DILLARD'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Dillard’s, Inc.(the “Company”) have been
prepared in accordance with accounting principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. Certain prior period balances have been reclassified to
conform with current period presentation. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. Operating results for the
three, six and twelve month periods ended August 3, 2002 are not necessarily indicative of the results that may
be expected for the fiscal year ending February 1, 2003, due to the seasonal nature of the business.
For further information, refer to the consolidated financial statements and footnotes thereto included in the
Company’s annual report on Form 10-K for the fiscal year ended February 2, 2002.
Note 2. Earnings Per Share Data
The following table sets forth the computation of basic and diluted earnings per share ("EPS") for the periods indicated (in
thousands, except per share data).
Three Months Ended Six Months Ended Twelve Months Ended
------------------------ ------------------------- -------------------------
August 3, August 4, August 3, August 4, August 3, August 4,
2002 2001 2002 2001 2002 2001
------------------------ ------------------------- -------------------------
Basic:
Earnings (loss) before extraordinary
item and accounting change $ 12,501 $ (20,568) $ 70,265 $5,266 $130,785 $45,313
Extraordinary gain (loss) (5,835) 1,963 (5,487) 5,122 (4,597) 28,042
Cumulative effect of accounting change - - (530,331) - (530,331) -
------------------------ ------------------------- -------------------------
Net earnings (loss) available for
per-share calculations $ 6,666 $ (18,605) $(465,553) $10,388 $(404,143) $73,355
======================== ========================= =========================
Average shares of common stock
outstanding 84,597 83,790 84,349 84,312 84,038 86,230
======================== ========================= =========================
Per share of common stock:
Earnings (loss) before extraordinary
item and accounting change $ 0.15 $ (0.24) $ 0.83 $ 0.06 $ 1.56 $ 0.52
Extraordinary gain (loss) (0.07) 0.02 (0.07) 0.06 (0.06) 0.33
Cumulative effect of accounting change - - (6.28) - (6.31) -
------------------------ ------------------------- -------------------------
Net income (loss) $ 0.08 $ (0.22) $ (5.52) $ 0.12 $ (4.81) $ 0.85
======================== ========================= =========================
Three Months Ended Six Months Ended Twelve Months Ended
------------------------ ------------------------- -------------------------
August 3, August 4, August 3, August 4, August 3, August 4,
2002 2001 2002 2001 2002 2001
------------------------ ------------------------- ------------------------
Diluted:
Earnings (loss) before extraordinary
item and accounting change $ 12,501 $ (20,568) $ 70,265 $5,266 $130,785 $45,313
Extraordinary gain (loss) (5,835) 1,963 (5,487) 5,122 (4,597) 28,042
Cumulative effect of accounting change - - (530,331) - (530,331) -
------------------------ ------------------------- ------------------------
Net earnings (loss) available for
per-share calculations $ 6,666 $ (18,605) $(465,553) $10,388 $(404,143) $73,355
======================== ========================= ========================
Average shares of common stock 84,597 83,790 84,349 84,312 84,038 86,230
outstanding
Stock options 1,223 - 1,055 538 725 297
------------------------ ------------------------- ------------------------
Total average equivalent shares 85,820 83,790 85,404 84,850 84,763 86,527
======================== ========================= ========================
Per share of common stock:
Earnings (loss) before extraordinary
Item and accounting change $ 0.15 $ (0.24) $ 0.82 $ 0.06 $ 1.54 $ 0.52
Extraordinary gain (loss) (0.07) 0.02 (0.06) 0.06 (0.05) 0.33
Cumulative effect of accounting change - - (6.21) - (6.26) -
------------------------ ------------------------- ------------------------
Net income (loss) $ 0.08 $ (0.22) $ (5.45) $ 0.12 $ (4.77) $ 0.85
======================== ========================= ========================
Total stock options outstanding were 11,401,725 and 11,525,335 at August 3, 2002 and August 4, 2001. Of these, options to
purchase 4,132,032 and 8,944,185 shares of Class A common stock at prices ranging from $24.01 to $40.22 and $18.13 to $40.22
per share were outstanding at August 3, 2002 and August 4, 2001, respectively, but were not included in the computation of
diluted earnings per share because they would be antidilutive. No stock options were included for the three months ended
August 4, 2001 computation of diluted earnings per share because they would be antidilutive due to the loss before
extraordinary item.
Note 3. Note Repurchase and Mortgage
During the quarter ended August 3, 2002, the Company repurchased $67.1 million of its outstanding unsecured notes
prior to their related maturity dates. During the six months ended August 3, 2002, the Company repurchased $73.2 million
of its outstanding unsecured notes prior to their related maturity dates. During the quarter ended August 3, 2002,
the Company also retired the remaining $143 million of its 6.31% Reset Put Securities (“REPS”) due August 1, 2012
prior to their maturity dates. Interest rates on the repurchased securities ranged from 6.13% to 9.50%. Maturity dates ranged
from 2002 to 2028. In connection with these transactions, the Company recorded after tax extraordinary losses during the
three and six months ended August 3, 2002 of $5.8 million (net of income taxes of $3.3 million) and $5.5 million (net of income
taxes of $3.1 million), respectively.
During the quarter ended May 4, 2002, a joint venture of the Company borrowed $40 million. The mortgage note is non-recourse
with building, land and improvements of Sunrise Mall in Brownsville, Texas pledged as collateral. The variable rate mortgage note
pays interest only at the one month LIBOR plus 3% on a monthly basis with the entire unpaid principal balance due and payable
on May 4, 2004.
Note 4. Revolving Credit Agreement
During the quarter ended August 3, 2002, the Company completed the documentation process and closed on a new
$400 million revolving credit facility with Fleet Retail Finance Inc. (“Fleet”). Borrowings under the
facility accrue interest at Fleet’s Base Rate or the Eurodollar Rate plus 1.75%. The line of credit agreement
is secured by inventory of certain Company stores. The agreement expires on May 9, 2005.
Note 5. Accounts Receivable Securitization
The Company sold an additional $100 million in accounts receivable securitizations to third parties bringing the total
accounts receivable securitizations sold at August 3, 2002 to $400 million. The Company utilizes these securitizations
of its credit card receivable portfolio as a financing vehicle. The Company accounted for these transactions as off balance
sheet financing. In early May 2002, the Company amended its conduit financing agreement in a manner that prevented future
transfers of accounts receivable to its master trust from qualifying as a sale and thus receiving off balance sheet treatment.
The Company decided not to amend its agreements to allow continuing off balance sheet treatment, but to allow accounts receivable
and the related financing to be brought back onto the balance sheet. As a result of this decision, the Company
took a charge to its income statement in the amount of $3.2 million related to the amortization of the beneficial interests
recognized up front on the off balance sheet financing. The Company anticipates that an additional charge of $2.2 million will be
incurred in the third quarter of 2002. As a result, the Company put approximately $240 million of debt and the related asset on its
balance sheet as of August 3, 2002. An additional $160 million will be put on its balance sheet during the third quarter of 2002.
The Company has reclassified interest expense related to its accounts receivable securitizations from other revenue to interest
expense on its consolidated statements of operations for all periods presented.
Note 6. Goodwill
The Company adopted Statement of Financial Accounting Standards (“SFAS”)No. 142, “Goodwill and
Other Intangible Assets” effective February 3, 2002. It changes the accounting for goodwill from an amortization method
to an “impairment only” approach. Under SFAS No. 142, goodwill is no longer amortized but reviewed for impairment
annually or more frequently if certain indicators arise. The Company tested goodwill for impairment as of the adoption
date using the two-step process prescribed in SFAS No. 142. The Company identified its reporting units under SFAS No. 142 at
the store unit level. The fair value of these reporting units was estimated using the expected discounted future cash flows
and market values of related businesses, where appropriate.
Related to the 1998 acquisition of Mercantile Stores Company Inc., the Company had $570 million in goodwill recorded in its
consolidated balance sheet at the beginning of 2002. The Company completed the required impairment tests of goodwill in the
second quarter of 2002 and determined that $530 million of goodwill was impaired under the fair value test. This impairment
was the result of sequential periods of declining profits in certain of these reporting units. In accordance with SFAS No.142
and SFAS No.3, “Reporting Accounting Changes in Interim Financial Statements” (“SFAS No. 3”), when a transitional
impairment loss for goodwill (cummulative effect type accounting change) is measured in other than the first interim reporting
period it shall be recognized in the first iterim period irrespective of the period in which it is measured. The impact on income
and earnings per share (“EPS”) for the three-months ended May 4, 2002 is as follows (dollars in thousands):
Net income(loss) Basic EPS Diluted EPS
---------------- ----------- -------------
Reported net income $ 58,112 $ 0.69 $ 0.68
Less: Impairment charge 530,331 (6.30) (6.24)
---------------- ----------- -------------
Adjusted net loss $(472,219) $(5.61) $(5.56)
================ =========== =============
The changes in the carrying amount of goodwill for the six months ended August 3, 2002 are as follows (in thousands):
Goodwill balance at February 2, 2002 $569,545
Cumulative effect of adopting SFAS No. 142 (530,331)
--------------
Goodwill balance at August 3, 2002 $39,214
==============
The application of the nonamortization provisions of this statement resulted in an increase in net income of approximately
$3.9 million ($.05 per fully diluted share) and $7.8 million ($.09 per fully diluted share) during the three and six
months ended August 3, 2002, respectively. Application of the nonamortization provisions of this statement is expected to result
in an increase in net income of approximately $15.6 million ($.18 per fully diluted share) during the 52 weeks ended
February 1, 2003.
The following pro forma financial information is presented as if the statement was adopted at February 4, 2001(in thousands,
except per share amounts):
Three Months Ended Six Months Ended Twelve Months Ended
-------------------------- ---------------------------- ---------------------------
August 3, August 4, August 3, August 4, August 3, August 4,
2002 2001 2002 2001 2002 2001
------------ ------------- --------------- ------------ ------------- -------------
Reported net income (loss) $6,666 $(18,605) $(465,553) $10,388 $(404,143) $73,355
Add back:
Goodwill amortization - 3,901 - 7,802 7,802 15,731
------------ ------------- -------------- ------------- ------------- -------------
Pro forma net income (loss) $6,666 $(14,704) $(465,553) $18,190 $(396,341) $89,086
============ ============= ============== ============= ============= =============
Net income (loss) per share
reported - basic $0.08 $(0.22) $(5.52) $0.12 $(4.81) $0.85
Goodwill amortization - 0.05 - 0.09 0.09 0.18
------------ ------------- -------------- ------------- ------------- -------------
Pro forma net income (loss) per
share - basic $0.08 $(0.17) $(5.52) $0.21 $(4.72) $1.03
============ ============= ============== ============= ============= =============
Net income (loss) per share
reported - diluted $0.08 $(0.22) $(5.45) $0.12 $(4.77) $0.85
Goodwill amortization - 0.05 - 0.09 0.09 0.18
------------ ------------- -------------- ------------- ------------- -------------
Pro forma net income (loss) per
share - diluted $0.08 $(0.17) $(5.45) $0.21 $(4.68) $1.03
============ ============= ============== ============= ============= =============
Note 7. Asset Impairment and Store Closing Charges
For the three months ended August 3, 2002, the Company recorded a pre-tax net gain of $.9 million for asset impairment and
store closing charges. The Company recorded $7.1 million of asset impairment and store closing charges related to six
stores and received forgiveness of a lease obligation of $8.0 million in connection with the sale of a closed owned store in
Memphis, Tennessee in satisfaction of that obligation.
Note 8. Recently Issued Accounting Standards
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 addresses the accounting and reporting for the impairment or disposal of long-lived assets. The statement provides a
single accounting model for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset
held-for-sale. This statement also focuses on reporting the effects of a disposal of a segment of a business. This
statement was effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 as of February
3, 2002, and the adoption did not have a material impact on the Company's financial position or results of operations.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS No. 145") was issued. SFAS No. 145 rescinds SFAS No. 4 and 64, which required gains and
losses from extinguishments of debt to be classified as extraordinary items. SFAS No. 145 amends SFAS No. 13 eliminating
inconsistencies in certain sale-leaseback transactions. The provisions of SFAS No. 145 are effective for fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in
prior periods presented shall be reclassified. The Company does not expect that the adoption of SFAS No. 145 will have a
material effect on the Company's financial position or results of operations.
In June 2002, SFAS No.146, Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146") was issued.
SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146 supercedes EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company has not yet determined the impact of this standard.
Item 2. Management's Discussion and Analysis of Financial
Condition And Results Of Operations
General
Net Sales. Net sales include sales of comparable stores, non-comparable stores and lease income on leased departments. Comparable
store sales include sales for those stores which were in operation for a full period in both the current month and the corresponding
month for the prior year. Non-comparable store sales include sales in the current fiscal year from stores opened during the previous
fiscal year before they are considered comparable stores, new stores opened in the current fiscal year and sales in the previous
fiscal year for stores that were closed in the current fiscal year.
Service charges, interest and other income. Service charges, interest and other income include interest and service charges, net of
service charge write-offs, related to the Company's proprietary credit card sales. Other income relates to joint ventures accounted
for by the equity method and gains (losses) on the sale of property and equipment.
Cost of sales. Cost of sales includes the cost of merchandise, bank card fees, freight to the distribution center, employee and
promotional discounts and payroll for salon personnel.
Advertising, selling, administrative and general expenses. Advertising, selling, administrative and general expenses include buying
and occupancy, selling, distribution, warehousing, store management and corporate expenses, including payroll and employee benefits,
insurance, employment taxes, advertising, management information systems, legal, bad debt costs and other corporate level expenses.
Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel.
Depreciation and amortization. Depreciation and amortization expenses include depreciation on property and equipment and
amortization of goodwill prior to February 3, 2002.
Rentals. Rentals include expenses for store leases and data processing equipment rentals.
Interest and debt expense. Interest and debt expense includes interest relating to the Company's unsecured notes, mortgage notes,
credit card securitizations, the Guaranteed Beneficial Interests in the Company's Subordinated Debentures, amortization of financing
intangibles and interest on capital lease obligations.
Asset impairment and store closing charges. Asset impairment and store closing charges consist of write downs to fair value of
under-performing stores including property and equipment and goodwill and exit costs associated with the closure of certain stores.
Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.
Extraordinary gain/loss. Extraordinary gain/loss consists of gains/losses on the repurchase of outstanding unsecured notes prior to
their related maturity dates net of the write-off of unamortized deferred financing costs relating thereto.
Critical Accounting Policies and Estimates
The Company's accounting policies are more fully described in Note 1of Notes to Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the fiscal year ended February 2, 2002. As disclosed in Note 1 of Notes to Consolidated Financial
Statements, the preparation of 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 consolidated financial statements and
accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results will differ
from those estimates. The Company evaluates its estimates and judgments on an on-going basis and predicates those estimates and
judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual
results may differ from these under different assumptions or conditions.
Management of the Company believes the following critical accounting policies, among others, affect its more significant judgments
and estimates used in preparation of the Consolidated Financial Statements.
Merchandise inventory. Approximately 97% of the inventories are valued at lower of cost or market using the retail last-in, first-out
("LIFO") inventory method. Under the retail inventory method ("RIM"), the valuation of inventories at cost and the resulting gross
margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. RIM is an averaging method
that has been widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of RIM will
result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of
inventories. Inherent in the RIM calculation are certain significant management judgments and estimates including, among others,
merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the
resulting gross margins. Management believes that the Company's RIM and application of LIFO provide an inventory valuation which
results in a carrying value at the lower of cost or market. The remaining 3% of the inventories are valued by the specific identified
cost method.
Allowance for doubtful accounts. The accounts receivable from the Company's proprietary credit card sales are subject to credit
losses. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to
make required payments. The adequacy of the allowance is based on historical experience with similar customers and current
macroeconomic conditions.
Long-lived assets and joint ventures. In evaluation of the fair value and future benefits of long-lived assets, the Company performs
an analysis of the anticipated undiscounted future net cash flows of the related long-lived assets. If the carrying value of the
related asset exceeds the undiscounted cash flows, the Company reduces the carrying value to its fair value, which is generally
calculated using discounted cash flows. Various factors including future sales growth and profit margins are included in this
analysis. To the extent these future projections or the Company's strategies change, the conclusion regarding impairment may differ
from the Company's current estimates. The Company's joint ventures are evaluated based on operating cash flows of the respective
malls. Future adverse changes to the Company's joint ventures, from changes in real estate values, demographics, or the introduction
of similar retail outlets into the joint ventures market, could result in losses or an inability to recover the carrying value of the
malls, thereby possibly causing an impairment charge in the future.
Results of Operations
The following table sets forth the results of operations, expressed as a percentage of net sales, for the periods indicated:
Three Months Ended Six Months Ended Twelve Months Ended
----------------------- -------------------------- ------------------------
August 3, August 4, August 3, August 4, August 3, August 4,
2002 2001 2002 2001 2002 2001
---------- ---------- ----------- ----------- ----------- ----------
Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 65.9 67.7 65.0 66.5 66.9 67.9
---------- ---------- ----------- ----------- ----------- ----------
Gross profit 34.1 32.3 35.0 33.5 33.1 32.1
Advertising, selling, administrative
and general expenses 29.2 29.4 28.2 28.8 26.6 26.7
Depreciation and amortization 4.2 4.2 4.1 4.1 3.8 3.6
Rentals 0.8 0.9 0.8 0.8 0.9 0.9
Interest and debt expense 2.6 2.8 2.5 2.6 2.3 2.6
Asset impairment and store closing charges (0.1) 0.1 0.0 0.1 0.0 0.7
---------- ---------- ----------- ----------- ----------- ----------
Total operating expenses 36.7 37.4 35.6 36.4 33.6 34.5
Service charges, interest and other income 3.7 3.3 3.5 3.2 3.1 3.1
---------- ---------- ----------- ----------- ----------- ----------
Income (loss) before income taxes 1.1 (1.8) 2.9 0.3 2.6 0.7
Income taxes (benefit) 0.4 (0.7) 1.0 0.1 1.0 0.1
---------- ---------- ----------- ----------- ----------- ----------
Income (loss) before extraordinary item
and accounting change 0.7 (1.1) 1.9 0.2 1.6 0.6
Extraordinary gain (loss) (0.3) 0.1 (0.2) 0.1 (0.1) 0.3
Cumulative effect of accounting change - - (14.2) - (6.5) -
---------- ---------- ----------- ----------- ----------- ----------
Net income (loss) 0.4 % (1.0) % (12.5) % 0.3 % (5.0) % 0.9 %
========== ========== =========== =========== =========== ==========
Net Sales
Net sales decreased 1% for the three and six month periods ended August 3, 2002 compared to the three and six month periods ended
August 4, 2001. This decrease was primarily due to decreases in comparable store sales of 1% for the six month period ended August
3, 2002 compared to the same period in 2001 and a net decrease in total store square footage from 2002 to 2001. The best performing
merchandise categories for the three month period were women's and juniors'clothing and children's clothing, which increased 3% and
4%, respectively. Home and men's clothing and decreased 7% and 5%, respectively, for the three month period ended August 3, 2002.
Sales declined in all merchandising categories but women's and juniors'clothing and children's clothing for the six month period
ended August 3, 2002. The weakest performing merchandise categories were home and men's clothing, which declined 4% and 3%,
respectively. Net sales declined 3% for the twelve month period ended August 3, 2002 compared to the same period in 2001.
Cost of Sales
Cost of sales, as a percentage of net sales, decreased to 65.9% for the quarter ended August 3, 2002, from 67.7% for the quarter
ended August 4, 2001. The reduction of 180 basis points in cost of sales for the three months ended August 3, 2002, is attributable
to a higher level of initial markups and an improved merchandise mix, partially offset by a higher level of markdowns. Comparable
store inventories decreased by 8% from last year's second quarter following a 6% decline from the second quarter of 2000.
Cost of sales, as a percentage of net sales, for the six months ended August 3, 2002 and August 4, 2001 was 65.0% and 66.5%,
respectively, with the decrease due to the factors discussed above.
Advertising, Selling, Administrative and General Expenses
Advertising, Selling, Administrative and General (“SG&A”) expenses, as a percentage of net sales,
decreased to 29.2% for the quarter ended August 3, 2002 from 29.4% for the quarter ended August 4, 2001. The decrease
in SG&A expenses, as a percent of net sales, is due to significant savings in payroll and services
partially offset by rising health care, worker’s compensation and insurance premiums and higher credit losses
related to the Company’s proprietary credit card resulting from increased bankruptcy levels.
The comparable relationship between SG&A expenses and net sales for the six months ended August 3,
2002 and August 4, 2001, respectively, was 28.2% and 28.8%, with the decrease due to the factors discussed above.
Depreciation and Amortization Expense
Depreciation and amortization expense, as a percentage of net sales, was flat for the three and six month periods ended August 3,
2002 compared to similar periods in 2001. Depreciation expense, which was offset by no goodwill amortization during 2002, increased
due primarily to new asset additions as well as increased expenditures in technology, which is depreciated at a more rapid rate. The
three and six month periods ended August 4, 2001 contained an additional $3.9 million and $7.8 million in goodwill amortization,
respectively. Goodwill is no longer amortized subsequent to the adoption of SFAS No. 142 on February 3, 2002.
Rentals
Rental expense, as a percentage of net sales, for the three, six and twelve month periods ended August 3, 2002 was .8% .8% and .9%,
respectively, compared to .9%, .8% and .9%, respectively, for the three, six and twelve month periods ended August 4, 2001.
Interest and Debt Expense
Interest and debt expense, as a percentage of net sales, was 2.6% and 2.5% for the three and six month period ended August 3, 2002
compared to 2.8% and 2.6% for three and six month periods in 2001. Interest and debt expense was $46.9 and $92.2 million for the
three and six month periods ended August 3, 2002 compared with $51.0 and $102.1 million for the similar periods in 2001. This
reduction is due primarily to a decrease of approximately $360 million in the average amount of outstanding debt, excluding debt
associated with the accounts receivable securitizations, in the six month period of 2002 compared to the six month period in 2001 and
to a reduction in short term interest rates from last year.
Interest and debt expense, as a percentage of net sales, decreased to 2.3% for the twelve month period ended August 3, 2002 from 2.6%
for the twelve month period ended August 4, 2001.
The Company has reclassified interest expense related to its accounts receivable securitizations from other revenue to interest
expense on its consolidated statements of operations for all periods presented.
Asset Impairment and Store Closing Charges
For the three months ended August 3, 2002, the Company recorded a pre-tax net gain of $.9 million for asset
impairment and store closing charges. The Company recorded $7.1 million of assetimpairment and store closing
charges related to six stores and received forgiveness of a lease obligation of $8.0 million in connection with
the sale of a closed owned store in Memphis, Tennessee in satisfaction of that obligation. For the three months
ended August 4, 2001, the Company recorded pre-tax charges of $2.0 million for asset impairment and store closing costs.
Service Charges, Interest and Other Income
Service charges, interest and other income, as a percentage of net sales, was 3.7% and 3.5% for the three
months and six months ended August 3, 2002 compared to 3.3% and 3.2% for the three and six month periods in 2001.
Service charges, interest and other income for the three months ended August 3, 2002 increased to $67.8 million
from $60.3 million for the three months ended August 4, 2001. Service charges, interest and other income for the
six months ended August 3, 2002 increased to $131.2 million from $120.5 million for the six months ended August 4, 2001.
This increase is due to an increase in the average amount of outstanding trade accounts receivable of approximately
$100 million during 2002 compared to 2001.
Income Taxes
The actual federal and state income tax rates for the three and six month period ended August 3, 2002 and August 4, 2001 was 36%,
exclusive of the nondeductible goodwill amortization in 2001. The Company's actual federal and state income tax rate (exclusive of
the effect of nondeductible goodwill amortization) was reduced from 37% in fiscal 1999 to 36% in fiscal 2000. The effect of these
reduced rates on the Company's deferred income taxes was to reduce the income tax provision by $16 million for the twelve month
period ended August 4, 2001.
Extraordinary Gain/Loss
For the three and six month period ended August 3, 2002, the Company recorded extraordinary losses of $5.8 million and $5.5 million
related to the repurchase of $67.1 million and $73.2 million of its outstanding unsecured notes and the retirement of $143 million of
its 6.31% REPS prior to their related maturity dates. For the three and six month period ended August 4, 2001, the Company recorded
extraordinary gains of $2.0 million and $5.1 million related to the repurchase $31.3 million and $62.1 million of its outstanding
unsecured notes prior to their related maturity dates.
Accounting Change
For the six months ended August 3, 2002, the Company recorded a non-cash charge of $530 million for the write-off of goodwill in
accordance with the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets". The Company tested its goodwill for impairment
using the two-step process prescribed in SFAS No. 142. The fair value of the Company's reporting units was estimated using the
expected discounted future cash flows and market values of related businesses, where appropriate. The Company completed the required
impairment tests of goodwill in the second quarter of 2002 and determined that $530 million of goodwill was impaired under the fair
value test. In accordance with SFAS No.142, the Company will restate its results for the first quarter ended May 4, 2002 to reflect
the resulting $530 million non-cash goodwill impairment charge as a cumulative effect of a change in accounting principle.
Financial Condition
Cash provided by operating activities totaled $163.7 million and $195.8 million for the six months ended August 3, 2002 and August 4,
2001, respectively. The decrease in cash provided by operating activities is due primarily to a $42.7 million decrease in accounts
payable from year end levels compared to a $120.5 million increase in accounts payable from prior year end levels partially offset by
smaller increases in merchandise inventories from the year end levels, as well as greater income before extraordinary item and
accounting change.
The Company invested $107.5 million in capital expenditures for the six months ended August 3, 2002 compared to $140.1 million for
the six months ended August 4, 2001.
During the six months ended August 3, 2002, the Company opened its newly constructed 98,000 square foot location at Prescott Gateway
in Prescott, Arizona and its 180,000 square foot replacement store at Lynnhaven Mall in Virginia Beach, Virginia. The Company
anticipates opening an additional four new stores in 2002, resulting in an addition of approximately 516,000 square feet of retail
space net of replaced square footage. In addition, the Company opened two former Montgomery Ward store locations during the six
months and anticipates opening two more locations in fiscal 2002. The Company closed five store locations during the six months and
has announced the upcoming third quarter closing of two additional stores.
Cash used in financing activities totaled $90.6 million and $196.5 million for the six months ended August 3, 2002 and August 4,
2001, respectively. During the six months ended August 3, 2002, the Company issued $40 million of variable rate mortgage notes due
2004. The Company sold an additional $100 million in accounts receivable securitizations to third parties bringing the total
accounts receivable securitizations sold to $400 million. During the six months ended August 3, 2002 and August 4, 2001, the Company
reduced its level of outstanding debt by $221.1 million and $175.8 million, respectively.
During the six months ended August 4, 2001, the Company repurchased 1.3 million shares of Class A common stock for $22.3 million
under its existing $200 million share repurchase authorization. Approximately $75 million in share repurchase authorization remained
under this open-ended plan at August 3, 2002.
Management of the Company anticipates that it will be necessary to incur additional short term borrowings during periods of peak
working capital demand in the fourth quarter of 2002. Although the Company has an unused committed line of credit in the amount of
$400 million, management expects to accomplish these borrowings through available accounts receivable securitization facilities.
Other than peak working capital requirements, management believes that cash generated from operations will be sufficient to cover its
reasonably foreseeable working capital, capital expenditure, stock repurchase and debt service requirements. Depending on conditions
in the capital markets and other factors, the Company will from time to time consider the issuance of debt or other securities, or
other possible capital market transactions, the proceeds of which could be used to refinance current indebtedness or other corporate
purposes.
New Accounting Standards
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
addresses the accounting and reporting for the impairment or disposal of long-lived assets. The statement provides a single
accounting model for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset held-for-sale.
This statement also focuses on reporting the effects of a disposal of a segment of a business. This statement was effective for
fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 as of February 3, 2002, and the adoption did not
have a material impact on the Company's financial position or results of operations.
In April 2002, Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145") was issued. SFAS No. 145 rescinds SFAS No. 4 and 64, which
required gains and losses from extinguishments of debt to be classified as extraordinary items. SFAS No. 145 also amends SFAS No. 13
eliminating inconsistencies in certain sale-leaseback transactions. The provisions of SFAS No. 145 are effective for fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior
periods presented shall be reclassified. The Company does not expect that the adoption of SFAS No. 145 will have a material effect
on the Company's financial position or results of operations.
In June 2002, SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146") was issued. SFAS No.
146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. SFAS No. 146 supercedes EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company has not yet determined the
impact of this standard.
Forward-Looking Information
Statements in the Management's Discussion and Analysis of Financial Condition and Results of Operations include certain
"forward-looking statements", including (without limitation) statements with respect to anticipated future operating and financial
performance, growth and acquisition opportunities and other similar forecasts and statements of expectation. Words such as
"expects," "anticipates," "plans," and "believes," and variations of these words and similar expressions, are intended to identify
these forward-looking statements. The Company cautions that forward-looking statements, as such term is defined in the Private
Securities Litigation Reform Act of 1995, contained in this report, the Company's annual report on Form 10-K or made by management
are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of
future performance. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence
of future events, the receipt of new information, or otherwise. Forward-looking statements of the Company involve risks and
uncertainties and are subject to change based on various important factors. Actual future performance, outcomes and results may
differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number
of risks, uncertainties and assumptions. Representative examples of those factors (without limitation) include general industry and
economic conditions; economic and weather conditions for regions in which the Company's stores are located and the effect of these
factors on the buying patterns of the Company's customers; changes in consumer spending patterns and debt levels; trends in personal
bankruptcies; the impact of competitive market factors and other economic and demographic changes of similar or dissimilar nature;
changes in operating expenses, including employee wages, commissions structures and related benefits; possible future acquisitions of
store properties from other department store operators and the continued availability of financing in amounts and at the terms
necessary to support the Company's future business.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
During the six months ended August 3, 2002, the Company repurchased $73.2 million of its outstanding unsecured notes prior to their
related maturity dates. During the quarter ended August 3, 2002, the Company also retired $143 million of its 6.31% Reset Put
Securities ("REPS") due August 1, 2012 prior to their maturity dates. Interest rates on the repurchased securities ranged from 6.13%
to 9.50%. Maturity dates ranged from 2002 to 2028.
Except as disclosed above, there have been no material changes in the information set forth under caption "Item 7A-Quantitative and
Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2002.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
NoneItem 2. Changes in Securities and Use of Proceeds
NoneItem 3. Defaults Upon Senior Securities
NoneItem 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of the Company was held on May 18, 2002. The matters submitted to a
vote of the stockholders were as follows:
Votes
Votes For Votes Against Abstained
------------------- ------------------------ ---------------
Election of Directors
Class A Nominees
Robert C. Connor 68,571,983 2,163,712 0
Will D. Davis 68,566,863 2,168,832 0
John Paul Hammerschmidt 68,548,080 2,187,615 0
John H. Johnson 68,565,590 2,170,105 0
Class B Nominees
Calvin N. Clyde, Jr. 3,994,068 0 0
Drue Corbusier 3,994,068 0 0
Alex Dillard 3,994,068 0 0
William Dillard, II 3,994,068 0 0
Mike Dillard 3,994,068 0 0
James I. Freeman 3,994,068 0 0
Warren A. Stephens 3,994,068 0 0
William H. Sutton 3,994,068 0 0
Item 5. Other Information
Ratio of Earnings to Fixed Charges:
The Company has calculated the ratio of earnings to fixed charges pursuant to Item 503 of Regulation S-K
of the Securities and Exchange Act as follows:
Six Months Ended Fiscal Year Ended
- ---------------------------- ----------------------------------------------------------------------------
August 3, August 4, February 2, February 3, January 29, January 30, January 31,
2002 2001 2002 2001* 2000 1999 1998
- -------------- ------------ ------------- -------------- --------------- -------------- --------------
2.05 1.05 1.48 1.54 2.04 1.97 3.69
============== ============ ============= ============== =============== ============== ==============
* 53 week year.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
12 Statement re: Computation of Earnings to Fixed Charges
99(a) Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
99(b) Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
(b) Reports of Form 8-K filed during the second quarter: None
SIGNATURES
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.
DILLARD'S, INC.
(Registrant)
DATE: September 17, 2002 /s/James I. Freeman
James I. Freeman
Senior Vice President & Chief Financial Officer
(Principal Financial & Accounting Officer)
CERTIFICATIONS
I, William Dillard, II, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dillard's, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this quarterly report.
Date: September 17, 2002
/s/ William Dillard, II
William Dillard, II
Chairman of the Board and Chief Executive Officer
I, James I. Freeman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dillard's, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this quarterly report.
Date: September 17, 2002
/s/ James I. Freeman
James I. Freeman
Senior Vice-President and Chief Financial Officer
EXPLANATORY NOTE REGARDING CERTIFICATIONS: Representations 4, 5 and 6 of the Certification as set forth in Form 10-Q have been
omitted, consistent with the Transition Provisions of SEC Exchange Act Release No. 34-46427, because this quarterly report on Form
10-Q covers a period ending before the Effective Date of Rules 13a-14 and 15d-14.
