The Cato Corporation
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended May 3, 2008
OR
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o |
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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 1-31340
THE CATO CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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56-0484485 |
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(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
8100 Denmark Road, Charlotte, North Carolina 28273-5975
(Address of principal executive offices)
(Zip Code)
(704) 554-8510
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of May 20, 2008, there were 27,796,746 shares of Class A common stock and 1,743,525
shares of Class B common stock outstanding.
THE CATO CORPORATION
FORM 10-Q
Quarter Ended May 3, 2008
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
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Three Months Ended |
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May 3, |
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May 5, |
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2008 |
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2007 |
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(Unaudited) |
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(Unaudited) |
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(Dollars in thousands, except per share |
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data) |
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REVENUES |
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Retail sales |
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$ |
225,791 |
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$ |
224,134 |
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Other income (principally finance charges, late fees and
layaway charges) |
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3,037 |
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3,094 |
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Total revenues |
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228,828 |
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227,228 |
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COSTS AND EXPENSES, NET |
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Cost of goods sold (exclusive of depreciation shown below) |
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141,620 |
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143,422 |
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Selling, general and administrative |
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56,317 |
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51,136 |
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Depreciation |
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5,610 |
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5,391 |
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Interest and other income |
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(1,901 |
) |
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(1,893 |
) |
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201,646 |
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198,056 |
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Income before income taxes |
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27,182 |
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29,172 |
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Income tax expense |
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10,329 |
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10,502 |
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Net Income |
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$ |
16,853 |
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$ |
18,670 |
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Basic earnings per share |
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$ |
0.58 |
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$ |
0.60 |
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Basic weighted average shares |
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29,095,913 |
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31,352,592 |
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Diluted earnings per share |
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$ |
0.58 |
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$ |
0.59 |
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Diluted weighted average shares |
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29,163,031 |
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31,897,676 |
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Dividends per share |
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$ |
.165 |
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$ |
0.15 |
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Comprehensive income: |
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Net income |
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$ |
16,853 |
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$ |
18,670 |
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Unrealized gains (losses) on available-for-sale securities, net
of deferred income tax benefit |
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(236 |
) |
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27 |
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Net comprehensive income |
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$ |
16,617 |
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$ |
18,697 |
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See notes to condensed consolidated financial statements.
2
THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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May 3, |
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May 5, |
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February 2, |
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2008 |
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2007 |
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2008 |
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(Unaudited) |
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(Unaudited) |
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(Dollars in thousands) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
42,091 |
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$ |
21,164 |
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$ |
21,583 |
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Short-term investments |
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85,138 |
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132,450 |
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92,995 |
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Accounts receivable, net of allowance for doubtful accounts of $3,192,
$3,243 and $3,263 at May 3, 2008, May 5, 2007, and February 2,
2008, respectively |
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45,570 |
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45,287 |
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45,282 |
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Merchandise inventories |
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113,227 |
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117,037 |
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118,679 |
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Deferred income taxes |
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6,837 |
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7,489 |
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6,756 |
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Prepaid expenses |
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7,659 |
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6,940 |
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7,755 |
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Total Current Assets |
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300,522 |
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330,367 |
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293,050 |
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Property and equipment net |
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122,936 |
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126,809 |
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123,190 |
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Other assets |
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4,548 |
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4,361 |
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4,552 |
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Total Assets |
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$ |
428,006 |
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$ |
461,537 |
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$ |
420,792 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
92,041 |
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$ |
90,952 |
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$ |
110,848 |
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Accrued expenses |
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29,755 |
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29,755 |
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27,617 |
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Accrued bonus and benefits |
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4,278 |
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1,065 |
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2,543 |
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Accrued income taxes |
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17,900 |
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15,692 |
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7,928 |
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Total Current Liabilities |
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143,974 |
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137,464 |
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148,936 |
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Deferred income taxes |
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1,707 |
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8,817 |
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1,707 |
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Other noncurrent liabilities (primarily deferred rent) |
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22,399 |
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23,298 |
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22,779 |
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Commitments and contingencies: |
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Stockholders Equity: |
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Preferred stock, $100 par value per share, 100,000 shares authorized,
none issued |
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Class A common stock, $.033 par value per share, 50,000,000
shares authorized; issued 36,258,360 shares, 36,082,118 shares
and 36,109,263 shares at May 3, 2008, May 5, 2007 and
February 2, 2008, respectively |
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1,209 |
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1,203 |
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1,204 |
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Convertible Class B common stock, $.033 par value per share,
15,000,000 shares authorized; issued 1,743,525 shares,
690,525 shares and 1,743,525 shares at May 3, 2008, May 5, 2007
and February 2, 2008, respectively |
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58 |
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23 |
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58 |
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Additional paid-in capital |
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59,462 |
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43,307 |
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58,685 |
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Retained earnings |
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352,098 |
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341,986 |
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340,088 |
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Accumulated other comprehensive income |
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473 |
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252 |
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709 |
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413,300 |
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386,771 |
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400,744 |
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Less Class A common stock in treasury, at cost (8,461,615 shares,
5,093,609 shares and 8,461,615 shares at May 3, 2008, May 5, 2007
and February 2, 2008, respectively) |
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(153,374 |
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(94,813 |
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(153,374 |
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Total Stockholders Equity |
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259,926 |
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291,958 |
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247,370 |
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Total Liabilities and Stockholders Equity |
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$ |
428,006 |
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$ |
461,537 |
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$ |
420,792 |
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See notes to condensed consolidated financial statements.
3
THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended |
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May 3, |
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May 5, |
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2008 |
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2007 |
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(Unaudited) |
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(Unaudited) |
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(Dollars in thousands) |
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OPERATING ACTIVITIES |
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Net income |
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$ |
16,853 |
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$ |
18,670 |
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Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation |
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5,610 |
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5,391 |
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Provision for doubtful accounts |
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767 |
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458 |
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Share-based compensation |
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509 |
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371 |
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Excess tax benefits from share-based compensation |
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(13 |
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(62 |
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Deferred income taxes |
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Loss on disposal of property and equipment |
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290 |
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133 |
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Changes in operating assets and liabilities which provided
(used) cash: |
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Accounts receivable |
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(1,055 |
) |
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213 |
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Merchandise inventories |
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5,452 |
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(1,119 |
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Prepaid and other assets |
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100 |
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(366 |
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Accrued income taxes |
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9,985 |
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10,396 |
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Accounts payable, accrued expenses and other liabilities |
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(15,213 |
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4,539 |
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Net cash provided by operating activities |
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23,285 |
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38,624 |
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INVESTING ACTIVITIES |
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Expenditures for property and equipment |
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(5,647 |
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(3,930 |
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Purchases of short-term investments |
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(45,536 |
) |
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(158,505 |
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Sales of short-term investments |
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53,075 |
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124,810 |
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Net cash provided by (used in) investing activities |
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1,892 |
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(37,625 |
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FINANCING ACTIVITIES |
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Change in cash overdrafts included in accounts payable |
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(100 |
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(400 |
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Dividends paid |
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(4,843 |
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(4,734 |
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Proceeds from employee stock purchase plan |
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213 |
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214 |
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Excess tax benefits from share-based compensation |
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13 |
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62 |
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Proceeds from stock options exercised |
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48 |
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190 |
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Net cash used in financing activities |
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(4,669 |
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(4,668 |
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Net increase (decrease) in cash and cash equivalents |
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20,508 |
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(3,669 |
) |
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Cash and cash equivalents at beginning of period |
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21,583 |
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24,833 |
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Cash and cash equivalents at end of period |
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$ |
42,091 |
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$ |
21,164 |
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See notes to condensed consolidated financial statements.
4
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 3, 2008 AND MAY 5, 2007
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
and for the periods ended May 3, 2008 and May 5, 2007 are unaudited. In the opinion of management,
all adjustments considered necessary for a fair presentation have been included. All such
adjustments are of a normal, recurring nature unless otherwise noted. The results of the interim
period may not be indicative of the results expected for the entire year.
The interim financial statements should be read in conjunction with the consolidated financial
statements and notes thereto, included in the Companys Annual Report on Form 10-K for the fiscal
year ended February 2, 2008.
The year-end condensed consolidated balance sheet data presented for fiscal year ended February 2,
2008 was derived from audited financial statements, but does not include all disclosures required
by accounting principles generally accepted in the United States of America.
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.
Short-term investments are classified as available-for-sale. As they are available for current
operations, they are classified in the Condensed 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 Condensed Consolidated Balance Sheets and a reduction of
interest and other income in the accompanying Condensed Consolidated Statements of Income and
Comprehensive Income. The cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. The amortization of premiums, accretion of discounts and
realized gains and losses are included in interest and other income.
Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market as
determined by the retail inventory method.
On May 22, 2008, the Board of Directors maintained the quarterly dividend at $.165 per share or an
annualized rate of $.66 per share.
5
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 3, 2008 AND MAY 5, 2007
NOTE 2 EARNINGS PER SHARE:
FASB No. 128 requires dual presentation of basic EPS and diluted EPS on the face of all income
statements for all entities with complex capital structures. The Company has presented one basic
EPS and one diluted EPS amount for all common shares in the accompanying consolidated statement of
income. While the Companys articles of incorporation provide the right for the
Board of Directors to declare dividends on Class A shares without declaration of commensurate
dividends on Class B shares, the Company has historically paid the same dividends to both Class A
and Class B shareholders and the Board of Directors has resolved to continue this practice.
Accordingly, the Companys allocation of income for purposes of EPS computation is the same for
Class A and Class B shares and the EPS amounts reported herein are applicable to both Class A and
Class B shares.
Basic EPS is computed as net income divided by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options and the Employee Stock Purchase Plan and the potential
vestings of restricted stock computed using the treasury stock method.
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Three Months Ended |
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May 3, |
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May 5, |
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2008 |
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2007 |
|
Weighted-average shares outstanding |
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29,095,913 |
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31,352,592 |
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Dilutive effect of : |
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Stock options |
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17,310 |
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501,653 |
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Restricted stock |
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49,808 |
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43,431 |
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Weighted-average shares and common stock
equivalents outstanding |
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29,163,031 |
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31,897,676 |
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NOTE 3 SUPPLEMENTAL CASH FLOW INFORMATION:
Income tax payments, net of refunds received, for the three months ended May 3, 2008 and May 5,
2007 were $339,000 and $140,000, respectively.
NOTE 4 FINANCING ARRANGEMENTS:
At May 3, 2008, the Company had an unsecured revolving credit agreement, which provided for
borrowings of up to $35 million. The revolving credit agreement is committed until August 2010.
The credit agreement contains various financial covenants and limitations, including the
maintenance of specific financial ratios with which the Company was in compliance as of
May 3, 2008. There were no borrowings outstanding under this credit facility during the first
three months ended May 3, 2008 or May 5, 2007, or the fiscal year ended February 2, 2008. Interest
on any borrowings is based on LIBOR which was 2.70% at May 3, 2008.
At May 3, 2008 and May 5, 2007 the Company had approximately $4,968,000 and $4,501,000,
respectively, of outstanding irrevocable letters of credit relating to purchase commitments.
6
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 3, 2008 AND MAY 5, 2007
NOTE 5 REPORTABLE SEGMENT INFORMATION:
The Company has two reportable segments: retail and credit. The Company operated its womens
fashion specialty retail stores in 32 states at May 3, 2008, principally in the southeastern United
States. The Company offers its own credit card to its customers and all related credit
authorizations, payment processing, and collection efforts are performed by a separate subsidiary
of the Company.
The following schedule summarizes certain segment information (in thousands):
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Three Months Ended |
|
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|
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May 3, 2008 |
|
Retail |
|
Credit |
|
Total |
Revenues |
|
$ |
226,310 |
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|
$ |
2,518 |
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|
$ |
228,828 |
|
Depreciation |
|
|
5,600 |
|
|
|
10 |
|
|
|
5,610 |
|
Interest and other income |
|
|
(1,901 |
) |
|
|
|
|
|
|
(1,901 |
) |
Income before taxes |
|
|
26,319 |
|
|
|
863 |
|
|
|
27,182 |
|
Total assets |
|
|
357,696 |
|
|
|
70,310 |
|
|
|
428,006 |
|
Capital expenditures |
|
|
5,647 |
|
|
|
|
|
|
|
5,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
May 5, 2007 |
|
Retail |
|
Credit |
|
Total |
Revenues |
|
$ |
224,630 |
|
|
$ |
2,598 |
|
|
$ |
227,228 |
|
Depreciation |
|
|
5,367 |
|
|
|
24 |
|
|
|
5,391 |
|
Interest and other income |
|
|
(1,893 |
) |
|
|
|
|
|
|
(1,893 |
) |
Income before taxes |
|
|
28,018 |
|
|
|
1,154 |
|
|
|
29,172 |
|
Total assets |
|
|
395,385 |
|
|
|
66,152 |
|
|
|
461,537 |
|
Capital expenditures |
|
|
3,917 |
|
|
|
13 |
|
|
|
3,930 |
|
The Company evaluates performance based on income before taxes. The Company does not allocate
certain corporate expenses or income taxes to the credit segment.
The following schedule summarizes the direct expenses of the credit segment which are reflected in
selling, general and administrative expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
May 3, |
|
|
May 5, |
|
|
|
2008 |
|
|
2007 |
|
Bad debt expense |
|
$ |
767 |
|
|
$ |
458 |
|
Payroll |
|
|
253 |
|
|
|
242 |
|
Postage |
|
|
273 |
|
|
|
278 |
|
Other expenses |
|
|
352 |
|
|
|
442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
1,645 |
|
|
$ |
1,420 |
|
|
|
|
|
|
|
|
7
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 3, 2008 AND MAY 5, 2007
NOTE 6 STOCK BASED COMPENSATION:
As of May 3, 2008, the Company had three long-term compensation plans pursuant to which stock-based
compensation was outstanding or could be granted. The Companys 1987 Non-Qualified Stock Option
Plan authorized 5,850,000 shares for the granting of options to officers and key employees. The
1999 Incentive Compensation Plan and 2004 Amended and Restated Incentive Compensation Plan
authorized 1,500,000 and 1,350,000 shares, respectively, for the granting of various forms of
equity-based awards, including restricted stock and stock options to officers and key employees.
The 1999 Plan has expired as to the ability to grant new awards.
The following table presents the number of options and shares of restricted stock initially
authorized and available for grant under each of the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1987 |
|
1999 |
|
2004 |
|
|
|
|
Plan |
|
Plan |
|
Plan |
|
Total |
Options and/or restricted stock initially authorized |
|
|
5,850,000 |
|
|
|
1,500,000 |
|
|
|
1,350,000 |
|
|
|
8,700,000 |
|
Options and/or restricted stock available for grant: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2008 |
|
|
12,277 |
|
|
|
|
|
|
|
1,006,033 |
|
|
|
1,018,310 |
|
May 3, 2008 |
|
|
12,877 |
|
|
|
|
|
|
|
879,114 |
|
|
|
891,991 |
|
Stock option awards outstanding under the Companys current plans were granted at exercise prices
which were equal to the market value of the Companys stock on the date of grant, vest over five
years and expire no later than ten years after the grant date.
The following is a summary of the changes in stock options outstanding during the three months
ended May 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Price |
|
Term |
|
Value (a) |
Options outstanding at February 2, 2008 |
|
|
139,075 |
|
|
$ |
12.41 |
|
|
|
4.64 |
|
|
$ |
494,087 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(600 |
) |
|
|
8.71 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(5,550 |
) |
|
|
8.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at May 3, 2008 |
|
|
132,925 |
|
|
$ |
12.58 |
|
|
|
4.56 |
|
|
$ |
431,413 |
|
Vested and exercisable at May 3, 2008 |
|
|
101,200 |
|
|
$ |
11.85 |
|
|
|
3.99 |
|
|
$ |
402,941 |
|
|
|
|
(a) |
|
The intrinsic value of a stock option is the amount by which the market value of the underlying
stock exceeds the exercise price of the option. |
No options were granted in fiscal 2007 or the first quarter of fiscal 2008.
8
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 3, 2008 AND MAY 5, 2007
NOTE 6 STOCK BASED COMPENSATION (CONTINUED):
As of May 3, 2008, there was approximately $138,000 of total unrecognized compensation cost related
to nonvested options, which is expected to be recognized over a remaining weighted-average vesting
period of 1.30 years. The total intrinsic value of options exercised during the first quarter ended
May 3, 2008 was approximately $39,000.
Effective with the adoption of FAS 123R, the Company began recognizing share-based compensation
expense ratably over the vesting period, net of estimated forfeitures. The Company recognized
share-based compensation expense for nonvested options of $23,000 and $31,000 for the first quarter
ended May 3, 2008 and May 5, 2007, respectively. These expenses are classified as a component of
selling, general and administrative expenses.
Prior to the adoption of SFAS No. 123R, the Company presented all benefits of tax deductions
resulting from the exercise of share-based compensation as operating cash flows in the Statements
of Cash Flows. SFAS No. 123R requires the benefits of tax deductions in excess of the compensation
cost recognized for those options (excess tax benefits) to be classified as financing cash flows.
For the three months ended May 3, 2008 and May 5, 2007, the Company reported $13,000 and $62,000 of
excess tax benefits as a financing cash inflow in addition to $261,000 and $404,000 in cash
proceeds received from the exercise of stock options and Employee Stock Purchase Plan purchases,
respectively.
The Companys Employee Stock Purchase Plan allows eligible full-time employees to purchase a
limited number of shares of the Companys Class A Common Stock during each semi-annual offering
period at a 15% discount through payroll deductions. During the three months ended
May 3, 2008 and May 5, 2007, the Company sold 16,628 shares and 11,403 shares to employees at an
average discount of $2.13 and $3.31 per share, respectively under the Employee Stock Purchase Plan.
The compensation expense recognized for the 15% discount given under the Employee Stock Purchase
Plan was approximately $35,000 and $38,000 for the three months ended May 3, 2008 and May 5, 2007,
respectively.
In accordance with SFAS No. 123R, the fair value of current restricted stock awards is estimated on
the date of grant based on the market price of the Companys stock and is amortized to compensation
expense on a straight-line basis over the related vesting periods. As of May 3, 2008 and May 5,
2007, there was $6,721,625 and $6,234,123 of total unrecognized compensation cost related to
nonvested restricted stock awards, which have a remaining weighted-average vesting period of 3.7
years and 4.3 years, respectively. The total fair value of the shares recognized as compensation
expense during the first quarter ended May 3, 2008 and May 5, 2007 was $438,000 and $302,000,
respectively.
9
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 3, 2008 AND MAY 5, 2007
NOTE 6 STOCK BASED COMPENSATION (CONTINUED):
The following summary shows the changes in the shares of restricted stock outstanding during the
three months ended May 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Number of Shares |
|
|
Value Per Share |
|
Restricted
stock awards at February 2, 2008 |
|
|
301,967 |
|
|
$ |
22.56 |
|
Granted |
|
|
138,169 |
|
|
|
16.68 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(11,250 |
) |
|
|
23.88 |
|
|
|
|
|
|
|
|
Restricted
stock awards at May 3, 2008 |
|
|
428,886 |
|
|
$ |
20.63 |
|
NOTE 7 INCOME TAXES:
For the quarter ended May 3, 2008, the Companys effective tax rate was 38%. During the next 12
months, various taxing authorities statutes of limitations will expire which could result in a
potential reduction of unrecognized tax benefits. In addition, certain federal and state
examinations may close, the ultimate resolution of which could materially affect the effective tax
rate. Without regard to the outcome of federal and state examinations, the 2008 annual effective
tax rate is expected to be between 35% and 36%.
NOTE 8 FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosure of fair value measurements.
Applicable provisions of SFAS 157 were adopted by the Company effective
February 3, 2008. In February 2008, the FASB issued FASB Staff Position 157-2, Effective date of
FASB Statement No. 157, which delayed for one year the effective date SFAS 157 for non-financial
assets and non-financial liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis. The Company has not yet determined the
impact on its financial statements of the February 1, 2009 adoption of SFAS No. 157-2 as it
pertains to non-financial assets and liabilities.
10
THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 3, 2008 AND MAY 5, 2007
NOTE 8 FAIR VALUE MEASUREMENTS (CONTINUED):
The following table sets forth information regarding the Companys financial assets that are
measured at fair value (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
Quoted Market |
|
|
|
|
|
|
|
|
|
|
Prices in Active |
|
Significant |
|
|
|
|
|
|
|
|
Market for |
|
Other |
|
Significant |
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
|
|
|
|
Assets/Liabilities |
|
Inputs |
|
Inputs |
Description |
|
May 3, 2008 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
85,138 |
|
|
$ |
77,788 |
|
|
$ |
7,350 |
|
|
|
|
|
Other Assets |
|
$ |
2,783 |
|
|
$ |
574 |
|
|
$ |
2,209 |
|
|
|
|
|
NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTS:
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosure of fair value measurements.
Applicable provisions of SFAS 157 were adopted by the Company effective
February 3, 2008. In February 2008, the FASB issued FASB Staff Position 157-2, Effective date of
FASB Statement No. 157, which delayed for one year the effective date SFAS 157 for non-financial
assets and non-financial liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis. The Company has not yet determined the
impact on its financial statements of the February 1, 2009 adoption of SFAS No. 157-2 as it
pertains to non-financial assets and liabilities.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value. SFAS 159 applies to all entities that elect the fair value
option. SFAS 159 was effective for the Company on February 3, 2008. The adoption of SFAS 159 did
not have an impact on the Companys financial position, results of operations or cash flows.
On June 14, 2007, the FASB reached consensus on EITF Issue No. 06-11, Accounting for Income Tax
Benefits of Dividends on Share-Based Payment. EITF Issue No. 06-11 requires that a realized income
tax benefit from dividends or dividend equivalents that are charged to retained earnings and are
paid to associates for equity classified nonvested equity shares, nonvested equity share units, and
outstanding equity share options should be recognized as an increase to additional paid-in capital.
The amount recognized in additional paid-in capital for the realized income tax benefit from
dividends on those awards should be included in the pool of excess tax benefits available to absorb
tax deficiencies on share-based payment awards. EITF Issue No. 06-11 is effective for fiscal years
beginning on or after December 15, 2007. The impact of the Companys adoption of EITF Issue No.
06-11 was immaterial.
11
THE CATO CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION:
The following information should be read along with the Unaudited Condensed Consolidated Financial
Statements, including the accompanying Notes appearing in this report. Any of the following are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended: (1) statements in this
Form 10-Q that reflect projections or expectations of our future financial or economic performance;
(2) statements that are not historical information; (3) statements of our beliefs, intentions,
plans and objectives for future operations, including those contained in Managements Discussion
and Analysis of Financial Condition and Results of Operations; (4) statements relating to our
operations or activities for fiscal 2008 and beyond, including, but not limited to, statements
regarding expected amounts of capital expenditures and store openings, relocations, remodelings and
closures; and (5) statements relating to our future contingencies. When possible, we have attempted
to identify forward-looking statements by using words such as expects, anticipates,
approximates, believes, estimates, hopes, intends, may, plans, should and
variations of such words and similar expressions. We can give no assurance that actual results or
events will not differ materially from those expressed or implied in any such forward-looking
statements. Forward-looking statements included in this report are based on information available
to us as of the filing date of this report, but subject to known and unknown risks, uncertainties
and other factors that could cause actual results to differ materially from those contemplated by
the forward-looking statements. Such factors include, but are not limited to, the following:
general economic conditions; competitive factors and pricing pressures; our ability to predict
fashion trends; consumer apparel buying patterns; adverse weather conditions; inventory risks due
to shifts in market demand; and other factors discussed under Risk Factors in Part I, Item 1A of
our annual report on Form 10-K for the fiscal year ended February 2, 2008 (fiscal 2007), as amended
or supplemented, and in other reports we file with or furnish to the SEC from time to time. We do
not undertake, and expressly decline, any obligation to update any such forward-looking information
contained in this report, whether as a result of new information, future events, or otherwise.
12
THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES:
The Companys accounting policies are more fully described in Note 1 to the consolidated financial
statements included in the Companys Annual Report on Form 10-K. As disclosed in Note 1 of Notes to
Consolidated Financial Statements, the preparation of the Companys financial statements in
conformity with generally accepted accounting principles requires management to make estimates and
assumptions about future events that affect the amounts reported in the financial statements and
accompanying notes. Future events and their effects cannot be determined with absolute certainty.
Therefore, the determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be material to the financial
statements. The most significant accounting estimates inherent in the preparation of the Companys
financial statements include the allowance for doubtful accounts receivable, reserves relating to
workers compensation, general and auto insurance liabilities, reserves for inventory markdowns,
calculation of asset impairment, shrinkage accrual and reserves for uncertain tax positions.
The Companys critical accounting policies and estimates are discussed with the Audit Committee.
RESULTS OF OPERATIONS:
The following table sets forth, for the periods indicated, certain items in the Companys unaudited
Condensed Consolidated Statements of Income and Comprehensive Income as a percentage of total
retail sales:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
May 3, |
|
May 5, |
|
|
2008 |
|
2007 |
Total retail sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Total revenues |
|
|
101.3 |
|
|
|
101.4 |
|
Cost of goods sold |
|
|
62.7 |
|
|
|
64.0 |
|
Selling, general and administrative |
|
|
24.9 |
|
|
|
22.8 |
|
Depreciation |
|
|
2.5 |
|
|
|
2.4 |
|
Interest and other income |
|
|
(0.8 |
) |
|
|
(0.8 |
) |
Income before income taxes |
|
|
12.1 |
|
|
|
13.0 |
|
Net income |
|
|
7.5 |
|
|
|
8.3 |
|
Comparison of First Quarter of 2008 with 2007
Total retail sales for the first quarter were $225.8 million compared to last years first quarter
sales of $224.1 million, a 0.8% increase. Same-store sales declined 1.6% in the first quarter of
fiscal 2008
compared to the first quarter of fiscal 2007. Total revenues, comprised of retail sales and other
income (principally, finance charges and late fees on customer accounts receivable and layaway
fees), were $228.8 million for the first quarter ended May 3, 2008 compared to $227.2 million for
the first
13
THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED):
quarter ended May 5, 2007. The Company operated 1,326 stores at May 3, 2008 compared to 1,286
stores at the end of last years first quarter. In the first quarter of fiscal 2008, the Company
opened 19 stores and closed 11 stores. The Company plans to open approximately 70 stores and close
approximately 32 stores during fiscal 2008.
Credit revenue of $2.5 million represented 1.1% of total revenues in the first quarter of fiscal
2008, compared to 2007 credit revenue of $2.6 million or 1.1% of total revenues. The slight
reduction in actual credit revenue was due to lower finance charge and late fee income from lower
sales under the Companys proprietary credit card and improved collections compared to the prior
year. Credit revenue is comprised of interest earned on the Companys private label credit card
portfolio and related fee income. Related expenses include principally bad debt expense, payroll,
postage and other administrative expenses and totaled $1.6 million in the first quarter of 2008
compared to last years first quarter expenses of $1.4 million. The increase in costs was
principally due to an increase in bad debt expense.
Other income in total, as included in total revenues was $3.0 million for the first quarter of
fiscal 2008, compared to $3.1 million for the prior years comparable first quarter. The decrease
resulted primarily from lower finance charges and late fee income.
Cost of goods sold was $141.6 million, or 62.7% of retail sales for the first quarter of fiscal
2008, compared to $143.4 million, or 64.0% of retail sales in the first quarter of fiscal 2007.
The overall decrease in cost of goods sold as a percent of retail sales for the first quarter of
fiscal 2008 resulted primarily from lower markdowns offset by higher occupancy costs. The decrease
in markdowns was primarily attributable to tight inventory management and higher sell-throughs of
regular priced merchandise. Cost of goods sold includes merchandise costs, net of discounts and
allowances, buying costs, distribution costs, occupancy costs, freight and inventory shrinkage.
Net merchandise costs and in-bound freight are capitalized as inventory costs. Buying and
distribution costs include payroll, payroll-related costs and operating expenses for the buying
departments and distribution center. Occupancy expenses include rent, real estate taxes,
insurance, common area maintenance, utilities and maintenance for stores and distribution
facilities. Total gross margin dollars (retail sales less cost of goods sold) increased by 4.3% to
$84.2 million for the first quarter of fiscal 2008 compared to $80.7 million in the first quarter
of fiscal 2007. Gross margin as presented may not be comparable to those of other entities.
Selling, general and administrative expenses (SG&A) primarily include corporate and store
payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card
processing fees and bad debts. SG&A expenses were $56.3 million, or 24.9% of retail sales for the
first quarter of fiscal 2008, compared to $51.1 million, or 22.8% of retail sales in the first
quarter of fiscal 2007. SG&A expenses as a percentage of retail sales increased 210 basis points
for the first quarter of fiscal
14
THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED):
2008 as compared to the prior year primarily because of an increase in incentive based compensation
expenses and bad debt expense. The overall dollar increase in SG&A expenses for the first quarter
of fiscal 2008 resulted primarily from increased incentive based compensation expenses, payroll and
bad debts.
Depreciation expense was $5.6 million, or 2.5% of retail sales for the first quarter of fiscal
2008, compared to $5.4 million, or 2.4% of retail sales in the first quarter of fiscal 2007.
Interest and other income was flat at $1.9 million, or 0.8% of retail sales for the first quarter
of fiscal 2008, compared to $1.9 million, or 0.8% of retail sales for the first quarter of fiscal
2007.
Income tax expense was $10.3 million or 4.6% of retail sales for the first quarter of fiscal 2008,
compared to $10.5 million, or 4.7% of retail sales for the first quarter of fiscal 2007. The first
quarter decrease resulted from lower pre-tax income offset by a higher effective tax rate. The
effective income tax rate for the first quarter of fiscal 2008 was 38.0% compared to 36.0% for the
first quarter of fiscal 2007.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:
The Company has consistently maintained a strong liquidity position. Cash provided by operating
activities during the first three months of fiscal 2008 was $23.3 million as compared to $38.6
million in the first three months of fiscal 2007. These amounts enable the Company to fund its
regular
operating needs, capital expenditure program, cash dividend payments and share repurchases. In
addition, the Company maintains $35 million of unsecured revolving credit facilities for short-term
financing of seasonal cash needs. There were no outstanding borrowings on these facilities at
May 3, 2008.
Cash provided by operating activities for the first three months of fiscal 2008 was primarily
generated by earnings adjusted for depreciation and changes in working capital. The decrease of
$15.3 million for the first three months of fiscal 2008 as compared to the first three months of
fiscal 2007 was primarily due to a decrease in accounts payable, accrued expenses and other
liabilities and lower net income in fiscal 2008 partially offset by lower inventory.
The Company believes that its cash, cash equivalents and short-term investments, together with cash
flows from operations and borrowings available under its revolving credit agreement, will be
adequate to fund the Companys planned capital expenditures, dividends, share repurchases and other
operating requirements for fiscal 2008 and for the foreseeable future.
15
THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):
At May 3, 2008, the Company had working capital of $156.5 million compared to $192.9 million at May
5, 2007. Additionally, the Company had $2.2 million invested in privately managed investment funds
at May 3, 2008, which are included in other assets on the Condensed Consolidated Balance Sheets.
At May 3, 2008, the Company had an unsecured revolving credit agreement, which provides for
borrowings of up to $35 million. The revolving credit agreement is committed until August 2010.
The credit agreement contains various financial covenants and limitations, including the
maintenance of specific financial ratios with which the Company was in compliance as of May 3,
2008. There were no borrowings outstanding under these credit facilities during the first quarter
ended May 3, 2008 or the fiscal year ended February 2, 2008.
At May 3, 2008 and May 5, 2007, the Company had approximately $5.0 million and $4.5 million,
respectively, of outstanding irrevocable letters of credit relating to purchase commitments.
Expenditures for property and equipment totaled $5.6 million in the first quarter of fiscal 2008,
compared to $3.9 million in last years first fiscal quarter. The expenditures for the first three
months of 2008 were primarily for the development of 19 new stores and additional investments in
new technology. In fiscal 2008, the Company is planning to invest approximately $18.9 million for
capital expenditures. This includes expenditures to open 70 new stores and relocate 11 stores.
Net cash provided by investing activities totaled $1.9 million in the first quarter of fiscal 2008
compared to $37.6 million used for the comparable period of 2007. The increase was due primarily
to the net decrease in purchases over sales of short-term investments.
On May 22, 2008, the Board of Directors maintained the quarterly dividend at $.165 per share or an
annualized rate of $.66 per share.
On August 30, 2007, the Board authorized an increase in the Companys share repurchase program of
two million shares. There is no specified expiration on any shares authorized in the program.
At May 3, 2008, 394,660 shares remain available for repurchase in open authorizations. No shares
were repurchased in the first three months of fiscal 2008.
The Company does not use derivative financial instruments. At May 3, 2008, the Companys investment
portfolio was primarily invested in governmental and other debt securities with maturities less
than 36 months. These securities are classified as available-for-sale and are recorded on the
balance sheet at fair value, with unrealized gains and temporary losses reported net of taxes as
accumulated other comprehensive income. Other than temporary declines in fair value of investments
are recorded as a reduction in the cost of investments in the accompanying Condensed Consolidated
Balance Sheets.
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THE CATO CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company is subject to market rate risk from exposure to changes in interest rates based on its
financing, investing and cash management activities, but the Company does not believe such exposure
is material.
ITEM 4. CONTROLS AND PROCEDURES:
We carried out an evaluation, with the participation of our principal executive officer and
principal financial officer, of the effectiveness of our disclosure controls and procedures as of
May 3, 2008. Based on this evaluation, our principal executive officer and principal financial
officer concluded that, as of May 3, 2008, our disclosure controls and procedures, as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act), were effective to
ensure that information we are required to disclose in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms and that such information is accumulated
and communicated to our management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
No change in the Companys internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f)) has occurred during the Companys fiscal quarter ended May 3, 2008 that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.
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PART II OTHER INFORMATION
THE CATO CORPORATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 1A. RISK FACTORS
In addition to the other information in this report, you should carefully consider the factors
discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for our fiscal year
ended February 2, 2008. These risks could materially affect our business, financial condition or
future results; however, they are not the only risks we face. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial may also materially adversely
affect our business, financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS
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Exhibit No. |
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Item |
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3.1
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Registrants Restated Certificate of Incorporation of the Registrant
dated March 6, 1987, incorporated by reference to Exhibit 4.1 to Form
S-8 of the Registrant filed February 7, 2000 (SEC File No.
333-96283). |
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3.2
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Registrants By Laws, incorporated by reference to Exhibit 99.2 to
Form 8-K of the Registrant filed December 10, 2007. |
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4.1
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Rights Agreement dated December 18, 2003, incorporated by reference
to Exhibit 4.1 to Form 8-A12G of the Registrant filed December 22,
2003 and as amended in Form 8-A12B/A filed January 6, 2004. |
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. |
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32.1
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Section 1350 Certification of Chief Executive Officer. |
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32.2
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Section 1350 Certification of Principal Financial Officer. |
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PART II OTHER INFORMATION
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.
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THE CATO CORPORATION |
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June 11, 2008
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/s/ John P. D. Cato |
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Date
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John P. D. Cato |
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Chairman, President and |
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Chief Executive Officer |
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June 11, 2008
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/s/ John R. Howe |
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Date
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John R. Howe |
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Principal Financial Officer |
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Senior Vice President |
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Controller
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