Exhibit 13
FINANCIAL HIGHLIGHTS
Melville Corporation 1994 Annual Report
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($ and shares in thousands, except per share data)
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Operating Results 1994 1993 % Change
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Net Sales $11,285,561 $10,435,401 8.1
Operating Profit 610,742 623,337 (2.0)
Earnings before Income Taxes and Minority Interests 578,106 599,527 (3.6)
Net Earnings 307,470 331,790 (7.3)
Dividends on Common Stock 160,422 159,686 0.5
Dividends on Preferred and Preference Stock 24,929 25,248 (1.3)
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Per Share of Common Stock
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Net Earnings $ 2.75 $ 3.00 (8.3)
Dividends 1.52 1.52 --
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Financial Position at Year End
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Cash and Cash Equivalents $ 117,035 $ 80,971 44.5
Inventories 2,138,243 1,858,772 15.0
Working Capital 1,007,757 1,091,323 (7.7)
Shareholders' Equity 2,381,605 2,246,846 6.0
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Key Percentages
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Operating Profit as a Percentage of Net Sales 5.4 6.0
Earnings before Income Taxes and Minority Interests
as a Percentage of Net Sales 5.1 5.7
Net Earnings as a Percentage of Net Sales 2.7 3.2
Return on Beginning Shareholders' Equity 13.7 16.0
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Statistics
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Weighted Average Common Shares Outstanding 105,481 105,069 0.4
Number of Stores 7,378 7,282 1.3
Number of Associates 117,414 111,082 5.7
Number of Common Shareholders 7,200 7,600 (5.3)
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30 Melville Corporation 1994 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Melville Corporation and Subsidiary Companies
Financial Condition
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($ in millions) 1994 1993 1992
----------------------------------------------------------------------------
Cash and cash
equivalents $117.0 $ 81.0 $145.1
Cash flows provided
by operating activities 498.4 435.9 559.4
Daily average of short-
term borrowings 567.4 464.8 542.2
Maximum short-term
borrowings 948.5 875.0 820.0
Short-term borrowings
outstanding at year end 200.0 90.0 -
Net interest expense 32.6 23.8 25.4
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Ratios
----------------------------------------------------------------------------
Long-term obligations
to total capitalization 12.8% 14.0% 15.3%
Long-term obligations
to shareholders equity 14.7% 16.2% 18.1%
Current ratio 1.6 1.8 1.8
----------------------------------------------------------------------------
The Company's primary source of liquidity is cash provided from its operations.
Since 70% of the Company's earnings occur in the fourth quarter, however, it
utilizes short-term borrowings, primarily commercial paper issuances, to finance
its seasonal inventory needs and capital expenditures throughout the year.
Borrowing levels were higher in 1994 as compared to 1993 due to increased
capital expenditures while earnings were lower.
Net interest expense is a function of interest rates and short-term borrowing
levels. The increase in net interest expense in 1994 relative to 1993 and 1992
reflects higher interest rates as well as higher borrowing levels.
Current assets increased due primarily to a $279.5 million increase in
inventories. The increase in inventories is due to new store openings, the early
receipt of spring merchandise, opportunistic purchases and increased stock
levels required for our larger store formats. Accounts receivable decreased
despite higher sales due to the settlement of a disposition related receivable
included in the 1993 balance. The allowance for doubtful accounts decreased due
to CVS' new pharmacy system, which allows faster verification of third party
coverage. Prepaid expenses decreased as utilization of realignment reserves
resulted in decreased deferred taxes.
Current liabilities increased due to higher accounts payable and notes
payable balances related to the higher inventories. In addition, the timing of
payments, particularly the payment of the 1994 ESOP dividends made after
year-end, as well as salaries, store rentals and state income taxes led to an
increase in accrued expenses.
Capital Expenditures
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($ in millions)
1994 1993 1992
----------------------------------------------------------------------------
Capital expenditures $421.4 $386.7 $304.3
----------------------------------------------------------------------------
Expenditures in all years were principally for improvements to new and existing
store locations, store equipment and information systems. Capital expenditures
for 1995 are estimated at $325.0 million and are primarily for new store
openings, continuing improvements to stores and continued investments in
information systems and distribution centers.
Results of Operations
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($ in millions, except
per share amounts) 1994 1993 1992
----------------------------------------------------------------------------
Net sales $11,285.6 $10,435.4 $10,432.8
Same store sales increase 3.3% 0.1% 3.2%
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Operating profit before
realignment charge $ 610.7 $ 623.3 $ 707.9
Realignment charge - - 347.0
Operating profit 610.7 623.3 360.9
Net earnings before
realignment charge and
accounting change 307.5 331.8 381.4
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Net earnings $ 307.5 $ 331.8 $ 133.4
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Net earnings per share
before realignment
charge and accounting
change $ 2.75 $ 3.00 $ 3.50
Net earnings per share 2.75 3.00 1.13
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Percentage of net sales
----------------------------------------------------------------------------
Cost of goods sold,
buying and
warehousing costs 64.3 63.9 62.6
Store operating, selling,
general and
administrative expenses 28.5 28.3 28.7
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Net Sales
Consolidated net sales for the year ended December 31, 1994 were $11.3 billion
representing an 8.1% increase over 1993. Sales for the fourth quarter of 1994,
which included six fewer selling days than the fourth quarter of 1993, were $3.7
billion, an increase of 4.3% over the prior year. The consolidated operating
results, however, exclude those of Chess King, Prints Plus and Accessory Lady
after their dispositions on May 17, May 29, and October 16, 1993, respectively.
Melville Corporation 1994 Annual Report 31
Adjusting for these factors, consolidated net sales would have increased 9.4%
for the year and 4.4% for the quarter. CVS, Kay-Bee, and Linens 'n Things
generated positive sales growth throughout the year while disappointing
performances at Wilsons and Thom McAn offset these improvements.
Consolidated net sales in 1993 were impacted by the 1993 dispositions and the
exclusion of sales of the stores designated to be closed by Thom McAn and
Kay-Bee under the 1992 strategic realignment program. Adjusting for these
factors, net sales in 1993 increased 4.8%.
Increases in consolidated net sales differ from same store sales increases
mainly due to acquisitions, dispositions and store openings and closings. The
1994 increase in same store sales was due primarily to very strong performances
at CVS and Kay-Bee offset by poor results at Marshalls and Wilsons. The lower
same store sales increase in 1993 resulted primarily from weakness in the
apparel and footwear segments.
Net Earnings
Consolidated net earnings for 1994 were negatively impacted by disappointing
performances in our apparel and footwear segments, and by costs related to the
Company's guarantees for leased properties of businesses sold to purchasers who
subsequently filed for bankruptcy protection. In addition to the $5.8 million
pre-tax reserve established last year for anticipated lease settlement costs for
the remaining Freddy's leases, an additional pre-tax reserve of $17.5 million
was set aside, $14.2 million of which was recorded in the fourth quarter, to
cover anticipated future obligations. These obligations relate principally to
Chess King leases rejected in bankruptcy by Merry-Go-Round Enterprises, the
purchaser of Chess King. Management is confident that these reserves are
adequate to cover the Company's obligations under these guarantees.
In 1993, net earnings were increased by $10.0 million due to a change in the
Company's method of determining retail price indices used in the valuation of
inventories valued on a last-in, first-out basis. This was offset by a
disappointing performance in our apparel segment, a gross margin decline at CVS
and a pre-tax $4.0 million reserve for the loss on sale of the note received in
connection with the sale of Chess King.
Under the strategic realignment program formulated during the fourth quarter
of 1992, the Company recorded an after-tax, non-cash charge of $222.0 million
($2.13 per share), and elected to record an after-tax, non-cash charge of $22.6
million ($0.21 per share) related to its change in accounting for postretirement
benefits.
Net earnings per share declined due to the factors noted above.
Adjusted to exclude the impact of the real estate costs, net earnings per share
in 1994 would have been $2.86. Adjusted to exclude the impact of the two special
charges, net earnings per share in 1992 would have been $3.50.
Strategy Development and Review
At year-end, the Company initiated a comprehensive strategic review, the
objective of which is to maximize the Company's sales and profits by examining
its mix of businesses.
By the end of 1994, the Company has completed many of the objectives of the
1992 strategic realignment program. To date, the Company has closed over 300
Thom McAn stores, and about 200 of the Kay-Bee and Linens 'n Things stores
designated to be closed or converted under the program. In 1993, three
divisions, Chess King, Prints Plus and Accessory Lady, were sold and accelerated
remodeling programs at CVS and Marshalls were completed. To date, $301.6 million
of the pre-tax amount recorded has been utilized.
Costs and Expenses
Cost of goods sold, buying and warehousing costs continue to increase as a
percentage of consolidated net sales, reflecting the increased proportion of the
prescription drugs, health and beauty care segment to total operations,
compounded by continued pressure on third party providers to offer prescriptions
at lower prices. In addition, lower initial markon and increased markdowns in
our other segments have contributed to the erosion of gross margin.
Store operating, selling, general and administrative expenses increased as a
percentage of consolidated net sales in 1994 as compared to a decrease in 1993.
The 1994 increase resulted from fixed costs which were not adequately leveraged
due to sales shortfalls at several divisions, which offset favorable trends in
variable expense categories. Additionally, 1994 included lease settlement costs
related to guarantees of Chess King and Freddy's stores sold. Excluding the
effect of these one-time costs, the ratio of store operating, selling, general
and administrative expenses as a percentage of consolidated net sales was flat
with the prior year.
The decrease in the ratio of store operating, selling, general and
administrative expenses as a percentage of consolidated net sales in 1993
stemmed from the success of the various cost containment programs underway which
have enabled the Company to make significant progress in reducing its variable
cost structure.
Accounting Changes
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
112, "Employers' Accounting for Postemployment Benefits", effective January 1,
1994, the impact of which was immaterial.
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes", the impact of which was also immaterial.
In 1992, the Company adopted SFAS No. 106,"Employers' Accounting for
Postretirement Benefits Other Than Pensions", and recorded a one-time,
after-tax, non-cash charge of $22.6 million to recognize the cumulative effect
of the accounting change.
32 Melville Corporation 1994 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Melville Corporation and Subsidiary Companies
Prescription Drugs, Health and Beauty Care
------------------------------------------------------------------------------
($ in millions) 1994 1993 1992
------------------------------------------------------------------------------
Net sales $4,330.1 $3,948.2 $3,632.1
Operating profit before
realignment charge 227.7 195.7 208.6
Operating profit 227.7 195.7 149.2
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Percent change from prior year
------------------------------------------------------------------------------
Net sales 9.7 8.7 3.0
Same store sales 6.0 5.7 7.7
Operating profit before
realignment charge 16.3 (6.2) 1.2
Operating profit 16.3 31.2 (27.6)
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Percent of consolidated total
------------------------------------------------------------------------------
Net sales 38.4 37.9 34.9
Operating profit* 35.2 30.8 40.3
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*Before corporate expenses.
CVS achieved very favorable increases in both net sales and same store sales in
1994. Lower margined pharmacy sales increased 14.7% in 1994 and 24.1% in 1993
due to an expansion of the division's managed care business and the ability of
the company to capitalize on its dominant market share. Various micro-marketing
initiatives, and an expansion of private label merchandise lines, also helped to
increase front store sales.
Net sales in 1993 reflect the success of the "Peoples Celebration Event"
launched in late May, 1993 to reintroduce these stores to the Washington, D.C.
market. Same store sales increased 7.0% in the fourth quarter of 1993 compared
to 6.2% in 1992.
Net sales in 1992 exclude the Freddy's division sold in 1991 and the CVS
stores in California sold in February, 1992. Adjusting for these dispositions,
net sales would have increased 11.5% in 1992.
Operating profit in 1994 increased despite the larger proportion of pharmacy
business as 1993 investments in technology yielded lower operating costs and
better inventory control, resulting in lower markdowns.
Operating profit decreased in 1993 due to the impact of increased lower
margined prescription sales and incremental costs of rolling out new point of
sale and pharmacy systems.
The 1992 realignment charge related principally to the Peoples Drug Stores
remodeling program which was completed in 1993.
Apparel
------------------------------------------------------------------------------
($ in millions) 1994 1993 1992
------------------------------------------------------------------------------
Net sales $3,538.9 $3,395.9 $3,486.1
Operating profit before
realignment charge 161.1 181.9 230.3
Operating profit 161.1 181.9 125.9
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Percent change from prior year
------------------------------------------------------------------------------
Net sales 4.2 (2.6) 7.5
Same store sales (1.5) (3.6) 3.1
Operating profit before
realignment charge (11.5) (21.0) 3.3
Operating profit (11.5) 44.5 (43.5)
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Percent of consolidated total
------------------------------------------------------------------------------
Net sales 31.3 32.5 33.4
Operating profit* 24.9 28.6 34.0
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*Before corporate expenses.
The decline in same store sales for this segment reflects the prolonged
nationwide slump in apparel sales, especially the off-price channel, as
consumers shifted spending to durables, home related goods and consumer
electronics. Underscoring the national trend, Marshalls' gifts and domestics
departments experienced a 19.6% increase in net sales while its total sales
increased 6.4% over 1993. The expansion of Bob's also contributed to the growth
in net sales. Sales decreased at Wilsons for a second year due to weakness in
the leather outerwear market which was compounded by overall warm temperatures
in fall and early winter.
The 1993 decrease in net sales was due to the sale of Chess King and
Accessory Lady and lower net sales at Wilsons. Adjusting for the divisions sold,
net sales in the segment would have increased 2.3% in 1993.
Operating profit decreased in 1994 and 1993 because of lower same store sales
and gross margins resulting from the heightened promotional activity throughout
the apparel industry. This was partially offset by the exclusion of the
unprofitable Chess King division and strong control of variable expenses at both
Marshalls and Wilsons.
Despite the negative impact of decreased sales and profits at Chess King,
operating profit in 1992 before the realignment charge increased due to strong
sales at Marshalls, coupled with strict expense control.
The realignment charge recorded in 1992 related to the write-down of certain
non-performing assets as well as an estimated loss on sale for the Chess King
and Accessory Lady divisions.
Melville Corporation 1994 Annual Report 33
Footwear
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($ in millions) 1994 1993 1992
------------------------------------------------------------------------------
Net sales $1,839.9 $1,713.1 $1,840.0
Operating profit before
realignment charge 158.6 169.0 180.0
Operating profit 158.6 169.0 92.0
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Percent change from prior year
------------------------------------------------------------------------------
Net sales 7.4 (6.9) 5.3
Same store sales 2.4 (2.5) (1.8)
Operating profit before
realignment charge (6.2) (6.1) 11.2
Operating profit (6.2) 83.7 (43.2)
------------------------------------------------------------------------------
Percent of consolidated total
------------------------------------------------------------------------------
Net sales 16.3 16.4 17.6
Operating profit* 24.5 26.6 24.9
------------------------------------------------------------------------------
*Before corporate expenses.
Net sales increases in 1994 at Meldisco and Footaction were offset by a decline
at Thom McAn, resulting from the discontinuation of its men's athletic and
children's departments in late 1993 as well as the contraction of this chain.
Net sales decreased in 1993 due to the exclusion from operations of about 390
stores designated to be closed under the strategic realignment program and the
discontinuation of product lines. Adjusting for stores excluded at Thom McAn,
net sales would have increased 2.2% in 1993.
Net sales increased in 1992 due to the acquisition of Footaction in November,
1991 coupled with a modest sales increase at Meldisco, offset by a decline at
Thom McAn. Adjusting to exclude the impact of Footaction, net sales would have
decreased 0.1% in 1992.
Operating profit in 1994 decreased due to weak same store sales at Thom McAn,
increased markdowns throughout the segment and higher operating costs incurred
from the rapid rollout of 32 new Footaction superstores, 27 of which were opened
in the second half of the year. In addition, about $5.0 million of one-time
costs, principally at Meldisco related to Kmart store closings and other
contingencies, negatively impacted profits.
Operating profit decreased in 1993 due to lower same store sales,
particularly at Thom McAn, and higher markdowns, which offset an increase in
initial markon at Meldisco. Meldisco's direct purchasing program in the Far East
and Footaction's success in negotiating more favorable volume discounts, as well
as strong expense control, contributed to the increase in operating profit
before the realignment charge in 1992.
The realignment charge recorded in 1992 provided for the costs of closing or
redeploying about 390 Thom McAn stores. Of the remaining stores designated to be
closed, about 50 are planned for 1995.
Toys and Home Furnishings
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($ in millions) 1994 1993 1992
------------------------------------------------------------------------------
Net sales $1,576.7 $1,378.2 $1,474.7
Operating profit before
realignment charge 99.4 89.1 98.1
Operating profit 99.4 89.1 2.9
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Percent change from prior year
------------------------------------------------------------------------------
Net sales 14.4 (6.5) 7.7
Same store sales 8.3 (2.5) 1.6
Operating profit before
realignment charge 11.5 (9.1) 7.3
Operating profit 11.5 2,946.4 (96.8)
------------------------------------------------------------------------------
Percent of consolidated total
------------------------------------------------------------------------------
Net sales 14.0 13.2 14.1
Operating profit* 15.4 14.0 0.8
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*Before corporate expenses.
Significant increases in net sales were reported at Kay-Bee, as it enjoyed a
strong year in most merchandise categories, and at Linens 'n Things, due to the
successful rollout of its superstore format and increased consumer spending in
home furnishings and related products.
Sales in 1993 benefitted from strong performances at Linens 'n Things and
This End Up, offset by the disposition of Prints Plus and a decrease at Kay-Bee.
The 1993 decline at Kay-Bee was due to the exclusion from operations of about
240 stores designated to be closed under the strategic realignment program and
the lack of a "blockbuster" toy. Adjusting for the stores excluded and sold, net
sales in 1993 would have increased 2.6% over 1992.
In 1992, net sales increased in all of the businesses in this segment except
for a slight decrease at This End Up. Adjusting for the effect of K&K toy stores
acquired in 1991, net sales would have increased 5.0% in 1992.
Operating profit improved in 1994 because of very strong sales growth and
strict control of variable expenses. In addition, a favorable LIFO adjustment
offset the decrease in gross margin caused by the implementation of sharper
pricing strategies at Kay-Bee early in the year.
Operating profit declined in 1993 due to decreases in same store sales and
initial markon at Kay-Bee, offset partially by a pre-tax LIFO adjustment of
about $14.0 million and aggressive expense control at all divisions in this
segment. Favorable economic trends in the housing industry and an expansion of
merchandise offerings at Linens 'n Things and This End Up also contributed to an
increase in operating profit before realignment in 1992.
The 1992 realignment charge provided primarily for costs of closing or
redeploying about 240 stores at Kay-Bee and converting Linens 'n Things stores
to its superstore format. Of the remaining Kay-Bee stores designated to be
closed, about 25 are planned for 1995.
Melville Corporation 1994 Annual Report 35
CONSOLIDATED STATEMENTS OF EARNINGS
Melville Corporation and Subsidiary Companies
($ in thousands, except per share data)
--------------------------------------------------------------------------------
Years Ended December 31 1994 1993 1992
--------------------------------------------------------------------------------
Net sales $11,285,561 $10,435,401 $10,432,843
Cost of goods sold, buying
and warehousing cost 7,252,568 6,664,395 6,529,239
--------------------------------------------------------------------------------
4,032,993 3,771,006 3,903,604
--------------------------------------------------------------------------------
Store operating, selling, general
and administrative expenses 3,215,985 2,956,081 2,994,723
Depreciation and amortization 206,266 191,588 201,008
Realignment charge -- -- 346,979
--------------------------------------------------------------------------------
3,422,251 3,147,669 3,542,710
--------------------------------------------------------------------------------
Operating profit 610,742 623,337 360,894
Interest expense, net 32,636 23,810 25,398
--------------------------------------------------------------------------------
Earnings before income taxes, minority
interests and cumulative effect of
change in accounting principle 578,106 599,527 335,496
Provision for income taxes 218,741 220,441 125,696
--------------------------------------------------------------------------------
Earnings before minority interests
and cumulative effect of change in
accounting principle 359,365 379,086 209,800
Minority interests in net earnings 51,895 47,296 53,820
--------------------------------------------------------------------------------
Earnings before cumulative effect of
change in accounting principle 307,470 331,790 155,980
Cumulative effect of change in
accounting principle, net -- -- 22,551
--------------------------------------------------------------------------------
Net earnings $ 307,470 $ 331,790 $ 133,429
--------------------------------------------------------------------------------
Per Share of Common Stock
--------------------------------------------------------------------------------
Earnings before cumulative effect
of change in accounting principle $ 2.75 $ 3.00 $ 1.34
Cumulative effect of change
in accounting principle, net -- -- 0.21
--------------------------------------------------------------------------------
Net earnings per share
of common stock $ 2.75 $ 3.00 $ 1.13
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
36 Melville Corporation 1994 Annual Report
CONSOLIDATED BALANCE SHEETS
Melville Corporation and Subsidiary Companies
($ in thousands)
-------------------------------------------------------------------------------
As of December 31 1994 1993
-------------------------------------------------------------------------------
Assets
-------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 117,035 $ 80,971
Accounts receivable, net 229,833 243,998
Inventories 2,138,243 1,858,772
Prepaid expenses 165,388 200,290
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Total Current Assets 2,650,499 2,384,031
-------------------------------------------------------------------------------
Property, plant, equipment and leasehold
improvements, at cost:
Land 32,917 25,584
Buildings and improvements 222,939 186,025
Fixtures and equipment 1,246,682 1,051,152
Leasehold improvements 687,095 623,403
-------------------------------------------------------------------------------
2,189,633 1,886,164
Less accumulated depreciation and amortization 674,727 583,964
-------------------------------------------------------------------------------
Net property, plant, equipment and
leasehold improvements 1,514,906 1,302,200
Leased property under capital leases,
net of accumulated amortization 12,016 14,677
Deferred charges and other assets 109,641 113,455
Goodwill, net of accumulated amortization
of $94,987 in 1994 and $81,531 in 1993 448,427 443,678
-------------------------------------------------------------------------------
Total Assets $4,735,489 $4,258,041
-------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Melville Corporation 1994 Annual Report 37
($ and shares in thousands, except per share data)
-------------------------------------------------------------------------------
1994 1993
-------------------------------------------------------------------------------
Liabilities
-------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 660,691 $ 559,469
Accrued expenses 659,502 558,270
Notes payable 200,000 90,000
Federal income taxes 102,008 74,376
Other current liabilities 20,541 10,593
-------------------------------------------------------------------------------
Total Current Liabilities 1,642,742 1,292,708
-------------------------------------------------------------------------------
Long-term debt 331,340 341,763
Deferred income taxes 81,702 83,333
Other long-term liabilities 188,126 198,203
Minority interests in subsidiaries 108,644 93,858
-------------------------------------------------------------------------------
Redeemable Preferred Stock
-------------------------------------------------------------------------------
Cumulative preferred stock, Series B,
$4.00 dividend, par value $100, redeemable
at par plus accrued dividends; authorized
and issued 17 shares in 1994 and 1993; 4 shares
held in treasury in 1994 and 1993 1,330 1,330
-------------------------------------------------------------------------------
Shareholders' Equity
-------------------------------------------------------------------------------
Preference stock, par value $1.00, authorized
50,000 shares; Series One ESOP Convertible,
liquidation value $53.45; issued and outstanding
6,379 in 1994 and 6,499 in 1993 340,948 347,346
Guaranteed ESOP Obligation (328,096) (328,570)
Common stock, par value $1.00, authorized
300,000 shares, issued 111,454 and 111,278,
outstanding 105,642 and 105,346, net of
treasury shares, in 1994 and 1993, respectively 111,454 111,278
Capital surplus 48,122 42,123
Retained earnings 2,494,383 2,364,322
Cumulative translation adjustment (1,421) --
Common stock in treasury, at cost; 5,812
and 5,932 shares in 1994 and 1993,
respectively (283,785) (289,653)
-------------------------------------------------------------------------------
Total Shareholders' Equity 2,381,605 2,246,846
-------------------------------------------------------------------------------
Total Liabilities and Equity $ 4,735,489 $ 4,258,041
-------------------------------------------------------------------------------
38 Melville Corporation 1994 Annual Report
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Melville Corporation and Subsidiary Companies
($ in thousands, except per share data)
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, Preference Guaranteed Common Capital Retained Treasury
1994, 1993 and 1992 Stock ESOP Obligation Stock Surplus Earnings Stock
-----------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1991 $ 355,275 $ (342,163) $ 110,678 $ 36,563 $ 2,245,700 $ (315,816)
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings 133,429
Purchase of Series B preferred shares for
treasury (237 shares) 7
Conversion of Series One ESOP Preference
Stock through the reissuance of common
stock held in treasury (50,358 shares) (2,692) 223 2,469
Dividends:
Series One ESOP Convertible Preference
Stock ($3.90 per share), net (15,670)
Series B preferred ($4.00 per share) (54)
Common ($1.48 per share) (154,530)
Exercise of stock options and net shares
awarded under stock plans 469 16,491 (85)
Conversion of Subordinated Debentures 3 18
Reduction of Guaranteed ESOP Obligation 6,286
-----------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1992 352,583 (335,877) 111,150 53,302 2,208,875 (313,432)
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings 331,790
Reissuance of common stock held in treasury
for business acquired (387,110 shares) (16,459) 149 18,976
Purchase of Series B preferred shares for
treasury (75 shares) 3
Conversion of Series One ESOP Preference
Stock through the reissuance of common
stock held in treasury (97,987 shares) (5,237) 434 4,803
Dividends:
Series One ESOP Convertible Preference
Stock ($3.90 per share), net (16,753)
Series B preferred ($4.00 per share) (53)
Common ($1.52 per share) (159,686)
Exercise of stock options and net shares
awarded under stock plans 128 4,843
Reduction of Guaranteed ESOP Obligation 7,307
-----------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1993 347,346 (328,570) 111,278 42,123 2,364,322 (289,653)
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings 307,470
Conversion of Series One ESOP Preference
Stock through the reissuance of common
stock held in treasury (119,696 shares) (6,398) 530 5,868
Dividends:
Series One ESOP Convertible Preference
Stock ($3.90 per share), net (16,934)
Series B preferred ($4.00 per share) (53)
Common ($1.52 per share) (160,422)
Exercise of stock options and net shares
awarded under stock plans 173 5,447
Conversion of Subordinated Debentures 3 22
Reduction of Guaranteed ESOP Obligation 474
-----------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1994 $ 340,948 $ (328,096) $ 111,454 $ 48,122 $ 2,494,383 $ (283,785)
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Melville Corporation 1994 Annual Report 39
CONSOLIDATED STATEMENTS OF CASH FLOWS
Melville Corporation and Subsidiary Companies
($ in thousands)
----------------------------------------------------------------------------------------------------------------
Years ended December 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 307,470 $ 331,790 $ 133,429
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Realignment charge -- -- 346,979
Cumulative effect of change in accounting principle -- -- 37,587
Depreciation and amortization 206,266 191,588 201,008
Minority interests in net earnings 51,895 47,296 53,820
Increase (decrease) in deferred income taxes and other noncash items 1,993 15,595 (93,417)
Change in assets and liabilities, excluding acquisitions and dispositions:
(Increase) decrease in accounts receivable, net (15,013) 33,484 (31,728)
Increase in inventories (266,069) (86,344) (25,184)
Increase in prepaid expenses, deferred charges and other assets (14,123) (14,392) (26,239)
Increase (decrease) in accounts payable and accrued expenses 125,849 (125,150) (10,335)
Increase (decrease) in Federal income taxes payable
and other liabilities 100,093 42,016 (26,509)
----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 498,361 435,883 559,411
----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Additions to property, plant, equipment and leasehold improvements (421,375) (386,724) (304,345)
Proceeds from the sale or disposal of property, plant, equipment
and leasehold improvements, leased property under capital leases,
and operations or assets sold 86,899 97,940 81,655
Acquisitions, net of cash (36,556) (41,534) (25,687)
----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (371,032) (330,318) (248,377)
----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Dividends paid or payable (225,500) (245,635) (239,467)
Additions to (reductions of) notes payable 110,000 90,000 (50,000)
Increase (decrease) in book overdrafts 26,931 (6,701) 39,050
Proceeds from the issuance of common stock 3,152 5,799 15,537
Reductions of long-term debt and obligations under capital leases (4,423) (13,190) (9,641)
Effect of currency fluctuation (1,421) -- --
Other (4) (5) (49)
----------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (91,265) (169,732) (244,570)
----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 36,064 (64,167) 66,464
Cash and cash equivalents at beginning of year 80,971 145,138 78,674
----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 117,035 $ 80,971 $ 145,138
----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
40 Melville Corporation 1994 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Melville Corporation and Subsidiary Companies
Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the
accounts of all subsidiary companies including foreign subsidiaries whose
results of operations are not material. The minority interests represent the 49%
participation of Kmart Corporation in the ownership of all retail subsidiaries
formed or to be formed from July, 1967 until May 1, 1995 for the purpose of
operating leased shoe departments in Kmart stores. All intercompany balances and
transactions have been eliminated.
Cash and Cash Equivalents: Cash equivalents consist of highly liquid
instruments with maturities of three months or less and are stated at cost which
approximates market. The Company's cash management program utilizes zero balance
accounts. Accordingly, all book overdraft balances have been reclassified to
current liabilities.
Inventories: Inventories are stated at the lower of cost or market.
Inventories of the retail operations are determined primarily by the retail
method with 18.1% valued on a last-in, first-out ("LIFO") basis. Inventories of
the manufacturing operations are determined on a first-in, first-out ("FIFO")
basis.
Fixed Assets: Depreciation and amortization of property, plant, equipment
and leasehold improvements is computed on a straight-line basis, generally over
the estimated useful lives of the assets or, when applicable, the life of the
lease, whichever is shorter. Amortization of leased property under capital
leases is computed on a straight-line basis over the life of the lease.
Capitalized software costs are amortized on a straight-line basis over their
estimated useful lives.
Deferred Charges: Deferred charges, principally beneficial leasehold costs,
are amortized on a straight-line basis, generally over the remaining life of the
leasehold acquired.
Goodwill: The excess of acquisition cost over the fair value of net assets
acquired is amortized on a straight-line basis over periods not to exceed forty
years. Impairment is assessed based on profitability of the related business
relative to planned levels and changes in useful life if disposition of a
business is expected.
Maintenance and Repairs: Maintenance and repairs are charged directly to
expense as incurred. Major renewals or replacements are capitalized after making
necessary adjustments in the asset and accumulated depreciation accounts for the
items renewed or replaced.
Store Opening and Closing Costs: New store opening costs are charged to
expense as incurred. In the event a store is closed before its lease has
expired, the total lease obligation, less sublease rental income, is provided
for in the year of closing.
Advertising Costs: The Company charges production costs of advertising to
expense the first time the advertising takes place.
Federal Income Taxes: The Company and its wholly-owned subsidiaries file a
consolidated Federal income tax return. The tax benefit for dividends on
unallocated shares of Series One Convertible ESOP Preference Stock ("ESOP
Preference Stock") is recorded as a credit to retained earnings.
Accounting Changes: Effective January 1, 1994, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits", the cumulative effect of which was not material to the
consolidated financial statements and is therefore not presented separately.
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"), the cumulative effect of which was also
immaterial to the consolidated financial statements and is therefore not
presented separately.
In 1993, the Company changed its method of determining retail price indices
used in the valuation of LIFO inventories.
Effective January 1, 1992, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("SFAS No. 106").
Postretirement Benefits: The annual cost of postretirement benefits is funded
as they arise and the cost is recognized over an employee's term of service with
the Company.
Earnings Per Share: Primary earnings per share is computed by dividing net
earnings, after deducting net preferred dividends on redeemable preferred stock
and the ESOP Preference Stock, by the weighted average number of common shares
outstanding during the year.
Fully diluted earnings per share is computed based upon the assumed
conversion of the ESOP Preference Stock into common stock. Net earnings are
reduced by the difference between the current dividend on the ESOP Preference
Stock and the common stock, adjusted for certain nondiscretionary expenses based
on net earnings.
Foreign Currency Translation: The Company translates foreign currency
financial statements by translating balance sheet accounts at the current
exchange rate and income statement accounts at the average rate for the year.
Translation gains and losses are recorded in shareholders' equity, and realized
gains and losses are reflected in income. The balance in the cumulative
translation adjustment account of $1.4 million as of December 31, 1994 relates
principally to the Company's operations in Mexico. Transaction gains and losses
were insignificant.
Reclassifications: Certain reclassifications have been made to the
consolidated financial statements of prior years to conform to the 1994
presentation.
Melville Corporation 1994 Annual Report 41
Acquisitions
During 1994, the Company acquired the assets of 11 prescription drugs, health
and beauty care stores, 12 apparel stores and three stores selling branded
athletic footwear and apparel, for an aggregate of $36.6 million in cash. These
acquisitions have been accounted for using the purchase method and resulted in
goodwill of $17.3 million. Results of operations are included in the
consolidated financial statements from their respective dates of acquisition.
Pro forma results have not been presented for the effect of these transactions
as the operations are not material to the consolidated financial results of the
Company.
Strategic Realignment Charge
In 1992, the Company recorded a pre-tax strategic realignment charge of $347.0
million to reflect the anticipated costs associated with a program to close or
convert to other formats duplicate or underperforming stores. The charge also
included the write-down of fixed assets and other underperforming assets, losses
from operations through the expected date of closure or lease settlement,
severance and inventory liquidation costs.
Accounts Receivable
Accounts receivable at December 31 consisted of the following:
--------------------------------------------------------------------
($ in thousands) 1994 1993
--------------------------------------------------------------------
Trade accounts $170,296 $216,062
Other 78,395 60,470
--------------------------------------------------------------------
248,691 276,532
Less allowance for doubtful
accounts 18,858 32,534
--------------------------------------------------------------------
$229,833 $243,998
--------------------------------------------------------------------
Inventories
Inventories at December 31 consisted of the following:
-------------------------------------------------------------------
($ in thousands) 1994 1993
-------------------------------------------------------------------
Finished goods $2,131,041 $1,849,651
Work-in-process 645 1,616
Raw materials and supplies 6,557 7,505
-------------------------------------------------------------------
$2,138,243 $1,858,772
-------------------------------------------------------------------
Prior to 1993, the Company used the U.S. Bureau of Labor Statistics indices
to measure inflation or deflation in the valuation of its LIFO inventories. In
1993, internally developed indices were used to more accurately measure price
fluctuations. The net earnings impact of this change on prior years,
individually and cumulatively, is not determinable. The change increased 1993
net earnings by $10.0 million.
Had the FIFO method been used, the carrying value of inventories valued on a
LIFO basis would have increased by $8.1 million and $22.4 million at December
31, 1994 and 1993, respectively.
Prepaid Expenses
Prepaid expenses at December 31 consisted of the following:
-----------------------------------------------------------------
($ in thousands) 1994 1993
-----------------------------------------------------------------
Deferred income taxes $ 97,668 $133,362
Other 67,720 66,928
-----------------------------------------------------------------
$165,388 $200,290
-----------------------------------------------------------------
Accrued Expenses
Accrued expenses at December 31 consisted of the following:
----------------------------------------------------------------
($ in thousands) 1994 1993
----------------------------------------------------------------
Taxes other than Federal
income taxes $143,801 $114,627
Rent 87,811 77,475
Other 427,890 366,168
----------------------------------------------------------------
$659,502 $558,270
----------------------------------------------------------------
Short-Term Borrowing Arrangements
Information regarding short-term borrowings outstanding at December 31 was as
follows:
---------------------------------------------------------------
($ in millions) 1994 1993
---------------------------------------------------------------
Commercial paper $200.0 $ 90.0
Weighted average interest rate 6.0% 3.3%
---------------------------------------------------------------
Lines of credit available $693.5 $630.0
Letters of credit outstanding 433.9 323.4
---------------------------------------------------------------
The Company has available lines of credit with various banks which permit
borrowings at prime or other negotiated interest rates. There were no short-term
borrowings outstanding under these lines of credit at December 31, 1994 and
1993. The Company can also obtain short-term financing through the issuance of
commercial paper and bank loan participation notes, and is not obligated under
any formal or informal compensating balance agreements.
Long-Term Debt
Long-term debt at December 31 consisted of the following:
-------------------------------------------------------------
($ in thousands) 1994 1993
-------------------------------------------------------------
Guaranteed ESOP note, 8.52%,
payable in various installments
through 2008* $340,100 $340,100
Other notes and mortgages payable 8,637 8,944
-------------------------------------------------------------
348,737 349,044
Less current installments 17,397 7,281
-------------------------------------------------------------
$331,340 $341,763
-------------------------------------------------------------
*See Employee Stock Ownership Plan footnote.
42 Melville Corporation 1994 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Melville Corporation and Subsidiary Companies
A $7.0 million payment for the guaranteed ESOP note was made on January 3,
1995, due to the 1994 calendar. The aggregate long-term debt maturing during
each of the next five years is as follows: $10.4 million in 1995, $13.8 million
in 1996, $17.5 million in 1997, $21.7 million in 1998 and $13.9 million in 1999.
Net interest expense for the years ended December 31 included the following:
------------------------------------------------------------------------------
($ in thousands) 1994 1993 1992
------------------------------------------------------------------------------
Interest expense* $34,113 $25,846 $26,681
Interest income and
capitalized interest 1,477 2,036 1,283
------------------------------------------------------------------------------
Net interest expense $32,636 $23,810 $25,398
------------------------------------------------------------------------------
* Excludes interest related to the guaranteed ESOP note but includes interest
costs recognized in connection with the Company's contribution to the ESOP.
Leases
The Company and its subsidiaries lease retail stores and warehouse, plant and
office facilities over periods generally ranging from 5 to 25 years with options
to renew such terms ranging from 5 to 15 years.
At December 31, 1994, the future minimum lease payments under capital leases,
rental payments required under operating leases, and future minimum sublease
rentals excluding lease obligations for closed facilities were as follows:
-------------------------------------------------------------------
Capital Operating
($ in thousands) Leases Leases
-------------------------------------------------------------------
1995 $ 5,974 $ 505,180
1996 5,650 478,941
1997 5,128 445,175
1998 4,420 406,847
1999 4,264 365,259
Thereafter 12,385 1,711,868
-------------------------------------------------------------------
Total $37,821 $3,913,270
Less amount representing
interest 15,586
-------------------------------------------------------------------
Present value of minimum
lease payments $22,235
-------------------------------------------------------------------
Total future minimum sublease
rentals $ 554 $ 43,671
-------------------------------------------------------------------
Net rental expense for all operating leases for the years ended December 31
was as follows:
------------------------------------------------------------------------------
($ in thousands) 1994 1993 1992
------------------------------------------------------------------------------
Minimum rentals $538,772 $496,555 $480,505
Contingent rentals 206,906 192,905 207,106
------------------------------------------------------------------------------
745,678 689,460 687,611
Less sublease rentals 9,928 6,286 5,085
------------------------------------------------------------------------------
$735,750 $683,174 $682,526
------------------------------------------------------------------------------
Contingent rentals are principally those for leased shoe departments operated
under license agreements with Kmart Corporation. These agreements are for terms
of 25 years and provide for rental payments based on sales and profits. The
remaining terms of license agreements in existence at December 31, 1994 ranged
from 5 to 25 years.
The balance of contingent rentals relate to other Company operations and are
based only on sales.
Leased property under capital leases at December 31 included:
-----------------------------------------------------------------
($ in thousands) 1994 1993
-----------------------------------------------------------------
Retail facilities $20,399 $25,262
Warehouse, plant and office
facilities 21,809 22,603
-----------------------------------------------------------------
42,208 47,865
Less accumulated amortization 30,192 33,188
-----------------------------------------------------------------
$12,016 $14,677
-----------------------------------------------------------------
Contingencies
In connection with dispositions completed in 1991, 1992 and 1993, Melville
Realty Company, Inc. ("MRC"), a wholly owned subsidiary of the Company,
continued to guarantee rental and other lease-related charges on 501 leases for
retail stores and warehouse and office facilities. The present value of these
minimum rental payments at December 31, 1994 was approximately $117.7 million.
This amount includes $27.5 million related to the sale of Chess King to Merry-
Go-Round Enterprises ("MGRE"), which filed for protection under Chapter 11 of
the United States Bankruptcy Code. Pursuant to the terms of sale to a third
party of a note receivable from MGRE, the Company will be indemnified for 52.5%
of costs incurred under any guarantees for the duration of MGRE's bankruptcy. As
of February 28, 1995, MGRE has rejected 119 leases guaranteed by MRC, which are
not included in the figures above. Although the ultimate liability under these
guarantees is uncertain, reserves totaling $15.0 million remain for potential
losses as of December 31, 1994.
Melville Corporation 1994 Annual Report 43
Stock Incentive Plans
The Company's 1990 Omnibus Stock Incentive Plan (the "Plan") provides for the
granting of options, restricted stock and other stock-based awards for a maximum
of 5,000,000 shares of common stock to key employees. The Plan replaced the
Company's 1973 and 1987 Stock Option Plans and the 1980 Restricted Stock Plan
("Previous Plans").
Stock options under the Plan are awarded at the fair market value on the date
of grant. The right to exercise these options generally commences one year from
the date of grant and expires ten years after the grant date, provided the
optionee continues to be employed by the Company.
The 1989 Directors' Stock Option Plan ("Directors' Plan") for non-employee
directors ("eligible directors") provides for the granting of options to
purchase a maximum of 150,000 shares of common stock. Any person who becomes an
eligible director receives an initial option grant to purchase 2,000 shares of
common stock, and, on each January 11 after such initial grant through January
11, 1998, is automatically granted an additional option to purchase 1,000
shares. All options are awarded at the fair value on the date of grant.
The right to exercise options granted under the Directors' Plan generally
commences six months from the date of grant and expires ten years after the
grant date, provided the director has served continuously during the exercise
period.
Information with respect to stock option activity under the Plan, the
Previous Plans and the Directors' Plan is as follows:
---------------------------------------------------------
Number Option Price
of Shares Range Per Share
---------------------------------------------------------
Outstanding at
December 31, 1991 2,814,640 $ 12.41 /$54.75
Granted 717,325 44.63 / 48.44
Exercised 460,090 12.41 / 52.00
Cancelled 44,650 36.00 / 52.00
---------------------------------------------------------
Outstanding at
December 31, 1992 3,027,225 $ 18.19 /$54.75
Granted 709,650 41.13 / 53.50
Exercised 126,400 18.19 / 52.00
Cancelled 139,875 39.38 / 52.00
---------------------------------------------------------
Outstanding at
December 31, 1993 3,470,600 $ 18.19 /$54.75
Granted 201,000 30.25 / 41.00
Exercised 76,428 18.19 / 39.38
Cancelled 7,000 45.00
---------------------------------------------------------
Outstanding at
December 31, 1994 3,588,172 $ 26.72 /$54.75
---------------------------------------------------------
Exercisable at
December 31, 1994 3,399,172 $ 26.72 /$54.75
---------------------------------------------------------
The Plan also permits the granting of performance shares, representing rights
to receive cash and/or common stock of the Company based upon certain
performance criteria over a three-year performance period, and performance based
restricted shares, representing rights to receive common stock of the Company
based upon certain performance criteria over a one-year performance period.
Compensation expense related to grants under these provisions is based on
current market price of the Company's common stock and the extent to which
performance criteria are being met.
Information regarding performance shares and performance based restricted
shares is as follows:
----------------------------------------------------------------------
($ in millions) 1994 1993 1992
----------------------------------------------------------------------
Units awarded 77,376 54,301 70,745
Fair market value of units
awarded $ 2.9 $ 2.6 $ 3.4
Shares granted related to
units previously awarded 42,051 - -
Fair market value of shares
granted $ 1.6 $ - $ -
----------------------------------------------------------------------
Restricted stock awards are currently granted under the Plan only in
connection with the hiring or retention of key executives and are subject to
certain conditions. Restrictions are lifted generally three years after the
grant date, provided the executive continues to be employed by the Company.
Information with respect to the restricted shares is as follows:
---------------------------------------------------------------------
($ in millions) 1994 1993 1992
---------------------------------------------------------------------
Shares granted 55,050 2,225 12,265
Fair market value of
shares granted $ 1.9 $ 0.1 $ 0.6
Shares cancelled 1,535 420 2,030
---------------------------------------------------------------------
At December 31, 1994 shares available for grant under the Plan totaled
1,959,660 and 68,000 shares of stock were available for grant under the
Directors' Plan.
Redeemable Preferred Stock
The Company is required to provide $279,000 annually, on December 1, as a
sinking fund to repurchase shares of Series B preferred stock at prices not to
exceed $100 per share. Any balance not so applied within one year is returned to
the general funds of the Company. The difference between the cost of shares
repurchased and par value is reflected in capital surplus.
44 Melville Corporation 1994 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Melville Corporation and Subsidiary companies
Postretirement Benefits
The Company provides postretirement health benefits at several divisions for
retirees who meet certain eligibility requirements.
Effective January 1, 1992, the Company adopted SFAS No. 106, and recorded an
accumulated postretirement benefit obligation ("APBO") of $37.6 million for
active employees and retirees.
The weighted average discount rate used to determine the APBO was 8.67% and
6.90% at December 31, 1994 and 1993, respectively. The following table reflects
the accrued postretirement benefit cost as of December 31:
------------------------------------------------------------------
($ in thousands) 1994 1993
------------------------------------------------------------------
Retirees $14,335 $19,400
Fully eligible active plan
participants 1,987 2,800
Other active plan participants 8,078 12,000
------------------------------------------------------------------
APBO 24,400 34,200
------------------------------------------------------------------
Unrecognized prior service gain 14,163 15,200
Unrecognized net gain (loss) 6,817 (4,000)
------------------------------------------------------------------
Accrued Postretirement
Benefit Cost $45,380 $45,400
------------------------------------------------------------------
Effective December, 1992, the Company amended these plans to terminate
certain benefits, resulting in a prior service gain of $16.7 million to be
amortized over 13 years. The net periodic cost recorded for the years ended
December 31 was as follows:
----------------------------------------------------------------------
($ in thousands) 1994 1993 1992
----------------------------------------------------------------------
Interest expense $2,000 $2,200 $3,300
Service cost (500)* (1,000)* 2,100
----------------------------------------------------------------------
$1,500 $1,200 $5,400
----------------------------------------------------------------------
* Net of prior service gain amortization.
For measurement purposes, an 11.0% increase in the cost of covered
health-care benefits was assumed for 1994; the rate was assumed to decline
gradually to 6.0% in 2010, and remain at that level thereafter. A 1.0% increase
in the health-care cost trend rate would increase the APBO at December 31, 1994
by $3.1 million, and the 1994 annual expense by $0.4 million.
401(k) Profit Sharing Plan
The Company has a qualified 401(k) Profit Sharing Plan available to full-time
employees who meet the plan's eligibility requirements. This plan, which is also
a defined contribution plan, contains a profit sharing component, with
tax-deferred contributions to each employee based on certain performance
criteria, and also permits employees to make contributions up to the maximum
limits allowed by Internal Revenue Code Section 401(k). Under the 401(k)
component, the Company matches a portion of the employee's contribution under a
predetermined formula based on the level of contribution and years of vesting
service. Company contributions to the plan for both profit sharing and matching
of employee contributions were $18.0 million, $20.3 million and $17.9 million in
1994, 1993 and 1992, respectively.
Employee Stock Ownership Plan
The Company sponsors a defined contribution plan for all full-time employees
through its Employee Stock Ownership Plan ("ESOP").
The ESOP Trust (the "Trust") borrowed $357.5 million through a 20-year loan
guaranteed by the Company and used the proceeds to purchase 6,688,494 shares of
ESOP Preference Stock from the Company. The original liquidation value of the
ESOP Preference Stock is guaranteed by the Company. Dividends are cumulative at
the stated rate or the common stock rate if higher. Information regarding the
ESOP is as follows:
------------------------------------------------------------------------
($ in millions) 1994 1993 1992
------------------------------------------------------------------------
Dividends paid $ - $29.6 $25.8
Dividends accrued 24.9 - 4.3
Annualized dividends 24.9 25.3 25.8
Tax benefit of annualized dividends 10.0 10.1 10.1
Cash contributions* 11.1 7.9 7.4
Interest costs incurred by the Trust 29.0 29.5 29.8
Compensation expense recognized 5.9 5.7 5.5
Interest expense recognized 5.3 5.9 4.7
------------------------------------------------------------------------
* 1994 amount accrued; paid January, 1995.
Contributions to the ESOP, plus the dividends paid on the ESOP Preference
Stock held by the Trust, are used to repay the loan principal and interest. The
difference between the cash contribution and the aggregate expense recognized is
credited to the Guaranteed ESOP Obligation.
Melville Corporation 1994 Annual Report 45
Income Taxes
Effective January 1, 1993, the Company adopted SFAS No. 109. The cumulative
effect of this accounting change was not material.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31 were as
follows:
-------------------------------------------------------------
($ in thousands) 1994 1993
-------------------------------------------------------------
Deferred tax assets:
Employee benefits $ 66,233 $ 53,915
Inventories 33,956 30,852
Other assets 7,895 21,920
-------------------------------------------------------------
Total deferred tax assets 108,084 106,687
-------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment 92,118 56,658
-------------------------------------------------------------
Net deferred tax assets $ 15,966 $ 50,029
-------------------------------------------------------------
The provision for income taxes for the years ended
December 31 consisted of the following:
-------------------------------------------------------------------
($ in millions) 1994 1993 1992
-------------------------------------------------------------------
Federal $166.6 $170.2 $ 99.1
State 52.1 50.2 26.6
-------------------------------------------------------------------
$218.7 $220.4 $125.7
-------------------------------------------------------------------
The provision for income taxes includes net deferred tax charges of $36.2
million and $103.4 million in 1994 and 1993, and a net deferred tax benefit of
$97.6 million in 1992. For 1992, deferred income taxes relate principally to
costs associated with the strategic realignment program, the capitalization of
inventory costs, depreciation, employee related benefits, and leased property
under capital leases.
Reconciliations of the effective tax rates to the U.S. statutory income tax
rates are as follows:
------------------------------------------------------------------
Percent of pre-tax income 1994 1993 1992
------------------------------------------------------------------
Effective tax rate 37.8 36.8 37.5
State income taxes, net of
Federal tax benefit (5.9) (5.4) (5.2)
51% owned subsidiaries
excluded from the
consolidated Federal
income tax return 3.0 2.6 4.4
Goodwill (0.8) (0.8) (3.9)
Other 0.9 1.8 1.2
------------------------------------------------------------------
Statutory income tax rates 35.0 35.0 34.0
------------------------------------------------------------------
Supplemental Cash Flow Information
During the years ended December 31, the Company had the following non-cash
financing and investing activities:
-----------------------------------------------------------------
($ in thousands) 1994 1993 1992
-----------------------------------------------------------------
Fair value of
assets acquired $41,832 $ 61,144 $26,417
Cash paid 36,578 38,814 25,691
-----------------------------------------------------------------
Liabilities assumed $ 5,254 $ 22,330 $ 726
-----------------------------------------------------------------
Book value of common
stock issued in
pooling of interests $ - $ 18,976 $ -
Note received for
operations sold - 29,413 -
-----------------------------------------------------------------
Cash payments for income taxes and interest for the years ended December 31
were as follows:
-----------------------------------------------------------------
($ in thousands) 1994 1993 1992
-----------------------------------------------------------------
Income taxes $ 140,789 $157,240 $236,975
Interest (net of
amounts capitalized) 34,113 25,747 26,628
-----------------------------------------------------------------
46 Melville Corporation 1994 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Melville Corporation and Subsidiary Companies
Summary of Quarterly Results
--------------------------------------------------------------------------------
(Unaudited; $ in thousands, except per share data)
--------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------------------------------------
Net Sales
--------------------------------------------------------------------------------
1994 $2,379,839 $2,507,469 $2,737,016 $3,661,237
1993 2,033,011 2,537,395 2,355,376 3,509,619
--------------------------------------------------------------------------------
Gross Margin
--------------------------------------------------------------------------------
1994 $ 800,222 $ 903,227 $ 966,772 $1,362,772
1993 694,749 926,835 853,159 1,296,263
--------------------------------------------------------------------------------
Net Earnings (Loss)
--------------------------------------------------------------------------------
1994 $ (2,505) $ 45,602 $ 51,718 $ 212,655
1993 (21,686) 74,525 41,504 237,447
--------------------------------------------------------------------------------
Net Earnings (Loss) Per Share
--------------------------------------------------------------------------------
1994 Primary $ (0.06) $ 0.39 $ 0.45 $ 1.97
1994 Fully Diluted* (0.06) 0.39 0.45 1.90
1993 Primary (0.24) 0.67 0.35 2.22
1993 Fully Diluted* (0.24) 0.67 0.35 2.12
--------------------------------------------------------------------------------
*Dilutive effect in the fourth quarter due to the assumed conversion of the ESOP
Preference Stock and the seasonality of earnings.
Market Information
Melville Corporation's common stock is listed on the New York Stock Exchange.
Its trading symbol is MES. Information with respect to quarterly trading ranges
(based on low/high stock prices) and dividends paid per share is as follows:
----------------------------------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
----------------------------------------------------------------------------------------------------------------------------------
Market Price Per Share
----------------------------------------------------------------------------------------------------------------------------------
1994 $ 35 3/4 - 41 3/4 $ 37 1/8 - 41 5/8 $ 34 1/2 - 39 7/8 $ 29 1/2 - 36 5/8 $ 29 1/2 - 41 3/4
1993 46 3/4 - 54 3/4 43 3/4 - 48 1/4 42 1/4 - 47 1/8 38 7/8 - 45 5/8 38 7/8 - 54 3/4
----------------------------------------------------------------------------------------------------------------------------------
Dividends Paid Per Share
----------------------------------------------------------------------------------------------------------------------------------
1994 $ 0.38 $ 0.38 $ 0.38 $ 0.38 $ 1.52
1993 0.38 0.38 0.38 0.38 1.52
----------------------------------------------------------------------------------------------------------------------------------
Melville Corporation 1994 Annual Report 47
Segment Information
The Company is a specialty retailer conducting business through retail stores in
four business segments: prescription drugs, health and beauty care; apparel;
footwear; and toys and home furnishings. Information about operations for each
of these segments is summarized as follows:
--------------------------------------------------------------------------------
($ in thousands) 1994 1993 1992
--------------------------------------------------------------------------------
Prescription Drugs, Health and Beauty Care
--------------------------------------------------------------------------------
Net sales $ 4,330,099 $ 3,948,197 $ 3,632,066
Operating profit (a)(b) 227,655 195,670 149,182
Identifiable assets at
December 31 (c) 1,662,127 1,592,964 1,492,471
Depreciation and amortization 60,827 56,883 60,233
Additions to property, plant,
equipment and leasehold
improvements (d) 102,047 104,592 111,802
--------------------------------------------------------------------------------
Apparel
--------------------------------------------------------------------------------
Net sales 3,538,928 3,395,926 3,486,065
Operating profit (a)(b) 161,087 181,922 125,893
Identifiable assets at
December 31 (c) 1,528,693 1,334,026 1,366,191
Depreciation and amortization 79,210 75,963 78,566
Additions to property, plant,
equipment and leasehold
improvements (d) 145,032 154,247 105,037
--------------------------------------------------------------------------------
Footwear
--------------------------------------------------------------------------------
Net sales 1,839,883 1,713,093 1,840,022
Operating profit (a)(b) 158,561 168,979 91,984
Identifiable assets at
December 31 (c) 660,197 568,015 572,344
Depreciation and amortization 25,911 20,937 22,293
Additions to property, plant,
equipment and leasehold
improvements (d) 56,503 45,924 26,973
--------------------------------------------------------------------------------
Toys and Home Furnishings
--------------------------------------------------------------------------------
Net sales 1,576,651 1,378,185 1,474,690
Operating profit (a)(b) 99,403 89,138 2,926
Identifiable assets at
December 31 (c) 789,859 655,290 639,764
Depreciation and amortization 37,424 34,797 37,454
Additions to property, plant,
equipment and leasehold
improvements 92,332 70,948 47,191
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Consolidated
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Net sales $11,285,561 $10,435,401 $10,432,843
Operating profit before
corporate expenses (a)(b) 646,706 635,709 369,985
Corporate expenses excluding
depreciation and amortization (e) 33,070 9,364 6,629
Corporate depreciation and
amortization 2,894 3,008 2,462
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Interest expense, net 32,636 23,810 25,398
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Earnings before income taxes
and minority interests $ 578,106 $ 599,527 $ 335,496
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Identifiable assets at
December 31 (c) $ 4,640,876 $ 4,150,295 $ 4,070,770
Corporate assets 94,613 107,746 131,392
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Total assets at December 31 $ 4,735,489 $ 4,258,041 $ 4,202,162
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Depreciation and amortization $ 206,266 191,588 201,008
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Corporate additions to property
plant, equipment and
leasehold improvements 25,461 11,013 13,342
Total additons to property, plant,
equipment and leasehold improve-
ments(d) $ 421,375 $ 386,724 $ 304,345
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(a) Operating profit is defined as total revenues less operating expenses.
(b) In 1992, includes the effect of the strategic realignment charge.
(c) Indentifiable assets include those assets directly related to each
segment's operations.
(d) Excludes acquisition.
(e) Includes general corporate expenses as well as net expenses related to
other corporate managed subsidiaries. Increase in 1994 relates to lease
settlement reserves as well as expansion of centralized services for
operating divisions.
48 Melville Corporation 1994 Annual Report
FIVE-YEAR FINANCIAL SUMMARY
Melville Corporation and Subsidiary Companies
($ in thousands, except per share data)
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Results for the Year 1994 1993 (a) 1992 (b) 1991 1990
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Net Sales $11,285,561 $10,435,401 $10,432,843 $ 9,886,183 $ 8,686,765
Wages and Compensation 1,403,401 1,338,881 1,315,564 1,257,756 1,053,440
Taxes 448,890 435,033 318,162 439,272 419,038
Earnings before Income Taxes, Minority
Interests and Cumulative Effect of
Change in Accounting Principle 578,106 599,527 335,496 640,098 687,338
Earnings before Cumulative Effect of Change in
Accounting Principle 307,470 331,790 155,980 346,681 385,261
Net Earnings 307,470 331,790 133,429 346,681 385,261
Dividends Declared 185,351 184,934 180,324 174,517 172,210
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Per Share of Common Stock
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Earnings before Cumulative Effect of
Change in Accounting Principle $ 2.75 $ 3.00 $ 1.34 $ 3.20 $ 3.59
Net Earnings 2.75 3.00 1.13 3.20 3.59
Dividends 1.52 1.52 1.48 1.44 1.42
Book Value 22.54 21.33 19.83 20.06 17.99
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End of Year Position
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Current Assets $ 2,650,499 $ 2,384,031 $ 2,429,772 $ 2,359,017 2,103,582
Current Liabilities 1,642,742 1,292,708 1,350,498 1,302,770 1,123,314
Current Ratio 1.6 1.8 1.8 1.8 1.9
Total Assets $ 4,735,489 $ 4,258,041 $ 4,202,162 $ 4,074,259 3,652,504
Total Long-Term Obligations and
Redeemable Preferred Stock 351,762 365,936 376,417 385,483 396,430
Percentage of Long-Term Obligations
to Total Capitalization 12.8 14.0 15.3 15.5 17.6
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Property, Plant, Equipment and
Leasehold Improvements
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Net of Accumulated Depreciation
and Amortization $ 1,514,906 $ 1,302,200 $ 1,207,871 $ 1,105,287 $ 965,085
Capital Additions(c) 421,375 386,724 304,345 253,072 231,132
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Percentage of Net Sales
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Earnings before Income Taxes, Minority
Interests and Cumulative Effect of
Change in Accounting Principle 5.1 5.7 3.2 6.5 7.9
Earnings before Cumulative Effect of Change in
Accounting Principle 2.7 3.2 1.5 3.5 4.4
Net Earnings 2.7 3.2 1.3 3.5 4.4
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Return on Beginning Shareholders' Equity 13.7% 16.0% 6.4% 18.7% 23.8%
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Number of Stores 7,378 7,282 8,213 8,293 7,754
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(a) Excludes stores designated to be closed in connection with the 1992
strategic realignment program.
(b) Includes impact of strategic realignment charge.
(c) Excludes acquisitions.