SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-3339
MERCANTILE STORES COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0032941
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
9450 Seward Road Fairfield, Ohio 45014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513) 881-8000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
36,748,550 shares of Common Stock at $.14 2/3 par value
as of June 16, 1998
Total number of sequentially numbered pages in this filing, including
exhibits thereto: 12
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<PAGE>
MERCANTILE STORES COMPANY, INC.
AND SUBSIDIARY COMPANIES
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets -
May 2, 1998 and January 31, 1998 3
Consolidated Condensed Statements of
Income - For the thirteen weeks
ended May 2, 1998 and May 3, 1997 4
Consolidated Condensed Statements of
Cash Flows - For the thirteen weeks
ended May 2, 1998 and May 3, 1997 5
Notes to Consolidated Condensed Financial
Statements 6 - 9
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial
Condition 10 - 11
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of
Security Holders 12
Item 6 - Exhibits and Reports on Form 8-K 12
- 2 -
<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.
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<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 statements.
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<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 equivalents 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.
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<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.
(Continued)
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<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(Continued)
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.
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.
(Continued)
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<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(Continued)
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.
(Continued)
<PAGE>
- 8 -
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(Continued)
10. Subsequent Event Acquisition by Dillard's, Inc. (continued)
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.
- 9 -
<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Material Changes in the Results of Operations for the First Quarter of 1998
Compared to the First Quarter of 1997
Revenues increased by .7% to $688 million in the 1998 first quarter. Sales
from retail operations were $664 million, a .5% increase over the prior
year; comparable unit sales decreased by 1.1%. Finance charge revenue
totaled $24 million in the current year quarter, a $2 million increase over
that recorded in the prior year.
Cost of Goods Sold (COGS), as a percent to revenues, was 70.7% in 1998
compared to 70.1% in the prior year. The increase was attributable to a
.3% increase in the occupancy costs (primarily depreciation) element of
COGS, which reflects the decline in comparable store sales and the
under-performing total sales results, and a .3% increase in costs associated
with lower-margin leased department sales (leased department sales increased
11% in the period). Merchandise margins in the period were relatively equal
with those reflected in the 1997 quarter.
Selling, general and administrative expenses, as a percent to revenues,
were 25.4% in the 1998 quarter, an increase of .1% over the prior year.
This increase was reflected in payroll and payroll related expenses and was,
again, primarily related to the inability to leverage the under-performing
sales results.
Interest expense, net, decreased $.9 million in the 1998 first quarter. The
decline was primarily attributable to a reduction in interest expense
associated with structured debt. Long-term debt (including the current
portion) was reduced by approximately $27 million from the end of 1997's first
quarter to the same date in 1998. In addition, increased interest income
earned on a higher level of invested cash during the current year's first
quarter contributed to the decline in net interest expense.
(Continued)
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<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Continued)
Material Changes in Financial Condition From January 31, 1998 to May 2, 1998
The retail business is highly seasonal with approximately one-third of annual
sales being generated in the fourth quarter which encompasses the important
Christmas selling season. As a result, significant variations can occur when
comparing financial conditions at the above dates.
The $9 million increase in cash and cash equivalents during the period was
attributable to the $21 million of cash generated by operations and proceeds
which was from the sale of property of $24 million, substantially offset by
$25 million of payments for capital expenditures and $11 million of dividend
payments.
Net customer receivables decreased approximately $46 million due to the normal
pay-down of peak year-end balances.
Inventories increased $87 million during the period due to the normal
replenishment of inventory levels following the Christmas promotional and
January clearance periods, the under-performing sales results and the $10
million inventory requirement for the two new stores opened during the period.
In April 1998, the Company completed the sale of its McAlpins' store in the
Dayton, Ohio market for $24 million in cash proceeds. The sale of the store
did not have a material impact on the Company's results of operation.
The $60 million increase in accounts payable is related to the increase in
inventory.
The Company satisfies short-term financing needs primarily through internally
generated funds. In addition, the Company has in place a committed, unsecured
$200 million revolving credit facility. This arrangement is with a consortium
of seven banks and expires in August, 2000. When used, interest rates will
be based, at the Company's option, on either the banks' best rates under a
competitive bid environment or a predefined spread over the appropriate LIBOR
rate. In addition to this committed facility, the Company has available
uncommitted lines of credit totaling $120 million. Significant cash balances
were maintained throughout the first three months of 1998 and it was not
necessary to use any of these credit arrangements during the period.
On May 16, 1998, the Company entered into an agreement with Dillard's Inc.,
pursuant to which all of the outstanding shares of the Company would be
acquired for $80 per share. Additional information regarding this subsequent
event is explained in footnote 10 of the Notes to Consolidated Condensed
Financial Statements.
- 11 -
<PAGE>
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
(a) There were no matters submitted to a vote of security holders
during the quarterly period ended May 2, 1998.
Item 6 - Exhibits and reports on form 8-K
(a) Exhibit 27 - Financial Data Schedule (filed electronically).
(b) There were no reports on Form 8-K filed for the quarterly
period ended May 2, 1998.
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 thereunto duly authorized.
MERCANTILE STORES COMPANY, INC.
(Registrant)
June 16, 1998
(Date)
s/ James M. McVicker
----------------------------------------
(James M. McVicker, Senior Vice President,
and Chief Financial Officer)
- 12 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEETS, CONSOLIDATED CONDENSED STATEMENTS OF
INCOME AND CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE PERIOD ENDED
MAY 2, 1998 AND IS QUALFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> MAY-2-1998
<CASH> 153,928
<SECURITIES> 0
<RECEIVABLES> 544,986
<ALLOWANCES> 19,756
<INVENTORY> 592,337
<CURRENT-ASSETS> 1,322,039
<PP&E> 1,234,450
<DEPRECIATION> 464,057
<TOTAL-ASSETS> 2,214,021
<CURRENT-LIABILITIES> 294,433
<BONDS> 0
0
0
<COMMON> 5,410
<OTHER-SE> 1,635,615
<TOTAL-LIABILITY-AND-EQUITY> 2,214,021
<SALES> 664,250
<TOTAL-REVENUES> 688,286
<CGS> 486,336
<TOTAL-COSTS> 486,336
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,408
<INCOME-PRETAX> 27,374
<INCOME-TAX> 10,595
<INCOME-CONTINUING> 16,779
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,779
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
