UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number 1-6140
DILLARD'S, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 71-0388071
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
1600 CANTRELL ROAD, LITTLE ROCK, ARKANSAS 72201
(Address of principal executive office)
(Zip Code)
(501) 376-5200
(Registrant's telephone number, including area code)
Indicate by checkmark 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 time
that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No_
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule
12-b-2). Yes x No _
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the
latest practicable date.
CLASS A COMMON STOCK as of August 2, 2003 79,281,941
CLASS B COMMON STOCK as of August 2, 2003 4,010,929
Index
DILLARD'S, INC.
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets as of August 2, 2003, February 1, 2003 and August 3, 3
2002.
Consolidated Statements of Operations and Retained Earnings for the Three, Six and
Twelve Month Periods Ended August 2, 2003 and August 3, 2002. 4
Consolidated Statements of Cash Flows for the Six Months Ended August 2, 2003 and
August 3, 2002. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk. 19
Item 4. Controls and Procedures. 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 20
Item 2. Changes in Securities and Use of Proceeds. 20
Item 3. Defaults Upon Senior Securities. 20
Item 4. Submission of Matters to a Vote of Security Holders. 20
Item 5. Other Information. 21
Item 6. Exhibits and Reports on Form 8-K. 21
SIGNATURES 22
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements DILLARD'S, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in Thousands)
August 2, February 1, August 3,
2003 2003 2002
-------------------------------- -----------------
Assets
Current Assets:
Cash and cash equivalents $ 150,451 $ 142,356 $ 118,546
Accounts receivable, net 1,159,297 1,338,080 1,111,665
Merchandise inventories 1,742,148 1,594,308 1,696,035
Other current assets 40,715 55,507 18,791
-------------------------------- -----------------
Total current assets 3,092,611 3,130,251 2,945,037
Property and Equipment, net 3,248,255 3,370,502 3,376,382
Goodwill 39,214 39,214 39,214
Other Assets 126,270 135,965 227,178
-------------------------------- -----------------
Total Assets $6,506,350 $ 6,675,932 $6,587,811
================================ =================
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable and accrued expenses $ 764,890 $ 675,962 $ 752,637
Current portion of capital lease obligations 1,895 1,856 2,078
Current portion of long-term debt 135,621 138,814 89,665
Federal and state income taxes 14,942 69,829 20,505
-------------------------------- -----------------
Total current liabilities 917,348 886,461 864,885
Long-term Debt 2,019,438 2,193,006 2,193,181
Capital Lease Obligations 17,681 18,600 19,484
Other Liabilities 138,074 137,070 116,327
Deferred Income Taxes 669,881 645,020 660,397
Guaranteed Preferred Beneficial Interests in the
Company's Subordinated Debentures 531,579 531,579 531,579
Stockholders' Equity:
Common stock 1,167 1,167 1,166
Additional paid-in capital 711,351 711,324 704,970
Accumulated other comprehensive loss (4,496) (4,496) -
Retained earnings 2,172,897 2,205,674 2,145,295
Less treasury stock, at cost (668,570) (649,473) (649,473)
-------------------------------- -----------------
Total stockholders' equity 2,212,349 2,264,196 2,201,958
-------------------------------- -----------------
Total Liabilities and Stockholders' Equity $6,506,350 $6,675,932 $6,587,811
================================ =================
See notes to consolidated financial statements.
3
DILLARD'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
(Amounts in Thousands, Except Per Share Data)
Three Months Ended Six Months Ended Twelve Months Ended
----------------------------- --------------------------- ----------------------------
August 2, August 3, August 2, August 3, August 2, August 3,
2003 2002 2003 2002 2003 2002
-------------- -------------- ------------- ------------- ------------- -------------
Net Sales $1,721,485 $1,817,976 $3,535,396 $3,728,855 $7,717,537 $8,135,153
Service Charges, Interest and Other Income 58,842 67,765 136,257 131,160 328,040 255,404
-------------- -------------- ------------- ------------- ------------- -------------
1,780,327 1,885,741 3,671,653 3,860,015 8,045,577 8,390,557
Costs and Expenses:
Cost of sales 1,186,418 1,197,299 2,398,390 2,423,727 5,228,797 5,440,052
Advertising, selling, administrative
and general expenses 507,803 530,960 1,017,486 1,050,679 2,130,840 2,162,596
Depreciation and amortization 74,561 76,893 148,588 154,260 295,735 310,979
Rentals 13,789 15,003 27,959 30,225 65,835 71,425
Interest and debt expense 59,364 56,032 102,789 100,768 191,800 198,957
Asset impairment and store closing
charges 17,063 (862) 17,063 (862) 70,149 890
-------------- -------------- ------------- ------------- ------------- -------------
Total Costs and Expenses 1,858,998 1,875,325 3,712,275 3,758,797 7,983,156 8,184,899
-------------- -------------- ------------- ------------- ------------- -------------
Income (Loss) Before Income Taxes (78,671) 10,416 (40,622) 101,218 62,421 205,658
Income Taxes (Benefit) (28,325) 3,750 (14,625) 36,440 21,270 79,470
-------------- -------------- ------------- ------------- ------------- -------------
Income (Loss) Before Cumulative Effect (50,346) 6,666 (25,997) 64,778 41,151 126,188
of Accounting Change
Cumulative Effect of Accounting Change - - - (530,331) - (530,331)
-------------- -------------- ------------- ------------- ------------- -------------
Net Income (Loss) (50,346) 6,666 (25,997) (465,553) 41,151 (404,143)
Retained Earnings at Beginning
of Period 2,226,633 2,142,020 2,205,674 2,617,608 2,145,295 2,562,919
-------------- -------------- ------------- ------------- ------------- -------------
2,176,287 2,148,686 2,179,677 2,152,055 2,186,446 2,158,776
Cash Dividends Declared (3,390) (3,391) (6,780) (6,760) (13,549) (13,481)
-------------- -------------- ------------- ------------- ------------- -------------
Retained Earnings at End of Period $2,172,897 $2,145,295 $2,172,897 $2,145,295 $ 2,172,897 $ 2,145,295
============== ============== ============= ============= ============= =============
Basic Earnings (Loss) Per Share:
Income (Loss) Before Cumulative
Effect of Accounting Change $(0.60) $0.08 $(0.31) $ 0.77 $0.49 $ 1.50
Cumulative Effect of Accounting Change - - - (6.29) - (6.31)
-------------- -------------- ------------- ------------- ------------- -------------
Net Income (Loss) $(0.60) $0.08 $(0.31) $(5.52) $0.49 $(4.81)
============== ============== ============= ============= ============= =============
Diluted Earnings (Loss) Per Share:
Income (Loss) Before Cumulative
Effect of Accounting Change $(0.60) $0.08 $(0.31) $ 0.76 $0.49 $ 1.49
Cumulative Effect of Accounting Change - - - (6.21) - (6.26)
-------------- -------------- ------------- ------------- ------------- -------------
Net Income (Loss) $(0.60) $0.08 $(0.31) $(5.45) $0.49 $(4.77)
============== ============== ============= ============= ============= =============
Cash Dividends Declared Per Common Share $0.04 $0.04 $0.08 $0.08 $0.16 $0.16
See notes to consolidated financial statements.
4
DILLARD'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)
Six Months Ended
------------------------------
August 2, August 3,
2003 2002
--------------- --------------
Operating Activities:
Net loss $ (25,997) $ (465,553)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 152,128 155,755
Asset impairment and store closing charges 17,063 (862)
Provision for loan losses 18,908 12,747
Gain on sale of joint venture (15,624) -
Cumulative effect of accounting change - 530,331
Changes in operating assets and liabilities:
Decrease in accounts receivable, net 159,875 90,528
Increase in merchandise inventories and other current assets (133,893) (128,216)
Decrease in other assets 2,217 6,116
Increase (decrease) in trade accounts payable and accrued expenses,
other liabilities and income taxes 60,545 (37,187)
--------------- --------------
Net cash provided by operating activities 235,222 163,659
Investing Activities:
Net proceeds from sale of joint venture 34,579 -
Purchases of property and equipment (98,215) (107,500)
--------------- --------------
Net cash used in investing activities (63,636) (107,500)
Financing Activities:
Proceeds from long-term debt borrowings - 40,000
Principal payments on long-term debt and capital lease obligations (137,641) (229,687)
Proceeds from receivable financing, net - 100,000
Proceeds from issuance of common stock 27 5,874
Cash dividends paid (6,780) (6,760)
Purchase of treasury stock (19,097) -
--------------- --------------
Net cash used in financing activities (163,491) (90,573)
Increase (Decrease) in Cash and Cash Equivalents 8,095 (34,414)
Cash and Cash Equivalents, Beginning of Period 142,356 152,960
--------------- --------------
Cash and Cash Equivalents, End of Period $ 150,451 $ 118,546
=============== ==============
See notes to consolidated financial statements.
5
| 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, each as promulgated under the Securities Exchange Act of 1934, as amended. 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 to current period presentation and to reflect the adoption of certain new accounting standards as discussed in Note 11. 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 2, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2004 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 1, 2003. |
| The Company periodically grants stock options to employees. Pursuant to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” the Company accounts for stock-based employee compensation arrangements using the intrinsic value method. Accordingly, no compensation expense has been recorded in the consolidated financial statements with respect to option grants. The Company has adopted only the disclosure provisions of SFAS No. 123, “Accounting for Stock Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure, an Amendment of FASB Statement No. 123". If compensation cost for the Company’s stock option plans had been determined in accordance with the fair value method prescribed by SFAS No. 123, the Company’s income before cumulative effect of accounting change would have been (in thousands, except per share data): |
Three Months Ended Six Months Ended Twelve Months Ended
August 2, August 3, August 2, August 3, August 2, August 3,
2003 2002 2003 2002 2003 2002
------------ ------------- ------------- ------------ ------------ -------------
Income (Loss) Before Cumulative Effect of
Accounting Change:
As reported $(50,346) $6,666 $(25,997) $64,778 $41,151 $126,188
Deduct: Total stock based employee
compensation expense determined under
fair value based method, net of taxes
(647) (4,840) (1,546) (6,016) (3,616) (8,882)
------------ ------------- ------------- ------------ ------------ -------------
Pro forma $(50,993) $1,826 $(27,543) $58,762 $37,535 $117,306
============ ============= ============= ============ ============ =============
Basic Earnings Per Share:
As reported $(0.60) $0.08 $(0.31) $0.77 $0.49 $1.50
Pro forma (0.61) 0.02 (0.33) 0.70 0.45 1.40
------------ ------------- ------------- ------------ ------------ -------------
Diluted Earnings Per Share:
As reported $(0.60) $0.08 $(0.31) $0.76 $0.49 $1.49
Pro forma (0.61) 0.02 (0.33) 0.69 0.44 1.38
------------ ------------- ------------- ------------ ------------ -------------
6
| The Company utilizes securitizations of its credit card receivable portfolio as a financing vehicle. The Company has historically accounted for these transactions as off-balance-sheet financing. However, in early May 2002, the Company amended its conduit financing agreement in a manner that prevented future transfers of accounts receivable from qualifying as a sale and thus receiving off-balance-sheet treatment. As a result of this decision, the Company records all financing through this facility on the balance sheet at August 2, 2003 of which $400 million is classified in long-term debt. During the quarter ended August 3, 2002, the Company placed $240 million of debt and the related asset on its balance sheet and took a charge to its income statement of $3.2 million. The charge was related to the amortization of the beneficial interests recognized upfront on the off-balance-sheet financing. The Company had $160 million of off-balance-sheet financing associated with its securitizations at August 3, 2002. The Company has reclassified $1.4 million and $6.8 million related to its receivable financing from other revenue to interest expense for the six and twelve months ended August 3, 2002, respectively. |
| 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. The cumulative effect of the accounting change as of February 3, 2002 was to decrease net income by $530 million. Financial statements for the quarter ended May 4, 2002 have been restated to reflect this change in accordance with SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. |
| The following adjusted 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 2, August 3, August 2, August 3, August 2, August 3,
2003 2002 2003 2002 2003 2002
------------ ------------- ------------ ------------- ------------ -------------
Reported net income (loss) $(50,346) $6,666 $(25,997) $(465,553) $41,151 $(404,143)
Cumulative effect of accounting change - - - 530,331 - 530,331
------------ ------------- ------------ ------------- ------------ -------------
Net income (loss) before the cumulative
effect of accounting change (50,346) 6,666 (25,997) 64,778 41,151 126,188
Add back:
Goodwill amortization - - - - - 7,802
------------ ------------- ------------ ------------- ------------ -------------
Adjusted net income (loss) $(50,346) $6,666 $(25,997) $64,778 $41,151 $133,990
============ ============= ============ ============= ============ =============
7
Net income (loss) per share reported - $(0.60) $0.08 $(0.31) $(5.52) $0.49 $(4.81)
basic
Cumulative effect of accounting change - - - 6.29 - 6.31
Goodwill amortization - - - - - 0.09
------------ ------------- ------------ ------------- ------------ --------------
Adjusted net income (loss) per share -
basic $(0.60) $0.08 $(0.31) $0.77 $0.49 $ 1.59
============ ============= ============ ============= ============ ==============
Net income (loss) per share reported - $(0.60) $0.08 $(0.31) $(5.45) $0.49 $ (4.77)
diluted
Cumulative effect of accounting change - - - 6.21 -
6.26
Goodwill amortization - - - - - 0.09
------------ ------------- ------------ ------------- ------------ --------------
Adjusted net income (loss) per share -
diluted $(0.60) $0.08 $(0.31) $0.76 $0.49 $ 1.58
============ ============= ============ ============= ============ ==============
| For the three months ended August 2, 2003, the Company repurchased approximately 294,000 shares of Class A Common Stock valued at approximately $3.8 million under its existing $200 million share repurchase authorization. During the six months ended August 2, 2003, the Company repurchased approximately 1.5 million shares of Class A common stock for $19.1 million. The Company’s board of directors authorized the program in May of 2000. Approximately $56 million in share repurchase authorization remained under this open-ended plan at August 2, 2003. |
| During the quarter ended August 2, 2003, the Company called the remaining $125.9 million of its 6.39% Reset Put Securities (“REPS”) due August 1, 2013 prior to their maturity dates. These notes were subject to mandatory repricing on August 1, 2003. A call premium of $15.6 million related to this early retirement is included in interest expense for the quarter ended August 2, 2003. During the quarter ended August 3, 2002, the Company repurchased $67.1 million of its outstanding unsecured notes prior to their related maturity dates and the Company also called the remaining $143 million of its 6.31% REPS due August 1, 2012 prior to their maturity dates. In connection with these transactions, the Company recorded interest expense for the three months ended August 3, 2002 of $9.1 million. Included in the $9.1 million reclassified loss is a call premium of $11.6 million related to the early retirement of $143 million 6.31% notes, partially offset by a gain on early extinguishment of debt during the second quarter of 2002. Interest rates on the repurchased securities was 6.39% and ranged from 6.13% to 9.50% for the quarters ended August 2, 2003 and August 3, 2002, respectively. The maturity date was 2013 for the quarter ended August 2, 2003 and ranged from 2002 to 2028 for the quarter ended August 3, 2002. |
| During the six months ended August 2, 2003, the Company repurchased $6.0 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. The loss for the quarter and six months ended August 3, 2002 has been reclassified to interest and debt expense from extraordinary loss as described in Note 11. |
| 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). |
8
Three Months Ended Six Months Ended Twelve Months Ended
------------------------ ------------------------- ---------------------------
August 2, August 3, August 2, August 3, August 2, August 3,
2003 2002 2003 2002 2003 2002
------------------------ ------------------------- ---------------------------
Basic:
Income (loss) before cumulative effect
of accounting change $(50,346) $ 6,666 $(25,997) $ 64,778 $41,151 $ 126,188
Cumulative effect of accounting change - - - (530,331) - (530,331)
------------------------ ------------------------- ---------------------------
Net income (loss) available for
per-share calculations $(50,346) $ 6,666 $(25,997) $(465,553) $41,151 $(404,143)
======================== ========================= ===========================
Weighted average shares of common
stock outstanding 83,417 84,597 83,951 84,349 84,314 84,038
======================== ========================= ===========================
Per Share of Common Stock:
Income (loss) before cumulative effect
of accounting change $ (0.60) $ 0.08 $ (0.31) $ 0.77 $ 0.49 $ 1.50
Cumulative effect of accounting change - - - (6.29) - (6.31)
------------------------ ------------------------- ---------------------------
Net income (loss) $ (0.60) $ 0.08 $ (0.31) $ (5.52) $ 0.49 $ (4.81)
======================== ========================= ===========================
Three Months Ended Six Months Ended Twelve Months Ended
------------------------ ------------------------- ---------------------------
August 2, August 3, August 2, August 3, August 2, August 3,
2003 2002 2003 2002 2003 2002
------------------------ -------------------------- --------------------------
Diluted:
Income (loss) before cumulative effect
of accounting change $(50,346) $ 6,666 $(25,997) $ 64,778 $41,151 $ 126,188
Cumulative effect of accounting change - - - (530,331) - (530,331)
------------------------ -------------------------- --------------------------
Net income (loss) available for
per-share calculations $(50,346) $ 6,666 $(25,997) $(465,553) $ 41,151 $(404,143)
======================== ========================== ==========================
Weighted average shares of common 83,417 84,597 83,951 84,349 84,314 84,038
stock outstanding
Stock options - 1,223 - 1,055 383 725
------------------------ -------------------------- --------------------------
Total weighted average equivalent
shares 83,417 85,820 83,951 85,404 84,697 84,763
======================== ========================== ==========================
Per Share of Common Stock:
Income (loss) before cumulative effect
of accounting change $ (0.60) $ 0.08 $ (0.31) $ 0.76 $ 0.49 $ 1.49
Cumulative effect of accounting change - - - (6.21) - (6.26)
------------------------ -------------------------- --------------------------
Net income (loss) $ (0.60) $ 0.08 $ (0.31) $ (5.45) $ 0.49 $ (4.77)
======================== ========================== ==========================
| Total stock options outstanding were 9,411,422 and 11,401,725 at August 2, 2003 and August 3, 2002. Of these, options to purchase 8,197,745 and 4,132,032 shares of Class A common stock at prices ranging from $15.74 to $40.22 and $24.01 to $40.22 per share were outstanding at August 2, 2003 and August 3, 2002, 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 and six months ended August 2, 2003 computation of diluted earnings per share because they would be antidilutive due to the loss before cumulative effect of accounting change. |
| Accumulated other comprehensive loss only consists of the minimum pension liability, which is calculated annually in the fourth quarter. The following table shows the computation of comprehensive income (in thousands): |
9
Three Months Ended Six Months Ended Twelve Months Ended
August 2, August 3, August 2, August 3, August 2, August 3,
2003 2002 2003 2002 2003 2002
------------ ------------- ------------- ------------- ------------ -------------
Net Income (Loss) $(50,346) $6,666 $(25,997) $(465,553) $41,151 $(404,143)
Other Comprehensive Loss:
Minimum pension liability
adjustment, net of taxes - - - - (4,496) -
------------ ------------- ------------- ------------- ------------ -------------
Total Comprehensive Income (Loss) $(50,346) $6,666 $(25,997) $(465,553) $36,655 $(404,143)
============ ============= ============= ============= ============ =============
|
Various
legal proceedings in the form of lawsuits and claims which occur in the normal course of
business are pending against the Company and its subsidiaries. In the opinion of
management, disposition of these matters is not expected to materially affect the
Company’s financial position, cash flows or results of operations. The Company has not provided any financial guarantees as of August 2, 2003. |
| During the quarter ended May 3, 2003, the Company sold its interest in the Sunrise Mall and its associated center in Brownsville, Texas for $80.7 million including the assumption of the $40.0 million mortgage note. The net assets, excluding the assumed debt, of the mall property were approximately $58.4 million and were included as a non-cash item in the consolidated statement of cash flows. The Company recorded a pretax gain of $15.6 million pertaining to the sale of its interest in Sunrise Mall for the three months ended May 3, 2003. The gain on the sale was recorded in Service Charges, Interest and Other Income. |
| During the quarter ended May 3, 2003, the Company recorded a $12.3 million pretax credit as a reduction of advertising, selling, administrative and general expenses due to the resolution of certain liabilities originally recorded in conjunction with the purchase of Mercantile Stores Company, Inc. |
| During the quarter ended August 2, 2003, the Company recorded $17.1 million for asset impairment and store closing charges related to seven stores. The charge consists of property and equipment write-downs to fair value for these underperforming stores and further deterioration of the estimated market value of certain assets held for sale. For the quarter ended August 3, 2002, the Company recorded a pre-tax net gain of $0.9 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. |
| In April 2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” 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 Company adopted the provisions of SFAS No. 145 as of February 2, 2003. For the three, six and twelve months ended August 3, 2002, as a result of adopting SFAS No. 145, the Company has reclassified $9,120,000, $8,577,000 and $7,177,000 ($5,835,000, $5,487,000 and $4,597,000 after-tax), respectively, to interest and debt expense from extraordinary loss. For the twelve months ended August 2, 2003, the Company has reclassified $1,740,000 ($1,113,000 after-tax) to interest and debt expense from extraordinary gain. |
10
| In March 2003, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) issued final transition guidance regarding accounting for vendor allowances in its Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor”. EITF Issue No. 02-16 addresses the accounting treatment for vendor allowances and stipulates that cash consideration received from a vendor should be presumed to be a reduction of the prices of the vendors’ product and should therefore be shown as a reduction in the purchase price of the merchandise. Further, these allowances should be recognized as a reduction in cost of sales when the related product is sold. To the extent that the cash consideration represents a reimbursement of a specific, incremental and identifiable cost, then those vendor allowances should offset such costs. The Company receives concessions from its vendors through a variety of programs and arrangements, including co-operative advertising and markdown reimbursement programs. Co-operative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurred. All other vendor allowances are recognized as a reduction of cost purchases. Accordingly, a reduction or increase in vendor concessions has an inverse impact on cost of sales and/or selling and administrative expenses. |
| The adoption of EITF Issue No. 02-16 in 2003 did not have a material impact on the Company’s financial position or results of operations. |
| In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This statement establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The statement will be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the period of adoption. We are still in the process of reviewing the possible impact of adopting this new statement. |
| FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of APB No. 50" (“FIN 46”) was issued in January 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company does not currently participate in any variable interest entities. |
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, sales from 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.
11
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, rental income, shipping and handling fees and gains (losses) on the sale of property and equipment and joint ventures.
Cost of sales. Cost of sales includes the cost of merchandise sold, bank card fees, freight to the distribution centers, employee and promotional discounts, non-specific vendor allowances and direct 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 receivables financing, the guaranteed beneficial interests in the Company’s subordinated debentures, gains and losses on note repurchases, 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.
Cumulative effect of accounting change. Effective February 3, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 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. The cumulative effect of the accounting change as of February 3, 2002 was to decrease net income for the six months and twelve months ended August 3, 2002 by $530 million or $6.21 and $6.26 per diluted share, respectively.
Critical Accounting Policies and Estimates
The Company’s accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003. As disclosed in this note, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 ongoing 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 will differ from these under different assumptions or conditions.
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Management of the Company believes the following critical accounting policies significantly affect its 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 uncollectible 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 including bankruptcy and write-off trends, current aging information and year-end balances. Management believes that the allowance for uncollectible accounts is adequate to cover anticipated losses in the reported credit card receivable portfolio under current conditions; however, significant deterioration in any of the above-noted factors or in the overall health of the economy could materially change these expectations.
Vendor Allowances. The Company receives concessions from its vendors through a variety of programs and arrangements, including co-operative advertising and markdown reimbursement programs. Co-operative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurred. All other vendor allowances are recognized as a reduction of cost purchases. Accordingly, a reduction or increase in vendor concessions has an inverse impact on cost of sales and/or selling and administrative expenses.
The Financial Accounting Standards Board’s Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting By A Customer (Including A Reseller) For Cash Consideration Received From A Vendor” addressed the accounting treatment for vendor allowances. The adoption of EITF Issue No. 02-16 in 2003 did not have a material impact on the Company’s financial position or results of operations.
Self insurance accruals. The Company purchases third-party insurance for workers’ compensation, automobile, product and general liability claims that exceed a certain level. However, the Company is responsible for the payment of claims below these insured limits. In estimating the obligation associated with incurred losses, the Company utilizes loss development factors. These development factors utilize historical data to project the future development of incurred losses. Loss estimates are adjusted based upon actual claims settlements and reported claims.
Finite-lived assets. In the evaluation of the fair value and future benefits of finite-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 carrying value is reduced to its fair value. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or our strategies change, the conclusion regarding impairment may differ from the current estimates.
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Goodwill. The Company evaluates goodwill annually or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flows. To the extent these future projections or our strategies change, the conclusion regarding impairment may differ from the current estimates.
Stock Options. The Compensation Committee of the Board of Directors periodically grants employees of the Company stock options. As allowed under GAAP, the Company does not record any compensation expense on the income statement with respect to options granted to employees. Alternatively, under GAAP, the Company could have recorded a compensation expense based on the fair value of employee stock options. As described in Note 2 in the consolidated financial statements, had the Company recorded a fair value-based compensation expense for stock options, diluted earnings per share would have been $0.01 and $0.06 less than what was reported for the three months ended August 2, 2003 and August 3, 2002, respectively, $0.02 and $0.07 less than what was reported for the six months ended August 2, 2003 and August 3, 2002, respectively, and $0.05 and $0.11 less than what was reported for the twelve months ended August 2, 2003 and August 3, 2002, respectively.
Income Taxes. The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires that deferred tax assets and liabilities be recognized using enacted rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities in the multiple taxing jurisdictions within which the Company operates. Future tax law changes may require adjustment to the Company’s existing tax assets and liabilities.
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 2, August 3, August 2, August 3, August 2, August 3,
2003 2002 2003 2002 2003 2002
---------- ---------- ----------- ----------- ----------- ----------
Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 68.9 65.9 67.8 65.0 67.8 66.9
---------- ---------- ----------- ----------- ----------- ----------
Gross profit 31.1 34.1 32.2 35.0 32.2 33.1
Advertising, selling, administrative
and general expenses 29.5 29.2 28.8 28.2 27.6 26.6
Depreciation and amortization 4.3 4.2 4.2 4.1 3.8 3.8
Rentals 0.8 0.8 0.8 0.8 0.9 0.9
Interest and debt expense 3.5 3.1 2.9 2.7 2.5 2.4
Asset impairment and store closing charges 1.0 (0.1) 0.5 0.0 0.9 0.0
---------- ---------- ----------- ----------- ----------- ----------
Total operating expenses 39.1 37.2 37.2 35.8 35.7 33.7
Service charges, interest and other income 3.4 3.7 3.9 3.5 4.3 3.1
---------- ---------- ----------- ----------- ----------- ----------
Income (loss) before income taxes (4.6) 0.6 (1.1) 2.7 0.8 2.5
Income taxes (benefit) (1.7) 0.2 (0.4) 1.0 0.3 0.9
---------- ---------- ----------- ----------- ----------- ----------
Income (loss) before accounting change (2.9) 0.4 (0.7) 1.7 0.5 1.6
Cumulative effect of accounting change - - - (14.2) - (6.6)
---------- ---------- ----------- ----------- ----------- ----------
Net income (loss) (2.9) % 0.4 % (0.7) % (12.5) % 0.5 % (5.0) %
========== ========== =========== =========== =========== ==========
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Net sales decreased 5% for the three and six month periods ended August 2, 2003 compared to the three and six month periods ended August 3, 2002. This decrease was primarily due to decreases in comparable store sales of 5% for the six month period ended August 2, 2003 compared to the same period in 2002. Sales were strongest in cosmetics and accessories, shoes and lingerie during the second quarter of 2003, with those areas performing above the Company average trend of a 5% decline for the period. Sales in the women’s and juniors’ categories were in line with the total Company sales performance. Sales were weakest in the home, men’s and children’s areas, with sales in children’s trending significantly below the average Company performance for the period. Net sales declined 5% for the twelve month period ended August 2, 2003 compared to the same period in 2002 as a result of comparable store sales declines.
Cost of sales, as a percentage of net sales, increased to 68.9% for the quarter ended August 2, 2003, from 65.9% for the quarter ended August 3, 2002. The increase of 300 basis points in cost of sales for the three months ended August 2, 2003, is attributable to continuing sales pressure experienced during the quarter, which necessitated the Company’s aggressive response to control inventory levels with increased markdown activity. Having entered the second quarter of 2003 with a comparable store inventory increase of 5%, and after realizing a comparable store sales decline of 5% during the second quarter, the Company managed inventory at August 2, 2003 to an increase of 3% compared to inventory at August 3, 2002.
Cost of sales, as a percentage of net sales, for the six months ended August 2, 2003 and August 3, 2002 was 67.8% and 65.0%, respectively, with the increase due to the factors discussed above.
Advertising, Selling, Administrative and General (“SG&A”) expenses declined $23.2 million for the quarter ended August 2, 2003 compared with the quarter ended August 2, 2003. The decrease was primarily driven by significant savings in payroll and advertising partially offset by increases in utilities and bad debt expense. Payroll and advertising expenses declined $11.7 million and $11.7 million, respectively, while utilities and bad debt expense increased $1.3 million and $2.7 million, respectively, during the second quarter of 2003. SG&A expenses as a percentage of net sales, increased to 29.5% for the quarter ended August 2, 2003 from 29.2% for the quarter ended August 3, 2002 due to a lack of sales leverage.
The comparable relationship between SG&A expenses and net sales for the six months ended August 2, 2003 and August 3, 2002, respectively, was 28.8% and 28.2%, with the increase due to the lack of sales leverage discussed above. SG&A expenses for the six months ended August 2, 2003 include a $12.3 million pretax credit recorded due to the resolution of certain liabilities originally recorded in conjunction with the purchase of Mercantile Stores Company, Inc.
Depreciation and amortization expense, as a percentage of net sales, increased to 4.3% for the quarter ended August 2, 2003 compared with 4.2% for the quarter ended August 3,2002. The percentage increase was due to a lack of sales leverage as depreciation and amortization expense decreased $2.3 million for the second quarter of 2003 compared with 2002. Depreciation and amortization expense, as a percentage of net sales, increased to 4.2% for the six months ended August 2, 2003 compared with 4.1% for the six months ended August 3,2002.
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Rental expense, as a percentage of net sales, for the three, six and twelve month periods ended August 2, 2003 was 0.8%, 0.8% and 0.9%, respectively, compared to 0.8%, 0.8% and 0.9%, respectively, for the three, six and twelve month periods ended August 3, 2002.
Interest and debt expense, as a percentage of net sales, was 3.5% and 2.9% for the three and six month periods ended August 2, 2003 compared to 3.1% and 2.7% for three and six month periods in 2002. Interest and debt expense was $59.4 million and $102.8 million for the three and six month periods ended August 2, 2003 compared with $56.0 million and $100.8 million for the similar periods in 2002. This increase is from the Company recording a call premium resulting in additional interest expense of $15.6 million for the second quarter of 2003 compared with a call premium of $11.6 million in the second quarter of 2002.
Interest and debt expense, as a percentage of net sales, increased to 2.5% for the twelve month period ended August 2, 2003 from 2.4% for the twelve month period ended August 3, 2002.
The Company adopted the provisions of SFAS No. 145 as of February 2, 2003. For the three, six and twelve months ended August 3, 2002, as a result of adopting SFAS No. 145, the Company has reclassified $9,120,000, $8,577,000 and $7,177,000, respectively, to interest and debt expense from extraordinary loss. For the twelve months ended August 2, 2003, the Company has reclassified $1,740,000 to interest and debt expense from extraordinary gain.
The Company has reclassified $1.4 million and $6.8 million related to its receivable financing from other revenue to interest expense for the six and twelve months ended August 3, 2002, respectively.
During the quarter ended August 2, 2003, the Company recorded $17.1 million for asset impairment and store closing charges related to seven stores. The charge consists of property and equipment write-downs to fair value for these underperforming stores and further deterioration of the estimated market value of certain assets held for sale. For the three months ended August 3, 2002, the Company recorded a net gain of $0.9 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.
Service charges, interest and other income, as a percentage of net sales, was 3.4% and 3.9% for the three months and six months ended August 2, 2003 compared to 3.7% and 3.5% for the same three and six month periods in 2002. Service charges, interest and other income for the three months ended August 2, 2003 decreased to $58.8 million from $67.8 million for the three months ended August 3, 2002. This decrease is due to a decrease in the average amount of outstanding trade accounts receivable of approximately $65 million during 2003 compared to 2002 and lower equity earnings due to the sale of certain joint ventures during 2002 and the first quarter of 2003. Service charges, interest and other income for the six months ended August 2, 2003 increased to $136.3 million from $131.2 million for the six months ended August 3, 2002. This increase is due to the inclusion of a gain of $15.6 million relating the sale of the Company’s interest in Sunrise Mall and its associated center in Brownsville, Texas during the first quarter of 2003 partially offset by lower average trade accounts receivable during 2003 compared to 2002.
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The actual federal and state income tax rates for the three and six month periods ended August 2, 2003 and August 3, 2002 was 36%.
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 restated 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.
Cash provided by operating activities totaled $235.2 million and $163.7 million for the six months ended August 2, 2003 and August 3, 2002, respectively. The increase in cash provided by operating activities is due primarily to a $60.5 million increase in accounts payable from year end levels compared to a $37.2 million decrease in accounts payable from prior year end levels and a larger decrease in accounts receivable, partially offset by lower income before accounting change in 2003.
The Company invested $98.2 million in capital expenditures for the six months ended August 2, 2003 compared to $107.5 million for the six months ended August 3, 2002.
During the six months ended August 2, 2003, the Company recorded a gain of $15.6 million and received net cash proceeds of $34.6 million from the sale of its interest in Sunrise Mall and its associated center in Brownsville, Texas. The purchaser also assumed $40 million in debt related to the sale.
During the six months ended August 2, 2003, the Company opened its newly constructed 220,000 square foot location at Great Northern Mall in North Olmstead, Ohio, near Cleveland and its 126,000 square foot store at NorthPark Mall in Davenport, Iowa. The Company anticipates opening an additional three new stores in 2003, resulting in an addition of approximately 427,000 square feet of retail space net of replaced square footage. The Company closed six store locations totaling 1,093,000 square feet during the six months ended August 2, 2003.
Cash used in financing activities totaled $163.5 million and $90.6 million for the six months ended August 2, 2003 and August 3, 2002, 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 to $400 million. During the six months ended August 2, 2003 and August 3, 2002, the Company reduced its level of outstanding debt by $137.6 million and $229.7 million, respectively.
During the six months ended August 2, 2003, the Company repurchased approximately 1.5 million shares of Class A common stock for $19.1 million under its existing $200 million share repurchase authorization. Approximately $56 million in share repurchase authorization remained under this open-ended plan at August 2, 2003.
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 2003. Although the Company has an unused committed line of credit in the amount of $400 million, management expects to accomplish these borrowings principally through its accounts receivable conduit facilities. Accounts receivable conduit facilities totaling $500 million were available to the Company with none utilized at August 2, 2003.
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Management expects its accounts receivable conduit facilities to meet peak borrowing demand. 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.
There have been no material changes in the information set forth under caption “Contractual Obligations and Commercial Commitments” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2003 except for reductions of contractual commitments for debt due to the early payoffs during the six months ended August 2, 2003.
The company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating the company’s business. The company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the company’s liquidity or the availability of capital resources.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This statement establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The statement will be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the period of adoption. We are still in the process of reviewing the possible impact of adopting this new statement.
FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of APB No. 50” (“FIN 46”) was issued in January 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company does not currently participate in any variable interest entities.
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, critical accounting policies and estimates, financing requirements 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
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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 retail industry conditions and macro-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; the impact of competitive pressures in the department store industry and other retail channels including specialty, off-price, discount, internet, and mail-order retailers; trends in personal bankruptcies and charge-off trends in the credit card receivables portfolio; changes in consumer spending patterns and debt levels; adequate and stable availability of materials and production facilities from which the Company sources its merchandise; changes in operating expenses, including employee wages, commission 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; potential disruption from terrorist activity and the effect on ongoing consumer confidence; potential disruption of international trade and supply chain efficiencies; world conflict and the possible impact on consumer spending patterns and other economic and demographic changes of similar or dissimilar nature.
During the six months ended August 2, 2003, the Company repurchased $6.0 million of its outstanding unsecured notes prior to their related maturity dates. During the six months ended August 2, 2003, the Company also retired $125.9 million of its 6.39% Reset Put Securities (“REPS”) due August 1, 2013 prior to their maturity dates. Interest rates on the repurchased securities ranged from 6.4% to 6.9%. Maturity dates ranged from 2004 to 2013.
$331.6 million of the Guaranteed Beneficial Interests in the Company's Subordinated Debentures are due January 29, 2009, but the interest rate is subject to repricing on January 29, 2004. Bids to adjust the interest rate will be solicited by the agent. The adjusted interest rate would be either a fixed or floating rate depending on the manner in which the repricing is effected. If the interest rate is fixed, the maximum rate would equal 250% of the base rate in effect immediately prior to the repricing date. The base rate will be set on October 29, 2003, and will equal the then 3-month LIBOR plus a spread of 1.56%. Based on the current base rate of 2.67%, the maximum rate would be 6.68%. If the interest rate is floating, the initial maximum rate would be the same as the fixed rate, but would fluctuate quarterly in direct relation with future changes in 3-month LIBOR. The Company has the right to call these securities at par on a quarterly basis.
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 1, 2003.
The Company maintains “disclosure controls and procedures”, as such term is defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the Company’s reports, pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can
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provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of August 2, 2003, the Company carried out an evaluation, with the participation of Company’s management, including William Dillard, II, Chairman of the Board of Directors and Chief Executive Officer (principal executive officer) and James I. Freeman, Senior Vice-President and Chief Financial Officer (principal financial officer), of the effectiveness of the Company’s “disclosure controls and procedures” pursuant to Securities Exchange Act Rule 13a-15. Based on their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in the Company’s internal controls over financial reporting that occurred during the quarter ended August 2, 2003 to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The annual meeting of the stockholders of the Company was held on May 17, 2003. 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 69,366,750 2,334,427 0
Will D. Davis 69,362,591 2,338,586 0
John Paul Hammerschmidt 69,249,456 2,451,721 0
Bob L. Martin 69,374,709 2,326,468 0
Class B Nominees
Drue Corbusier 4,010,568 0 0
Alex Dillard 4,010,568 0 0
William Dillard, II 4,010,568 0 0
Mike Dillard 4,010,568 0 0
James I. Freeman 4,010,568 0 0
Warren A. Stephens 4,010,568 0 0
William H. Sutton 4,010,568 0 0
J. C. Watts 4,010,568 0 0
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Other Proposals Global Human Rights Standards 10,455,545 56,168,054 2,655,272 Indexed Options 14,599,055 53,227,550 1,451,671
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 Years Ended
- ---------------------------- ----------------------------------------------------------------------------
August 2, August 3, February 1, February 2, February 3, January 29, January 30,
2003 2002 2003 2002 2001* 2000 1999
- -------------- ------------ ------------- -------------- --------------- -------------- --------------
0.63 1.90 2.00 1.46 1.51 2.00 1.97
============== ============ ============= ============== =============== ============== ==============
* 53 week year.
(a) Exhibits
Number Description
12 Statement re: Computation of Earnings to Fixed Charges
31(a) Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a) (17 CFR
240.13a-14(a) or Rule 15d-14(a) (17 CFR 240.15d-14(a))
31(b) Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a) (17 CFR
240.13a-14(a) or Rule 15d-14(a) (17 CFR 240.15d-14(a))
32(a) Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
32(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:
A current report on Form 8-K dated May 21, 2003 was filed with the Securities and Exchange Commission on May 21, 2003 to report, under Item 5, that the registrant issued a press release (attached as Exhibit 99 thereto).
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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 16, 2003 /s/James I. Freeman
James I. Freeman
Senior Vice President & Chief Financial Officer
(Principal Financial & Accounting Officer)
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