Edgar Filing: CATO CORP

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Table of Contents

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, 2013

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 1-31340

THE CATO CORPORATION
(Exact name of registrant as specified in its charter)

Delaware	56-0484485
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

As of November 2, 2013, there were 27,515,706 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 November 2, 2013

				Page No.

PART I – FINANCIAL INFORMATION (UNAUDITED)

	Item 1.		Financial Statements (Unaudited):

	Condensed Consolidated Statements of Income and Comprehensive Income			2
		For the Three Months and Nine Months Ended November 2, 2013 and October 27, 2012

	Condensed Consolidated Balance Sheets			3
		At November 2, 2013, February 2, 2013 and October 27, 2012

	Condensed Consolidated Statements of Cash Flows			4
		For the Nine Months Ended November 2, 2013 and October 27, 2012

	Notes to Condensed Consolidated Financial Statements			5 – 18
		For the Three Months and Nine Months Ended November 2, 2013 and October 27, 2012

	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	19 – 26

	Item 3.		Quantitative and Qualitative Disclosures About Market Risk	27

	Item 4.		Controls and Procedures	27

PART II – OTHER INFORMATION

	Item 1.		Legal Proceedings	28

	Item 1A.		Risk Factors	28

	Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	28

	Item 3.		Defaults Upon Senior Securities	28

	Item 4.		Mine Safety Disclosures	29

	Item 5.		Other Information	29

	Item 6.		Exhibits	29

	Signatures			30 - 34

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PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE CATO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE INCOME

(UNAUDITED)


		Three Months Ended			Nine Months Ended
	November 2, 2013		October 27, 2012		November 2, 2013		October 27, 2012

		(Dollars in thousands, except per share data)
REVENUES
Retail sales	$	198,786	$	197,575	$	695,345	$	701,815
Other revenue (principally finance charges, late fees and
layaway charges)		2,257		2,430		7,114		7,597
Total revenues		201,043		200,005		702,459		709,412

COSTS AND EXPENSES, NET
Cost of goods sold (exclusive of depreciation shown below)		128,787		130,399		430,638		430,690
Selling, general and administrative (exclusive of depreciation
shown below)		61,032		58,252		179,386		178,828
Depreciation		5,459		5,346		16,344		16,859
Interest and other income		(723)		(814)		(2,328)		(2,705)
Cost and expenses, net		194,555		193,183		624,040		623,672

Income before income taxes		6,488		6,822		78,419		85,740

Income tax expense		1,603		2,153		27,920		32,016

Net income	$	4,885	$	4,669	$	50,499	$	53,724

Basic earnings per share	$	0.17	$	0.16	$	1.73	$	1.84

Diluted earnings per share	$	0.17	$	0.16	$	1.73	$	1.84

Dividends per share	$	0.05	$	0.25	$	0.15	$	0.73

Comprehensive income:
Net income	$	4,885	$	4,669	$	50,499	$	53,724
Unrealized gain (loss) on available-for-sale securities, net of
deferred income taxes of $188 and ($18) for the three and
nine months ended November 2, 2013 and ($47) and ($3) for
the three and nine months ended October 27, 2012, respectively		312		(78)		(30)		(5)
Comprehensive income	$	5,197	$	4,591	$	50,469	$	53,719

See notes to condensed consolidated financial statements (unaudited).

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THE CATO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



	November 2, 2013		February 2, 2013		October 27, 2012
	(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	74,055	$	31,069	$	53,075
Short-term investments		159,223		157,578		202,277
Restricted cash and investments		4,706		5,999		5,999
Accounts receivable, net of allowance for doubtful accounts of
$2,043, $2,053 and $2,050 at November 2, 2013, February 2, 2013
and October 27, 2012 respectively		41,156		40,016		42,790
Merchandise inventories		131,016		140,738		130,826
Deferred income taxes		4,649		4,631		3,583
Prepaid expenses		6,393		10,183		3,630
Total Current Assets		421,198		390,214		442,180
Property and equipment – net		142,991		134,227		130,635
Other assets		7,938		8,205		7,380
Total Assets	$	572,127	$	532,646	$	580,195
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	89,468	$	99,247	$	84,846
Accrued expenses		44,534		43,773		46,443
Accrued bonus and benefits		2,598		2,290		4,597
Accrued income taxes		15,593		14,292		9,999
Total Current Liabilities		152,193		159,602		145,885
Deferred income taxes		3,330		3,330		7,887
Other noncurrent liabilities (primarily deferred rent)		28,335		24,480		24,964

Commitments and contingencies:		-		-		-

Stockholders' Equity:
Preferred stock, $100 par value per share, 100,000 shares
authorized, none issued		-		-		-
Class A common stock, $.033 par value per share, 50,000,000
shares authorized; issued 27,515,706 shares, 27,543,376 shares
and 27,540,724 shares at November 2, 2013, February 2, 2013 and
October 27, 2012 respectively		917		918		918
Convertible Class B common stock, $.033 par value per share,
15,000,000 shares authorized; issued 1,743,525 shares at
November 2, 2013, February 2, 2013 and October 27, 2012		58		58		58
Additional paid-in capital		79,325		76,594		74,785
Retained earnings		307,178		266,843		324,767
Accumulated other comprehensive income		791		821		931
Total Stockholders' Equity		388,269		345,234		401,459
Total Liabilities and Stockholders’ Equity	$	572,127	$	532,646	$	580,195

See notes to condensed consolidated financial statements (unaudited).

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THE CATO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		Nine Months Ended
	November 2, 2013		October 27, 2012

		(Dollars in thousands)

Operating Activities:
Net income	$	50,499	$	53,724
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation		16,344		16,859
Provision for doubtful accounts		975		1,004
Share-based compensation		2,264		2,111
Excess tax benefits from share-based compensation		(38)		(146)
Loss on disposal and write-offs of property and equipment		1,532		806
Changes in operating assets and liabilities which provided
(used) cash:
Accounts receivable		(2,115)		(770)
Merchandise inventories		9,722		(444)
Prepaid and other assets		3,181		1,678
Accrued income taxes		1,339		(4,999)
Accounts payable, accrued expenses and other liabilities		(6,706)		(2,417)
Net cash provided by operating activities		76,997		67,406

Investing Activities:
Expenditures for property and equipment		(23,781)		(30,966)
Purchase of short-term investments		(15,731)		(104,497)
Sales of short-term investments		13,906		107,964
Change in restricted cash and investments		1,293		(674)
Net cash used in investing activities		(24,313)		(28,173)

Financing Activities:
Dividends paid		(4,390)		(21,346)
Repurchase of common stock		(5,783)		(361)
Proceeds from employee stock purchase plan		387		463
Excess tax benefits from share-based compensation		38		146
Proceeds from stock options exercised		50		47
Net cash used in financing activities		(9,698)		(21,051)

Net increase in cash and cash equivalents		42,986		18,182

Cash and cash equivalents at beginning of period		31,069		34,893
Cash and cash equivalents at end of period	$	74,055	$	53,075

Non-cash investing activity
Accrued plant and equipment	$	(5,678)	$	-

See notes to condensed consolidated financial statements (unaudited).

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2013 AND OCTOBER 27, 2012

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 three and nine month periods ended November 2, 2013 and October 27, 2012 are unaudited. In the opinion of management, all adjustments considered necessary for a fair statement 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 Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2013. Amounts as of February 2, 2013 have been derived from the audited balance sheet, but do not include all disclosures required by accounting principles generally accepted in the United States of America.

On November 26, 2013, the Board of Directors maintained the quarterly dividend at $0.05 per share. The Board of Directors previously accelerated the payment of the full fiscal year 2013 dividend of $1.00 on December 28, 2012 and increased the dividend $0.20 per share on an annualized basis during the first quarter.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2013 AND OCTOBER 27, 2012

NOTE 2 - EARNINGS PER SHARE:

ASC 260 – Earnings Per Share requires dual presentation of basic and diluted Earnings Per Share (“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 Condensed Consolidated Statements of Income and Comprehensive Income. While the Company’s certificate of incorporation provides 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 Company’s allocation of income for purposes of the 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 less earnings allocated to non-vested equity awards 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.

				Three Months Ended				Nine Months Ended
				November 2, 2013		October 27, 2012		November 2, 2013		October 27, 2012
		(Dollars in thousands)
Numerator
	Net earnings		$	4,885	$	4,669	$	50,499	$	53,724
	Earnings allocated to non-vested equity awards			(81)		(68)		(818)		(830)
	Net earnings available to common stockholders		$	4,804	$	4,601	$	49,681	$	52,894

Denominator
	Basic weighted average common shares outstanding			28,746,459		28,822,403		28,772,006		28,780,682
	Dilutive effect of stock options			7,860		3,875		5,309		3,779
	Diluted weighted average common shares outstanding			28,754,319		28,826,278		28,777,315		28,784,461

Net income per common share
	Basic earnings per share		$	0.17	$	0.16	$	1.73	$	1.84
	Diluted earnings per share		$	0.17	$	0.16	$	1.73	$	1.84

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2013 AND OCTOBER 27, 2012

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME:

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ending November 2, 2013:

	Changes in Accumulated Other
	Comprehensive Income (a)
			Unrealized Gains
			and (Losses) on
			Available-for-Sale
			Securities
Beginning Balance at August 3, 2013		$	479
Other comprehensive income before
reclassifications			294

Amounts reclassified from accumulated
other comprehensive income (b)			18

Net current-period other comprehensive income			312

Ending Balance at November 2, 2013		$	791

(a) All amounts are net-of-tax.
(b) Includes $29 impact of accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities. The tax impact of this reclassification was $11.

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the first nine months ending November 2, 2013:

	Changes in Accumulated Other
	Comprehensive Income (a)
			Unrealized Gains
			and (Losses) on
			Available-for-Sale
			Securities
Beginning Balance at February 2, 2013		$	821
Other comprehensive income before
reclassifications			11

Amounts reclassified from accumulated
other comprehensive income (b)			(41)

Net current-period other comprehensive income			(30)

Ending Balance at November 2, 2013		$	791

(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to OCI.
(b) Includes $47 impact of accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities. The tax impact of this reclassification was $25.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2013 AND OCTOBER 27, 2012

NOTE 4 – FINANCING ARRANGEMENTS:

As of November 2, 2013, the Company had an unsecured revolving credit agreement to borrow $35.0 million. During 2013, the revolving credit agreement was amended and extended to August 2015. 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 November 2, 2013. There were no borrowings outstanding under this credit facility during the periods ended November 2, 2013, February 2, 2013 or October 27, 2012. The weighted average interest rate under the credit facility was zero at November 2, 2013 due to no borrowings during the year.

At November 2, 2013, February 2, 2013 and October 27, 2012, the Company had approximately $0.6 million, $2.9 million and $3.3 million, respectively, of outstanding irrevocable letters of credit related to purchase commitments.

NOTE 5 – REPORTABLE SEGMENT INFORMATION:

The Company has determined that it has four operating segments, as defined under ASC 280-10, including Cato, It’s Fashion, Versona Accessories and Credit. As outlined in ASC 280-10, the Company has two reportable segments: Retail and Credit. The Company has aggregated its retail operating segments based on the aggregation criteria outlined in ASC 280-10, which states that two or more operating segments may be aggregated into a single reportable segment if aggregation is consistent with the objective and basic principles of ASC 280-10, if the segments have similar economic characteristics, similar product, similar production processes, similar clients and similar methods of distribution.

The Company’s retail operating segments have similar economic characteristics and similar operating, financial and competitive risks. They are similar in nature of product, as they all offer women’s apparel, shoes and accessories. Merchandise inventory of the Company’s operating segments is sourced from the same countries and some of the same vendors, using similar production processes. Clients of the Company’s operating segments have similar characteristics. Merchandise for the Company’s operating segments is distributed to retail stores in a similar manner through the Company’s single distribution center and is subsequently distributed to clients in a similar manner, through its retail stores.

The Company operates its women’s fashion specialty retail stores principally in the southeastern United States, and does business in 32 states as of November 2, 2013. The Company offers its own credit card to its customers and all credit authorizations, payment processing and collection efforts are performed by a separate subsidiary of the Company.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2013 AND OCTOBER 27, 2012

NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):

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

Three Months Ended				Nine Months Ended
November 2, 2013	Retail	Credit	Total	November 2, 2013	Retail	Credit	Total

Revenues	$ 199,540	$ 1,503	$ 201,043	Revenues	$ 697,782	$ 4,677	$ 702,459
Depreciation	5,451	8	5,459	Depreciation	16,314	30	16,344
Interest and other income	723	-	723	Interest and other income	2,328	-	2,328
Income before taxes	5,948	540	6,488	Income before taxes	76,756	1,663	78,419
Total assets	505,595	66,532	572,127	Total assets	505,595	66,532	572,127
Capital expenditures	13,087	88	13,175	Capital expenditures	23,693	88	23,781

Three Months Ended				Nine Months Ended
October 27, 2012	Retail	Credit	Total	October 27, 2012	Retail	Credit	Total

Revenues	$ 198,247	$ 1,758	$ 200,005	Revenues	$ 704,019	$ 5,393	$ 709,412
Depreciation	5,333	13	5,346	Depreciation	16,820	39	16,859
Interest and other income	814	-	814	Interest and other income	2,705	-	2,705
Income before taxes	6,153	669	6,822	Income before taxes	83,433	2,307	85,740
Total assets	503,110	77,085	580,195	Total assets	503,110	77,085	580,195
Capital expenditures	11,044	-	11,044	Capital expenditures	30,966	-	30,966

The Company evaluates segment 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				Nine Months Ended
		November 2, 2013		October 27, 2012		November 2, 2013		October 27, 2012

Bad debt expense	$	279	$	408	$	975	$	1,004
Payroll		231		231		696		676
Postage		179		170		558		555
Other expenses		266		267		755		812

Total expenses	$	955	$	1,076	$	2,984	$	3,047

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2013 AND OCTOBER 27, 2012

NOTE 6 – STOCK BASED COMPENSATION:

As of November 2, 2013, the Company had two long-term compensation plans pursuant to which stock-based compensation was outstanding or could be granted. The Company’s 1987 Non-Qualified Stock Option Plan is for the granting of options to officers and key employees and the 2013 Incentive Compensation Plan is for the granting of various forms of equity-based awards, including restricted stock and stock options for grant, to officers, directors and key employees. Effective May 23, 2013, shares for grant were no longer available under the 2004 Amended and Restated Incentive Compensation Plan.

The following table presents the number of options and shares of restricted stock initially authorized and available for grant under each of the plans as of November 2, 2013:

	1987	2004	2013
	Plan	Plan	Plan	Total
Options and/or restricted stock initially authorized	5,850,000	1,350,000	1,500,000	8,700,000
Options and/or restricted stock available for grant:
February 2, 2013	20,127	443,566	-	463,693
November 2, 2013	-	-	1,489,152	1,489,152

In accordance with ASC 718, the fair value of current restricted stock awards is estimated on the date of grant based on the market price of the Company’s stock and is amortized to compensation expense on a straight-line basis over the related vesting periods. As of November 2, 2013, February 2, 2013 and October 27, 2012, there was $9.1 million, $6.4 million and $7.0 million of total unrecognized compensation expense related to nonvested restricted stock awards, which have a remaining weighted-average vesting period of 2.8 years, 2.3 years and 2.5 years, respectively. The total fair value of the shares recognized as compensation expense during the three and nine months ended November 2, 2013 was $739,000 and $2,187,000, respectively, compared to $631,000 and $2,029,000, respectively, for the three and nine months ended October 27, 2012. These expenses are classified as a component of selling, general and administrative expenses in the Condensed Consolidated Statements of Income.

The following summary shows the changes in the shares of restricted stock outstanding during the nine months ended November 2, 2013:

			Weighted Average
	Number of		Grant Date Fair
	Shares		Value Per Share
Restricted stock awards at February 2, 2013	440,146	$	23.70
Granted	214,385		23.57
Vested	(121,692)		19.82
Forfeited or expired	(26,217)		24.70
Restricted stock awards at November 2, 2013	506,622	$	24.52

The Company’s Employee Stock Purchase Plan allows eligible full-time employees to purchase a limited number of shares of the Company’s Class A Common Stock during each semi-annual offering period at a 15% discount through payroll deductions. During the nine months ended November 2, 2013 and October 27, 2012, the Company sold 18,811 and 21,463 shares to employees at an average discount of $3.63 and $3.81 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 $68,000 and $82,000 for the nine months ended November 2, 2013 and October 27, 2012, respectively. These expenses are classified as a component of selling, general and administrative expenses.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2013 AND OCTOBER 27, 2012

The following is a summary of changes in stock options outstanding during the nine months ended November 2, 2013.

				Weighted
			Weighted	Average
			Average	Remaining		Aggregate
			Exercise	Contractual		Intrinsic
	Shares		Price	Term		Value(a)
Options outstanding at February 2, 2013	9,550	$	13.47	2.12 years	$	136,185
Granted	20,127		23.56
Forfeited or expired	-
Exercised	(2,800)		14.19
Outstanding at November 2, 2013	26,877	$	20.95	7.5 years	$	185,972
Vested and exercisable at November 2, 2013	6,750	$	13.17	0.7 years	$	99,225

(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.

During the first nine months of fiscal 2013, 20,127 options were granted. No options were granted in the first nine months of fiscal 2012.

The total intrinsic value of options exercised during the three and nine months ended November 2, 2013 was $4,000 and $32,000, respectively, compared to $23,000 and $73,000, respectively, for the three and nine months ended October 27, 2012.

The stock option expense was $4,000 and $9,000 for the three and nine months ended November 2, 2013, respectively, and zero for the three and nine months ended October 27, 2012.

Stock option awards outstanding under the Company’s current plans were granted at exercise prices which were equal to the market value of the Company’s stock on the date of grant, vest over five years and expire no later than ten years after the grant date.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2013 AND OCTOBER 27, 2012

NOTE 7 – FAIR VALUE MEASUREMENTS:

The following tables set forth information regarding the Company’s financial assets that are measured at fair value (in thousands) as of November 2, 2013, February 2, 2013 and October 27, 2012.

			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	November 2, 2013		Assets		Inputs		Inputs
Description	November 2, 2013		Level 1		Level 2		Level 3
Assets:
State/Municipal Bonds	$	158,996	$	-	$	158,996	$	-
Corporate Bonds		978		-		978		-
Auction Rate Securities (ARS)		3,450		-		-		3,450
U.S. Treasury Notes		3,404		3,404		-		-
Cash Surrender Value of Life Insurance		2,897		-		-		2,897
Privately Managed Funds		393		-		-		393
Corporate Equities		606		606		-		-
Certificates of Deposit		100		100		-		-
Total Assets	$	170,824	$	4,110	$	159,974	$	6,740

Liabilities:
Deferred Compensation		(3,043)		-		-		(3,043)
Total Liabilities	$	(3,043)	$	-	$	-	$	(3,043)

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2013 AND OCTOBER 27, 2012


			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
		February 2, 2013	Assets		Inputs		Inputs
Description		February 2, 2013	Level 1		Level 2		Level 3
Assets:
State/Municipal Bonds	$	151,377	$	-	$	151,377	$	-
Corporate Bonds		8,035		-		8,035		-
Auction Rate Securities (ARS)		3,450		-		-		3,450
U.S. Treasury Notes		3,906		3,906		-		-
Cash Surrender Value of Life Insurance		2,051		-		-		2,051
Privately Managed Funds		561		-		-		561
Corporate Equities		474		474		-		-
Certificates of Deposit		100		100		-		-
Total Assets	$	169,954	$	4,480	$	159,412	$	6,062

Liabilities:
Deferred Compensation		(2,178)		-		-		(2,178)
Total Liabilities	$	(2,178)	$	-	$	-	$	(2,178)

			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
		October 27, 2012	Assets		Inputs		Inputs
Description		October 27, 2012	Level 1		Level 2		Level 3

Assets:
State/Municipal Bonds	$	177,774	$	-	$	177,774	$	-
Corporate Bonds		15,414		-		15,414		-
Auction Rate Securities (ARS)		3,450		-		-		3,450
Variable Rate Demand Notes (VRDN)		10,495		10,495		-		-
U.S. Treasury Notes		3,203		3,203		-		-
Privately Managed Funds		767		-		-		767
Corporate Equities		462		462		-		-
Certificates of Deposit		100		100		-		-
Total Assets	$	211,665	$	14,260	$	193,188	$	4,217

Table of Contents

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2013 AND OCTOBER 27, 2012

The Company’s investment portfolio was primarily invested in corporate bonds and tax-exempt and taxable governmental debt securities held in managed accounts with underlying ratings of A or better at November 2, 2013, February 2, 2013 and October 27, 2012. These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted cash and investments and Other assets on the accompanying Condensed Consolidated Balance Sheets. These assets are carried at fair value with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income.

Additionally, at November 2, 2013, the Company had $0.4 million of privately managed funds, $0.6 million of corporate equities, a single auction rate security (“ARS”) of $3.5 million which continues to fail its auction, and deferred compensation plan assets of $2.9 million. At February 2, 2013, the Company had $0.6 million of privately managed funds, $0.5 million of corporate equities, a single ARS of $3.5 million and deferred compensation plan assets of $2.1 million. At October 27, 2012, the Company had $0.8 million of privately managed funds, $0.5 million of corporate equities and a single ARS of $3.5 million. All of these assets are recorded within Other assets in the Condensed Consolidated Balance Sheets.

Level 1 category securities are measured at fair value using quoted active market prices. Level 2 investment securities include corporate and municipal bonds for which quoted prices may not be available on active exchanges for identical instruments. Their fair value is principally based on market values determined by management with assistance of a third party pricing service. Since quoted prices in active markets for identical assets are not available, these prices are determined by the pricing service using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other factors.

The ARS of $3,450,000 par value was issued by the Wake County, NC Industrial Facilities & Pollution Control Financing Authority. The security is an obligation of Duke Energy Progress and has a credit rating of Aa3. The Company has collected all interest payments when due since the security was purchased and continues to expect that it will receive all interest due on the security in full and on a timely basis in the future.

The Company’s failed ARS is recorded at par value which approximates fair value using Level 3 inputs at each reporting period. Because there is no active market for this particular ARS, its fair value was determined to approximate par value based on an estimate of fair value through the use of a discounted cash flow analysis. The terms used in the analysis were based on management’s estimate of the timing of future liquidity, which assumes that the security will be called or refinanced by the issuer or settled with a broker dealer prior to maturity. The discount rates used in the discounted cash flow analysis were based on market rates for similar liquid tax exempt securities with comparable ratings and maturities. Due to the uncertainty surrounding the timing of future liquidity, the Company also considered a liquidity/risk value reduction. In estimating the fair value of this ARS, the Company also considered the financial condition and near-term prospects of the issuer, the probability that the Company will be unable to collect all amounts due according to the contractual terms of the security and whether the security has been downgraded by a rating agency. The Company’s valuation is sensitive to market conditions and management’s judgment and can change significantly based on the assumptions used.

The Company’s privately managed funds consist of two types of funds. The privately managed funds cannot be redeemed at net asset value at a specific date without advance notice. As a result, the Company has classified the investments as Level 3.

Table of Contents

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2013 AND OCTOBER 27, 2012

Deferred compensation plan assets consist of life insurance policies. These life insurance policies are valued based on the cash surrender value of the insurance contract, which is determined based on such factors as the fair value of the underlying assets and discounted cash flow and are therefore classified within level 3 of the valuation hierarchy. The level 3 liability associated with the life insurance policies represents a deferred compensation obligation, the value of which is tracked via underlying insurance funds. These funds are designed to mirror existing mutual funds and money market funds that are observable and actively traded. Cash surrender values are provided by third parties and reviewed for reasonableness by the Company.

The following tables summarize the change in fair value of the Company’s financial assets measured using Level 3 inputs as of November 2, 2013 and October 27, 2012 (in thousands):

Table of Contents

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2013 AND OCTOBER 27, 2012

		Fair Value Measurements Using Significant
		Unobservable Asset Inputs (Level 3)
	Available-For-Sale					Cash
	Debt Securities		Other Investments			Surrender
	ARS		Private Equity			Value	Total
Beginning Balance at February 2, 2013	$	3,450	$	561	$	2,051	$	6,062
Redemptions		-		(174)		-		(174)
Additions		-		-		705		705
Total gains or (losses)
Included in earnings (or changes in net assets)		-		7		141		148
Included in other comprehensive income		-		(1)		-		(1)
Ending Balance at November 2, 2013