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Mercantile Stores Co Inc ˇ 10-K ˇ For 1/31/98 ˇ EX-13

Filed On 4/27/98   ˇ   Accession Number 64923-98-5   ˇ   SEC File 1-03339

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  As Of                Filer                Filing    For/On/As Docs:Size

 4/27/98  Mercantile Stores Co Inc          10-K        1/31/98    6:88K

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         10     39K 
 2: EX-13       Annual or Quarterly Report to Security Holders        27    131K 
 3: EX-21       Subsidiaries of the Registrant                         1      8K 
 4: EX-23       Consent of Experts or Counsel                          1      5K 
 5: EX-24       Power of Attorney                                      1      6K 
 6: EX-27       Financial Data Schedule                                1      8K 


EX-13   —   Annual or Quarterly Report to Security Holders

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MERCANTILE STORES COMPANY, INC. 1997 Annual Report table of contents financial highlights page 1 chairman's letter page 3 financial information pages 5-25 group presidents, store divisions and locations pages 26-27 corporate officers page 28 directors and stockholder information inside back cover
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[Enlarge/Download Table] Financial Highlights 1997 1996 % change Year Ending January 31, 1998 Year Ending February 1, 1997 For the year: Retail Sales $ 3,054,900,000 $ 2,945,600,000 3.7 Income: Net Operating Income- Excluding Impairment Charge $ 129,706,000 $ 128,665,000 0.8 Impairment Charge -- (7,200,000) _________________ ________________ Net Income $ 129,706,000 $ 121,465,000 6.8 ================= ================= Per Share Data: Net Income- Excluding Impairment Charge $ 3.53 $ 3.50 Impairment Charge -- (.20) ________________ _________________ Net Income $ 3.53 $ 3.30 ================ ================= At year-end: Working Capital $ 1,023,310,000 $ 1,017,533,000 0.6 Ratio 5.1 4.6 Long-Term Debt (including current maturities) $ 224,066,000 $ 254,927,000 (12.1) Debt to Capitalization Ratio 12.0% 14.0% Stockholders' Equity $ 1,646,846,000 $ 1,565,313,000 5.2 Book Value Per Share $ 44.81 $ 42.48 5.5 ONE
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OUR COMMITMENT. . . - We will operate leading department stores in each community we serve. - We will provide value, quality, and exceptional service to our customers. - We will offer to our associates an environment of respect, learning, and opportunity for development. - We will share our resources with the communities we serve. - We will succeed in an atmosphere of highest ethical standards. - We will dedicate ourselves to dynamic growth and achieve a high return for our shareholders. PHOTO OF STORE The 212,000 square foot Maison Blanche storewas opened in the new Mall of Louisiana in Baton Rouge,Louisiana in October. TWO
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Dear Shareholders,The year 1997 was marked by intensified competition and sales promotion in the retail industry. In light of this environment, Mercantile Stores Company, Inc. has remained stable with total retail sales increasing 3.7% and net income increasing 6.8% over 1996. In fact, when looking at one of the key measurements used by the analytical community in reviewing performance, the ratio of pretax profits to sales, Mercantile's 6.8% in 1997 ranks us in the upper quartile of the retail industry. In addition, the Company's debt-to-capitalization ratio, which declined to 12% in 1997 from 14% in 1996, is one of the lowest such ratios in the business. While these results represent an increase over our last year's performance, we certainly recognize the need to "raise the bar" and drive toward increasing our position within the retail community.Now, let's review some of the successes Mercantile has experienced over the past year and the programs that have been established to address this challenge: - The new Joslins Park Meadows store in Denver opened to rave reviews and was named "Retail Store of the Year" by Chain Store Age, a major print media voice of the retail industry. This is the first time that this coveted and prestigious award has been presented to a Mercantile store and we will certainly take what we have learned from this experience and implement it in the opening of future new stores. - Our hair and nail salon business surpassed the $100 million milestone for the first time. Part of this success was the expansion of the newly furbished McAlpin's Day Spa & Salon in the Kenwood Towne Centre in Cincinnati. With 118 stations, we believe this to be the largest hair and nail salon in the country. - Year-end inventories declined by $55 million as a result of a concentrated program to align inventory levels with recent sales trends. - Within the last several months, plans have been finalized to introduce an innovative concept into our stores to satisfy our customers' appetite for the active lifestyle. During the first quarter of 1998, a new "Activezone" merchandising concept has been introduced which will display cross-gender athletic wear and accessories in a self-contained boutique setting. In looking to the future, Mercantile's management has responded to the challenge of profitably growing our business by embarking upon a unique campaign. In early February, 1998, after nine months of an extensive methodology study utilizing both internal and external resources, we have established the Profit Growth Initiative Program. We have charged thirty- three of our fast-track, upper and middle management associates to examine the five most significant elements of our business operation with the purpose of identifying "Best Practice" modes. These individuals are dedicating themselves, on a full-time basis, to the task of determining the most effective and efficient ways to conduct our business. This program is on schedule and we have the utmost confidence that the positive results from it will be implemented in 1998 and reflected in our reported 1999 earnings. In thinking about the progress of this past year, we thank our associates for their hard work and dedication which has contributed to making us a better Company. We also thank our vendors and shareholders whose support is so vital to our success. And lastly, but most importantly, we extend our sincere gratitude to our customers for judging us a better place in which to spend their valued time and hard-earned resources. Sincerely, David L. Nichols Chairman of the Board THREE
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PHOTO OF ACTIVEZONE DEPARTMENT In 1998, responding to our customers' interest in the active lifestyle, we are introducing the "ACTIVEZONE" -- a one-stop shopping experience which offers men's and women's athletic footwear and apparel in a sports-oriented environment. FOUR
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MANAGEMENT'S DISCUSSION ANALYSIS (Certain statements contained in this report reflect "forward looking" information, as that term is defined in the Private Securities Legislation Reform Act of 1995. Such "forward looking" information is based on a series of projections and estimates and involves certain risks and uncertainties that could cause actual results to differ materially from those indicated in any "forward looking" statements. Such factors include but are not limited to, the level of consumer spending for merchandise carried by the Company, the competitive pricing environment within the department store industry, and the effectiveness of the Company's planned advertising programs, appropriate inventory management, and the availability of trained personnel.) Results of Operations Revenues include sales from retail operations as well as finance charges earned on private label credit sales. In 1997, revenues amounted to $3.1 billion, an increase of 3.7% over the previous year. In 1996, revenues increased 2.9% to $3.0 billion. Total retail sales for 1997 reflect the impact of two new department stores opened during 1997 and a full year of operation for five new department stores opened during 1996. The percentage changes in total and comparable retail sales for the last three years were as follows: 1997 1996 1995* Total retail sales 3.7% 3.0% 1.5% Comparable retail sales 1.1% 2.4% 1.2%* (The 1995 year consisted of 53 weeks; percentages for that year are reflected on an equalized 52-week basis.) Finance charges in 1997 increased 4.7% to $89 million. This improvement was primarily due to the incremental finance charge income earned on a 4.5% increase in private label credit sales. Finance charges amounted to $85 million in 1996 compared to $52 million in 1995. The lower amount earned in 1995 was attributable to changes in the servicing of the Company's private label credit program in mid-1995, as discussed in Note 1 of Notes to Consolidated Financial Statements. Net Income in 1997 increased 6.8% to $129.7 million, or $3.53 per share, compared to reported net income of $121.5 million, or $3.30 per share, earned in 1996. However, 1996 net income was reduced by a net of tax charge of $7.2 million, or $.20 per share, to recognize the requirements of an accounting standard with respect to impaired assets. Excluding this charge, net income for 1996 amounted to $128.7 million, or $3.50 per share. In 1995, net income amounted to $123.2 million, or $3.35 per share. Net income reported for 1997 was positively impacted by the effect of the last-in, first-out (LIFO) method of inventory valuation, and a non-recurring gain resulting from a software licensing agreement. The following summary presents an analysis of net and per share, pre-LIFO income on a comparable basis for the past three years: 1997 1996 1995 (amounts in millions) Amount Per Share Amount Per Share Amount Per Share Net income before LIFO and non-recurring items $ 121.8 $ 3.31 $ 133.5 $ 3.63 $ 122.9 $ 3.34 LIFO credit / (charge) 3.6 .10 (4.8) (.13) 0.3 .01 Impairment charge - - (7.2) (.20) - - Software license 4.3 .12 - - - - _______ ______ ______ ______ ______ _____ Net income $ 129.7 $ 3.53 $ 121.5 $ 3.30 $ 123.2 $ 3.35 ======= ====== ====== ====== ====== ====== FIVE
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Cost of Goods Sold (COGS) in the retail industry traditionally includes certain occupancy and buying costs which are not directly associated with the cost of merchandise. Occupancy costs so classified include depreciation, rent, utilities and real estate taxes; buying costs, in this respect, include the payroll and travel expenses of the corporate central buying and merchandise planning functions. In 1997, COGS, as a percent to revenues, increased by 0.5% from the prior year. Excluding the impact of the LIFO method of inventory valuation, COGS increased 1.0% from 1996. This increase in COGS was primarily attributable to an increase in markdowns and other promotional activity, such as the extension of volume discounts to private label credit card customers who had established a certain level of purchasing activity. In 1996, COGS, as a percent to revenues and on a pre-LIFO basis, decreased 0.5%. A merchandise margin improvement of 0.8%, attributable primarily to a higher initial markup, was effectively offset by a 0.2% increase in lower margin leased department sales and a 0.1% increase in shrinkage expense. The Company follows the LIFO method to value all retail inventories and utilizes inflation indices produced by the Bureau of Labor Statistics. The effect of LIFO on COGS, as a percent to revenues, for the past three years was: 1997 1996 1995 Cost of goods sold 70.2% 69.7% 69.9% LIFO credit/(charge) .2 (.3) - ---- ----- ---- Cost of goods sold (excluding LIFO) 70.4% 69.4% 69.9% Selling, General and Administrative Expenses (SG&A), as a percent to revenues, decreased 0.1% to 23.1% in 1997. Advertising costs associated with the higher promotional environment increased by 0.1% and were offset by a 0.2% reduction in payroll, payroll-related costs and other operating expenses. In 1996, SG&A expenses, as a percent to revenues, posted a similar 0.1% decline. For the most part, this was attributable to a decline of similar proportion in payroll and payroll-related costs. Interest Expense and Income (combined) - The $2 million increase in 1997 primarily resulted from a reduction in interest expense capitalized in connection with new store construction, as 1996 represented a historic high of five new department store openings. Increased interest expense associated with higher average short-term borrowings in 1997 was offset by a reduction in interest expense on long-term debt. Interest expense and income in 1996 declined $4 million in comparison to 1995, primarily due to higher levels of invested cash throughout the year and the influence of capitalized interest discussed above. Other Income increased by $7.4 million in 1997 with the improvement being almost entirely due to a non-recurring gain which resulted from an agreement to license an element of proprietary software to a retail organization with which the Company does not compete directly. This one-time gain amounted to $4.3 million, net of tax, or $.12 per share. In 1996, the decline of $12 million in other income was attributable to changes made in the servicing of the Company's private label credit program in mid-1995. Prior to that period, the Company's share of finance charge revenue was earned under revenue sharing agreements with unaffiliated companies and was classified as an element of other income. Impairment Charge - During the first quarter of 1996, the Company adopted Statement of Financial Accounting Standards (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 application of this new accounting standard in 1996 resulted in a pre-tax impairment charge of $12 million ($7.2 million after tax, or $.20 per share) to write down the carrying value of certain operating stores to their estimated fair value. SIX
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Earnings per Share (EPS) - In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share," which establishes new standards for computing and presenting EPS. SFAS No. 128 replaces the presentation of primary EPS with basic EPS and requires the presentation of diluted EPS for all entities with complex capital structures. The Company adopted the provisions of this standard as of the year ended January 31, 1998. The Company's basic and diluted EPS amounts are equivalent for all years presented and restatement of previously reported EPS was not required. Liquidity and Capital Resources - Cash flow from operations amounted to $220 million in 1997 contrasted with $145 million in 1996 and $189 million in 1995. The 1997 increase was primarily due to a comparative reduction in inventory requirements which was partially offset by a decline in the related level of accounts payable. Year-end inventories declined by $55 million as a result of a concentrated program to render inventory levels more commensurate with recent sales trends. In 1996, the $44 million reduction from the prior year in cash provided by operations was attributable to increased requirements for accounts receivable, which resulted from the dynamics associated with the change in the Company's private label credit program which took place in the 1995 year. Net cash used in investing activities primarily consists of capital expenditures which amounted to $131 million in 1997 compared to $134 million in 1996. Capital expenditures in 1997 reflect the opening of two new department stores in 1997 as well as costs incurred for two new department stores opened in the first quarter of 1998. In 1996, cash used for capital expenditures increased $33 million over 1995 due to the requirements for five new department stores opened in that year. Net cash used for financing activities totaled $79 million in 1997, compared to $47 million in 1996 and $44 million in 1995. Payments on long-term debt amounted to $31 million, including the first $19 million sinking fund requirement associated with the 6.7% Notes due 2002. In addition, as discussed in Note 4 of Notes to Consolidated Financial Statements, approximately $5 million was used in 1997 to repurchase 95,500 shares of the Company's common stock. It is the Company's intent to hold these repurchased shares as treasury stock as a source for potential issuance of a similar number of shares under the 1996 Stock Option Plan. Traditionally, the Company has satisfied its short-term financing requirements primarily through the use of internally generated funds. The Company also has in place a committed, unsecured $200 million revolving credit facility with a syndicate of seven banks which expires in August 2000. Interest rates on borrowings under this facility are based, at the Company's option, on either the banks' best rates under a competitive bidding environment or a predefined spread over the appropriate LIBOR rate. The Company also has in place uncommitted lines of credit totaling $120 million. Maximum short-term borrowings under these facilities were $86 million in 1997, $43 million in 1996 and $3 million in 1995, at weighted-average interest rates of 5.8%, 6.0% and 5.9%, respectively. No borrowings were outstanding under any of these credit arrangements at the end of each of the last three years. A consistent stability of financial position has long been a Company hallmark and is best exemplified in the strength of the balance sheet. A significant barometer of this financial strength is the Company's debt-to-capitalization ratio, which declined to 12% in 1997 from 14% in 1996 and is one of the lowest such ratios in the retail industry. The Company's long-term debt ratings of A+ and A1, which have been reaffirmed by Standard & Poor's Corporation and Moody's Investors Services, Inc., respectively, are among the highest awarded in the industry. SEVEN
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Expansion and Capital Expenditures - During 1997, the Company opened two new department stores and completed several minor expansions, which added approximately 600,000 square feet to the Company's retail base. The two new department stores--a Maison Blanche unit in Baton Rouge, Louisiana and a Joslins store in Denver, Colorado, both entailed approximately 212,000 square feet and are located in new malls in existing markets. At the end of the year, the Company closed two under-performing stores--a 374,000 square foot Jones store in downtown Kansas City, Missouri, and a 161,000 square foot J. B. White store in Augusta, Georgia. In April 1998, the Company exited the Dayton, Ohio market upon the sale of the 212,000 square foot McAlpin's store. The closing of these store locations did not have a material impact on the Company's 1997 operating results. The Company has opened two new department stores in the first quarter of 1998, a 192,000 square foot Gayfers unit in a new mall in Oviedo, Florida and a 160,000 square foot J. B. White store in an existing mall in Augusta, Georgia. This latter unit replaces the under-performing J. B. White store in that same city which was closed at the end of 1997. No additional new department stores are planned for the 1998 year. Capital expenditures for 1998 are estimated at $70 million, a substantial decline from the average $132 million spent in 1997 and 1996. This reduction reflects a diminishment in viable new department store opportunities in the Company's existing and adjacent markets, as well as changes between years in the timing of new department store openings. As stated previously, the majority of the capital expenditures associated with the two new department stores opened in the first quarter of 1998 were incurred in 1997. Capital expenditures for 1997 also reflected the costs associated with the two new department stores opened during the third quarter of 1997, while 1996 capital expenditures reflect five new department store openings. The Company anticipates that its capital expenditures will be funded through a combination of existing working capital and internally generated funds. Impact of The "Year 2000" Issue - As is the case with most business organizations, the Company utilizes software and related technology that is date sensitive and will be affected by the date change which will take place in the year 2000. The Company conducted a comprehensive review of its exposure to the "Year 2000" issue and has developed an implementation plan to resolve these issues in advance of the turn of the millennium. The Company believes that, with modifications to existing software and conversion to new software, where appropriate, the "Year 2000" issue will not present significant operational problems for the Company's computer systems. During 1997, the Company started modifying programming code in conformity with it's implementation plan and anticipates completion of it's "Year 2000" efforts by early 1999. Costs associated with the Company's "Year 2000" efforts will be expensed as incurred. Costs incurred in 1997 and total estimated costs are not material. EIGHT
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BENEFIT PROGRAM The Company offers a comprehensive benefit program to its eligible associates including pension and profit sharing plans as well as health, disability and life insurance programs. The Pension Plan, established in 1945, has been funded entirely by Company contributions. All associates who meet the eligibility requirements are enrolled in the Plan. Members are 100% vested in their accrued benefits upon completing five years of service after age 18, as defined. At the beginning of 1997, there were approximately 30,700 Pension Plan members, including retirees. The market value of Plan assets was $452 million as of the end of 1997. All associates who are enrolled in the Pension Plan are eligible to participate in the Savings, Profit Sharing and Supplemental Retirement Plan. During 1997, to the extent permitted by the Internal Revenue Code, members had the option to contribute up to 14% of their earnings into the Plan. Members can elect to have their contributions invested in a balanced fund, an equity fund, an investment contract fund or any combination of these funds. As explained in Note 7 of Notes to Consolidated Financial Statements, the Company makes an annual contribution to the Savings, Profit Sharing and Supplemental Retirement Plan based upon its pre-tax income, as defined. For the latest year, the Company's contribution amounted to $10.6 million, or approximately $.61 for each $1.00 deposited, before-tax, by a member up to 6% of compensation. All members employed as of February 1, 1993 or earlier are 100% vested in the Company's contribution as soon as it is credited to their accounts. All members employed after February 1, 1993 vest in Company contributions according to a 3 to 7 year vesting schedule. Members can elect to invest the Company's annual contribution in a balanced fund, an equity fund, an investment contract fund, Mercantile Stores common stock fund or any combination of these funds. Members who have an investment in Mercantile Stores common stock at year-end may, in confidence, direct the Trustee, The Northern Trust Company, to vote their shares at the Annual Meeting of Stockholders. At January 31, 1998, the Trustee was holding 1,250,960 shares of Mercantile stock, or 3.4% of the total outstanding shares, for the benefit of Plan members. Plan assets at year-end totalled $602 million, at market value. The Company pays a substantial portion of the costs of various group medical and dental plans which are offered to eligible associates. In addition, the Company offers disability and term life insurance coverage to eligible associates. Paid vacation and holiday time, discounts on merchandise, and a highly successful policy of training and promoting from within complete the comprehensive benefit program available to associates. ƒ WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. [Enlarge/Download Table] Market and Dividend Information 1997 1996 Market Dividends Market Dividends Quarter High Low Declared Paid High Low Declared Paid First $ 50 1/4 $ 46 3/8 $ .58 1/2 $ .28 1/2 $ 62 5/8 $ 44 1/4 $ .55 $ .26 1/2 Second 68 15/16 49 3/4 - .30 67 57 1/8 - .28 1/2 Third 66 15/16 57 1/4 .60 .30 59 3/8 47 .57 .28 1/2 Four 65 9/16 58 1/4 _ .30 54 47 7/8 _ .28 1/2 $1.18 1/2 $1.18 1/2 $1.12 $1.12 The Company's common stock is traded on the New York Stock Exchange (NYSE symbol - MST). The number of stockholders at January 31, 1998 was 9,007. On April 16, 1998, the Board of Directors approved an increase in the quarterly dividend from $.30 to $.31 1/2 per share. This increase, payable on June 15, 1998 to holders of record on May 29, 1998, converts to an indicated annual dividend of $1.26 per share. NINE
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Statement of Management's Responsibility for Financial Statements The management of Mercantile Stores Company, Inc. has prepared the consolidated financial statements and related financial information contained in this Annual Report. Management is responsible for the integrity of the financial statements and other financial information included and for ascertaining that the data accurately reflect the financial position and results of operations of the Company. Financial statements are prepared in conformity with generally accepted accounting principles, applying certain informed estimates and judgments as required. The Company maintains a system of internal accounting controls designed to provide reasonable assurance that transactions are executed in accordance with proper authorization; that all such transactions are properly recorded and summarized to produce reliable financial records and reports; that assets are safeguarded; and that the accountability for assets is maintained. Management believes its system of internal accounting controls, augmented by its internal auditing function, assures the adequacy and quality of financial reporting. Arthur Andersen LLP, independent public accountants, have been engaged to render an objective, independent professional opinion on the fairness of reported operating results and financial condition. They consider the Company's internal control structure in determining the nature, timing and extent of the audit procedures they deem necessary to reach and express an opinion on the fairness of the financial statements. The Board of Directors pursues its responsibility for the Company's financial statements through its Audit Committee which is comprised solely of directors who are not officers or employees of the Company. The Audit Committee meets regularly with the independent public accountants, management, and the internal auditors. The independent public accountants have direct access to the Audit Committee, with or without the presence of management representatives, to discuss the scope and results of their audit work and their comments on the adequacy of internal accounting controls and the quality of financial reporting. Based on the controls described, we believe the financial statements and related financial information in this report are accurate in all material respects and that they were prepared in accordance with appropriate and generally accepted accounting principles. David L. Nichols James M. McVicker Chairman of the Board Senior Vice President and Chief Financial Officer 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. Cincinnati, Ohio Arthur Andersen LLP April 3, 1998 TEN
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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 ELEVEN
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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 TWELVE
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(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 =========== =========== thirteen
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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 activit (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 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. 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. fifteen
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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. 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. sixteen
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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. 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%. seventeen
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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. eighteen
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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 nineteen
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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. 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 twenty
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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. twenty-one
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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. twenty-two
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[Enlarge/Download Table] QUARTERLY RESULTS (unaudited in thousands, except per share data) January 31, 1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total 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 February 1, 1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total 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 twenty-three
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[Enlarge/Download Table] FIVE YEAR SELECTED FINANCIAL DATA (dollars in thousands, except per share data) 1997 1996 1995 1994 1993 Operating Results Revenues $ 3,143,765 $ 3,030,822 $ 2,944,324 $ 2,819,837 $ 2,729,928 Retail sales 3,054,924 2,945,606 2,892,083 2,819,837 2,729,928 Cost of goods sold 2,207,618 2,113,022 2,059,753 2,020,264 1,960,914 Selling, general and administrative expenses 727,083 702,862 686,924 625,726 627,391 Interest expense, net 12,542 10,786 14,471 23,526 30,948 Other income (16,840) (9,400) (21,404) (27,571) (33,003) Impairment charge - 12,000 - - - Provision for consolidation/relocation - - - 5,000 - Income before provision for income taxes 213,362 201,552 204,580 172,892 143,678 Percent to revenues 6.8 6.7 6.9 6.1 5.3 Provision for income taxes 83,656 80,087 81,332 68,375 57,039 Income before cumulative effect of accounting changes 129,706 121,465 123,248 104,517 86,639 Net income 129,706 121,465 123,248 103,417 89,739 Per common share Earnings per share(1) $ 3.53 $ 3.30 $ 3.35 $ 2.81 $ 2.44 Dividends $ 1.19 $ 1.12 $ 1.05 $ 1.02 $ 1.02 Stockholders' equity $ 44.81 $ 42.48 $ 40.31 $ 38.01 $ 36.23 Financial PositionWorking capital $ 1,023,310 $ 1,017,533 $ 1,013,576 $ 957,030 $ 902,268 Current ratio 5.1 4.6 4.7 4.7 3.5 Receivables, net 589,104 588,187 574,622 620,238 635,114 Inventories 505,201 560,666 523,573 468,782 425,492 Property and equipment, net (includes capitalized leases) 786,384 738,207 701,233 688,806 691,502 Total assets 2,177,791 2,142,503 2,074,724 1,981,729 2,031,982 Long-term debt (includes capitalized lease obligations) 202,637 229,910 254,926 261,187 271,965 Debt to capitalization ratio 12.0 14.0 15.0 16.0 22.5 Retained earnings 1,640,024 1,553,892 1,473,692 1,389,130 1,323,294 Stockholders' equity 1,646,846 1,565,313 1,485,113 1,400,551 1,334,715 Other DataCapital expenditures for property and equipment $ 131,011 $ 133,861 $ 101,202 $ 93,639 $ 106,210 Depreciation 79,254 83,661 88,714 93,540 93,455 Department stores Opened 2 5 - 3 2 Closed 2 - 3 2 1 Number of department stores, at end of year 102 102 97 100 99 Home fashion stores Opened 2 3 1 3 1 Closed 1 - - - - Number of home stores, at end of year 16 15 12 11 8 Total square feet 17,331 17,282 16,300 16,484 16,212 Sales per square foot(2) $179 $177 $177 $173 $169 All years include 52 weeks, except 1995 which includes 53 weeks. (1) Based on 36,844,050 shares outstanding for all years, except 1997 which has 36,770,797 weighted average shares outstanding. (2) Based on stores opened for the entire year. The 1995 year is presented on a 52 week basis. twenty-four and twenty-five
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STORE DIVISIONS AND GROUP PRESIDENTS MERCANTILE SOUTH Gayfers/Maison Blanche Headquartered in Mobile, Alabama Michael G. Shannon, President Store Locations Shopping Centers/Malls Mobile, AL Springdale Mall (Gayfers) Jubilee Mall (Gayfers) Biloxi-Gulfport, MS Edgewater Mall (Gayfers) Edgewater Mall Home Store (Gayfers) Baton Rouge, LA Main Street (Maison Blanche) Cortana Mall (Maison Blanche) Mall of Louisiana (Maison Blanche) Lafayette, LA Acadiana Mall (Maison Blanche) New Orleans, LA Canal Street (Maison Blanche) Clearview Shopping Center (Maison Blanche) Plaza Lake Forest (Maison Blanche) North Shore Square (Maison Blanche) Oakwood Shopping Center (Maison Blanche) Clearwater, FL Clearwater Mall (Gayfers) Pensacola, FL Town & Country Plaza (Gayfers) Cordova Mall (Gayfers) Ft. Walton Beach, FL Santa Rosa Mall (Gayfers) Panama City, FL Panama City Mall (Gayfers) Panama City Mall Home Store (Gayfers) Tallahassee, FL Tallahassee Mall (Gayfers) Jacksonville, FL Regency Square Mall (Gayfers) Roosevelt Mall (Gayfers) Orange Park Mall (Gayfers) The Avenues (Gayfers) Daytona Beach, FL Volusia Mall (Gayfers) Orlando, FL Orlando Fashion Square (Gayfers) Altamonte Mall (Gayfers) The Florida Mall (Gayfers) West Oaks Mall (Gayfers) Oviedo, FL Oviedo Marketplace (Gayfers) MERCANITLE SOUTHEAST Gayfers/J.B. White Headquartered in Montgomery, Alabama Robin E. Sanderford, President Store Locations Shopping Centers/Malls Montgomery, AL Montgomery Mall (Gayfers) Eastdale Mall (Gayfers) Eastdale Mall Home Store (Gayfers) Auburn, AL Village Mall (Gayfers) Dothan, AL Wiregrass Commons (Gayfers) Tuscaloosa, AL McFarland Mall (Gayfers) Albany, GA Albany Mall (Gayfers) Columbus, GA Peachtree Mall (Gayfers) Jackson, MS Metrocenter (Gayfers) Northpark Mall (Gayfers) Hattiesburg, MS Turtle Creek Mall (Gayfers) Savannah, GA Savannah Mall (J.B. White) Augusta, GA National Hills Shopping Center (J.B. White) National Hills Home Store (J.B. White) Augusta Mall (J.B. White) Aiken, SC Heritage Square (J.B. White) Columbia, SC Columbiana Mall (J.B. White) Dutch Square (J.B. White) Richland Mall (J.B. White) Greenville, SC Greenville Mall (J.B. White) Spartanburg, SC Westgate Mall (J.B. White) Westgate Mall Home Store (J.B. White) MERCATILE CENTRAL Castner Knott Headquartered in Nashville, Tennessee Edward A. Overbey, Jr., President Store Locations Shopping Centers/Malls Nashville, TN The Mall at Green Hills Rivergate Mall Donelson Plaza Harding Mall Hickory Hollow Mall Bellevue Center Tullahoma, TN Northgate Mall Murfreesboro, TN Stones River Mall Franklin, TN Cool Springs Galleria Cool Springs Galleria Home Store Florence, AL Regency Square Mall Decatur, AL River Oaks Center River Oaks Center Home Store Huntsville, AL Madison Square Mall Bowling Green, KY Greenwood Mall Greenwood Mall Home twenty-six Bacons/McAlpin's/Lion/Root's Headquartered in Louisville, Kentucky Thomas N. Groh, President Store Locations Shopping Centers/Malls Louisville, KY Bashford Manor Mall (Bacons) Bashford Manor Home Store (Bacons) Shively Center (Bacons) Louisville Galleria (Bacons) The Mall in St. Matthew's (Bacons) St. Matthew's Home Store (Bacons) Owensboro, KY Towne Square Mall (Bacons) Lexington, KY Lexington Mall (McAlpin's) Turfland Mall (McAlpin's) Turfland Mall Home Store (McAlpin's) Fayette Mall (McAlpin's) Crestview Hills, KY Crestview Hills Mall (McAlpin's) Clarksville, IN River Falls Mall (Bacons) Terre Haute, IN Honey Creek Square (Root's) Cincinnati, OH Eastgate Mall (McAlpin's) Kenwood Towne Centre (McAlpin's) Northgate Mall (McAplin's) Signatures Home Store-Harper's Station (McAlpin's) Tri-County Mall (McAlpin's) Western Hills Plaza (McAlpin's) Middletown, OH Towne Mall (McAlpin's) Toledo, OH Southwyck Shopping Center (Lion) Southwyck Home Store (Lion) North Towne Square (Lion) Franklin Park Mall (Lion) Westgate Home Store (Lion) MERCANTILE WEST Jones/Joslins/Hennessy's de Lendrecie's/Glass Block Headquartered in Kansas City, Missouri James L. Schmidt, President Store Locations Shopping Centers/Malls Kansas City, MO Blue Ridge Mall (Jones) Metro North Mall (Jones) Bannister Mall (Jones) Overland Park, KS Metcalf South Shopping Center (Jones) Metcalf South Home Store (Jones) Prairie Village, KS Prairie Village Shopping Center (Jones) Independence, MO Independence Center (Jones) Topeka, KS West Ridge Mall (Jones) Denver, CO Buckingham Square (Joslins) Villa Itaila Center (Joslins) Westminister Mall (Joslins) Southwest Plaza (Joslins) Southglenn Mall (Joslins) Park Meadows (Joslins) Greeley, CO Greeley Mall (Joslins) Longmont, CO Twin Peaks Mall (Joslins) Colorado Springs, CO Chapel Hills Mall (Joslins) Pueblo, CO Pueblo, CO (Joslins) Cheyenne, WY Frontier Mall (Joslins) Billings, MT Rimrock Mall (Hennessy's) Missoula, MT Southgate Mall (Hennessy's) Helena, MT Capital Hill Shopping Center (Hennessy's) Fargo, ND West Acres Shopping Center (de Lendrecie's) Duluth, MN Miller Hill Mall (Glass Block) twenty-seven
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MERCANTILE STORES COMPANY, INC. is a traditional department store retailer which, at year-end, operated 102 predominantly fashion apparel stores and 16 home fashion stores. The stores, which are located in a total of 17 states, are primarily mall-based and operate under 13 different names. They are situated in 53 different markets and, in the majority of these markets, the Company holds the dominant general merchandise retailer position. This acceptance within the communities in which we operate essentially conforms with our Corporate strategy: To operate profitable stores in markets in which we hold a substantial competitive position and thereby produce an acceptable return for our stockholders while offering value, selection and service to our customers. The typical Mercantile department store encompasses approximately 170,000 square feet and presents a merchandise assortment which includes apparel, cosmetics, accessories and home fashions which is tailored to appeal to the middle to upper-middle income consumer. The Company also maintains a partnership interest in five operating shopping centers. In each of these centers, the Company operates a full-line department store. CORPORATE OFFICERS David L. Nichols Chairman of the Board and Chief Executive Officer James M. McVicker Senior Vice President and Chief Financial Officer Randolph L. Burnette Senior Vice President Real Estate Kathryn M. Muldowney Vice President Chief Information Officer Louis L. Ripley Vice President Human Resources William A. Carr Treasurer and Secretary Donald L. Radcliff Controller (Picture of Store) The 212,000 square foot Joslins store in the Park Meadows Mall in Denver, Colorado was opened in August. It received the prestigious Chain Store Age Magazine "Retail Store of the Year" award the first Mercantile store to be so honored. twenty-eight
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DIRECTORS snu H. Keith H. Brodie, M.D. President Emeritus of Duke University s John A. Herdeg Attorney at Law and Chairman of the Board of Christiana Bank & Trust Company s Thomas J. Malone President, Chief Operating Officer and Director of Milliken & Company Gerrish H. Milliken Director Emeritus of Milliken & Company n Minot K. Milliken Director Emeritus of Milliken & Company snu Roger Milliken Chairman of the Board and Chief Executive Officer of Milliken & Company David L. Nichols Chairman of the Board and Chief Executive Officer of Mercantile Stores Company, Inc. n Lawerance R. Pugh Chairman of the Board of VF Corporation n Francis G. Rodgers Former Vice President of IBM Corporation u Roger K. Smith Product Line Marketing Manager of Analog Devices, Inc. s- Audit Committee n- Compensation Committee u- Nominating Committee Annual Meeting The Annual Meeting of Stockholders will be held at 11:00 a.m. on Wednesday, May 27, 1998 at 1100 North Market Street, Wilmington, Delaware. All stockholders are cordially invited to attend. Corporate Offices Mercantile Stores Company, Inc. 9450 Seward Road Fairfield, Ohio 45014 Telephone: 513-881-8000 Stock Transfer Agent, Registrar and Dividend Distributing Agent Harris Trust Company of New York 311 West Monroe Street, 11th Floor Chicago, Illinois 60690 Telephone: 312-461-3309 6.7% Notes and 8.2% Debentures Trustee Fifth Third Bank 38 Fountain Square Plaza Cincinnati, Ohio 45263 Telephone: 513-579-5300 Independent Accountants Arthur Andersen LLP 425 Walnut Street Cincinnati, Ohio Telephone: 513-381-6900 General Counsel Curtis, Mallet-Prevost, Colt & Mosle 101 Park Avenue New York, New York 10178 Telephone: 212-696-6000 Form 10-K Annual Report A copy of Mercantile's 1997 Form 10-K Annual Report as filed with the Securities and Exchange Commission is available upon request by writing: Office of the Secretary Mercantile Stores Company, Inc. 1100 North Market Street Wilmington, Delaware 19801 Telephone: 302-575-1816 Mercantile's Home Page on the Internet http://www.mercstores.com

Dates Referenced Herein   and   Documents Incorporated By Reference

Referenced-On Page
This 10-K Filing   Date First   Last      Other Filings
2/1/9310
8/1/9515
2/3/961510-K, DEF 14A
2/4/9611
10/31/9620
12/3/9618
2/1/9722110-K, DEF 14A
10/31/9720
For The Period Ended1/31/98222DEF 14A
4/3/9811
4/16/9810
Filed On / Filed As Of4/27/98
5/27/98278-K
5/29/9810
6/15/9810
8/3/0017
 
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