<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-9223
SERVICE MERCHANDISE COMPANY, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-0816060
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 24600, Nashville, TN
37202-4600
(Mailing Address)
7100 Service Merchandise Drive, Brentwood, TN
(Address of principal executive offices)
37027
(Zip code)
(615) 660-6000
(Registrant's telephone number including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock as of the latest practicable date.
As of October 30, 1994, there were 99,341,773 shares of
Service Merchandise Company, Inc. common stock outstanding.
This document contains 22 pages.
<PAGE> 2
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Statements of Operations (Unaudited) - Three and
Nine Periods Ended October 2, 1994 and September 30, 1993. . . 3
Consolidated Balance Sheets - October 2, 1994 (Unaudited),
September 30, 1993 (Unaudited) and January 1, 1994 . . . . . . 4
Consolidated Statements of Cash Flows (Unaudited) - Nine
Periods Ended October 2, 1994 and September 30, 1993 . . . . . 5
Notes to Consolidated Financial Statements (Unaudited) . . . . 6-7
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited). . . . . . . . . . . . . 8-12
PART II - OTHER INFORMATION
Other Information. . . . . . . . . . . . . . . . . . . . . . . 13
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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<PAGE> 3
<TABLE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Periods Ended Nine Periods Ended
------------------- ------------------
Oct. 2, Sept. 30, Oct. 2, Sept. 30,
------------------- ------------------
1994 1993 1994 1993
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net sales $757,662 $704,080 $2,327,805 $2,180,055
Costs and expenses:
Cost of merchandise sold and
buying and occupancy expenses 582,414 534,659 1,785,727 1,654,740
--------- --------- ---------- ----------
Gross margin after cost of
merchandise sold and buying
and occupancy expenses 175,248 169,421 542,078 525,315
Selling, general and
administrative expenses 157,794 143,608 481,545 436,928
Depreciation and amortization 15,064 15,137 46,826 45,608
--------- --------- ---------- ----------
Earnings before interest and
income taxes 2,390 10,676 13,707 42,779
Interest expense-debt 17,089 15,153 46,672 45,572
Interest expense-capitalized
leases 2,515 2,762 7,741 8,443
--------- --------- ---------- ----------
Loss before income taxes
(benefit) (17,214) (7,239) (40,706) (11,236)
Income taxes (benefit) (6,885) (2,936) (16,282) (4,495)
--------- --------- ---------- ----------
Loss before extraordinary loss
and cumulative effect of change
in accounting principle (10,329) (4,303) (24,424) (6,741)
Extraordinary loss from early
extinguishment of debt, net of
tax benefit of $0, $124, $3,551
and $4,982, respectively - 124 (5,326) (7,474)
Cumulative effect of change in
accounting principle - - - 7,742
--------- --------- ---------- ----------
Net loss ($10,329) ($4,179) ($29,750) ($6,473)
========= ========= ========== ==========
Weighted average common shares
and common share equivalents
outstanding 101,094 102,135 101,391 102,113
========= ========= ========== ==========
Per common share:
Loss before extraordinary loss
and cumulative effect of change
in accounting principle ($0.10) ($0.04) ($0.24) ($0.07)
Extraordinary loss from early
extinguishment of debt, net of
tax benefit - - (0.05) (0.07)
Cumulative effect of change in
accounting principle - - - 0.08
--------- --------- ---------- ----------
Net loss per common share ($0.10) ($0.04) ($0.29) ($0.06)
========= ========= ========== ==========
See Notes to Consolidated Financial Statements.
</TABLE>
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<PAGE> 4
<TABLE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
<CAPTION>
(Unaudited)
---------------------------------
Oct. 2, Sept. 30, January 1,
1994 1993 1994 (1)
---------- ---------- ----------
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $15,864 $10,346 $325,092
Accounts receivable, net of allowance of
$3,151, $3,010 and $2,894, respectively 39,261 33,320 53,014
Refundable income taxes 12,538 4,766 -
Inventories 1,327,219 1,236,844 939,259
Prepaid expenses 50,230 45,751 29,898
---------- ---------- ----------
TOTAL CURRENT ASSETS 1,445,112 1,331,027 1,347,263
Property and equipment:
Owned assets, net of accumulated
depreciation of $443,958, $398,450 and
$408,696, respectively 574,891 546,586 575,712
Capitalized leases, net of accumulated
amortization of $74,076, $77,937 and
$68,245, respectively 53,889 61,814 60,128
Deferred income taxes - - -
Other assets and deferred charges 19,849 28,074 28,472
---------- ---------- ----------
TOTAL ASSETS $2,093,741 $1,967,501 $2,011,575
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $425,400 $301,500 -
Accounts payable 596,262 565,016 $630,723
Accrued expenses 148,029 145,842 188,050
State and local sales tax 30,166 25,891 59,035
Income taxes - - 54,914
Current maturities of long-term debt 13,126 40,933 91,751
Current maturities of capitalized leases 7,894 8,469 8,075
---------- ---------- ----------
TOTAL CURRENT LIABILITIES 1,220,877 1,087,651 1,032,548
Long-term debt 545,061 604,188 616,752
Capitalized lease obligations 75,876 84,063 81,769
Deferred income taxes 1,696 1,555 968
---------- ---------- ----------
TOTAL LIABILITIES 1,843,510 1,777,457 1,732,037
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value,
cumulative, authorized 4,600 shares,
undesignated as to rate and other
rights, none issued
Series A Junior Preferred Stock, $1 par
value, authorized 400 shares, none
issued
Common stock, $.50 par value, authorized
500,000 shares, issued and outstanding
99,334, 99,322 and 99,368 shares,
respectively 49,667 49,661 49,684
Additional paid-in capital 3,640 3,945 4,055
Deferred compensation (312) (1,492) (1,187)
Retained earnings 197,236 137,930 226,986
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 250,231 190,044 279,538
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $2,093,741 $1,967,501 $2,011,575
========== ========== ==========
(1) Derived from fiscal year ended January 1, 1994 audited financial
statements.
See Notes to Consolidated Financial Statements.
</TABLE>
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<PAGE> 5
<TABLE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<CAPTION>
Nine Periods Ended
---------------------
Oct. 2, Sept. 30,
1994 1993
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($29,750) ($6,473)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 50,718 51,560
Deferred taxes on income 728 (7,664)
Loss on disposal of property and equipment 1,735 188
Write-off bond issue cost and bond discount 6,830 5,094
Changes in assets and liabilities:
Accounts receivable, net 13,753 19,991
Inventories (387,960) (379,204)
Prepaid expenses (20,332) (25,297)
Accounts payable (34,461) 68,070
Accrued expenses and state and local sales
tax (68,890) (34,926)
Income taxes (67,452) (57,326)
-------- --------
NET CASH USED BY OPERATING ACTIVITIES (535,081) (365,987)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment - owned (43,873) (70,798)
Proceeds from the disposal of property and
equipment 1,901 555
Other, net 47 (1,879)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (41,925) (72,122)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issuance costs (1,783) (8,077)
Proceeds from short-term borrowings 425,400 301,500
Proceeds from long-term debt 3,200 300,000
Repayment of long-term debt (153,554) (304,971)
Repayment of capitalized lease obligations (5,850) (7,113)
Exercise of stock options 365 1,799
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 267,778 283,138
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (309,228) (154,971)
CASH AND CASH EQUIVALENTS- BEGINNING OF PERIOD 325,092 165,317
-------- --------
CASH AND CASH EQUIVALENTS- END OF PERIOD $15,864 $10,346
======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
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<PAGE> 6
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. The consolidated financial statements, except for the consolidated
balance sheet as of January 1, 1994, have been prepared by the Company
without audit.
In management's opinion, the information and amounts furnished in this
report reflect all adjustments (consisting of normal recurring
adjustments) considered necessary for the fair presentation of the
financial position and results of operations for the interim periods
presented. Certain prior period amounts have been reclassified to
conform to the current year's presentation. These financial statements
should be read in conjunction with the Company's Annual Report on Form
10-K for the fiscal year ended January 1, 1994.
The Company has historically incurred a net loss for the first three
quarters of the year due to the seasonality of its business. The results
of operations for the third quarter ended October 2, 1994 and September
30, 1993 are not necessarily indicative of the operating results for the
entire fiscal year.
B. Effective January 2, 1994, the Company began reporting quarterly
results as 13 weeks (two four-week periods and one five-week period)
rather than three calendar months. Accordingly, the third quarter of
fiscal 1994 ended October 2, 1994 and contained 91 selling days versus
the third quarter of fiscal 1993 which ended September 30, 1993 and
contained 92 selling days. The nine periods ended October 2, 1994
contained 273 selling days and the nine months ended September 30, 1993
contained 270 selling days. The change had no significant impact on the
comparability of the results of operations for the third quarter of
fiscal 1994 and the third quarter of fiscal 1993 and the comparability of
the year-to-date fiscal 1994 and year-to-date fiscal 1993 results of
operations.
C. The net loss per common share is computed by dividing the net loss by the
weighted average number of common shares and common share equivalents
outstanding.
D. Cash payments for interest for the three quarters ended October 2, 1994
and September 30, 1993 were $47.3 million and $47.5 million,
respectively. Cash payments for income taxes for the three quarters
ended October 2, 1994 and September 30, 1993 were $46.9 million and $47.8
million, respectively. The Company considers all highly liquid
investments purchased as part of its daily cash management activities to
be cash equivalents. Such investments are generally made for periods
covering 1 to 30 days.
-6-
<PAGE> 7
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)(continued)
E. In June 1994, the Company completed a new $600 million Reducing Revolving
Credit Facility for short-term borrowings and stand-by letter of credit
usage, which replaced its existing $475 million Revolving Credit
Facility and $122 million Term Loan. The new $600 million Reducing
Revolving Credit Facility, negotiated during the second quarter, extends
the maturity of the Company's working capital facility from December 31,
1995 to June 8, 1999, reducing the effective interest rate on those
borrowings from LIBOR +1.5% to LIBOR + 1.0% (both rates include a 3/8%
facility fee on all commitments), releasing the majority of property and
assets of the Company from security interests held in connection with the
prior facility and providing for generally less restrictive covenants.
The maximum commitment level for the new facility reduces $25 million
annually until reaching $475 million in 1999. Short-term borrowings
related to the Credit Facility were $425.4 million as of October 2, 1994.
F. During the first two quarters of fiscal 1994, the Company incurred an
extraordinary loss of $5.3 million, or $0.05 per share. This
extraordinary loss included a $1.3 million charge in the first quarter
resulting from the early extinguishment of $17 million of high-coupon
mortgages with interest rates ranging between 10% and 12.5% and a non-
cash extraordinary loss of $4.0 million, or $0.04 per share, related to a
write-off of deferred finance charges, in the second quarter, associated
with the refinancing of the Company's $475 million Revolving Credit
Facility and $122 million Term Loan (See Note E).
G. On February 17, 1993, the Company issued $300 million of 9% Senior
Subordinated Debentures due in equal installments in 2003 and 2004. Net
proceeds of $294 million, together with cash on hand, were used to redeem
the existing $300 million of 11 3/4% Senior Subordinated Notes due 1996
at a premium of 101.68% plus accrued interest. The Company recorded an
extraordinary loss of $7.5 million, net of tax benefit of $5.0 million,
in connection with the early extinguishment of this debt.
H. The Company adopted SFAS 109, "Accounting for Income Taxes," effective the
first day of fiscal 1993. The adoption of SFAS 109 changed the Company's
method of accounting for income taxes from the deferred method (APB 11)
to an asset and liability approach. The asset and liability approach
requires recognition of deferred tax assets and liabilities for expected
future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities.
The adjustment to the January 3, 1993 consolidated balance sheet to adopt
SFAS 109 was a benefit of $7.7 million. This benefit was reflected in
net loss for the first quarter of 1993 as the cumulative effect of change
in accounting principle. The adjustment primarily represents the impact
of adjusting deferred taxes to reflect the 34% federal income tax rate at
the time of the change as opposed to the higher income tax rates in
effect when the temporary differences originated. There was no material
impact to the deferred tax liability resulting from the statutory federal
income tax rate increase enacted by the Omnibus Budget Reconciliation Act
of 1993.
-7-
<PAGE> 8
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (UNAUDITED)
For comparative purposes, interim balance sheets are more meaningful when
compared to the balance sheets at the same point in time of the prior year.
Comparisons to balance sheets of the most recent fiscal year end may not be
meaningful due to the seasonal nature of the Company's business.
RESULTS OF OPERATIONS
The nature of the Company's business is highly seasonal. Historically, sales
in the fourth quarter have been substantially higher than sales achieved in
each of the first three quarters of the fiscal year. Thus expenses and, to a
greater extent, operating income vary greatly by quarter. Caution,
therefore, is advised when appraising results for a period shorter than a
full year, or when comparing any period other than to the same period of the
previous year.
THIRD QUARTER ENDED OCTOBER 2, 1994 VS. THIRD QUARTER ENDED SEPTEMBER 30,
1993
NET SALES
Net sales for the third quarter of 1994 were $757.7 million compared to
$704.1 million last year, representing an increase of $53.6 million, or 7.6%.
Comparable store sales increased 3.9% for the third quarter. The increase
was primarily the combined result of an increased emphasis on customer
service, more competitive pricing and a better in-stock inventory position on
sale items. The trend in sales improved as the quarter progressed,
particularly in the jewelry business where the sales gains outpaced
hardlines. The third quarter of fiscal 1994 contained 91 selling days as
compared with 92 selling days in the year-earlier period. At the close of
the third quarter, Service Merchandise was operating a total of 393 catalog
stores, an increase of 17 from a year ago.
GROSS MARGIN
The gross margin for the third quarter of fiscal 1994, including buying and
occupancy expense, was $175.2 million, or 23.1% of net sales, as compared
with $169.4 million, or 24.1% of net sales, a year ago. The decline in the
gross margin percentage was primarily due to lower pricing on both regular
priced and promotional merchandise in both jewelry and hardlines categories.
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<PAGE> 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited) (continued)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $157.8 million, or 20.8% of
net sales, for the third quarter versus $143.6 million, or 20.4% of net
sales, in the year-earlier quarter. The higher expenses relate generally to
the planned increase in store payroll to improve the customer shopping
experience and the net opening of 17 new catalog stores since the end of the
third quarter last year.
INTEREST EXPENSE
Interest expense for the third quarter of 1994 was $19.6 million as compared
to the third quarter of 1993 of $17.9 million. Despite sharp increases in
short-term interest rates, the Company's short-term interest expense remained
relatively flat due to the negotiation of interest rate reductions. Interest
expense increased $1.7 million, or 9.5%, primarily as a result of interest
associated with the issuance of $100 million Senior Notes in October 1993.
This increase was partially offset by lower interest expense resulting from
scheduled payments and the prepayment of $27.1 million in high-coupon
mortgages during fiscal 1994.
TAXES ON INCOME
The Company recognized an income tax benefit of $6.9 million and $2.9 million
for the third quarters ended October 2, 1994 and September 30, 1993,
respectively. The Company historically incurs a net loss in the first three
quarters of the year, but has net income on an annual basis. The effective
tax rates for the quarters ended October 2, 1994 and September 30, 1993 were
40% and 40.6%, respectively. The higher effective rate for the third quarter
of 1993 was a result of the adjustment to the year-to-date federal tax
benefit to reflect the retroactive federal income tax rate increase enacted by
the Omnibus Budget Reconciliation Act of 1993. For the fiscal year ended
January 1, 1994 the effective income tax rate was 40%.
NINE PERIODS ENDED OCTOBER 2, 1994 VS. NINE MONTHS ENDED SEPTEMBER 30, 1993
NET SALES
Net sales for the three quarters ended October 2, 1994 were $2,327.8 million,
an increase of $147.7 million, or 6.8%, compared with $2,180.1 million a year
ago. There were three more selling days in the three quarters ended October
2, 1994 (273 days versus 270 days) than the comparable reporting period in
fiscal 1993. Comparable store sales increased 0.8% for the first three
quarters of 1994. This increase during the third quarter was attributable to
more competitive pricing, increased emphasis on customer service, and better
in-stock inventory position on sale items. This increase was partially
offset by decreases in comparable store sales for the first half of fiscal 1994
due to a very competitive retail environment associated with consumer
electronics and adverse weather conditions during early 1994.
-9-
<PAGE> 10
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited) (continued)
GROSS MARGIN
Gross margin for the nine periods ended October 2, 1994, after taking into
account buying and occupancy expenses, was $542.1 million, or 23.3% of net
sales, as compared to $525.3 million, or 24.1% of net sales, for the same
period a year ago. The decline in the gross margin percentage was primarily
due to lower pricing on both regular priced and promotional merchandise in
jewelry and hardline categories, shifts in sales mix between product
categories within jewelry and hardlines and, to a lesser extent, increases in
the accrual for shrinkage.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $481.5 million, or
20.7% of net sales, for the nine periods ended October 2, 1994 as compared to
$436.9 million, or 20.0% of net sales, for the comparable reporting period a
year ago. The increase as a percentage of sales is primarily attributable to
planned increases in store payroll to enhance the customer shopping
experience.
INTEREST EXPENSE
For the nine periods ended October 2, 1994, interest expense on debt and
capitalized leases was $54.4 million as compared to the same period last year
of $54.0 million. Interest expense remained relatively flat as increases
associated with the issuance of the $100 million Senior Notes in October 1993
were partially offset by interest reductions due primarily to scheduled debt
and lease payments, as well as decreases due to the prepayment of $27.1
million in mortgages in early 1994 and the refinancing of the $300 million
Senior Subordinated Debentures from 11 3/4% to 9% in the first quarter of
1993.
TAXES ON INCOME
The Company recognized an income tax benefit of $16.3 million for the nine
periods ended October 2, 1994 compared to an income tax benefit of $4.5
million for the same period a year ago. The estimated annual effective tax
rate for the nine periods ended October 2, 1994 and September 30, 1993 was
40%. For fiscal year ended January 1, 1994 the effective income tax rate was
40%.
The Company adopted SFAS 109, "Accounting for Income Taxes," effective the
first day of fiscal 1993. The adoption of SFAS 109 changed the Company's
method of accounting for income taxes from the deferred method (APB 11) to an
asset and liability approach. The asset and liability approach requires
recognition of deferred tax assets and liabilities for expected future tax
consequences of temporary differences between the carrying amounts and the
tax bases of assets and liabilities.
The adjustment to the January 3, 1993 consolidated balance sheet to adopt
SFAS 109 was a benefit of $7.7 million. This benefit was reflected in net
loss for the first quarter of 1993 as the cumulative effect of change in
accounting principle. The adjustment primarily represents the impact of
adjusting deferred taxes to reflect the 34% federal income tax rate at the
time of the change as opposed to the higher income tax rates in effect when
the temporary differences originated. There was no material impact to the
deferred tax liability resulting from the statutory federal income tax rate
increase enacted by the Omnibus Budget Reconciliation Act of 1993.
-10-
<PAGE> 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited) (continued)
EXTRAORDINARY ITEMS
During the first two quarters of fiscal 1994, the Company incurred an
extraordinary loss of $5.3 million, or $0.05 per share. This included a
$1.3 million extraordinary loss resulting from the early extinguishment in
the first quarter of $17 million high-coupon mortgages with interest ranging
between 10% and 12.5%. Also included was a non-cash extraordinary
loss of $4.0 million, or $0.04 per share, related to a write-off of deferred
finance charges, in the second quarter, associated with the refinancing of
the Company's $475 million Revolving Credit Facility and $122 million Term
Loan.
On February 17, 1993, the Company issued $300 million of 9% Senior
Subordinated Debentures due in equal installments in 2003 and 2004. Net
proceeds of $294 million, together with cash on hand, were used to redeem the
existing $300 million of 11 3/4% Senior Subordinated Notes due 1996 at a
premium of 101.68% plus accrued interest. The Company recorded an
extraordinary loss of $7.5 million, net of tax benefit of $5.0 million, in
connection with the early extinguishment of this debt.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled $224.2 million at the end of the third quarter of
1994, a decrease of 7.9% from working capital at September 30, 1993 of
$243.4 million. The current ratio at both Octber 2, 1994 and September 30,
1993 was 1.2:1.
Working capital requirements fluctuate significantly during the year due to
the seasonal nature of the retail catalog store business. These requirements
are financed through a combination of internally generated cash flow from
operating activities and short-term seasonal borrowings. At October 2, 1994,
short-term borrowings totaled $425.4 million ($134.7 million available for
borrowing) compared to $301.5 million ($130.8 million available for
borrowing) at September 30, 1993, an increase of $123.9 million.
Approximately $122 million of the Company's short-term borrowings at October
2, 1994 resulted from the prepayment of the Company's $122 million Term Loan
with short-term borrowings under the Company's new Credit Facility.
In June 1994, the Company completed a new $600 million Reducing Revolving
Credit Facility for short-term borrowings and stand-by letter of credit
usage, which replaced its existing $475 million Revolving Credit Facility and
$122 million Term Loan. The new $600 million Reducing Revolving Credit
Facility, negotiated during the second quarter, extends the maturity of the
Company's working capital facility from December 31, 1995 to June 8, 1999,
reducing the effective interest rate on those borrowings from LIBOR +1.5% to
LIBOR + 1.0% (both rates include a 3/8% facility fee on all commitments),
releasing the majority of property and assets of the Company from security
interests held in connection with the prior facility and providing for
generally less restrictive covenants. The maximum commitment level for the
new facility reduces $25 million annually until reaching $475 million in
1999.
-11-
<PAGE> 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited) (continued)
Total long-term debt, including current maturities and capitalized leases,
decreased to $642.0 million at October 2, 1994 from $737.7 million at
September 30, 1993. The decrease in total long-term debt was primarily the
result of the prepayment of the $122 million Term Loan, the early
extinguishment of $27.1 million in mortgages, and scheduled payments of
approximately $50 million on capitalized leases, mortgages, IRB's and the
Term Loan. This decrease was partially offset by the issuance of $100 millon
Senior Notes in October 1993 and additions to capitalized leases and mortgages.
At October 2, 1994, the Company was in compliance with various financial
and other covenants included in the new Credit Facility and other financial
instruments.
Additions to owned property and equipment were $43.9 million for the nine
periods ended October 2, 1994 compared to $70.8 million for the same period
last year. The Company opened a net of 2 new catalog stores during the nine
periods ended October 2, 1994 and has plans to open approximately a net of 15
catalog stores by the end of the fiscal year. In fiscal 1993, the Company
opened a net of 20 new catalog stores. The Company expects to incur capital
expenditures of approximately $100 million during fiscal 1994 and to fund
these expenditures through a combination of cash flow from operations and
borrowings under the new Credit Facility.
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<PAGE> 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in the Rights of the Company's Security Holders
Not applicable.
Item 3. Defaults by the Company on Its Senior Securities
Not applicable.
Item 4. Results of Votes of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
-13-
<PAGE> 14
PART II - OTHER INFORMATION (continued)
Item 6. Exhibits and Reports on Form 8-K
6(a) Exhibits filed with this Form 10-Q
Exhibit No. Under Item
601 of Regulation S-K Brief Description
----------------------- -----------------
10 Key Executive Severance
Plan Agreement for execution
by certain key executives in
replacement of employment
contracts.
11 Statement re
Computation of Net Loss
Per Common Share for
the Three Periods Ended
and Nine Periods Ended
October 2, 1994 and
September 30, 1993.
27 Financial Data Schedule
for the Nine Periods ended
October 2, 1994.
6(b) Reports on Form 8-K
There were no reports on Form 8-K during the three periods
ended October 2, 1994.
-14-
<PAGE> 15
SIGNATURES
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.
SERVICE MERCHANDISE
COMPANY, INC.
Date: November 11, 1994 /s/ Raymond Zimmerman
------------------------
Raymond Zimmerman
Chairman of the Board
(Chief Executive Officer)
Date: November 11, 1994 /s/ S. Cusano
------------------------
S. Cusano
Vice President and Chief Financial
Officer (Chief Financial Officer)
(Chief Accounting Officer)
-15-
<PAGE> 16
EXHIBIT 10
AGREEMENT
THIS AGREEMENT made and entered into as of the ____ day of
_____________, 1994, by and between Service Merchandise Company, Inc., a
Tennessee corporation (the "Company"), and ___________ (the "Executive").
RECITALS
WHEREAS, the Executive is currently employed by the Company;
WHEREAS, the Company and the Executive wish to set forth their
respective rights and obligations in the event the Executive's employment is
terminated and to provide for salary continuation on the terms and under the
circumstances set forth herein;
NOW, THEREFORE, in consideration of the premises hereof and of the
mutual promises and agreements contained herein, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. Compensation on Termination of Employment.
(a) Disability. If the Executive's employment with the Company is
terminated by the Executive or the Company at any time due to the
Executive's inability to perform his duties as a result of physical or
mental incapacity ("Disability"), the Executive shall be paid such
amounts, if any, as he is entitled to receive under the Company's
disability insurance policies then in effect for Company officers, but
shall be entitled to no further compensation or benefits (unless
previously accrued under the Company's benefit plans).
(b) Other Termination Not Giving Rise to Salary Continuation. If
the Executive's employment shall be terminated for Cause (as hereinafter
defined) or if the Executive dies or if the Executive terminates his
employment for any reason, the Company shall pay the Executive any
installments of his base salary as then in effect that would otherwise
be due through the date on which his employment is terminated. The
Company shall then have no further obligations to the Executive under
this Agreement except that in the event of termination by death, the
Executive's estate or beneficiaries, as the case may be, shall be paid
such amounts as may be payable to the Executive under the Company's
insurance policies and/or other benefit plans. For the purposes of this
Agreement, the Company shall have "Cause" to terminate the Executive's
employment upon (i) the willful engaging by the Executive in misconduct
materially injurious to the Company, (ii) acts of dishonesty or fraud by
the Executive, or (iii) the willful violation by the Executive of the
provisions of Section 3 or Section 4 hereof.
(c) Termination Giving Rise to Salary Continuation. If the
Company shall terminate the Executive's employment with the Company for
any reason other than due to the Executive's death or Disability or for
Cause, then, subject to the compliance by the Executive with the
provisions of Sections 3 and 4 hereof, the Company shall pay, as salary
continuation, to the Executive an amount equal to two (2) times his
<PAGE> 17
maximum annual base salary in effect from the date of this Agreement
through the date of termination, payable, at the Company's option, (i)
in a lump sum or (ii) in equal monthly installments, but no other
compensation or benefits (unless accrued under the Company's benefit
plans prior to the date of termination of employment or as provided in
Section 1(d) hereof) shall be owed to the Executive.
(d) Healthcare Coverage. If the Executive's employment with the
Company is terminated by the Company for any reason other than due to
the Executive's death or Disability or for Cause, the Company will
reimburse the Executive for the premium paid by the Executive for
continued coverage for the Executive (and any dependents of the
Executive covered by the Company's healthcare plans at the time the
Executive's employment was terminated) under the Company's healthcare
plan pursuant to "COBRA" (or any other mandatory healthcare continuation
law then in effect), such coverage then being substantially similar to
that provided by the Company to its senior executives and their eligible
dependents. The Executive will be entitled to reimbursement for such
coverage for the period commencing with the date of termination of
employment and ending on the earlier of (i) the second anniversary of
termination of employment, or (ii) the date the Executive becomes
eligible to receive any healthcare coverage from another employer of the
Executive or his spouse, or any governmental entity, that does not
contain any exclusion or limitation with respect to any pre-existing
condition of the Executive or his covered dependents. If the Executive
(or his dependents covered at the time of termination of employment)
elects not to continue coverage under COBRA (or any other mandatory
healthcare continuation law then in effect) or is not eligible to
continue coverage under such healthcare continuation law, and is
otherwise eligible under this Section 1(d), the Company will reimburse
the Executive for the cost of purchasing substantially similar coverage
or a supplement required to achieve substantially similar coverage under
another arrangement approved by the Company for the same period;
however, such reimbursement shall be limited to the then current premium
charged to others by the Company for substantially similar coverage
under COBRA (or other mandatory healthcare continuation law then in
effect). Any amount payable to the Executive shall be subject to
withholding of applicable taxes as provided in Section 7 hereof.
(e) Sole Remedy. The Executive hereby agrees that amounts payable
under this Section 1 shall be his sole and exclusive remedy against the
Company on account of termination of employment.
2. Binding Agreement. This Agreement and all obligations of the
Company hereunder shall be binding upon the successors and assigns of the
Company. This Agreement and all rights of the Executive hereunder shall
inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
3. Non-Competition. During the period in which the Executive is
employed by the Company and for a period of one (1) year following any
termination giving rise to salary continuation payments pursuant to Section
1(c) hereof, the Executive will not (a) directly or indirectly own, manage,
<PAGE> 18
operate, control or participate in the ownership, management, operation or
control of, or be connected as an officer, employee, partner, director or
otherwise with, or have any financial interest in, or aid or assist anyone
else in the conduct of, any business which is in substantial competition with
any business conducted by the Company or by any group, division or subsidiary
of the Company in any area where such business is being conducted at the time
of such termination (provided that ownership of five percent (5%) or less of
the voting stock of any publicly held corporation shall not constitute a
violation hereof) or (b) directly or indirectly employ, solicit for
employment, or advise or recommend to any other persons that they employ or
solicit for employment, any employee of the Company or any of its
subsidiaries or affiliates.
4. Unauthorized Disclosure. During the period in which the Executive
is employed by the Company, the Executive shall not, without the prior
written consent of the Board of Directors, or a person authorized thereby,
disclose to any person, other than a person to whom disclosure is necessary
or appropriate in connection with the performance by the Executive of his
duties as an officer of the Company, or its subsidiaries or its affiliates,
any confidential information obtained by him while in the employ of the
Company with respect to any of the Company's products, improvements,
formulae, designs or styles, processes, customers, methods of marketing or
distribution, systems, procedures, plans, proposals, policies or methods of
manufacture, the disclosure of which he knows, or should have reason to know,
will be damaging to the Company or its subsidiaries or its affiliates, nor
shall he make any false statements regarding the Company or its subsidiaries
or its affiliates or take any other action which he knows, or should have
reason to know, will be damaging to the Company or its subsidiaries or its
affiliates; provided, however, that confidential information shall not
include any information known generally to the public (other than as a result
of unauthorized disclosures by the Executive) or any information of a type
not otherwise considered confidential by persons engaged in the same business
or a business similar to that conducted by the Company. Following the
termination of the Executive's employment with the Company for any reason,
the Executive shall not disclose any confidential information of the type
described above or take any action of type described above except as may be
required in the opinion of the Executive's counsel in connection with any
judicial or administrative proceeding or inquiry. The provisions of this
Section 4 shall be binding upon the Executive's heirs, successors and legal
representatives.
5. Specific Performance. The Executive acknowledges and agrees that,
in the event of a breach of Section 3 or Section 4 hereof by the Executive,
the Company would be irreparably harmed and that monetary damages would be an
inadequate remedy in favor of the Company. Accordingly, the Executive and
the Company agree that in the event of such a breach, the Company shall be
entitled to injunctive relief against the Executive.
6. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
<PAGE> 19
If to the Executive:
______________________________
______________________________
______________________________
If to the Company:
Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, TN 37027
Attn: General Counsel
or to such other address as any party may have furnished to the other in
writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
7. Withholding of Taxes. The Company may withhold from any amounts
payable under this Agreement, including without limitation sums payable under
Section 1(a), (b), (c) and (d), all federal, state, city or other taxes as
shall be required pursuant to any law or government regulation or ruling.
8. Governing Law. This Agreement shall be construed according to the
laws of Tennessee, without giving effect to the principles of conflicts of
laws of such State.
9. Amendment; Modification; Waiver. This Agreement may not be amended
except by the written agreement of the parties hereto. No provisions of this
Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing signed by Executive and the
Company. No waiver by either party hereto at any time of any breach by the
other party hereto or compliance with any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
<PAGE> 20
10. Binding Effect. This Agreement is personal in nature and neither
of the parties hereto shall, without the consent of the other, assign,
transfer or delegate this Agreement or any rights or obligations hereunder
except as expressly provided for herein. Without limiting the generality of
the foregoing, Executive's right to receive payments hereunder shall not be
assignable, transferable or delegable, whether by pledge, creation of a
security interest or otherwise, other than by a transfer by his will or by
the laws of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this paragraph, the Company shall have no
liability to pay any amount so attempted to be assigned, transferred or
delegated.
11. Entire Contract. This Agreement constitutes the entire agreement
and supersedes all other prior agreements, employment contracts and
understandings, both written and oral, express or implied with respect to the
subject matter of this Agreement, including, without limitation, that certain
Employment Agreement, dated as of ------------, by and between the Company
and the Executive, which Employment Agreement shall hereafter be null and void.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
SERVICE MERCHANDISE COMPANY, INC.
By: ______________________________________
__________________________________________
Executive
#302269.03
<PAGE> 21
EXHIBIT 11
<TABLE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Computation of Net Loss Per Common Share (Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Periods Ended Nine Periods Ended
--------------------- -------------------
Oct. 2, Sept. 30, Oct. 2, Sept. 30,
--------------------- -------------------
1994 1993 1994 1993
--------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Primary
- -------
Loss before extraordinary loss
and cumulative effect of
change in accounting
principle ($10,329) ($4,303) ($24,424) ($6,741)
Extraordinary loss from early
extinguishment of debt, net
of tax benefit of $ 0, $124,
$3,551 and $4,982,
respectively - 124 (5,326) (7,474)
Cumulative effect of change in
accounting principle - - - 7,742
-------- ------- -------- -------
Net loss ($10,329) ($4,179) ($29,750) ($6,473)
======== ======= ======== =======
Shares:
Weighted average common
shares outstanding 98,576 98,362 98,532 98,248
Weighted average shares of
restricted stock
outstanding 774 932 831 960
Additional shares assuming
exercise of stock options 1,744 2,841 2,028 2,905
-------- ------- -------- -------
Weighted average common
shares and common share
equivalents outstanding -
primary 101,094 102,135 101,391 102,113
======== ======= ======== =======
Loss before extraordinary loss
and cumulative effect of
change in accounting
principle ($0.10) ($0.04) ($0.24) ($0.07)
Extraordinary loss from early
extinguishment of debt, net
of tax benefit - - (0.05) (0.07)
Cumulative effect of change in
accounting principle - - - 0.08
-------- ------- -------- -------
Net loss ($0.10) ($0.04) ($0.29) ($0.06)
======== ======= ======== =======
Assuming Full Dilution
- ----------------------
Loss before extraordinary loss
and cumulative effect of
change in accounting
principle ($10,329) ($4,303) ($24,424) ($6,741)
Extraordinary loss from early
extinguishment of debt, net
of tax benefit of $ 0, $124,
$3,551 and $4,982,
respectively - 124 (5,326) (7,474)
Cumulative effect of change in
accounting principle - - - 7,742
-------- ------- -------- -------
Net loss ($10,329) ($4,179) ($29,750) ($6,473)
======== ======= ======== =======
Shares:
Weighted average common
shares outstanding 98,576 98,362 98,532 98,248
Weighted average shares of
restricted stock
outstanding 774 932 831 960
Additional shares assuming
exercise of stock options 1,778 2,853 2,045 2,925
-------- ------- -------- -------
Weighted average common
shares and common share
equivalents outstanding -
fully diluted 101,128 102,147 101,408 102,133
======== ======= ======== =======
Loss before extraordinary loss
and cumulative effect of
change in accounting
principle ($0.10) ($0.04) ($0.24) ($0.07)
Extraordinary loss from early
extinguishment of debt, net
of tax benefit - - (0.05) (0.07)
Cumulative effect of change in
accounting principle - - - 0.08
-------- ------- -------- -------
Net loss ($0.10) ($0.04) ($0.29) ($0.06)
======== ======= ======== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Service Merchandise Co., Inc.'s Form 10-Q for the Nine Periods Ended
October 2, 1994 and is qualified in its entirety by reference to such
financial statements and accompanying notes to the financial statements
detailed in Part I of the Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-1995
<PERIOD-START> JAN-02-1994
<PERIOD-END> OCT-02-1994
<CASH> 15,864
<SECURITIES> 0
<RECEIVABLES> 42,412
<ALLOWANCES> 3,151
<INVENTORY> 1,327,219
<CURRENT-ASSETS> 1,445,112
<PP&E> 1,146,814
<DEPRECIATION> 518,034
<TOTAL-ASSETS> 2,093,741
<CURRENT-LIABILITIES> 1,220,877
<BONDS> 620,937
<COMMON> 99,334<F1>
0
0
<OTHER-SE> 200,564
<TOTAL-LIABILITY-AND-EQUITY> 2,093,741
<SALES> 2,327,805
<TOTAL-REVENUES> 2,327,805
<CGS> 1,785,727
<TOTAL-COSTS> 1,785,727
<OTHER-EXPENSES> 528,371<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,413
<INCOME-PRETAX> (40,706)
<INCOME-TAX> (16,282)
<INCOME-CONTINUING> (24,424)
<DISCONTINUED> 0
<EXTRAORDINARY> (5,326)
<CHANGES> 0
<NET-INCOME> (29,750)
<EPS-PRIMARY> (0.29)<F3>
<EPS-DILUTED> (0.29)<F3>
<FN>
<F1>Amount represents the number of shares of $.50 par value common stock
issued and outstanding.
<F2>Amount includes I) depreciation and amortization and II) selling,
general and administrative expenses.
<F3>Earnings per share multiplier is 1.0.
</FN>
</TABLE>
