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 August 1, 2015

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 August 1, 2015, there were 26,318,286 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 August 1, 2015

				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 Six Months Ended August 1, 2015 and August 2, 2014

	Condensed Consolidated Balance Sheets			3
		At August 1, 2015, January 31, 2015 and August 2, 2014

	Condensed Consolidated Statements of Cash Flows			4
		For the Six Months Ended August 1, 2015 and August 2, 2014

	Notes to Condensed Consolidated Financial Statements			5 – 16
		For the Three Months and Six Months Ended August 1, 2015 and August 2, 2014

	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	17 – 23

	Item 3.		Quantitative and Qualitative Disclosures About Market Risk	24

	Item 4.		Controls and Procedures	24

PART II – OTHER INFORMATION

	Item 1.		Legal Proceedings	25

	Item 1A.		Risk Factors	25

	Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	25

	Item 3.		Defaults Upon Senior Securities	25

	Item 4.		Mine Safety Disclosures	26

	Item 5.		Other Information	26

	Item 6.		Exhibits	26

	Signatures			27-31

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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			Six Months Ended
	August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014

		(Dollars in thousands, except per share data)
REVENUES
Retail sales	$	249,215	$	243,775	$	530,790	$	526,238
Other revenue (principally finance charges, late fees and
layaway charges)		2,054		2,283		4,378		4,553
Total revenues		251,269		246,058		535,168		530,791

COSTS AND EXPENSES, NET
Cost of goods sold (exclusive of depreciation shown below)		154,483		148,637		317,003		313,001
Selling, general and administrative (exclusive of depreciation
shown below)		67,111		68,332		135,695		135,819
Depreciation		5,554		5,424		10,928		10,875
Interest and other income		(834)		(1,099)		(1,402)		(1,841)
Cost and expenses, net		226,314		221,294		462,224		457,854

Income before income taxes		24,955		24,764		72,944		72,937

Income tax expense		9,361		9,113		26,267		27,279

Net income	$	15,594	$	15,651	$	46,677	$	45,658

Basic earnings per share	$	0.56	$	0.56	$	1.67	$	1.61

Diluted earnings per share	$	0.56	$	0.56	$	1.67	$	1.61

Dividends per share	$	0.30	$	0.30	$	0.60	$	0.60

Comprehensive income:
Net income	$	15,594	$	15,651	$	46,677	$	45,658
Unrealized gain (loss) on available-for-sale securities, net of
deferred income taxes of $58 and ($143) for the three and
six months ended August 1, 2015 and $53 and $21 for
the three and six months ended August 2, 2014, respectively		98		87		(234)		36
Comprehensive income	$	15,692	$	15,738	$	46,443	$	45,694

See notes to condensed consolidated financial statements (unaudited).

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THE CATO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



	August 1, 2015		January 31, 2015		August 2, 2014

ASSETS	(Dollars in thousands)
Current Assets:
Cash and cash equivalents	$	70,132	$	93,946	$	92,247
Short-term investments		213,848		162,185		158,198
Restricted cash and investments		4,472		4,479		4,692
Accounts receivable, net of allowance for doubtful accounts of
$1,535, $1,542 and $1,735 at August 1, 2015, January 31, 2015
and August 2, 2014, respectively		37,580		41,023		40,315
Merchandise inventories		123,195		137,549		116,026
Deferred income taxes		4,433		4,291		4,699
Prepaid expenses		9,678		10,978		7,271
Total Current Assets		463,338		454,451		423,448
Property and equipment – net		134,993		135,181		145,614
Noncurrent deferred income taxes		4,567		3,363		1,375
Other assets		20,506		15,283		9,674
Total Assets	$	623,404	$	608,278	$	580,111
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	100,642	$	111,674	$	86,302
Accrued expenses		50,429		48,404		47,735
Accrued bonus and benefits		6,141		19,567		11,416
Accrued income taxes		17,957		14,256		23,481
Total Current Liabilities		175,169		193,901		168,934
Other noncurrent liabilities (primarily deferred rent)		36,546		34,179		31,951

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 26,318,286 shares, 26,174,684 shares
and 26,175,776 shares at August 1, 2015, January 31, 2015 and
August 2, 2014, respectively		877		873		873
Convertible Class B common stock, $.033 par value per share,
15,000,000 shares authorized; issued 1,743,525 shares at
August 1, 2015, January 31, 2015 and August 2, 2014, respectively		58		58		58
Additional paid-in capital		87,405		85,029		82,612
Retained earnings		322,797		293,452		294,869
Accumulated other comprehensive income		552		786		814
Total Stockholders' Equity		411,689		380,198		379,226
Total Liabilities and Stockholders' Equity	$	623,404	$	608,278	$	580,111

See notes to condensed consolidated financial statements (unaudited).

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THE CATO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		Six Months Ended
	August 1, 2015		August 2, 2014

		(Dollars in thousands)

Operating Activities:
Net income	$	46,677	$	45,658
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation		10,928		10,875
Provision for doubtful accounts		498		548
Purchase premium and premium amortization of investments		(3,593)		399
Share-based compensation		1,996		1,750
Excess tax benefits from share-based compensation		(126)		(119)
Deferred income taxes		(1,204)		-
Loss on disposal and write-offs of property and equipment		123		178
Changes in operating assets and liabilities which provided
(used) cash:
Accounts receivable		2,945		(1,639)
Merchandise inventories		14,354		34,835
Prepaid and other assets		(1,296)		(1,438)
Accrued income taxes		3,827		8,745
Accounts payable, accrued expenses and other liabilities		(19,362)		(15,123)
Net cash provided by operating activities		55,767		84,669

Investing Activities:
Expenditures for property and equipment		(11,402)		(13,967)
Purchase of short-term investments		(78,776)		(21,430)
Sales of short-term investments		30,265		23,997
Purchase of Other Assets		(2,995)		(1,200)
Sales of Other Assets		268		69
Change in restricted cash and investments		7		8
Net cash used in investing activities		(62,633)		(12,523)

Financing Activities:
Dividends paid		(16,795)		(17,127)
Repurchase of common stock		(547)		(42,615)
Proceeds from employee stock purchase plan		268		297
Excess tax benefits from share-based compensation		126		119
Proceeds from stock options exercised		-		-
Net cash used in financing activities		(16,948)		(59,326)

Net increase/(decrease) in cash and cash equivalents		(23,814)		12,820

Cash and cash equivalents at beginning of period		93,946		79,427
Effect of exchange rate on cash		-		-
Cash and cash equivalents at end of period	$	70,132	$	92,247

Non-cash investing activity:
Accrued plant and equipment	$	(1,075)	$	(4,880)

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 SIX MONTHS ENDED AUGUST 1, 2015 AND AUGUST 2, 2014

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 August 1, 2015 and August 2, 2014 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 January 31, 2015. Amounts as of January 31, 2015 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.

During the first quarter of 2015, the Company determined that it had improperly calculated a long-term deferred tax liability in prior periods due to the inclusion of certain insurance premium amounts related to its captive insurance company. The Company recorded a favorable out of period adjustment during the three month period ended May 2, 2015 which resulted in a decrease in its long-term deferred tax liability by $1.2 million, decreased its Income tax expense by $1.0 million and increased its Accrued income taxes by $0.2 million. The Condensed Consolidated Statements of Income and Comprehensive Income, Balance Sheet and Statement of Cash Flows for the six months ended August 1, 2015 reflect the above amounts. The correction is not deemed material to prior period or current period consolidated financial statements.

The Company has changed the classification of certain items in its Consolidated Statements of Cash Flows to conform the August 2, 2014 presentation with our fiscal 2014 Form 10-K to show approximately $0.9 million of cash outflows related to the purchase and sale of other assets previously reported in operating activities as investing activities.

On August 27, 2015, the Board of Directors maintained the quarterly dividend at $0.30 per share.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2015 AND AUGUST 2, 2014

NOTE 2 - EARNINGS PER SHARE:

Accounting Standard Codification (“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				Six Months Ended
				August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014
		(Dollars in thousands)
Numerator
	Net earnings		$	15,594	$	15,651	$	46,677	$	45,658
	Earnings allocated to non-vested equity awards			(335)		(323)		(961)		(860)
	Net earnings available to common stockholders		$	15,259	$	15,328	$	45,716	$	44,798

Denominator
	Basic weighted average common shares outstanding			27,452,199		27,357,829		27,410,674		27,846,611
	Dilutive effect of stock options			5,739		2,516		5,916		1,654
	Diluted weighted average common shares outstanding			27,457,938		27,360,345		27,416,590		27,848,265

Net income per common share
	Basic earnings per share (Class A and B Shares)		$	0.56	$	0.56	$	1.67	$	1.61
	Diluted earnings per share (Class A and B Shares)		$	0.56	$	0.56	$	1.67	$	1.61

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2015 AND AUGUST 2, 2014

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 ended August 1, 2015:

	Changes in Accumulated Other
	Comprehensive Income (a)
			Unrealized Gains
			and (Losses) on
			Available-for-Sale
			Securities
Beginning Balance at May 2, 2015		$	454
Other comprehensive income before
reclassifications			102

Amounts reclassified from accumulated
other comprehensive income (b)			(4)

Net current-period other comprehensive income			98

Ending Balance at August 1, 2015		$	552

(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to Other Comprehensive Income.
(b) Includes ($6) 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 ($2).

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the six months ended August 1, 2015:

	Changes in Accumulated Other
	Comprehensive Income (a)
			Unrealized Gains
			and (Losses) on
			Available-for-Sale
			Securities
Beginning Balance at January 31, 2015		$	786
Other comprehensive income before
reclassifications			(382)

Amounts reclassified from accumulated
other comprehensive income (b)			148

Net current-period other comprehensive income			(234)

Ending Balance at August 1, 2015		$	552

(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to Other Comprehensive Income.
(b) Includes $236 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 $88.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2015 AND AUGUST 2, 2014

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED):

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended August 2, 2014:

	Changes in Accumulated Other
	Comprehensive Income (a)
			Unrealized Gains
			and (Losses) on
			Available-for-Sale
			Securities
Beginning Balance at May 3, 2014		$	727
Other comprehensive income before
reclassifications			213

Amounts reclassified from accumulated
other comprehensive income (b)			(126)

Net current-period other comprehensive income			87

Ending Balance at August 2, 2014		$	814

(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to Other Comprehensive Income.
(b) Includes $202 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 $76.

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the six months ended August 2, 2014:

	Changes in Accumulated Other
	Comprehensive Income (a)
			Unrealized Gains
			and (Losses) on
			Available-for-Sale
			Securities
Beginning Balance at February 1, 2014		$	778
Other comprehensive income before
reclassifications			181

Amounts reclassified from accumulated
other comprehensive income (b)			(145)

Net current-period other comprehensive income			36

Ending Balance at August 2, 2014		$	814

(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to Other Comprehensive Income.
(b) Includes $232 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 $87.

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2015 AND AUGUST 2, 2014

NOTE 4 – FINANCING ARRANGEMENTS:

As of August 1, 2015, the Company had an unsecured revolving credit agreement to borrow $35.0 million less the balance of any revocable letters of credit as discussed below. The revolving credit agreement is committed until August 2018. 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 August 1, 2015. There were no borrowings outstanding under this credit facility during the periods ended August 1, 2015, January 31, 2015 or August 2, 2014. The weighted average interest rate under the credit facility was zero at August 1, 2015 due to no borrowings during the year.

At August 1, 2015 and January 31, 2015, the Company had no outstanding revocable letters of credit relating to purchase commitments. At August 2, 2014 the Company had approximately $0.3 million of outstanding revocable 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 and Credit. As outlined in ASC 280-10, the Company has two reportable segments: Retail and Credit. The Company has aggregated its three retail operating segments, including e-commerce, 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, which require 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 for the Company’s retail operating segments is sourced from the same countries and some of the same vendors, using similar production processes. 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.

The Company operates its women’s fashion specialty retail stores in 32 states as of August 1, 2015, principally in the southeastern United States. 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 SIX MONTHS ENDED AUGUST 1, 2015 AND AUGUST 2, 2014

NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):

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

Three Months Ended				Six Months Ended
August 1, 2015	Retail	Credit	Total	August 1, 2015	Retail	Credit	Total

Revenues	$ 249,919	$ 1,350	$ 251,269	Revenues	$ 532,412	$ 2,756	$ 535,168
Depreciation	5,541	13	5,554	Depreciation	10,903	25	10,928
Interest and other income	(834)	-	(834)	Interest and other income	(1,402)	-	(1,402)
Income before taxes	24,479	476	24,955	Income before taxes	71,997	947	72,944
Total assets	554,375	69,029	623,404	Total assets	554,375	69,029	623,404
Capital expenditures	6,823	-	6,823	Capital expenditures	11,402	-	11,402

Three Months Ended				Six Months Ended
August 2, 2014	Retail	Credit	Total	August 2, 2014	Retail	Credit	Total

Revenues	$ 244,622	$ 1,436	$ 246,058	Revenues	$ 527,879	$ 2,912	$ 530,791
Depreciation	5,412	12	5,424	Depreciation	10,850	25	10,875
Interest and other income	(1,099)	-	(1,099)	Interest and other income	(1,841)	-	(1,841)
Income before taxes	24,188	576	24,764	Income before taxes	71,879	1,058	72,937
Total assets	513,174	66,937	580,111	Total assets	513,174	66,937	580,111
Capital expenditures	9,851	-	9,851	Capital expenditures	13,967	-	13,967

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				Six Months Ended
		August 1, 2015		August 2, 2014		August 1, 2015		August 2, 2014

Bad debt expense	$	239	$	240	$	498	$	548
Payroll		219		211		430		417
Postage		200		188		391		379
Other expenses		203		209		465		485

Total expenses	$	861	$	848	$	1,784	$	1,829

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2015 AND AUGUST 2, 2014

NOTE 6 – STOCK BASED COMPENSATION:

As of August 1, 2015, the Company had three 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. As of August 1, 2015, there were no available stock options for grant. The 2013 Incentive Compensation Plan and 2004 Amended and Restated Incentive Compensation Plan are 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 August 1, 2015:

	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:
January 31, 2015	-	-	1,287,396	1,287,396
August 1, 2015	-	-	1,128,599	1,128,599

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 August 1, 2015, January 31, 2015 and August 2, 2014, there was $14,528,000, $10,357,000 and $12,330,000 of total unrecognized compensation expense related to nonvested restricted stock awards, which had a remaining weighted-average vesting period of 3.1 years, 2.6 years and 3.1 years, respectively. The total fair value of the shares recognized as compensation expense during the three and six months ended August 1, 2015 was $1,319,000 and $1,940,000, respectively, compared to $1,183,000 and $1,689,000, respectively, for the three and six months ended August 2, 2014. 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 unvested restricted stock outstanding during the six months ended August 1, 2015:

			Weighted Average
	Number of		Grant Date Fair
	Shares		Value Per Share
Restricted stock awards at January 31, 2015	552,495	$	26.19
Granted	159,673		39.60
Vested	(87,130)		26.03
Forfeited or expired	(18,443)		27.92
Restricted stock awards at August 1, 2015	606,595	$	29.69

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THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2015 AND AUGUST 2, 2014

NOTE 6 – STOCK BASED COMPENSATION (CONTINUED):

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 six months ended August 1, 2015 and August 2, 2014, the Company sold 8,781 and 12,748 shares to employees at an average discount of $5.40 and $4.11 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 $47,000 and $52,000 for the six months ended August 1, 2015 and August 2, 2014, respectively. These expenses are classified as a component of Selling, general and administrative expenses.

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 August 1, 2015, January 31, 2015 and August 2, 2014:

			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	August 1, 2015		Assets		Inputs		Inputs
Description	August 1, 2015		Level 1		Level 2		Level 3
Assets:
State/Municipal Bonds	$	198,965	$	-	$	198,965	$	-
Corporate Bonds		15,010		-		15,010		-
U.S. Treasury Notes		3,004		3,004		-		-
Cash Surrender Value of Life Insurance		6,447		-		-		6,447
Privately Managed Funds		39		-		-		39
Corporate Equities		678		678		-		-
Certificates of Deposit		100		100		-		-
Total Assets	$	224,243	$	3,782	$	213,975	$	6,486

Liabilities:
Deferred Compensation		(6,143)		-		-		(6,143)
Total Liabilities	$	(6,143)	$	-	$	-	$	(6,143)

Table of Contents

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2015 AND AUGUST 2, 2014

			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
		January 31, 2015	Assets		Inputs		Inputs
Description		January 31, 2015	Level 1		Level 2		Level 3
Assets:
State/Municipal Bonds	$	148,650	$	-	$	148,650	$	-
Corporate Bonds		14,052		-		14,052		-
Auction Rate Securities (ARS)		-		-		-		-
U.S. Treasury Notes		3,758		3,758		-		-
Cash Surrender Value of Life Insurance		4,558		-		-		4,558
Privately Managed Funds		306		-		-		306
Corporate Equities		613		613		-		-
Certificates of Deposit		100		100		-		-
Total Assets	$	172,037	$	4,471	$	162,702	$	4,864

Liabilities:
Deferred Compensation		(4,272)		-		-		(4,272)
Total Liabilities	$	(4,272)	$	-	$	-	$	(4,272)

			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
		August 2, 2014	Assets		Inputs		Inputs
Description		August 2, 2014	Level 1		Level 2		Level 3

Assets:
State/Municipal Bonds	$	152,479	$	-	$	152,479	$	-
Corporate Bonds		6,452		-		6,452		-
Auction Rate Securities (ARS)		3,140		-		-		3,140
U.S. Treasury Notes		1,503		1,503		-		-
Cash Surrender Value of Life Insurance		3,812		-		-		3,812
Privately Managed Funds		324		-		-		324
Corporate Equities		606		606		-		-
Certificates of Deposit		100		100		-		-
Total Assets	$	168,416	$	2,209	$	158,931	$	7,276

Liabilities:
Deferred Compensation		(4,132)		-		-		(4,132)
Total Liabilities	$	(4,132)	$	-	$	-	$	(4,132)

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 August 1, 2015 and January 31, 2015 and Aa3 or better at August 2, 2014. The state, municipal and corporate bonds have contractual maturities which range from one month to 6.1 years. The U.S. Treasury Notes and Certificates of Deposit have contractual maturities which range from two months to 1.6 years. 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.

Table of Contents

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 1, 2015 AND AUGUST 2, 2014

Additionally, at August 1, 2015, the Company had $0.7 million of corporate equities and deferred compensation plan assets of $6.4 million. At January 31, 2015, the Company had $0.3 million of privately managed funds, $0.6 million of corporate equities and deferred compensation plan assets of $4.6 million. At August 2, 2014, the Company had $0.3 million of privately managed funds, a single auction rate security (“ARS”) of $3.1 million which was redeemed at par in the fourth quarter 2014, $0.6 million of corporate equities and deferred compensation plan assets of $3.8 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 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.

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 August 1, 2015 and August 2, 2014 (in thousands):

		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 January 31, 2015	$	-	$	306	$	4,558	$	4,864
Redemptions		-		(246)		-		(246)
Additions		-				1,668		1,668
Total gains or (losses)
Included in interest and other income (or changes in net assets)		-		-		221		221
Included in other comprehensive income		-		(21)		-		(21)
Ending Balance at August 1, 2015	$	-	$	39	$	6,447	$	6,486

	Fair Value Measurements Using Significant
	Unobservable Liability Inputs (Level 3)
	Deferred
	Compensation			Total
Beginning Balance at January 31, 2015	$	(4,272)	$	(4,272)
Additions		(1,692)		(1,692)
Total (gains) or losses
Included in interest and other income (or changes in net assets)		(179)		(179)
Included in other comprehensive income		-		-
Ending Balance at August 1, 2015	$	(6,143)	$	(6,143)


	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 1, 2014	$	3,140	$	392	$	2,957	$	6,489
Redemptions		-		(70)		-		(70)
Additions						753		753
Total gains or (losses)
Included in interest and other income (or changes in net assets)		-		2		102		104
Included in other comprehensive income		-		-				-
Ending Balance at August 2, 2014	$	3,140	$	324	$	3,812	$	7,276


	Fair Value Measurements Using Significant