Exhibit 13
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------
($ and shares in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------
Operating Results 1993(a) 1992(b) % Change
- ------------------------------------------------------------------------------------------------------------------------
Net Sales $ 10,435,401 $ 10,432,843 --
Operating Profit 623,337 360,894 72.7
Earnings before Income Taxes, Minority Interests and
Cumulative Effect of Change in Accounting Principle 599,527 335,496 78.7
Earnings before Cumulative Effect of
Change in Accounting Principle 331,790 155,980 112.7
Net Earnings 331,790 133,429 148.7
Dividends on Common Stock 159,686 154,530 3.3
Dividends on Preferred and Preference Stock 25,248 25,794 (2.1)
- ------------------------------------------------------------------------------------------------------------------------
Per Share Data
- ------------------------------------------------------------------------------------------------------------------------
Earnings Per Share of Common Stock before Cumulative Effect
of Change in Accounting Principle $ 3.00 $ 1.34 123.9
Net Earnings Per Share of Common Stock 3.00 1.13 165.5
Dividends Per Share of Common Stock 1.52 1.48 2.7
- ------------------------------------------------------------------------------------------------------------------------
Financial Position at Year End
- ------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents $ 80,971 $ 145,138 (44.2)
Inventories 1,858,772 1,806,550 2.9
Working Capital 1,070,293 1,060,753 0.9
Shareholders' Equity 2,246,846 2,076,601 8.2
- ------------------------------------------------------------------------------------------------------------------------
Key Percentages
- ------------------------------------------------------------------------------------------------------------------------
Operating Profit as a Percent of Net Sales 6.0 3.5
Earnings before Income Taxes, Minority Interests and
Cumulative Effect of Change in Accounting Principle
as a Percent of Net Sales 5.7 3.2
Earnings before Cumulative Effect of Change in Accounting
Principle as a Percent of Net Sales 3.2 1.5
Net Earnings as a Percent of Net Sales 3.2 1.3
Return on Beginning Shareholders' Equity 16.0 6.4
- ------------------------------------------------------------------------------------------------------------------------
Statistics
- ------------------------------------------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding 105,069 104,418 0.6
Number of Stores 7,282 8,213 (11.3)
Number of Associates 111,082 115,644 (3.9)
Number of Common Shareholders 7,600 8,000 (5.0)
========================================================================================================================
<FN>
(a)Excludes stores designated to be closed in connection with the 1992 strategic realignment program.
(b)Operating profit and earnings figures reflect the impact of the 1992 strategic realignment charge of $346,979
(see Notes to consolidated financial statements).
</FN>
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Melville Corporation and Subsidiary Companies
Financial Condition
- ------------------------------------------------------------------------
($ in thousands) 1993 1992 1991
- ------------------------------------------------------------------------
Cash and cash
equivalents $ 80,971 $ 145,138 $ 78,674
Cash flows provided
by operating activities 419,654 559,411 369,813
Long-term obligations
to total capitalization 14.0% 15.3% 15.5%
Long-term obligations
to shareholders' equity 16.2% 18.1% 18.4%
Current ratio 1.8 1.8 1.8
========================================================================
The Company's primary source of liquidity continues to be cash provided by
operations. As over 70% of the Company's earnings occur in the fourth quarter,
however, it utilizes short-term borrowings, primarily through issuance of
commercial paper, to finance its seasonal inventory needs. During 1993,
short-term borrowings reached a maximum of $875.0 million as compared to
$820.0 million in 1992 and $747.8 million in 1991. The increase in 1993 over
1992 reflects lower earnings and additional capital expenditures related to
store openings and remodeling costs as well as system enhancements and new
technologies.
As of December 31, 1993, $90.0 million of short-term borrowings were
outstanding, with none outstanding at December 31, 1992, and $50.0 million
outstanding at December 31, 1991. The daily average of all short-term
borrowings was $464.8 million, $542.2 million and $453.4 million for 1993,
1992 and 1991, respectively.
Net interest expense is a function of interest rates and the level of
short-term borrowings resulting from the Company's cyclical cash requirements.
The Company had net interest expense of $23.8 million, $25.4 million and $29.5
million in 1993, 1992 and 1991, respectively. The decrease in net interest
expense in 1993 as compared to 1992 and 1991 is due to declining interest
rates as well as a significant decrease in the average level of short-term
borrowings from 1992.
Current assets decreased despite an increase in inventories of $52.2
million, primarily due to a lower cash position resulting from lower cash
flows from operations. The increase in inventories is due to acquisitions, new
store openings, the early receipt of spring merchandise, opportunistic
purchases and increased stock levels required for our larger store formats,
offset by dispositions. Prepaid expenses decreased as utilization of
realignment reserves resulted in decreased levels of deferred taxes.
Current liabilities decreased due to the timing of payments as well as a
decrease in costs relative to store closings and the sales of certain
divisions.
CAPITAL EXPENDITURES
Capital expenditures were $386.7 million in 1993, $304.3 million in 1992 and
$253.1 million in 1991. These expenditures were principally for improvements
to new and existing leased store locations, store equipment and information
systems. Capital expenditures for 1994 are estimated at $395.0 million and
are primarily for new store openings, continuing improvements to stores and
investments in new technologies.
Results of Operations
- ---------------------------------------------------------------------------
($ in millions, except
per share amounts) 1993 1992 1991
- ---------------------------------------------------------------------------
Net sales $10,435.4 $10,432.8 $9,886.2
Same store sales increase 0.1% 3.2% 0.4%
- ---------------------------------------------------------------------------
Operating profit before
realignment charge $ 623.3 $ 707.9 $ 669.6
Realignment charge -- 347.0 --
Operating profit 623.3 360.9 669.6
Net earnings before
realignment charge and
accounting change 331.8 381.4 346.7
- ---------------------------------------------------------------------------
Net earnings $ 331.8 $ 133.4 $ 346.7
- ---------------------------------------------------------------------------
Net earnings per share
before realignment
charge and accounting
change $ 3.00 $ 3.50 $ 3.20
Net earnings per share 3.00 1.13 3.20
- ---------------------------------------------------------------------------
Percent of net sales
- ---------------------------------------------------------------------------
Cost of goods sold,
buying and
warehousing costs 63.9 62.6 62.3
Store operating, selling,
general and
administrative expenses 28.3 28.7 29.1
===========================================================================
NET SALES
Consolidated net sales for the year as well as the fourth quarter ended
December 31, 1993 were flat with last year at $10.4 billion and $3.5 billion,
respectively. 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, as well as the results of stores
designated to be closed by Thom McAn and Kay-Bee under the 1992 strategic
realignment program. Adjusting for these factors in the 1993 and 1992 periods,
consolidated net sales would have increased 4.8% for the year and 7.1% for the
quarter. CVS,
Linens 'n Things and This End Up generated positive sales growth throughout
the year while disappointing performances at Marshalls, Kay-Bee, Wilsons and
Thom McAn offset these improvements.
The 1992 increase in consolidated net sales was due in part to the 1991
acquisitions of K&K toy stores and FootAction but also reflects the absence of
Freddy's, sold in 1991, and CVS stores in California, sold in February, 1992.
Adjusting for these factors, net sales increased 7.1%.
Increases in consolidated net sales differ from same store sales
increases mainly due to acquisitions and store openings and closings. The
lower same store sales increase in 1993 resulted primarily from weakness in
the apparel and footwear segments.
NET EARNINGS
Net earnings for 1993 were negatively impacted by disappointing sales,
heavier than expected markdowns in our apparel segment, a decline in gross
margin as CVS increases in proportion to the total operations of the Company,
and the partial write-off of the notes received in connection with the sales
of Freddy's and Chess King. Although the $5.8 million write-off related to
Freddy's was recovered in the fourth quarter, the proceeds were set aside to
cover anticipated lease settlement costs for the remaining Freddy's leases
which are guaranteed by the Melville Realty subsidiary of the Company. Also,
$4.0 million was charged to earnings to provide for less than full recovery of
the $29.4 million note related to the sale of Chess King as the note was sold
to a third party subsequent to year end for less than face value. Earnings
were impacted positively by a change in the Company's method of determining
retail price indices used in the valuation of its LIFO inventories, which
increased net earnings by $10.0 million.
Management formulated a strategic realignment program during the fourth
quarter of 1992 which resulted in 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) retroactive to January 1, 1992, reflecting
the cumulative effect of a change in accounting for postretirement benefits.
Net earnings per share of common stock was $3.00 in 1993 compared with
$1.13 in 1992 and $3.20 in 1991. Net earnings per share in 1992, excluding the
impact of the two special charges, would have been $3.50.
STRATEGIC REALIGNMENT
In 1993 we accomplished the major objectives of the 1992 strategic
realignment program: three divisions, Chess King, Prints Plus and Accessory
Lady, were sold on May 17, May 29 and October 16, 1993, respectively, and
the Company closed over 200 Thom McAn stores and about 90 of the Kay-Bee and
Linens 'n Things stores designated to be closed or converted under the program.
To date, $279.0 million of the pre-tax amount recorded was utilized as follows:
the write-off of intangibles and the losses on sale, inclusive of operating
losses through the dates of disposition, amounted to $85.0 million; and asset
writedowns, operating losses and severance costs for store closings and the
acceleration of remodeling programs amounted to $194.0 million.
COSTS AND EXPENSES
Cost of goods sold, buying and warehousing costs continue to increase as
a percentage of consolidated net sales, reflecting the increased significance
of the prescription drugs, health and beauty aids segment to total operations,
compounded by continued pressure on third party providers to offer
prescriptions at lower prices, as well as lower initial markon in our other
segments. Increased markdowns in our apparel and footwear segments in 1993 as
compared to 1992 have also contributed to the erosion of gross margin.
Store operating, selling, general and administrative expenses continue to
decrease as a percentage of consolidated net sales due to the success of the
various cost containment programs currently 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. 109, "Accounting for Income Taxes," effective January 1, 1993, but elected
to delay implementation of SFAS No. 112 "Employers' Accounting for
Postemployment Benefits," which is not required until fiscal 1994. The impact
of the adoption of SFAS No. 109 was immaterial, as would have been the impact
had SFAS No. 112 been adopted.
The Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective retroactively to
January 1, 1992. This statement requires that certain benefits be recorded on
the accrual basis, over an employee's service period, rather than on a cash
basis. The Company recorded a one-time, after-tax, non-cash charge of $22.6
million to recognize the accumulated obligation for retirees and active
employees as of January 1, 1992. The pre-tax annual retiree benefit
expense recorded in 1993 was $1.2 million as compared to $5.4 million in 1992.
The decrease in 1993 is due to a plan amendment which was effective December,
1992, and resulted in a prior service gain which is being amortized
prospectively.
PRESCRIPTION DRUGS,HEALTH AND BEAUTY AIDS
- ------------------------------------------------------------
($ in millions) 1993 1992 1991
- ------------------------------------------------------------
Net Sales $3,948.2 $3,632.1 $3,526.4
Operating profit before
realignment charge 195.7 208.6 206.1
Operating profit 195.7 149.2 206.1
- ------------------------------------------------------------
Pecent change from prior year
- ------------------------------------------------------------
Net Sales 8.7 3.0 31.6
Same stores sales 5.7 7.7 5.5
Operating profit before
realignment charge (6.2) 1.2 3.8
Operating profit 31.2 (27.6) 3.8
- ------------------------------------------------------------
Percent of consolidated total
- ------------------------------------------------------------
Net Sales 37.9 34.9 35.7
Operating profit* 30.8 40.3 30.2
============================================================
*Before corporate expenses.
CVS achieved very favorable increases in both net sales
and same store sales in 1993, with particularly strong increases in the fourth
quarter reflecting 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.
Lower margined third party sales increased 24.1% in 1993 and 25.0% in
1992 due to an expansion of the division's managed care business and the
success of several key marketing strategies. Various micro-marketing
initiatives, and an expansion of private label merchandise lines, also helped
to increase front store sales in 1993 and 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.
In 1991, net sales increased 31.6% due to the inclusion of Peoples Drug
Stores, acquired in 1990. After adjusting for this acquisition and the
disposition of the Freddy's division, net sales would have increased 14.4% in
1991.
Operating profit before the realignment charge decreased in 1993 due to
the impact of increasing lower margined prescription sales and incremental
costs of rolling out new point of sale and pharmacy systems which will not
yield any benefits until 1994.
The 1992 realignment charge related principally to the Peoples Drug
Stores remodeling program which was completed in 1993.
APPAREL
- -------------------------------------------------------------
($ in millions) 1993 1992 1991
- -------------------------------------------------------------
Net Sales $3,395.9 $3,486.1 $3,243.2
Operating profit before
realignment charge 181.9 230.3 223.0
Operating profit 181.9 125.9 223.0
- -------------------------------------------------------------
Pecent change from prior year
- -------------------------------------------------------------
Net Sales (2.6) 7.5 6.8
Same stores sales (3.6) 3.1 (0.6)
Operating profit before
realignment charge (21.0) 3.3 (7.1)
Operating profit 44.5 (43.5) (7.1)
- -------------------------------------------------------------
Percent of consolidated total
- -------------------------------------------------------------
Net Sales 32.5 33.4 32.8
Operating profit* 28.6 34.0 32.7
=============================================================
*Before corporate expenses.
The 1993 decrease in net sales was due to the sale of Chess King and
Accessory Lady, and a shift in consumer spending to more durable and home
related goods which resulted in lower net sales at Wilsons and decreased same
store sales at Marshalls. Net sales at Marshalls increased 2.3% over
1992, with its gifts and domestics department experiencing a 10.0% increase.
Adjusting for the divisions sold, net sales in the segment increased 2.3% in
1993.
In contrast, Marshalls and Wilsons experienced strong sales growth in
1992, which was overshadowed by a very weak performance at Chess King. The
protracted economic recession, especially in the Northeast and Southern
California, negatively impacted this segment's performance in 1991.
Operating profit before realignment charge decreased in 1993 because of
lower gross margin at Marshalls resulting from heightened promotional activity
throughout the apparel industry. This was partially offset by the exclusion of
the unprofitable Chess King division and strong expense control at both
Marshalls and Wilsons, achieved through investments in technology and the
reengineering of business processes.
Despite the negative impact of decreased sales and profits for a third
successive year at Chess King, operating profit in 1992 before the realignment
charge increased from 1991 due to strong sales at Marshalls, coupled with
strict expense control at Marshalls and Wilsons.
The realignment charge recorded in 1992 related to the writedown of
certain non-performing assets as well as an estimated loss on sale for the
Chess King and Accessory Lady divisions.
FOOTWEAR
- ----------------------------------------------------------------------------
($ in millions) 1993 1992 1991
- ----------------------------------------------------------------------------
Net sales $1,713.1 $1,840.0 $1,747.4
Operating profit before
realignment charge 169.0 180.0 161.9
Operating profit 169.0 92.0 161.9
- ----------------------------------------------------------------------------
Percent change from prior year
- ----------------------------------------------------------------------------
Net sales (6.9) 5.3 1.9
Same store sales (2.5) (1.8) (1.4)
Operating profit before
realignment charge (6.1) 11.2 3.8
Operating profit 83.7 (43.2) 3.8
- ----------------------------------------------------------------------------
Percent of consolidated total
- ----------------------------------------------------------------------------
Net sales 16.4 17.6 17.7
Operating profit* 26.6 24.9 23.7
============================================================================
*Before corporate expenses.
Net sales increases in 1993 at Meldisco and FootAction were offset by a
decline in net sales at Thom McAn, resulting from the exclusion from
operations of about 390 stores designated to be closed under the strategic
realignment program and the discontinuation of its men's athletic and
children's departments. Adjusting for stores excluded at Thom McAn, net
sales in the segment would have increased 2.2%.
Net sales in this segment increased 5.3% in 1992 due to the acquisition
of FootAction in November, 1991 coupled with a modest sales increase at
Meldisco. The continued lack of appeal of the traditional family footwear
business represented by Thom McAn, however, as well as the closing of 68 of
its stores, negatively impacted the sales results. Adjusting to exclude the
impact of FootAction, net sales would have decreased 0.1% in 1992.
Operating profit before the realignment charge decreased from 1992 due
to lower same store sales in the segment, particularly at Thom McAn, and a
higher level of mark-downs, which offset the increase in initial markon at
Meldisco as it continues to expand its direct purchasing program in the Far
East. Meldisco's overseas buying program 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, over 60 are planned for 1994.
TOYS AND HOUSEHOLD FURNISHINGS
- ----------------------------------------------------------------------------
($ in millions) 1993 1992 1991
- ----------------------------------------------------------------------------
Net sales $1,378.2 $1,474.7 $1,369.2
Operating profit before
realignment charge 89.1 98.1 91.4
Operating profit 89.1 2.9 91.4
- ----------------------------------------------------------------------------
Percent change from prior year
- ----------------------------------------------------------------------------
Net sales (6.5) 7.7 8.9
Same store sales (2.5) 1.6 (5.0)
Operating profit before
realignment charge (9.1) 7.3 (30.1)
Operating profit 2,946.4 (96.8) (30.1)
- ----------------------------------------------------------------------------
Percent of consolidated total
- ----------------------------------------------------------------------------
Net sales 13.2 14.1 13.8
Operating profit* 14.0 0.8 13.4
============================================================================
*Before corporate expenses.
Significant increases in net sales were reported at Linens 'n Things, due to
the successful rollout of its superstore format, and at This End Up, both of
which benefitted from the shift in spending to home furnishings and related
products. Despite these gains, the disposition of Prints Plus and a decrease
at Kay-Bee, due to the exclusion from operations of about 240 stores
designated to be closed under the strategic realignment program, declining
mall traffic and the lack of a "blockbuster" toy, led to an overall sales
decline in this segment as compared to last year. Adjusting for the stores
excluded and sold, net sales in 1993 increased 2.6% over 1992.
In both 1992 and 1991, 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 declined in 1993 from the 1992 pre-realignment level
due to a same store sales decrease at Kay-Bee and a decrease in its initial
markon resulting from changing sales mix, offset partially by a pre-tax LIFO
adjustment in 1993 of about $14.0 million. Double digit sales increases at
This End Up, due to both its Wood's End product line and its larger store
format, positively impacted operating profit in 1993, as did 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 coverting Linens 'n Things
stores to its superstore format. Of the remaining Kay-Bee stores designated
to be closed, 90 are planned for 1994.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Melville Corporation:
We have audited the accompanying consolidated
balance sheets of Melville Corporation and
subsidiary companies as of December 31, 1993 and
1992 and the related consolidated statements of
earnings, shareholders' equity, and cash flows for
each of the years in the three-year period ended
December 31, 1993. These consolidated financial
statements are the responsibility of the Company's
management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial
statements referred to above present fairly, in
all material respects, the financial position of
Melville Corporation and subsidiary companies at
December 31, 1993 and 1992 and the results of
their operations and their cash flows for each of
the years in the three-year period ended December
31, 1993 in conformity with generally accepted
accounting principles.
As discussed in notes to consolidated
financial statements, the Company has adopted
Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" effective January 1,
1992 and changed its method of determining retail
price indices used in the valuation of LIFO
inventories in 1993.
/s/KPMG Peat Marwick
New York, New York
February 10, 1994, except as to the Subsequent
Event note, which is as of March 1, 1994
CONSOLIDATED STATEMENTS OF EARNINGS
Melville Corporation and Subsidiary Companies
($ in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------
Net sales $ 10,435,401 $ 10,432,843 $ 9,886,183
Cost of goods sold, buying and warehousing costs 6,664,395 6,529,239 6,163,853
- ------------------------------------------------------------------------------------------------------------------------
3,771,006 3,903,604 3,722,330
- ------------------------------------------------------------------------------------------------------------------------
Store operating, selling, general and administrative expenses 2,956,081 2,994,723 2,875,610
Depreciation and amortization 191,588 201,008 177,110
Realignment charge -- 346,979 --
- ------------------------------------------------------------------------------------------------------------------------
3,147,669 3,542,710 3,052,720
- ------------------------------------------------------------------------------------------------------------------------
Operating profit 623,337 360,894 669,610
Interest expense, net 23,810 25,398 29,512
- ------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes, minority interests and
cumulative effect of change in accounting principle 599,527 335,496 640,098
Provision for income taxes 220,441 125,696 242,949
- ------------------------------------------------------------------------------------------------------------------------
Earnings before minority interests and cumulative effect
of change in accounting principle 379,086 209,800 397,149
Minority interests in net earnings 47,296 53,820 50,468
- ------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of
change in accounting principle 331,790 155,980 346,681
Cumulative effect of change in accounting principle, net -- 22,551 --
- ------------------------------------------------------------------------------------------------------------------------
Net earnings $ 331,790 $ 133,429 $ 346,681
- ------------------------------------------------------------------------------------------------------------------------
Per Share of Common Stock
- ------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of change in
accounting principle $ 3.00 $ 1.34 $ 3.20
Cumulative effect of change in accounting principle, net -- 0.21 --
- ------------------------------------------------------------------------------------------------------------------------
Net earnings per share of common stock $ 3.00 $ 1.13 $ 3.20
========================================================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
Melville Corporation and Subsidiary Companies
($ in thousands, except per share data)
- -----------------------------------------------------------------------------
As of December 31 1993 1992
- -----------------------------------------------------------------------------
Assets
- -----------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 80,971 $ 145,138
Accounts receivable, net 243,998 245,204
Inventories 1,858,772 1,806,550
Prepaid expenses 214,649 244,780
- -----------------------------------------------------------------------------
Total Current Assets 2,398,390 2,441,672
- -----------------------------------------------------------------------------
Property, plant, equipment and leasehold improvements, at cost:
Land 25,584 20,016
Buildings and improvements 186,025 173,284
Fixtures and equipment 1,051,152 980,604
Leasehold improvements 623,403 640,454
- -----------------------------------------------------------------------------
1,886,164 1,814,358
Less accumulated depreciation and amortization 583,964 606,487
- -----------------------------------------------------------------------------
Net property, plant, equipment and leasehold
improvements 1,302,200 1,207,871
Leased property under capital leases, net of
accumulated amortization 14,677 17,168
Deferred charges and other assets 113,455 117,433
Goodwill, net of accumulated amortization of
$81,531 in 1993 and $68,789 in 1992 443,678 429,918
- -----------------------------------------------------------------------------
Total Assets $ 4,272,400 $ 4,214,062
=============================================================================
See accompanying notes to consolidated financial statements.
($ in thousands, except per share data)
- -----------------------------------------------------------------------------
As of December 31 1993 1992
- -----------------------------------------------------------------------------
Liabilities
- -----------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 567,131 $ 676,519
Accrued expenses 585,997 609,166
Notes payable 90,000 --
Federal income taxes 74,376 87,073
Other current liabilities 10,593 8,161
- -----------------------------------------------------------------------------
Total Current Liabilities 1,328,097 1,380,919
- -----------------------------------------------------------------------------
Long-term debt 341,763 349,013
Deferred income taxes 83,333 22,125
Other long-term liabilities 177,173 283,834
Minority interests in subsidiaries 93,858 100,233
- -----------------------------------------------------------------------------
Redeemable Preferred Stock
- -----------------------------------------------------------------------------
Cumulative preferred stock, Series B, $4.00 dividend,
par value $100, redeemable at par plus accrued
dividends; authorized and issued 17,269 shares
in 1993 and 1992; 3,971 and 3,896 shares held in
treasury in 1993 and 1992, respectively 1,330 1,337
- -----------------------------------------------------------------------------
Shareholders' Equity
- -----------------------------------------------------------------------------
Preference stock, $1.00 par value, authorized
50,000,000 shares; Series One ESOP Convertible,
liquidation value $53.45; 6,498,514 issued and
outstanding in 1993 and 6,596,501 in 1992 347,346 352,583
Guaranteed ESOP Obligation (328,570) (335,877)
Common stock, par value $1.00, authorized
300,000,000 shares, issued 111,278,470 and
111,150,265, outstanding 105,346,356 and
104,733,054, net of treasury shares, in
1993 and 1992, respectively 111,278 111,150
Capital surplus 42,123 53,302
Retained earnings 2,364,322 2,208,875
Common stock in treasury, at cost; 5,932,114 and
6,417,211 shares in 1993 and 1992, respectively (289,653) (313,432)
- -----------------------------------------------------------------------------
Total Shareholders' Equity 2,246,846 2,076,601
- -----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 4,272,400 $ 4,214,062
=============================================================================
See accompanying notes to consolidated financial statements.
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
1993, 1992 and 1991 Stock ESOP Obligation Stock Surplus Earnings Stock
- --------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1990 $ 356,928 $(347,200) $ 110,319 $ 29,245 $ 2,063,391 $(360,750)
- --------------------------------------------------------------------------------------------------------------------------------
Net earnings 346,681
Reissuance of common stock held in treasury
for business acquired (885,719 shares) (5,664) 43,418
Purchase of Series B preferred shares for
treasury (3,028 shares) 45
Conversion of Series One ESOP Preference
Stock through the reissuance of common
stock held in treasury (30,928 shares) (1,653) 137 1,516
Dividends:
Series One ESOP Convertible Preference
Stock ($3.90 per share,) net (15,778)
Series B preferred ($4.00 per share) (58)
Common ($1.44 per share) (148,536)
Exercise of stock options and restricted
shares issued under stock plans 356 12,783
Conversion of Subordinated Debentures 3 17
Reduction of Guaranteed ESOP Obligation 5,037
- --------------------------------------------------------------------------------------------------------------------------------
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 restricted shares
issued 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 restricted shares
issued 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 $(289,653)
================================================================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Melville Corporation and Subsidiary Companies
($ in thousands)
- ----------------------------------------------------------------------------
Years ended December 31 1993 1992 1991
- ----------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 331,790 $ 133,429 $ 346,681
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 191,588 201,008 177,110
Minority interests in net earnings 47,296 53,820 50,468
Increase (decrease) in deferred income
taxes and other noncash items 15,595 (93,417) (10,130)
Change in assets and liabilities,
excluding acquisitions and dispositions:
Decrease (increase) in accounts
receivable, net 33,484 (31,728) (45,371)
Increase in inventories (86,344) (25,184) (216,380)
Increase in prepaid expenses, deferred
charges and other assets (16,854) (27,163) (15,198)
(Decrease) increase in accounts payable
and accrued expenses (120,182) (7,371) 76,434
Increase (decrease) in Federal income
taxes payable and other liabilities 23,281 (28,549) 6,199
- ----------------------------------------------------------------------------
Net Cash Provided by Operating Activities 419,654 559,411 369,813
- ----------------------------------------------------------------------------
Cash Flows From Investing Activities:
Additions to property, plant, equipment
and leasehold improvements (386,724) (304,345) (253,072)
Proceeds from the sale or disposal of
property, plant, equipment and leasehold
improvements, leased property under
capital leases, and operations sold 97,940 81,655 58,081
Acquisitions, net of cash acquired (41,534) (25,687) (42,206)
- ----------------------------------------------------------------------------
Net Cash Used in Investing Activities (330,318) (248,377) (237,197)
- ----------------------------------------------------------------------------
Cash Flows From Financing Activities:
Dividends paid (229,409) (239,467) (225,256)
Additions to (reductions of) notes payable 90,000 (50,000) 50,000
(Decrease) increase in book overdrafts (6,701) 39,050 20,902
Proceeds from the issuance of common stock 5,799 15,537 10,720
Reductions of long-term debt and
obligations under capital leases (13,190) (9,641) (22,384)
Other (2) (49) 983
- ----------------------------------------------------------------------------
Net Cash Used in Financing Activities (153,503) (244,570) (165,035)
- ----------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (64,167) 66,464 (32,419)
Cash and cash equivalents at beginning
of year 145,138 78,674 111,093
- ----------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 80,971 $ 145,138 $ 78,674
============================================================================
See accompanying notes to consolidated financial statements.
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 insignificant. 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 through 1994 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 17.2% valued on a last-in, first-out (LIFO) basis. Inventories of
the manufacturing operations are determined primarily on a first-in, first-out
(FIFO) basis.
Fixed Assets: Depreciation and amortization of property, plant, equipment
and leasehold improvements have been provided in the consolidated financial
statements 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.
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.
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 (the "ESOP
Preference Stock") is recorded as a credit to retained earnings.
Accounting Changes: Effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"), the cumulative effect of which was not material to
the consolidated financial statements and is therefore not presented
separately. Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to the differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the year in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date; this effect was immaterial in 1993.
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 Statement of Financial
Accounting Standards 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. The tax benefit of dividends on the ESOP
Preference Stock included in the calculation was $10.1 million in 1993 and
1992, and $10.2 million in 1991.
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. Fully diluted earnings per share is not presented for
1992 since the effect is anti-dilutive.
Reclassifications: Certain reclassifications have been made to the
consolidated financial statements of prior years to conform to the 1993
presentation.
ACQUISITIONS AND DISPOSITIONS
During 1993, the Company acquired the assets of 50 prescription drugs, health
and beauty aids stores, 31 leather apparel stores and 10 stores selling
branded athletic footwear and apparel, for an aggregate of $38.8 million
in cash. These acquisitions have been accounted for using the purchase method
and resulted in goodwill of $26.1 million. Results of operations are included
in
the consolidated financial statements from their respective dates of
acquisition.
The Company also acquired all outstanding stock of a chain of nine
prescription drugs, health and beauty aids stores in exchange for 387,110
shares of the Company's common stock, which were reissued from treasury. This
acquisition was accounted for as a pooling of interests. Previously reported
financial statements have not been restated to include results of the acquired
company's operations as revenues and earnings prior to acquisition were not
material to the consolidated financial results of the Company. The difference
between the net book value of the acquired business and the cost of shares
reissued has been recorded in capital surplus.
The Company completed the sale of its Chess King, Prints Plus and
Accessory Lady divisions effective May 17, May 29 and October 16, 1993,
respectively, for aggregate proceeds of $77.1 million, including a note
receivable of $29.4 million. The aggregate loss on disposition of $85.0
million, inclusive of goodwill write-offs and losses from operations through
the dates of disposition, was provided for as part of the strategic
realignment charge recorded in 1992.
Pro forma financial results have not been presented for the effect of
these transactions since 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) 1993 1992
- -------------------------------------------------------------------
Trade accounts $ 216,062 $ 195,820
Other 60,470 74,515
- -------------------------------------------------------------------
276,532 270,335
Less allowance for doubtful
accounts 32,534 25,131
- -------------------------------------------------------------------
$ 243,998 $ 245,204
===================================================================
INVENTORIES
Inventories at December 31 consisted of the following:
- ------------------------------------------------------------------
($ in thousands) 1993 1992
- -------------------------------------------------------------------
Finished goods $1,849,651 $1,790,780
Work-in-process 1,616 1,143
Raw materials and supplies 7,505 14,627
- ------------------------------------------------------------------
$1,858,772 $1,806,550
==================================================================
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 $22.4 million and $33.7 million at
December 31, 1993 and 1992, respectively.
PREPAID EXPENSES
Prepaid expenses at December 31 consisted of the following:
- ----------------------------------------------------------
($ in thousands) 1993 1992
- ----------------------------------------------------------
Deferred income taxes $133,362 $167,834
Other 81,287 76,946
- ----------------------------------------------------------
$214,649 $244,780
==========================================================
ACCRUED EXPENSES
Accrued expenses at December 31 consisted of the following:
- ----------------------------------------------------------
($ in thousands) 1993 1992
- ----------------------------------------------------------
Taxes other than Federal
income taxes $114,627 $136,194
Rents 74,985 85,781
Strategic realignment reserve 3,570 100,905
Other 392,815 286,286
- ----------------------------------------------------------
$585,997 $609,166
==========================================================
SHORT-TERM BORROWING ARRANGEMENTS
At December 31, 1993, $90.0 million in commercial paper borrowings were
outstanding bearing interest at a rate of 3.3%. There were no short-term
borrowings outstanding at December 31, 1992.
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, 1993 and 1992. Lines
of credit available at December 31, 1993 and 1992, including lines available
for letters of credit, were $630.0 million and $600.4 million, respectively.
Letters of credit outstanding against these lines were approximately $323.4
million and $288.1 million as of December 31, 1993 and 1992, respectively.
The Company can also obtain short-term financing through the issuance of
commercial paper and bank loan participation notes, and is not obligated under
any formal or informal compensating balance agreements.
LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
- ----------------------------------------------------------
($ in thousands) 1993 1992
- ----------------------------------------------------------
Guaranteed ESOP note, 8.60%,
payable in various installments
through 2008* $340,100 $343,500
Other notes and mortgages payable 8,944 10,001
- ----------------------------------------------------------
349,044 353,501
Less current installments 7,281 4,488
- ----------------------------------------------------------
$341,763 $349,013
==========================================================
*See Employee Stock Ownership Plan footnote.
The aggregate long-term debt maturing during each of the next five years
is as follows: $7.3 million in 1994, $10.4 million in 1995, $13.8 million in
1996, $17.5 million in 1997 and $21.7 million in 1998.
Interest costs excluding the guaranteed ESOP note were $25.8 million in
1993, $26.7 million in 1992, and $31.2 million in 1991, which included
interest costs recognized in connection with the Company's contribution to the
ESOP. Interest income and capitalized interest totaled $2.0 million in 1993,
$1.3 million in 1992 and $1.7 million in 1991.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities at December 31 consisted of the
following:
- ----------------------------------------------------------------
($ in thousands) 1993 1992
- ----------------------------------------------------------------
Strategic realignment reserve $ 6,996 $ 142,242
Other 170,177 141,592
- ----------------------------------------------------------------
$177,173 $ 283,834
================================================================
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.
Leased property under capital leases at December 31 included:
- ----------------------------------------------------------------
($ in thousands) 1993 1992
- ----------------------------------------------------------------
Retail facilities $ 25,262 $ 33,198
Warehouse, plant and office
facilities 22,603 22,508
- ----------------------------------------------------------------
47,865 55,706
Less accumulated amortization 33,188 38,538
- ----------------------------------------------------------------
$ 14,677 $ 17,168
================================================================
At December 31, 1993, the future minimum lease payments under capital
leases, rental payments required under operating leases, and the future
minimum sublease rentals excluding lease obligations for closed stores were as
follows:
- ------------------------------------------------------------------
Capital Operating
($ in thousands) Leases Leases
- ------------------------------------------------------------------
1994 $ 6,176 $ 473,748
1995 5,790 444,389
1996 5,458 404,558
1997 4,990 371,487
1998 4,376 365,228
Thereafter 16,594 1,326,055
- ------------------------------------------------------------------
Total $ 43,384 $3,385,465
Less amount representing interest 17,228
- ------------------------------------------------------------------
Present value of minimum
lease payments $ 26,156
- ------------------------------------------------------------------
Total future minimum sublease
rentals $ 1,862 $ 25,865
==================================================================
Net rental expense for all operating leases for the years ended December
31 was as follows:
- ---------------------------------------------------------------------------
($ in thousands) 1993 1992 1991
- ---------------------------------------------------------------------------
Minimum rentals $ 496,555 $ 480,505 $ 447,779
Contingent rentals 192,905 207,106 198,584
- ---------------------------------------------------------------------------
689,460 687,611 646,363
Less sublease rentals 6,286 5,085 3,860
- ---------------------------------------------------------------------------
$ 683,174 $ 682,526 $ 642,503
===========================================================================
Contingent rentals are principally those for leased shoe departments
operated under license agreements with Kmart Corporation. These agreements are
for terms of 25 years, provide for rental payments based on sales and profits
and require certain performance standards. The remaining terms of license
agreements in existence at December 31, 1993 ranged from 6 to 25 years.
The balance of contingent rentals relate to other Company operations and
are based only on sales.
CONTINGENCIES
In connection with dispositions completed in 1991, 1992 and 1993, including
Chess King, Melville Realty Company, Inc. ("MRC"), a wholly owned subsidiary
of the Company, continues to guarantee rental and other lease-related charges
on 720 leases for retail stores and warehouse and office facilities. The
present value of these minimum rental payments at December 31, 1993 was
approximately $189.0 million. See subsequent event footnote regarding
guarantees of Chess King leases.
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.
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.
The 1989 Directors' Stock Option Plan ("Directors' Plan") for nonemployee
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 granted at the fair market
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, 1990 2,532,148 $ 12.41 / $ 54.75
Granted 667,250 39.75 / 49.31
Exercised 321,108 12.41 / 52.00
Cancelled 63,650 28.69 / 52.00
- ------------------------------------------------------------------
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
- ------------------------------------------------------------------
Exercisable at
December 31, 1993 2,787,150 $ 18.19 / $ 54.75
==================================================================
Restricted stock awards granted under the Plan are subject to certain
conditions, and restrictions are lifted generally three years after the grant
date.
Restricted stock grants under the Plan totaled 2,225 in 1993, 12,265 in
1992 and 39,060 in 1991. The fair market value as of the grant date was $0.1
million, $0.6 million and $1.8 million for 1993, 1992 and 1991, respectively.
Additionally, 420 shares, 2,030 shares and 1,520 shares were cancelled in
1993, 1992 and 1991, respectively.
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.
During 1993, 54,301 performance based restricted share units were
awarded at a fair market value of $2.6 million. During 1992 and 1991, 70,745
and 61,970 performance share units were awarded at a fair market value of $3.4
million and $3.1 million, respectively.
At December 31, 1993 2,181,629 shares were available for grant under the
Plan and 82,000 shares of stock were available for grant under the Directors'
Plan.
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 $37.6 million for
active employees and retirees.
The weighted average discount rate used to determine the APBO was 6.9%
and 8.0% at December 31, 1993 and 1992, respectively. The following table
reflects the APBO as of December 31:
- ------------------------------------------------------------
($ in thousands) 1993 1992
- ------------------------------------------------------------
Retirees $19,400 $16,300
Fully eligible active
plan participants 2,800 2,900
Other active plan participants 12,000 10,000
- ------------------------------------------------------------
APBO 34,200 29,200
Unrecognized prior service gain 15,200 16,700
Unrecognized net loss (4,000) --
- ------------------------------------------------------------
Accrued APBO $45,400 $45,900
============================================================
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) 1993 1992
- -------------------------------------------------------
Interest expense $ 2,200 $ 3,300
Service cost (1,000)* 2,100
- -------------------------------------------------------
$ 1,200 $ 5,400
=======================================================
* Net of prior service gain amortization.
For measurement purposes, a 12.0% increase in the cost of covered
health-care benefits was assumed for 1993; 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 January
1, 1993 by $4.5 million, and the 1993 annual expense by $0.5 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 $20.3 million, $17.9 million and $15.1
million in 1993, 1992 and 1991, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors a defined contribution plan for all full-time employees
through its ESOP.
The ESOP Trust (the "Trust") borrowed $357.5 million at an interest rate
of 8.6% 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.
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.
Dividends paid were $29.6 million, $25.8 million and $25.9 million in December
1993, October 1992 and October 1991, respectively. Cash contributions made by
the Company were $7.9 million, $7.4 million and $4.1 million, respectively, in
the same periods. Interest costs incurred by the Trust were approximately
$29.5 million in 1993, $29.8 million in 1992 and $29.9 million in 1991.
Compensation expense of $5.7 million, $5.5 million, and $5.3 million was
recognized in 1993, 1992 and 1991, respectively. The difference between the
cash contribution and the expense recognized is credited to the Guaranteed
ESOP Obligation.
INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109. The
cumulative effect of this accounting change was not material.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the
amounts used for income tax purposes. Significant components of the Company's
deferred tax assets and liabilities as of December 31, were as follows:
- --------------------------------------------------------
($ in thousands) 1993
- --------------------------------------------------------
Deferred tax assets:
Inventories $ 30,852
Other assets 21,920
Employee benefits 53,915
- --------------------------------------------------------
Total deferred tax assets 106,687
- --------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment 56,658
- --------------------------------------------------------
Net deferred tax assets $ 50,029
========================================================
The provision for income taxes at December 31 consisted of the
following:
- --------------------------------------------------------
($ in millions) 1993 1992 1991
- --------------------------------------------------------
Federal $ 170.2 $ 99.1 $ 189.4
State 50.2 26.6 53.5
- --------------------------------------------------------
$ 220.4 $ 125.7 $ 242.9
========================================================
Reconciliations of the effective tax rates to the U.S. statutory income
tax rate are as follows:
- --------------------------------------------------------
Percent of pre-tax income 1993 1992 1991
- --------------------------------------------------------
Effective tax rate 36.8 37.5 38.0
State income taxes, net of
Federal tax benefit (5.4) (5.2) (5.5)
51% owned subsidiaries
excluded from the
consolidated Federal
income tax return 2.6 4.4 2.2
Goodwill (0.8) (3.9) (0.7)
Other 1.8 1.2 --
- --------------------------------------------------------
Statutory income tax rate 35.0 34.0 34.0
========================================================
The provision for income taxes includes a net deferred tax benefit of
$103.4 million in 1993, and net deferred tax charges of $97.6 million in 1992
and $1.2 million in 1991. For 1992 and 1991, deferred income taxes relate
principally to costs associated with the strategic realignment program, the
capitalization of inventory costs, depreciation, employee related benefits,
and leased property under capital leases.
SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended December 31, the Company had the following non-cash
financing and investing activities:
- ---------------------------------------------------------------------
($ in thousands) 1993 1992 1991
- ---------------------------------------------------------------------
Fair value of
assets acquired $ 61,144 $ 26,417 $ 129,306
Fair value of common
stock reissued
from treasury -- -- 37,754
Cash paid 38,814 25,691 40,480
- ---------------------------------------------------------------------
Liabilities assumed $ 22,330 $ 726 $ 51,072
- ---------------------------------------------------------------------
Book value of common
stock issued in
pooling of interests $ 18,976 $ -- $ --
Notes received for
operations sold 29,413 -- 19,201
=====================================================================
Cash payments for income taxes and interest for the year ended December
31 were as follows:
- ---------------------------------------------------------------------
($ in thousands) 1993 1992 1991
- ---------------------------------------------------------------------
Income taxes $ 157,240 $ 236,975 $ 223,094
Interest (net of
amounts capitalized) 25,747 26,628 30,317
=====================================================================
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS No.
112") which requires the recognition of an obligation for benefits provided to
former or inactive employees after employment but before retirement, must be
implemented in fiscal 1994. Had the Company adopted SFAS No. 112 in 1993, the
impact would have been immaterial to the consolidated financial statements.
SUBSEQUENT EVENT
Included in accounts receivable is a $29.4 million note received in connection
with the sale of the Chess King division (the "Note"). Subsequent to year end,
the issuer of the Note (the "Purchaser") filed for protection under Chapter 11
of the United States Bankruptcy Code. On March 1, 1994, the Company sold the
Note to a third party and realized a loss of approximately $4.0 million, which
was recorded in the 1993 consolidated financial statements.
MRC continues to guarantee rental and lease related charges for 423 of
the Chess King leases sold, the present value of which is approximately $91.0
million. Pursuant to the terms of sale of the Note, the Company will be
indemnified for 52.5% of any costs incurred under these guarantees for the
duration of the Purchaser's bankruptcy. As such, the Company's potential
liability under the guarantees is uncertain.
SUMMARY OF QUARTERLY RESULTS
- -----------------------------------------------------------------------------
(Unaudited; $ in thousands, except per share data)
- -----------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Net Sales
1993 $ 2,033,011 $ 2,537,395 $ 2,355,376 $ 3,509,619
1992 2,059,351 2,495,073 2,390,584 3,487,835
- -----------------------------------------------------------------------------
Gross Profit
- -----------------------------------------------------------------------------
1993 $ 694,749 $ 926,835 $ 853,159 $ 1,296,263
1992 731,520 948,978 892,344 1,330,762
- -----------------------------------------------------------------------------
Earnings (Loss) before Cumulative Effect of Change in Accounting Principle
- -----------------------------------------------------------------------------
1993 $ (21,686) $ 74,525 $ 41,504 $ 237,447
1992 (13,609) 77,077 55,269 37,243
- -----------------------------------------------------------------------------
Net Earnings (Loss)
- -----------------------------------------------------------------------------
1993 $ (21,686) $ 74,525 $ 41,504 $ 237,447
1992 (36,160) 77,077 55,269 37,243
- -----------------------------------------------------------------------------
Earnings (Loss) Per Share before Cumulative Effect of Change in Accounting
Principle
- -----------------------------------------------------------------------------
1993 Primary $ (.24) $ .67 $ .35 $ 2.22
1993 Fully Diluted * (.24) .67 .35 2.12
1992 Primary (.17) .70 .49 .32
- -----------------------------------------------------------------------------
Net Earnings (Loss) Per Share
- -----------------------------------------------------------------------------
1993 Primary $ (.24) $ .67 $ .35 $ 2.22
1993 Fully Diluted * (.24) .67 .35 2.12
1992 Primary (.38) .70 .49 .32
=============================================================================
*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
- ------------------------------------------------------------------------------------------------
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
1992 42 1/2--52 43 1/2--51 1/4 44 1/4--50 7/8 47 1/2--55 42 1/2--55
- ------------------------------------------------------------------------------------------------
Dividends Paid Per Share
- ------------------------------------------------------------------------------------------------
1993 $ .38 $ .38 $ .38 $ .38 $ 1.52
1992 .37 .37 .37 .37 1.48
================================================================================================
SEGMENT INFORMATION
The Company is a specialty retailer conducting business through retail stores
in four business segments: prescription drugs,
health and beauty aids; apparel; footwear; and toys and household furnishings.
Information about operations for each of these
segments is summarized as follows:
- -------------------------------------------------------------------------------------------------------------------------
($ in thousands) 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
Prescription Drugs, Health and Beauty Aids
- -------------------------------------------------------------------------------------------------------------------------
Net sales $ 3,948,197 $ 3,632,066 $ 3,526,401
Operating profit (a) 195,670 149,182 206,106
Identifiable assets at December 31 1,592,964 1,492,471 1,525,541
Depreciation and amortization 56,883 60,233 55,985
Additions to property, plant, equipment and leasehold improvements 104,592 111,802 74,281
- -------------------------------------------------------------------------------------------------------------------------
Apparel
- -------------------------------------------------------------------------------------------------------------------------
Net sales 3,395,926 3,486,065 3,243,159
Operating profit (a) 181,922 125,893 222,968
Identifiable assets at December 31 1,348,385 1,378,091 1,308,957
Depreciation and amortization 75,963 78,566 69,898
Additions to property, plant, equipment and leasehold improvements 154,247 105,037 117,626
- -------------------------------------------------------------------------------------------------------------------------
Footwear
- -------------------------------------------------------------------------------------------------------------------------
Net sales 1,713,093 1,840,022 1,747,415
Operating profit (a) 168,979 91,984 161,876
Identifiable assets at December 31 568,015 572,344 582,858
Depreciation and amortization 20,937 22,293 19,198
Additions to property, plant, equipment and leasehold improvements 45,924 26,973 18,908
- -------------------------------------------------------------------------------------------------------------------------
Toys and Household Furnishings
- -------------------------------------------------------------------------------------------------------------------------
Net sales 1,378,185 1,474,690 1,369,208
Operating profit (a) 89,138 2,926 91,439
Identifiable assets at December 31 655,290 639,764 632,133
Depreciation and amortization 34,797 37,454 30,832
Additions to property, plant, equipment and leasehold improvements 70,948 47,191 41,031
- -------------------------------------------------------------------------------------------------------------------------
Consolidated
- -------------------------------------------------------------------------------------------------------------------------
Net sales $10,435,401 $10,432,843 $ 9,886,183
Operating profit before corporate expenses (a) 635,709 369,985 682,389
Corporate expenses excluding depreciation and amortization (b) 9,364 6,629 11,582
Corporate depreciation and amortization 3,008 2,462 1,197
Interest expense, net 23,810 25,398 29,512
- -------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and minority interests $ 599,527 $ 335,496 $ 640,098
- -------------------------------------------------------------------------------------------------------------------------
Identifiable assets at December 31 $ 4,164,654 $ 4,082,670 $ 4,049,489
Corporate assets 107,746 131,392 35,746
- -------------------------------------------------------------------------------------------------------------------------
Total assets at December 31 $ 4,272,400 $ 4,214,062 $ 4,085,235
- -------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 191,588 $ 201,008 $ 177,110
- -------------------------------------------------------------------------------------------------------------------------
Corporate additions to property, plant, equipment and
leasehold improvements 11,013 13,342 1,226
Total additions to property, plant, equipment and
leasehold improvements $ 386,724 $ 304,345 $ 253,072
=========================================================================================================================
<FN>
Operating profit is defined as total revenues less operating expenses. Identifiable assets include those assets directly
related to each segment's operations.
Capital additions exclude acquisitions.
(a) In 1992, includes the effect of the strategic realignment charge.
(b) Includes general corporate expenses as well as net expenses related to other corporate managed subsidiaries.
</FN>
FIVE-YEAR FINANCIAL SUMMARY
Melville Corporation and Subsidiary Companies
($ in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------------
Results for the Year 1993(a) 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------------
Net Sales $10,435,401 $10,432,843 $ 9,886,183 $ 8,686,765 $ 7,553,971
Wages and Compensation 1,338,881 1,315,564 1,257,756 1,053,440 969,309
Taxes 449,563 329,778 439,272 419,038 400,273
Earnings before Income Taxes, Minority
Interests and Cumulative Effect of
Change in Accounting Principle 599,527 335,496 640,098 687,338 704,305
Earnings before Cumulative Effect of Change in
Accounting Principle 331,790 155,980 346,681 385,261 398,076
Net Earnings 331,790 133,429 346,681 385,261 398,076
Dividends Declared 184,934 180,324 174,517 172,210 164,765
- --------------------------------------------------------------------------------------------------------------------------------
Per Share of Common Stock
- --------------------------------------------------------------------------------------------------------------------------------
Earnings before Cumulative Effect of
Change in Accounting Principle $ 3.00 $ 1.34 $ 3.20 $ 3.59 $ 3.56
Net Earnings 3.00 1.13 3.20 3.59 3.56
Dividends 1.52 1.48 1.44 1.42 1.30
Book Value 21.33 19.83 20.06 17.99 15.76
================================================================================================================================
End of Year Position
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets $ 2,398,390 $ 2,441,672 $ 2,369,993 $ 2,113,235 $ 1,874,530
Current Liabilities 1,328,097 1,380,919 1,330,227 1,147,717 808,863
Current Ratio 1.8 1.8 1.8 1.8 2.3
Total Assets $ 4,272,400 $ 4,214,062 $ 4,085,235 $ 3,662,157 $ 3,031,767
Total Long-Term Obligations and
Redeemable Preferred Stock 365,936 376,417 385,483 396,430 391,361
Percent of Long-Term Obligations to Total Capitalization 14.0 15.3 15.5 17.6 19.4
- --------------------------------------------------------------------------------------------------------------------------------
Property, Plant, Equipment and Leasehold Improvements
- --------------------------------------------------------------------------------------------------------------------------------
Net of Accumulated Depreciation and Amortization $ 1,302,200 $ 1,207,871 $ 1,105,287 $ 965,085 $ 766,560
Capital Additions 386,724 304,345 253,072 231,132 202,570
- --------------------------------------------------------------------------------------------------------------------------------
Percent of Net Sales
- --------------------------------------------------------------------------------------------------------------------------------
Earnings before Income Taxes, Minority
Interests and Cumulative Effect of
Change in Accounting Principle 5.7 3.2 6.5 7.9 9.3
Earnings before Cumulative Effect of Change in
Accounting Principle 3.2 1.5 3.5 4.4 5.3
Net Earnings 3.2 1.3 3.5 4.4 5.3
- --------------------------------------------------------------------------------------------------------------------------------
Return on Beginning Shareholders' Equity 16.0% 6.4% 18.7% 23.8% 23.3%
- --------------------------------------------------------------------------------------------------------------------------------
Number of Stores 7,282 8,213 8,293 7,754 6,930
================================================================================================================================
<FN>
(a) Excludes stores designated to be closed in connection with the 1992 strategic realignment program.
</FN>
EXHIBIT 18
February 10, 1994
The Board of Directors
Melville Corporation, Inc.
Dear Members:
We have audited the consolidated balance sheets of Melville Corporation and
subsidiary companies as of December 31, 1993 and 1992 and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31,1993, and have
reported thereon under date of February 10, 1994 except as to the Subsequent
Event note, which is as of March 1, 1994. The aforementioned consolidated
financial statements and our audit report thereon are included in the
Company's 1993 Annual Report to Shareholders which is incorporated by
reference in the Company's annual report on Form 10-K for the year ended
December 31, 1993. As stated on page 41 of the 1993 Annual Report to
Shareholders, the Company changed its method of determining retail price
indices used in the valuation of LIFO inventories in 1993, and states that the
newly adopted method is preferable in the circumstances because the indices
used in 1993 more accurately measure inflation or deflation in the Company's
own retail prices. In accordance with your request, we have reviewed and
discussed with Company officials the circumstances and business judgment and
planning upon which the decision to make this change in the method of
accounting was based.
With regard to the aforementioned accounting change, authoritative criteria
have not been established for evaluating the preferability of one acceptable
method of accounting over another acceptable method. However, for purposes of
Melville Corporation's compliance with the requirements of the Securities and
Exchange Commission, we are furnishing this letter.
Based on our review and discussion, with reliance on management's business
judgment and planning, we concur that the newly adopted method of accounting
is preferable in the Company's circumstances.
Very truly yours,
/s/KPMG PEAT MARWICK
KPMG Peat Marwick