-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H48HXasl5YyjnpyorhDKThajK00KK00YqdFzBCLFsVU5FSodU9PNfm/hivWDzvNa dx/tmE2cBThmrf3FrpkS0w== 0000064923-96-000006.txt : 19960430 0000064923-96-000006.hdr.sgml : 19960430 ACCESSION NUMBER: 0000064923-96-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960203 FILED AS OF DATE: 19960429 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCANTILE STORES CO INC CENTRAL INDEX KEY: 0000064923 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 510032941 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03339 FILM NUMBER: 96553049 BUSINESS ADDRESS: STREET 1: 9450 SEWARD ROAD CITY: FAIRFIELD STATE: OH ZIP: 45014-2230 BUSINESS PHONE: 5138818000 MAIL ADDRESS: STREET 1: 9450 SEWARD ROAD CITY: FAIRFIELD STATE: OH ZIP: 45014 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 3, 1996 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 (I.R.S. Employer Identification No.) incorporation) 9450 Seward Road, Fairfield, Ohio 45014 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (513) 881-8000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common stock $.14 2/3 par value The New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the Company's voting stock held by non-affiliates based on the closing price on the New York Stock Exchange at April 26, 1996 was $1,366,569,200. The number of shares outstanding of the registrant's common stock, $.14 2/3 par value was 36,844,050 at April 26, 1996. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Registrant's 1995 Annual Report to Stockholders are incorporated into Parts I, II and IV. 2. Portions of Registrant's Proxy Statement, dated April 19, 1996, relating to the Annual Meeting of Stockholders to be held on May 22,1996 filed pursuant to Regulation 14A, are incorporated by reference into Parts I and III of this Form 10-K. PART I Item 1. Business. Mercantile Stores Company, Inc. ("Company" or "Registrant") was incorporated under the laws of the State of Delaware on January 10, 1919. The Company is listed on the New York Stock Exchange (NYSE designation of MST) and is engaged in general merchandise department store retailing. The Company's business is highly competitive. The Company's strategy is to cater to middle and upper income customers by carrying wide of national brand items and goods sold under the Company's private label with emphasis on apparel, accessories and fashion home products. Its stores compete with other national, regional and local retail establishments, including department stores, specialty stores and discount stores which carry similar lines of merchandise. The Company's competitive methodology focuses on value, customer service, fashion, selection, marketing and store location. The retail business is highly seasonal. The fourth quarter, which includes the Christmas season, is the most significant selling period. For the year ended February 3, 1996, the fourth quarter accounted for approximately 34% of consolidated retail sales and 63% of consolidated net income. The Company regularly employs on a full or part-time basis an average of approximately 31,700 associates, of which approximately 19,600 are considered full-time equivalents. The following portions from the Registrant's Annual Report to Stockholders for the fiscal year ended February 3, 1996 are incorporated herein by reference: Financial Highlights (inside front cover); Management's Discussion and Analysis (pages 11-14); Note 1 (pages 21-22) and Note 2 (page 22) of Notes to Consolidated Financial Statements; Ten-Year Selected Financial Data (pages 30-31). Item 2. Properties. The Company's typical store averages 170,000 in size square feet and are located in seventeen different states under thirteen different names. The following table summarizes the property ownership and applicable square footage of the ninety seven department stores and four specialty stores operated by the Company as of February 3, 1996: Number of Square Stores Footage _________ _________ Owned Stores 58 8,840,877 Leased Stores 43 7,458,658 _________ _________ Total 101 16,299,535 Management's Discussion andf Analysis (pages 11-14); Note 1 (pages 21-22) of Notes to Consolidated Financial Statements and Store Divisions and Locations (pages 32-33) from the Registrant's Annual Report to Stockholders for fiscal year ended February 3, 1996 are incorporated herein by reference. -2- Item 3. Legal Proceedings. Information required by Item 3 is incorporated by reference to Note 9 (page 28) from the Registrant's Annual Report to Stockholders for the fiscal year ended February 3, 1996 and to the information set forth under the caption "Litigation" included in the Registrant's definitive Proxy Statement, dated April 19, 1996, relating to the Annual Meeting of Stockholders to be held on May 22, 1996 and filed pursuant to Regulation 14A. Item 4. Submission of Matters to a Vote of Security Holders. None PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Market and Dividend Information (page 15) and Stockholder Information (inside back cover) from the Registrant's Annual Report to Stockholders for the fiscal year ended February 3, 1996 are incorporated herein by reference. Item 6. Selected Financial Data. The Ten-Year Selected Financial Data (pages 30-31) and Notes to Consolidated Financial Statements (pages 21-28) from the Registrant's Annual Report to Stockholders for the fiscal year ended February 3, 1996 are incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's Discussion and Analysis (pages 11-14) and Notes to Consolidated Financial Statements (pages 21-28) from the Registrant's Annual Report to Stockholders for the fiscal year ended February 3, 1996 are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The Consolidated Financial Statements (pages 17-20), Notes to Consolidated Financial Statements (pages 21-28), Report of Independent Public Accountants (page 16), which includes an explanatory paragraph that describes the change in the methods of accounting for postemployment benefits discussed in Note 7 and accounting for income taxes discussed in Note 6 of Notes to Consolidated Financial Statements, and Quarterly Results (page 29) from the Registrant's Annual Report to Stockholders for the fiscal year ended February 3, 1996 are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. None. -3- PART III Item 10. Directors and Executive Officers of the Registrant. The information set forth under the captions "Election of Directors", "Stock Ownership of Management", "Other Executive Officers" and "Compliance with Section 16(a) of the Exchange Act" included in the Registrant's definitive Proxy Statement, dated April 19, 1996, relating to the Annual Meeting of Stockholders to be held on May 22, 1996 and filed pursuant to Regulation 14A, is incorporated herein by reference. Item 11. Executive Compensation. The information set forth under the captions "Management Remuneration", "Compensation Committee Interlocks and Insider Participation", "Pension Plans", "Severance Protection Agreements", and "Directors' Compensation" included in the Registrant's definitive Proxy Statement, dated April 19, 1996, relating to the Annual Meeting of Stockholders to be held on May 22, 1996 and filed pursuant to Regulation 14A, is incorporated herein by reference. Notwithstanding the foregoing, (i) the information set forth in said Proxy Statement under the caption "Report of the Compensation Committee" and (ii) the information set forth under the caption "Performance Graph" in said Proxy Statement, is not incorporated herein by reference or in any other filing of the Registrant. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information set forth under the captions "Stock Ownership of Management" and "Stock Ownership of Certain Beneficial Owners" included in the Registrant's definitive Proxy Statement, dated April 19, 1996, relating to the Annual Meeting of Stockholders to be held on May 22, 1996 and filed pursuant to Regulation 14A, is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information set forth under the caption "Transactions with Management and Others" included in the Registrant's definitive Proxy Statement, dated April 19, 1996, relating to the Annual Meeting of Stockholders to be held on May 22, 1996 and filed pursuant to Regulation 14A, is incorporated herein by reference. -4- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. A. 1. The following Consolidated Financial Statements of Mercantile Stores Company, Inc., Notes to Consolidated Financial Statements and Report of Independent Public Accountants, from the Registrant's Annual Report to Stockholders for the fiscal year ended February 3, 1996 are incorporated herein by reference: (a) Statements of Consolidated Income and Retained Earnings for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 - page 17. (b) Consolidated Balance Sheets as of February 3,1996 and January 28, 1995 - pages 18 and 19. (c) Statements of Consolidated Cash Flows for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 - page 20. (d) Notes to Consolidated Financial Statements - pages 21-28. (e) Report of Independent Public Accountants, which includes an explanatory paragraph that describes the change in the methods of accounting for postemployment benefits discussed in Note 7 and accounting for income taxes discussed in Note 6 of Notes to Consolidated Financial Statements - page 16. 2. Financial Statement Schedules of the Registrant and Consolidated Subsidiaries included herein: (a) Report of Independent Public Accountants, on the schedule listed below. (b) Schedule II - Valuation and Qualifying Accounts All other schedules have been omitted as they are inapplicable or the information required is shown in the Consolidated Financial Statements or the Notes thereto. -5- 3. Exhibits: (3a)- The Restated Certificate of Incorporation of Mercantile Stores Company, Inc., as amended, is incorporated herein by reference from the Registrant's Form 10-K for the fiscal year ended January 31, 1989. (3b)- The Registrant's Bylaws, as amended, are incorporated herein by reference from the Registrant's Form 10-K for the fiscal year ended January 31, 1989. (4)- The Indenture agreement between Mercantile Stores Company, Inc. and The Fifth Third Bank, as Trustee, dated as of July 1, 1992, is incorporated herein by reference from Registration No. 33-50604, Exhibit 4.1. *(10.a)- The Severance Protection Agreement, dated as of May 1, 1995, between David L. Nichols and the Company. *(10.b)- The Form Severance Protection Agreements, dated as of May 1, 1995, between the Company and each of James M. McVicker, Randolph L. Burnette, James D. Cain and Paul E. McLynch. (13)- The Registrant's Annual Report to Stockholders for the fiscal year ended February 3, 1996. (21)- A listing of the subsidiaries of the Registrant. (23)- Consent of Independent Public Accountants. (24)- Power of Attorney. (27)- Financial Data Schedule. - --------------------- * - Management contract or compensatory plan. B. No reports on Form 8-K have been filed during the fourth quarter of the fiscal year ended February 3, 1996. Pursuant to the requirements of Section 13 or 15(d) 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) BY: s/ David L. Nichols David L. Nichols Chairman of the Board Date: April 29, 1996. -6- Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: s/David L. Nichols __________________________________ ____________________________ David L. Nichols * Thomas J. Malone (Chairman of the Board) (Director) As Principal Executive Officer s/James M. McVicker ___________________________________ _________________________ James M. McVicker * Lawrence R. Pugh (Senior Vice President and (Director) Chief Financial Officer) __________________________________ ___________________________ * John A. Herdeg * Gerrish H. Milliken (Director) (Director) _________________________________ _________________________ * Roger K. Smith * Minot K. Milliken (Director) (Director) _________________________________ ________________________ * George S. Moore * Roger Milliken (Director) (Director) ________________________________ ________________________ * Francis G. Rodgers * H. Keith H. Brodie, MD (Director) (Director) * BY: s/David L. Nichols David L. Nichols Date: April 29, 1996 An original Power of Attorney authorizing David L. Nichols, James M. McVicker and William A. Carr and each of them to sign this report hereto as Attorneys for Directors of the Registrant is being filed concurrently with the Securities and Exchange Commission. -7- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Mercantile Stores Company, Inc: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Mercantile Stores Company, Inc.'s annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated March 25, 1996. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed under Part IV Item 14(A)(2)(b) is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Cincinnati, Ohio March 25, 1996
MERCANTILE STORES COMPANY, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C - Additions Column D Column E Balance at Charged to Charged to Deductions Balance at beginning costs and other write offs net end of Description of period expenses accounts of recoveries period Allowance for Doubtful Accounts: Year Ended February 3, 1996 $3,100 $20,282 $ 0 $6,883 $16,499 Year Ended January 28, 1995 $0 $1,462 $ 3,130(A) $1,492 $3,100 Year Ended January 29, 1994 Not Applicable Note: (A) - Prior to November 1993, the Company sold all Maison Blanche customer receivables to MB Funding Trust, an unaffiliated company. This agreement was terminated during fiscal 1994 (see Note 3 of Notes to Consolidated Financial Statement). Upon completion of the termination process, the customer receivables, net of an allowance for doubtful accounts, were transferred to the Company from MB Funding Trust.
-9- EX-10.A 2 MANAGEMENT CONTRACT EXHIBIT 10.A SEVERANCE PROTECTION AGREEMENT THIS AGREEMENT, made as of the 1st day of May, 1995, by and between the Company (as hereinafter defined) and David L. Nichols (the "Executive"). WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change in Control (as hereinafter defined) exists and that the threat or the occurrence of a Change in Control can result in significant distractions of its key management personnel because of the uncertainties inherent in such a situation; WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its stockholders to retain the services of the Chairman and the Chief Executive Officer of the Company in the event of a threat or the occurrence of a Change in Control and to ensure his continued dedication and efforts in such event without undue concern for his personal financial and employment security; and WHEREAS, the Executive is the Chairman and Chief Executive Officer of the Company and in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive to provide the Executive with certain benefits in the event his employment is terminated as a result of, or in connection with, a Change in Control. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is hereby agreed as follows: 1. Term of Agreement. This Agreement shall commence as of May 1, 1995 and shall continue in effect until April 30, 1997, provided, however, that commencing on May 1, 1996 and on each May 1 thereafter, the term of this Agreement shall automatically be extended for one (1) year unless either the Company or the Executive shall have given written notice to the other at least ninety (90) days prior thereto that the term of this Agreement shall not be so extended; and provided, further, however, that notwithstanding any such notice by the Company not to extend, the term of this Agreement shall not expire prior to the later of (i) the expiration of twenty-four (24) months after the occurrence of a Change in Control during the term of this Agreement, or (ii) until such time as all benefits to be provided for hereunder have been provided in full. Notwithstanding the foregoing, however, this Agreement shall terminate in the event that the Executive enters into an agreement covering the subject matter hereof with the Company subsequent to the date hereof and such agreement specifically states that this Agreement is terminated. 2. Definitions. 2.1. Accrued Compensation. For purposes of this Agreement, "Accrued Compensation" shall mean an amount which shall include all amounts earned or accrued through the Termination Date (as hereinafter defined) but not paid as of the Termination Date including (i) base salary, (ii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the Company during the period ending on the Termination Date, (iii) vacation pay, and (iv) bonuses and incentive compensation. 2.2. Base Amount. For purposes of this Agreement, "Base Amount" shall mean the Executive's annual base salary at the highest rate in effect during the one year period prior to the Change in Control, and shall include all amounts of his base salary that are deferred under the qualified and non-qualified employee benefit plans of the Company or any other agreement or arrangement. 2.3. Bonus Amount. For purposes of this Agreement, "Bonus Amount" shall mean an amount equal to the annual bonus paid or payable to the Executive for the most recently completed fiscal year prior to the Change in Control. 2.4. Cause. For purposes of this Agreement, a termination of employment is for "Cause" if the Executive has been convicted of a felony or the termination is evidenced by a resolution adopted in good faith by two-thirds of the Board that the Executive (a) intentionally and continually failed substantially to perform his reasonably assigned duties with the Company (other than a failure resulting from the Executive's incapacity due to physical or mental illness or as a result of the assignment to the Executive of duties inappropriate for a Chief Executive Officer) which failure continued for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to the Executive specifying the manner in which the Executive has failed substantially to perform, or (b) intentionally engaged in conduct which is demonstrably and materially injurious to the Company; provided, however, that no termination of the Executive's employment shall be for Cause as set forth in clause (b) above until (x) there shall have been delivered to the Executive a copy of a written notice setting forth that the Executive was guilty of the conduct set forth in clause (b) and specifying the particulars thereof in detail, and (y) the Executive shall have been provided an opportunity to be heard in person by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, nor failure to act, on the Executive's part, shall be considered "intentional" unless the Executive has acted, or failed to act, with a lack of good faith and with a lack of reasonable belief that the Executive's action or failure to act was in the best interest of the Company. 2.5. Change in Control. A "Change in Control" shall mean any of the following events: (a) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty percent (20%) or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred, Voting Securities which are acquired in a Non-Control Acquisition (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (1) an employee benefit plan (or a trust forming a part thereof) maintained by (x) the Company or (y) any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Subsidiary"), (2) the Company or any Subsidiary, or (3) any Person in connection with a Non-Control Transaction (as hereinafter defined); (b) The individuals who, as of January 1, 1995, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (c) Approval by stockholders of the Company of: (1) A merger, consolidation or re- organization involving the Company, unless (i) the stockholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly immediately following such merger, consolidation or reorganization, at least seventy percent (70%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization, (ii) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation, and (iii) no Person (other than the Company, any Subsidiary, any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation or any Subsidiary, or any Person who, immediately prior to such merger, consolidation or reorganization, had Beneficial Ownership of fifteen percent (15%) or more of the then outstanding Voting Securities) has Beneficial Ownership of fifteen percent (15%) or more of the combined voting power of the Surviving Corporation's then outstanding voting securities (a transaction described in clauses (i) through (iii) above shall herein be referred to as a "Non-Control Transaction"); (2) A complete liquidation or dissolu- tion of the Company; or (3) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities beneficially owned by the Subject Person, then a Change in Control shall occur. (d) Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to a Change in Control and the Executive reasonably demonstrates that such termination (i) was at the request of a third party who had indicated an intention or taken steps reasonably calculated to effect a Change in Control and who effectuates a Change in Control or (ii) otherwise occurred in connection with, or in anticipation of, a Change in Control which actually occurs, then for all purposes of this Agreement, the date of a Change in Control with respect to the Executive shall mean the date immediately prior to the date of such termination of the Executive's employment. 2.6. Company. For purposes of this Agreement, the "Company" shall mean Mercantile Stores Company, Inc., a Delaware corporation, and shall include its Successors and Assigns (as hereinafter defined). As used in this Agreement, the term "affiliates" shall include any company controlled by, controlling, or under common control with, the Company. 2.7. Disability. For purposes of this Agreement, "Disability" shall mean a physical or mental infirmity which impairs the Executive's ability to substantially perform his duties with the Company for a period of one hundred eighty (180) consecutive days and the Executive has not returned to his full time employment prior to the Termination Date as stated in the Notice of Termination (as hereinafter defined). 2.8. Notice of Termination. For purposes of this Agreement, following a Change in Control, "Notice of Termination" shall mean a written notice of termination from the Company of the Executive's employment which indicates the specific termination provision in this Agreement relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. The Notice of Termination shall also specify the relevant Termination Date. 2.9. Successors and Assigns. For purposes of this Agreement, "Successors and Assigns"' shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. 2.10. Termination Date. For purposes of this Agreement, "Termination Date" shall mean in the case of the Executive's death, his date of death, in the case of the Executive's resignation for any reason, the last day of his employment, and in all other cases, the date specified in the Notice of Termination; provided, however, that if the Executive's employment is terminated by the Company for Cause or due to Disability, the date specified in the Notice of Termination shall be at least 30 days from the date the Notice of Termination is given to the Executive, provided, that in the case of Disability the Executive shall not have returned to the full-time performance of his duties during such period of at least 30 days. 3. Termination of Employment. 3.1. If, during the term of this Agreement, the Executive's employment with the Company shall be terminated within twenty-four (24) months following a Change in Control, the Executive shall be entitled to the following compensation and benefits: (a) If the Executive's employment with the Company shall be terminated (1) by the Company for Cause or Disability, or (2) by reason of the Executive's death, the Company shall pay to the Executive the Accrued Compensation. (b) If the Executive's employment with the Company shall be terminated for any reason other than as specified in Section 3.1(a) (including, without limitation, by reason of the Executive's voluntary resignation), the Executive shall be entitled to the following: (i) the Company shall pay the Executive all Accrued Compensation; (ii) the Company shall pay the Executive as severance pay and in lieu of any further compensation for periods subsequent to the Termination Date, an amount in cash equal to either (A) $2,997,075, or (B) 2.99 times the sum of the Base Amount and the Bonus Amount, at the Executive's sole election; (iii) for a period of thirty-six (36) months after the Termination Date (the "Continuation Period"), the Company shall, at its expense, continue on behalf of the Executive and his dependents and beneficiaries all employee benefits provided (x) to the Executive at any time during the one year period prior to the Change in Control or at any time thereafter or (y) to other similarly situated executives who continue in the employ of the Company during the Continuation Period, including, but not limited to, long-term disability, medical, dental, life insurance, flexible spending account, pre-tax insurance premiums and employee discount, but excluding pension and profit-sharing benefits. The coverage and benefits (including deductibles and costs) provided in this Section 3.1(b)(iii) during the Continuation Period shall be no less favorable to the Executive and his dependents and beneficiaries than the most favorable of such coverages and benefits during any of the periods referred to in clauses (x) and (y) above. The Company's obligation hereunder with respect to the foregoing benefits shall be limited to the extent that the Executive obtains any such benefits pursuant to a subsequent employer's benefit plans, in which case the Company may reduce the coverage of any benefits it is required to provide the Executive hereunder as long as the aggregate coverages and benefits of the combined benefit plans is no less favorable to the Executive than the coverages and benefits required to be provided hereunder. This subsection (iii) shall not be interpreted so as to limit any benefits to which the Executive, his dependents or beneficiaries may be entitled under any of the Company's employee benefit plans, programs or practices following the Executive's termination of employment, including, without limitation, retiree medical and life insurance benefits. In the event the Executive elects to be paid the amount set forth in clause (A) of Section 3.1(b)(ii), and in the event that any payment or benefit to be received by the Executive or for his benefit paid or payable or distributed or distributable pursuant to the terms of this Section 3.1(b)(iii) (collectively, the "Benefit Payments") is subject to income tax imposed by any federal, state or local taxing authority or any interest or penalties are incurred by the Executive with respect to any such income taxes (such income tax, together with any such interest and penalties, other than interest and penalties imposed by reason of the Executive's failure to file timely a tax return or pay taxes shown due on his return, imposed with respect to such income taxes, are hereinafter collectively referred to as the "Income Tax"), then the Executive will be entitled to receive an additional payment (the "Additional Payment") such that the net amount retained by the Executive, after deduction and/or payment of any Income Tax on the Benefit Payments and any income tax imposed by any federal, state and local taxing authority on the Additional Payment (including any interest and penalties, other than interest and penalties imposed by reason of the Executive's failure to timely file a tax return or pay taxes shown due on his return, imposed with respect to such taxes), shall be equal to the Benefit Payments. The intent of the parties hereto is that in the event the Executive elects to be paid the amount set forth in clause (A) of Section 3.1(b)(ii), the Executive shall receive no more or no less than what the Executive would have received had the benefit payments not been subject to Income Tax; (iv) the Company shall pay to the Executive in a single payment an amount in cash equal to the excess of (A) the Supplemental Retirement Benefit (as defined below) had (w) the Executive remained employed by the Company for an additional three (3) complete years of credited service, (x) his annual compensation during such period been equal to the Base Amount and the Bonus Amount, (y) the benefit accrual formulas of each retirement plan remained no less advantageous to the Executive than those in effect immediately preceding the date on which a Change in Control occurred and the Company made employer contributions to each defined contribution plan in which the Executive was a participant at the Termination Date (in an amount equal to the amount of such contribution for the plan year immediately preceding the Termination Date), and (z) he been fully (100%) vested in his benefit under each retirement plan in which the Executive was a participant, over (B) the lump sum actuarial equivalent of the aggregate retirement benefit the Executive is actually entitled to receive under such retirement plans. For purposes of this subsection (iv), the "Supplemental Retirement Benefit" shall mean the lump sum actuarial equivalent of the aggregate retirement benefit the Executive would have been entitled to receive under the Company's supplemental and other retirement plans, including, but not limited to, the Mercantile Stores Pension Plan, the Mercantile Stores Non-Qualified Top Hat Pension Plan, the Mercantile Stores Non-Qualified Excess Pension Plan and the Mercantile Stores Savings, Profit Sharing and Supplemental Retirement Plan (the "Pension Plans"). For purposes of this subsection (iv), the "actuarial equivalent" shall be determined in accordance with the actuarial assumptions used for the calculation of benefits under the Pension Plans as applied prior to the Termination Date in accordance with such plan's past practices. (c) The amounts provided for in Sections 3.1(a), 3.1(b)(i), 3.1(b)(ii) and 3.1(b)(iv) shall be paid in a single lump sum cash payment within five (5) days after the Executive's Termination Date (or earlier, if required by applicable law); and the amount payable to the Executive to compensate the Executive for any taxes that may be imposed upon the Benefit Payments and other payments payable to the Executive pursuant to Section 3.1(b)(iii) shall be paid in a single lump sum cash payment within five (5) days after the Executive demands such payment from the Company. (d) The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment except as provided in Section 3.1(b)(iii). Notwithstanding the foregoing, the Executive agrees that during the Continuation Period, he shall not (i) solicit any employees of the Company to leave the Company's employ to work for any company with which the Executive is employed, or (ii) employ any associate who is employed by the Company at any time during the Continuation Period. A breach of either of the foregoing covenants will result in the Executive forfeiting any further benefits to which he is entitled pursuant to Section 3.1(b)(iii), although the Executive shall not be required to return any payments to the Company which have been made to the Executive prior to the date of such breach. 3.2. (a) The severance pay and benefits provided for in this Section 3 shall be in lieu of any other severance or termination pay to which the Executive may be entitled under any Company severance or termination plan, program, practice or arrangement. (b) The Executive's entitlement to any or other compensation benefits shall be determined in accordance with the Company's employee benefit plans and other applicable programs, policies and practices then in effect. (c) Notwithstanding anything to the contrary in this Agreement, in the event the Executive is terminated by the Company after the occurrence of a Change in Control and is subsequently rehired by the Company at any time thereafter, the Executive shall not be entitled to any further benefits under Section 3.1(b)(iii) of this Agreement although the Executive shall not be required to return any payments to the Company which have been made to the Executive prior to the date the Executive is rehired. 4. Notice of Termination. Following a Change in Control, any purported termination of the Executive's employment by the Company shall be communicated by Notice of Termination to the Executive. For purposes of this Agreement, no such purported termination shall be effective without such Notice of Termination. 5. Excise Tax Payments. 5.1 In the event the Executive elects to be paid the amount set forth in clause (A) of Section 3.1(b)(ii), the following provisions shall be applicable (capitalized terms used in this Section 5.1 shall have the meanings assigned to them in this Section 5.1 only): (a) In the event that any payment or benefit (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), to the Executive or for his benefit paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with the Company or a change in ownership or effective control of the Company or of a substantial portion of its assets (each a "Payment" and collectively, the "Payments"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive will be entitled to receive an additional payment (a "Gross-Up Payment"), such that the net amount retained by the Executive, after deduction and/or payment of any Excise Tax on the Payments and the Gross-Up Payment and any federal, state and local income tax on the Gross- Up Payment (including any interest or penalties, other than interest and penalties imposed by reason of the Executive's failure to file timely a tax return or pay taxes shown due on his return, imposed with respect to such taxes), shall be equal to the Payments. The intent of the parties hereto is that the Executive shall receive no more or no less than what the Executive would have received had the Payment or Payments not been subject to the Excise Tax. (b) An initial determination as to whether a Gross-Up Payment is required pursuant to this Agreement and the amount of such Gross-Up Payment shall be made at the Company's expense by an accounting firm selected by the Company and reasonably acceptable to the Executive which is designated as one of the five largest accounting firms in the United States (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation to the Company and the Executive within five days of the Termination Date if applicable, or such other time as requested by the Executive (provided the Executive reasonably believes that any of the Payments may be subject to the Excise Tax) and if the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to a Payment or Payments, it shall furnish the Executive with an opinion reasonably acceptable to the Executive that no Excise Tax will be imposed with respect to any such Payment or Payments. Within ten days of the delivery of the Determination to the Executive, the Executive shall have the right to dispute the Determination (the "Dispute"). The Gross-Up Payment, if any, as determined pursuant to this Paragraph 5.1(b) shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. The existence of the Dispute shall not in any way affect the Executive's right to receive the Gross-Up Payment in accordance with the Determination. If there is no Dispute, the Determination shall be binding, final and conclusive upon the Company and the Executive subject to the application of Section 5.1(c) below. (c) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that a Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Excess Payment") or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred (i) upon notice (formal or informal) to the Executive from any governmental taxing authority that the Executive's tax liability (whether in respect of the Executive's current taxable year or in respect of any prior taxable year) may be increased by reason of the imposition of the Excise Tax on a Payment or Payments with respect to which the Company has failed to make a sufficient Gross-Up Payment, (ii) upon a determination by a court, (iii) by reason of a determination by the Company (which shall include the position taken by the Company, together with its consolidated group, on its federal income tax return) or (iv) upon the resolution of the Dispute to the Executive's satisfaction. If an Underpayment occurs, the Executive shall promptly notify the Company and the Company shall promptly, but in any event, at least five days prior to the date on which the applicable government taxing authority has requested payment, pay to the Executive an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties (other than interest and penalties imposed by reason of the Executive's failure to file timely a tax return or pay taxes shown due on the Executive's return) imposed on the Underpayment. An Excess Payment shall be deemed to have occurred upon a Final Determination (as hereinafter defined) that the Excess Tax shall not be imposed upon a Payment or Payments (or portion thereof) with respect to which the Executive had previously received a Gross-Up Payment. A "Final Determination" shall be deemed to have occurred when the Executive has received from the applicable government taxing authority a refund of taxes or other reduction in the Executive's tax liability by reason of the Excess Payment and upon either (x) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxing authority which finally and conclusively binds the Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and either all appeals have been taken and finally resolved or the time for all appeals has expired or (y) the statute of limitations with respect to the Executive's applicable tax return has expired. If an Excess Payment is determined to have been made, the amount of the Excess Payment shall be treated as a loan by the Company to the Executive and the Executive shall pay to the Company on demand (but not less than 10 days after the determination of such Excess Payment and written notice has been delivered to the Executive) the amount of the Excess Payment plus interest at an annual rate equal to the Applicable Federal Rate provided for in Section 1274(d) of the Code from the date the Gross-Up Payment (to which the Excess Payment relates) was paid to the Executive until the date of repayment to the Company. (d) Notwithstanding anything contained in this Agreement to the contrary, in the event that, according to the Determination, an Excise Tax will be imposed on any Payment or Payments, the Company shall pay to the applicable government taxing authorities as Excise Tax withholding, the amount of the Excise Tax that the Company has actually withheld from the Payment or Payments. 5.2 In the event the Executive elects to be paid the amount set forth in clause (B) of Section 3.1(b)(ii), the following provisions shall be applicable (capitalized terms used in this Section 5.2 shall have the meanings assigned to them in this Section 5.2 only): (a) Notwithstanding anything contained in this Agreement to the contrary, to the extent that any payment or benefit (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")), to the Executive or for his benefit paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with the Company or a Change in ownership or effective control of the Company or of a substantial portion of its assets (each a "Payment" and collectively, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Payments shall be reduced (but not below zero) if and to the extent necessary so that no payment to be made or benefit to be provided to the Executive shall be subject to the Excise Tax (such reduced amount is hereinafter referred to as the "Limited Payment Amount"). Unless the Executive shall have given prior written notice specifying a different order to the Company to effectuate the Limited Payment Amount, the Company, in consultation with the Executive, shall reduce or eliminate the Payments, by first reducing or eliminating those payments or benefits which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the Determination (as hereinafter defined). Any notice given by the Executive pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing the Executive's rights and entitlements to any benefits or compensation. (b) An initial determination as to whether the Payments shall be reduced to the Limited Payment Amount pursuant to Section 5.2(a) and the amount of such Limited Payment Amount shall be made at the Company's expense by an accounting firm selected by the Company which is designated as one of the five largest accounting firms in the United States (the "Accounting Firm"). The Accounting Firm shall provide its initial determination (the "Determination"), together with detailed supporting calculations and documentation to the Company and the Executive within five (5) days of the Termination Date, or such other time as requested by the Executive, and shall furnish the Executive with an opinion reasonably acceptable to the Executive setting forth its conclusions (together with supporting calculations). Within ten (10) days of the delivery of the Determination to the Executive, the Executive shall have the right to dispute the Determination (the "Dispute"). If there is no Dispute, the Determination shall be binding, final and conclusive upon the Company and the Executive subject to the application of Section 5.2(c) below. In addition, the Executive shall have the right to request the Accounting Firm, at the Company's expense, to render additional determinations from time to time, subsequent to the Determination, as to whether an Excess Payment (as defined in Section 5.2(c)) or an Underpayment (as defined in Section 5.2(c)) has occurred. The Accounting Firm shall provide each subsequent determination within five (5) days after each such request by the Executive, and shall furnish the Executive with an opinion reasonably satisfactory to the Executive setting forth its conclusions (together with supporting calculations). (c) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that the Payments to be made to, or provided for the benefit of, the Executive, either have been made or will not be made by the Company which, in either case, will be inconsistent with the limitations provided in Section 5.2(a) (hereinafter referred to as an "Excess Payment" or "Underpayment", respectively). If it is established pursuant to a final determination of a court or an Internal Revenue Service (the "IRS") proceeding which has been finally and conclusively resolved, that an Excess Payment has been made, such Excess Payment shall be deemed for all purposes to be a loan to the Executive made on the date the Executive received the Excess Payment and the Executive shall repay the Excess Payment to the Company on demand (but not less than ten (10) days after written notice is received by the Executive) together with interest on the Excess Payment at the "Applicable Federal Rate" (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such Excess Payment until the date of such repayment. In the event that it is determined by (i) the Accounting Firm or the Company (which shall include the position taken by the Company, or together with its consolidated group, on its federal income tax return), (ii) pursuant to a determination by a court, or (iii) upon the resolution to the Executive's satisfaction of the Dispute, that an Underpayment has occurred, the Company shall pay an amount equal to the Underpayment to the Executive within ten (10) days of such determination or resolution together with interest on such amount at the Applicable Federal Rate from the date such amount would have been paid to the Executive until the date of payment. 6. Successors' Binding Agreement. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns and the Company shall require any Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 7. Fees and Expenses. The Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by the Executive as they become due as a result of (a) the Executive's termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment), (b) the Executive seeking to obtain or enforce any right or benefit provided by this Agreement (including, but not limited to, any such fees and expenses incurred in connection with the Dispute (under either Section 5.1 or 5.2, as the case may be) and any other matter arising under Section 5.1 or Section 5.2, including the existence and amount of any Excess Payment or Underpayment (under either Section 5.1 or Section 5.2, as the case may be) and issues with respect to the Gross-Up Payment, whether as a result of any applicable government taxing authority proceeding, audit or otherwise, or by any other plan or arrangement maintained by the Company under which the Executive is or may be entitled to receive benefits), provided, however, that any such action by the Executive is commenced in good faith and for good reason, and (c) the Executive's hearing before the Board as contemplated in Section 2.4 of this Agreement; provided, however, that the circumstances set forth in clauses (a) and (b) (other than as a result of the Executive's termination of employment under circumstances described in Section 2.5(d)) occurred on or after a Change in Control. 8. Notices. For the purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses for the parties set forth on Exhibit A hereto or to any other addresses as the respective parties may designate by notice delivered pursuant to this Section 8, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 9. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company and for which the Executive may qualify, nor shall anything herein limit or reduce such rights as the Executive may have under any other agreements with the Company. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 10. Settlement of Claims. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others. 11. Modification, Waiver and Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 12. Governing Law and Jurisdiction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the conflict of laws principles thereof. Any claims arising under or related to this Agreement shall be settled by binding arbitration pursuant to the rules of the American Arbitration Association or such other rules as to which the parties may agree. The arbitration shall take place in New York, New York within thirty (30) days following service of notice of such dispute by one party on the other. The arbitration shall be conducted before a panel of three (3) arbitrators, one to be selected by each of the parties and the third to be selected by the other two. The panel of arbitrators shall have no authority to order a modification or amendment of this Agreement. Any proceeding under this Agreement to enforce an arbitration award shall be brought in any court having jurisdiction. 13. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 14. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written. MERCANTILE STORES COMPANY, INC. By:_____________________________ James M. McVicker Senior Vice President and Chief Financial Officer ________________________________ DAVID L. NICHOLS EX-10.B 3 MANAGEMENT CONTRACT EXHIBIT 10.B SEVERANCE PROTECTION AGREEMENT THIS AGREEMENT, made as of the 1st day of May, 1995, by and between the Company (as hereinafter defined) and each of James M. McVicker, Randolph L. Burnette, James D. Cain and Paul E. McLynch (the "Executive"). WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change in Control (as hereinafter defined) exists and that the threat or the occurrence of a Change in Control can result in significant distractions of its key management personnel because of the uncertainties inherent in such a situation; WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its stockholders to retain the services of certain key corporate officers of the Company and the Company's Store Group Presidents in the event of a threat or the occurrence of a Change in Control and to ensure their continued dedication and efforts in such event without undue concern for their personal financial and employment security; and WHEREAS, the Executive is a Vice President of the Company and in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive to provide the Executive with certain benefits in the event his employment is terminated as a result of, or in connection with, a Change in Control. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is hereby agreed as follows: 1. Term of Agreement. This Agreement shall commence as of May 1, 1995 and shall continue in effect until April 30, 1997, provided, however, that commencing on May 1, 1996 and on each May 1 thereafter, the term of this Agreement shall automatically be extended for one (1) year unless either the Company or the Executive shall have given written notice to the other at least ninety (90) days prior thereto that the term of this Agreement shall not be so extended; and provided, further, however, that notwithstanding any such notice by the Company not to extend, the term of this Agreement shall not expire prior to the expiration of twenty-four (24) months after the occurrence of a Change in Control during the term of this Agreement. Notwithstanding the foregoing, however, this Agreement shall terminate in the event that the Executive enters into an agreement covering the subject matter hereof with the Company subsequent to the date hereof and such agreement specifically states that this Agreement is terminated. 2. Definitions. 2.1. Accrued Compensation. For purposes of this Agreement, "Accrued Compensation" shall mean an amount which shall include all amounts earned or accrued through the Termination Date (as hereinafter defined) but not paid as of the Termination Date including (i) base salary, (ii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the Company during the period ending on the Termination Date, (iii) vacation pay, and (iv) bonuses and incentive compensation. 2.2. Base Amount. For purposes of this Agreement, "Base Amount" shall mean the Executive's annual base salary at the highest rate in effect during the one year period prior to the Change in Control, and shall include all amounts of his base salary that are deferred under the qualified and non-qualified employee benefit plans of the Company or any other agreement or arrangement. 2.3. Bonus Amount. For purposes of this Agreement, "Bonus Amount" shall mean an amount equal to the annual bonus paid or payable to the Executive for the most recently completed fiscal year prior to the Change in Control. 2.4. Cause. For purposes of this Agreement, a termination of employment is for "Cause" if the Executive has been convicted of a felony or the termination is evidenced by a resolution adopted in good faith by two-thirds of the Board that the Executive (a) intentionally and continually failed substantially to perform his reasonably assigned duties with the Company (other than a failure resulting from the Executive's incapacity due to physical or mental illness or for any reason that would constitute Good Reason as hereinafter defined) which failure continued for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to the Executive specifying the manner in which the Executive has failed substantially to perform, or (b) intentionally engaged in conduct which is demonstrably and materially injurious to the Company; provided, however, that no termination of the Executive's employment shall be for Cause as set forth in clause (b) above until (x) there shall have been delivered to the Executive a copy of a written notice setting forth that the Executive was guilty of the conduct set forth in clause (b) and specifying the particulars thereof in detail, and (y) the Executive shall have been provided an opportunity to be heard in person by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, nor failure to act, on the Executive's part, shall be considered "intentional" unless the Executive has acted, or failed to act, with a lack of good faith and with a lack of reasonable belief that the Executive's action or failure to act was in the best interest of the Company. 2.5. Change in Control. A "Change in Control" shall mean any of the following events: (a) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty percent (20%) or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred, Voting Securities which are acquired in a Non-Control Acquisition (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (1) an employee benefit plan (or a trust forming a part thereof) maintained by (x) the Company or (y) any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Subsidiary"), (2) the Company or any Subsidiary, or (3) any Person in connection with a Non-Control Transaction (as hereinafter defined); (b) The individuals who, as of January 1, 1995, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (c) Approval by stockholders of the Company of: (1) A merger, consolidation or re-organization involving the Company, unless (i) the stockholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly immediately following such merger, consolidation or reorganization, at least seventy percent (70%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization, (ii) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation, and (iii) no Person (other than the Company, any Subsidiary, any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation or any Subsidiary, or any Person who, immediately prior to such merger, consolidation or reorganization, had Beneficial Ownership of fifteen percent (15%) or more of the then outstanding Voting Securities) has Beneficial Ownership of fifteen percent (15%) or more of the combined voting power of the Surviving Corporation's then outstanding voting securities (a transaction described in clauses (i) through (iii) above shall herein be referred to as a "Non-Control Transaction"); (2) A complete liquidation or dissolution of the Company; or (3) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities beneficially owned by the Subject Person, then a Change in Control shall occur. (d) Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to a Change in Control and the Executive reasonably demonstrates that such termination (i) was at the request of a third party who had indicated an intention or taken steps reasonably calculated to effect a Change in Control and who effectuates a Change in Control (a "Third Party") or (ii) otherwise occurred in connection with, or in anticipation of, a Change in Control which actually occurs, then for all purposes of this Agreement, the date of a Change in Control with respect to the Executive shall mean the date immediately prior to the date of such termination of the Executive's employment. 2.6. Company. For purposes of this Agreement, the "Company" shall mean Mercantile Stores Company, Inc, a Delaware corporation, and shall include its Successors and Assigns (as hereinafter defined). As used in this Agreement, the terms "affiliated company", "affiliated companies" and "affiliate" shall include any company controlled by, controlling, or under common control with, the Company. 2.7. Disability. For purposes of this Agreement, "Disability" shall mean a physical or mental infirmity which impairs the Executive's ability to substantially perform his duties with the Company for a period of one hundred eighty (180) consecutive days and the Executive has not returned to his full time employment prior to the Termination Date as stated in the Notice of Termination (as hereinafter defined). 2.8. Good Reason. (a) For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change in Control of any of the events or conditions described in subsections (1) through (9) hereof: (1) a change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, represents an adverse change from his status, title, position or responsibilities as in effect at any time within one year preceding the date of a Change in Control or at any time thereafter; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with his status, title, position or responsibilities as in effect at any time within one year preceding the date of a Change in Control or at any time thereafter; or any removal of the Executive from or failure to reappoint or reelect him to any of such offices or positions, except in connection with the termination of his employment for Disability, Cause, as a result of his death or by the Executive other than for Good Reason; (2) a reduction in the Executive's base salary or the failure of the Company to (i) pay to the Executive an annual base salary at least equal to the Base Amount, (ii) pay to the Executive an annual bonus in cash at least equal to the Bonus Amount, such bonus to be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the annual bonus is awarded, unless the Executive shall elect to defer the receipt of such annual bonus, (iii) increase the Executive's base salary and annual bonus consistent with the Company's practice prior to the Change in Control or, if greater, as the same may be increased from time to time for other key executive officers of the Company and its affiliated companies, or (iv) pay to the Executive any compensation or benefits to which he is entitled within five (5) days of the date due; (3) the Company's requiring the Executive to be based at any place outside a 30-mile radius from Fairfield, Ohio, except for reasonably required travel on the Company's business which is not materially greater than such travel requirements prior to the Change in Control; (4) the failure by the Company to (A) continue in effect (without reduction in benefit level and/or reward opportunities) any material compensation or employee benefit plan (including, without limitation, long- term disability, medical, dental, life insurance, flexible spending account, pre-tax insurance premiums, vacation pay, pension, profit-sharing and employee discount) in which the Executive was participating at any time within one year preceding the date of a Change in Control or at any time thereafter, unless such plans are replaced with plans that provide substantially equivalent compensation or benefits to the Executive, (B) provide the Executive with compensation and benefits, in the aggregate, at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each other employee benefit plan, program and practice in which the Executive was participating at any time within one year preceding the date of a Change in Control or at any time thereafter, or (C) permit the Executive to participate in any or all incentive, savings, retirement plans and benefit plans, fringe benefits, practices, policies and programs applicable generally to other key executives of the Company and its affiliated companies; (5) the insolvency or the filing (by any party, including the Company) of a petition for bankruptcy of the Company, which petition is not dismissed within sixty (60) days; (6) any material breach by the Company of any provision of this Agreement; (7) any purported termination of the Executive's employment for Cause by the Company which does not comply with the terms of Section 2.4; (8) the disposition of (A) all, or substantially all, of the assets or (B) the majority of the voting securities, of: (i) the Company, or (ii) the store group or affiliated company for which the Executive serves in an executive capacity; or (9) the failure of the Company to obtain an agreement, satisfactory to the Executive, from any Successors and Assigns to assume and agree to perform this Agreement, as contemplated in Section 6 hereof. (b) Any event or condition described in Section 2.8(a)(1) through (9) above which occurs prior to a Change in Control but which the Executive reasonably demonstrates (1) was at the request of a Third Party, or (2) otherwise arose in connection with, or in anticipation of, a Change in Control which actually occurs, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Change in Control. 2.9. Notice of Termination. For purposes of this Agreement, following a Change in Control, "Notice of Termination" shall mean a written notice of termination from the Company of the Executive's employment which indicates the specific termination provision in this Agreement relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. The Notice of Termination shall also specify the relevant Termination Date. 2.10. Severance Period. For purposes of this Agreement, "Severance Period" shall mean the period from the Termination Date through the date that is twenty-four (24) months following a Change in Control. 2.11. Successors and Assigns. For purposes of this Agreement, "Successors and Assigns"' shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. 2.12. Termination Date. For purposes of this Agreement, "Termination Date" shall mean in the case of the Executive's death, his date of death, in the case of the Executive's resignation for any reason, the last day of his employment, and in all other cases, the date specified in the Notice of Termination; provided, however, that if the Executive's employment is terminated by the Company for Cause or due to Disability, the date specified in the Notice of Termination shall be at least 30 days from the date the Notice of Termination is given to the Executive, provided, that in the case of Disability the Executive shall not have returned to the full-time performance of his duties during such period of at least 30 days. 3. Termination of Employment. 3.1. If, during the term of this Agreement, the Executive's employment with the Company shall be terminated within twenty-four (24) months following a Change in Control, the Executive shall be entitled to the following compensation and benefits: (a) If the Executive's employment with the Company shall be terminated (1) by the Company for Cause or Disability, (2) by reason of the Executive's death, or (3) by the Executive other than for Good Reason, the Company shall pay to the Executive the Accrued Compensation. (b) If the Executive's employment with the Company shall be terminated for any reason other than as specified in Section 3.1(a), the Executive shall be entitled to the following: (i) the Company shall pay the Executive all Accrued Compensation; (ii) the Company shall pay the Executive as severance pay and in lieu of any further compensation for periods subsequent to the Termination Date, an amount in cash equal to the greater of: (A) (x) 2.99 times the sum of the Base Amount and the Bonus Amount, less (y) the amount of cash compensation paid or payable to the Executive for services rendered by the Executive to the Company from the date of the Change in Control through the Termination Date, or (B) two weeks' compensation at a level equal to the Base Amount plus the Bonus Amount for every year of the Executive's service with the Company and/or its affiliates (with a pro ration for partial years of service), at the Executive's sole election; (iii) throughout the Severance Period, the Company shall, at its expense, continue on behalf of the Executive and his dependents and beneficiaries all employee benefits provided (x) to the Executive at any time during the one year period prior to the Change in Control or at any time thereafter or (y) to other similarly situated executives who continue in the employ of the Company during the Severance Period, including, but not limited to, long-term disability, medical, dental, life insurance, flexible spending account, pre-tax insurance premiums and employee discount, but excluding pension and profit-sharing benefits. The coverage and benefits (including deductibles and costs) provided in this Section 3.1(b)(iii) during the Severance Period shall be no less favorable to the Executive and his dependents and beneficiaries than the most favorable of such coverages and benefits during any of the periods referred to in clauses (x) and (y) above. The Company's obligation hereunder with respect to the foregoing benefits shall be limited to the extent that the Executive obtains any such benefits pursuant to a subsequent employer's benefit plans, in which case the Company may reduce the coverage of any benefits it is required to provide the Executive hereunder as long as the aggregate coverages and benefits of the combined benefit plans is no less favorable to the Executive than the coverages and benefits required to be provided hereunder. This subsection (iii) shall not be interpreted so as to limit any benefits to which the Executive, his dependents or beneficiaries may be entitled under any of the Company's employee benefit plans, programs or practices following the Executive's termination of employment, including, without limitation, retiree medical and life insurance benefits; (iv) the Company shall pay to the Executive in a single payment an amount in cash equal to the excess of (A) the Supplemental Retirement Benefit (as defined below) had (w) the Executive remained employed by the Company for an additional two (2) complete years of credited service, (x) his annual compensation during such period been equal to the Base Amount and the Bonus Amount, (y) the benefit accrual formulas of each retirement plan remained no less advantageous to the Executive than those in effect immediately preceding the date on which a Change in Control occurred and the Company made employer contributions to each defined contribution plan in which the Executive was a participant at the Termination Date (in an amount equal to the amount of such contribution for the plan year immediately preceding the Termination Date), and (z) he been fully (100%) vested in his benefit under each retirement plan in which the Executive was a participant, over (B) the lump sum actuarial equivalent of the aggregate retirement benefit the Executive is actually entitled to receive under such retirement plans. For purposes of this subsection (iv), the "Supplemental Retirement Benefit" shall mean the lump sum actuarial equivalent of the aggregate retirement benefit the Executive would have been entitled to receive under the Company's supplemental and other retirement plans, including, but not limited to, the Mercantile Stores Pension Plan, the Mercantile Stores Non-Qualified Top Hat Pension Plan, the Mercantile Stores Non-Qualified Excess Pension Plan and the Mercantile Stores Savings, Profit Sharing and Supplemental Retirement Plan (the "Pension Plans"). For purposes of this subsection (iv), the "actuarial equivalent" shall be determined in accordance with the actuarial assumptions used for the calculation of benefits under the Pension Plans as applied prior to the Termination Date in accordance with such plan's past practices. (c) The amounts provided for in Sections 3.1(a), 3.1(b)(i), clause (B) of Section 3.1(b)(ii), if applicable, and 3.1(b)(iv) shall be paid in a single lump sum cash payment within five (5) days after the Executive's Termination Date (or earlier, if required by applicable law); and the amounts provided for in clause (A) of Section 3.1(b)(ii), if applicable, shall be paid in equal monthly installments from the Termination Date until the expiration of the Severance Period. (d) The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment except as provided in Section 3.1(b)(iii). Notwithstanding the foregoing, the Executive agrees that, during the Severance Period, he shall not (i) solicit any employees of the Company to leave the Company's employ to work for any company with which the Executive is employed, or (ii) employ any associate who is employed by the Company at any time during the Severance Period. A breach of either of the foregoing covenants will result in the Executive forfeiting any further payments or benefits to which he is entitled pursuant to Sections 3.1(b)(ii) and 3.1(b)(iii), although the Executive shall not be required to return any payments to the Company which have been made to the Executive prior to the date of such breach. 3.2. (a) The severance pay and benefits provided for in this Section 3 shall be in lieu of any other severance or termination pay to which the Executive may be entitled under any Company severance or termination plan, program, practice or arrangement. (b) The Executive's entitlement to any or other compensation benefits shall be determined in accordance with the Company's employee benefit plans and other applicable programs, policies and practices then in effect. (c) Notwithstanding anything to the contrary in this Agreement, in the event the Executive is terminated by the Company after the occurrence of a Change in Control and is subsequently rehired by the Company at any time thereafter, the Executive shall not be entitled to any further payments or benefits under Sections 3.1(b)(ii) and 3.1(b)(iii) of this Agreement although the Executive shall not be required to return any payments to the Company which have been made to the Executive prior to the date the Executive is rehired. 4. Notice of Termination. Following a Change in Control, any purported termination of the Executive's employment by the Company shall be communicated by Notice of Termination to the Executive. For purposes of this Agreement, no such purported termination shall be effective without such Notice of Termination. 5. Excise Tax Payments. (a) Notwithstanding anything contained in this Agreement to the contrary, to the extent that any payment or benefit (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")), to the Executive or for his benefit paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with the Company or a Change in ownership or effective control of the Company or of a substantial portion of its assets (each a "Payment" and collectively, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Payments shall be reduced (but not below zero) if and to the extent necessary so that no payment to be made or benefit to be provided to the Executive shall be subject to the Excise Tax (such reduced amount is hereinafter referred to as the "Limited Payment Amount"). Unless the Executive shall have given prior written notice specifying a different order to the Company to effectuate the Limited Payment Amount, the Company, in consultation with the Executive, shall reduce or eliminate the Payments, by first reducing or eliminating those payments or benefits which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the Determination (as hereinafter defined). Any notice given by the Executive pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing the Executive's rights and entitlements to any benefits or compensation. (b) An initial determination as to whether the Payments shall be reduced to the Limited Payment Amount pursuant to Section 5(a) and the amount of such Limited Payment Amount shall be made at the Company's expense by an accounting firm selected by the Company which is designated as one of the five largest accounting firms in the United States (the "Accounting Firm"). The Accounting Firm shall provide its initial determination (the "Determination"), together with detailed supporting calculations and documentation to the Company and the Executive within five (5) days of the Termination Date, or such other time as requested by the Executive, and shall furnish the Executive with an opinion reasonably acceptable to the Executive setting forth its conclusions (together with supporting calculations). Within ten (10) days of the delivery of the Determination to the Executive, the Executive shall have the right to dispute the Determination (the "Dispute"). If there is no Dispute, the Determination shall be binding, final and conclusive upon the Company and the Executive subject to the application of Section 5(c) below. In addition, the Executive shall have the right to request the Accounting Firm, at the Company's expense, to render additional determinations from time to time, subsequent to the Determination, as to whether an Excess Payment (as defined in Section 5(c)) or an Underpayment (as defined in Section 5(c)) has occurred. The Accounting Firm shall provide each subsequent determination within five (5) days after each such request by the Executive, and shall furnish the Executive with an opinion reasonably satisfactory to the Executive setting forth its conclusions (together with supporting calculations). (c) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that the Payments to be made to, or provided for the benefit of, the Executive either have been made or will not be made by the Company which, in either case, will be inconsistent with the limitations provided in Section 5(a) (hereinafter referred to as an "Excess Payment" or "Underpayment", respectively). If it is established pursuant to a final determination of a court or an Internal Revenue Service (the "IRS") proceeding which has been finally and conclusively resolved, that an Excess Payment has been made, such Excess Payment shall be deemed for all purposes to be a loan to the Executive made on the date the Executive received the Excess Payment and the Executive shall repay the Excess Payment to the Company on demand (but not less than ten (10) days after written notice is received by the Executive) together with interest on the Excess Payment at the "Applicable Federal Rate" (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such Excess Payment until the date of such repayment. In the event that it is determined by (i) the Accounting Firm or the Company (which shall include the position taken by the Company, or together with its consolidated group, on its federal income tax return), (ii) pursuant to a determination by a court, or (iii) upon the resolution to the Executive's satisfaction of the Dispute, that an Underpayment has occurred, the Company shall pay an amount equal to the Underpayment to the Executive within ten (10) days of such determination or resolution together with interest on such amount at the Applicable Federal Rate from the date such amount would have been paid to the Executive until the date of payment. 6. Successors' Binding Agreement. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns and the Company shall require any Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 7. Fees and Expenses. The Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by the Executive as they become due as a result of (a) the Executive's termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment), (b) the Executive seeking to obtain or enforce any right or benefit provided by this Agreement (including, but not limited to, any such fees and expenses incurred in connection with the Dispute and any other matter arising under Section 5, including the existence and amount of any Excess Payment or Underpayment, whether as a result of any applicable government taxing authority proceeding, audit or otherwise, or by any other plan or arrangement maintained by the Company under which the Executive is or may be entitled to receive benefits), provided, however, that any such action by the Executive is commenced in good faith and for good reason, and (c) the Executive's hearing before the Board as contemplated in Section 2.4 of this Agreement; provided, however, that the circumstances set forth in clauses (a) and (b) (other than as a result of the Executive's termination of employment under circumstances described in Section 2.5(d)) occurred on or after a Change in Control. 8. Notices. For the purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses for the parties set forth on Exhibit A hereto or to any other addresses as the respective parties may designate by notice delivered pursuant to this Section 8, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 9. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company except for any severance or termination policies, plans, programs or practices and for which the Executive may qualify, nor shall anything herein limit or reduce such rights as the Executive may have under any other agreements with the Company except for any severance or termination agreement. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 10. Settlement of Claims. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others. 11. Modification, Waiver and Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 12. Governing Law and Jurisdiction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the conflict of laws principles thereof. Any claims arising under or related to this Agreement shall be settled by binding arbitration pursuant to the rules of the American Arbitration Association or such other rules as to which the parties may agree. The arbitration shall take place in New York, New York within thirty (30) days following service of notice of such dispute by one party on the other. The arbitration shall be conducted before a panel of three (3) arbitrators, one to be selected by each of the parties and the third to be selected by the other two. The panel of arbitrators shall have no authority to order a modification or amendment of this Agreement. Any proceeding under this Agreement to enforce an arbitration award shall be brought in any court having jurisdiction. 13. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 14. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written. MERCANTILE STORES COMPANY, INC. By:_________________________________ David L. Nichols Chairman and Chief Executive Officer ____________________________________ NAMED EXECUTIVE EX-13 4 REGISTRANT ANNUAL REPORT TABLE OF CONTENTS financial highlights inside cover chairman's letter page 3 overview page 4-10 financial information page 11-31 store divisions and locations page 32-33 group presidents and corporate officers page 34 directors and stockholder information inside back cover
financial highlights 1995 1994 % change Year Ending Year Ending February 3, 1996 January 28, 1995 For the year: Total Revenues $2,944,324,000* $2,819,837,000 4.4* Income: Net Operating Income - Excluding Consolidation $ 123,248,000 $ 107,517,000 14.6 Consolidation Provision -- (3,000,000) Net Operating Income 123,248,000 104,517,000 17.9 Accounting Change -- (1,100,000) Net Income $ 123,248,000 $ 103,417,000 19.2 Per Share Data: Net Income - Excluding Consolidation $ 3.35 $ 2.92 Consolidation Provision -- (.08) Net Operating Income 3.35 2.84 Accounting Change -- (.03) Net Income $ 3.35 $ 2.81 At year end: Working Capital $1,013,576,000 $ 957,030,000 5.9 Ratio 4.7 4.7 Long-Term Debt (including current maturities) $ 261,073,000 $ 266,397,000 (2.0) Debt to Capitalization Ratio 15.0% 16.0% Stockholders' Equity $1,485,113,000 $1,400,551,000 6.0 Book Value Per Share $ 40.31 $ 38.01 6.0 *Revenues in 1995 include finance charge income. In addition, the 1995 year comprises 53 weeks. Excluding finance charge income and the 53rd week in 1995, total retail sales increased 1.5%.
THE CORPORATION Mercantile Stores Company, Inc. is a conventional department store retailer which, at year-end, operated 101 stores under 13 different names in a total of 17 states. The stores are located in 50 different markets and, in the majority of these markets, the Company's units hold the dominant general merchandise retailer position. This status substantially conforms to our corporate goal: "To operate profitable stores which hold the number one or number two position in every market in which we do business and thereby produce a desirable return on investment for our shareholders as we deliver value to our customers." - - A typical store is approximately 170,000 square feet and offers a merchandise mix which appeals to middle to upper-middle income consumers with an emphasis on apparel, cosmetics, accessories, and home fashions. - - In addition to its department store business, the Company maintains a partnership interest in five operating shopping centers. Each of these joint venture shopping centers contains a Company department store. -1- momentum mounts... "your Company benefited from the momentum which has been building over the past four years" "a number of the programs on which we have been concentrating have begun to fall into place" "the progress seen in 1995 will continue to give us momentum as we strive for increased success" (picture of Chairman of the Board, David L. Nichols.) -2- Dear Shareholders, In 1995, your Company benefited from the momentum which has been building over the past four years. Thanks to the determined efforts of our associates, company-wide, we were able to report an encouraging increase in earnings in spite of the extremely difficult and competitive retail industry environment. Net income in 1995 increased 19.2% over the previous year, thanks largely to a very strong fourth quarter in which net income rose 30.4% over the 1994 comparable quarter. The 1995 performance is attributable to several factors. A number of management and planning programs on which we have been concentrating over the past several years have begun to fall into place. These programs are focused on the dual targets of improving merchandising margins and better controlling merchandising costs, such as shrinkage. Continuing efforts in these areas will be pursued with vigor in 1996 and beyond. In August, we assumed full responsibility for managing our Mercantile Consumer Credit Program. The credit operation in this transitional year progressed so well that it was not dilutive to earnings as we had previously assumed. Going forward, we anticipate that this element of the business will continue to be additive to profits and will also present us with increased opportunities, such as target marketing, to grow the business. The following pages of this Annual Report will depict some of the activities and initiatives we will be undertaking in 1996 and beyond. With profound sadness, we report that Rene C. McPherson, a member of our Board of Directors since 1984, died on February 26, 1996. His enthusiastic involvement and his sage guidance made a considerable contribution to the Company. Some of the progress and momentum we review in this report can be attributed to the innovative and inspirational influence of Mr. McPherson. We are grateful to him for his many contributions. Indeed, "Ren" has left us with a legacy that impels the quest for excellence in all that we do. We regret that George S. Moore has stated that he will not stand for re- election at the Annual Meeting in May, 1996. Mr. Moore has been a director since 1957. His many contributions to the success of your Company for almost forty years have been significant. His wise counsel and participation in our business will be missed. Thank you, Mr. Moore, for all you have done for Mercantile. In January, 1996, Lawrence R. Pugh was elected to the Board of Directors. Mr. Pugh is Chairman of the Board of VF Corporation, the manufacturer and marketer of some of America's most popular apparel brands. VF Corporation is a leader in developing and implementing advanced technology as well as strategies ranging from niche marketing to global growth. We welcome him to the Board. Clearly, the future will be what we make of it. With the hard work of our dedicated associates, we believe the progress seen in 1995 will continue and give us momentum as we strive for increased success in the tough retail climate ahead. We recognize the important role our vendors and their quality products play in our accomplishments. We also acknowledge the essential value of the loyalty of our customers and the support of our shareholders. David L. Nichols Chairman of the Board -3- GROWTH (picutre of Joslins Southglenn Mall store) Significant thrust will be provided to Mercantile's momentum in 1996 from the opening of five new stores, totaling 875,000 square feet. With the exception of the Maison Blanche acquisition in 1992, this represents the largest annual square footage addition in the history of the Company. The opening of these new stores is indicative of our growth strategy of averaging three to five new units a year for the remainder of the decade. These new retail facilities will be placed in locations which both strengthen our presence in existing markets and open new markets which fit logistically into our present geographical structure. The execution of this strategy will carry the growth momentum of 1996 into the twenty-first century. New Store Units for 1996: Orlando, FL - Gayfers - West Oaks Mall - 212,000 square feet - Fourth Store in Market Spartanburg, SC - J.B. White - Westgate Shopping Center - 161,000 square feet - New Market Dayton, OH - McAlpin's - Dayton Mall - 208,000 square feet - New Market Columbia, SC - J.B. White - Columbiana Center - 184,000 square feet - Third Store in Market Murfreesboro, TN - Castner Knott Co. - Stones River Mall - 110,000 square feet - New Market -4- (Picture of Home Store merchandise (Sled Bed)). -5- (Picture of Home store merchandise (cookware)). -6- PRODUCT DEVELOPMENT (Picture of private label merchandise) As we continue to build the momentum of our business, product development and our related private label programs will be an ever more important part of the force that drives our progress. In each of the last three years, private label sales grew by a full percentage point and, in 1995, represented 12% of sales. This momentum is projected to continue and, by 1997, private label merchandise will represent 15% of sales. Continued focus on this important area of our business will enable Mercantile to offer products designed to meet the specific needs of our customers' lifestyles while differentiating our stores from the competition. Private label enhances and sustains customer loyalty by providing products of consistent fit, color and durability. This high level of quality is monitored and guaranteed by our in-house Quality Assurance staff. Private label merchandise is an essential element in our commitment to offer superior value to our customers. -7- EDUCATION AND DEVELOPMENT (Picture of associates in classroom setting) An important element in our significant new store expansion program will be the customer service education that will be provided to our associates in these new units. A major part of this education will be conducted by Mercantile Stores University (MSU) through a program called "World Class Customer Service." Recently, MSU extended its work arena beyond its classroom walls at Corporate Headquarters by taking the training process out to the field. We refer to this expansion to our educational activities as "MSU on the Road." During 1995, the "MSU on the Road" team made more than thirty visits to our operating groups. This on-going emphasis affords the opportunity to tailor subject matter to the specific needs of each student body and will be ideal in providing our new store associates with the tenets of "World Class Customer Service." "MSU on the Road" means more momentum in Mercantile's future. -8- MARKETING (Picture of marketing brochures) As we move toward the 21st century, we face monumental changes in the way we market our products and services to our customers and prospective customers. It is essential that we lead the momentum of these changes through dynamic creativity and innovative marketing. Several of our marketing programs, among others, reflect our efforts to achieve this leadership: - - A databased communications system which takes mainframe information and enables our associates to target our messages to specific customers more precisely and efficiently. - - Multi-media programs, including magalogs and an internet on-line presence, to deliver our marketing messages to a broader scoped audience in a sophisticated and attractive presentation. Together, these programs, targeted and broad based, balance our marketing efforts as we build momentum in the evolution from this century's print and broadcast advertising to the myriad of media that will be part of the retail industry in the 21st Century. -9- CUSTOMER SERVICE (Picture of merchandise) No matter how many new stores we build, or how good our education, marketing and product development are, we cannot succeed unless we take care of our customers. As we build momentum to build our business, we must always remember that the customer comes first. One example of Mercantile's dedication to customer service is our Personal Shopper Program. Through an appointment process, this concept offers professional sales associates in each of our stores to work directly with our customers. . .one-on-one. . .and at no cost. In our busy lifestyles, where time is the equivalent of currency, these knowledgeable associates help in identifying the customers' needs and assist with the selection and purchase of the full spectrum of merchandise offered by our stores. The strength of the program can be demonstrated in terms of sales productivity. Over the past two years, volume generated by our personal shopper associates has more than doubled. As we continue to move our business forward, using the momentum of each accomplishment to build to the next, we are confident that they will all be based on the most solid foundation of all. . .DAZZLING CUSTOMER SERVICE. -10- MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Revenues which in 1995 included $52 million of finance charge revenue on the Company's private label credit program, increased by 4.4% to $2,944 million. There were 53 weeks in the 1995 year. The percentage changes in total and comparable retail sales, on an equalized 52 week basis, for the last three years were as follows: 1995 1994 1993 Total retail sales 1.5% 3.3% (.1%) Comparable retail sales 1.2% 1.7% (1.9%) Net Income for 1995 increased 19.2% to $123 million, or $3.35 per share, from the $103 million, or $2.81 per share, earned in the prior year. Last year's results included charges amounting to $4 million, or $.11 per share, for a consolidation provision and the impact of an accounting change. The following summary presents an analysis of the components of net income for the past three years:
1995 1994 1993 (in millions, except per share data) Amount Per Share Amount Per Share Amount Per Share Net income before non-recurring item and accounting changes $123.2 $3.35 $107.5 $2.92 $86.6 $2.35 Consolidation provision - - (3.0) (.08) - - Postemployment benefits - - (1.1) (.03) - - Income taxes - - - - 3.1 .09 Net income $123.2 $3.35 $103.4 $2.81 $89.7 $2.44
-11- 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 expenses 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 1995, COGS, as a percent of revenues, decreased 1.7% from the prior year. This improvement during the year was due, in part, to the inclusion of finance charge revenue in 1995. Excluding the impact of finance charge revenue and the application of the last-in, first-out (LIFO) method, COGS, as a ratio to retail sales, improved approximately 0.6% over the prior year. The improvement resulted from a 0.4% increase in merchandise margins, due to higher initial mark-up, partially offset increased markdowns. Another significant contributor to the improved margin result was a 0.5% reduction in shrinkage expense. Lower margin leased department sales increased 12% over the prior year and served to increase COGS by 0.3%. Occupancy and central buying expenses were relatively flat for fiscal 1995. In 1994, COGS (excluding the impact of LIFO) increased 0.1% over the prior year. The increase was attributable to the impact which a 16% increase in lower margin leased department sales had on total COGS. A 0.2% improvement in merchandising costs was offset by an increase in shrinkage expense. In 1993, COGS (excluding the impact of LIFO) increased 1.2%. This increase was attributable, primarily, to a higher promotional environment, particularly during the important fourth quarter. The Company employs the LIFO method to value all of its retail inventories and uses indices produced by the Bureau of Labor Statistics to calculate the impact of inflation on inventory valuations. In 1995, the application of the LIFO method resulted in a credit to net income of $.01 per share. This contrasted to the 1994 year in which the LIFO impact was unusual as significant categories of merchandise actually experienced a price deflation. This produced a LIFO credit of $.11 per share in 1994. In 1993, the LIFO application resulted in a charge of $.06 per share. The impact of LIFO on COGS, as a percent of retail sales, was: 1995 1994 1993 Cost of goods sold 71.2% 71.6% 71.8% LIFO credit/(charge) - .2 (.1) Cost of goods sold (excluding LIFO) 71.2% 71.8% 71.7% Operating Expenses - Selling, general and administrative expenses (SG&A), as a percent to revenues, increased 1.1% to 23.3% in 1995. The increase was primarily attributable to costs associated with the Company's assumption of full responsibility for managing its private label credit program at the end of the 1995 second quarter. Previously, this program had been managed by an affiliate of Citibank. This arrangement was terminated on July 31, 1995. The most significant among these credit related expenses was bad debts, including $10 million for the establishment of a bad debt reserve, which increased SG&A by 0.6%. The remaining increase in SG&A expenses was primarily attributable to increases in payroll costs and marketing expenses. In 1994, SG&A expenses, as a percent of revenues, decreased 0.8%. Approximately 60% of this decline was attributable to reductions in payroll and payroll related expenses. In 1993, SG&A declined approximately 0.5% from the prior year with payroll and payroll related expenses again comprising better than 50% of the decline. In 1994, the Company recorded a $5 million pre-tax provision for the consolidation of the Joslins division, centered in Denver, Colorado with the Jones Store Company Division, headquartered in Kansas City, Missouri. The provision covered severance pay, early retirement costs and relocation costs. As a result of this consolidation, the Company has saved approximately $3 million, annually, primarily as a result of reduced payroll and payroll related expenses. -12- Interest Expense decreased $9 million and $8 million in 1995 and 1994, respectively, primarily as a result of the scheduled payment of $110 million of mortgages and senior notes which carried an average interest coupon of 10.4%. These payments were made in the second quarter of 1994. Other Income decreased approximately $6 million in 1995 and $5 million in 1994. The decline in 1995 was attributable to changes in the servicing of the Company's private label credit programs, partially offset by a gain from the sale of an equity investment in an unaffiliated company and an increase in the Company's share of equity earnings from the real estate joint ventures. Other income in 1993 included a gain from the sale of a land investment, which resulted in the comparative decline in 1994. As discussed in Note 3 of Notes to Consolidated Financial Statements, effective July 31, 1995, the Company terminated its servicing agreement with Citibank, which covered all of its private label credit program other than accounts generated by Maison Blanche (MB), and assumed full responsibility for managing its customer receivables program. A sale and servicing agreement with an unaffiliated company covering customer accounts generated by MB was terminated during 1994. Finance charge revenue recorded in 1995 on customer accounts serviced by the Company has been classified as a component of revenues. The Effective Income Tax Rate has been relatively consistent for the last three years and was 39.8% in 1995,39.5% in 1994, and 39.7% in 1993. Accounting Change - As discussed in Note 1 of Notes to Consolidated Financial Statements, the Company will adopt the provisions of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed of" in the first quarter of fiscal 1996. Management anticipates that the application of this new accounting standard will result in a pre-tax impairment provision of approximately $12 million. Liquidity and Capital Resources - Cash flow from operating activities amounted to $187 million in 1995, contrasted with $169 million in 1994, and $138 million in 1993. The increase in 1995 was due to the improvement in net income and a decrease in working capital requirements, partially offset by a reduction in non-cash charges. The 1994 increase was primarily attributable to the increase in net income and non-cash charges, partially offset by an increase in working capital requirements, primarily those for inventory. Net customer receivables declined $33 million due, primarily, to the continuing erosion of private label credit sales. This decrease also reflected an increase in the bad debt reserve which was required as a result of the termination of the servicing agreement with Citibank. The $13 million decline in other receivables was primarily attributable to the elimination of the annual settlement with Citibank which, while the contract was still in effect, was satisfied in the first quarter of the ensuing year. In 1995, the year-end inventory level increased $55 million over the prior year. In part, this increase was attributable to calendar fluctuations, to wit, the earlier Easter in 1996 and the week later closing of the 1995 fiscal year. Also contributing to this increase was a heavier concentration of higher ticket home and home related merchandise in the composition of 1995's inventory. Cash allocated to capital expenditures was $101 million in 1995, contrasted with $94 million in 1994 and $106 million in 1993. During 1995, the Company sold its minority position in the stock of Ivey Properties, Inc. when the shareholders of that publicly traded Real Estate Investment Trust voted to sell it to an outside interest. The Company realized proceeds of $6 million from this sale. During 1994 and 1993, the Company realized proceeds of $2 million and $6 million, respectively, from the sales of property. Cash requirements to satisfy debt obligations declined substantially in 1995 to $5 million from $121 million in 1994 and $27 million in 1993. The 1995 amount represented regularly scheduled debt payments. In 1994, the scheduled payments included $110 million of debt assumed in the 1992 MB acquisition. In addition, in 1994, the Company prepaid, at a discount, $5 million of the 6.7% Notes due 2002. In 1993, in addition to the scheduled payments, the Company prepaid $25 million of Mortgage Notes and Industrial Revenue Bonds. -13- The Company primarily satisfies its short-term financing requirements through internally generated funds. In addition, the Company has available both committed and uncommitted short-term borrowing facilities. As discussed in Note 5 of Notes to Consolidated Financial Statements, during 1995, the Company cancelled a $175 million revolving credit agreement with Citibank and replaced it with a committed, unsecured $200 million revolving credit arrangement. The new facility is a five year agreement with a consortium of seven banks. When used, interest rates under the new arrangement will be based, at the Company's option, on either the banks' best rates under a competitive bid environment or a predefined spread (which is dependent on the Company's long-term debt credit rating) over the appropriate LIBOR rate. In addition to the committed $200 million arrangement, the Company has available uncommitted lines of credit totalling $20 million. Maximum borrowings under the combined facilities were $3 million in 1995, $69 million in 1994, and $51 million in 1993. No borrowings were outstanding under any of these credit arrangements at the end of the last three fiscal years. The Company is committed to maintaining a strong financial position. The debt to capitalization ratio considered to be a significant measure of financial strength, was 15% at the end of the fiscal year - among the lowest in the retail industry. Our long-term debt ratings of A+ and A1 by Standard & Poor's Corporation and Moody's Investors Services, Inc., respectively, are among the highest in the industry. Expansion and Capital Expenditures - Capital expenditures for 1996 are estimated at $130 million and it is anticipated that they will be funded through existing working capital and internally generated funds. Approximately 60% of these expenditures will be allocated to new stores scheduled to open in 1996 and 1997; approximately 25% will be spent on remodeling and upgrading existing stores; and the remainder on the various support functions needed to sustain the business. During 1995, the Company opened a 50,000 square foot McAlpin's Signatures Home Store, dedicated strictly to home fashions merchandise, in Cincinnati, Ohio. In mid-1995, a 113,000 square foot Joslins store in downtown Denver was closed. At the end of the year, downtown stores in Nashville, Tennessee and Cincinnati, Ohio, encompassing a total of 314,000 square feet, were also closed. In 1996, the Company plans to add the largest, annual new store square footage (other than acquisitions) in its history. A total of five new stores, totalling 875,000 square feet will be opened during the second half of the year. The new store units for 1996 are: Operating Identity Location Square Feet Gayfers Orlando, Florida 212,000 J.B. White Spartanburg, South Carolina 161,000 McAlpin's Dayton, Ohio 208,000 J.B. White Columbia, South Carolina 184,000 Castner Knott Murfreesboro, Tennessee 110,000 -14- BENEFIT PROGRAM The Company offers a comprehensive benefit program including pension and profit sharing plans as well as health, disability and life insurance programs to its eligible associates. The Pension Plan, established in 1945, has been funded entirely by Company contributions. All associates who meet the eligibility requirements (one year of service and attainment of age 21) are enrolled in the Plan. Members are 100% vested in their accrued benefits upon completing five years of service after age 18. At the end of the 1995 fiscal year, there were 28,497 Pension Plan members, including retirees, and the market value of Plan assets was $341 million. All associates who are enrolled in the Pension Plan are eligible to participate in the Savings, Profit Sharing and Supplemental Retirement Plan. During 1995, members in this Plan had the option to have the Company deposit up to 14% of their earnings into the plan, on a before- tax basis, to the extent permitted by IRS Code Section 401(k). Associates can elect to have their contributions invested in a balanced fund, an equity fund, insurance company contracts 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 Plan based upon its pre- tax income as defined. For the latest year, the Company's contribution amounted to $9.7 million, or approximately $.58 for each $1.00 deposited, before-tax, by a member up to 6% of compensation. All members employed as of February 1, 1993 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, insurance company contracts, or Mercantile Stores common stock. 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 February 3, 1996, the Trustee was holding 1,425,869 shares of Mercantile stock, or 3.9% of the total outstanding shares, for the benefit of Plan members. Plan assets at year-end totalled $479 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.
MARKET AND DIVIDEND INFORMATION For the fiscal year 1995 1994 Market Dividends Market Dividends Quarter High Low Declared Paid High Low Declared Paid First $46 $39 3/4 $ .52 $ .25 1/2 $41 1/8 $36 $ .51 $ .25 1/2 Second 49 42 5/8 - .26 1/2 38 1/2 30 1/2 - .25 1/2 Third 48 3/8 42 3/4 .53 .26 1/2 57 32 1/2 .51 .25 1/2 Fourth 49 3/8 44 1/4 - .26 1/2 46 36 1/2 - .25 1/2 $1.05 $1.05 $1.02 $1.02
The Company's common stock is traded on the New York Stock Exchange (NYSE symbol - MST). The number of stockholders at February 3, 1996 was 9,648. On April 3, 1996, the Board of Directors approved an increase in the quarterly dividend from $.26 1/2 to $.28 1/2 per share. This increase, payable on June 14, 1996 to holders of record on May 31, 1996, converts to an indicated annual dividend of $1.14 per share. -15- MANAGEMENT'S AND AUDITORS' REPORTS 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 has the primary responsibility 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. Independent public accountants provide an objective, independent review of management's discharge of its responsibilities insofar as they relate to the fairness of reported operating results and financial condition. They review the system of internal accounting controls in order to provide a basis for reliance on such controls and perform such tests and other 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 February 3, 1996 and January 28, 1995, and the related statements of consolidated income and retained earnings and cash flows for each of the three years in the period ended February 3,1996. 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 February 3, 1996 and January 28, 1995, and the results of their operations and their cash flows for each of the three years in the period ended February 3, 1996 in conformity with generally accepted accounting principles. As explained in Notes 6 and 7 to the Consolidated Financial Statements, the Company changed its method of accounting for postemployment benefits effective January 30, 1994 and its method of accounting for income taxes effective February 1, 1993. Cincinnati, Ohio Arthur Andersen LLP March 25,1996 -16-
STATEMENTS OF CONSOLIDATED INCOME AND RETAINED EARNINGS (in thousands, except per share data) 1995 1994 1993 Revenues $2,944,324 $2,819,837 $2,729,928 Costs, Expenses, and Other Income: Cost of goods sold (including occupancy and central buying expenses) 2,059,753 2,020,264 1,960,914 Selling, general and administrative expenses 686,924 625,726 627,391 Provision for consolidation - 5,000 - Interest expense 19,558 28,118 36,236 Interest income (5,087) (4,592) (5,288) Other income (21,404) (27,571) (33,003) 2,739,744 2,646,945 2,586,250 Income before Provision for Income Taxes 204,580 172,892 143,678 Provision for Income Taxes: Current 80,239 65,848 54,456 Deferred 1,093 2,527 2,583 81,332 68,375 57,039 Income before cumulative effect of accounting changes 123,248 104,517 86,639 Cumulative effect of accounting changes: Postemployment benefits (net of income taxes of $700) - (1,100) - Income taxes - - 3,100 Net Income $ 123,248 $ 103,417 $ 89,739 Retained Earnings at Beginning of Year 1,389,130 1,323,294 1,271,136 Dividends Declared 38,686 37,581 37,581 Retained Earnings at End of Year $1,473,692 $1,389,130 $1,323,294 Net Income Per Share: Income before cumulative effect of accounting changes $ 3.35 $ 2.84 $ 2.35 Cumulative effect of accounting changes: Postemployment benefits - (0.03) - Income taxes - - 0.09 Net Income Per Share $ 3.35 $ 2.81 $ 2.44 See Notes to Consolidated Financial Statements
-17- CONSOLIDATED BALANCE SHEETS (in thousands) February 3, January 28, 1996 1995 Assets Current Assets: Cash and cash equivalents $ 161,893 $ 114,237 Receivables: Customer, net 559,544 592,402 Other 15,078 27,836 Inventories 523,573 468,782 Deferred income taxes 12,248 7,667 Other current assets 14,048 7,821 Total Current Assets 1,286,384 1,218,745 Prepaid Pension and Other Noncurrent Assets 87,107 73,878 Deferred Income Taxes - 300 Property and Equipment: Land 37,400 36,512 Buildings and improvements 733,785 675,187 Fixtures 292,349 310,671 Leased property 62,018 64,311 1,125,552 1,086,681 Less accumulated depreciation 424,319 397,875 Property and equipment, net 701,233 688,806 Total $2,074,724 $1,981,729 See Notes to Consolidated Financial Statements -18- (in thousands) February 3, January 28, 1996 1995 Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term debt $ 6,147 $ 5,210 Accounts payable 106,645 121,667 Taxes other than income 21,352 17,101 Other current liabilities 69,546 61,132 Accrued income taxes 40,533 32,381 Accrued payroll 28,585 24,224 Total Current Liabilities 272,808 261,715 Long-term Debt 254,926 261,187 Due to Affiliated Companies 25,106 26,115 Deferred Income Taxes 6,867 - Other Long-term Liabilities 29,904 32,161 Stockholders' Equity:Common stock - $.14 2/3 par value,authorized and issued 36,887,475 shares,outstanding 36,844,050 (after deducting43,425 treasury shares) 5,403 5,403 Additional paid-in capital 6,018 6,018 Retained earnings 1,473,692 1,389,130 Total Stockholders' Equity 1,485,113 1,400,551 Total $2,074,724 $1,981,729 -19- STATEMENTS OF CONSOLIDATED CASH FLOWS (in thousands) 1995 1994 1993 Cash Flows from Operating Activities: Net Income $ 123,248 $ 103,417 $ 89,739 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 88,714 93,540 93,455 Deferred taxes 1,093 2,527 2,583 Net (gain) loss on disposition of property (5,916) 1,250 (3,904) Provision for consolidation - 5,000 - Postretirement benefits costs 91 166 2,200 Gain on sale of joint venture - - (1,610) Cumulative effect of accounting changes,net of taxes - 1,100 (3,100) Equity in unremitted earnings of affiliated companies (1,453) (206) (1,141) Net pension benefit (14,667) (15,653) (13,788) Changes in working capital: Change in inventories (54,791) (43,290) (2,673) Change in accounts receivable 45,616 14,876 (21,406) Change in accounts payable (15,022) 5,551 6,931 Change in other working capital items 20,325 1,143 (9,180) Net cash provided by operating activities 187,238 169,421 138,106 Cash Flows from Investing Activities: Cash payments for property and equipment (101,202) (93,639) (106,210) Proceeds from sale of property 5,982 1,550 6,095 Proceeds from sale of joint venture - - 785 Net change in other noncurrent assets and liabilities (466) 997 2,845 Net cash used in investing activities (95,686) (91,092) (96,485) Cash Flows from Financing Activities: Payments of long-term debt (5,210) (121,055) (26,740) Dividends paid (38,686) (37,581) (37,581) Net cash used in financing activities (43,896) (158,636) (64,321) Net Increase (Decrease) in Cash and Cash Equivalents 47,656 (80,307) (22,700) Cash and Cash Equivalents at Beginning of Year 114,237 194,544 217,244 Cash and Cash Equivalents at End of Year $ 161,893 $ 114,237 $ 194,544 Supplemental Cash Flow Information: Interest paid $ 20,926 $ 29,532 $ 37,393 Income taxes paid $ 70,593 $ 68,227 $ 49,670 See Notes to Consolidated Financial Statements -20- 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 97 department stores and 4 specialty stores under 13 different names in a total of 17 states. The stores are located in 50 different markets within these states. A subsidiary, Mercantile Credit Corp., headquartered in Baton Rouge, Louisiana, provides servicing for the Company's private label credit program. In addition to its department store and credit operations, the Company 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. Fiscal year 1995 consisted of fifty-three weeks and ended on February 3, 1996. Fiscal years 1994 and 1993 consisted of fifty-two weeks and ended on January 28, 1995 and January 29, 1994, respectively. 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 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. Prior to 1995, the Company's share of finance charge income accrued to the Company under revenue sharing agreements with unaffiliated companies and was classified as a component of other income. 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 Expense - Advertising expenditures, including production costs, are expensed as incurred. G. Store Pre-opening Expenses - Store pre-opening expenses are not material and are charged to income in the year the expenses are incurred. These include advertising, occupancy, and payroll costs. H. 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. I. Customer Receivables - Customer receivables are classified as current assets and include some amounts which are due after one year, consistent with industry practice. J. 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 both February 3, 1996 and January 28, 1995, inventories were $30 million lower than they would have been had the retail method been applied using the first-in, first-out (FIFO) cost basis. During the year ended February 3, 1996, the Company changed its method of accounting for promotional markdowns for purposes of determining current costs under the FIFO basis. Due to the application of the LIFO cost method, this change in accounting method for FIFO purposes did not have a material impact on the Company's financial position and results of operations. K. 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 10-35 years Store fixtures 5-7 years Leased property Term of lease or life of property, if shorter -21- The Company leases certain properties, principally store locations, under capital leases as defined by Statement of Financial Accounting Standards (SFAS) No. 13. Property meeting the criteria within the Statement 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. In March 1995, the Financial Accounting Standards Board issued 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 book values exceed expected future cash flows. The Company will adopt SFAS No. 121 in the first quarter of fiscal 1996 and it is anticipated that the application of this standard will result in a pre-tax impairment provision of approximately $12 million. L. 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. M. Segment Reporting - The Company has one significant segment of business (general merchandise department store retailing). N. Reclassifications - Certain reclassifications have been made to prior years' financial statements to conform with the classification used in the 1995 financial statements. 2. PROVISION FOR CONSOLIDATION During the first quarter of 1994, the Company recorded a $5 million charge for the consolidation of the Joslins division,centered in Denver, Colorado, with the Jones Store Company division, headquartered in Kansas City, Missouri. The provision was made to cover severance pay for the displacement of approximately 175 associates, early retirement costs for certain qualifying associates, and relocation costs. The consolidation of this operation was completed in 1994. 3. CUSTOMER RECEIVABLES Effective August 1, 1995, the Company terminated its servicing agreement with Citibank and assumed full responsibility for servicing its customer receivables. The servicing agreement covered substantially all of the Company's private label credit program. Prior to termination, Citibank was responsible for credit authorization, absorption of bad debts and collection of customer receivables. During 1994, the Company terminated a sales and servicing agreement with an unaffiliated company for customer receivables generated by its Maison Blanche (MB) division. Finance charge revenue recorded during 1995 on customer accounts serviced by the Company totalled $52 million and is classified as a component of revenues in the accompanying Statements of Consolidated Income and Retained Earnings. Operating expenses incurred in connection with the private label credit program are included in selling, general and administrative expenses. Customer receivables at February 3, 1996 are net of an allowance for doubtful accounts in the amount of $16 million. -22 4. LONG-TERM DEBT The Company's long-term debt consisted of the following: (in thousands) 1995 1994 8.2% Sinking Fund Debentures due 2022 (a) $100,000 $100,000 6.7% Notes due 2002 (a) 95,000 95,000 Industrial Revenue Bonds at rates ranging from 5.61% to 7.75% 9,475 10,689 Mortgage Note Payable (b) 980 1,080 Other Notes Payable 6,528 8,669 Total Debt 211,983 215,438 Capitalized Lease Obligations 49,090 50,959 261,073 266,397 Less - due within one year 6,147 5,210 Total Long-term Debt $254,926 $261,187 (a) The 6.7% notes have a mandatory annual sinking fund requirement of $19 million commencing in 1997. The 8.2% sinking fund debentures have a similar requirement of $5 million commencing in 2003. (b) The mortgage note payable carries a variable interest rate of 1.5% over prime with final payment due on February 1, 1997. Maturities of long-term debt, including capitalized leases, for the next five years are as follows: Fiscal year (in thousands) Amount 1996 $ 6,147 1997 $ 25,017 1998 $ 25,181 1999 $ 23,644 2000 $ 21,505 The fair value of long-term debt, including the current portion and excluding capital lease obligations, was approximately $225 million at February 3, 1996 and approximately equal to book value at January 28, 1995. 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. 5. FINANCING ARRANGEMENTS During the third quarter of 1995, the Company and a syndicate of banks entered into a five year, $200 million Revolving Credit Agreement (The Credit Agreement) which expires on August 3, 2000. The Credit Agreement replaced a $175 million revolving credit facility with Citibank which was terminated on July 31, 1995. The applicable interest rate on borrowings is based, at the Company' 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 $20 million. No fee is paid for maintaining these lines and interest on any borrowings is charged at a floating rate. At February 3, 1996 and January 28, 1995, there were no borrowings outstanding under the revolving credit arrangements or the discretionary lines. Maximum borrowings under these facilities for 1995 were $3 million, at an average interest rate of 5.9%. During 1994, maximum borrowings were $69 million, at an average interest rate of 5.4%. -23- 6. INCOME TAXES The components of taxes on income, excluding the cumulative effect of accounting changes, consisted of the following: (in thousands) 1995 Federal State Total Current $66,171 $14,068 $80,239 Deferred 494 599 1,093 Total $66,665 $14,667 $81,332 1994 Federal State Total Current $56,041 $ 9,807 $65,848 Deferred 1,781 746 2,527 Total $57,822 $10,553 $68,375 1993 Federal State Total Current $45,989 $ 8,467 $54,456 Deferred 1,517 1,066 2,583 Total $47,506 $ 9,533 $57,039 Deferred income taxes result from temporary differences in the recognition of revenue and expense for tax and financial statement purposes. The sources of these differences and the tax effect, excluding the cumulative effect of accounting changes, of each were as follows: (in thousands) 1995 1994 1993 Depreciation $ (3,967) $ (5,231) $ (4,431) Associate benefit plans 7,425 5,520 4,410 Bad debts (4,875) - - Consolidation 408 2,025 1,883 Other 2,102 213 721 Total $ 1,093 $ 2,527 $ 2,583 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) 1995 1994 1993 Provision at statutory rate of 35% $71,603 $60,512 $50,287 State and local income tax, less Federal income tax benefit 9,534 6,859 6,196 Other 195 1,004 556 Total income tax provision $81,332 $68,375 $57,039 Effective income tax rate 39.8% 39.5% 39.7% -24- During 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." This statement requires deferred tax recognition for all temporary differences in accordance with the liability method and requires adjustment of deferred tax assets and liabilities for enacted changes in tax laws and rates. The cumulative effect of this accounting change resulted in a credit to net income of $3.1 million, or $.09 per share. The tax effects of significant temporary differences representing deferred tax assets and liabilities were as follows: (in thousands) 1995 1994 Assets: Inventory accounting $ 3,783 $ 3,060 Associate benefit costs 12,675 14,047 Interest, taxes and real estate costs 12,786 10,364 Relocation costs 552 960 Bad debts 4,875 - Capitalized leases 4,184 3,893 Other 2,685 8,538 Total deferred tax assets 41,540 40,862 Liabilities: Depreciation (7,035) (10,981) Pension, savings and profit sharing costs (27,153) (21,120) Other (1,971) (794) Total deferred tax liabilities (36,159) (32,895) Total Net Deferred Tax Assets $ 5,381 $ 7,967 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 generally are 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 fiscal years were as follows: (in thousands) 1995 1994 1993 Service cost $ 5,656 $ 6,884 $ 6,524 Interest cost 12,405 11,267 10,351 Actual return on plan assets (54,809) 1,723 (39,586) Amortization of transition asset (5,043) (5,043) (5,043) Other amortization and deferral 27,124 (30,484) 13,966 Net pension benefit $ (14,667) $ (15,653) $ (13,788) The expected long-term rate of return on assets used in determining the net pension benefit was 8.5% in all years presented. The actuarial present value of benefit obligations was determined using a discount rate of 7.5% in 1995, 8.5% in 1994, and 7.5% in 1993. The changes in the discount rate assumptions increased the 1995 projected benefit obligation by approximately $22 million and lowered the 1994 projected benefit obligation by approximately $20 million. The rate of compensation increase used to measure the projected benefit obligation was 5.0% in 1995 and 5.5% in 1994 and 1993. -25- The funded status of the formal, qualified pension plan at February 3, 1996 and January 28, 1995, based on actuarial and plan asset as of October 31, 1995 and 1994, was as follows: (in thousands) 1995 1994 Actuarial present value of benefit obligations: Vested benefits $154,580 $116,600 Non-vested benefits 3,856 1,800 Accumulated benefit obligation 158,436 118,400 Impact of future salary increases 22,126 26,830 Projected benefit obligation 180,562 145,230 Plan assets at fair value 344,141 298,091 Plan assets in excess of projected benefit obligation 163,579 152,861 Items not yet recognized in income: Initial transition credit which is being amortized over 15 years (30,259) (35,302) Subsequent net gain (62,472) (61,378) Prepaid pension benefit $ 70,848 $ 56,181 No funding activity occurred between the plan and the Company during the fourth quarter of 1995 or 1994.The plan's assets include investments in common stocks, fixed income securities, real estate investments, short- term investments, and cash. The Company contributes to qualified and non-qualified savings, profit sharing and supplemental retirement plans, and non-qualified pension plans covering certain associates. The Company's total contribution to the qualified and non-qualified savings, profit sharing and supplemental retirement plans is based on 5% of pre-federal income tax FIFO profits, as defined. The costs to the Company under these plans for the past three years were as follows: (in thousands) 1995 1994 1993 Savings and Profit Sharing $ 9,750 $ 8,068 $ 7,026 Pension 810 1,754 1,258 Total $10,560 $ 9,822 $ 8,284 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. -26- The plan was changed during the 1993 fiscal year to provide for retiree contributions based on years of service. Further cost containment was achieved by increasing deductibles and introducing managed care. The Company reserves the right to modify or terminate this program at any time. 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) 1995 1994 1993 Service cost earned during the year $ 490 $ 536 $ 1,729 Interest cost on projected benefit obligation 800 770 1,581 Net amortization and deferral (1,199) (1,140) (703) Net periodic postretirement benefit cost $ 91 $ 166 $ 2,607 The following table sets forth the plan's combined funded status at February 3, 1996 and January 28, 1995 based on obligations measured as of October 31, 1995 and 1994: (in thousands) 1995 1994 Accumulated postretirement benefit obligation: Retirees $ 3,816 $ 4,024 Fully eligible active plan participants 204 182 Other active plan participants 6,372 5,352 10,392 9,558 Unrecognized net gain from changes in plan and assumptions 6,422 5,594 Unrecognized prior service cost 4,968 7,608 Accrued postretirement benefit cost $21,782 $22,760 For measurement purposes, the following assumptions were used to project changes in the accumulated postretirement benefit obligation for 1995 and 1994: 1995 1994 Discount rate 7.5% 8.5% Health care cost trend rate 8.75% to 5% 9.5% to 5% Years to ultimate trend 9 10 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 $.9 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by $.1 million. Effective January 30, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which requires the Company to recognize an obligation for postemployment benefits provided to former or inactive employees after employment but before retirement. The cumulative effect of this accounting change resulted in a charge of $1.1 million, or $.03 per share, after tax benefits of $.7 million. -27- 8. LEASES The Company leases some of its operating properties such as store and warehouse facilities and some equipment. 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 February 3, 1996 were as follows: Fiscal Year (in thousands) Capital Operating Total 1996 $ 6,232 $ 23,711 $ 29,943 1997 6,232 22,368 28,600 1998 6,118 20,388 26,506 1999 6,060 18,428 24,488 2000 6,060 16,537 22,597 Thereafter 71,050 112,298 183,348 Total minimum lease payments $101,752 $213,730 $315,482 Less: Executory Costs (235) Interest (52,427) Present value of net minimum lease payments $ 49,090 Rent expense consisted of the following: (in thousands) 1995 1994 1993 Minimum rentals $ 23,305 $ 23,840 $ 23,509 Contingent rentals (based on % of sales) 7,269 5,328 4,503 $ 30,574 $ 29,168 $ 28,012 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. -28-
QUARTERLY RESULTS (unaudited in thousands, except per share data) February 3, 1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Revenues $ 602,858 $ 642,448 $ 694,765 $ 1,004,253 $ 2,944,324 Costs, Expenses, and Other Income: Cost of goods sold 427,006 468,917 470,813 693,017 2,059,753 Selling, general and administrative expenses 159,994 165,423 173,859 187,648 686,924 Interest expense, net 3,976 3,938 3,265 3,292 14,471 Other income (4,682) (6,654) (1,792) (8,276) (21,404) 586,294 631,624 646,145 875,681 2,739,744 Income before provision for income taxes 16,564 10,824 48,620 128,572 204,580 Provision for income taxes 6,613 4,321 19,410 50,988 81,332 Net Income $ 9,951 $ 6,503 $ 29,210 $ 77,584 $ 123,248 Net income per share $ .27 $ .18 $ .79 $ 2.11 $ 3.35
January 28, 1995 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Revenues $ 592,509 $ 619,307 $ 679,453 $ 928,568 $ 2,819,837 Costs, Expenses, and Other Income: Cost of goods sold 421,380 455,082 475,190 668,612 2,020,264 Selling, general and administrative expense 150,719 148,766 161,863 164,378 625,726 Provision for consolidation 5,000 - - - 5,000 Interest expense, net 7,173 6,637 5,190 4,526 23,526 Other income (6,687) (7,679) (6,361) (6,844) (27,571) 577,585 602,806 635,882 830,672 2,646,945 Income before provision for income taxes 14,924 16,501 43,571 97,896 172,892 Provision for income taxes 5,920 6,702 17,365 38,388 68,375 Income before cumulative effect of accounting change 9,004 9,799 26,206 59,508 104,517 Cumulative effect of accounting change for postemployment benefits (net of income taxes of $700) (1,100) - - - (1,100) Net income $ 7,904 $ 9,799 $ 26,206 $ 59,508 $ 103,417 Net income per share: Income cumulative effect of accounting change $ .24 $ .27 $ .71 $ 1.62 $ 2.84 Cumulative effect of accounting change (.03) - - - (.03) Net income per share $ .27 $ .27 $ .71 $ 1.62 $ 2.81
-29-
TEN-YEAR SELECTED FINANCIAL DATA (dollars in thousands, except per share data) 1995 1994 1993 1992 1991 Operating Results Revenues $2,944,324 $2,819,837 $2,729,928 $2,732,041 $2,442,425 Retail sales 2,892,083 2,819,837 2,729,928 2,732,041 2,442,425 Cost of goods sold 2,059,753 2,020,264 1,960,914 1,927,149 1,720,361 Selling, general and administrative expenses 686,924 625,726 627,391 641,573 547,268 Provision for consolidation/relocation - 5,000 - 17,000 - Interest expense 19,558 28,118 36,236 35,464 23,390 Interest income (5,087) (4,592) (5,288) (3,099) (4,511) Other income (21,404) (27,571) (33,003) (29,145) (30,485) Income before provision for income taxes 204,580 172,892 143,678 143,099 186,402 Percent to revenues 6.9 6.1 5.3 5.2 7.6 Provision for income taxes 81,332 68,375 57,039 56,262 72,363 Income before extraordinary charge and cumulative effect of accounting change 123,248 104,517 86,639 86,837 114,039 Extraordinary charge, net - - - (5,550) - Accounting change, net - (1,100) 3,100 (12,200) - Net income 123,248 103,417 89,739 69,087 114,039 Percent to revenues 4.2 3.7 3.3 2.5 4.7 Per common share $ 3.35 $ 2.81 $ 2.44 $ 1.88 $ 3.10 Dividends declared 38,686 37,581 37,581 37,581 37,120 Per common share $ 1.05 $ 1.02 $ 1.02 $ 1.02 $ 1.00 3/4 Dividends paid 38,686 37,581 37,581 37,581 37,120 Per common share $ 1.05 $ 1.02 $ 1.02 $ 1.02 $ 1.00 3/4 Financial Position Working capital $1,013,576 $ 957,030 $ 902,268 $ 992,153 $ 988,786 Ratio of current assets to current liabilities 4.72 4.66 3.46 4.64 6.44 Receivables, net 574,622 620,238 635,114 613,708 656,428 Inventories 523,574 468,782 425,492 422,819 381,406 Property and equipment, net (includes capitalized leases) 701,233 688,806 691,502 680,933 461,563 Total assets 2,074,724 1,981,729 2,031,982 2,007,868 1,673,099 Long-term debt 254,926 261,187 271,965 390,258 207,150 Retained earnings 1,473,692 1,389,130 1,323,294 1,271,136 1,239,630 Stockholders' equity 1,485,113 1,400,551 1,334,715 1,282,557 1,251,051 Per common share $ 40.31 $ 38.01 $ 36.23 $ 34.81 $ 33.96 Return on stockholders' equity(1) 8.5% 7.6% 6.9% 5.5% 9.4% Number of shares outstanding 36,844 36,844 36,844 36,844 36,844 Other Data Capital expenditures for property and equipment, net $ 101,202 $ 93,639 $ 106,210 $ 110,638 $ 79,931 Depreciation 88,714 93,540 93,455 94,036 70,607 Stores opened during year 1 4 3 1 2 Stores acquired - - - 16 - Stores closed during year 3 2 1 1 1 Number of stores, at year end 101 103 101 99 83 Total square feet 16,300 16,484 16,212 15,820 13,145 Sales per square foot(2) $ 177 $ 173 $ 169 $ 174 $ 188 All years include 52 weeks, except 1995 which includes 53 weeks. (1) Based on average stockholders' equity at beginning and end of year. (2) Based on stores opened for the entire year. The 1995 year is presented on a 52 week basis.
-30-
TEN-YEAR SELECTED FINANCIAL DATA (dollars in thousands, except per share data) 1990 1989 1988 1987 1986 Operating Results Revenues $2,367,210 $2,312,802 $2,265,500 $2,155,653 $2,028,202 Retail sales 2,367,210 2,312,802 2,265,500 2,155,653 2,028,202 Cost of goods sold 1,670,555 1,594,849 1,551,484 1,476,327 1,377,763 Selling, general and administrative expenses 527,467 502,537 480,225 451,885 431,656 Provision for consolidation/ relocation - 10,000 - - - Interest expense 23,422 22,818 23,076 22,971 23,695 Interest income (4,160) (4,289) (3,934) (3,268) (3,301) Other income (29,186) (26,156) (22,021) (19,402) (17,811) Income before provision for income taxes 179,112 213,043 236,670 227,140 216,200 Percent to revenues 7.6 9.2 10.4 10.5 10.7 Provision for income taxes 55,498 82,700 92,208 97,584 105,135 Income before extraordinary charge and cumulative effect of accounting change 123,614 130,343 144,462 129,556 111,065 Extraordinary charge, net - - - - - Accounting change, net - - - - - Net income 123,614 130,343 144,462 129,556 111,065 Percent to revenues 5.2 5.6 6.4 6.0 5.5 Per common share $ 3.36 $ 3.54 $ 3.92 $ 3.52 $ 3.01 Dividends declared 26,804 33,896 35,923 24,870 21,370 Per common share $ .72 3/4 $ .92 $ .97 1/2$ .67 1/2$ .58 Dividends paid 35,278 32,791 28,554 24,870 21,370 Per common share $ .95 3/4$ .89 $ .77 1/2$ .67 1/2 $ .58 Financial Position Working capital $ 934,495 $ 873,613 $ 846,839 $ 817,450 $ 756,699 Ratio of current assets to current liabilities 6.13 4.65 4.63 4.88 4.52 Receivables, net 667,600 644,633 625,199 588,510 548,132 Inventories 393,304 393,319 362,037 332,175 306,516 Property and equipment, net (includes capitalized leases) 444,696 408,229 355,438 310,486 294,846 Total assets 1,596,630 1,548,438 1,451,752 1,353,357 1,279,112 Long-term debt 207,906 199,284 197,058 205,241 205,786 Retained earnings 1,162,711 1,065,901 969,454 860,915 756,229 Stockholders' equity 1,174,132 1,077,322 980,875 872,336 767,729 Per common share $ 31.87 $ 29.24 $ 26.62 $ 23.68 $ 20.84 Return on stockholders' equity 11.0% 12.7% 15.6% 15.8% 15.4% Number of shares outstanding 36,844 36,844 36,844 36,844 36,845 Other Data Capital expenditures for property and equipment, net $ 82,944 $ 97,230 $ 92,572 $ 57,797 $ 64,436 Depreciation 63,158 54,478 47,541 47,141 46,833 Stores opened during year 3 1 2 1 2 Stores acquired - - - - - Stores closed during year 1 1 1 4 - Number of stores, at year end 82 80 80 79 82 Total square feet 12,683 12,077 11,791 11,124 11,105 Sales per square foot(2) $ 191 $ 192 $ 195 $ 195 $ 185 All years include 52 weeks, except 1995 which includes 53 weeks. (1) Based on average stockholders' equity at beginning and end of year. (2) Based on stores opened for the entire year. The 1995 year is presented on a 52 week basis.
-31- STORE DIVISIONS AND LOCATIONS BACONS/McALPIN'S/LION/ROOT'S Store Locations Shopping Centers/Malls Louisville, KY Bashford Manor Mall (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) Fayette Mall (McAlpin's) Crestview Hills, KY - Crestview Hills Mall (McAlpin's) Signatures Home Store (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 (McAlpin'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) North Towne Square (Lion) Franklin Park Mall (Lion) Westgate Home Store (Lion) CASTNER KNOTT Store Locations Shopping Centers/Malls Nashville, TN Galleria at Cool Springs The Mall at Green Hills Rivergate Mall Donelson Plaza Harding Mall Hickory Hollow Mall Bellevue Center Tullahoma, TN Northgate Mall Florence, AL Regency Square Mall Decatur, AL Riveroaks Center Huntsville, AL Madison Square Mall Bowling Green, KY Greenwood Mall GAYFERS/J.B. WHITE Store Locations Shopping Centers/Malls Montgomery, AL Montgomery Mall (Gayfers) Eastdale Mall (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 Regency Mall (J.B. White) National Hills Shopping Center (J.B. White) Aiken, SC Heritage Square (J.B. White) Columbia, SC Dutch Square (J.B. White) Richland Mall (J.B.White) Greenville, SC Greenville Mall (J.B. White) -32- GAYFERS/MAISON BLANCHE Store Locations Shopping Centers/Malls Mobile, AL Springdale Mall (Gayfers) Jubilee Mall (Gayfers) Biloxi-Gulfport, MS Edgewater Mall (Gayfers) Baton Rouge, LA Main Street (Maison Blanche) Cortana Mall (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) 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) JONES/JOSLINS/HENNESSY'S/De LENDRECIE'S/GLASS BLOCK Store Locations Shopping Centers/Malls Kansas City, MO Downtown (The Jones Store Co.) Blue Ridge Mall (The Jones Store Co.) Metro North Mall (The Jones Store Co.) Bannister Mall (The Jones Store Co.) Overland, KS Melcalf South Shopping Center (The Jones Store Co.) Prairie Village, KS Prairie Village Shopping Center (The Jones Store Co.) Independence, MO Independence Center (The Jones Store Co.) Topeka, KS West Ridge Mall (The Jones Store Co.) Denver, CO Buckingham Square (Joslins) Villa Italia Center (Joslins) Westminster Mall (Joslins) Southwest Plaza (Joslins) Southglenn Mall (Joslins) Greeley, CO Greeley Mall (Joslins) Longmont, CO Twin Peaks Mall (Joslins) Colorado Springs, CO Chapel Hills Mall (Joslins) Pueblo, CO Pueblo Mall (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) -33- GROUP PRESIDENTS Thomas N. Groh President of Bacons, McAlpin's, Root's, and Lion Twenty-four Stores in Kentucky, Ohio,and Indiana Headquartered in Louisville, Kentucky Edward A. Overbey, Jr. President of Castner Knott Twelve Stores in Tennessee, Kentucky, and Alabama Headquartered in Nashville, Tennessee Robin E. Sanderford President of Gayfers and J.B. White Seventeen Stores in Alabama, Georgia,Mississippi, and South Carolina Headquartered in Montgomery, Alabama James L. Schmidt President of The Jones Store Co., Joslins,Glass Block, Hennessy's, and de Lendrecie's Twenty-three Stores in Missouri, Kansas, Colorado, Montana, Wyoming, Minnesota, and North Dakota Headquartered in Kansas City, Missouri Michael G. Shannon President of Gayfers and Maison Blanche Twenty-five Stores in Florida, Louisiana, Alabama, and Mississippi Headquartered in Mobile, Alabama Charles O. Unfried President, Mercantile Credit Corp.Central Credit Organization Headquartered in Baton Rouge, Louisiana 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 Vice President James D. Cain Vice President Louis L. Ripley Vice President William A. Carr Treasurer Kathryn M. Muldowney Controller Dennis F. Murphy Secretary -34- 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 and Trust Company s Thomas J. Malone President, Chief Operating Officer and Director of Milliken & Company Gerrish H. Milliken Director of Milliken & Company n Minot K. Milliken Vice President and Director of Milliken & Company snu Roger Milliken Chairman of the Board, Chief Executive Officer and Director of Milliken & Company sn George S. Moore International Financial Consultant David L. Nichols Chairman of the Board and Chief Executive Officer of Mercantile Stores Company, Inc. n Lawrence R. Pugh Chairman of the Board of VF Corporation n Francis G. Rodgers Former Vice President of IBM Corporation u Roger K. Smith Strategic Marketing Manager of Analog Devices, Inc. s Audit Committee n Compensation Committee u Nominating Committee STOCKHOLDERINFORMATION Annual Meeting The Annual Meeting of Stockholders will be held at 11:00 a.m. on Wednesday, May 22, 1996at 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 45202 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 1995 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 EX-21 5 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 MERCANTILE STORES COMPANY, INC. SUBSIDIARY SCHEDULE AS OF FEBRUARY 3, 1996 STATE OF SUBSIDIARY COMPANY INCORPORATION J. BACON & SONS KENTUCKY THE CASTNER-KNOTT DRY GOODS COMPANY TENNESSEE THE O.J. de LENDRECIE CO. DELAWARE C.J. GAYFER & COMPANY, INCORPORATED DELAWARE HENNESSY COMPANY MONTANA THE JONES STORE COMPANY DELAWARE THE JOSLIN DRY GOODS COMPANY, INC. COLORADO THE LAZARUS STORE, INC. DELAWARE THE LION DRY GOODS COMPANY, INC. OHIO THE McALPIN COMPANY KENTUCKY GAYFER'S MONTGOMERY FAIR CO. DELAWARE ROOT DRY GOODS COMPANY, INC. INDIANA J.B. WHITE & COMPANY, INC. SOUTH CAROLINA DULUTH GLASS BLOCK STORE COMPANY MINNESOTA THE McALPIN COMPANY OHIO THE PEOPLES STORE COMPANY WASHINGTON J.B. WHITE & COMPANY NEW JERSEY THE MACDOUGAL & SOUTHWICK COMPANY WASHINGTON MCCREERY & COMPANY MAINE SERF CORPORATION MISSOURI MERSCO REALTY CO., INC. OHIO THE JONES STORE COMPANY HAIRSTYLING SCHOOL MISSOURI MERCANTILE STORES COMPANY, INC. (N.Y.) NEW YORK MERSCO FINANCE COMPANY DELAWARE MERCANTILE PROPERTIES, INC. DELAWARE MERCANTILE REAL ESTATE CO., INC. DELAWARE THE O.J. de LENDRECIE CO. MINNESOTA MERSCO DEVELOPMENT COMPANY, INC. DELAWARE MERCANTILE INTERNATIONAL, INC. DELAWARE MAISON BLANCHE, INC. LOUISIANA TSM HOLDING COMPANY, INC. DELAWARE GOUDCHAUX'S CAR CARE CENTER, INC. LOUISIANA MERCANTILE CREDIT CORP. LOUISIANA EX-23 6 CONSENT OF PUBLIC ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-50604. ARTHUR ANDERSEN LLP Cincinnati, Ohio April 29, 1996 EX-24 7 POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints David L. Nichols, James M. McVicker and William A. Carr, and each of them, his true and lawful Attorney-in-Fact and Agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (including his capacity as director of Mercantile Stores Company, Inc.) to sign Form 10K of Mercantile Stores Company, Inc. for the year ended February 3, 1996, and to file the same together with all Exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting to the Attorneys-in-Fact and Agents and each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that the Attorneys-in-Fact and Agents or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: April 3, 1996 H. Keith H. Brodie, MD Roger Milliken John A. Herdeg George S. Moore Thomas J. Malone Lawrence R. Pugh Gerrish H. Milliken Francis G. Rodgers Minot K. Milliken Roger K. Smith EX-27 8 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF CONSOLIDATED CONSOLIDATED INCOME AND RETAINED EARNINGS, CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE PERIOD ENDED FEBRUARY 3, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS FEB-03-1996 FEB-03-1996 161,893 0 576,043 16,499 523,573 1,286,384 1,125,552 424,319 2,074,724 272,808 0 5,403 0 0 1,479,710 2,074,724 2,892,083 2,944,324 2,059,753 2,059,753 0 0 19,558 204,580 81,332 123,248 0 0 0 123,248 3.35 3.35
-----END PRIVACY-ENHANCED MESSAGE-----