<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 April 3, 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
37027
(Address of principal executive offices)
(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 April 30, 1994, there were 99,368,265 shares of
Service Merchandise Company, Inc. common stock outstanding.
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<TABLE>
<CAPTION>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART 1 - FINANCIAL INFORMATION
<S> <C>
Consolidated Statements of Operations (Unaudited) - Three Periods Ended April 3,
1994 and March 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets - April 3, 1994 (Unaudited), March 31, 1993
(Unaudited) and January 1, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows (Unaudited) - Three Periods Ended April 3,
1994 and March 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . 6
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-10
PART II - OTHER INFORMATION
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
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<PAGE> 3
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Periods Ended
------------------------------
April 3, March 31,
------------------------------
1994 1993
----------- -----------
<S> <C> <C>
Net sales $724,209 $672,863
Costs and expenses:
Cost of merchandise sold and buying and occupancy expenses 557,611 518,391
---------- -----------
Gross margin after cost of merchandise sold and buying and
occupancy expenses 166,598 154,472
Selling, general and administrative expenses 155,213 139,174
Depreciation and amortization 15,862 15,226
---------- -----------
Earnings (loss) before interest and taxes (4,477) 72
Interest expense-debt 14,247 15,004
Interest expense-capitalized leases 2,644 2,867
---------- -----------
Loss before income tax benefit (21,368) (17,799)
Income tax benefit (8,547) (6,942)
---------- -----------
Loss before extraordinary loss and cumulative effect of
change in accounting principle (12,821) (10,857)
Extraordinary loss from early extinguishment of debt, net
of tax benefit of $843 and $4,858, respectively (1,265) (7,598)
Cumulative effect of change in accounting principle - 7,742
---------- -----------
Net loss ($ 14,086) ($ 10,713)
========== ===========
Weighted average common shares and common
share equivalents outstanding 101,688 102,143
========== ===========
Per common share:
Loss before extraordinary loss and cumulative effect of
change in accounting principle ($ 0.13) ($ 0.11)
Extraordinary loss from early extinguishment of debt, net
of tax benefit (0.01) (0.07)
Cumulative effect of change in accounting principle - 0.08
---------- -----------
Net loss per common share ($ 0.14) ($ 0.10)
========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE> 4
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
----------------------------
April 3, March 31, January 1,
1994 1993 1994 (1)
-------------- ------------ ------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 23,988 $ 15,203 $ 325,092
Accounts receivable, net of allowance of
$3,180, $3,090 and $2,894, respectively 41,986 40,760 53,014
Refundable income taxes - 244 -
Inventories 1,095,461 1,052,587 939,259
Prepaid expenses 36,764 34,260 29,898
---------- ---------- ----------
TOTAL CURRENT ASSETS 1,198,199 1,143,054 1,347,263
Property and equipment:
Owned assets, net of accumulated depreciation of
$420,345, $379,334 and $408,696, respectively 572,957 511,400 575,712
Capitalized leases, net of accumulated amortization of
$70,332, $73,049 and $68,245, respectively 58,076 66,640 60,128
Deferred income taxes - 823 -
Other assets and deferred charges 27,033 29,979 28,472
---------- ---------- ----------
TOTAL ASSETS $1,856,265 $1,751,896 $2,011,575
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 75,000 $ 179,000 -
Accounts payable 563,197 493,302 $ 630,723
Accrued expenses 143,734 126,774 188,050
State and local sales tax 28,605 24,860 59,035
Income taxes 3,414 - 54,914
Current maturities of long-term debt 75,433 40,998 91,751
Current maturities of capitalized leases 8,065 9,546 8,075
---------- ---------- ----------
TOTAL CURRENT LIABILITIES 897,448 874,480 1,032,548
Long-term debt 612,132 604,852 616,752
Capitalized lease obligations 79,941 87,912 81,769
Deferred income taxes 968 - 968
---------- ---------- ----------
TOTAL LIABILITIES 1,590,489 1,567,244 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 99,388, 98,210 and 99,368 shares, respectively 49,694 49,605 49,684
Additional paid-in capital 4,058 3,539 4,055
Deferred compensation (876) (2,182) (1,187)
Retained earnings 212,900 133,690 226,986
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 265,776 184,652 279,538
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,856,265 $1,751,896 $2,011,575
========== ========== ==========
(1) Derived from fiscal year ended January 1, 1994 audited financial statements.
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE> 5
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Periods Ended
---------------------------
April 3, March 31,
---------------------------
1994 1993
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 14,086) ($ 10,713)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 17,905 17,055
Deferred taxes on income - (10,042)
Loss on disposal of property and equipment 157 91
Write-off debt issuance cost 90 5,094
Changes in assets and liabilities:
Accounts receivable, net 11,028 12,551
Refundable income taxes - (244)
Inventories (156,202) (194,947)
Prepaid expenses (6,866) (13,806)
Accounts payable (67,526) (3,644)
Accrued expenses and state and local sales tax (74,746) (55,025)
Income taxes (51,500) (52,560)
------------ ------------
NET CASH USED BY OPERATING ACTIVITIES (341,746) (306,190)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment - owned (11,322) (9,516)
Proceeds from the disposal of property and equipment 62 17
Other, net (444) (1,564)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (11,704) (11,063)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issuance costs - (6,587)
Proceeds from short-term borrowings 75,000 179,000
Proceeds from long-term debt - 300,000
Repayment of long-term debt (20,951) (304,241)
Repayment of capitalized lease obligations (1,872) (1,996)
Exercise of stock options 169 963
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 52,346 167,139
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (301,104) (150,114)
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD 325,092 165,317
------------ ------------
CASH AND CASH EQUIVALENTS-END OF PERIOD $ 23,988 $ 15,203
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
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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 in the first three
periods of the year due to the seasonality of its business. The results
of operations for the first quarter ended April 3, 1994 and March 31,
1993 are not necessarily indicative of the operating results for the
entire fiscal year.
B. Effective January 2, 1994, the Company began reporting interim results
as 13-week periods instead of three calendar months. Accordingly, the
first quarter of fiscal 1994 ended April 3, 1994 and contained 91
selling days versus the first quarter of fiscal 1993 which ended March
31, 1993 and contained 88 selling days. The change had no significant
impact on the comparability of the results of operations for the first
quarter of fiscal 1994 and the first quarter of fiscal 1993.
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 periods ended April 3, 1994
and March 31, 1993 were $11.4 million and $17.3 million, respectively.
Cash payments for income taxes for the three periods ended April 3, 1994
and March 31, 1993 were $42.1 million and $42.5 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.
E. During the first quarter of fiscal 1994, the Company incurred an
extraordinary loss of $1.3 million, or $.01 per share, related to the
early extinguishment of $17 million of high-coupon mortgages with
interest rates ranging between 10% and 12.5%.
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<PAGE> 7
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.
FIRST QUARTER ENDED APRIL 3, 1994 VS. FIRST QUARTER ENDED MARCH 31, 1993
NET SALES
Net sales for the first quarter of 1994 were $724.2 million compared to $672.9
million for the first quarter of 1993, an increase of $51.3 million or 7.6%.
The Company opened a net of 18 new catalog stores since March 31, 1993.
Effective January 2, 1994, the Company began reporting interim results as
13-week periods instead of three calendar months. Accordingly, the first
quarter of fiscal 1994 ended April 3, 1994 and contained 91 selling days versus
the first quarter of fiscal 1993 which ended March 31, 1993 and contained 88
selling days. Comparable store sales, adjusted to reflect a comparable number
of selling days, decreased 1.1%. Factors affecting comparable store
sales included the adverse weather conditions during the quarter and the very
competitive retail environment associated with consumer electronics.
Year-to-year comparisons for the quarter were also affected by increased sales
realized in 1993 by the Company's stores in southern Florida from the unusually
strong demand following Hurricane Andrew.
GROSS MARGIN
Gross margin for the first quarter, after taking into account buying and
occupancy expense, was $166.6 million as compared to $154.5 million for the
year-earlier quarter. Although total gross margin rate remained unchanged at
23.0% of net sales, gross margin rate in jewelry declined slightly while gross
margin rate in hardlines showed some improvement. These changes primarily
reflect shifts in sales mix between product categories within jewelry and
hardlines.
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<PAGE> 8
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 $155.2 million, or 21.4% of
net sales, for the first quarter of 1994 versus $139.2 million, or 20.7% of net
sales, for the same quarter last year. The rise in selling, general and
administrative expenses as a percentage of net sales was influenced
significantly by the lower comparable store sales for the quarter.
Approximately $3.7 million of the higher expenses related to having three more
selling days in the first quarter of 1994. Employment and advertising costs
also increased for the quarter. The higher employment costs were primarily
associated with the net 18 new catalog stores opened since the first quarter of
last year. The higher advertising costs were principally due to increases in
circulation and page quantities. Publication quantities through mid-quarter
had been increased over the prior year in anticipation of additional demand
arising from 1993's fourth quarter broadcast advertising campaign, which was
not ultimately realized. During the second half of the quarter, publication
quantities were adjusted to more historical levels.
INTEREST EXPENSE
Interest expense decreased $1.0 million, or 5.5%, as compared to the first
quarter of 1993. The lower interest expense is attributable to the refinancing
of $300 million of senior subordinated debt at a lower rate and renegotiation
of lower interest rates on the Company's Revolving Credit Facility and Term
Loan Agreement during the first half of fiscal 1993, as well as lower levels of
revolving credit borrowings during the first quarter of 1994. The incremental
interest expense associated with the $100 million senior notes issued in
October 1993 partially offset these interest savings.
TAXES ON INCOME
The Company recognized an income tax benefit of $8.5 million and $6.9 million
for the first quarter ended April 3, 1994 and March 31, 1993, respectively.
The Company historically incurs a net loss in the first three periods of the
year, but has net income on an annual basis. The effective tax rate for the
quarters ended April 3, 1994 and March 31, 1993 was 40% and 39%, respectively.
For the 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.
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<PAGE> 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited) (continued)
The adjustment to the January 3, 1993 consolidated balance sheet to adopt SFAS
109 was a benefit of $7.7 million. This benefit is reflected in net income 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.
EXTRAORDINARY ITEMS
In the first quarter of fiscal 1994, the Company incurred an extraordinary loss
of $1.3 million, or $.01 per share, related to the early extinguishment of $17
million of high-coupon mortgages with interest rates ranging between 10% and
12.5%.
On February 17, 1993, the Company issued $300 million of 9% Senior Subordinated
Debentures (the "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 $300.8 million at the end of the first quarter of 1994,
an increase of 12.0% from working capital at March 31, 1993 of $268.6 million.
The current ratio at both April 3, 1994 and March 31, 1993 was 1.3.
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 April 3, 1994, short-term
borrowings totaled $75 million ($400 million available for borrowing) compared
to $179 million ($296 million available for borrowing) at March 31, 1993, a
decrease of $104 million, due primarily to the effect of the issuance of $100
million senior notes in October 1993.
Total long-term debt, including current maturities and capitalized leases,
increased to $775.6 million at April 3, 1994 from $743.3 million at March 31,
1993. The increase in total long-term debt was the result of the issuance of
the $100 million senior notes in October 1993 which was partially offset by the
early extinguishment of high-coupon mortgages in the first quarter of 1994
totaling $17 million with interest rates ranging from 10% to 12.5% and by
scheduled payments of approximately $50 million on capitalized leases,
mortgages, IRB's and the Term Loan. The Company plans to prepay an additional
mortgage with a principal balance of $10.1 million during the second quarter of
fiscal 1994. No significant loss is anticipated as a result of this
prepayment. At April 3, 1994, the Company was in compliance with various
financial and other covenants included in the Credit Agreement.
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<PAGE> 10
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited) (continued)
Additions to owned property and equipment were $11.3 million for the first
quarter of 1994 compared to $9.5 million for the same quarter last year. The
Company opened 1 new catalog store and closed 2 catalog stores during the first
quarter of 1994 and has plans to open approximately a net of 25 catalog stores
by the end of the 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
Revolving Credit Facility.
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<PAGE> 11
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.
Item 6. Exhibits and Reports on Form 8-K
6(a) Exhibits filed with this Form 10-Q
Exhibit No. Under Items
601 of Regulation S-K Brief Description
--------------------- -----------------
11 Statement re
Computation of Net Loss
Per Common Share for
the Three Periods Ended
April 3, 1994 and March 31,
1993.
6(b) Reports on Form 8-K
There were no reports on Form 8-K during the first
quarter ended April 3, 1994.
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<PAGE> 12
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.
<TABLE>
<S> <C>
SERVICE MERCHANDISE
COMPANY, INC.
Date: May 13, 1994 /s/ Raymond Zimmerman
----------------------
Raymond Zimmerman
President, Chairman of the Board and
Director (Chief Executive
Officer)
Date: May 13, 1994 /s/ S. Cusano
---------------------
S. Cusano
Vice President and Chief Financial Officer
(Chief Financial Officer)
(Chief Accounting Officer)
</TABLE>
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<PAGE> 1
EXHIBIT 11
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Computation of Net Loss Per Common Share (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Periods Ended
------------------------
April 3, March 31,
------------------------
1994 1993
------------ ----------
<S> <C> <C>
Primary
- --------
Loss before extraordinary loss and cumulative
effect of change in accounting principle ($ 12,821) ($ 10,857)
Extraordinary loss from early extinguishment of debt,
net of tax benefit of $843 and $4,858, respectively (1,265) (7,598)
Cumulative effect of change in accounting principle - 7,742
---------- ---------
Net loss ($ 14,086) ($ 10,713)
========== =========
Shares:
Weighted average common shares outstanding 98,482 98,126
Weighted average shares of restricted
stock outstanding 892 988
Additional shares assuming exercise of stock options 2,314 3,029
Weighted average common shares and common ---------- ---------
share equivalents outstanding - primary 101,688 102,143
========== =========
Loss before extraordinary loss and cumulative
effect of change in accounting principle ($ 0.13) ($ 0.11)
Extraordinary loss from early extinguishment of debt,
net of tax benefit (0.01) (0.07)
Cumulative effect of change in accounting principle - 0.08
---------- ---------
Net loss per common share - primary ($ 0.14) ($ 0.10)
========== =========
Assuming Full Dilution
- ----------------------
Loss before extraordinary loss and cumulative
effect of change in accounting principle ($ 12,821) ($ 10,857)
Extraordinary loss from early extinguishment of debt,
net of tax benefit of $843 and $4,858, respectively (1,265) (7,598)
Cumulative effect of change in accounting principle - 7,742
---------- ---------
Net loss ($ 14,086) ($ 10,713)
========== =========
Shares:
Weighted average common shares outstanding 98,482 98,126
Weighted average shares of restricted
stock outstanding 892 988
Additional shares assuming exercise of stock options 2,322 3,057
---------- ---------
Weighted average common shares and common
share equivalents outstanding - fully diluted 101,696 102,171
========== =========
Loss before extraordinary loss and cumulative
effect of change in accounting principle ($ 0.13) ($ 0.11)
Extraordinary loss from early extinguishment of debt,
net of tax benefit (0.01) (0.07)
Cumulative effect of change in accounting principle - $ 0.08
---------- ---------
Net loss per common share - fully diluted ($ 0.14) ($ 0.10)
========== =========
</TABLE>
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