-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ArRWQcZfPrpnJDYhQhs0c9BeRS/PgfZEIDd+jEAmLatlzNd8hdIHrn4GZlg5Ymot XFB9hhZjJ7qrPUZPSa5WIQ== 0000950135-96-004734.txt : 19961111 0000950135-96-004734.hdr.sgml : 19961111 ACCESSION NUMBER: 0000950135-96-004734 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960928 FILED AS OF DATE: 19961108 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MELVILLE CORP CENTRAL INDEX KEY: 0000064803 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 041611460 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01011 FILM NUMBER: 96656830 BUSINESS ADDRESS: STREET 1: ONE THEALL ROAD CITY: RYE STATE: NY ZIP: 10580 BUSINESS PHONE: 9149254000 MAIL ADDRESS: STREET 1: ONE THEALL ROAD CITY: RYE STATE: NY ZIP: 10580 FORMER COMPANY: FORMER CONFORMED NAME: MELVILLE SHOE CORP DATE OF NAME CHANGE: 19760630 10-Q 1 MELVILLE CORPORATION QUARTERLY REPORT ON FORM 10-Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended September 28, 1996 Commission File Number 1-1011 MELVILLE CORPORATION (Exact Name of registrant as specified in its charter) ---------- NEW YORK 04-1611460 (State or other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) One CVS Drive, Woonsocket, Rhode Island 02865 (401) 765-1500 (Address and telephone number of principal executive offices) ---------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Common Stock, $1 par value outstanding at November 5,1996 - 106,359,794 shares ================================================================================ 2 INDEX - -------------------------------------------------------------------------------- PART I. - FINANCIAL INFORMATION: - -------------------------------- Page ---- Consolidated Condensed Statements of Operations - Three and Nine Month Periods Ended September 28, 1996 and September 30, 1995 3 Consolidated Condensed Balance Sheets - As of September 28, 1996, December 31, 1995 and September 30, 1995 5 Consolidated Condensed Statements of Cash Flows - Nine Months Ended September 28, 1996 and September 30, 1995 7 Notes to Consolidated Condensed Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Review by Independent Auditors 14 Exhibit I - Report of Review by Independent Auditors 15 PART II. - OTHER INFORMATION: 16 - ----------------------------- 2 3 MELVILLE CORPORATION AND SUBSIDIARY COMPANIES Consolidated Condensed Statements of Operations (unaudited) (Dollars and shares in thousands except per share amounts)
Three Months Ended Nine Months Ended - ----------------------------------------------------------------------------------------------------------------------------- September 28, September 30, September 28, September 30, 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Net sales $1,356,277 $1,170,002 $3,978,218 $3,501,032 Cost of goods sold, buying, and warehousing costs 982,160 839,545 2,853,602 2,505,475 - --------------------------------------------------------------------------------------------------------------------------- Gross margin 374,117 330,457 1,124,616 995,557 - --------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 299,625 279,658 854,952 784,072 Depreciation and amortization 19,599 20,222 59,174 56,404 - --------------------------------------------------------------------------------------------------------------------------- Total operating expenses 319,224 299,880 914,126 840,476 - --------------------------------------------------------------------------------------------------------------------------- Operating profit 54,893 30,577 210,490 155,081 Gain on sale of securities 25,480 -- 102,105 -- Dividend income 147 -- 5,590 -- Interest expense, net (4,453) (16,588) (21,958) (37,233) - --------------------------------------------------------------------------------------------------------------------------- Other income (expense), net 21,174 (16,588) 85,737 (37,233) - --------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and cumulative effect of change in accounting principle 76,067 13,989 296,227 117,848 Income tax provision 31,186 1,129 119,913 43,711 - --------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before cumulative effect of change in accounting principle 44,881 12,860 176,314 74,137 Discontinued operations: Loss from operations, net of income tax benefits of $0, $4,202, $31,048 and $43,072 for the three and nine month periods ended September 28, 1996 and September 30, 1995, respectively -- (17,963) (54,823) (98,570) Estimated gain (loss) on disposal, net of income tax (provisions) benefits of $(15,195) and $55,289 for the three and nine month periods ended September 28, 1996, respectively 18,750 -- (106,192) -- - --------------------------------------------------------------------------------------------------------------------------- Earnings (loss) from discontinued operations 18,750 (17,963) (161,015) (98,570) - --------------------------------------------------------------------------------------------------------------------------- Earnings (loss) before cumulative effect of change in accounting principle 63,631 (5,103) 15,299 (24,433) Cumulative effect of change in accounting principle, net -- -- -- 22,315 Net earnings (loss) $ 63,631 $ (5,103) $ 15,299 $ (46,748) ===========================================================================================================================
See accompanying notes to consolidated condensed financial statements. 3 4 MELVILLE CORPORATION AND SUBSIDIARY COMPANIES Consolidated Condensed Statements of Operations (unaudited) (Dollars and shares in thousands except per share amounts)
Three Months Ended Nine Months Ended - ---------------------------------------------------------------------------------------------------------------------------------- September 28, September 30, September 28, September 30, 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Primary earnings per common share: Earnings from continuing operations before cumulative effect of change in accounting principle $ 0.39 $ 0.08 $ 1.57 $ 0.58 Earnings (loss) from discontinued operations, net 0.18 (0.17) (1.52) (0.94) - ---------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) before cumulative effect of change in accounting principle 0.57 (0.09) 0.05 (0.36) Cumulative effect of change in accounting principle, net -- -- -- (0.21) - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ 0.57 $ (0.09) $ 0.05 $ (0.57) ================================================================================================================================== Weighted average common shares outstanding 106,278 105,063 105,631 105,104 ================================================================================================================================== Fully diluted earnings per common share: Earnings from continuing operations before cumulative effect of change in accounting principle $ 0.38 $ 0.08 $ 1.57 $ 0.58 Earnings (loss) from discontinued operations, net 0.17 (0.17) (1.52) (0.94) - ---------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) before cumulative effect of change in accounting principle 0.55 (0.09) 0.05 (0.36) Cumulative effect of change in accounting principle, net -- -- -- (0.21) - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ 0.55 $ (0.09) $ 0.05 $ (0.57) ================================================================================================================================== Weighted average common shares outstanding 113,172 105,063 105,631 105,104 ================================================================================================================================== Dividends per common share $ 0.11 $ 0.38 $ 0.33 $ 1.14 ==================================================================================================================================
See accompanying notes to consolidated condensed financial statements. 4 5 MELVILLE CORPORATION AND SUBSIDIARY COMPANIES Consolidated Condensed Balance Sheets (Dollars and shares in thousands)
- ---------------------------------------------------------------------------------------------------------------------- September 28, December 31, September 30, 1996 1995 1995 (unaudited) (unaudited) - ---------------------------------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 89,513 $ 129,583 $ 80,062 Investments 44,441 175,000 -- Accounts receivable, less allowance for doubtful accounts of $28,291, $33,438 and $14,301 at September 28, 1996, December 31, 1995 and September 30, 1995, respectively 309,191 296,393 264,238 Inventories: Finished goods 1,569,706 1,661,677 2,568,467 Work-in-process -- 767 2,394 Raw materials and supplies -- 10,513 13,367 - -------------------------------------------------------------------------------------------------------------------- Total inventories 1,569,706 1,672,957 2,584,228 Prepaid expenses 253,433 285,995 170,419 - -------------------------------------------------------------------------------------------------------------------- Total current assets 2,266,284 2,559,928 3,098,947 Property and equipment, less accumulated depreciation and amortization of $412,308, $593,523 and $777,421 at September 28, 1996, December 31, 1995 and September 30, 1995, respectively 909,351 1,114,404 1,551,426 Deferred charges and other assets 146,198 91,612 118,276 Goodwill, net of accumulated amortization of $29,972, $28,152 and $105,563 at September 28, 1996, December 31, 1995, and September 30, 1995, respectively 173,211 195,618 438,404 - -------------------------------------------------------------------------------------------------------------------- Total assets $3,495,044 $3,961,562 $5,207,053 ====================================================================================================================
See accompanying notes to consolidated condensed financial statements. 5 6 MELVILLE CORPORATION AND SUBSIDIARY COMPANIES Consolidated Condensed Balance Sheets (Dollars and shares in thousands except per share amounts)
- --------------------------------------------------------------------------------------------------------------------------------- September 28, December 31, September 30, 1996 1995 1995 (unaudited) (unaudited) - --------------------------------------------------------------------------------------------------------------------------------- Liabilities: Accounts payable $ 569,103 $ 690,651 $ 875,391 Accrued expenses 837,963 1,039,825 539,100 Notes payable 4,000 52,000 940,000 Other current liabilities 14,569 15,212 14,247 - ------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,425,635 1,797,688 2,368,738 Long-term debt 321,264 327,698 332,056 Deferred income taxes 11,115 9,103 87,395 Other long-term liabilities 127,755 184,150 136,998 Minority interests in subsidiaries 49,537 93,830 79,516 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 with 4 shares held in treasury at September 28, 1996, December 31, 1995 and September 30, 1995 1,330 1,330 1,330 Shareholders' equity: Preference stock, par value $1.00, authorized 50,000 shares; Series One ESOP convertible, liquidation value $53.45; 5,818, 6,267 and 6,294 shares issued and outstanding at September 28, 1996, December 31, 1995 and September 30, 1995, respectively 310,976 334,947 336,424 Guaranteed ESOP obligation (309,675) (309,675) (321,096) Common stock, par value $1.00, authorized 300,000 shares, issued 112,229, 111,649 and 111,646 shares at September 28, 1996, December 31, 1995 and September 30, 1995, respectively; outstanding 106,128, 105,106 and 105,076 shares at September 28, 1996, December 31, 1995 and September 30, 1995, respectively, net or shares held in treasury 112,229 111,649 111,646 Capital surplus 76,425 54,878 54,708 Retained earnings 1,640,447 1,660,409 2,327,589 Unrealized gain on investments, net of tax 10,844 -- -- Cumulative translation adjustment 41 146 (2,306) Common stock in treasury, at cost, 6,101, 6,543 and 6,570 shares at September 28, 1996, December 31, 1995 and September 30, 1995, respectively (282,879) (304,591) (305,945) - ------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,558,408 1,547,763 2,201,020 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $3,495,044 $3,961,562 $5,207,053 ===============================================================================================================================
See accompanying notes to consolidated condensed financial statements. 6 7 11 MELVILLE CORPORATION AND SUBSIDIARY COMPANIES Consolidated Condensed Statements of Cash Flows (unaudited) (Dollars in thousands)
Nine Months Ended - ------------------------------------------------------------------------------------------------------------- September 28, September 30, 1996 1995 - ------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities $ 21,053 $(281,416) - ---------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property and equipment (175,343) (261,290) Proceeds from sale or disposal of property and equipment and operations or assets sold 165,676 17,718 Proceeds from sale of investments 252,105 -- - ---------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 242,438 (243,572) - ---------------------------------------------------------------------------------------------------------- Cash flows from financing activities: (Decrease) increase in notes payable (48,000) 740,000 Decrease in book overdrafts (175,479) (47,203) Dividends paid (99,123) (172,229) Repurchase of common stock -- (26,309) Proceeds from stock issuance 18,592 671 Increase (decrease) in long-term debt and obligations under capital leases 553 (6,026) Effect of currency fluctuations (104) (889) - ---------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (303,561) 488,015 - ---------------------------------------------------------------------------------------------------------- Net decrease in cash and equivalents (40,070) (36,973) Cash and cash equivalents at the beginning of year 129,583 117,035 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 89,513 $ 80,062 ==========================================================================================================
See accompanying notes to consolidated condensed financial statements. 7 8 MELVILLE CORPORATION AND SUBSIDIARY COMPANIES Notes to consolidated condensed financial statements (unaudited) NOTE 1 The financial statements should be read in conjunction with the financial statements included in Melville Corporation's Annual Report on Form 10-K for the year ended December 31, 1995. The accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of Melville's financial position at September 28, 1996 and September 30, 1995 and its results of operations for each of the respective three and nine month periods ended September 28, 1996 and September 30, 1995 and cash flows for each of the nine month periods ended September 28, 1996 and September 30, 1995. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The results of operations for the nine months ended September 28, 1996 are not necessarily indicative of the results for the full year. Certain reclassifications have been made to the consolidated condensed financial statements of prior periods to conform to the current period presentation. NOTE 2 Since October 1995, Melville has been implementing a strategic restructuring program, which was the product of a strategic review initiated in 1994. The main components of the restructuring include the creation of two publicly-traded, independent and industry-focused companies -- CVS Corporation ("CVS") in the chain drug industry and Footstar, Inc. ("Footstar") in the footwear industry -- a significant reduction in costs, the sale of Melville's unrelated businesses, and the closing of approximately 330 underperforming stores. Through September 28, 1996, the Company completed the disposition of its Marshalls, Kay-Bee Toys, Wilsons and This End Up divisions (collectively referred to as the "Dispositions") as part of this restructuring program. In addition, the Company: o announced several steps on June 3, 1996 to accelerate the emergence of CVS as a stand-alone chain drug company and to further strengthen Footstar. The announcement included: 1) a formal plan to separate the Linens `n Things and Bob's divisions from CVS, and 2) a formal plan to convert 80 to 100 of Thom McAn's stores to the Footaction store format and to exit the Thom McAn business by mid-1997 (collectively defined as the "Separation Plans"). Primarily in connection with these actions, the Company recorded a one-time, after tax restructuring charge of approximately $148 million in discontinued operations during the second quarter of 1996. o filed a registration statement on September 18, 1996 (as since amended) under the Securities Act of 1933 relating to a public offering of a portion of the shares of common stock of Linens `n Things held by Melville. Melville has announced its intention to dispose of, subject to market conditions, its entire ownership of Linens `n Things by the end of 1997. No assurance can be given as to when or whether such public offering will be consummated, as to the number shares or as to the offering price of the shares to be sold therein. o completed the spin-off of Footstar on October 12, 1996 by distributing 100% of the shares of Footstar common stock held by Melville to its shareholders of record as of the close of business on October 2, 1996 (the "Distribution"). Please see Melville's current report on Form 8-K filed on October 28, 1996 filed in connection with the Distribution for information regarding the Distribution. As a result of the Dispositions, Separation Plans and other actions discussed above, the results of operations for Footstar (which includes the Meldisco, Footaction and Thom McAn divisions which collectively make up the footwear segment), the apparel segment (which includes the Marshalls, Wilsons, and Bob's divisions) and the toys and home furnishings segment (which includes the Kay-Bee Toys, This End Up and Linens `n Things divisions) have been classified as discontinued operations in the accompanying consolidated condensed statements of operations for all periods presented. Melville's results from continuing operations, therefore, represent solely those of CVS. 8 9 MELVILLE CORPORATION AND SUBSIDIARY COMPANIES Notes to consolidated condensed financial statements (unaudited) NOTE 3 Discontinued operations accounted for approximately 37% of total assets and approximately 32% of total liabilities at September 28, 1996. Net sales from discontinued operations totaled $773.0 million and $1.6 billion for the three month periods ended September 28, 1996 and September 30, 1995 and $2.5 billion and $4.6 billion for the nine month periods ended September 28, 1996 and September 30, 1995, respectively. NOTE 4 Primary earnings (loss) per share is computed by dividing net earnings (loss), after deducting net preferred dividends on redeemable preferred stock and Series One ESOP Convertible Preference Stock ("ESOP Preference Stock"), by the weighted average number of common shares outstanding during the period. Fully diluted earnings (loss) per share is computed based upon the assumed conversion of the ESOP Preference Stock into common stock. Net earnings (loss) utilized in the calculation is adjusted for the difference between the current dividend on the ESOP Preference Stock and the common stock, and for certain non-discretionary expenses based on net earnings. NOTE 5 The components of net interest expense are as follows (dollars in thousands):
Three Months Ended Nine Months Ended - --------------------------------------------------------------------------------- September 28, September 30, September 28, September 30, 1996 1995 1996 1995 - --------------------------------------------------------------------------------- Interest expense $ 6,838 $ 16,779 $ 25,782 $ 37,547 Interest income (2,385) (191) (3,824) (314) - ----------------------------------------------------------------------------- Interest expense, net $ 4,453 $ 16,588 $ 21,958 $ 37,233 =============================================================================
NOTE 6 The Company had the following non-cash financing and investing activities (dollars in thousands):
Nine Months Ended - ------------------------------------------------------------------------------- September 28, September 30, 1996 1995 - ------------------------------------------------------------------------------- Notes received for operations sold $158,811 $-- Unrealized gain on investments 17,199 $--
NOTE 7 On June 28, 1996, the Company sold 1.15 million shares of the TJX Series E preferred stock received as a portion of the proceeds from the sale of the Marshalls division for $191.6 million, resulting in a pre-tax gain of approximately $76.6 million. The remaining 350,000 shares of the TJX Series E preferred stock were sold on July 3, 1996 for $60.5 million, resulting in a pre-tax gain of approximately $25.5 million. The Company continues to hold 250,000 shares of TJX Series D preferred stock which is expected to be sold during the fourth quarter of 1996. 9 10 MELVILLE CORPORATION AND SUBSIDIARY COMPANIES Management's Discussion And Analysis of Financial Condition And Results of Operations STRATEGIC RESTRUCTURING PROGRAM - ------------------------------- Since October 1995, Melville has been implementing a strategic restructuring program, which was the product of a strategic review initiated in 1994. The main components of the restructuring include the creation of two publicly-traded, independent and industry-focused companies -- CVS Corporation ("CVS") in the chain drug industry and Footstar, Inc. ("Footstar") in the footwear industry -- a significant reduction in costs, the sale of Melville's unrelated businesses, and the closing of approximately 330 underperforming stores. Through September 28, 1996, the Company completed the disposition of its Marshalls, Kay-Bee Toys, Wilsons and This End Up divisions (collectively referred to as the "Dispositions") as part of this restructuring program. In addition, the Company: o announced several steps on June 3, 1996 to accelerate the emergence of CVS as a stand-alone chain drug company and to further strengthen Footstar. The announcement included: 1) a formal plan to separate the Linens `n Things and Bob's divisions from CVS, and 2) a formal plan to convert 80 to 100 of Thom McAn's stores to the Footaction store format and to exit the Thom McAn business by mid-1997 (collectively defined as the "Separation Plans"). Primarily in connection with these actions, the Company recorded a one-time, after tax restructuring charge of approximately $148 million in discontinued operations during the second quarter of 1996. o filed a registration statement on September 18, 1996 (as since amended) under the Securities Act of 1933 relating to a public offering of a portion of the shares of common stock of Linens `n Things held by Melville. Melville has announced its intention to dispose of, subject to market conditions, its entire ownership of Linens `n Things by the end of 1997. No assurance can be given as to when or whether such public offering will be consummated, as to the number shares or as to the offering price of the shares to be sold therein. o completed the spin-off of Footstar on October 12, 1996 by distributing 100% of the shares of Footstar common stock held by Melville to its shareholders of record as of the close of business on October 2, 1996 (the "Distribution"). Please see Melville's current report on Form 8-K filed on October 28, 1996 filed in connection with the Distribution for information regarding the Distribution. As a result of the Dispositions, Separation Plans and other actions discussed above, the results of operations for Footstar (which includes the Meldisco, Footaction and Thom McAn divisions which collectively make up the footwear segment), the apparel segment (which includes the Marshalls, Wilsons, and Bob's divisions) and the toys and home furnishings segment (which includes the Kay-Bee Toys, This End Up and Linens `n Things divisions) have been classified as discontinued operations in the accompanying consolidated condensed statements of operations for all periods presented. Melville's results from continuing operations, therefore, represent solely those of CVS. RESULTS OF OPERATIONS - --------------------- Third Quarter - ------------- Net sales from continuing operations for the third quarter of 1996 increased 15.9% to $1.36 billion from sales of $1.17 billion for the comparable period last year due to strong performances in both the front store (which increased 11.7% as compared to the 1995 period) and pharmacy (which increased 20.5% as compared to the 1995 period). Same store sales for the quarter rose 12.4%, with same store pharmacy sales increasing 18.7%. Pharmacy sales were 44.5% of total sales for the third quarter of 1996, compared to 42.6% in the 1995 period. Cost of goods sold, buying and warehousing costs from continuing operations as a percentage of net sales were 72.4% in the third quarter of 1996, compared to 71.8% in the 1995 period. The 60 basis point increase as a percentage of net sales is due primarily to the continued increase in lower gross margin third party prescription sales, the continued increase in pharmacy sales as a percentage of total sales and the timing of physical inventory results. Third party prescription sales were 81.8% of pharmacy sales in third quarter of 1996, compared to 75.8% in the 1995 period. 10 11 MELVILLE CORPORATION AND SUBSIDIARY COMPANIES Management's Discussion And Analysis of Financial Condition And Results of Operations Selling, general and administrative expenses from continuing operations as a percentage of net sales were 22.1% for the third quarter of 1996, compared to 23.9% in the 1995 period. The 180 basis point improvement from 1995 is primarily due to leveraging sales growth, realizing the benefits from key technology initiatives, controlling fixed costs, and the cost reductions resulting from the strategic restructuring program. Depreciation and amortization expense from continuing operations as a percentage of consolidated net sales was 1.5% for the third quarter of 1996, compared to 1.7% in the 1995 period. The 20 basis point improvement from 1995 is primarily due to the write-off of certain assets related to the strategic restructuring program. Operating profit from continuing operations for the third quarter of 1996 was $54.9 million, an increase of 79.5% from $30.6 million in the comparable period last year. Operating profit as a percentage of net sales was 4.0% for the third quarter, compared to 2.6% in the 1995 period. The 140 basis point improvement from 1995 is primarily due to: 1) controlling selling, general and administrative expenses, and 2) reducing corporate administrative expenses and depreciation and amortization, primarily as a result of the strategic restructuring program, partially offset by the increase in cost of goods sold discussed above. During the third quarter of 1996, the Company completed the sale of 350,000 shares of TJX Series E Preferred Stock received as a portion of the proceeds from the sale of the Marshalls division (the "Third Quarter TJX Series E Preferred Sale") for approximately $60.5 million, resulting in a pre-tax gain of approximately $25.5 million. During the third quarter of 1996, the Company recognized dividend income of approximately $147,000 on the TJX Series D and E Preferred Stock. As a result of the TJX Series E Preferred Sales (defined below) and following the completion of the TJX Series D Preferred Sale (defined below), dividend income will not continue. Interest expense totaled $6.8 million in the third quarter of 1996, compared to $16.8 million in the 1995 period. The decrease in interest expense is primarily due to lower average borrowing levels as a result of the Dispositions and to timing differences related to the recognition of interest expense on the Company's ESOP. Interest income totaled $2.4 million in the third quarter of 1996, compared to $191,000 in the 1995 period. The increase in interest income is primarily due to the notes receivable received as a portion of the proceeds from the Dispositions. Consolidated net earnings from continuing operations for the third quarter of 1996 increased 249.0% to $44.9 million, or $.39 per share, compared to $12.9 million, or $.08 per share in the 1995 period. Excluding the $.14 per share gain from the Third Quarter TJX Series E Preferred Sale, consolidated net earnings from continuing operations for the third quarter of 1996 increased 132.1% to $29.8 million, or $.25 per share. The Company's total consolidated net income, including continuing and discontinued operations as well as the gain from the Third Quarter TJX Series E Preferred Sale was $63.6 million, or $.57 per share, compared to a net loss of $5.1 million, or $.09 per share in 1995. Nine Months - ----------- Net sales from continuing operations for the first nine months of 1996 increased 13.6% to $3.98 billion from sales of $3.50 billion for the comparable period last year due to strong performances in both the front store (which increased 9.6% as compared to the 1995 period) and pharmacy (which increased 17.9% as compared to the 1995 period). Same store sales for the first nine months increased 10.8%, with same store pharmacy sales increasing 16.3%. Pharmacy sales were 44.3% of total sales for the first nine months of 1996, compared to 42.5% in the 1995 period. 11 12 MELVILLE CORPORATION AND SUBSIDIARY COMPANIES Management's Discussion And Analysis of Financial Condition And Results of Operations Cost of goods sold, buying and warehousing costs from continuing operations as a percentage of net sales were 71.7% in the first nine months of 1996, compared to 71.6% in the 1995 period. The 10 basis point increase as a percentage of net sales is primarily due to the continued increase in lower gross margin third party prescription sales and to the continued increase in pharmacy sales as a percentage of total sales. Third party prescription sales were 81.4% of pharmacy sales in the first nine months of 1996, compared to 75.4% in the 1995 period. Selling, general and administrative expenses from continuing operations were 21.5% of net sales for the first nine months of 1996, compared to 22.4% in the 1995 period. The 90 basis point improvement from 1995 is primarily due to leveraging sales growth, realizing the benefits from key technology initiatives, controlling fixed costs, and to the cost reductions resulting from the strategic restructuring program. Depreciation and amortization expense from continuing operations as a percentage of consolidated net sales was 1.5% for the first nine months of 1996 compared to 1.6% in the 1995 period. The 10 basis point improvement from 1995 is primarily due to the write-off of certain assets related to the strategic restructuring program. Operating profit from continuing operations was $210.5 million, an increase of 35.7% from $155.1 million for the comparable period in 1995. Operating profit as a percentage of net sales was 5.3% for the first nine months, compared to 4.4% in the 1995 period. The 90 basis point improvement from 1995 is primarily due to: 1) controlling selling, general and administrative expenses, and 2) reducing corporate administrative expenses primarily as a result of the strategic restructuring program. During the first nine months of 1996, the Company completed the sale of 1.5 million shares of TJX Series E Preferred Stock for approximately $252.1 million, resulting in a pre-tax gain of approximately $102.1 million (the "TJX Series E Preferred Sales"). The Company continues to hold 250,000 shares of TJX Series D Preferred Stock which is expected to be sold during the fourth quarter of 1996 (the "TJX Series D Preferred Sale"). During the first nine months of 1996, the Company recognized dividend income of approximately $5.6 million on the TJX Series D and E Preferred Stock. As a result of the TJX Series E Preferred Sales and following the completion of the TJX Series D Preferred Sale, dividend income will not continue. Interest expense totaled $25.8 million during the first nine months of 1996, compared to $37.5 million in the 1995 period. The decrease in interest expense is primarily due to lower average borrowing levels as a result of the Dispositions and to timing differences related to the recognition of interest expense on the Company's ESOP. Interest income totaled $3.8 million in the first nine months of 1996, compared to $314,000 in the 1995 period. The increase in interest income is primarily due to the notes receivable received as a portion of the proceeds from the Dispositions. Consolidated net earnings from continuing operations for the first nine months of 1996 increased 137.8% to $176.3 million, or $1.57 per share, compared to $74.1 million, or $.58 per share in 1995. Excluding the $.57 per share gain from the TJX Series E Preferred Sales, consolidated net earnings from continuing operations for the first nine months of 1996 increased 55.8% to $115.5 million, or $1.00 per share. The Company's total consolidated net income, including continuing and discontinued operations as well as the gain from the TJX Series E Preferred Sales, the restructuring charge and the cumulative effect of the change in accounting principle was $15.3 million, or $.05 per share, compared to a net loss of $46.7 million, or $.57 per share in the 1995 period. As of September 28, 1996, operating results from continuing operations included 1,389 CVS stores, compared to 1,356 stores at September 30, 1995. 12 13 MELVILLE CORPORATION AND SUBSIDIARY COMPANIES Management's Discussion And Analysis of Financial Condition And Results of Operations FINANCIAL CONDITION AND LIQUIDITY Inherent in the seasonality of retailing are cyclical buildups of inventory prior to peak selling periods, the most significant of which include Christmas, Palm and Easter Sundays, and Back-to-School. Although the Company finances its growth in operations and working capital requirements primarily through internally generated funds, short-term borrowings are used to finance these seasonal inventory buildups. Short-term borrowing levels historically peak in the Fall due to the inventory buildup for the Christmas selling season. For the nine months ended September 28, 1996, cash and cash equivalents decreased $40.1 million to $89.5 million. The Company's short-term borrowings totaled $4.0 million at September 28, 1996, compared to $940.0 million at September 30, 1995. For the nine months ended September 28, 1996, short-term borrowings decreased $48.0 million from $52.0 million at December 31, 1995. The decrease in short-term borrowing requirements in 1996 is primarily due to the Dispositions, the TJX Series E Preferred Sales as well as to improved asset management and improved cash flow from continuing operations. Investments decreased $130.6 million to $44.4 million during the nine months ended September 28, 1996 primarily due to the TJX Series E Preferred Sales, offset partially by an increase in the unrealized gain on the remaining TJX Series D Preferred Stock held by the Company at September 28, 1996. Net accounts receivable increased $12.8 million to $309.2 million during the nine months ended September 28, 1996. The increase in net accounts receivable balances in 1996 is primarily due to the reclassification of a note receivable in the amount of $100 million from deferred charges and other assets to accounts receivable as a result of Melville's intention to monetize the note in early 1997. The above increase was offset by a reduction in accounts receivable due to the Dispositions. For the nine months ended September 28, 1996, inventories decreased $103.3 million to $1.6 billion. The lower inventory level in 1996 is primarily due to the Dispositions and to improved inventory turns, partially offset by planned increases in inventory to support the Halloween and Christmas selling seasons. Deferred charges and other assets increased $54.6 million to $146.2 million during the nine months ended September 28, 1996. The increase in deferred charges and other assets in 1996 is primarily due to an increase in long-term notes receivable resulting from the Dispositions, offset partially by the $100 million reclassification discussed above. Accounts payable decreased by $121.5 million to $569.1 million during the nine months ended September 28, 1996. The decrease in accounts payable in 1996 is primarily due to lower inventory levels resulting from the Dispositions and to a decrease in book overdrafts which was also impacted by the Dispositions. Accrued expenses decreased by $201.9 million to $838.0 million during the nine months ended September 28, 1996. The decrease in 1996 was primarily due to the Dispositions and to the utilization of accruals primarily related to closed store lease settlements, outsourcing costs and severance costs resulting from the Company's strategic restructuring program, offset partially by the restructuring reserve recorded in the second quarter of 1996. Capital additions of $175.3 million and $261.3 million in the first nine months of 1996 and 1995, respectively, represented expenditures primarily for improvements to new and existing leased store locations, store equipment, information systems and distribution and office facilities. The lower capital expenditure level in 1996 is primarily due to the Dispositions. 13 14 REVIEW BY INDEPENDENT AUDITORS The September 28, 1996 and September 30, 1995 consolidated condensed financial statements included in this filing on Form 10-Q have been reviewed by KPMG Peat Marwick LLP, independent auditors, in accordance with established professional standards and procedures for such a limited review. The report of KPMG Peat Marwick LLP, commenting on their review, is included herein as Part I - Exhibit 1. 14 15 Part 1 - Exhibit 1 Independent Auditors' Review Report The Board of Directors and Shareholders of Melville Corporation: We have reviewed the consolidated condensed balance sheets of Melville Corporation and subsidiary companies as of September 28, 1996 and September 30, 1995, and the related consolidated condensed statements of operations for the three and nine month periods then ended and cash flows for the nine months then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Melville Corporation and subsidiary companies as of December 31, 1995 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 15, 1996, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1995, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /S/ KPMG Peat Marwick LLP Boston, Massachusetts October 21, 1996 15 16 Part II. - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K a) Exhibits: 11 Computation of Per Share Earnings 15 Letter re: Unaudited Interim Financial Information 27 Financial Data Schedule - September 28, 1996 b) Reports on Form 8-K: During the three months ended September 28, 1996, the Registrant filed a current report on Form 8-K dated September 24, 1996 in connection with the Registrant's: 1) distribution of all the common stock of Footstar, Inc. on October 12, 1996 to its shareholders of record on October 2, 1996 and 2) special meeting of shareholders to be held on November 19, 1996 relating to the proposed change of name to CVS Corporation and reincorporation from New York to Delaware. On October 28, 1996, the Registrant filed a current report on Form 8-K in connection with the Registrant's distribution of all the common stock of Footstar, Inc. on October 12, 1996 to its shareholders of record on October 2, 1996. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MELVILLE CORPORATION -------------------- (REGISTRANT) /S/ CHARLES C. CONAWAY ---------------------- CHARLES C. CONAWAY Executive Vice President and Chief Financial Officer Date: November 8, 1996 16 EX-11 2 COMPUTATION OF PER SHARE EARNINGS 1 Exhibit 11 MELVILLE CORPORATION AND SUBSIDIARY COMPANIES Computation of Per Share Earnings (Dollars and shares in thousands except per share amounts)
- ------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 28, September 30, September 28, September 30, 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Primary earnings (loss) per common share: Net earnings (loss) $ 63,631 $ (5,103) $ 15,299 $(46,748) Less: preferred dividends, net (3,383) (4,302) (10,180) (12,907) - ---------------------------------------------------------------------------------------------------------------- Net earnings (loss) used to compute primary earnings (loss) per share $ 60,248 $ (9,405) $ 5,119 $(59,655) ================================================================================================================ Weighted average number of shares outstanding 105,846 105,035 105,496 105,077 Add: weighted average number of shares which could have been issued upon exercise of outstanding stock options 432 28 135 27 - ---------------------------------------------------------------------------------------------------------------- Weighted average number of shares used to compute primary earnings (loss) per share 106,278 105,063 105,631 105,104 ================================================================================================================ Primary earnings (loss) per share $ 0.57 $ (0.09) $ 0.05 $ (0.57) ================================================================================================================ Fully diluted earnings (loss) per common share: Net earnings (loss) $ 63,631 $ (5,103) $ 15,299 $(46,748) Less: preferred dividends, net (341) (4,302) (10,180) (12,907) - ---------------------------------------------------------------------------------------------------------------- Net earnings (loss) used to compute fully diluted earnings (loss) per share before adjustments 63,290 (9,405) 5,119 (59,655) Less: adjustments resulting principally from the assumed conversion of the Series One ESOP Convertible Preference stock, net of tax benefit (1,589) -- -- -- - ---------------------------------------------------------------------------------------------------------------- Net earnings (loss) used to compute fully diluted earnings (loss) per share $ 61,701 $ (9,405) $ 5,119 $(59,655) ================================================================================================================ Weighted average number of shares outstanding 105,846 105,035 105,496 105,077 Add: weighted average number of shares of Series One ESOP Convertible Preference Stock assuming conversion 6,751 -- -- -- Add: weighted average number of shares which could have been issued upon exercise of outstanding stock options 575 28 135 27 - ---------------------------------------------------------------------------------------------------------------- Weighted average number of shares used to compute fully diluted earnings (loss) per share 113,172 105,063 105,631 105,104 ================================================================================================================ Fully diluted earnings (loss) per share $ 0.55 $ (0.09) $ 0.05 $ (0.57) ================================================================================================================
17 EX-15 3 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION 1 Exhibit 15 Melville Corporation Woonsocket, Rhode Island Board of Directors: Re: Registration Statements Numbers 33-40251, 33-17181 and 2-97913 on Form S-8 and Number 33-34946 on Form S-3 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated October 21, 1996 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. Very truly yours, /S/ KPMG Peat Marwick LLP Boston, Massachusetts November 8, 1996 18 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED BALANCE SHEETS AND THE CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-28-1996 89,513 44,441 337,482 28,291 1,569,706 2,266,284 1,321,659 412,308 3,495,044 1,425,635 321,264 112,229 1,330 0 1,446,179 3,495,044 3,978,218 3,978,218 2,853,602 2,853,602 914,126 0 21,958 296,227 119,913 176,314 (161,015) 0 0 15,299 .05 .05
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