:

The condensed consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the Company), and all amounts shown as of November 2, 2002 and November 3, 2001 are unaudited. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of the interim period may not be indicative of the entire year.

The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Annual Report in Form 10-K for the fiscal year ended February 2, 2002.

The Company’s short-term investments are classified as available-for-sale securities, and therefore, are carried at fair value, with unrealized gains and losses, net of income taxes, reported as a component of other comprehensive income within Shareholders’ Equity.

Total comprehensive income for the third quarter and nine months ended November 2, 2002 was $5,275,000 and $35,499,000, respectively. Total comprehensive income for the third quarter and nine months ended November 3, 2001 was $5,752,000 and $32,677,000, respectively. Total comprehensive income is composed of net income and net unrealized gains and losses on available-for-sale securities.

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

In the third quarter of fiscal 2002, the Company repurchased 4,100 shares of Class A common stock for a total of $70,923, or an average market price of $17.30 per share. For the nine months ended November 2, 2002, the Company repurchased 66,000 shares of Class A common stock for a total of $1,186,687, or an average market price of $17.98 per share and accepted 48,681 mature shares of Class A common stock from an officer for payment of an option exercise for $1,144,500, or $23.51 per share, the average fair market value on the date of the exchange. For the nine months ended November 2, 2002, the Company repurchased and accepted a combined total of 114,681 shares of Class A common stock for $2,331,187, or an average market price of $20.33 per share. For the nine months ended November 3, 2001, the Company repurchased 774,750 shares of Class A common stock for a total of $11,729,439, or an average market price of $15.14 per share and accepted 9,071 mature shares of Class A common stock from an officer for payment of an option exercise for $171,669, or $18.93 per share, the average fair market value on the date of the exchange, for a combined total of 783,821 shares of Class A common stock for $11,901,108, or an average market price of $15.18 per share.

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

 


 

Page 6

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2002
AND NOVEMBER 3, 2001


NOTE 1 – GENERAL (CONTINUED):

The provisions for income taxes are based on the Company’s estimated annual effective tax rate. As allowed by SFAS No. 109, “Accounting for Income Taxes”, deferred income taxes are calculated annually.

Certain reclassifications have been made to the condensed consolidated financial statements for prior periods to conform to the current period presentation.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS:

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting 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 indefinite lived intangible assets.

In August 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment of 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 Board Opinion (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 material impact on the Company’s consolidated results of operations and financial position.

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

 


 

Page 7

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2002
AND NOVEMBER 3, 2001


NOTE 3 — EARNINGS PER SHARE:

Earnings per share is calculated by dividing net income by the weighted-average number of Class A and Class B common shares outstanding during the respective periods. The weighted-average shares outstanding is used in the basic earnings per share calculation, while the weighted-average shares and common stock equivalents outstanding is used in the diluted earnings per share calculation.

                                 
    Three Months Ended   Nine Months Ended
   
 
    November 2,   November 3,   November 2,   November 3,
    2002   2001   2002   2001
   
 
 
 
Weighted-average shares outstanding
    25,516,334       25,109,834       25,437,165       25,244,887  
 
                               
Dilutive effect of stock options
    376,203       564,935       498,484       640,914  
 
   
     
     
     
 
 
                               
Weighted-average shares and common stock equivalents outstanding
    25,892,537       25,674,769       25,935,649       25,885,801  
 
   
     
     
     
 

NOTE 4 — SUPPLEMENTAL CASH FLOW INFORMATION:

Income tax payments, net of refunds received, for the nine months ended November 2, 2002 and November 3, 2001 were $15,231,400 and $19,794,000, respectively.

NOTE 5 — FINANCING ARRANGEMENTS:

At November 2, 2002, the Company had an unsecured revolving credit agreement which provides for borrowings of up to $35,000,000. The revolving credit agreement is committed until October 31, 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 periods ended November 2, 2002, November 3, 2001 or the fiscal year ended February 2, 2002.

 


 

Page 8

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2002
AND NOVEMBER 3, 2001


NOTE 6 – REPORTABLE SEGMENT INFORMATION:

The Company has two reportable segments: retail and credit. The following schedule summarizes certain segment information (in thousands):

                                     
        Three Months Ended   Nine Months Ended
       
 
        November 2,   November 3,   November 2,   November 3,
        2002   2001   2002   2001
       
 
 
 
Revenues:
                               
 
Retail
  $ 159,879     $ 149,633     $ 547,162     $ 506,107  
 
Credit
    3,496       3,236       10,242       9,894  
 
   
     
     
     
 
   
Total
  $ 163,375     $ 152,869     $ 557,404     $ 516,001  
 
   
     
     
     
 
Income before income taxes:
                               
 
Retail
  $ 7,079     $ 6,826     $ 52,322     $ 46,359  
 
Credit
    1,428       920       4,081       2,738  
 
   
     
     
     
 
   
Total
  $ 8,507     $ 7,746     $ 56,403     $ 49,097  
 
   
     
     
     
 

 


 

Page 9

THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items in the Company’s unaudited Condensed Consolidated Statements of Income as a percentage of total retail sales:

                                 
    Three Months Ended   Nine Months Ended
   
 
    November 2,   November 3,   November 2,   November 3,
    2002   2001   2002   2001
   
 
 
 
Total retail sales
    100.0 %     100.0 %     100.0 %     100.0 %
Total revenues
    103.3       103.5       102.9       103.1  
Cost of goods sold
    69.7       68.9       66.6       67.2  
Selling, general and administrative
    25.6       27.5       24.0       24.5  
Income before income taxes
    5.4       5.2       10.4       9.8  
Net income
    3.4       3.4       6.6       6.4  

Comparison of Third Quarter and First Nine Months of 2002 with 2001.

Total retail sales for the third quarter were $158.2 million compared to last year’s third quarter sales of $147.6 million, a 7% increase. Same-store sales for the quarter were flat to last year. For the nine months ended November 2, 2002, total retail sales were $541.7 million compared to last year’s first nine months sales of $500.4 million, an 8% increase, and same-store sales increased 1% for the comparable nine month period. The increase in retail sales for the first nine months of 2002 resulted from the Company’s continued everyday low pricing strategy, improved merchandise offerings, and an increase in store development activity. The Company operated 992 stores at November 2, 2002 compared to 917 stores at the end of last year’s third quarter.

Other income for the third quarter of 2002 decreased 2% over the prior year’s comparable period. The decrease in the third quarter resulted primarily from lower earnings on cash and cash equivalents and short-term investments. Other income for the first nine months of 2002 was flat to the prior year’s comparable period as increases in finance fees and layaway charges were offset by lower earnings on cash and cash equivalents and short-term investments.

Cost of goods sold was 69.7% and 66.6% of total retail sales for the third quarter and first nine months of 2002, respectively, compared to 68.9% and 67.2% for last year’s comparable three and nine month periods. The increase in cost of goods sold as a percent of retail sales for the third quarter of 2002 resulted primarily from accelerated markdowns taken during the implementation of the new enterprise-wide information system for merchandising, distribution and finance. The decrease in cost of goods sold as a percent of retail sales for the first nine months of 2002 resulted primarily from improved procurement, maintaining timely and aggressive markdowns, strong sell through of regular priced goods and tightly managed inventory.

 


 

Page 10

THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


RESULTS OF OPERATIONS — CONTINUED

Selling, general and administrative (SG&A) expenses were $40.5 million and $130.0 million for the third quarter and first nine months of this year, compared to $40.6 million and $122.7 million for last year’s comparable three and nine month periods, respectively. SG&A expenses as a percentage of retail sales decreased 190 basis points for the third quarter of 2002 and 50 basis points for the first nine months of 2002, as compared to the prior year due to tightly controlled expenses. Selling, general and administrative (SG&A) expenses were flat for the third quarter, while the overall increase in SG&A for the nine months resulted primarily from increased selling-related expenses and increased infrastructure expenses attributable to the Company’s store development activities.

Certain reclassifications have been made to the condensed consolidated financial statements for prior periods to conform to the current period presentation.

CRITICAL ACCOUNTING POLICIES

The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effect cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgement. Actual results may differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include the allowance for doubtful accounts receivable, reserves relating to workers’ compensation, general and auto insurance liabilities and reserves for inventory markdowns and shrinkage. Historically, actual results have not significantly deviated from those determined using the estimates described above.

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting 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 indefinite lived intangible assets.

In August 2001, the FASB issued 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 Board Opinion (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.

 


 

Page 11

THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


CRITICAL ACCOUNTING POLICIES – CONTINUED

The Company adopted SFAS No. 144 on February 3, 2002 and the adoption of this statement had no material impact on the Company’s consolidated results of operations and financial position.

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

LIQUIDITY AND CAPITAL RESOURCES

At November 2, 2002, the Company had working capital of $153.5 million, compared to $131.0 million at November 3, 2001 and $139.6 million at February 2, 2002. Cash provided by operating activities was $52.4 million for the nine months ended November 2, 2002, compared to $30.0 million for last year’s comparable nine month period. The increase in net cash provided by operating activities results primarily from an increase in net income, timing of payments of income taxes and accounts payable and an increase in other liabilities partially offset by an increase in inventories and other assets. At November 2, 2002, the Company had cash, cash equivalents, and short-term investments of $104.2 million, compared to $77.3 million at November 3, 2001 and $84.7 million at February 2, 2002.

Net cash used in investing activities totaled $34.4 million for the first nine months of 2002 compared to $31.7 million for the comparable period of 2001. Cash was used to fund capital expenditures for new, relocated and remodeled stores and for investments in new technology for an enterprise-wide information system for merchandising, distribution and finance. Additionally, the increase in cash used was in part related to an increase in capital expenditures and a decrease in the purchase of short-term investments offset by a decrease in the sale of short-term investments in fiscal 2002 as compared to fiscal 2001.

Expenditures for property, equipment and investments in technology totaled $22.1 million for the nine months ended November 2, 2002, compared to $18.6 million of expenditures in last year’s first nine months. The Company expects total capital expenditures to be approximately $29 million for the current fiscal year. The Company intends to open approximately 90 new stores, close 5 stores and to relocate 23 stores during the current fiscal year. For the nine months ended November 2, 2002, the Company opened 56 new stores, relocated 20 stores and closed one store.

 


 

Page 12

THE CATO CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


LIQUIDITY AND CAPITAL RESOURCES — CONTINUED

Net cash used in financing activities totaled $10.3 million for the first nine months of 2002 compared to $17.9 million for the comparable period of 2001. The decrease was due primarily to a reduction in its share buyback program offset partially by a decrease in proceeds from stock options exercised and an increase in dividends paid in fiscal 2002 as compared to fiscal 2001.

At November 2, 2002, the Company had an unsecured revolving credit agreement which provides for borrowings of up to $35,000,000. The revolving credit agreement is committed until October 31, 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 periods ended November 2, 2002, November 3, 2001 or the fiscal year ended February 2, 2002.

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

The Company does not use derivative financial instruments. At November 2, 2002, November 3, 2001 and February 2, 2 002, the Company’s investment portfolio was primarily invested in governmental debt securities with maturities of up to 36 months. These securities are classified as available-for-sale, and are recorded on the balance sheet at fair value with unrealized gains and losses reported as accumulated other comprehensive losses.

The Company believes that its cash, cash equivalents and short-term investments, together with cash flow 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 during fiscal 2002.

Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical facts included in the Form 10-Q and located elsewhere herein regarding the Company’s financial position and business strategy may constitute forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.

 


 

Page 13

THE CATO CORPORATION
CONTROLS AND PROCEDURES


EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company is recorded, processed, summarized, and reported within the time periods specified in the appropriate rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as of November 2, 2002. Each has concluded that these controls and procedures are effective.

CHANGES IN INTERNAL CONTROLS

There have been no significant changes in the Company’s internal controls and procedures or in other factors that could significantly affect these controls and procedures including no corrective actions. There have been, subsequent to the date of their evaluations, no corrective actions with regard to significant deficiencies and material weaknesses.

 


 

Page 14

PART II OTHER INFORMATION

THE CATO CORPORATION

ITEM 1. LEGAL PROCEEDINGS

       None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

       None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

       Not Applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

       None

ITEM 5. OTHER INFORMATION

       None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

      Form 8-K filed September 3, 2002 Exhibit 99.1 and Exhibit 99.2 certification of Form 10-K for the fiscal year ended February 2, 2002, and all reports on Form 10-Q, and all definitive proxy materials subsequent to the filing of the Form 10-K.

SIGNATURES PAGE AND CERTIFICATIONS

 


 

Page 15

PART II OTHER INFORMATION (CONTINUED)

THE CATO CORPORATION

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
    THE CATO CORPORATION
     
 
December 12, 2002   /s/ John P. Derham Cato

 
Date   John P. Derham Cato
    President, Vice Chairman of the Board
    and Chief Executive Officer
     
 
December 12, 2002   /s/ Michael O. Moore

 
Date   Michael O. Moore
    Executive Vice President
    Chief Financial Officer and Secretary
     
 
December 12, 2002   /s/ Robert M. Sandler

 
Date   Robert M. Sandler
    Senior Vice President
    Controller

 


 

Page 16

PART II OTHER INFORMATION (CONTINUED)

THE CATO CORPORATION

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the accompanying Form 10-Q of The Cato Corporation for the quarter ended November 2, 2002, I, John P. Derham Cato, President, Vice Chairman of the Board and Chief Executive Officer of The Cato Corporation, hereby certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

1)   such Form 10-Q of The Cato Corporation for the quarter ended November 2, 2002 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 such Form 10-Q of The Cato Corporation for the quarter ended November 2, 2002 fairly presents, in all material respects, the financial condition and results of operations of The Cato Corporation.
     
December 12, 2002   /s/ John P. Derham Cato

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

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the accompanying Form 10-Q of The Cato Corporation for the quarter ended November 2, 2002, I, Michael O. Moore, Executive Vice President, Chief Financial Officer and Secretary of The Cato Corporation, hereby certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

1)   such Form 10-Q of The Cato Corporation for the quarter ended November 2, 2002 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 such Form 10-Q of The Cato Corporation for the quarter ended November 2, 2002 fairly presents, in all material respects, the financial condition and results of operations of The Cato Corporation.
     
December 12, 2002   /s/ Michael O. Moore

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

 


 

Page 17

PART II OTHER INFORMATION (CONTINUED)

THE CATO CORPORATION

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, John P. Derham Cato, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of The Cato Corporation;
 
2.   Based on my knowledge, this quarterly 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 quarterly report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
 
4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14) 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 quarterly 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 quarterly report (the “Evaluation Date”); and
 
  c)   presented in this quarterly 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

 


 

Page 18

PART II OTHER INFORMATION (CONTINUED)

THE CATO CORPORATION

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER (CONTINUED)

6.   The registrant’s other certifying officers and I have indicated in this quarterly 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.
     
December 12, 2002   /s/ John P. Derham Cato

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

 


 

Page 17

PART II OTHER INFORMATION (CONTINUED)

THE CATO CORPORATION

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Michael O. Moore, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of The Cato Corporation;
 
2.   Based on my knowledge, this quarterly 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 quarterly report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
 
4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14) 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 quarterly 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 quarterly report (the “Evaluation Date”); and
 
  c)   presented in this quarterly 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

 


 

Page 18

PART II OTHER INFORMATION (CONTINUED)

THE CATO CORPORATION

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER (CONTINUED)

6.   The registrant’s other certifying officers and I have indicated in this quarterly 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.
     
December 12, 2002   /s/ Michael O. Moore

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