SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 8-K
CURRENT REPORT
_______________________
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
May 16, 1998
DATE OF REPORT (Date of earliest event reported)
DILLARD'S, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-6140 71-0388071
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification Number)
incorporation)
1600 Cantrell Road, Little Rock, Arkansas 72201
(Address of principal executive offices)
(Zip Code)
(501) 376-5200
(Registrant's telephone number, including area code)
<PAGE>
Item 5. Other Events.
On May 16, 1998 the Board of Directors approved a definitive
agreement under which Dillard's, Inc. (the "Company") will
acquire Mercantile Stores Company, Inc. ("Mercantile") for
$80.00 per share or approximately $2.9 billion in cash.
Mercantile operates 103 department stores and 16 home
fashion stores in 17 states.
Pursuant to the agreement, a cash tender offer (the
"Offer")commenced on May 21, 1998 by MSC Acquisitions, Inc,
a subsidiary of the Company. The Offer, to acquire all
outstanding common shares of Mercantile is conditioned upon,
among other things, (i) there being validly tendered and not
properly withdrawn prior to the expiration of the Offer, a
number of Shares which, together with any Shares owned,
directly or indirectly, by Dillard's or its subsidiaries,
constitutes more than 50% of the voting power (determined on
a fully diluted basis) of all the securities of Mercantile
entitled to vote generally in the election of directors or
in a merger and (ii) the expiration or termination of all
applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
The Offer and withdrawal rights are set to expire at 12:00
Midnight, EDT, on Monday, July 6, 1998, unless the tender
offer is extended.
The Company plans to finance the acquisition with $240
million in Commercial Paper, $500 million in short-term bank
borrowings, $1.2 billion in a bridge loan facility, and $1.1
billion in publicly underwritten long-term notes.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
7(a)(1) The following audited consolidated financial
statements of Mercantile Stores Company, Inc. and subsidiaries
are included herein:
Report of Independent Public Accountants
Statements of Consolidated Income and
Retained Earnings for each of the years ended
January 31, 1998, February 1, 1997 and February 3, 1996
Consolidated Balance Sheets as of January 31, 1998 and
February 1, 1997
Statements of Consolidated Cash Flows for each of the years
ended January 31, 1998, February 1, 1997 and February 3, 1996
Notes to Consolidated Financial Statements
7(a)(2) The following unaudited consolidated financial
statements of Mercantile Stores Company, Inc. and subsidiaries
are included herein:
Consolidated Condensed Balance Sheet as of May 2, 1998
Consolidated Condensed Statements of Income for the 13
weeks ended May 2, 1998 and May 3, 1997
Consolidated Condensed Statements of Cash Flows for the 13
weeks ended May 2, 1998 and May 3, 1997
Notes to Consolidated Condensed Financial Statements
7(b) The following unaudited pro forma financial information
is included herein:
Pro Forma Income Statement (unaudited) for the year
ended January 31, 1998
Pro Forma Income Statement (unaudited) for the 13 weeks
ended May 2, 1998
Pro Forma Balance Sheet (unaudited) as of May 2, 1998
Notes to Pro Forma Financial Statements (unaudited)
<PAGE>
7(c) Exhibits
2* Agreement and Plan of Merger, dated as of May
16, 1998, among Dillard's, Inc., MSC Acquisitions,
Inc. and Mercantile Stores Company, Inc.(Exhibit
(c)(1) to Schedule 14D-1 in 005-10123)
23 Consent of Independent Public Accountants
*Incorporated herein by reference as indicated.
SIGNATURE
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 hereunto duly authorized.
DILLARD'S, INC.
(Registrant)
By: /s/ James I. Freeman
James I. Freeman
Senior Vice President and Chief
Financial Officer
Date: July 1, 1998
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Mercantile Stores
Company, Inc.:
We have audited the accompanying consolidated balance sheets of
Mercantile Stores Company, Inc. (a Delaware corporation) and
subsidiaries as of January 31, 1998 and February 1, 1997, and the
related statements of consolidated income and retained earnings and
cash flows for each of the three years in the period ended
January 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mercantile Stores
Company, Inc. and subsidiaries as of January 31, 1998 and February 1,
1997, and the results of their operations and their cash flows for each
of the three years in the period ended January 31, 1998 in conformity with
generally accepted accounting principles.
As explained in Note 2 to the Consolidated Financial Statements, the Company
changed its method of accounting for long-lived assets effective February 4,
1996.
Arthur Andersen LLP
Cincinnati, Ohio
April 3, 1998
<PAGE>
Mercantile Stores Company, Inc.
STATEMENTS OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(in thousands, except per share data)
1997 1996 1995
Revenues $ 3,143,765 $ 3,030,822 $2,944,324
Costs, Expenses, and Other Income:
Cost of goods sold
(including occupancy
and central buying expenses) 2,207,618 2,113,022 2,059,753
Selling, general and
administrative expenses 727,083 702,862 686,924
Interest expense 17,685 16,451 19,558
Interest income (5,143) (5,665) (5,087)
Other income (16,840) (9,400) (21,404)
Impairment charge - 12,000 -
____________ ____________ __________
2,930,403 2,829,270 2,739,744
____________ ___________ __________
Income before Provision
for Income Taxes 213,362 201,552 204,580
Provision for Income Taxes:
Current 74,420 82,951 80,239
Deferred 9,236 (2,864) 1,093
__________ ___________ ___________
83,656 80,087 81,332
__________ ___________ _________
Net Income $ 129,706 $ 121,465 $ 123,248
__________ ___________ _________
Retained Earnings at
Beginning of Year 1,553,892 1,473,692 1,389,130
Dividends Declared 43,574 41,265 38,686
__________ ____________ _________
Retained Earnings at
End of Year $ 1,640,024 $ 1,553,892 $ 1,473,692
========== ========== ==========
Earnings per Share $ 3.53 $ 3.30 $ 3.35
========== =========== ==========
Weighted Average Shares Outstanding 36,770,797 36,844,050 36,844,050
See Notes to Consolidated Financial Statements
<PAGE>
Mercantile Stores Company, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 31, 1998 February 1, 1997
ASSETS
Current Assets:
Cash and cash equivalents $ 144,986 $ 128,115
Receivables:
Customer, net 571,513 571,336
Other 17,591 16,851
Inventories 505,201 560,666
Deferred income taxes 19,196 13,009
Other current assets 16,702 13,325
___________ ___________
Total Current Assets 1,275,189 1,303,302
___________ ___________
Prepaid Pension and
Other Noncurrent Assets 116,218 100,994
___________ ___________
Property and Equipment:
Land 38,869 40,663
Buildings and improvements 839,356 783,825
Fixtures 292,307 251,502
Leased property 62,018 62,018
___________ ___________
1,232,550 1,138,008
Accumulated depreciation (446,166) (399,801)
___________ ___________
Property and equipment, net 786,384 738,207
___________ ___________
Total Assets $ 2,177,791 $ 2,142,503
=========== ===========
See Notes to Consolidated Financial Statements
<PAGE>
(in thousands) January 31, 1998 February 1, 1997
Liabilities and
Stockholders' Equity
Current Liabilities:
Current maturities of
long-term debt $ 21,429 $ 25,017
Accounts payable 79,117 112,485
Taxes other than income 22,235 18,876
Other current liabilities 63,775 62,438
Accrued income taxes 40,913 39,128
Accrued payroll 24,410 27,825
___________ ___________
Total Current Liabilities 251,879 285,769
___________ ___________
Long-term Debt 202,637 229,910
___________ ___________
Due to Affiliated Companies 25,353 24,737
___________ ___________
Deferred Income Taxes 21,712 5,685
___________ ___________
Other Long-term Liabilities 29,364 31,089
___________ ___________
Stockholders' Equity:
Common stock - $.14 2/3 par
value, 36,887,475 authorized
and issued shares 5,410 5,410
Additional paid-in capital 6,018 6,018
Retained earnings 1,640,024 1,553,892
Treasury stock, at cost,
138,925 shares in 1997 and
43,425 in 1996 (4,606) (7)
__________ __________
Total Stockholders' Equity 1,646,846 1,565,313
__________ __________
Total Liabilities and
Stockholders' Equity $ 2,177,791 $ 2,142,503
=========== ===========
See Notes to Consolidated Financial Statements
<PAGE>
Mercantile Stores Company, Inc.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands) 1997 1996 1995
Cash Flows from Operating Activites:
Net Income $ 129,706 $ 121,465 $ 123,248
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 79,254 83,661 88,714
Deferred taxes 9,236 (2,864) 1,093
Gain on disposition of property (2,832) (157) (5,916)
Impairment charge - 12,000 -
Net pension benefit (17,299) (12,851) (14,667)
Changes in working capital
attributable to
Inventories 55,465 (37,093) (54,791)
Receivables (917) (13,565) 45,616
Accounts payable (33,368) 5,840 (15,022)
Other working capital item 404 (11,349) 20,416
________ ________ ________
Net cash provided by operating activities 219,649 145,087 188,691
________ ________ ________
Cash Flows from Investing Activities:
Cash payments for property
and equipment (131,011) (133,861) (101,202)
Proceeds from sale of property 6,240 2,777 5,982
Net change in other noncurrent
assets and liabilities 1,027 (369) (1,919)
_________ _________ ________
Net cash used in investing activities (123,744) (131,453) (97,139)
Cash Flows from Financing Activities:
Payments of long-term debt (30,861) (6,147) (5,210)
Repurchase of common stock (4,599) - -
Dividends paid (43,574) (41,265) (38,686)
_________ _________ ________
Net cash used in financing activities (79,034) (47,412) (43,896)
Net Increase (Decrease) in
Cash and Cash Equivalents 16,871 (33,778) 47,656
Cash and Cash Equivalents at
Beginning of Year 128,115 161,893 114,237
_________ _________ _______
Cash and Cash Equivalents at
End of Year $ 144,986 $ 128,115 $161,893
========= ========= ========
Supplemental Cash Flow Information:
Interest paid $ 19,975 $ 19,950 $ 20,926
Income taxes paid $ 68,424 $ 83,491 $ 70,593
See Notes to Consolidated Financial Statements
<PAGE>
Mercantile Stores Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Operations - Mercantile Stores Company, Inc. (the Company) is a
conventional department store retailer engaged in the general merchandising
business. The Company operates 102 department stores and 16 home fashion
stores under 13 different names in a total of 17 states. The Company also
maintains a partnership interest in five operating shopping center ventures
and one land ownership venture.
B. Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and all of its subsidiaries. All material
intercompany accounts and transactions have been eliminated. The Company
uses the equity method to account for its 33 1/3% to 50% position in the
six joint ventures.
C. Fiscal Year - The Company's fiscal year ends on the Saturday nearest to
January 31. All fiscal years presented consist of fifty-two weeks except
1995 which included fifty-three weeks. Fiscal year 1997 ended on January
31, 1998; fiscal year 1996 ended on February 1, 1997; and fiscal year 1995
ended on February 3, 1996. All references to years relate to fiscal years
rather than calendar years.
D. Revenues - Revenues include sales from retail operations,
leased departments and finance charge revenue earned on customer
accounts serviced by the Company under its private label credit
program. Finance charge revenue from the Company's private label credit
program is recognized in the period in which it is earned. Finance charge
revenue earned in 1997, 1996 and 1995 totalled $89 million, $85 million
and $52 million, respectively. Operating expenses incurred in connection
with the private label credit program are included in selling, general and
administrative expenses. Prior to August 1, 1995, the Company's share of
finance charge revenue accrued to the Company under revenue sharing
agreements with unaffiliated companies and was classified as a component
of other income in the accompanying Statements of Consolidated Income
and Retained Earnings.
E. Cost of Goods Sold - Cost of goods sold in the retail industry
traditionally includes occupancy and buying costs which are not directly
associated with the cost and eventual selling price of merchandise. Among
the occupancy expenses so classified are depreciation, rent, utilities and
real estate taxes. Buying costs, in this respect, include the payroll and
travel expenses associated with the corporate buying and merchandise
planning functions.
F. Advertising Costs - Advertising expenditures, including production
costs, are expensed as incurred. In 1997, total advertising expense was
$109 million, compared with $100 million in 1996, and $97 million in 1995.
G. Store Pre-opening Costs - Store pre-opening costs which include
advertising, occupancy, and payroll are charged to expense as incurred.
H. Earnings per Share (EPS) - Effective January 31, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which replaces the calculation of primary and fully diluted EPS
under previous accounting standards with basic and diluted EPS.
The assumed issuance of all equivalent common shares granted under the
Company's 1996 Stock Option Plan did not have a material effect on the number of
weighted average shares outstanding used in the 1997 diluted EPS
calculation and there were no outstanding stock options in 1996 and 1995.
Therefore, the Company's basic and diluted EPS amounts are equivalent for all
years presented and restatement of previously reported EPS amounts is
not required.
<PAGE>
I. Cash and Cash Equivalents - For purposes of these statements, short-term
investments which have a maturity of 90 days or less are considered cash
equivalents. The carrying amount of cash equivalents is a reasonable
estimate of fair value.
J. Customer Receivables - Customers are extended credit under customary
revolving credit terms. Customer receivables are classified as current
assets and include some amounts which are due after one year, consistent
with industry practice. Concentrations of credit risk with respect to
customer receivables are limited due to the large number of customers and
their geographic dispersion. At January 31, 1998 and February 1, 1997,
customer receivables are net of an allowance for doubtful accounts in the
amount of $18 million and $16 million, respectively.
K. Inventories - All retail inventories are valued by the retail method and
stated on the last-in, first-out (LIFO) cost basis, which is lower than
market. At January 31, 1998 and February 1, 1997, inventories were $32
million and $38 million lower, respectively, than they would have been had
the retail method been applied using the first-in, first-out (FIFO) cost
basis.
L. Property and Equipment - Property and equipment is carried at cost.
Depreciation is provided by using the straight-line method based on
estimated useful lives of the assets for financial reporting purposes while
accelerated depreciation, where permitted, is used for income tax purposes.
Betterments, renewals, and repairs that extend the life of the asset are
capitalized; other repairs and maintenance are expensed. Property and
equipment, other than buildings, are written off in the year that they
become fully depreciated.
The Company computes depreciation for financial reporting
purposes based on the following ranges of estimated useful lives:
Buildings 15-50 years
Building improvements 10-30 years
Store fixtures 7 years
Leased property Term of lease or life of property
The Company leases certain properties, principally store locations, under
capital leases as defined by SFAS No. 13, "Accounting for Leases." Property
meeting the criteria within the SFAS No. 13 is capitalized and accounted for
as an asset with the corresponding obligation carried as a liability. The
provision for amortization of leased properties is included in depreciation
and amortization expense. All other lease agreements are classified and
accounted for as operating leases with payments expensed as incurred.
M. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
N. Segment Reporting - The Company has one significant segment of business
(general merchandise department store retailing).
O. Reclassifications - Certain reclassifications have been made to prior
years'financial statements to conform with the classification used in the
1997 financial statements.
<PAGE>
2. IMPAIRMENT CHARGE
During the first quarter of 1996, the Company adopted SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which addresses the
identification and measurement of asset impairments and requires
the recognition of impairment losses on long-lived assets when
carrying values exceed expected future cash flows. The Company
evaluated its investment in long-lived assets at the individual
store level. Based upon an assessment of historical and projected
operating results, it was determined that the carrying value of
certain operating stores was impaired under the criteria defined
in SFAS No. 121. As a result, in 1996, the Company recorded a
pre-tax impairment charge of $12 million (a net of tax impact of
$7.2 million, or $.20 per share) to write down the carrying value
of these assets to their estimated fair value. The fair value of
these assets was based on operating projections and discounted
future cash flows.
3. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
The Company's long-term debt consisted of the following:
(in thousands) 1997 1996
8.2% Sinking Fund Debentures due 2022 (a) $100,000 $100,000
6.7% Notes due 2002 (b) 76,000 95,000
Industrial Revenue Bonds, at rates ranging
from 5.61% to 7.75% 505 8,250
Other Notes Payable 2,231 4,385
________ _______
Total 178,736 207,635
Capitalized Lease Obligations 45,330 47,292
________ _______
224,066 254,927
Less - due within one year 21,429 25,017
________ ________
Total Long-term Debt $202,637 $229,910
(a) The 8.2% Sinking Fund Debentures have a mandatory sinking fund
requirement of $5 million annually commencing in 2003.
(b) The 6.7% Notes have a mandatory annual sinking fund requirement
of $19 million through 2000; $14 million in 2001, and $5 million in 2002.
Maturities of long-term debt, including capitalized leases, for
the next five years are as follows:
(in thousands)
Amount
1998 $ 21,429
1999 $ 21,565
2000 $ 21,505
2001 $ 16,865
2002 $ 7,181
The fair value of long-term debt, including the current portion
and excluding capital lease obligations, was approximately $194 million
at January 31, 1998 and approximately $215 million at February 1, 1997.
The fair value is based on the present value of future cash flows. The
discount rates used approximated the current borrowing costs for similar
instruments.
The Company has a $200 million Revolving Credit Agreement (the Credit
Agreement) with a syndicate of banks which expires on August 3, 2000. The
applicable interest rate on borrowings is based, at the Company's option,
on either the banks' best rates under a competitive bid environment
or a predefined spread (which is tied to the Company's long-term debt
credit rating) over the appropriate LIBOR rate. The Credit Agreement
requires the Company to comply with certain financial covenants with respect
to minimum net worth and financial leverage.
<PAGE>
The Company also has in place additional uncommitted lines of credit in the
total amount of $120 million. No fee is paid for maintaining these lines and
interest on any borrowings is charged at a floating rate.
At January 31, 1998 and February 1, 1997, there were no borrowings
outstanding under the Credit Agreement or the uncommitted lines. Maximum
borrowings under these facilities for 1997 were $86 million, at an average
interest rate of 5.8%. During 1996, maximum borrowings were $43 million, at
an average interest rate of 6.0%.
4. STOCKHOLDERS' EQUITY
During the first quarter of 1997, the Board of Directors authorized the
Company to purchase up to 1,500,000 shares of its common stock in the open
market over a time frame which may extend to ten years. These shares are to
be held as treasury stock and are to be used solely to satisfy requirements
arising from the exercise of options granted under the 1996 Stock Option
Plan, which is discussed in Note 5. During the year ended January 31, 1998,
under this program, the Company purchased 95,500 shares of its common
stock at a cost of approximately $4.6 million.
5. STOCK OPTIONS
On December 3, 1996, the Company adopted the Mercantile Stores Company, Inc.
1996 Stock Option Plan, which provides for the issuance of non-qualified stock
option awards to certain employees designated by the Company's Board of
Directors. Beginning in 1997, stock options were granted under the plan at
an exercise price equal to the fair market value of the Company's common
stock on the date of grant. These options will generally become
exercisable in equal increments over a four year period and expire ten years
from the date of grant. The maximum number of shares available for awards
under the plan is 1,500,000. For the year ended January 31, 1998, 95,500
stock options were granted under the plan at an exercise price of $48 per
share. There were no stock options exercised or forfeited during 1997.
The Company has elected to account for stock options under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and to provide the pro forma disclosures required by SFAS No. 123,
"Accounting for Stock-Based Compensation." Therefore, no compensation expense
has been recognized in the accompanying Statements of Consolidated Income and
Retained Earnings. Had the Company applied the fair value method of accounting
for stock options set forth in SFAS No. 123, pro forma net income and earnings
per share would have been approximately the same as the amounts reported.
The Company estimated the fair value of stock options granted using the
Black-Scholes option-pricing model with the following assumptions: risk-free
interest rate of 6.9%; expected volatility of 22.7%; dividend yield of 2.3%
and a weighted-average expected life of the stock options of six years. The
weighted-average fair market value of stock options granted in 1997 was $14
per share.
<PAGE>
6. INCOME TAXES
The provision for income taxes consisted of the following:
(in thousands) 1997 Federal State Total
Current $63,486 $10,934 $74,420
Deferred 7,861 1,375 9,236
_______ _______ _______
Total $71,347 $12,309 $83,656
1996 Federal State Total
Current $67,287 $15,664 $82,951
Deferred (2,325) (539) (2,864)
________ ________ ________
Total $64,962 $15,125 $80,087
1995 Federal State Total
Current $66,171 $14,068 $80,239
Deferred 494 599 1,093
_______ _______ _______
Total $66,665 $14,667 $81,332
The provision for income taxes is different from the amount computed by
applying the statutory Federal income tax rate. The differences are
summarized as follows:
(in thousands) 1997 1996 1995
Provision at statutory rate of 35% $74,677 $70,543 $71,603
State and local income tax, less
Federal income tax benefit 8,001 9,831 9,534
Other 978 (287) 195
______ ________ _______
Total income tax provision $83,656 $80,087 $81,332
Effective income tax rate 39.2% 39.7% 39.8%
The tax effects of significant temporary differences representing
deferred tax assets and liabilities were as follows:
(in thousands) 1997 1996
Assets:
Inventory accounting $ 8,046 $ 3,804
Associate benefit costs 13,515 13,309
Interest, taxes and real estate costs 11,456 11,887
Bad debts 5,485 4,845
Capitalized leases 4,660 4,457
Other 8,919 8,384
_______ _______
Total deferred tax assets 52,081 46,686
Liabilities:
Depreciation (13,599) (6,455)
Pension and profit
sharing plan costs (38,365) (30,386)
Other (2,633) (2,521)
________ ________
Total deferred tax liabilities (54,597) (39,362)
________ ________
Total net deferred tax (liability) asset $(2,516) $ 7,324
<PAGE>
7. ASSOCIATE BENEFIT PLANS
The Company maintains a formal, qualified, non-contributory, defined benefit
pension plan covering all associates who have met certain age and service
requirements. Benefits under this plan are generally based on a career
average formula. The Company funds this plan in accordance with ERISA
requirements.
As computed under the provisions of SFAS No. 87, "Employers'Accounting for
Pensions," components of the net pension benefit included in income before
income taxes for the past three years were as follows:
(in thousands) 1997 1996 1995
Service cost $ 8,429 $ 8,689 $ 5,656
Interest cost 14,764 14,169 12,405
Actual return on plan assets (74,581) (44,416) (54,809)
Amortization of transition asset (5,043) (5,043) (5,043)
Other amortization and deferral 39,132 13,750 27,124
_________ _________ _________
Net pension benefit $(17,299) $(12,851) $(14,667)
The expected long-term rate of return on assets used in determining the net
pension benefit was 8.5% in all years presented.
The funded status of the formal, qualified pension plan at January 31, 1998
and February 1, 1997, based on actuarial and plan asset information as of
October 31, 1997 and 1996, was as follows:
(in thousands) 1997 1996
Actuarial present value of benefit obligations:
Vested benefits $ 181,734 $ 154,385
Non-vested benefits 5,070 4,537
_________ _________
Accumulated benefit obligation 186,804 158,922
Impact of future salary increases 28,300 27,629
_________ _________
Projected benefit obligation 215,104 186,551
Plan assets at fair value 444,531 379,861
Plan assets in excess of projected benefit
obligation 229,427 193,310
Items not yet recognized in income:
Initial transition credit which
is being amortized over 15 years (20,172) (25,216)
Subsequent net gains (108,257) (84,395)
___________ ___________
Prepaid pension benefit $ 100,998 $ 83,699
The actuarial present value of benefits was determined using a discount rate
of 7.25% in 1997 and 7.75% in 1996. The rate of compensation increase used to
measure the projected benefit obligation was 4.5% in 1997 and 5.0% in 1996.
The change in the discount rate and rate of compensation assumptions caused
the projected benefit obligation to increase by approximately $12 million in
1997.
The plan's assets include investments in common stocks, fixed income
securities, real estate investments, short-term investments, and cash. No
funding activity occurred between the plan and the Company during the fourth
quarter of 1997 or 1996.
The Company contributes to qualified and non-qualified savings and profit
sharing plans covering certain associates. The Company's total contribution
to the qualified and non-qualified savings and profit sharing plans
is based on 5% of pre-federal income tax FIFO profits, as defined. The
Company also provides retirement benefits to certain associates through
non-qualified defined benefit pension plans.
<PAGE>
The costs to the Company under these plans for the past three
years were as follows:
(in thousands) 1997 1996 1995
Savings and Profit Sharing $ 10,604 $ 10,271 $ 9,750
Pension 1,852 1,682 810
________ ________ ________
Total $ 12,456 $ 11,953 $ 10,560
The Company provides certain health care benefits for retired associates on a
contributory basis. Current retirees and active associates who retire on or
after age 60, with five or more years of service, are eligible for these
benefits if they had continuous medical coverage in the five years preceding
retirement. The plan does not cover retirees after Medicare eligibility. The
Company funds these benefits as claims are incurred.
The Company accounts for postretirement benefits under the provisions of
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The components of net periodic postretirement benefit cost for the
last three years were as follows:
(in thousands) 1997 1996 1995
Service cost earned during the year $ 509 $ 522 $ 490
Interest cost on projected benefit
obligation 771 776 800
Net amortization and deferral (1,174) (1,148) (1,199)
________ ________ ________
Net periodic postretirement benefit cost $ 106 $ 150 $ 91
The following table sets forth the plan's funded status at
January 31, 1998 and February 1, 1997:
(in thousands) 1997 1996
Accumulated postretirement benefit obligation:
Retirees $ 3,719 $ 3,520
Fully eligible active plan participants 235 216
Other active plan participants 6,534 6,279
________ ________
10,488 10,015
Unrecognized net gain from changes in plan
and assumptions 4,358 5,301
Unrecognized prior service cost 4,448 5,490
________ ________
Accrued postretirement benefit cost $19,294 $20,806
For measurement purposes, the following assumptions were used to project
changes in the accumulated postretirement benefit obligation for 1997
and 1996:
1997 1996
Discount rate 7.25% 7.75%
Health care cost trend rate 7.50% to 5.0% 8.00% to 5.0%
Years to ultimate trend 7 8
The health care cost trend rate affects the amounts reported. To illustrate,
increasing the assumed health care cost trend rate by one percentage point in
each year would increase the accumulated postretirement benefit obligation by
$1.0 million and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost by $.1 million.
<PAGE>
8. LEASES
The Company leases certain stores, warehouse facilities and equipment under
operating leases. The majority of these leases will expire within the next 20
years. the leases usually contain renewal options and provide for payment by
the lessee of real estate taxes and other expenses, and, in certain instances,
increased rentals based on percentages of sales.
Future minimum lease payments under noncancelable leases as of
January 31, 1998 were as follows:
(in thousands) Capital Operating Total
1998 $ 6,118 $ 26,137 $ 32,255
1999 6,060 25,129 31,189
2000 6,060 23,021 29,081
2001 5,955 22,119 28,074
2002 5,562 20,687 26,249
Thereafter 59,534 101,677 161,211
_______ ________ ________
Total minimum lease payments $ 89,239 $ 218,770 $308,059
Less: Executory costs (188)
Interest (43,771)
Present value of net minimum ________
lease payments $ 45,330
Rent expense consisted of the following:
(in thousands) 1997 1996 1995
Minimum rentals $ 25,180 $ 23,993 $23,305
Contingent rentals
(based on % of sales) 7,218 7,080 7,269
________ ________ ________
$ 32,398 $ 31,073 $30,574
9. CONTINGENCIES
The Company is involved in various legal actions arising in the normal course
of business. After taking into consideration legal counsels' evaluation of
such actions, management is of the opinion that their outcome will not have a
significant effect on the Company's consolidated financial statements.
The Company has entered into agreements with certain executives which provide
for severance pay benefits should the executive's employment be terminated
within two years following a change in control of the Company. In general,
severance pay benefits under these agreements are payable at 2.99 times the
executive's annual compensation for the year preceding the change in control.
Such annual compensation totalled approximately $5.2 million for the year
ended January 31, 1998.
<PAGE>
<TABLE>
QUARTERLY RESULTS
(unaudited in thousands, except per share data)
January 31, 1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 683,298 $ 692,905 $753,730 $ 1,013,832 $ 3,143,765
Costs, Expenses, and Other Income:
Cost of goods sold 478,928 494,063 527,599 707,028 2,207,618
Selling, general and
administrative expenses 172,642 173,593 189,849 190,999 727,083
Interest expense, net 3,235 2,372 1,879 5,056 12,542
Other income (3,252) (2,401) (2,965) (8,222) (16,840)
_____________ _________________________ ___________ ___________
651,553 667,627 716,362 894,861 2,930,403
_____________ _________________________ ___________ ___________
Income before provision for
income taxes 31,745 25,278 37,368 118,971 213,362
Provision for income taxes 12,437 9,930 14,658 46,631 83,656
____________ ________________________ ___________ ___________
Net income $ 19,308 $ 15,348 $ 22,710 $ 72,340 $ 129,706
============ ======================= =========== ===========
Earnings per share $ .52 $ .42 $ .62 $ 1.97 $ 3.53
</TABLE>
<TABLE>
February 1, 1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 655,409 $ 659,527 $ 727,741 $ 988,145 $ 3,030,822
Costs, Expenses, and Other Income:
Cost of goods sold 452,969 467,927 495,379 696,747 2,113,022
Selling, general and
administrative expenses 168,251 168,112 180,814 185,685 702,862
Interest expense, net 2,414 2,222 2,387 3,763 10,786
Other income (2,314) (2,755) (2,590) (1,741) (9,400)
Impairment charge 12,000 - - - 12,000
____________ ____________ ____________ ___________ ____________
633,320 635,506 675,990 884,454 2,829,270
____________ ____________ ____________ ___________ ____________
Income before provision for
income taxes 22,089 24,021 51,751 103,691 201,552
Provision for income taxes 8,818 9,587 20,663 41,019 80,087
____________ ____________ ____________ ___________ ____________
Net Income $ 13,271 $ 14,434 $ 31,088 $ 62,672 $ 121,465
============ ============ ============ =========== ============
Earnings per share $ .36 $ .39 $ .85 $ 1.70 $ 3.30
</TABLE>
<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
May 2, January 31,
1998 1998
Assets
Current Assets:
Cash and cash equivalents $153,928 $ 144,986
Receivables:
Customer, net 525,230 571,513
Other 13,236 17,591
Inventories 592,337 505,201
other current assets 37,308 35,898
Total Current Assets 1,322,039 1,275,189
Prepaid Pension & Other Noncurrent Assets 121,589 116,218
Property and Equipment, net 770,393 786,384
Total Assets $ 2,214,021 $ 2,177,791
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 139,252 $ 79,117
Notes payable and current maturities
of long-term debt 21,430 21,429
Accrued income taxes 26,360 40,913
Taxes other than income 25,820 22,235
Accrued payroll 18,220 24,410
Other current liabilities 63,351 63,775
Total Current Liabilities 294,433 251,879
Long-term Debt 202,077 202,637
Other Long-term Liabilities 76,486 76,429
Stockholders' Equity 1,641,025 1,646,846
Total Liabilities & Stockholders' Equity $ 2,214,021 $2,177,791
The accompanying notes are an integral part of these statements.
<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share data)
Thirteen Weeks Ended
May 2, May 3,
1998 1997
Revenues $ 688,286 $ 683,298
Cost of goods sold (including occupancy
and central buying expenses) 486,336 478,928
Gross Profit 201,950 204,370
Expenses and Other Income:
Selling, general and administrative expenses 174,735 172,642
Interest expense, net 2,296 3,235
Other income (2,455) (3,252)
174,576 172,625
Income before Provision for Income Taxes 27,374 31,745
Provision for income taxes 10,595 12,437
Net Income $ 16,779 $ 19,308
Earnings Per Share $ .46 $ .52
Dividends Declared Per Share $ .615 $ .585
Weighted Average Shares Outstanding 36,748,550 36,835,783
The accompanying notes are an integral part of these statement.
<PAGE>
MERCANTILE STORES COMPANY, INC AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Thirteen Weeks Ended
May 2, May 3,
1998 1997
Cash Flows From Operating Activities:
Net Income $ 16,779 $ 19,308
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 20,798 18,727
Deferred income taxes 249 1,813
Net pension benefit (5,562) (3,933)
Change in inventories (87,136) (19,028)
Change in accounts receivable 50,638 45,782
Change in accounts payable 60,135 24,731
Net change in other working capital items (34,486) 31,200)
Net cash provided by operating activities 21,415 56,200
Cash Flows From Investing Activities:
Cash payments for property and equipment (25,392) (26,850)
Proceeds from sale of property 24,314 -
Net change in other noncurrent assets and liabilities 188 (280)
Net cash used in investing activities ( 890) (27,130)
Cash Flows From Financing Activities:
Payments of notes payable and long-term debt (559) (3,529)
Repurchase of common stock -- (3,487)
Dividends paid (11,024) (10,500)
Net cash used in financing activities (11,583) (17,516)
Net increase in cash and cash equivalent 8,942 11,554
Beginning cash and cash equivalents 144,986 128,115
Ending cash and cash equivalents $ 153,928 $ 139,669
Supplemental Cash Flow Information:
Interest paid $ 7,718 $ 8,505
Income taxes paid $ 24,899 $ 18,830
The accompanying notes are an integral part of these statements.
<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
1. Nature of Operations
Mercantile Stores Company, Inc. (the "Company") is a conventional
department store retailer engaged in the general merchandising
business. The Company operates 103 department stores and 16 home
fashion stores under 13 different names in a total of 17 states.
A subsidiary, Mercantile Credit Corp., provides servicing for the
Company's private label credit program. The Company also
maintains a partnership interest in five operating shopping
center ventures and one land ownership venture. During the second
quarter of 1998, the partnership interest in one of the shopping
center ventures was sold. The pre-tax profit of approximately $4
million resulting from this sale will be recorded in the second
quarter.
2. Accounting Policies
The consolidated condensed financial statements included herein
have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission
with respect to Form 10-Q. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures made herein
are adequate to make the information not misleading. It is
suggested that these consolidated condensed financial statements
be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on
Form 10-K.
Interim statements are subject to possible adjustments in
connection with the annual audit of the Company's accounts for
the full 1998 fiscal year. In the Company's opinion, all
adjustments (consisting only of normal recurring adjustments)
necessary for fair statement presentation have been included.
Because of seasonality, the results of operations for the periods
presented are not necessarily indicative of the results expected
for the year ending January 30, 1999.
3. Revenues
Revenues include sales from retail operations, leased departments
and finance charge revenue earned on customer accounts serviced
by the Company under its private label credit program. Finance
charge revenue is recognized in the period in which it is earned
and amounted to $24 million and $22 million, respectively, for
the 1998 and 1997 first quarter.
4. Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term, highly
liquid investments with a maturity of ninety days or less.
5. Customer Receivables
Customers are extended credit under customary revolving credit
terms. Customer receivables are classified as current assets and,
consistent with industry practice, include some amounts which are
due after one year. Concentrations of credit risk with respect
to customer receivables are limited due to the large number of
customers comprising the Company's credit card base, and their
geographic dispersion. Customer receivables at May 2, 1998 and
January 31, 1998 are net of an allowance for doubtful accounts of
$20 million and $18 million, respectively.
6. Merchandise Inventories
All retail inventories are valued by the retail method and stated
on the last-in, first-out (LIFO) cost basis, which is lower than
market. Since inventories under the LIFO method are based on an
annual determination of quantities and costs, the inventories at
interim periods are based on certain estimates relating to
quantities and costs as of the fiscal year-end.
<PAGE>
7. Stockholders' Equity
During the first quarter of 1997, the Board of Directors
authorized the Company to purchase up to 1,500,000 shares of its
common stock in the open market over a time frame which may
extend to ten years. These shares are to be held as Treasury
stock and are to be used solely to satisfy requirements arising
from the exercise of options granted under the 1996 Stock Option
Plan. There were no shares purchased under this program during
the first quarter of 1998. During the quarter ended May 3, 1997,
the Company purchased 73,300 shares of its common stock at a cost
of approximately $3.5 million.
8. 1996 Stock Option Plan
The Mercantile Stores Company, Inc. 1996 Stock Option Plan (the
Plan) provides for the issuance of stock option awards to certain
employees designated by the Company's Board of Directors. Stock
options awarded under the Plan are granted at an exercise price
equal to the fair market value of the Company's common stock on
the date of grant and generally vest and become exercisable in
equal increments over a four-year period. The Plan also provides
for full accelerated vesting in the event of a change in control
of the Company, as defined. The maximum number of shares
available for awards under the Plan is 1,500,000. During the
quarter ended May 3, 1997, 95,500 stock options were granted
under the Plan at an exercise price of $48 per share. No
additional options have been granted. During the first quarter of
1998, 25% of the options granted in 1997 became exercisable. None
were exercised.
9. Earnings per Share (EPS)
Effective January 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share,"
which replaces the calculation of primary and fully diluted EPS
which existed under previous accounting standards with new
standards for the calculation of basic and diluted EPS. The
assumed issuance of all equivalent common shares granted under
the Company's 1996 Stock Option Plan did not have a material
effect on the number of weighted average shares outstanding used
in the calculation of EPS for the periods presented. The
Company's basic and diluted EPS amounts are identical for the
periods presented.
10. Subsequent Event Acquisition by Dillard's, Inc.
On May 16, 1998, the Company entered into an Agreement and Plan
of Merger with Dillard's, Inc. and MSC Acquisitions, Inc., a
wholly owned subsidiary of Dillard's, Inc., pursuant to which MSC
Acquisitions, Inc. agreed to purchase all of the issued and
outstanding shares of the Company through a cash tender offer of
$80 per share, or approximately $2.9 billion. Stockholders
representing approximately 40% of the issued and outstanding
shares of the Company have contractually agreed, among other
things, to tender their shares. The cash tender offer was
commenced on May 21, 1998 and is scheduled to expire on June 19,
1998, unless the offer is extended. The consummation of the
merger is contingent upon, among other things, the tendering of
more than 50% of the outstanding shares of the Company and the
approval of the Federal Trade Commission. In the first quarter
of 1998, the Company's Board of Directors approved an Incentive
Performance Plan to, among other things, award a total of up to
$3 million to five key executives for assistance to the Board in
pursuing one or more strategic alternatives potentially available
to the Company. If and when the merger with Dillard's is
consummated, it would be the expectation that the Board would
elect to pay the full amount authorized under the Incentive
Performance Plan to the five key executives. In addition, under
the Incentive Performance Plan, the Company must pay a "Gross-Up
Payment" (as defined therein) to any covered associate with
respect to any payment to be made under the Incentive Performance
Plan, under Severance Protection Agreements, or in respect of the
Company's 1996 Stock Option Plan.
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Pro Forma Statements of Income for the
year ended January 31, 1998 and the thirteen weeks ended May 2,
1998 present unaudited results of operations for Dillard's, Inc.
(the "Company") as if the acquisition of Mercantile Stores
Company Inc. ("Mercantile") (the "Acquisition") and other
transactions described in the next paragraph (the "Pro Forma
Financing Transactions") had occurred as of the beginning of the
fiscal year presented. The following Unaudited Pro Forma Balance
Sheet presents the unaudited pro forma financial condition of the
Company as if the Acquisition and Pro Forma Financing
Transactions had occurred as of May 2, 1998. The excess purchase
price over the identifiable net assets and liabilities is
reported as Goodwill. The carrying values of Mercantile's net
assets are assumed to equal their fair value for purposes of
these Unaudited Pro Forma Financial Statements unless indicated
otherwise in the Notes to Unaudited Pro Forma Financial
Statements. These values are subject to revision following the
results of any appraisals after the consummation of the
Acquisition.
The Pro Forma Financial Statements reflect the Acquisition, which
is accounted for as a purchase, in accordance with Accounting
Principles Board Opinion No. 16 "Business Combinations" ("APB
16"). The Pro Forma Financial Statements reflect assumed
borrowings by the Company to finance the Acquisition (previously
defined, the "Pro Forma Financing Transactions"). The Pro Forma
Financing Transactions include:
Borrowing Type Amount Interest Rate
(thousands)
Commercial Paper $ 240,000 5.50%
Short-term bank line 500,000 6.00%
Bridge loan facility 1,200,000 5.85%
Publicly underwritten
Long-term notes 1,100,000 6.84%
$3,040,000
The Pro Forma Adjustments described in the accompanying Notes to
the Pro Forma Financial Statements should be read in conjunction
with such statements. Final amounts will differ from those set
forth in the following Unaudited Pro Forma Financial Statements.
As a result of its planned installation of standardized store
systems in all Mercantile locations, and consolidation of various
administrative support functions such as marketing, buying,
advertising, accounting, and management information systems, the
Company's management expects to operate the combined operations
of the Company and Mercantile with a more efficient overhead
expense structure than each of the two entities operating on a
stand-alone basis. The Company also expects to achieve cost
reductions as a result of increased purchasing power derived from
the combination of the two companies. However, for purposes of
the Unaudited Pro Forma Income Statements these and other
potential synergies in overhead expense have not been reflected
because their realization cannot be assured.
The Unaudited Pro Forma Financial Statements are presented for
information purposes only and do not purport to be indicative of
the actual financial position or results of operations of the
Company had such transactions actually been consummated on such
dates, or of the future financial position or results of
operations of the Company which may result from the consummation
of such transactions. The retail business is seasonal in nature,
with a higher proportion of sales and earnings usually being
generated in the months of November and December than in other
periods. Because of this seasonality and other factors, results
of operations for an interim period are not necessarily
indicative of results of operations for an entire fiscal year.
<PAGE>
The Unaudited Pro Forma Financial Statements are based in part on
the historical financial statements of the Company and Mercantile
and should be read in conjunction with each of the consolidated
financial statements of the Company and Mercantile and the
related notes thereto contained in (i) The Company's Annual
Report on Form 10-K for the year ended January 31, 1998, (ii) the
Company's Quarterly Report on Form 10-Q for the quarter ended May
2, 1998, (iii) Mercantile's audited financial statements for the
year ended January 31, 1998, which are included herein and (iv)
Mercantile's unaudited financial statements for the thirteen
weeks ended May 2, 1998, which are included herein. Certain items
derived from Mercantile's historical financial statements have
been reclassified to conform to the pro forma presentation.
<PAGE>
Pro Forma Balance Sheet (Unaudited)
May 2, 1998
(in thousands)
<TABLE>
Historical Pro Forma
Dillard's Mercantile Adjustments Pro Forma
Note 1
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $81,495 $153,928 $ - $235,423
Trade accounts receivable 1,073,626 525,230 - 1,598,856
Merchandise inventories 2,063,898 592,337 32,000 2,688,235
Other current assets 13,176 50,544 63,720
TOTAL CURRENT ASSETS 3,232,195 1,322,039 32,000 4,586,234
INVESTMENTS AND OTHER ASSETS 100,414 121,589 128,000 355,003
5,000
PROPERTY AND EQUIPMENT 2,462,262 770,393 563,000 3,795,655
CONSTRUCTION IN PROGRESS 41,204 - - 41,204
GOODWILL - - 938,975 938,975
TOTAL ASSETS $5,836,075 $2,214,021 $1,666,975 $9,717,071
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable and
accrued expenses $810,635 $246,643 $ - $1,057,278
Commercial paper 288,429 - 240,000 528,429
Short-term bank debt - - 500,000 500,000
Federal and state income taxes 50,548 26,360 - 76,908
Current portion of long-term debt 107,268 21,430 - 128,698
Current portion of capital leases 1,624 - - 1,624
TOTAL CURRENT LIABILITIES 1,258,504 294,433 740,000 2,292,937
LONG-TERM DEBT 1,463,968 202,077 2,300,000 3,966,045
CAPITAL LEASE OBLIGATIONS 11,872 - - 11,872
OTHER LONG-TERM LIABILILITIES - 76,486 - 76,486
DEFERRED INCOME TAXES 322,028 - 268,000 590,028
STOCKHOLDERS' EQUITY 2,779,703 1,641,025 (1,641,025) 2,779,703
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $5,836,075 $2,214,021 $1,666,975 $9,717,071
See Notes to Unaudited Pro Forma Financial Statements
</TABLE>
<PAGE>
Pro Forma Income Statement (Unaudited)
For the year ended January 31, 1998
(in thousands, except per share data)
<TABLE>
Historical Pro Forma
Dillard's Mercantile Adjustments Pro Forma
Note 2
<S> <C> <C> <C> <C>
Net sales $6,631,752 $3,143,765 ($89,000)(a) $9,686,517
Service charges, interest,
and other income 185,157 21,983 89,000 (a) 296,140
6,816,909 3,165,748 - 9,982,657
Costs and expenses:
Cost of sales 4,393,291 2,207,618 (189,837)(a) 6,411,072
Advertising, selling,
administrative and general 1,629,721 727,083 69,545 (a) 2,435,349
9,000 (b)
Depreciation and amortization 199,939 - 79,254 (a) 330,817
28,150 (c)
23,474 (d)
Rentals 54,686 - 41,038 (a) 95,724
Interest and debt expense 129,237 17,685 188,640 (e) 335,562
6,406,874 2,952,386 249,264 9,608,524
Income Before Income Taxes 410,035 213,362 (249,264) 374,133
Income taxes 151,710 83,656 (85,713)(f) 149,653
Net Income $258,325 $129,706 ($163,551) $224,480
Earnings per share:
Basic $2.32 $3.53 $2.02
Diluted $2.31 $3.53 $2.00
Average Shares Outstanding:
Basic 111,303 36,771 111,303
Diluted 111,994 36,771 111,994
See Notes to Unaudited Pro Forma Financial Statements
</TABLE>
<PAGE>
Pro Forma Income Statement (Unaudited)
For the 13 weeks ended May 2, 1998
(in thousands, except per share data)
<TABLE>
Historical Pro Forma
Dillard's Mercantile Adjustments Pro Forma
Note 2
<S> <C> <C> <C> <C>
Net sales $1,682,216 $688,286 ($24,000)(a) $2,346,502
Service charges, interest,
and other income 47,669 2,455 24,000 (a) 74,124
1,729,885 690,741 - 2,420,626
Costs and expenses:
Cost of sales 1,117,221 486,336 (48,405)(a) 1,555,152
Advertising, selling,
administrative and general 414,048 174,735 17,248 (a) 608,281
2,250 (b)
Depreciation and amortization 54,554 - 20,798 (a) 88,259
7,038 (c)
5,869 (d)
Rentals 10,291 - 10,359 (a) 20,650
Interest and debt expense 33,656 2,296 47,160 (e) 83,112
1,629,770 663,367 62,317 2,355,454
Income Before Income Taxes 100,115 27,374 (62,317) 65,172
Income taxes 37,045 10,595 (21,571)(f) 26,069
Net Income $63,070 $16,779 ($40,746) $39,103
Earnings per share:
Basic $0.58 $0.46 $0.36
Diluted $0.58 $0.46 $0.36
Average Shares Outstanding:
Basic 108,323 36,749 108,323
Diluted 108,951 36,749 108,951
See Notes to Unaudited Pro Forma Financial Statements
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(in thousands)
Note 1. Unaudited Pro Forma Balance Sheet Adjustments
The acquisition of Mercantile will be accounted for as a purchase
in accordance with APB 16. The purchase price is being allocated
first to tangible assets and liabilities of Mercantile based on
preliminary estimates of their fair values, with the remainder
being allocated to goodwill. The following table sets forth the
purchase price based on the tender offer price of $80.00 per
share and preliminary purchase price allocation:
Cash paid for stock $2,940,000
Cash paid for outstanding stock options 3,000
Transaction expenses 92,000
Purchase price 3,035,000
Historical book value of net assets acquired (1,641,025)
Excess of purchase price over historical
book value of assets acquired $1,393,975
===========
Allocation of excess purchase price:
Adjust inventories to fair value $ 32,000
Increase property & equipment to fair value 563,000
Adjustment to pension assets 128,000
Increase to goodwill 938,975
Changes in deferred income taxes for the tax effect
of the above adjustments (except goodwill) (268,000)
$1,393,975
===========
The Pro Forma Balance Sheet reflects the following as assumed
borrowings by the Company to finance the Acquisition:
Borrowing Type Amount Interest Rate
Commercial Paper $ 240,000 5.50%
Short-term bank line 500,000 6.00%
Bridge loan facility 1,200,000 5.85%
Publicly underwritten
Long-term notes 1,100,000 6.84%
$3,040,000
==========
Prepaid debt expenses are expected to be approximately $5
million. Actual borrowings and sources may differ from the
estimated amounts depending upon actual costs, borrowing needs
and market conditions.
Note 2. Unaudited Pro Forma Income Statement Adjustments.
(a) To reclassify certain Mercantile presentations to conform to
the Company's income statement presentation.
(b) To adjust Mercantile's pension expense as a result of the
increase in the prepaid pension asset recognized in the purchase
accounting adjustments.
(c) To adjust depreciation of Mercantile's property and
equipment to amounts based on estimated market values, using a
weighted average depreciable life of 20 years.
(d) To recognize amortization of the excess purchase price over
net assets acquired in connection with the Acquisition assuming a
40 year period.
(e) To record interest expense on the borrowings incurred to
fund the Acquisition at the interest rates disclosed in Note 1,
above (which assumed rates may vary from the actual rates of
interest thereon). An increase or decrease of 0.125% in the interest
rate would result in an increase or decrease in interest expense
of $3.8 million and $950 thousand for the year ended January 31, 1998
and the thirteen weeks ended May 2, 1998, respectively.
(f) To adjust income tax expense based upon an assumed composite
(federal, state and local) income tax rate of 40%, which reflects
an increase from the Company's historical effective rate due to
the non deductibility of goodwill amortization.
<PAGE>
Note 3. Synergies
As a result of its planned installation of standardized store
systems in all Mercantile locations, and consolidation of various
administrative support functions such as marketing, buying,
advertising, accounting, and management information systems, the
Company's management expects to operate the combined operations
of the Company and Mercantile with a more efficient overhead
expense structure than each of the two entities operating on a
stand-alone basis. The Company also expects to achieve cost
reductions as a result of increased purchasing power derived from
the combination of the two companies. However, for purposes of
the Unaudited Pro Forma Income Statements these and other
potential synergies in overhead expense have not been reflected
because their realization cannot be assured.
<PAGE>
Exhibit Index
Exhibit Number Description
2* Agreement and Plan of Merger, dated as of May
16, 1998, among Dillard's, Inc., MSC Acquisitions,
Inc. and Mercantile Stores Company, Inc. (Exhibit
(c)(1) to Schedule 14D-1 in 005-10123)
23 Consent of Independent Public Accountants
*Incorporated herein by reference as indicated.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated April 3, 1998, included in this Current Report
on Form 8-K, into Dillard's, Inc.'s previously filed Registration Statement
File No. 333-51603 on Form S-3, Registration Statement File No. 33-42500 on
Form S-8, Registration Statement File No. 33-42553 on Form S-8 and
Registration Statement File No. 33-42499 on Form S-8.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
July 1, 1998
