DILLARD'S, INC. — Proxy Solicitation & Information Statement 2003

Apr 10, 2003

DEF 14A 1 def14a_020103.htm DILLARD'S, INC. PROXY STATEMENT DILLARD'S, INC. POST OFFICE BOX 486 LITTLE ROCK, ARKANSAS 72203 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 17, 2003 MARKER PAGE="sheet: 2; page: 2" PROXY STATEMENT DILLARD'S, INC. POST OFFICE BOX 486 LITTLE ROCK, ARKANSAS 72203 TO THE HOLDERS OF CLASS A AND Little Rock, Arkansas CLASS B COMMON STOCK: April 8, 2003 Notice is hereby given that the annual meeting of Stockholders of Dillard's, Inc., will be held at the auditorium of Dillard's Corporate Office, 1600 Cantrell Road, Little Rock, Arkansas on Saturday, May 17, 2003, at 9:30 a.m. for the following purposes: 1. To elect 12 Directors of the Company (four Directors to represent Class A Stockholders and eight Directors to represent Class B Stockholders). 2. To consider and act upon proposals by certain Stockholders. 3. To transact such other business as may properly come before the meeting or any adjournment or adjournments thereof. The stock transfer books of the Company will not be closed, but only stockholders of record at the close of business on March 31, 2003, will be entitled to notice of, and to vote at, the meeting. Your participation in the meeting is earnestly solicited. If you do not expect to be present in person at the meeting, please sign, date, and fill in the enclosed Proxy and return it by mail in the enclosed envelope to which no postage need be affixed if mailed in the United States of America. By Order of the Board of Directors JAMES I. FREEMAN Senior Vice President, Chief Financial Officer, Assistant Secretary MARKER PAGE="sheet: 3; page: 3" DILLARD'S, INC. POST OFFICE BOX 486 LITTLE ROCK, ARKANSAS 72203 Telephone (501) 376-5200 April 8, 2003 PROXY STATEMENT The enclosed Proxy is solicited by and on behalf of the management of Dillard's, Inc. (the "Company"), a Delaware corporation, for use at the annual meeting of stockholders to be held on Saturday, May 17, 2003, at 9:30 a.m. at the Dillard's Corporate Office, 1600 Cantrell Road, Little Rock, Arkansas, or at any adjournment or adjournments thereof. Any stockholder giving a Proxy has the power to revoke it, at any time before it is voted, by written revocation delivered to the Secretary of the Company. Proxies solicited herein will be voted in accordance with any directions contained therein, unless the Proxy is received in such form or at such time as to render it ineligible to vote, or unless properly revoked. If no choice is specified, the shares will be voted in accordance with the recommendations of the Board of Directors as described herein. If matters of business other than those described in the Proxy properly come before the meeting, the persons named in the Proxy will vote in accordance with their best judgment on such matters. The Proxies solicited herein shall not confer any authority to vote at any meeting of stockholders other than the meeting to be held on May 17, 2003, or any adjournment or adjournments thereof. The cost of soliciting Proxies will be borne by the Company. The Company will reimburse brokers, custodians, nominees and other fiduciaries for their charges and expenses in forwarding proxy material to beneficial owners of shares. In addition to solicitation by mail, certain officers and employees of the Company may solicit Proxies by telephone, telegraph and personally. These persons will receive no compensation other than their regular salaries. The Company has retained D.F. King & Co., Inc., a professional proxy solicitation firm, to assist in the solicitation of proxies. The fees of such firm are not expected to exceed $7,000. OUTSTANDING STOCK; VOTING RIGHTS; VOTE REQUIRED FOR APPROVAL The stock transfer books of the Company will not be closed, but only stockholders of record at the close of business on March 31, 2003, will be entitled to notice of, and to vote at, the meeting. At that date, there were 80,747,732 shares of Class A Common Stock outstanding and 4,010,929 shares of Class B Common Stock outstanding. Each holder of Class A Common Stock and each holder of Class B Common Stock shall be entitled to one vote on the matters presented at the meeting for each share standing in his name except that the holders of Class A Common Stock are empowered as a class to elect one-third of the Directors and the holders of Class B Common Stock are empowered as a class to elect two-thirds of the Directors. Stockholders will not be allowed to vote for a greater number of nominees than those named in this proxy statement. Nominees for director of each class, to be elected, must receive a plurality of the votes cast within that class. Cumulative voting for Directors is not permitted. Approval of the Stockholder proposals requires the affirmative vote of the holders of a majority of the shares of Common Stock represented at the meeting and entitled to vote. Under Delaware General Corporate Law, if shares are held by a broker that has indicated that it does not have discretionary authority to vote on a respect to that matter, but such shares will be counted with respect to determining whether a quorum is present. Abstentions will not be counted as votes cast for election of directors and with respect to the Stockholder proposals, abstentions will have the effect of a vote against such proposals. The last date for the acceptance of Proxies by management is the close of business on May 16, 2003, and no Proxy received after that date will be voted by management at the meeting. MARKER PAGE="sheet: 4; page: 4" PRINCIPAL HOLDERS OF VOTING SECURITIES The following table sets forth certain information regarding persons who beneficially owned five percent (5%) or more of a class of the Company's outstanding voting securities at the close of business on February 1, 2003. No. of Percent Name and Address Class Shares Owned Of Class (1) Dillard's, Inc. Retirement Trust Class A 10,646,883(2) 13.2% 1600 Cantrell Road Little Rock, AR 72201 Dodge & Cox Class A 8,633,305(2) 10.7% One Sansome St. 35th Floor San Francisco, CA 94014 Flippin, Bruce & Porter, Inc. Class A 3,659,293(2) 4.5% 800 Main Street, Suite 200 Lynchburg, VA 24505 W.D. Company (3) Class A 41,496 * Little Rock, Arkansas Class B 3,985,776 99.4% Wellington Management Company, LLP Class A 8,111,570(2) 10.0% 75 State Street Boston, MA 02109 * Denotes less than 0.1% (1) At February 1, 2003 there were a total of 80,746,732 shares of the Company's Class A Common Stock and 4,010,929 shares of the Company's Class B Common Stock outstanding. (2) Based on information contained in a Schedule 13G filed with the Securities and Exchange Commission. (3) William Dillard II, Chief Executive Officer of the Company, Alex Dillard, President, and Mike Dillard, Executive Vice President, are officers and directors of W.D. Company, Inc. and own 27.4%, 27.9% and 26.3%, respectively, of the outstanding voting stock of W.D. Company, Inc. ELECTION OF DIRECTORS Four Directors representing Class A Stockholders and eight Directors representing Class B Stockholders are to be elected by the Class A Stockholders and the Class B Stockholders, respectively, at the annual meeting for a term of one year and until the election and qualification of their successors. The Proxies solicited hereby will be voted "FOR" the election as Directors of the 12 persons hereinafter identified under "Nominees for Election as Directors" if not specified otherwise. Management does not know of any nominee who will be unable to serve, but should any nominee be unable or decline to serve, the discretionary authority provided in the Proxy will be exercised to vote for a substitute or substitutes. Management has no reason to believe that any substitute nominee will be required. MARKER PAGE="sheet: 5; page: 5" In 1998, the Company adopted a resolution amending its by-laws to provide that nominations to represent Class A stockholders shall be of independent persons only. For these purposes, independent shall mean a person who: has not been employed by the Company or an affiliate in any executive capacity within the last five years; was not, and is not a member of a corporation or firm that is one of the Company's paid advisers or consultants; is not employed by a significant customer, supplier or provider of professional services; has no personal services contract with the Company; is not employed by a foundation or university that receives significant grants or endowments from the Company; is not a relative of the management of the Company; is not a shareholder who has signed shareholder agreements legally binding him to vote with management; and is not the chairman of a company on which Dillard's, Inc. Chief Executive Officer is also a board member. All of the nominees to represent Class A Stockholders listed below qualify as independent persons as defined in the above resolution THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ELECTION AS DIRECTORS OF THE 12 PERSONS HEREINAFTER IDENTIFIED. NOMINEES FOR ELECTION AS DIRECTORS The following table briefly indicates the principal occupation of each nominee, the approximate number of shares of Class A and Class B Common Stock of the Company beneficially owned by each nominee as of March 31, 2003, and the year each nominee first was elected as a Director. The table also indicates the approximate number of shares of Class A and Class B Common Stock of the Company beneficially owned by the executive officers named under "Compensation of Directors and Executive Officers" and the number of shares beneficially owned by the directors and executive officers, as a group, as of March 31, 2003. Name Age Principal Director Shares of Common Stock Beneficially Percent of Occupation Since Owned as of 3/31/2003 (1) Class Owned as of 3/31/2003 (1) Class Robert C. Connor (a) 61 Investments 1987 Class A 32,009 (2) * Class B None Drue Corbusier (b) 56 Executive Vice 1994 Class A 826,339 (3) 1.0% President of the Company Class B None Will D. Davis (a) 73 Partner, Heath, Davis & 1972 Class A 34,440 (4) * McCalla, Attorneys, Class B None Austin, TX Alex Dillard (b)(5) 53 President of the Company 1975 Class A 1,947,414 (6) 2.4% Class B 3,985,776 (6) 99.4% Mike Dillard (b)(5) 51 Executive Vice 1976 Class A 1,325,117 (6) 1.6% President of the Company Class B 3,985,776 (6) 99.4% William Dillard II 58 Chief Executive Officer 1967 Class A 2,066,855 (6) 2.5% (b)(5) of the Company Class B 3,985,776 (6) 99.4% MARKER PAGE="sheet: 6; page: 6" James I. Freeman (b) 53 Senior Vice President 1991 Class A 794,746 (7) 1.0% and Chief Financial Class B None Officer of the Company John Paul Hammerschmidt (a) 80 Retired Member of 1992 Class A 24,000 (8) * Congress Class B None Bob L. Martin (a) 54 Business Consultant and - Class A 1,000 * Retired Chief Executive Class B None Officer of Wal-Mart International Warren A. Stephens (b) 46 President and Chief 2002 Class A 6,000 (9) * Executive Officer, Class B None Stephens Group and Stephens, Inc., Little Rock, AR William H. Sutton (b) 72 Managing Partner, 1994 Class A 33,000 (10) * Friday, Eldredge & Class B None Clark, Attorneys, Little Rock, AR J. C. Watts 45 Former Member of 2003 Class A 1,000 * Congress & Chairman of Class B None the J.C. Watts Companies All Nominees and Executive Class A 8,521,628 (11)(12) 9.8% Officers as a Group (a total Class B 3,985,776 (11) 99.4% of 21 persons) (a) Class A Director (b) Class B Director Denotes less than 0.1% (1) Based on information furnished by the respective individuals. (2) Includes nine shares owned by his wife. Robert C. Connor owns 13,732 shares of Class A Common Stock and has the right to acquire beneficial ownership of 18,268 shares pursuant to currently exercisable options granted under Company stock option plans. (3) Drue Corbusier owns 225,046 shares of Class A Common Stock and has the right to acquire beneficial ownership of 601,293 shares pursuant to currently exercisable options granted under Company stock option plans. (4) Will D. Davis owns 13,440 shares of Class A Common Stock and has the right to acquire beneficial ownership of 21,000 shares pursuant to currently exercisable options granted under Company stock option plans. MARKER PAGE="sheet: 7; page: 7" (5) William Dillard II, Alex Dillard and Mike Dillard are directors and officers of W.D. Company, Inc. and own 27.4%, 27.9% and 26.3%, respectively, of the outstanding voting stock of such company. (6) Includes 41,496 shares of Class A Common Stock and 3,985,776 of Class B Common Stock owned by W.D.Company, Inc., in which shares William Dillard II, Alex Dillard and Mike Dillard are each deemed to have a beneficial interest due to their respective relationships with W.D. Company, Inc. See "Principal Holders of Voting Securities." William Dillard II individually owns 600,359 shares of Class A Common Stock and has the right to acquire beneficial ownership of 1,425,000 shares pursuant to currently exercisable options granted under Company stock option plans. Alex Dillard and his wife individually own 432,607 and 48,311 shares, respectively, of Class A Common Stock, and he has the right to acquire beneficial ownership of 1,425,000 shares pursuant to currently exercisable options granted under Company stock option plans. Mike Dillard and his wife individually own 329,681 and 335 shares, respectively of Class A Common Stock, he has sole voting power with respect to 43,605 shares held in trust for three minor children and has the right to acquire beneficial ownership of 910,000 shares pursuant to currently exercisable options granted under Company stock option plans. (7) James I. Freeman owns 162,257 shares of Class A Common Stock, has sole voting power with respect to 14,150 shares held in trust for three minor children and has the right to acquire beneficial ownership of 618,339 shares pursuant to currently exercisable options granted under Company stock option plans. (8) John Paul Hammerschmidt owns 5,097 shares of Class A Common Stock and has the right to acquire beneficial ownership of 18,903 shares pursuant to currently exercisable options granted under Company stock option plans. (9) Warren A. Stephens owns 1,000 shares of Class A Common Stock and has the right to acquire beneficial ownership of 5,000 shares pursuant to currently exercisable options granted under Company stock option plans. (10) William H. Sutton owns 12,000 shares of Class A Common Stock and has the right to acquire beneficial ownership of 21,000 shares pursuant to currently exercisable options granted under Company stock option plans. (11) The shares in which William Dillard II, Alex Dillard and Mike Dillard are deemed to have a beneficial interest due to their respective relationships with W.D. Company, Inc. have been included in this computation only once and were not aggregated for such purpose. (12) Includes the right to acquire beneficial ownership of 6,242,735 shares pursuant to currently exercisable options granted under Company stock option plans. The following nominees for director also hold directorships in the designated companies: Name Director of William Dillard, II Acxiom Corporation and Barnes & Noble, Inc. John Paul Hammerschmidt First Federal Bank of Arkansas and Southwestern Energy Co. Bob L. Martin Edgewater Technologies, Inc., Furniture Brands International, Inc., The Gap, Inc. and Sabre Holdings Corporation. Warren A. Stephens Alltel Corporation, American Capital Access Holdings, Inc., Stephens Group, Inc., Stephens Holding Company and Stephens, Inc. J.C. Watts Terex Corporation MARKER PAGE="sheet: 8; page: 8" The business associations of the nominees as shown in the table under "Nominees for Election as Directors" have been continued for more than five years, except that prior to 1998 Drue Corbusier was Vice President of the Company, Alex Dillard was Executive Vice President of the Company and William Dillard II was President and Chief Operating Officer of the Company. Mr. Martin retired from Wal-Mart International in 1999. Mr. Watts retired from Congress in 2003. Each nominee for Director was elected to the Board of Directors at the annual meeting of stockholders held May 18, 2002, except for Bob L. Martin and J.C. Watts. The Board of Directors met four times during the Company's last fiscal year, on March 2, May 18, August 24, and November 16, 2002. Audit Committee members are Calvin N. Clyde, Jr., Robert C. Connor, Chairman; and John H. Johnson. The Audit Committee held four meetings during the year. The Executive Compensation Committee members are Robert C. Connor; Will D. Davis, Chairman and John Paul Hammerschmidt. The Executive Compensation Committee held two meetings during the year. The Stock Option Committee members are Robert C. Connor; Will D. Davis, Chairman and John Paul Hammerschmidt. The Stock Option Committee held three meetings during the year. All of the nominees for director attended at least 75% of the aggregate of (1) the total number of meetings of the Board of Directors and (2) the total number of meetings held by all committees of the board on which they served. MARKER PAGE="sheet: 9; page: 9" COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS Cash and Other Compensation The following table sets forth, for the fiscal years indicated, the cash and other compensation provided by the Company and its subsidiaries to the Chief Executive Officer and each of the four most highly compensated executive officers (the "named executive officers") of the Company in all capacities in which they served. Summary Compensation Table Long Term Compensation ---------------------------- ---------- Annual Compensation Awards Payouts ----------- ------------ ---------------- --------------- ------------ ---------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Annual Restricted Securities LTIP All Other Name and Principal Compensation Stock Underlying Payouts Compensa- Position Year Salary($) Bonus($) ($) Award(s)($) Options/ ($) tion($)(1) SARs(#) --------------------------- ------- ----------- ------------ ---------------- --------------- ------------ ---------- --------------- William Dillard II Chief Executive Officer 2002 $710,000 $1,375,000 -- -- 300,000 -- $76,046 2001 710,000 0 -- -- 165,000 -- 93,446 2000 710,000 0 -- -- 160,000 -- 194,189 Alex Dillard 2002 620,000 1,375,000 -- -- 300,000 -- 51,410 President 2001 620,000 0 -- -- 165,000 -- 72,100 2000 620,000 0 -- -- 160,000 -- 182,250 Mike Dillard 2002 540,000 645,000 -- -- 150,000 -- 63,446 Executive Vice President 2001 540,000 0 -- -- 80,000 -- 35,027 2000 540,000 0 -- -- 80,000 -- 141,431 Drue Corbusier 2002 500,000 645,000 -- -- 150,000 -- 54,100 Executive Vice President 2001 500,000 0 -- -- 80,000 -- 54,100 2000 500,000 0 -- -- 80,000 -- 122,110 James I. Freeman 2002 500,000 555,000 -- -- 150,000 -- 54,100 Senior Vice President and 2001 500,000 0 -- -- 60,000 -- 54,100 Chief Financial Officer 2000 500,000 0 -- -- 80,000 -- 97,596 (1) Amounts represent the Company's defined contributions for the benefit of the named executive officers pursuant to its Retirement Plans. MARKER PAGE="sheet: 10; page: 10" Stock Option Grants The following table sets forth information concerning stock options granted under the Company's 2000 Stock Option Plan to the named executive officers: Option/SAR Grants in Last Fiscal Year Potential Realizable Value at Assumed Annual Rates of Stock Price Individual Grants Appreciation for Option Term --------------------------------- ------------- ---------------- -------------- ------------- ------------ ------------ (a) (b) (c) (d) (e) (f) (g) Number of Securities % of Total Underlying Options/SARs Options/ Granted to Exercise or Expiration SARs Granted Employees in Base Price Date 5% ($) 10% ($) Name (#)(1) Fiscal Year ($/Sh) -------------------------------- --------------- -------------- ------------- ------------ ------------ -------------- William Dillard II 300,000 13.0% $24.01 5/14/2009 $2.932,800 $6,833,700 Alex Dillard 300,000 13.0 24.01 5/14/2009 2.932,800 6,833,700 Mike Dillard 150,000 6.5 24.01 5/14/2009 1,466,400 3,416,850 Drue Corbusier 150,000 6.5 24.01 5/14/2009 1,466,400 3,416,850 James I. Freeman 150,000 6.5 24.01 5/14/2009 1,466,400 3,416,850 (1) If payment for shares upon exercise of any of these options is made with shares of the Company's common stock owned by the optionee, the optionee shall be granted on that date an option ("Reload Option") to purchase a number of shares equal to the number of shares tendered to the Company. The exercise price of the Reload Option shall be the market price of the Company's common stock on the Reload Option grant date, and the expiration date of the Reload Option shall be the same as that of the original option. Stock Option Exercises and Holdings The following table sets forth information concerning stock options exercised during the last fiscal year and stock options held as of the end of the last fiscal year by the named executive officers. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES (a) (b) (c) (d) (e) Number of Securities Underlying Unexercised Options/ Value of Unexercised SARs at FY-End (#) In-the-Money Options/ SARs at FY-End ($)(1) Shares Acquired Name on Exercise (#) Value Realized ($) Exercisable Exercisable Unexercisable Unexercisable ----------------------------------- ------------------- ------------------- ---------------------------- ---------------------------- William Dillard II 150,000 $411,000 1,425,000 0 $ 754,000 0 Alex Dillard 150,000 411,000 1,425,000 0 754,000 0 Mike Dillard 150,000 411,000 910,000 0 377,000 0 Drue Corbusier 410,000 3,064,017 601,293 0 0 0 James I. Freeman 363,135 2,021,850 618,339 0 0 0 (1) Represents the amount by which the market price at fiscal year end of the shares underlying unexercised options exceeds the exercise price for such shares. MARKER PAGE="sheet: 11; page: 11" Pension Plan The following table shows the estimated annual benefits payable pursuant to the Company's pension plan to persons in specified compensation and years of service categories upon retirement. Pension Plan Table Years of Service Compensation 15 20 25 30 35 $500,000 $92,925 $123,900 $154,875 $185,850 $216,825 750,000 149,175 198,900 248,625 298,350 348,075 1,000,000 205,425 273,900 342,375 410,850 479,325 1,250,000 261,675 348,900 436,125 523,350 610,575 1,500,000 317,925 498,900 623,625 748,350 873,075 2,000,000 430,425 573,900 717,375 860,850 1,004,325 2,250,000 486,675 648,900 811,125 973,350 1,135,575 2,500,000 542,925 723,900 904,875 1,085,850 1,266,825 A participant's compensation covered by the Company's pension plan is his average salary and bonus (as reported in the Summary Compensation Table) for the highest three years of his employment with the Company. The credited years of service for each of the named executive officers is as follows: William Dillard II, 34 years; Alex Dillard, 31 years; Mike Dillard, 31 years; Drue Corbusier, 34 years; and James I. Freeman, 14 years. Benefits shown are computed as a single life annuity with five years term certain beginning at age 65 and are not subject to deduction for social security or other offset amounts. Compensation of Directors Directors who are not officers of the Company each receive an annual retainer of $20,000 as well as 1,000 shares of Class A Common Stock. In addition, committee chairmen receive an annual retainer of $10,000. Directors who are not officers also receive $1,500 for attendance at each board meeting, $1,000 for each committee meeting, and actual travel expenses. Report of Executive Compensation and Stock Option Committees The following report addressing the Company's compensation policies for executive officers for fiscal 2002 is submitted by the Executive Compensation and Stock Option Committees (the "Compensation Committee") of the Board of Directors. General The Compensation Committee, which is composed of independent directors who are not employees of the Company, establishes policies relating to the compensation of employees and oversees the administration of the Company's employee benefit plans. The compensation program of the Company has been designed (1) to provide compensation opportunities that are equivalent to those offered by comparable companies, thereby allowing the Company to compete for and retain talented executives who are critical to the Company's long-term success, (2) to motivate key senior officers by rewarding them for attainment of profitability of the Company, and (3) to align the interests of executives with the long-term interests of stockholders by awarding stock options to executives as part of the compensation provided to them. MARKER PAGE="sheet: 12; page: 12" In order to develop a competitive compensation package for the executive officers of the Company, the Compensation Committee compares the Company's compensation package with those of a comparison group. The comparison group is composed of department stores, specialty stores and other public companies that were family-founded and continue to be family-managed. Not all of the companies in the comparison group are included in the Standard & Poor's Supercomposite Department Stores Index. The Compensation Committee believes that the companies in the comparison group are comparable to the Company in management style and management culture. Although the Compensation Committee has made these comparisons, it also has taken into account that as the Company has grown in size, the number of senior executives has not grown proportionately, so that the number of senior executives retained by the Company is lower than the number of senior executives at other companies of similar size. Currently, the Company's compensation program consists of salary, annual cash performance bonus based on the profitability of the Company, and long-term incentive opportunities in the form of stock options. The compensation program is focused both on short-term and long-term performance of the Company, rewarding executives for both achievement of profitability and growth in stockholder value. Salary -- Each year the Compensation Committee establishes the salary for all executive officers. Such salaries are set at the discretion of the Compensation Committee and are not specifically related to any company performance criteria, as are both the cash performance bonus and stock option portions of the compensation program, which are discussed below. The Compensation Committee does, however, base any increase in salary on targets based on a regression analysis of salaries paid versus total revenues for the comparison group. For fiscal 2002, the salaries set by the Compensation Committee were below the target salaries produced by this analysis. Cash Performance Bonus -- Cash performance bonuses may be paid annually to senior management. For bonuses to be paid, however, the Company must have income before federal and state income taxes ("pre-tax income") for the fiscal year. The Compensation Committee, within ninety (90) days after the start of a fiscal year, designates those individuals in senior management eligible to receive a cash performance bonus. Bonuses are paid at the conclusion of a fiscal year from a bonus pool, which is equal to one and one-half percent (1-1/2%) of the Company's pre-tax income plus three and one-half (3-1/2%) of the increase in pre-tax income over the prior fiscal year. When the Compensation Committee designates the individuals eligible to participate in the cash performance bonus program, it also designates the percent of the bonus pool each individual will be entitled to receive. The Compensation Committee retains at all times the authority to adjust downward the amount of bonus any individual may receive pursuant to the above-described formula. For fiscal 2002, the Company experienced a pre-tax income of $211,100,000 and an increase in pre-tax income of $99,530,000. The Compensation Committee decided to adjust downward by approximately $2,055,052 the amount of bonus, which the named executive officers would receive for fiscal 2002. Stock Options -- Stock option grants under the Company's 2000 Incentive and Non-Qualified Stock Option Plan are utilized by the Company for long-term incentive compensation for executive officers. These stock option grants relate their compensation directly to the performance of the Company's stock. The exercise price for the options granted is one hundred percent (100%) of the fair market value of the shares underlying such options on the date of grant and have value to the executive officers only if the Company's stock price increases. The stock options are exercisable on or after May 14, 2002. When making option grants, the Stock Option Committee and the Compensation Committee do not consider the number of options already held by an executive officer. MARKER PAGE="sheet: 13; page: 13" As discussed in previous Compensation Committee Reports, the Omnibus Budget Reconciliation Act of 1993 prevents public corporations from deducting as a business expense that portion of compensation exceeding $1 million paid to a named executive officer in the Summary Compensation Table. This deduction limit does not apply to "performance-based compensation." The Compensation Committee believes that the necessary steps have been taken to qualify as performance-based compensation the compensation paid under the cash performance bonus and stock option portions of the Company's compensation program. Chief Executive Officer In setting the Chief Executive Officer's compensation, the Compensation Committee makes the same determination with regard to salary, cash performance bonus and stock options as discussed above for the other named executive officers. For fiscal 2002, the increase in the Chief Executive Officer's salary over the prior fiscal year resulted in a salary lower than the target salary produced by the regression analysis discussed above Robert C. Connor John Paul Hammerschmidt Will D. Davis, Chairman Company Performance The graph below compares for each of the last five fiscal years the cumulative total returns on the Company's Class A Common Stock, the Standard & Poor's 500 Index and the Standard & Poor's Supercomposite Department Stores Index. The cumulative total return on the Company's Class A Common Stock assumes $100 invested in such stock on February 1, 1998 and assumes reinvestment of dividends. Dillard's, Inc. Proxy Graph Data Points Base 1998 1999 2000 2001 2002 Dillard's, Inc. 100 70.91 55.35 44.7 35.78 37.82 S&P 500 100 132.59 142.74 139.78 117.15 90.76 S&P Supercomposite Dept. Strs 100 101.86 74.94 94.57 101.16 69.82 MARKER PAGE="sheet: 14; page: 14" CERTAIN RELATIONSHIPS AND TRANSACTIONS William Dillard II, Drue Corbusier, Alex Dillard and Mike Dillard are siblings. Mr. William H. Sutton is Managing Partner of the law firm Friday, Eldredge & Clark, which is retained by the Company for legal services. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10% of the Company's Class A Common Stock, to file with the Securities and Exchange Commission and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of stock of the Company. To the Company's knowledge, based solely on a review of copies of reports provided by such individuals to the Company and written representations of such individuals that no other reports were required, during the fiscal year ended February 1, 2003, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with. AUDIT COMMITTEE REPORT The Audit Committee operates under a written charter adopted by the Board of Directors. Each of the members of the Audit Committee is independent as defined under the listing standards of the New York Stock Exchange. The Audit Committee has reviewed and discussed the audited financial statements for the year ended February 1, 2003 with management and the independent auditors, Deloitte & Touche LLP. Management represented to the Audit Committee that the Company's consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. The discussions with Deloitte & Touche LLP included the matters required by Statement on Auditing Standards No. 61, as amended (Communications with Audit Committees). Deloitte & Touche LLP provided to the Audit Committee the written disclosures and the letter regarding its independence as required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees). The Audit Committee also considered whether the provision of non-audit services by Deloitte & Touche LLP is compatible with maintaining the auditor's independence. Based upon the reviews and discussions noted above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Company's Annual Report on Form 10-K to be filed with the Securities and Exchange Commission for the year ended February 1, 2003. Robert C. Connor Calvin N. Clyde John H. Johnson MARKER PAGE="sheet: 15; page: 15" INDEPENDENT PUBLIC ACCOUNTANTS A representative of Deloitte & Touche LLP, the Company's independent public accountants for fiscal year 2002 and the current year, will be present at the meeting, will have the opportunity to make a statement, and also will be available to respond to appropriate questions. Audit Fees Deloitte & Touche LLP billed the Company a total of $567,106 for professional services rendered for the audit of the Company's annual financial statements for the year ended February 1, 2003 and for the review of the financial statements included in the Company's quarterly reports on Form 10-Q for fiscal 2002. Financial Systems Design and Implementation Fees No fees were paid to Deloitte & Touche LLP for any information technology services (of the type described in Rule 2-01(c)(4)(ii)(B) of Regulation S-X) during 2002. All Other Fees The Company paid Deloitte & Touche LLP an aggregate of $1,202,157 for all services rendered by Deloitte & Touche LLP other than the audit and financial systems design and implementation described above. The Audit Committee of the Board of Directors has considered whether the provision of services described above under "Financial Systems Design and Implementation Fees" and "All Other Fees" is compatible with maintaining the independence of Deloitte & Touche LLP. MARKER PAGE="sheet: 16; page: 16" STOCKHOLDER PROPOSAL CONCERNING GLOBAL HUMAN RIGHTS STANDARDS The New York City Pension Funds, 1 Centre Street, New York, NY 10007, owner of 295,482 shares of Class A Common Stock, Christian Brothers Investment Services, Inc., 90 Park Avenue, 29th Floor, New York, NY 10016, owner of 48,500 shares of Class A Common Stock and Aaron Merle Epstein, 13455 Ventura Boulevard, #209, Sherman Oaks, CA 91423, owner of 185 shares of Class A Common Stock have indicated that they intend of propose the following resolution for action at the meeting: "Whereas, Dillard's, Inc. currently has extensive overseas operations, and Whereas, reports of human rights abuses in the overseas subsidiaries and suppliers of some U.S.-based corporations has led to an increased public awareness of the problems of child labor, "sweatshop" conditions, and the denial of labor rights in U.S. corporate overseas operations, and Whereas, corporate violations of human rights in these overseas operations can lead to negative publicity, public protests, and a loss of consumer confidence which can have a negative impact on shareholder value, and Whereas, a number of corporations have implemented independent monitoring programs with respected human rights and religious organizations to strengthen compliance with international human rights norms in subsidiary and supplier factories, and Whereas, these standards incorporate the conventions of the United Nations' International Labor Organization (ILO) on workplace human rights which include the following principles: 1) All workers have the right to form and join trade unions and to bargain collectively. (ILO Conventions 87 and 98) 2) Workers representatives shall not be the subject of discrimination and shall have access to all workplaces necessary to enable them to carry out their representation functions. (ILO Convention 135) 3) There shall be no discrimination or intimidation in employment. Equality of opportunity and treatment shall be provided regardless of race, color, sex, religion, political opinion, age, nationality, social origin, or other distinguishing characteristics. (ILO Convention 100 and 111) 4) Employment shall be freely chosen. There shall be no use of force, including bonded or prison labor. (IL)Conventions 29 and 105 5) There shall be no use of child labor. (ILO Convention 138), and, Whereas, independent monitoring of corporate adherence to these standards is essential if consumer and investor confidence in our company's commitment to human rights is to be maintained, Therefore, be it resolved that shareholders request that the company commit itself to the implementation of a code of corporate conduct based on the aforementioned ILO human rights standards by its international suppliers and in its own international production facilities and commit to a program of outside, independent monitoring of compliance with these standards." THE BOARD OF DIRECTORS FAVORS A VOTE AGAINST THE ADOPTION OF THIS PROPOSAL FOR THE FOLLOWING REASONS: The Company recognizes the importance, as both an ethical and a business responsibility, of obtaining assurances that the products it sells are manufactured in accordance with all applicable laws and that the rights and welfare of workers around the world are respected. MARKER PAGE="sheet: 17; page: 17" The Company has always been committed to the highest ethical conduct and strict compliance with the law in all its business dealings, including its relationships with its many suppliers. The Company is deeply concerned about the issues raised in the Proposal and believes it has already adequately addressed such issues as described below. Products sold at the Company's stores are supplied by independent suppliers who also supply other retail stores and chains. To a much lesser degree, the Company is also supplied by sources contracted by buying agents for the Company. The Company does not engage directly in manufacturing. The Company has previously addressed the concerns raised in the Proposal by implementation of the following policies and procedures: The Company has developed a formal business policy (the "Policy") which focuses on the workplace conditions of, and legal compliance by, foreign vendors. The Policy was distributed to all of the Company's foreign vendors to restate and reemphasize the Company's longstanding philosophy that no merchandise purchased by the Company will be manufactured with the use of illegal labor conditions. In addition, under the Policy the Company reserves the right not to contract with and to break contracts with vendors who violate basic human rights. In furtherance of the Policy, the Company's agreements with foreign buying agents (including a buying office) include prohibitions against illegal child labor and other forms of illegal employment, manufacturing, shipping, customs and environmental practices. Under the contract, a buying agent must use its best efforts to ensure that each vendor is in full compliance with any current, or later adopted, law of either the country of manufacture or the United States governing the use of child labor, prison labor, and/or governing the importation into the United States of merchandise produced with child labor as well as any other similar human rights statute, regulation or law. Buying agents must also follow policies and procedures which the Company implements to ensure that all such statutes, laws or regulations are followed. If a buying agent discovers a violation of such prohibitions, the buying agent must immediately notify the Company of such violation(s) or evidence of violation(s), so that appropriate action can be taken to rectify such violation(s). Under these agreements, among other measures, buying agents are required to periodically inspect factories to ensure compliance with these standards. Additionally, Company employees personally inspect selected factories to verify compliance. The Company's philosophy also appears in the Company's Purchase Order Terms, Conditions & Instructions, which is the Company's standard form of purchase order and which is applicable to all transactions between the Company and all of its suppliers. The document explicitly requires each supplier to warrant and represent that its merchandise is manufactured in compliance with any current, or later adopted, law of either the country of manufacture or the United States governing the use of child labor, prison labor, and/or governing the importation into the United States of merchandise produced with child labor as well as any other similar human rights statute, regulation or law. The Company has previously issued a press release announcing its business policy, which policy contains prohibitions against workplace abuse and also contains the steps taken by the Company to implement the policy. Furthermore, the Company has furnished a copy of that policy to interested shareholders, and will continue to so provide copies of that policy. The Company believes that it has already addressed the concerns raised in the Proposal without further expenditure of valuable time and funds. As the above reflects, the Company is committed to assuring that its suppliers treat their employees properly. FOR THE ABOVE REASONS, THE BOARD RECOMMENDS VOTING AGAINST THE PROPOSAL. MARKER PAGE="sheet: 18; page: 18" INDEXED OPTIONS PROPOSAL The Trust for the International Brotherhood of Electrical Workers' Pension Benefit Fund, 1125 Fifteenth Street N.W., Washington, D.C. 20005 owner of 3,790 shares of Class A Common Stock have indicated that they intend to propose the following resolution for action at the meeting: "Resolved, that the shareholders of Dillard's (the "Company") request that the Board of Directors adopt an executive compensation policy that all future stock option grants to senior executives shall be performance-based. For the purposes of this resolution, a stock option is performance-based if the option exercise price is indexed or linked to an industry peer group stock performance index so that the options have value only to the extent that the Company's stock price performance exceeds the peer group performance level." Statement of Support: As long-term shareholders of the Company, we support executive compensation policies and practices that provide challenging performance objectives and serve to motivate executives to achieve long-term corporate value maximization goals. It is our opinion that stock option grants can and do often provide levels of compensation well beyond those merited. It is also our view that stock option grants without specific performance-based targets often reward executives for stock price increases due solely to a general stock market rise, rather than to extraordinary company performance. Indexed stock options are one type of option whose exercise price moves with an appropriate peer group index composed of a company's primary competitors. The resolution requests that the Company's Board ensure that future senior executive stock option plans link the options exercise price to an industry performance index associated with a peer group of companies selected by the Board, such as those companies used in the Company's proxy statement to compare 5 year price performance. Implementing an indexed stock option plan would mean that our Company's participating executives would receive payouts only if the Company's stock price performance was better than that of the peer group average. By tying the exercise price to a market index, indexed options reward participating executives for outperforming the competition. Indexed options would have value when our Company's stock price rises in excess of its peer group average or declines less that its peer group average stock price decline. By downwardly adjusting the exercise price of the option during a downturn in the industry, indexed options remove pressure to re-price stock options. In short, superior performance would be rewarded. At present, stock options granted by the Company are not indexed to peer group performance standards. As long-term owners, we feel strongly that our Company would benefit from the implementation of a stock option program that rewarded superior long-term corporate performance. We urge your support for this important governance reform. THE BOARD OF DIRECTORS FAVORS A VOTE AGAINST THE ADOPTION OF THIS PROPOSAL FOR THE FOLLOWING REASONS: The Board believes that adopting a compensation policy that requires the Company to grant options with conditions such as those contained in the shareholder proposal is inconsistent with competitive compensation practices and, therefore, could place the Company at a substantial disadvantage in recruiting and retaining talented executives. In addition, indexing options in the manner set forth in the proposal -- disconnecting the options from increases or decreases in the Company's stock price -- could undermine the entire incentive purpose of stock options. For example, the Company's stock price could decrease, but less so than the contemplated industry peer group, which would cause the Company's executives' options to have value and confer an economic benefit on the executives even though the shareholders would suffer a loss. This clearly is not a result that aligns the interests of the Company's executives with those of its shareholders, but instead disjoins those interests. MARKER PAGE="sheet: 19; page: 19" In addition to introducing potential competitive disadvantages and disjoining incentive compensation from shareholder value, implementing the shareholder proposal would have negative financial consequences for the Company and its shareholders. Internal Revenue Code Š162(m) limits the deductibility of compensation expense over $1 million paid to certain executives. Specific performance-based compensation meeting IRS criteria is excluded from the calculation to determine whether the $1 million cap has been exceeded. If the ultimate exercise price of a stock option is less than the fair market value of the stock on the date of grant of the stock option, all compensation arising from the exercise would fail to qualify as performance-based compensation and, thus, would be includable as compensation subject to the $1 million limit on deductibility. The shareholder proposal thereby potentially increases the Company's tax expense, to the ultimate disadvantage of shareholders. Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") and Financial Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB No. 25," provide the accounting and financial reporting guidance relative to the Company's stock options. Assuming the exercise price of the senior executives' stock options were indexed in accordance with the shareholder proposal, the stock option plan would be treated as a variable plan and compensation expense would be measured, for all individuals who received grants under the plan, at each reporting period until the option is exercised. Because the Company applies APB No. 25 to the compensation expense recorded in the income statement, the calculation would be based on the intrinsic value method, the difference between the market value and the exercise price of the stock at the reporting date. This accounting treatment could reduce earnings if the Company's operating results outperform the industry peer group index, such that if the stock price increases and the exercise price does not fluctuate the difference would cause additional compensation expense over the service periods. Moreover, the Compensation Committee--which is comprised of independent directors--has implemented various measures to make sure that compensation provides executives with the appropriate incentives, while also protecting shareholders. In fact, options granted under the Company's current incentive plan already provide for performance-based compensation: because an option's exercise price is equal to the fair market value of the stock underlying the option on the date of grant, executives receive an economic benefit from stock options only if the stock price increases subsequent to a grant. As such, stock option grants under the incentive plan already motivate executives to maximize long-term corporate value and directly link executives' interests to those of shareholders. In summary, the Board believes that implementation of the shareholder proposal could have serious competitive and financial consequences and could undermine the incentive purpose of stock option compensation to the detriment of the Company and its shareholders. The Board believes the right balance is currently being achieved in the granting of stock options to executives under the incentive plan. FOR THE ABOVE REASONS, THE BOARD RECOMMENDS VOTING AGAINST THE PROPOSAL. OTHER MATTERS Management of the Company knows of no other matters that may come before the meeting. However, if any matters other than those referred to herein should properly come before the meeting, it is the intention of the persons named in the enclosed Proxy to vote the Proxy in accordance with their judgment. STOCKHOLDER PROPOSALS FOR THE 2003 ANNUAL MEETING Proposals of stockholders intended to be presented at the Company's annual meeting of stockholders in 2004 must be received by the Company at its principal executive offices not later than December 9, 2003 in order to be included in the Company's Proxy Statement and form of Proxy relating to that meeting. MARKER PAGE="sheet: 20; page: 20" ANNUAL REPORTS The Company's annual report for the fiscal year ended February 1, 2003 is being mailed with this Proxy Statement but is not to be considered as a part hereof. A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS AND SCHEDULES THERETO, REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, MAY BE OBTAINED WITHOUT CHARGE BY ANY STOCKHOLDER WHOSE PROXY IS SOLICITED UPON WRITTEN REQUEST TO: DILLARD'S, INC. Post Office Box 486 Little Rock, Arkansas 72203 Attention: James I. Freeman, Senior Vice President, Chief Financial Officer By Order of the Board of Directors JAMES I. FREEMAN Senior Vice President, Chief Financial Officer, Assistant Secretary THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS Dillard's, Inc. Post Office Box 486 Little Rock, Arkansas 72203 PROXY The undersigned hereby appoints Telephone No.(501)376-5200 William Dillard II and James I. Freeman as Proxies, each with the power to appoint his substitute, and hereby authorizes them to represent and vote, as designated below, all the shares of the Class A Common Stock of Dillard's, Inc., held of record by the undersigned on March 31, 2003, at the annual meeting of stockholders to be held on May 17, 2003, or any adjournment thereof. -------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- 1. ELECTION OF DIRECTORS. ? FOR all Class A ? WITHHOLD AUTHORITY nominees listed to vote for all below (except as Class A nominees marked to the contrary below) (INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR AN INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.) Class A Nominees Robert C. Connor * Will D. Davis * John Paul Hammerschmidt * Bob L. Martin -------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- Management of the Company supports this proposal -------------------------------------------------------------------------------------------------------------------- 2. STOCKHOLDER PROPOSAL CONCERNING GLOBAL HUMAN RIGHTS STANDARDS. (Management of the Company opposes this proposal.) ? FOR ? AGAINST ? ABSTAIN 3. STOCKHOLDER PROPOSAL CONCERNING INDEXED OPTIONS. (Management of the Company opposes this proposal.) ? FOR ? AGAINST ? ABSTAIN 4. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THE PROXY WILL BE VOTED FOR PROPOSAL 1 AND AGAINST PROPOSALS 2 AND 3. Please sign exactly as name appears below. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. DATED: , 2003 Signature Signature, if jointly held PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS* Dillard's, Inc. Post Office Box 486 Little Rock, Arkansas 72203 PROXY The undersigned hereby appoints Telephone No.(501)376-5200 William Dillard II and James I. Freeman as Proxies, each with the power to appoint his substitute, and hereby authorizes them to represent and vote, as designated below, all the shares of the Class B Common Stock of Dillard's, Inc., held of record by the undersigned on March 31, 2003, at the annual meeting of stockholders to be held on May 17, 2003, or any adjournment thereof. ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ 1. ELECTION OF DIRECTORS. ? FOR all Class B ? WITHHOLD AUTHORITY nominees listed to vote for all below (except as Class B nominees marked to the contrary below) (INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR AN INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.) Class B Nominees Drue Corbusier * Alex Dillard * Mike Dillard * William Dillard II * James I. Freeman * Warren A. Stephens * William H. Sutton * J.C. Watts ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Management of the Company supports this proposal. ------------------------------------------------------------------------------------------------------------------------------------ 2. STOCKHOLDER PROPOSAL CONCERNING GLOBAL HUMAN RIGHTS STANDARDS. (Management of the Company opposes this proposal.) ? FOR ? AGAINST ? ABSTAIN 3. STOCKHOLDER PROPOSAL CONCERNING INDEXED OPTIONS. (Management of the Company opposes this proposal.) ? FOR ? AGAINST ? ABSTAIN 4. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THE PROXY WILL BE VOTED FOR PROPOSAL 1 AND AGAINST PROPOSALS 2 AND 3. Please sign exactly as name appears below. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. DATED: , 2003 Signature Signature, if jointly held PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.