<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 March 31, 1996
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 April 28, 1996, there were 99,724,005 shares of
Service Merchandise Company, Inc. common stock outstanding.
<PAGE> 2
<TABLE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<CAPTION>
Page No.
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Statements of Operations (Unaudited) - First Quarter Ended
March 31, 1996 and April 2, 1995 . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets - March 31, 1996 (Unaudited), April 2, 1995
(Unaudited) and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows (Unaudited) - First Quarter Ended
March 31, 1996 and April 2, 1995 . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . 6
Management's Discussion and Analysis of Financial Condition and Results
of Operations (Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-9
PART II - OTHER INFORMATION
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
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<PAGE> 3
<TABLE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
First Quarter Ended
------------------------------------
March 31, April 2,
--------------- --------------
1996 1995
--------------- --------------
<S> <C> <C>
Net sales $715,628 $737,129
Costs and expenses:
Cost of merchandise sold and buying and occupancy expenses 554,870 567,845
--------------- --------------
Gross margin after cost of merchandise sold and buying and
occupancy expenses 160,758 169,284
Selling, general and administrative expenses 168,674 174,170
Depreciation and amortization 15,609 15,872
--------------- --------------
Loss before interest and income taxes (23,525) (20,758)
Interest expense-debt 14,113 14,540
Interest expense-capitalized leases 2,225 2,422
--------------- --------------
Loss before income tax benefit (39,863) (37,720)
Income tax benefit (15,148) (14,711)
--------------- --------------
Net loss ($24,715) ($23,009)
=============== ==============
Weighted average common shares and common
share equivalents outstanding 101,366 101,111
=============== ==============
Per common share:
Net loss per common share ($0.24) ($0.23)
=============== ==============
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)
--------------------------------
March 31, April 2, December 31,
1996 1995 1995 (1)
-------------- -------------- ---------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $27,248 $24,958 $177,314
Accounts receivable, net of allowance of
$3,074, $3,377 and $2,763, respectively 42,926 42,041 53,621
Refundable income taxes 2,898 4,044 -
Inventories 1,101,390 1,179,813 1,034,467
Prepaid expenses 31,978 32,259 25,277
-------------- -------------- ---------------
TOTAL CURRENT ASSETS 1,206,440 1,283,115 1,290,679
Property and equipment:
Owned assets, net of accumulated depreciation of
$502,503, $469,561 and $505,429, respectively 573,577 586,461 583,290
Capitalized leases, net of accumulated amortization of
$83,492, $76,777 and $81,579, respectively 42,909 50,035 44,823
Other assets and deferred charges 20,074 21,149 21,778
-------------- -------------- ---------------
TOTAL ASSETS $1,843,000 $1,940,760 $1,940,570
============== ============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $185,000 $229,000 -
Accounts payable 463,260 564,430 $620,669
Accrued expenses 156,212 168,441 193,016
State and local sales taxes 29,430 28,555 61,224
Income taxes - - 29,209
Current maturities of long-term debt 1,932 9,367 1,936
Current maturities of capitalized lease obligations 8,066 7,923 7,885
Deferred income taxes 11,715 2,286 11,715
-------------- -------------- ---------------
TOTAL CURRENT LIABILITIES 855,615 1,010,002 925,654
Long-term debt 556,401 543,908 557,392
Capitalized lease obligations 63,838 71,843 65,894
Deferred income taxes 4,888 2,341 4,888
-------------- -------------- ---------------
TOTAL LIABILITIES 1,480,742 1,628,094 1,553,828
-------------- -------------- ---------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, 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 99,722, 99,650 and 99,686 shares, respectively 49,861 49,825 49,843
Additional paid-in capital 5,591 5,421 5,483
Deferred compensation (1,945) (2,712) (2,050)
Retained earnings 308,751 260,132 333,466
-------------- -------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 362,258 312,666 386,742
-------------- -------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,843,000 $1,940,760 $1,940,570
============== ============== ===============
(1) Derived from fiscal year ended December 31, 1995 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>
First Quarter Ended
---------------------------------------
March 31, April 2,
--------------- ---------------
1996 1995
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($24,715) ($23,009)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 16,307 16,594
(Gain) loss on disposal of property and equipment (2,789) 4
Changes in assets and liabilities (net of disposition):
Accounts receivable, net 10,695 13,093
Inventories (66,923) (175,531)
Prepaid expenses (6,701) (4,481)
Accounts payable (157,409) (75,336)
Accrued expenses and state and local sales taxes (68,598) (70,373)
Income taxes (32,107) (43,408)
--------------- ---------------
NET CASH USED BY OPERATING ACTIVITIES (332,240) (362,447)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment - owned (5,441) (5,740)
Proceeds from the disposal of property and equipment 4,249 100
Other, net 1,246 (1,861)
--------------- ---------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 54 (7,501)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 185,000 229,000
Repayment of long-term debt (1,008) (4,643)
Repayment of capitalized lease obligations (1,875) (1,756)
Exercise of stock options (forfeiture of restricted stock), net 3 (959)
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 182,120 221,642
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (150,066) (148,306)
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD 177,314 173,264
--------------- ---------------
CASH AND CASH EQUIVALENTS-END OF PERIOD $27,248 $24,958
=============== ===============
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 December 31, 1995, 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 December
31, 1995.
The Company has historically incurred a net loss for the first quarter of
the year due to the seasonality of its business. The results of operations
for the first quarter ended March 31, 1996 and April 2, 1995 are not
necessarily indicative of the operating results for the entire fiscal year.
B. The first quarters ended March 31, 1996 and April 2, 1995 each contained 91
selling days.
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 first quarter ended March 31, 1996 and
April 2, 1995 were $10.1 million and $10.9 million, respectively. Cash
payments for income taxes for the first quarter ended March 31, 1996 and
April 2, 1995 were $17.0 million and $28.7 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. On June 8, 1994, the Company completed a $600 million Reducing Revolving
Credit Facility which replaced its existing $475 million Revolving Credit
Facility and $122 million outstanding under the existing Secured Term Loan.
The maximum commitment level for the new facility reduces $25 million
annually until reaching $475 million at December 31, 1998. Currently, the
maximum commitment level is $550 million. The Reducing Revolving Credit
Facility matures on June 8, 1999 and currently has an effective interest
rate of LIBOR + 1.0% with a 3/8% facility fee on the committed amount.
Short-term borrowings related to the Credit Facility were $185 million and
$229 million as of March 31, 1996 and April 2, 1995, respectively.
F. Effective January 1, 1996, the Company adopted the provisions of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and determined that no
material impairment exists which would require recognition under the
provisions of this standard.
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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 MARCH 31, 1996 VS. FIRST QUARTER ENDED APRIL 2, 1995
NET SALES
Net sales for the first quarter of 1996 were $715.6 million compared to $737.1
million for the first quarter of 1995, representing a decrease of $21.5 million,
or 2.9%. Comparable store sales decreased 3.5%. Comparable jewelry sales
increased and hardlines comparable store sales were down from last year levels.
While the trend improved through the quarter, sales early in the quarter were
negatively impacted by the adverse weather conditions experienced in the middle
and eastern areas of the country and a reduction in advertising. At the end of
the first quarter, Service Merchandise was operating a total of 409 catalog
stores, a net increase of 1 store from a year ago.
GROSS MARGIN
Gross margin for the first quarter of 1996, after taking into account buying and
occupancy expenses, was $160.8 million, or 22.5% of net sales, compared with
$169.3 million, or 23.0%, a year ago. The decline in gross margin rates results
primarily from increased transportation costs and to a lesser extent occupancy
costs. Merchandise margin rates, before buying and occupancy expenses, improved
in total as compared to last year due to the significant improvement in the
sales mix between jewelry and hardlines.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $168.7 million, or 23.6% of
net sales, for the first quarter of 1996 versus $174.2 million, or 23.6% of net
sales, in the year-earlier quarter. The reduction of $5.5 million in selling,
general and administrative expense dollars reflects decreased advertising
expenses. The advertising expense decreases are primarily attributable to the
elimination of less effective publications.
-7-
<PAGE> 8
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited) (continued)
INTEREST EXPENSE
Interest expense for the first quarter of 1996 was $16.3 million as compared to
$17.0 million for the first quarter of 1995. Interest expense for the quarter
decreased primarily due to lower variable interest rates this year as compared
to last year. Reduced borrowings under the Credit Facility also
contributed to the decreased expense.
TAXES ON INCOME
The Company recognized an income tax benefit of $15.1 million and $14.7 million
for the first quarter ended March 31, 1996 and April 2, 1995, respectively. The
effective tax rates for the quarter ended March 31, 1996 and April 2, 1995 were
38% and 39%, respectively. For the fiscal year ended December 31, 1995 the
effective income tax rate was 38%.
LIQUIDITY AND CAPITAL RESOURCES
Working capital improved to $350.8 million at the end of the first quarter of
1996, an increase of 28.5% from the working capital at April 2, 1995 of $273.1
million. Short-term borrowings totaled $185.0 million ($350.1 million available
for borrowing) at March 31, 1996 compared to $229.0 million ($328.4 million
available for borrowing) at April 2, 1995, a decrease of $44.0 million. The rise
in working capital is primarily the result of additional operating cash flow and
reduced capital expenditures over the past year. Short term borrowings declined
as purchases of inventory were reduced to manage inventory carrying costs more
effectively. These reduced purchases contributed to the decline in trade
accounts payable. The impact on working capital of refinancing a $7.8 million
mortgage effecting a reclassification from short-term to long-term debt was
offset in part by a rise in the current portion of deferred income taxes.
Working capital requirements fluctuate significantly during the year due to the
seasonal nature of the retail jewelry, gift and home business. These
requirements are financed through a combination of internally generated cash
flow from operating activities and short-term borrowings. The current ratio at
March 31, 1996 and April 2, 1995 was 1.4:1 and 1.3:1, respectively.
On June 8, 1994, the Company completed a $600 million Reducing Revolving Credit
Facility which replaced its existing $475 million Revolving Credit Facility and
$122 million outstanding under the existing Secured Term Loan. The maximum
commitment level for the new facility reduces $25 million annually until
reaching $475 million at December 31, 1998. Currently, the maximum commitment
level is $550 million. The Reducing Revolving Credit Facility matures on June 8,
1999 and currently has an effective interest rate of LIBOR + 1.0% with a 3/8%
facility fee on the committed amount. Short-term borrowings related to the
Credit Facility were $185 million and $229 million as of March 31, 1996 and
April 2, 1995, respectively.
-8-
<PAGE> 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited) (continued)
Total debt, including current maturities and capitalized leases, decreased to
$630.2 million at March 31, 1996 from $633.0 million at April 2, 1995. The
decrease in total debt was primarily the result of scheduled payments for
capitalized lease obligations, mortgages and Industrial Revenue Bonds offset by
two new mortgage loans obtained by the Company in the second half of 1995.
Effective January 1, 1996, the Company adopted the provisions of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" and determined that no material
impairment exists which would require recognition under the provisions of this
standard.
Additions to owned property and equipment were $5.4 million for the first
quarter ended March 31, 1996 compared to $5.7 million for the same quarter last
year. The Company operated 409 stores as of March 31, 1996, a net increase of 1
store from a year ago. New store openings are anticipated to be approximately 2%
for fiscal 1996. This figure does not take into account store closings for such
period. The Company expects to incur capital expenditures of approximately $50
million during fiscal 1996 and plans to fund these expenditures through a
combination of cash flow from operations and borrowings under the Reducing
Revolving Credit Facility.
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<PAGE> 10
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.
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<PAGE> 11
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
---------------------- -----------------
11 Statement re:
Computation of Net Loss
Per Common Share for
the First Quarter Ended
March 31, 1996 and
April 2, 1995.
27 Financial Data Schedule
for the First Quarter Ended
March 31, 1996 and
April 2, 1995.
6(b) Reports on Form 8-K
There were no reports on Form 8-K during the first quarter ended
March 31, 1996.
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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.
SERVICE MERCHANDISE
COMPANY, INC.
Date: May 20, 1996 /s/ Raymond Zimmerman
------------------------------
Raymond Zimmerman
Chairman of the Board
(Chief Executive Officer)
Date: May 20, 1996 /s/ Gary M. Witkin
-----------------------------
Gary M. Witkin
President
(Chief Operating Officer)
Date: May 20, 1996 /s/ S. Cusano
-----------------------------
S. Cusano
Vice President and Chief Financial
Officer (Chief Financial Officer)
(Chief Accounting Officer)
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<PAGE>
<TABLE>
EXHIBIT 11
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Computation of Net Loss Per Common Share (Unaudited)
(In thousands, except per share data)
<CAPTION>
First Quarter Ended
------------------------------------------------
March 31 April 2
1996 1995
-------------------- --------------------
Primary
-------
<S> <C> <C>
Net loss ($24,715) ($23,009)
==================== ====================
Shares:
Weighted average common shares outstanding 99,184 98,874
Weighted average shares of restricted
stock outstanding 520 856
Additional shares assuming exercise of stock options 1,662 1,381
-------------------- --------------------
Weighted average common shares and common
share equivalents outstanding - primary 101,366 101,111
==================== ====================
Primary net loss per common share ($0.24) ($0.23)
==================== ====================
Assuming Full Dilution
----------------------
Net loss ($24,715) ($23,009)
==================== ====================
Shares:
Weighted average common shares outstanding 99,184 98,874
Weighted average shares of restricted
stock outstanding 520 856
Additional shares assuming exercise of stock options 1,674 1,407
-------------------- --------------------
Weighted average common shares and common
share equivalents outstanding - fully diluted 101,378 101,137
==================== ====================
Fully diluted net loss per common share ($0.24) ($0.23)
==================== ====================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Service
Merchandise Company, Inc. Form 10-Q for the quarterly period ended March 31,
1996 and is qualified in its entirety by reference to such financial statements
detailed in Part I of the Form 10-Q.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-29-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-02-1995
<PERIOD-END> MAR-31-1996 APR-02-1995
<CASH> 27,248 24,958
<SECURITIES> 0 0
<RECEIVABLES> 46,000 45,418
<ALLOWANCES> 3,074 3,377
<INVENTORY> 1,101,390 1,179,813
<CURRENT-ASSETS> 1,206,440 1,283,115
<PP&E> 1,202,481 1,182,834
<DEPRECIATION> 585,995 546,338
<TOTAL-ASSETS> 1,843,000 1,940,760
<CURRENT-LIABILITIES> 855,615 1,010,002<F1>
<BONDS> 620,239 615,751
0 0
0 0
<COMMON> 99,722<F2> 99,650<F2>
<OTHER-SE> 312,397 262,841
<TOTAL-LIABILITY-AND-EQUITY> 1,843,000 1,940,760
<SALES> 715,628 737,129
<TOTAL-REVENUES> 715,628 737,129
<CGS> 554,870 567,845
<TOTAL-COSTS> 554,870 567,845
<OTHER-EXPENSES> 184,283<F3> 190,042<F3>
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 16,338 16,962
<INCOME-PRETAX> (39,863) (37,720)
<INCOME-TAX> (15,148) (14,711)
<INCOME-CONTINUING> (24,715) (23,009)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (24,715) (23,009)
<EPS-PRIMARY> (0.24) (0.23)
<EPS-DILUTED> (0.24) (0.23)
<FN>
<F1> Certain prior period amounts have been reclassified for comparative
purposes.
<F2> Amount represents the number of shares of $0.50 par value common stock
issued and outstanding.
<F3> Amount includes I) depreciation and amortization and II) selling, general
and administrative expenses.
</FN>
</TABLE>
